Fitch Assigns 'BBB' Rating to Express Scripts

Business Wire, Oct 28, 2004

CHICAGO -- Fitch Ratings has assigned a 'BBB' to Express Scripts Inc.'s (Express Scripts) senior unsecured debt and secured bank credit facility. The ratings apply to approximately $420 million of debt. The Rating Outlook is Stable. The ratings were initiated by Fitch as a service to users of Fitch's ratings and are based on public information.

The ratings on Express Scripts (ESRX), a leading pharmacy benefit manager (PBM), reflect the firm's size, strong cash flow, modest leverage, and manageable capital needs, offset by uncertainties regarding litigation risks and legislative risks, many common to the PBM industry.

Express Scripts is successfully expanding its revenue base by adding new clients, striking new alliances, and acquiring selected businesses. While offering Express Scripts new business opportunities, the expansion is also requiring modest investments in technology, plant, equipment, and additional staff.

Express Scripts has modest and manageable capital expenditure requirements. The firm generated roughly $442 million in free cash flow (net cash flow from operations less capital expenditures) during the last twelve months (LTM), ending June 30, 2004. Targeted acquisitions could be funded, in part, by free cash flow (FCF). However, larger acquisitions would likely require the assumption of additional debt or the issuance of additional stock. The cash acquisition of Curascripts consumed $330 million of FCF. For LTM ending June 30, 2004, ESRX repurchased $150 million in common shares. The firm has authorization to repurchase an additional 5.2 million shares.

Relatively stable demand growth should continue to benefit the company. Additionally, Express Scripts' profitability should improve as it generates solid growth in its more profitable business activities, namely mail-order pharmacy and the dispensing of generic drugs.

Concerns include legislative/legal risk and transparency issues that confront Express Scripts, as well as most of the PBM industry. Fitch expects these issues to be manageable for Express Scripts. However, with such tight gross margins, these issues will continue to be monitored.

LTM at June 30, 2004, interest coverage (EBITDA/interest) was 11.8 times (x) and leverage (total debt/EBITDA) was 0.8x.