Bireme Capital sees a value in Express Scripts Holding Company (Nasdaq: ESRX), a $34-billion market cap pharmacy benefit management (PBM) company in North America. In its Q3 investor letter. Let’s take a look at the fund’s investment thesis on ESRX:

Express Scripts (ESRX) is a company that manages the drug prescription approval and payment process for health plans, companies, and some government entities. In this role they are called the Pharmacy Benefits Manager (PBM). They pool the negotiating power of their customers and seek pricing concessions directly from the drug manufacturers or wholesalers, allowing clients to achieve better pricing than if they negotiated on their own. They also use their expertise to exclude some drugs from coverage—usually drugs for which there are cheaper or better alternatives. Finally, they are somewhat vertically integrated, operating a large mail order pharmacy called Accredo.

We believe the opportunity exists to buy ESRX at a discount to intrinsic value due to a dispute with one of their largest customers, Anthem. This conflict came fully to light in early 2016, when Anthem initiated a lawsuit that claimed $3B in annual overcharging by ESRX. ESRX’s stock price quickly fell from $85 to $65 and has yet to recover, despite the company posting consistently higher EBITDA and earnings since. In fact, with trailing free cash flow (FCF) per share above $6 at the time, this means that the multiple on the stock has collapsed from a healthy ~14x to just over 10x. Since then FCF has expanded and the stock price has declined further, creating a FCF multiple of about 8.5x at the end of the quarter.

Recently ESRX disclosed exactly how much EBITDA they make from their contract with Anthem, which expires 12/31/2019. At about 31% of total EBITDA, their profits on the Anthem business are material. However, we feel that a loss of the Anthem business is more than priced into the stock, and calculate they will earn about $4.50 per share in 2021 when Anthem has fully exited the relationship. At that point the core ESRX business, which grew EBITDA 6% last year, would trade at a still-discounted 13x multiple. We think ESRX is priced for above-market returns.

Headquartered in St. Louis, Missouri, Express Scripts Holding Company is engaged in providing integrated pharmacy benefit management services, including network-pharmacy claims processing, home delivery pharmacy care, specialty pharmacy care, specialty benefit management, benefit-design consultation, drug utilization review, formulary management and medical and drug data analysis services. The company also distributes biopharmaceutical products and provides cost-management and patient-care services. It is one of the 15 biggest healthcare companies in America.

On Wednesday, ESRX closed up 1.52% at $62.12. The stock has a trailing P/E ratio of 10.78 and a forward P/E ratio of 8. Its trailing EPS is $5.76. The company does not pay a dividend.

For the nine months ending September 30, ESRX reported revenues of $74.7 billion, versus $75.4 billion in the same period last year. Net income for the period was $2.19 billion, up from $1.97 billion in 2016. It posted an EPS of $3.72 for the nine-month period, which is slightly up from $3.09 in 2016. For full-year 2017, the company raised its adjusted EPS forecast to a range of $6.97 to $7.05 from $6.95 to $7.05.

ESRX appears to be a popular stock among the hedge funds covered by Insider Monkey. According to our database, there were 43 funds with bullish positions in the company at the end of the second quarter.

Meanwhile, don’t miss reading Bireme Capital’s comments about Humana Inc (NYSE: HUM), a $34-billion market cap health insurance company based in Louisville, Kentucky. Humana is one of the top 12 biggest defense contractors in America.