Is Express Scripts Holding Co. (NASDAQ:ESRX) still a Buy?

Berkshire Hathaway Inc.’s (NYSE: BRK.B) only new third-quarter position was Express Scripts Holding Co. (NASDAQ:ESRX), but investors shouldn’t take this as a sign that the largest pharmacy benefit management (or PBM) is right for their portfolios. Express faces a number of challenges in the upcoming year and we may have got a hint of those when the company reported third-quarter sales.

Even though the company showed a gain in net income for the quarter, sales declined from a year earlier. Express narrowed its full-year adjusted earnings per diluted share guidance from a range of $4.84 to $4.92 to a range of $4.86 to $4.90. The new guidance range reflects year-over-year growth of 18% to 19%.

Things could get hairier for the company as it strives to shake off the complexities of integrating its 2012 acquisition of Medco Health Solutions. While it would appear to the casual observer that that buying Medco would give Express a big competitive advantage, investors often overlook the fact that companies have to devote substantial time and resources to make an acquisition work – especially one of this size. The result: sometimes the business suffers.

That’s pretty much what happened when CVS Health Corp. (NYSE: CVS) expanded into the PBM market in 2007 by buying Caremark. Express took advantage of the opening caused by the chaos of integrating Caremark into CVS to expand its business. The same may be happening to Express now.

Express shares are up about 20 percent this year to about $82 per share, beating the DJIA but trailing CVS by about 10 points. Besides the acquisition integration challenge, other caution signs are being raised about Express.  Since the second quarter of 2012, company sales have been essentially flat. No matter how much savings the company can squeeze out, the top line has to grow eventually. If not, it means wringing even more efficiencies out of the operation. In 2015, sales are forecast to grow only about 2 percent – and we’ll see if Express can even hit that mark in an increasingly competitive environment.

Investors should also be concerned that the company’s trailing 12-month EPS growth rate has been on the decline since the second quarter of 2013, dropping from 25 percent to single digits.

To help protect its margins Express Scripts – and CVS, for that matter – are banning certain high-priced drugs, according to a Nov. 25 article in Bloomberg.The company has refuses outright to pay for dozens of drugs, and is making patients justify use of the most expensive medications.

Express is excluding 66 brand-name drugs in 2015 from its main formulary, or list of covered drugs, up from 48 in 2014, when it started exclusions. This move didn’t sit well with three pharmacy compounding companies: They sued Express, claiming that denying insurance claims for their customized medicines in decisions that lack scientific backing threatens to put them out of business.

So can we expect another 20 percent gain in Express’s share price in 2015? That might be optimistic considering the challenges facing the company and some performance trends that seem to be headed in the wrong direction. If you still like this stock, it might be wise to proceed with caution.