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By Vishnu Lekraj | 02-26-2014 10:00 AM

Morningstar Minute: 3 Pillars to Express Scripts' Wide Moat

Pharmacy benefits manager Express Scripts is attractively priced given its ability to fend off competitors for years to come.

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.

Vishnu Lekraj: We're going to talk about Express Scripts, that's ticker ESRX. What this company does, is it processes or adjudicates pharmacy claims for health-care plans for employers that provide a drug benefit to their members or to their employees. It's a very wide-moat firm.

What it does, is it gets a spread from the sale of the drug, from the manufacturer or supplier, to the plan member. Basically it makes a tiny spread, but it's very asset-light. It's a very good company in terms of being deeply involved in the pharmaceutical industry. It processes alone itself 30% of the claims volume here in the U.S.

Express Scripts has three major pillars that support its wide moat. Number one, it has a sticky client base. It's pretty hard for its clients to switch benefit plans on their employees or plan members. [To do so, they would] have to go through a whole new process of selected drugs or preferred drugs or preferred pharmacy networks.

Second, the firm has a strong foothold within the pharmaceutical market. If you're going to be a player in the pharmaceutical market, you have to deal with Express Scripts one way or another most likely. It does deal with distributors, retail pharmacies, and also manufacturers. And, again, any processed claims in the U.S., 30% of them go through Express Scripts.

But perhaps the strongest piece of its moat is going to be the company's scale advantages. It's so large; it's so big. It has an advantage over most other firms. The only other firm that probably comes close is CVS Caremark, which is another larger pharmacy benefits manager. Those are the two firms you would rate with wide moats. But Express Scripts today is probably discounted a lot more in terms of valuation, which makes it a little bit more attractive of an investment opportunity right now in my opinion.

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