UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

Commission File Number: 1-31312

MEDCO HEALTH SOLUTIONS, INC.

(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)
100 Parsons Pond Drive, Franklin Lakes, NJ
(Address of principal executive offices) 22-3461740
(I.R.S. Employer Identification No.)
07417-2603
(Zip Code)

Registrant’s telephone number, including area code: 201-269-3400

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, Par Value $0.01 7.25% Senior Notes Due 2013	New York Stock Exchange New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ  No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o  No þ

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ	Accelerated filer o
Non-Accelerated filer o	Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

The aggregate market value of the Registrant’s voting stock held by non-affiliates as of June 25, 2011 was $20,806,818,951. The Registrant has no non-voting common equity.

As of February 6, 2012, the Registrant had 388,124,321 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Medco Health Solutions, Inc.’s Proxy Statement for its 2012 Annual Meeting of Shareholders are incorporated by reference in this Annual Report on Form 10-K in response to Part III (Items 10 through 14).

MEDCO HEALTH SOLUTIONS, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Form 10-K Item Number:		Page No.
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		21
Item 1B.	Unresolved Staff Comments		32
Item 2.	Properties		33
Item 3.	Legal Proceedings		33
Item 4.	Mine Safety Disclosures		33
Executive Officers of the Company			34
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		38
Item 6.	Selected Financial Data		41
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		44
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		79
Item 8.	Financial Statements and Supplementary Data		80
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		117
Item 9A.	Controls and Procedures		117
Item 9B.	Other Information		118
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		120
Item 11.	Executive Compensation		120
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		120
Item 13.	Certain Relationships and Related Transactions, and Director Independence		122
Item 14.	Principal Accounting Fees and Services		122
PART IV
Item 15.	Exhibits, Financial Statement Schedules		123
Signatures			129
Exhibit 10.2
Exhibit 12.1
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I

Item 1. Business.

Overview

We are a leading healthcare company that is pioneering the world’s most advanced pharmacy^® and our clinical research and innovations are part of Medco making medicine smarter™ for more than 65 million members in 2011. Medco provides clinically driven pharmacy services designed to improve the quality of care and lower total healthcare costs for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans. Our unique Medco Therapeutic Resource Centers^®, which conduct therapy management programs using Medco Specialist Pharmacists who have expertise in the medications used to treat certain chronic conditions, as well as Accredo Health Group, Medco’s Specialty Pharmacy, represent innovative models for the care of patients with chronic and complex conditions. Additionally, Medco has capabilities and expertise in post-approval safety and economics outcomes research such as Risk Evaluation and Mitigation Strategies for biotechnology and other pharmaceutical drugs through our subsidiary, United BioSource Corporation^® (“UBC”).

Our business model requires collaboration with payors, retail pharmacies, physicians, pharmaceutical manufacturers, the Centers for Medicare & Medicaid Services (“CMS”) for Medicare, and, particularly in Specialty Pharmacy, collaboration with other third-party payors such as health insurers, and state Medicaid agencies. Our programs and services help control the cost and enhance the quality of prescription drug benefits. We accomplish this by providing pharmacy benefit management (“PBM”) services through our national networks of retail pharmacies and our own mail-order pharmacies, as well as through Accredo Health Group.

Our clients are generally entities that provide prescription drug benefits to their underlying membership, such as members of their benefit plans or their employees. We operate in a competitive environment as clients and other payors seek to control the growth in the cost of providing prescription drug benefits and leverage prescription drug therapy to lower overall medical costs. Our business model is designed not only to reduce the level of drug cost increase, also known as drug trend, but also to close gaps in pharmacy care to improve patient health and reduce total medical spending levels by utilizing advanced clinical tools to encourage adherence. We reduce drug costs for clients primarily through programs that: maximize the substitution rate of expensive brand-name drugs for lower-cost clinically equivalent generic drugs; drive competitive discounts from brand-name and generic drug pharmaceutical manufacturers, including rebates from brand-name pharmaceutical manufacturers; secure discounts from retail pharmacies; and apply our sophisticated service innovations and efficiently administer prescription dispensing through our mail-order pharmacies.

Traditional prescription drug programs (“PDP“s) include the dispensing of pills primarily in capsule or tablet form. These medicines are produced by brand-name and generic pharmaceutical manufacturers, and are not as complicated to dispense or administer as specialty products. Specialty pharmacy drugs are generally manufactured by biopharmaceutical or biotechnology companies, tend to be more expensive than traditional medicines and can cost as much as several hundred thousand dollars per patient per year. These specialty drugs are often infusible or injectable and require special handling, temperature control and ancillary equipment, as well as a higher level of individualized patient care as compared to traditional medicines. Disease categories treated by specialty drugs, including, for example, multiple sclerosis and autoimmune disorders, are often the most complex to manage.

The advanced technologies we have developed are instrumental to our ability to drive growth, increase service levels, reduce costs and improve health outcomes. Our technology platform is designed to seamlessly integrate prescription management at both mail order and retail with our client and member services. The cornerstone of our mail-order pharmacy technology is our single networked information technology platform, which connects prescription ordering functions at our prescription order processing

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pharmacies with our state-of-the-art automated dispensing pharmacies. At our call center pharmacies and our work-at-home locations, our experienced customer service representatives and consulting pharmacists use advanced technology to provide real-time service to members, including specialized prescription and health information. Our Web and integrated voice-response phone technologies allow members to easily and quickly manage their prescription drug benefits. These technologies also allow members to enroll in mail-order pharmacy service, submit a refill or renewal mail-order prescription for processing, track the status of a mail-order prescription, price a medication and locate in-network retail pharmacies in their area, along with other features.

Our proprietary Web-based solutions improve client and member service by facilitating prescription ordering and by providing important healthcare information, including tools to assist patients in managing their own levels of prescription adherence. We support distinct websites for clients, members, physicians and pharmacists that provide critical benefit information and interactive tools aimed at helping members to take their medications as prescribed, to use lower-cost drugs and to simplify benefit administration.

Our data center links our mail-order pharmacy operations, including our call center pharmacies, work-at-home sites, our websites, and the retail pharmacies in our networks. The data center enables us to efficiently receive, process and administer claims, and dispense prescription drugs with speed and accuracy in a secure environment. It also allows us to easily detect potential adverse drug events and alert the patients and prescribing physicians of potentially harmful drug interactions.

Our innovative and flexible programs and services have enabled us to deliver effective drug trend management for our clients and offer a portfolio of initiatives designed to improve the quality of care for members. Our services focus on:

• Providing high quality clinical care to members with chronic and complex conditions through access to Medco Specialist Pharmacists, located in Medco Therapeutic Resource Centers^®, who have expertise in the medications used to treat specific chronic conditions.

