Ahead of the Bell: Express Scripts

The debt load that pharmacy-benefit manager Express Scripts Inc. will bear is manageable if its $26 billion bid for larger competitor Caremark Rx Inc. transpires and defeats a rival offer from the CVS Corp. drug store chain, several analysts said Tuesday.

Express Scripts will take on a debt load roughly quadruple its annual cash flow if the deal is approved, and Prudential Equity Group analyst David H. Shove said he thinks Express Scripts will be able to pay down the debt. Shove expects new interest expense in a range of $790 million and $810 million during the first fiscal year if the transaction closes, since the company is taking on about $13.4 billion in additional debt.

"However, with strong cash flow and a solid, acquisition-laden track record, we are confident in the company's ability to successfully carry and pay off this level of debt," Shove wrote in a client note.

Wachovia Capital Markets analyst Matt Perry echoed a similar sentiment, saying that Express Scripts' leverage would be 3.6 times the debt/EBITDA (earnings before interest, taxes depreciation and amortization) in 2007.

Perry said it's "a level that we view as manageable, and similar to the level Express Scripts reached in 1999 after two acquisitions."

Perry also said Express Scripts' offer supports his view that fundamentals in the pharmacy benefits manager sector will continue to be strong over the next few years and disputes the notion that the pharmacy benefits manager business is deteriorating.

"To make the offer, we think Express Scripts must be confident that the combined company will generate strong and stable cash flows over the next several years to pay down the debt burden," Perry wrote.

In premarket electronic trading, shares of Express Scripts shed $1.97, or 3 percent, to $68 after closing at $69.97 on the Nasdaq.