Fitch Rates Express Scripts' Sr Unsecured Debt Offering 'BBB'

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CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB' rating to Express Scripts' (ESRX) senior unsecured debt offering. Fitch expects the proceeds from the offering will be used to fund share repurchases and for other corporate purposes.

Fitch believes ESRX will remain a consistent generator of strong cash flow relative to its modest capital expenditure needs. In addition, Fitch's ratings incorporate some capacity for acquisitions and share repurchases, as ESRX had leverage (total debt-to-EBITDA) of 1.0 times (x) at March 31, 2011. This bond issuance funding anticipated share repurchases will reduce some of that capacity during 2011.

The key rating drivers for this credit are leverage, EBITDA margins and free cash flow. The 'BBB' leverage range for this credit is approximately 1.5x-2.0x. Margin variability of less than 90 basis points and material free cash flow generation are expected for this rating.

The integration of NextRx is complete, and ESRX expects to generate more than $1 billion of EBITDA from the acquired business in 2011. Incorporating Fitch's expectations of moderate organic growth, relatively stable margins and solid working capital management, free cash flow during 2011 is forecast to range from $2 billion to $2.2 billion. Factoring today's bond issuance, Fitch expects ESRX will operate with leverage between 1.4x-1.7x during 2011.

Despite the currently challenging employment environment, Fitch believes ESRX will continue to generate reliable growth in the intermediate term. The company continues to maintain high client retention rates and garner new business wins. Its focus on behavioral economics is helping to improve the cost effectiveness of drug therapy, which appears to be resonating with both patients and payers.

Fitch does not expect the health care reform legislation enacted in March 2010 to meaningfully affect the credit ratings of ESRX and other standalone pharmacy benefit managers (PBMs). While an increase in health care coverage for the uninsured is likely to lead to moderate volume increases during 2014-2016, the law potentially creates pricing pressure on drug manufacturers and increases transparency requirements, both of which could pressure PBM margins. In addition, the need for payers to moderate the growth in member drug spending has the potential to pressure the industry's gross and operating margins. However, to the extent that PBMs can demonstrate their ability to moderate the growth in drug spending and positively influence patients' health, Fitch believes the industry can obtain adequate pricing and sufficient fees from payers to support the industry's profitability.

Acquisition targets in the PBM and specialty pharmacy segments have decreased in size and number. However, Fitch expects ESRX will continue to search for acquisition opportunities while remaining disciplined regarding price and strategic fit.

ESRX generated roughly $1.5 billion in free cash flow during the latest 12 months ending March 31, 2011 and ended with the period with approximately $766 million in cash/short-term investments. ESRX had no borrowings against its $750 million revolving credit facility, which matures in August 2013. At March 31, 2011, the company had $2.5 billion in debt with approximately $1 billion maturing in 2012, $1 billion in 2014, and $500 million in 2019.

Fitch currently rates ESRX as follows:

--Issuer Default Rating (IDR) at 'BBB';

--Senior unsecured bank credit facility at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

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