• Effectively managing drug utilization, a key factor in reducing drug trend, through a wide range of trend management tools, including drug utilization review programs and rules governing the conditions under which drugs are covered, according to the requirements established by our clients.

• Providing customized plan design, partnering with clients to create innovative solutions, and delivering solutions with speed and accuracy. We offer ongoing consulting services and model clinical and financial outcomes for clients based on a broad range of plan design and formulary choices.

• Providing a flexible array of Medicare Part D Prescription Drug Program (“Medicare Part D”) products to support our clients’ unique PDP, to facilitate benefits in a retiree drug subsidy environment and with Employer Group Waiver Programs, or to serve individual Medicare-eligible consumers nationwide through our own PDP offerings.

• Offering a broad base of specialty medicines at competitive prices, and with a comprehensive service model designed to ensure patient safety, product integrity, and proper drug administration.

• Offering the cost-saving and clinical advantages of mail order to our clients.

• Actively identifying opportunities to increase the use of lower-cost generic drugs as alternatives to brand-name medicines.

• Enhancing formulary compliance through physician, client and member communications and education programs, including therapeutic brand-to-“preferred-brand” interchange and step therapy programs. The use of multi-tiered co-payment and other cost-sharing payment structures, and the increased use of mail order further enhance formulary compliance.

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• Developing and publishing scientific evidence to guide the safe, effective and affordable use of medicines.

In 2011, we administered 757 million prescriptions or 981 million adjusted prescriptions (adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions) recorded net revenues of $70 billion and net income of $1.5 billion; and reported earnings before interest income/expense, taxes, depreciation and amortization, or EBITDA, of over $3 billion. See Part II, Item 6, “Selected Financial Data,” of this Annual Report on Form 10-K for a definition and calculation of EBITDA and EBITDA per adjusted prescription.

We have two reportable segments, Pharmacy Benefit Management and Specialty Pharmacy. Business segment information and geographic financial information is set forth in Part II, Items 7, 7A and 8 (Note 13, “Segment and Geographic Data” to our audited consolidated financial statements) of this Annual Report on Form 10-K.

When we use “Medco,” the “Company,” “we,” “us” and “our,” we mean Medco Health Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries. When we use the term “mail order,” we mean inventory dispensed through Medco’s mail-order pharmacy operations.

Agreement and Plan of Merger with Express Scripts, Inc.

On July 20, 2011, we entered into a definitive Merger Agreement with Express Scripts, Inc. (“Express Scripts”) and certain of its subsidiaries (as amended on November 7, 2011 by Amendment No. 1 thereto, the “Merger Agreement”) providing for the combination of Express Scripts and Medco under a new holding company, New Express Scripts. As a result of the transactions contemplated by the Merger Agreement, former Medco shareholders and Express Scripts shareholders will own stock in New Express Scripts. Subject to the terms and conditions set forth in the Merger Agreement, upon the closing of the transaction, each share of Medco common stock will be converted into the right to receive $28.80 in cash and 0.81 shares of New Express Scripts. Upon closing of the transaction, Express Scripts’ shareholders are expected to own approximately 59% of the combined company and Medco’s shareholders are expected to own approximately 41%. The transaction is expected to close in the first half of 2012. The merger is subject to regulatory clearance and other customary closing conditions. The shareholders approved the merger on December 21, 2011. Currently, Express Scripts and Medco are independent companies, and they will continue to be managed and operated as such until the completion of the pending merger.

Special Note About Forward-Looking Statements

We make forward-looking statements in this Annual Report on Form 10-K, including in the sections entitled “Business,” “Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and future financial results of the PBM and specialty pharmacy industries, and other legal, regulatory and economic developments. Forward-looking statements include, among other things, information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition, and the effects of future legislation or regulations. We use words such as “anticipates,” “believes,” “plans,” “expects,” “projects,” “future,” “intends,” “may,” “will,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue” and similar expressions to identify these forward-looking statements.

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Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this Annual Report on Form 10-K, except as required by law.

The risk factors discussed in “Risk Factors” and other risks identified in this Annual Report on Form 10-K could cause our actual results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.

Industry Overview

PBMs emerged in the 1980s, primarily to provide cost-effective drug distribution and claims processing for payors. The PBM industry further evolved in response to the continued escalation of healthcare costs, as benefit plan sponsors sought to more aggressively contain costs. PBMs developed strategies to effectively influence both supply and demand. On the supply side, PBMs leverage their buying power to negotiate purchase discounts and rebates from manufacturers, and discounts from distributors and retail pharmacies. On the demand side, PBMs educate clients, members and physicians on cost-effective prescription medications and apply various techniques to encourage members to make cost-effective choices, such as the use of less expensive generic drugs and the more efficient mail-order channel. Generic substitution for drugs on which patents have expired is a significant and growing factor in reducing costs. PBMs also developed clinically-based programs and expertise to counsel its stakeholders with a focus on improving clinical outcomes for members and reducing costs.

Business Strategy

Our business strategy is guided by our quest to leverage the power of pharmacy to reform the way healthcare is delivered—lowering costs and improving outcomes. We believe we have unique clinical and technological competitive advantages that enable us to deliver enhanced services to clients and members, and effectively manage drug trend, ultimately reducing the total cost of healthcare. These advantages include our automated mail-order pharmacy capability; our specialty pharmacy; our specialized Therapeutic Resource Centers^®; our investments in other systems and technologies; our extensive value-added programs and services offerings; our ability to generate significant discounts and rebates that translate into client and member savings; the cost-saving potential from our comprehensive generic substitution programs; and our research capabilities through UBC and the Medco Research Institute^®. See “—Products and Services—Research Services” below for more information on UBC and the Medco Research Institute^®.

Our business strategy includes a financial focus to deliver earnings growth and build shareholder value through a combination of strategies, including: disciplined selling, general and administrative expense control; managing cash flow generation to redeploy funds internally through investments in the business; managing debt levels; driving improvements in return on invested capital; and expanding service revenues. Our net income is driven by our ability to generate favorable discounts on generic prescription drugs dispensed from our mail-order pharmacies; earn discounts and rebates on brand-name drugs; negotiate competitive client pricing, including rebate sharing terms; earn administrative fees and price discounts, as well as negotiate favorable retail pharmacy reimbursement rates; provide competitively priced specialty pharmacy products and services; and deliver highly differentiated and innovative services in a cost-efficient manner.

