Express Scripts is a pharmacy benefits management company established in 1986, facing challenges due to high long-term debt and dependency on major retail pharmacy chains. The proposed solutions include issuing convertible bonds to reduce interest expenses and forming a new division to provide average wholesale price data in the industry following the exit of a major competitor. The company's strategic analysis highlights strengths, weaknesses, opportunities, and threats, informing its financial decisions.

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Experts in Profit Maximization & Business Growth Services
Case Study - Express ScriptsJohn M Exley MBA, CPA Candidate
President, Financial Services Group
Above the Standard Procurement Group, Inc.®, www.ATSPG.com

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Case Study - Express ScriptsMay 12, 2014
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Situation Analysis
Perspective – Outside Expertise of Above the Standard
Nature of the Company
Pharmacy benefits company combining retail pharmacy claims processing, for-
mulary management, and home delivery services to create an integrated product
offering seeking to manage the prescription drug benefit for payors.
Additional Introductory Information
 Established in 1986
 Headquartered in St. Louis, Missouri
 Employs 13,000 people
 SEC Code ESRX
 Operations in United States and Canada
Strategic Analysis
SWOT Analysis
Strengths
 Diverse Customer Base enables sustainable growth
 Consumer ology program differentiates Express Scripts from the competition
 Contract with customers for three year period
 Extensive intellectual capital and technical capability in BPM
Weaknesses
 Dependence on major retail pharmacy chains
 Long term debt in the corporation $11.7B
 Long term bonds financed at high coupon
 Cash on Balance sheet at $1.24B
Opportunities
 Launch of new products and services
 Aging Boomer generation will create greater numbers of clients needing ser-
vice
 Opportunity to capitalize on the vacuum left by First Data Bank
Threats
 Changes in industry pricing benchmark
 Legislative and Regulatory impact on the industry

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Case Study - Express ScriptsMay 12, 2014
„„ Gross Sales and Net Income figures for 2012 are YTD.
„„ Stock Price is as of Jan, 1, 2012 to maintain consistency with prior years
„„ EPS is as of 09/30/2012
„„ Sales rise steadily from 2007 to 2009. We note an increase from 2009 to 2010 of approx. $22.M. This
reflects the purchase of NextRx PBM in December 2009. Express Scripts bought Medco in April 2012.
You’ll note sales for 2012 over 2011 are $20.7M greater.
„„ Net income for the period of 2007 to 2011 shows steady rise from $601M in 2007 to $1,276M in 2011.
Net income then declines from $1.276 in 2011 to $809M YTD for 2012. 2012 projected based on 2012
YTD would be $1,078M.
„„ Stock Price increases from 2007 thru 2011 reflecting increased demand for shares and favorable ratings
from investment analysts due to steady growth in stock value and earnings for the company.
„„ From 2011 to Sept. 2012 please note decrease in stock price arising from downgrade of stock due to
high levels of debt in the corporation arising from Express Scripts purchase of Medco.
„„ EPS directly correlates to the previously listed analysis.
„„ Balance sheet as of latest 10Q shows $1,248M in cash, $34,562M in long term debt.

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Case Study - Express ScriptsMay 12, 2014
Express Scripts Value Chain
Problem #1
„„ Express Scripts shows $16,146M in long term debt on the balance sheet with
total liabilities of $34,562M. Current debt service of $315.23M per year on
$7067M in LT debt.
„„ Express Scripts shows $1.248M on the balance sheet as cash.
Alternative Solution #1
„„ Issue $7B in convertible bonds, coupon rate of 3%, term of 10 years, convert-
ible at $63 per share, no conversion rights in the first four years of the bonds.
„„ Current median stock target at 11/16/2012 is $63 per share. Conversion
shares are common, full rights.
„„ Proceeds of the bond issue to pay off $7B in long term debt reducing annual
interest expense on the debt by $105.23M.
Pros to option #1
„„ Increase cash flow by $105.23M per year, equivalent to $8.8M per month in
additional cash flow.
„„ Reduce outstanding long term debt expense which can then be used to in-
crease monthly debt payments on the balance of long term debt as listed on
the balance sheet.
HQ Stl, Centralized OpsFirm Infra-
structure
Pharma and retail ops are housed in
Company owned buildings
Human
Resource
Management
Centralized HR Function
STL
13000 Employees
Technology
development
Highly Integrated I/T System
Better managementof the
Programs
Consumerology System
Procurement
Purchase from Suppliers –
generic, brand, and specialty
prescription meds. Direct
from Mfgs./Wholesalers
Inventory
held in
Dist. Ctr
in STL.
Also held
in spec.
pharm.
And home
delv.
pharm
PBM
Services
Retail
Network
Pharmacy
Admin.
Scrips
shipped
from
Dist. Ctrs,
home
delv.
Serv.
Sales mgrs
and
Directors
market and
sell PBM –
supported by
Team of
client service
reps.
PBM Services
Retail Network
Pharmacy
Administration
Home delivery
Services
Formulary
Compliance
Service
Inbound
Logistics
Operations Outbound
Logistics
Marketing
and Sales
Service
xx

