Management Team (clockwise from bottom left) Stuart Bascomb, Executive Vice President and Director of Sales and Marketing; Thomas Boudreau, Senior Vice President of Administration, General Counsel and Corporate Secretary; George Paz, Senior Vice President and Chief Financial Officer; David Lowenberg, Senior Vice President and Director of Site Operations; Linda Logsdon, Senior Vice President of Health Management Services; Robert Davis, Senior Vice President and Chief Information Systems Officer; Barrett Toan, President and Chief Executive Officer.
to our shareholders
In 1997, Express Scripts adopted a four-point strategy to maintain the growth and competitiveness we have achieved during the last decade. Our strategy includes focusing on new sales to new clients, developing new products and services for existing clients, strengthening alliances and making acquisitions that allow us to maximize operating efficiencies. We effectively executed this strategy and achieved our key goals for 1997, delivering another year of record growth and profitability. During the year, we strengthened our core pharmacy benefit management (PBM) business through our relationships with providers and payers, expanded geographically with additional growth in Canada, introduced new healthcare management products and services and continued to develop our complementary businesses. We set ambitious goals for 1997 and we're proud to say we've met them.
On February 20, 1998, we announced the signing of the definitive agreement for the acquisition of ValueRx, the pharmacy benefit management business of Columbia/HCA Healthcare Corporation. This acquisition will position Express Scripts as the largest pharmacy benefit manager in North America independent of pharmaceutical manufacturer ownership. After the merger is complete, we will manage more than $4 billion in pharmaceutical expenditures for more than 20 million members. And more importantly, this move illustrates what we believe is our best strategy for growth, namely to apply capital and resources to pharmacy benefit management. This will enable us to bring better healthcare to our members, cost savings to our clients and value to our shareholders. The second half of this annual report discusses our core competencies and how they will be strengthened by adding the talent and expertise of ValueRx to our own.
Financial Performance
In 1997, our revenues were $1.2 billion, a 59.1 percent increase over 1996's $773.6 million. Net income for the year was $33.4 million, an increase of 27.9 percent. On a diluted earnings per share basis, net income rose 26.3 percent to $2.02 per share from $1.60 in 1996. Our cash, cash equivalents and investment balances were $122.1 million, compared with our prior year's balance of $79.6
million. At the end of 1997, we carried no debt and had total shareholders'
equity of $203.7 million.
Express Scripts posted strong operating results in every quarter of 1997,
thanks to significant revenue growth, successful ongoing expense controls and increasing economies of scale. We balanced our efforts to reduce Selling, General and Administrative (SG&A) expenses against our need to invest in future capabilities, because we realized our ability to assist our clients in healthcare management requires innovation and continued investment.
Continuing Demand for PBM Services
Our outstanding service also is reflected in our membership growth. We began 1998 with 12.3 million PBM members, compared to 10.1 million at the beginning of 1997. This was strong growth, particularly since we lost 1.1 million members during 1997, when our largest client, FHP International, Inc., was acquired by PacifiCare Health Systems, Inc.
In 1997, our PBM processed more than 73 million prescriptions in the
network and grew by 26.5 percent. Mail-order prescriptions increased by 40.8
percent. Our independence from pharmaceutical company ownership is attractive to our clients and a stimulus for continued growth. Our high-quality service
and responsiveness to client needs is what leads to high client retention.
For the second year in a row, Express Scripts received the highest average ranking overall in the Pharmacy Benefit Management Institute (PBMI) Customer Satisfaction Survey. The annual survey targets existing customers of PBMs and evaluates their satisfaction level in 21 categories. We ranked first in nine of those categories and second in nine others.
The Company's strategic alliance with Premier, a nationwide alliance of
integrated healthcare providers, has grown to include more than 1 million covered lives. Also, during the fourth quarter of 1997, Express Scripts announced a new agreement with Wal-Mart Stores to provide PBM services for prescriptions processed through the retailer's managed pharmacy programs. We also renewed our contract with Coventry Corporation for a period of two years through 1999. These agreements capped a year that saw us win several other major contracts, including RightCHOICE Managed Care, Bell Canada and First Canadian Health Management. The agreement with First Canadian Health Management will enroll approximately 640,000 registered Inuits and Indians in July of 1998. We look forward to continued development of PBM services in Canada in the future.
Express Scripts believes that healthcare's reliance on pharmaceutical therapy will continue to grow. In a recent survey of employers conducted by William M. Mercer, a healthcare consulting firm, 54 percent of survey respondents said they likely will introduce or expand managed drug programs and 51 percent will introduce or expand disease management programs. Correspondingly, through our own analysis, we estimate that annual drug costs will grow 10 to 15 percent. This was illustrated in Express Scripts Drug Trends Report 1993-96, released in June of 1997. The report analyzes pharmacy costs and shows the variety of factors that constitute pharmacy cost trends. By examining these factors, it is possible to devise better strategies to both contain the cost and improve the value of pharmaceuticals. The report stated that per-member per-year average wholesale drug ingredient costs rose by 35 percent from 1993 to 1996. One-third of the increase came from medications introduced after 1993.
We remained committed in 1997 to finding new and better ways to help our clients manage these costs. We offered them powerful tools, such as ExpressPreferenceSM, our drug therapy management program that reached a total of 4.7 million lives and ExpressTherapeuticsSM, our advanced clinical drug utilization review module, which was introduced late last year and now covers nearly 100,000 lives. Our clinical pharmacists continued to develop tailored programs to address the management needs of our members.
Other Business Lines
Just as PBM services grew in 1997, so did our non-PBM business lines:
Practice Patterns Science, Inc. (PPS); Express Health LineSM and IVTx, Inc. Our strong performance in 1997 reflected contributions from these complementary healthcare businesses.
As a new product, Express Health LineSM, an informed decision counseling service that features a call center staffed by nurses and pharmacists, met its enrollment targets for the year and now provides its services to more than 1.3 million members.
PPS introduced the PTE-RegistryTM, a national comparative database, as a resource for pharmaceutical manufacturers and healthcare providers.
Recent Developments
Through the acquisition of ValueRx, we are confident that we will create a stronger, more competitive healthcare management company. And, by growing in size and strength, we will be able to offer enhanced services and generate significant economies of scale, which will increase our value to our clients, their members and our shareholders.
Historically, Express Scripts and ValueRx have served different market segments. In general, ValueRx works with larger employer groups, unions and indemnity insurance carriers, while Express Scripts has focused on managed care organizations and smaller group plans by building strong relationships with third-party administrators. ValueRx also has East Coast facilities that will complement Express Scripts' presence in the Midwest and West. This transaction provides us with resources and experience to pursue new business with large and small plan sponsors across the United States and Canada.
When we first considered purchasing ValueRx, we analyzed whether it would fit into our strategy. Our analysis showed that it does. It will enable us to pursue new clients in new markets. We will be able to sell existing products to new customers. And, because we will double in size, we will realize operating efficiencies that will allow us to increase our investment in new products and services.
We want to welcome all of the employees of ValueRx to the Express Scripts family. We all have a tremendous amount of work to do in 1998. We will focus on a smooth integration of the two companies. Our mission is clear: We will continue to create the innovative tools our clients need to improve the quality of healthcare and to better manage its cost, and we will work hard to grow our membership and offer value to our shareholders.
President and Chief Executive Officer