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Medco’s strategy for continued success and profitability includes the following key growth drivers and other business initiatives:

Key Growth Drivers

• New Business and Renewals: Retaining existing clients and winning new clients by profitably providing quality service, engaging members, leveraging technology and delivering new products and services, all of which deliver value to our clients and members and are critical to our business strategy.

• Generics: Optimizing the value of generics in light of significant brand-name patent expirations expected over the next several years, and continued development of programs designed to further reduce the cost of prescription healthcare.

• Mail Order: Maximizing the mail-order prescription opportunity for patients with chronic and complex diseases through enhanced communication and plan design.

• Specialty Pharmacy: Expanding our specialty pharmacy model by providing new and creative services that reduce drug cost, simplify the administrative process, and further enhance patient safety and convenience, including home-based and ambulatory specialty infusion services.

• Solutions for Seniors: Developing innovative and flexible approaches that assist our health plan and employer clients in successfully managing a range of opportunities available to seniors through Medicare Part D and other retiree programs.

• Services to Pharmaceutical Companies: Expanding the array of services we provide to pharmaceutical companies, such as our capabilities to provide Risk Evaluation and Mitigation strategies for biotechnology and other pharmaceutical drugs.

• Clinical Innovation: Executing a next-generation clinical strategy that is designed to establish a new benchmark for pharmacy healthcare by engaging members and modeling behaviors to improve clinical outcomes and reduce costs. Through our Medco Therapeutic Resource Centers^®, Medco Specialist Pharmacists — who have expertise in the medications used to treat certain chronic conditions—help achieve better clinical outcomes for patients with chronic and complex conditions by closing gaps in care. We also have an expanded and global capability to participate in safety, economic evaluation, outcomes and personalized medicine research for the benefit of all stakeholders in healthcare. In addition, we provide guidance and decision support for genomic medicine to patients, providers, payors and employees.

• Pioneering Research: Personalizing medicine represents an opportunity to enhance our clinical programs by identifying a patient’s genetic profile through laboratory testing, which guides prescribing physicians to more accurately and quickly select the best medicine and the most appropriate dose optimized to an individual’s unique genotype, improving health outcomes and reducing overall healthcare costs.

In order for our strategy to be successful, we must anticipate and respond to both the common and unique needs of our clients and other payors, and we must continue to deliver scalable yet flexible capabilities and solutions that are affordable for payors and profitable for us. This includes delivering high-quality client and member service; leveraging our significant technology investments to drive business agility and growth; reducing costs; actively pursuing sources of growth from new clients and increasing our clients’ use of our value-added services, including our mail-order pharmacies.

See “—Competition” below for a description of competition in the PBM industry.

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Products and Services

To support our efforts to control prescription drug costs for our clients while supporting the appropriate use of prescription drugs, we offer a wide range of programs and services that help manage the cost, improve the quality and streamline the administration procedures for traditional and specialty drugs.

Plan Design

Our client teams take a consultative approach to assisting clients in the development and implementation of plan designs that suit their specific needs. Each client has access to the skills of various Medco professionals, including experienced clinical, financial and information technology specialists. Each client’s success in achieving the business objectives of their specific pharmacy benefit strategy ultimately depends on the design of their benefit plan. These customized plan designs take into account formulary structure, retail pharmacy management, mail-order initiatives, specialty pharmacy, drug coverage and exclusion, cost-share options, and generic drug utilization initiatives.

Integrating Medicare Part D considerations into plan designs is increasingly important to clients with Medicare-eligible members. We support clients by providing several program options: the Retiree Drug Subsidy program, which is offered by CMS to reimburse municipalities, unions and private employers for a portion of their eligible expenses for retiree prescription drug benefits; the Medco Employer Group Waiver Plan, a group-enrolled Medicare Part D option for employers and labor groups; as well as serving as the “PBM inside” for a number of Medicare Part D sponsors that offer drug-only and integrated medical and Medicare Part D drug benefits. Medco also offers an individual prescription drug plan, and the Medco Medicare Prescription Plan^®, which is offered to beneficiaries in all 34 Medicare regions across the U.S., as well as Puerto Rico.

Our advanced information technologies allow our professionals to design with clients the plan structure that best meets the clients’ benefit cost objectives, while providing an optimized benefit to members of the clients’ plans. Recognizing the diverse plan design and administrative needs of different payors, our account teams are organized by industry-specific customer groups designed to ensure that we provide customized solutions that satisfy the distinctive needs of our clients and their respective membership. As an integral part of our consultative approach, our account teams use proprietary software tools that we have developed to model the effects of different plan designs based on historical data, including Medco’s EXPERxT Advisor^®, an automated tool that provides real-time plan design modeling capability for our clients. Clients can use these models to judge the impact of specific plan design elements before they are implemented.

Clinical Management

We also offer clinically-based programs that identify drug waste representing unnecessary prescription use and potential abuse related to particular categories of questionable drug claims. We capitalize on our clinical expertise and advanced information technology infrastructure to help reduce client costs for prescription drugs in a medically appropriate manner, while striving to improve safety and the quality of care for members. We do this primarily by delivering evidence-based clinical programs and services to our commercial clients based on clinical rationale reviewed by the independent Pharmacy and Therapeutics Committee.

Our Pharmacy and Therapeutics Committee makes decisions independently, and is comprised of a distinguished independent group of clinicians. This independent advisory body guides us in maintaining a consistent and therapeutically appropriate approach to the clinical content of certain programs and services, including, for example, the development of formularies and coverage criteria.

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We offer coverage management and utilization management programs, including drug utilization review, which is a systematic evaluation of individual and population use of prescription drugs, to identify and address over-use, under-use, and misuse of prescription drugs. As a result of these evaluations, we alert pharmacists, physicians and patients to possible issues, such as drug-drug interactions, and opportunities to consider alternate therapies, including generics and formulary preferred drugs.

Our clients have the option of integrating our programs into their pharmacy benefit plan. To monitor our activity under these programs, if requested by the client, we regularly report on the success of our programs, review clinical and financial data, and identify opportunities for improvement.

We offer a complete portfolio of innovative clinical solutions. Among them is our proprietary RationalMed^® service, an advanced patient safety program designed to improve patient care and lower total healthcare costs. For clients who participate, RationalMed^® analyzes patients’ available prescriptions, medical and laboratory claim records to detect gaps and errors in care, and then engages physicians, pharmacists and patients in making appropriate changes, resulting in reducing inappropriate and unsafe prescription use, reducing gaps in care and avoiding unnecessary medical costs.