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Case Study - Express ScriptsMay 12, 2014
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„„ Use the additional $8.8M per month to fund CAPX, flow thru to retained earn-
ings and then to EPS.
„„ Use the funds to engage in an active treasury stock program purchasing out-
standing shares of stock. We would then treat treasury stock as an additional
line of business. We could also use the treasury stock to provide stock for
conversion on our bonds.
Cons to Option #1
„„ Issuing bonds in the current economic climate could prove to be a challenge.
Uncertainty on the US economy, the Euro Zone, and the global macro-eco-
nomic dynamics may have an impact on the success of a convertible bond
issue.
„„ Express Scripts current debt level and corresponding capital structure may give
rise to debt service concerns.
Alternative Solution #2
Issue stock on a rights offering of 100,000,000 shares of common stock, purchase
by exercise of rights at $42 per share. Proceeds of $4.2B used to reduce long term
debt interest expense as outlined in option number 1. Shares would be issued as
rights are exercised.
Pros to Option #2
„„ Raise cash to reduce outstanding long term and expensive debt
„„ Issue shares as rights are exercised.
„„ Use a portion of $4.2B for CAPX; buy back of current stock, treasury stock
management/line of business program.
Cons to Option #2
„„ Further dilution of EPS on outstanding shares. Possibility of few rights exer-
cised, although $42 to purchase stock with a projected median stock price of
$63 may be an incentive.
Problem #2
Express Scripts now has but one source for information on Average Wholesale
Prices. Average Wholesale prices were supplied to the BPM industry by MediS-
pan and First DataBank. First DataBank discontinued operations in 2011. Express
Scripts is now using Medispan.
Alternative Solution #1
„„ Express Scripts has a database of prescription medicine cost information from
a variety of suppliers of generic, brand, and specialty prescription medication.
„„ Utilize this information to determine the average wholesale price paid for
these medications across the industry.

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Case Study - Express ScriptsMay 12, 2014
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„„ Use the intellectual and technological capital and capabilities at Express
Scripts to form a new division or corporation with a primary mission to fill the
gap and capitalize on the opportunity created when First Data Bank ceased
operations.
Pros to Solution #1
„„ Express Scripts, using its’ considerable assets capitalizes on the opportunity
to become a “provider of choice” supplying the AWP to the industry in direct
competition with Medispan.
„„ ESRX is in an excellent position to successfully launch the project, overcome
any barriers to entry, compete effectively and gain market share in a compara-
tively short time span.
Cons to Solution #1
Potential conflict of interest in doing so may arise from a PBM affiliate providing
AWP information.
„„ Federal, state, and industry law and regulation may prevent or severely restrict
the success of any such venture.
Alternative Solution #2
In concert with the Medicaid/Medicare programs proactively pursues the creation
of another Federal Agency which could “warehouse” and supply the AWP infor-
mation to the industry. This could be tied to the Patient Protection and Affordable
Care Act.
Pros to Solution #2
„„ Express Scripts gains recognition for exercising leadership in the solution to an
industry level problem. Express Scripts has direct impact on relevant aspects
of agency.
„„ The Federal Agency manages the program and provides information on an
impartial third party provider basis.
Cons to Solution #2
„„ Creation of another Federal Agency with oversight and control of industry pric-
ing practices may put the agency itself in a conflict of interest as Medicare and
Medicaid base payments on the information re AWP.
„„ Private industry can do the same job more efficiently and at less cost than a
Federal Agency.

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Case Study - Express ScriptsMay 12, 2014
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Chosen Solutions:
Problem #1
Express Scripts should use Solution #1 for Problem #1. Express Scripts should
issue convertible bonds to reduce the interest expense for their long term bond
debt.
„„ Benefits – reduction in cost of capital for their long term bonds, increased cash
flow. ESRX gains cash to use in operations, CAPX, treasury operations, debt
reduction and reamortization of same.
„„ Implementation Concerns – Current economic market may impact sale of the
bonds and require a longer time frame to complete the offering.
Problem #2
Express Scripts should use Solution #1 for Problem #2. Express Scripts should
actively pursue forming a new business venture to provide the AWP for the BPM
industry capitalizing on its’ existing intellectual and technological capital.
„„ Benefits – creates a new source of cash flow for the company and reinforces
ESRX as a leader in the BPM industry and creates additional employment op-
portunities for new and existing ESRX staff.
„„ Implementation Concerns – potential for conflict of interest with Federal regu-
lators in providing AWP pricing data to the industry.