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Express Scripts: One of the Widest Moats in Health Care

Vishnu Lekraj

Vishnu Lekraj: We recently conducted a competitive analysis of many health-care-services players, and one name that was very close to the top was Express Scripts (ESRX). When we couple this analysis with the firm's current market valuation, we believe it provides investors an opportunity to buy shares of a quality company at a significant discount. Express is the largest pharmacy benefit manager in the U.S., as it processes approximately 1.3 billion prescription claims annually, giving it about 22% market share.

PBMs help to manage a health insurance provider's drug benefits from construction of the plan to processing a prescription for a provider's member. The PBM industry is largely a "rational oligopoly," with Express leading the pack. CVS Health (CVS) and the new UnitedHealth/Catamaran PBM each process about 1 billion to 1.2 billion claims annually themselves, which gives three major players control over 65% of all prescriptions filled in the U.S. This dynamic endows these players--and especially Express Scripts--with enormous supplier-pricing and centralized-scale advantages.

With that said, I believe these players are some of the most competitively advantaged within the health-care ecosystem. Express trades at a material discount to our $100 fair value estimate, and this gives market participants the ability to own a high-quality business below its intrinsic value.