For Medicare Part D plans, Medco offers a robust Medication Therapy Management program, designed to ensure that covered Medicare Part D medications prescribed to targeted beneficiaries are appropriately utilized to optimize therapeutic outcomes. Medco uses the Chronic Disease Score, a proprietary software algorithm, to identify beneficiaries who meet the criteria established by CMS.

Our clinical expertise has been further enhanced by our emerging personalized medicine capabilities. As personalized medicine becomes a more prominent component of prescription guidelines, our ability to build a new generation of solutions to deliver precision medicine will result in improving safety and efficacy while enhancing clinical outcomes and lowering costs.

Pharmacy Management

One of the core features of our PBM service is the management of prescription claims.

Mail-Order Service. The Medco Pharmacy^®, our mail-order service, is the industry’s largest pharmacy based on the number of prescriptions dispensed. In 2011, the Medco Pharmacy^® filled 113 million prescriptions. Mail order is most appropriate for chronic and complex maintenance medications. Typically, mail order reduces costs for clients as a result of Medco’s purchasing scale, high levels of automation and efficiency, increased generic dispensing and higher rebates through enhanced formulary compliance. Many members prefer mail order for maintenance medications because they can receive up to a 90-day supply instead of the commonly dispensed 30-day supply at most retail pharmacies. Members also benefit from generally lower co-payments at mail order and the convenience of receiving their prescriptions delivered to their home. Members can place first-fill, refill and renewal orders through the mail or they can request refill or renewal orders easily online through our member website, medco.com^®, or our integrated voice-response phone system. Additionally, physicians can fax first-fill prescriptions to the Medco Pharmacy^® or use point-of-care or e-prescribing technologies.

In our prescription order processing pharmacies, our pharmacists, technicians and other staff focus on pharmacy activities such as reviewing, recording and interpreting incoming prescriptions, screening for interactions based on each patient’s drug history profile, resolving benefit issues with rules that are determined by plan sponsors, resolving clinical or prescription clarification issues with physicians and collecting the co-payment from the patient. We use image-based technology, which provides for quick access to prescription orders and promotes efficient processing.

Our Medco Therapeutic Resource Centers^®, located within our mail-order pharmacy operations, are an integral part of the prescription order processing function and are designed around the theory that specialization leads to better pharmacy care for members with chronic and complex conditions. To better serve these members and their plans, our pharmacists receive additional specialized training in the chronic conditions that are generally associated with significant gaps in care and significant costs, such as

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diabetes, heart disease and asthma. Medco Specialist Pharmacists of a given specialty practice together in centers dedicated to the pharmacy care of people with needs in that disease category. Our scale and technology allow us to dedicate entire pharmacy practices to a single specialty and bring the services of our Medco Specialist Pharmacists to the members who need them, as they need them.

Once the prescription ordering processes are completed, the prescriptions are approved for dispensing and electronically routed to one of our mail-order dispensing pharmacies. All of our Medco mail-order pharmacies are networked into one integrated systems platform. This approach to mail-order operations frees the time of our professional pharmacists so they can remain focused on patient care; it also optimizes the efficiency of the dispensing function, improving safety and reducing costs.

In our dispensing pharmacies, the focus is on fulfillment and distribution of medications to patients. Our dispensing pharmacies use state-of-the-art, patented automated technology to dispense tablets and capsules, as well as items dispensed in original packaging. The dedicated teams of pharmacists and pharmacy personnel achieve Six Sigma^® quality levels and embrace Six Sigma^® process control and continuous improvement principles to ensure patients get the right medication at the right time. Through the efforts of our high-performing people and technology, we are able to use optimal dispensing methodologies to dispense prescriptions and then combine and sort orders for shipment to reduce delivery times and place the medication in the hands of the patient as quickly and efficiently as possible.

Retail Pharmacy Networks. We have contractual relationships covering over 60,000 independent and chain retail pharmacies that have agreed to participate in one or more of our retail networks. A network offers members access to a choice of pharmacies, while providing clients with contracted discount rates that we negotiate with retail pharmacies. In general, these rates for brand-name drugs are at a discount to the average wholesale price of the drug, which is the current standard pricing unit used in the industry. In addition, we determine a maximum allowable cost for most generic drugs. Our retail pharmacy network agreements also include professional dispensing fees paid to the retail pharmacy. Clients generally select a retail pharmacy network based on the number and location of pharmacies in the network and the competitiveness of the discounts that the network offers. Pharmacies in a network also agree to follow our policies and procedures designed to enhance specific performance standards regarding patient safety and service levels.

Specialty Pharmacy Management. Accredo Health Group provides an enhanced level of care and therapy management services to patients taking specialty medicines to treat complex or chronic conditions. Accredo Health Group focuses on dispensing infused, injectable, inhaled, and oral drugs that require a higher level of patient services and support compared to what typically is available from traditional pharmacies. Many specialty drugs have FDA safety and monitoring requirements. Accredo Health Group’s therapy teams may include specialty-trained pharmacists, registered nurses and patient service representatives. Our patients receive counseling and education services that include, but are not limited to, training on how to self-administer specialty pharmacy medications, advice on how to manage potential side-effects, and continuous 24-hour a day access to clinical resources that assist patients in managing critical aspects of care. Accredo Health Group dispenses specialty medications directly to the patient, the patient’s physician, or an infusion center with packaging and temperature-controlled handling and shipping as appropriate to maintain product integrity. The shipment may contain ancillary supplies required for administration. A majority of products are dispensed and shipped from three specialty pharmacy facilities. Accredo Health Group also maintains branch and infusion pharmacies across the United States. In some therapies, Accredo Health Group provides administration devices, supplies and home nursing services.

Call Center Pharmacies. We operate call center pharmacies, each of which is staffed by pharmacists and service representatives. Personnel at our call center pharmacies are available to answer questions and provide information and support to members 24 hours a day, seven days a week, for members using either our mail-order service or our retail pharmacy networks. Our call center pharmacies also provide information and services to physicians and pharmacists who provide service to our clients’ members. We also have a substantial number of work-at-home call center representatives, which allows flexibility in providing appropriate coverage and contingency planning. The majority of our call center representatives are Medco employees. We have, on a limited basis, outsourced some call handling capabilities to third-party vendors, including the management of inbound calls from retail pharmacies.

