As the second quarter earnings season winds down, we thought a review of two of our areas of interest - pharmacy benefit management and streaming video - would be in order. In late June, Chris Retzler visited a number of companies in St. Louis, including Express Scripts (ESRX), while John Barr attended Brightcove's (BCOV) PLAY 2012 global customer conference in Boston.
Express Scripts (ESRX, +3.8% in July) is a leading pharmacy benefits management company and on June 30, was the largest holding in the Needham Growth Fund as well as a significant holding in the other two funds. Express Scripts and Medco Health Solutions recently merged and announced expected synergies of $1 billion.
We see Express Scripts contributing savings to the U.S. healthcare system and benefitting from the number of drugs going generic in 2012, including Plavix, Viagra and Lexapro. In 2Q12, Express Scripts filled 77.8% of its prescriptions with generics, which are lower cost for the payor and higher margin for Express Scripts. Availability of a generic drug increases utilization and therefore increases Express Scripts' fulfillments.
Chris Retzler had the opportunity to visit with management and tour Express Scripts' St. Louis headquarters. The visit reinforces our Firm's opinion of the strength of the business opportunities and market leadership. It's an impressive operation that shows that scale and technology really matter in this business. His visit to the mail distribution facility provided an opportunity to see the significant investment required to achieve a high quality, low error drug dispensing operation. The management is well positioned to drive significant synergies from the MedCo merger across multiple areas of the company. Express Scripts reported 2Q12 earnings on August 8 and the results exceeded expectations. Express Scripts has a strong business model that can handle uncertain markets.
On July 18, Express Scripts and Walgreen Co. (WAG) announced a multi-year agreement that allows Walgreen participation in Express Scripts' largest and broadest retail pharmacy network. The companies had stopped working together on January 1 - Express Scripts comprised 10% of Walgreen's prescription fulfillment volume in 2011 and prior to this new agreement, business was going to Walgreen's competitors. Ultimately, the selling season for ESRX was not impacted; however, this "breakup and makeup" demonstrates the relevance of Express Scripts' network in the pharmacy benefit management universe.
John Barr attended Brightcove's (BCOV, -3.3% in July) PLAY 2012 Conference in Boston June 25-27. Brightcove is the leading online video hosting and online video player solution. We were impressed by the opening keynote speech featuring Brightcove founder, Jeremy Allaire, and Akamai CEO, Paul Sagan (AKAM, +10.8% in July). On June 30, Akamai was the largest holding of the Needham Aggressive Growth Fund and Brightcove was a holding in NEEGX and NEAGX.
Brightcove's Jeremy Allaire sees content rapidly "appifying," or integrating across the television, the tablet and the smartphone. He views Apple's (AAPL) unannounced but much anticipated TV product and also Microsoft's (MSFT) Xbox as having a significant impact on the market. He believes Apple will give users the ability to transmit and manipulate content from their touch devices (iPhone and iPad) to the TV screen. Jeremy believes that "Steve Jobs' 'cracking the code of TV' was that he actually figured out a model to use the TV as a compelling application platform." Apple does not need to enter the "glass" portion of the television business, but can change the way video is consumed and interacted with in the home. At PLAY 2012, Brightcove introduced AppCloud Core, which is a free cloud-based service for developing dual screen TV apps for Apple and other devices. As of June 30, Apple was a top-ten holding in NEAGX.
Akamai's Paul Sagan discussed the theme that better video quality drives engagement and therefore monetization. Users are now abandoning sites after two seconds of waiting. Akamai's network of over 100,000 servers speeds delivery of video and data.
On July 25, Akamai reported strong results with growth in both its cloud-based enterprise and streaming services. Akamai is key to the delivery of video over the Internet which is a timely topic as NBC is offering every Olympic event to cable system subscribers on its www.nbcolympics.com site.
Another highlight of PLAY 2012 was a presentation by Steve Rotter, Brightcove's VP of Marketing, titled "Unlocking the Potential of Content Marketing." He discussed the 5 C's: content, context, channel, community and closed loop analytics. Most interestingly, Steve recommended the video "Coca-Cola Content 2020." Coca-Cola's 2020 Vision defines their mission, vision and culture for the next ten years.
"Coca-Cola Content 2020" is an engaging video that outlines how Coke sees marketing through the next decade. They highlight the move from creative excellence to content excellence. Coke sees the key to marketing in the future as creating ideas so contagious, they can't be controlled. Liquid (pun intended), linked brand stories create conversations with and about Coke, therefore every contact point with a customer tells an emotional story. Coke sees this initiative as key to doubling the size of their business. We recommend the video.
Coca-Cola Content 2020 Part Two
Coca-Cola Content 2020 Part One