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Reimbursement Services. With Accredo Health Group’s focus on specialty drugs to treat specific chronic diseases, significant expertise has been developed in managing reimbursement issues related to the patient’s condition and treatment program. Due to the long duration and high cost of therapy generally required to treat these chronic disorders, the availability of adequate health insurance is a constant concern for this patient population. Generally, the payor, such as an insurance provider under a medical benefit, is contacted prior to each shipment to determine the patient’s health plan coverage and the portion of costs that the payor will reimburse. Reimbursement specialists review matters such as pre-authorization or other prior approval requirements, lifetime limits, pre-existing condition clauses, and the availability of special state programs. By identifying coverage limitations as part of an initial consultation, we can assist the patient in planning for alternate coverage, if necessary. In addition, we accept assignment of benefits from numerous payors, which substantially eliminates the claims submission process for most patients. Historically, specialty drugs were primarily reimbursed by the patient’s health insurance plan through a medical benefit. This has evolved where, based on the type of drug dispensed, an increasing percentage of transactions are reimbursed through a prescription card benefit, which typically accelerates reimbursement. Additionally, diabetes drugs and supplies dispensed under the Liberty brand require similar reimbursement services to assist patients in navigating the complex requirements of government and commercial payors.

Web-based Services

Our web-based services have been recognized as the most advanced and comprehensive in the PBM industry. Not only do we offer what we believe is the industry’s leading consumer website for members, we also offer sites for clients and retail pharmacists that provide interactive tools aimed at improving compliance with plan goals, simplifying benefit administration, and providing critical benefit and medical information. Our web-based prescription savings program tool called My Rx Choices^® is a complimentary program that provides members with available lower-cost options to the medications they take on an ongoing basis in order to help them save on prescription drug costs. The program provides members with greater transparency around their benefits and facilitates more informed patient-physician dialogue, and is designed to lead to lower costs for our clients and their members.

Member-Oriented Web Services. Our member website capabilities allow members to self-manage their prescription benefits, while encouraging the use of safe, effective therapies that comply with their plan’s provisions. These services include an online alert function to its member website capability that informs members taking maintenance medications who are registered on medco.com^® of gaps in care that could harm their health, and enable them to take action to help close those gaps. Closing these gaps can help clients and members avoid significant preventable healthcare costs due to avoidable hospitalizations and emergency room visits. In 2011, Medco introduced the Medco Pharmacy™ mobile application, designed to lower costs for both clients and members and offer another convenient way for members to manage their prescription benefit program. Our member website, medco.com^®, was the first Web pharmacy site to be certified by the National Association of Boards of Pharmacy.

Medicare Part D Web Services. Our member website also supports pre-enrollment and post-enrollment activities on behalf of our Medicare PDP and programs serving multiple clients. Prospective Medicare PDP participants and their caregivers can use the pre-enrollment site’s Plan Compare tool to accurately project costs for all their medications. The post-enrollment site allows members who have signed up to receive a Medicare Part D benefit from either Medco or one of our clients to securely manage all aspects of their prescription program.

Client-Oriented Web Services. Our client website provides online access to Medco’s proprietary tools for reporting, analyzing and modeling data, clinical-utilization management and decision-support, plan administration, including eligibility and claims reviews, the latest industry news, and easy submission and tracking of service requests. Clients who perform their own member service can use our client website to update eligibility data and counsel members on all aspects of their pharmacy benefit, formularies, co-payments and coverage provisions, including the location of retail network pharmacies. Clients also have the ability to view detailed, consolidated claims for retail and mail-order service and issue prior-authorization approval. We can tailor access to the specific needs of different users involved in managing the pharmacy benefit within the client organization, limiting access only to authorized individuals.

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Pharmacist-Oriented Web Services. Our Pharmacist Resource Center offers online support for retail pharmacies that participate in our national networks. This service provides pharmacists with the latest information on new benefit plans, plan design changes, pricing information, drug recalls and alerts, as well as online access to our pharmacy services manual. Pharmacists can use this service to check patient eligibility, determine coverage and review claims status for plan members. The center also gives participating pharmacies e-mail access to our pharmacy services help desk.

Research Services

In 2009, we established the Medco Research Institute^®, a subsidiary that coordinates, extends and amplifies Medco’s research initiatives by evaluating and demonstrating the effectiveness of new and existing clinical interventions. Its research and development activities are designed to translate scientific findings into clinical practice through services offered by Medco to benefit Medco’s clients and members. The Medco Research Institute^® also works collaboratively with outside entities, including academic organizations, diagnostic companies and, in certain cases, the pharma- and biopharmaceutical industries, and, as part of its operations, maintains certified laboratory capabilities.

Services to Pharmaceutical Companies

We expanded our suite of services provided to pharmaceutical companies with the acquisition of UBC in September 2010. UBC is a leader in serving life sciences industry clients and is focused on developing scientific evidence to guide the safe, effective and affordable use of medicines. UBC also provides services and technologies which seek to improve the efficiency, accuracy and integrity of clinical development processes. UBC’s services include evidence generation in peri- and post-approval product development, safety and risk management, health economics, outcomes research, value/payor research, medical publications, scientific communications, clinical investigator training, data quality support and trial automation services. Through UBC, Medco now has the capability to conduct Risk Evaluation and Mitigation Strategies research and analysis with respect to safety and economics outcomes for biotechnology and other pharmaceutical drugs. Revenues from data analytics and research associated with UBC are reflected as a component of service revenues in our consolidated statements of income.

Physician Services

Helping physicians to prescribe more cost-effective therapies and providing easy physician access to our mail-order pharmacy services are key Medco objectives. We offer a number of programs designed to meet these goals, from our Physician’s Service Center, which is dedicated to answering physician questions and accepting phone prescriptions, to products like RationalMed^® and Physician Practice Summaries, which inform physicians about prescribing options and patterns for their Medco patients.

We encourage physicians to prescribe electronically through a number of initiatives, including through our ownership interest in Surescripts^®, which promotes a standardized platform to route prescriptions from prescribers to pharmacies, and our involvement in regional initiatives that promote electronic prescribing such as the Southeast Michigan ePrescribing Initiative (SEMI) undertaken by Medco and the three largest U.S. auto makers.

Our approach to the physician community includes the establishment of a department for Physician Advocacy & Strategy, which considers the physician viewpoint in the development of our products and services. We use market research with practicing physicians and their staff to better understand the needs of the physician office in working with Medco effectively.

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Contractual Relationships

Clients. Our net revenues are principally derived from contracting with clients to provide prescription drugs to their members through our mail-order pharmacies and our networks of retail pharmacies. Our PBM client contracts provide that a client will pay for drugs dispensed to its members at specified discounts to average wholesale prices or other industry benchmarks, plus the applicable dispensing fee. Both the specified discounts to average wholesale prices and the applicable dispensing fee vary based on whether the drug dispensed is a brand-name drug, generic drug or a specialty drug, and whether the prescription is dispensed through our mail-order pharmacies or a pharmacy in our retail network. Clients may also pay an administrative fee or other fees for various services we provide. These services include claims processing, eligibility management, benefits management, formulary compliance management, clinical and retail pharmacy network management, and other related services. Client contracts may also provide that we will share with clients some or all of the rebates we receive from pharmaceutical manufacturers for that client’s utilization.

Additionally, many of our contracts with clients contain provisions that guarantee the level of service we will provide to the client, the minimum level of rebates or discounts the client may receive, closure of gaps in care, or guaranteed savings levels. These clients may be entitled to performance penalties if we fail to meet a service or cost guarantee. The majority of our clients are party to these types of contracts, and our clients are generally entitled to audit our compliance with their contracts.

In some cases, clients contract with us to provide only a subset of services or individual services. For example, a client may engage Medco to provide mail-order pharmacy, manage a network of retail pharmacies, or provide formulary management services. These clients typically are entities that provide and/or administer both medical and pharmacy benefits, or primarily pharmacy benefits, to their downstream customers, such as health plans or other pharmacy benefit managers. We also offer “private label” services to clients, whereby we can provide our services under our client’s brand names.

Pharmaceutical Manufacturers. Our contracts with pharmaceutical manufacturers provide us with rebates and fees for prescription drugs dispensed through our mail-order pharmacies and retail pharmacy networks, discounts for prescription drugs we purchase and dispense from our mail-order pharmacies, and performance-based service fees associated with certain specialty drugs. Rebates and fees are generally calculated as a percentage of the aggregate dollar value of a particular drug that we dispensed, based on the manufacturer’s published wholesale price for that drug. Rebates and fees are generally invoiced to the pharmaceutical manufacturer and paid to us on a quarterly basis. We share the majority of rebates with our clients, which are based on the provisions of the applicable client contract, and may also guarantee a minimum rebate per prescription dispensed to the client’s members.

A significant portion of UBC’s revenue is earned by performing services under contracts with various pharmaceutical and biotechnology companies based on terms, which range in duration from a few months to several years. Service contracts generally take the form of fee-for-service or fixed-price arrangements.

Retail Pharmacies. We have contractual relationships covering over 60,000 independent and chain retail pharmacies that have agreed to participate in one or more of our retail networks. See “—Products and Services—Retail Pharmacy Networks” above for more information.

CMS. Our product net revenues also include premiums associated with our Medicare PDP risk-based product offerings. These products involve prescription dispensing for beneficiaries enrolled in the CMS-sponsored Medicare Part D prescription drug benefit. Our two insurance company subsidiaries have been operating under contracts with CMS since 2006, and currently offer several Medicare PDP options. The products involve underwriting the benefit, charging enrollees applicable premiums, providing covered prescription drugs and administering the benefit as filed with CMS. We provide two Medicare drug

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benefit plan options for beneficiaries, including a “standard Part D” benefit plan as mandated by statute, and a benefit plan with enhanced coverage that exceeds the standard Part D benefit plan, available for an additional premium. We also offer numerous customized benefit plan designs to employer group retiree plans under the Medicare Part D prescription drug benefit.

Clients

We have clients in a broad range of industry categories, including various Blue Cross/Blue Shield plans; health plans; insurance carriers; third-party benefit plan administrators; employers; federal, state and local government agencies; and union-sponsored benefit plans. Our largest client, UnitedHealth Group Incorporated (“UnitedHealth Group”), represented approximately $11,700 million or 17% of our net revenues during 2011. On July 21, 2011, we announced that our pharmacy benefit services agreement with UnitedHealth Group would not be renewed, although we will continue to provide service under the current agreement until it expires on December 31, 2012. The UnitedHealth Group account has a lower than average mail-order penetration and, because of its size, steeper pricing than the average client, and consequently generally yields lower profitability as a percentage of net revenues than smaller client accounts. In addition, with respect to mail-order volume, which is an important contributor to our overall profitability, the mail-order volume associated with this account represented less than 10% of our overall mail-order volume for the fiscal year ended December 31, 2011. None of our other clients individually represented more than 10% of our net revenues in 2011, 2010 or 2009. For the fiscal year ended December 31, 2011, our ten largest clients based on revenue, including UnitedHealth Group, accounted for approximately 46% of our net revenues. In addition to UnitedHealth Group, other top 10 clients representing approximately 13% of our net revenues did not renew for 2012 as a result of acquisitions by competitors or transitioning in the normal course of business.

Mail-Order Inventory Suppliers

We maintain inventory in our mail-order pharmacies primarily consisting of a broad range of brand-name, generic and specialty pharmaceuticals. If a drug is not in our inventory, we can generally obtain it from a supplier within one or two business days. We purchase our pharmaceuticals either from our primary wholesaler, AmerisourceBergen Corporation, which accounted for approximately 63% of our overall 2011 drug purchases, or directly from pharmaceutical manufacturers. Most of the purchases from our primary wholesaler were for brand-name drugs. Specialty and generic drugs are generally purchased directly from manufacturers. We believe that alternative sources of supply for most generic and brand-name pharmaceuticals are readily available, except to the extent that brand-name drugs are available to the market exclusively through the manufacturer.

Accredo Health Group also has supply agreements with specialty product manufacturers. Our agreements with certain biopharmaceutical manufacturers may contain minimum purchasing volume commitments. Certain biopharmaceutical manufacturers may also make selected biopharmaceuticals available to only a limited number of specialty pharmacies.

Competition

Competition among providers of healthcare services in the markets we serve is intense. We compete primarily on the basis of our ability to design and administer innovative programs and services that provide a flexible, high quality prescription drug benefit management offering to our clients and their members at competitive pricing to the plan sponsor. We believe the following factors are critical to our ongoing competitiveness:

• Quality and breadth of clinical services designed to provide a high level of care and compliance. We also have the ability to differentiate ourselves in the marketplace with our innovative member engagement model, which includes the specialized practice of pharmacy and services accessed through Medco Therapeutic Resource Centers^®, our initiatives in the field of personalized medicine and the innovative Medco Research Institute^®. Collectively, these programs and initiatives are designed to improve clinical outcomes and reduce the total cost of healthcare for plan sponsors;

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• Ability to effectively provide innovative plan designs focused on the specific and changing needs of clients, patients and other payors, as well as effectively administer new programs, such as those associated with Medicare Part D;

• Broad capabilities, and regional and national scale to provide a fully integrated prescription drug benefit model, including effective mail order, retail access, specialty pharmacy, and customer service;

• Proven history in effectively managing drug trend, including the ability to negotiate favorable discounts from pharmaceutical manufacturers and retail pharmacies, rebates from brand-name pharmaceutical manufacturers, and the ability to encourage the use of lower cost generics, all of which return value to the plan sponsor;

• Capabilities in developing scientific evidence to guide the safe, effective and affordable use of medicines, through a variety of post-approval research activities, including safety and risk management, and health economics and outcomes research, all provided by UBC;

• Use of technology to deliver information and services to clients and members and create an agile enterprise; and

• Financial condition.

We compete with a wide variety of market participants, including national, regional and local PBMs, Blue Cross/Blue Shield plans, insurance companies, health plans, large retail pharmacy chains, large retail stores and supermarkets with in-store pharmacy operations and Web pharmacies. Our competitors include many profitable and well-established companies that have significant financial, marketing and other resources. Some of our specialty pharmacy and clinical service offerings compete with similar services provided by smaller entities in niche markets. We have entered into a definitive Merger Agreement with Express Scripts. Our other main competitors include Aetna Inc., Catalyst Health Solutions, Inc., CIGNA Corporation, CVS Caremark Corporation, Humana Inc., Prime Therapeutics LLC, SXC Health Solutions Corp., Target Corporation, UnitedHealth Group and Wal-Mart Stores, Inc.

Consolidation of client entities within the markets we serve, as well as the consolidation of our competitors or suppliers, could impair our ability to attract and retain clients. We believe, however, that our efficient and integrated business model, differentiating clinical programs, innovative services and the alignment of our business model with the demands of clients and members, will enable us to compete effectively. We also believe that these capabilities will be enhanced by our pending merger with Express Scripts.

Corporate Compliance and Government Regulation

Corporate Compliance and Ethics Program

We have always been committed to the highest levels of integrity in our business operations, insisting on ethical behavior and compliance with statutory, regulatory and other legal requirements. Medco’s Corporate Compliance and Ethics Program (“Compliance and Ethics Program”) is designed to maintain a culture at Medco that promotes our core value of business with integrity and the prevention, detection and resolution of potential violations of laws or Company policies. To achieve this goal, we are committed to an effective compliance and ethics program tailored to our business and working environment. The Compliance and Ethics Program is dynamic, involving regular review and assessment to ensure that it is responsive to our changing business strategy and utilizes a broad risk management framework for planning and decision-making.

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Our Compliance and Ethics Program supports a broad set of standards of business conduct designed to reduce the prospect of criminal and other improper conduct and to promote compliance with federal and state laws and regulations, including statutes, regulations and written directives of Medicare, Medicaid and all other federal and state programs in which we participate. These standards are embodied in our Code of Conduct, Conflict of Interest policy, Use and Disclosure of Individual Health Information policy and our Standards of Business Conduct, which provide information about the Compliance and Ethics Program and summarize key policies. We train our employees and contingent workers regarding the specific rules, regulations, policies and procedures that must be followed. In addition, our Compliance and Ethics Program encourages adherence to business unit and departmental procedures created to effect safe and efficient delivery of our products and services while operating our business within a compliant environment.

Our Compliance and Ethics Program addresses the following elements of an effective program:

• Establishing and communicating compliance-related policies and procedures;

• Creating a high-level structure to oversee and implement compliance efforts;

• Educating and training employees and consultants;

• Internal reporting mechanisms;

• Regular monitoring and auditing;

• Effective performance and disciplinary standards; and

• Procedures for promptly responding to potential misconduct.

Oversight responsibility for our Compliance and Ethics Program is assigned to the Audit Committee of our Board of Directors, along with our Corporate Compliance Committee, consisting of members of senior management. Our Corporate Compliance Officer has day-to-day responsibility for ensuring that we maintain an effective compliance and ethics program.

Employees are encouraged to raise concerns about improper, illegal, or unethical conduct, as well as specific instances of non-compliance. Our Compliance and Ethics Office is an available resource, either directly or via telephone through our Compliance and Ethics Line, for all employees to report compliance concerns or to raise questions about any business practices. Other reporting mechanisms are also available. Once raised, we immediately review, investigate, and resolve all concerns about non-compliant behavior and report them through the Corporate Compliance Officer in a consolidated presentation to the Corporate Compliance Committee and the Audit Committee of the Board of Directors.

Government Regulation

Federal and state laws and regulations govern many aspects of our business, including: our administration of prescription drug benefits and our drug and health education programs and services; the activities of our mail-order pharmacies; the provision of nursing services; and the operations of laboratories. We believe we are in substantial compliance with all existing legal and regulatory requirements material to the operation of our business. We have standard operating procedures and controls designed to assist in ensuring compliance with existing contractual requirements and state and federal law. We diligently monitor and audit our adherence to these procedures and controls, and we take prompt corrective and disciplinary action when appropriate. However, we cannot predict how courts or regulatory agencies may interpret existing laws or regulations or what additional federal or state legislation or regulatory initiatives may be enacted in the future regarding healthcare or the PBM industry and the application of complex standards to the operation of our business creates areas of uncertainty.

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Among the federal and state laws and regulations that affect aspects of our business are the following:

Regulation of Our Pharmacy, Nursing, Home Health Agency, and Laboratory Operations. Our mail-order pharmacies deliver prescription drugs and supplies to individuals in all 50 states and Puerto Rico. The practice of pharmacy is generally regulated at the state level by state boards of pharmacy. Each of our dispensing pharmacies, prescription processing centers and call center pharmacies must be licensed in the state in which it is located. In some of the states where our dispensing pharmacies are located, state regulations require compliance with standards promulgated by the United States Pharmacopeia (“USP”). The USP creates standards in the packaging, storage and shipping of pharmaceuticals. Also, many of the states where we deliver pharmaceuticals, including controlled substances, have laws and regulations that require out-of-state mail-order pharmacies to register with that state’s board of pharmacy or similar regulatory body. In addition, some states have proposed laws to regulate online pharmacies, and we may be subject to this legislation if it is passed. Furthermore, certain of our pharmacies that dispense durable medical equipment items, such as infusion pumps, and that bear a federal legend requiring dispensing pursuant to a prescription, are also regulated by applicable state and federal durable medical equipment laws. Accredo Health Group also operates wholesale pharmacy operations, which are subject to state licensure.

Federal agencies further regulate our pharmacy operations. Pharmacies must register with the U.S. Drug Enforcement Administration and individual state-controlled substance authorities in order to dispense controlled substances. In addition, the FDA (Food and Drug Administration) inspects facilities in connection with procedures to effect recalls of prescription drugs. The FTC (Federal Trade Commission) also has requirements for mail-order sellers of goods. The U.S. Postal Service (“USPS”) has statutory authority to restrict the transmission of drugs and medicines through the mail to a degree that could have an adverse effect on our mail-order operations. If the USPS restricts our ability to deliver drugs through the mail, alternative means of delivery are available to us. However, alternative means of delivery could be significantly more expensive. The Department of Transportation has regulatory authority to impose restrictions on drugs inserted in the stream of commerce. These regulations generally do not apply to the USPS and its operations.

In addition, in those states that require home health or nursing licensure to provide in-home patient education or in-home administration of the pharmaceuticals we dispense, we are also regulated by those states’ Departments of Health. Some states also require Certificates of Need in order to be granted home health agency licensure. Finally, our molecular genetics laboratory has received all necessary licenses, including federal CLIA (Clinical Laboratory Improvement Amendments) and State of Florida Agency for Health Care Administration approval that allows us to perform and report the results of certain diagnostic tests.

We believe that our operations have the appropriate licenses required under the laws of the states in which they are located and that we conduct our pharmacy, laboratory and nursing operations in accordance with the laws and regulations of these states.

Third-Party Administration and Other State Licensure Laws. Many states have licensure or registration laws governing companies that perform third-party administration, or TPA, services on behalf of others. The definition of a TPA required to register and comply with these laws varies from state to state. In addition, many states have laws or regulations that govern ancillary healthcare organizations, including preferred provider organizations and companies that provide utilization review and related services. The scope of these laws differs significantly from state to state, and the application of these laws to the activities of PBMs is often unclear. These regulations generally require annual or more frequent reporting and licensure renewals and impose other restrictions or obligations affecting PBM services. We have registered under these laws in states in which we have concluded, after discussion with the appropriate state agency, that registration is required.

Consumer Protection Laws. Most states have consumer protection laws designed to ensure that information provided to consumers is adequate, fair and not misleading. We believe that our practices conform to the requirements of state consumer protection laws. However, we may be subject to further scrutiny under these laws as they are often interpreted broadly.

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Network Access Legislation. As part of our PBM services, we form and manage pharmacy networks by entering into contracts with retail pharmacies. A significant number of states have adopted legislation that may affect our ability to limit access to our retail pharmacy networks or to remove retail pharmacies from a network. This type of legislation, commonly known as “any willing provider” legislation, may require us or our clients to admit into our networks and retain any retail pharmacy willing to meet the standard terms and conditions. To date, these statutes have not had a significant impact on our business. We will admit any licensed pharmacy that meets our network’s terms, conditions and credentialing criteria.

Proposals for Direct Regulation of PBMs. Legislation directly regulating PBM activities in a comprehensive manner has been introduced in a number of states. In addition, legislation has been proposed in some states seeking to impose fiduciary obligations or disclosure requirements on PBMs. If enacted in a state in a form that is applicable to the operations we conduct there, this type of legislation could materially adversely impact us. Maine and the District of Columbia had each enacted a statute imposing fiduciary and disclosure obligations on PBMs, although a court has ruled that certain provisions of the District of Columbia law are unconstitutional and cannot be enforced, and in 2011, the Maine law was repealed by the Maine legislature. Other states, including Maryland, have enacted PBM regulation laws that differ from the Maine and District of Columbia laws, and are generally less onerous.

ERISA Regulation. We provide PBM services to a number of different corporations and other sponsors of health plans that are subject to ERISA (the Employee Retirement Income Security Act of 1974). ERISA regulates employee pension benefit plans and employee welfare benefit plans, including health benefit, medical and prescription drug plans.

ERISA imposes duties on any fiduciary with respect to a plan that is subject to ERISA. We administer pharmacy benefit plans according to the plan design choices made by the plan sponsor. We believe that our activities are sufficiently limited that we are not a fiduciary except in those instances in which we have expressly contracted to act as a fiduciary for the limited purpose of addressing benefit claims and appeals, including our program to meet the U.S. Department of Labor (“DOL”) regulations for claims payment and member appeals.

In addition, we anticipate that the DOL will issue proposed regulations under the provisions of ERISA that regulate plan contracts with service providers, including PBMs. The DOL has held hearings on these issues and related regulations previously proposed have been withdrawn. In recently issued final fee disclosure regulations relating to retirement plan service providers, the DOL has reserved space for anticipated welfare plan service provider regulations and again indicated that it continues to explore regulations that could impact PBMs. As a result, we are not yet able to assess the impact on our business. We will comply with the regulations when they are finalized.

Fraudulent Billing, Anti-Kickback, Stark, Civil Monetary Penalties, and False Claims Laws and Regulations.

Billing. Our operations participate in federal and state programs such as Medicare and Medicaid, where we are subject to extensive government regulation, numerous state and federal laws and corresponding regulations directed at preventing fraud and abuse and regulating reimbursement. The government’s Medicare and Medicaid regulations are complex and sometimes subjective and therefore may require management’s interpretation. Our compliance with Medicare and Medicaid regulations may be reviewed by federal or state agencies, including the United States Department of Health and Human Services’ Office of the Inspector General (“OIG”), CMS, the Department of Justice (“DOJ”), and the FDA. To ensure compliance with Medicare, Medicaid and other regulations, government agencies conduct periodic audits of us to ensure compliance with various supplier standards and billing requirements. Similarly, regional health insurance carriers routinely conduct audits and request patient records and other documents to support claims submitted by us for payment.

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Anti-Kickback Laws and Regulations. Federal law prohibits the payment, offer, receipt or solicitation of any remuneration that is knowingly and willfully intended to induce the referral of Medicare, Medicaid or other federal healthcare program beneficiaries for the purchase, lease, ordering or recommendation of the purchase, lease or ordering of items or services reimbursable under federal healthcare programs. These laws are commonly referred to as anti-remuneration or anti-kickback laws. Several states also have similar laws, known as “all payor” statutes, which impose anti-kickback prohibitions on services not covered by federal healthcare programs. Anti-kickback laws vary between states, and courts have rarely interpreted them.

Courts, the OIG, and some administrative tribunals have broadly interpreted the federal anti-kickback statute and regulations. Courts have ruled that a violation of the statute may occur even if only one of the purposes of a payment arrangement is to induce patient referrals or purchases. It is possible that our practices in the commercial sector may not be appropriate in the government payor sector.

The Ethics in Patient Referrals Law (Stark Law). Federal law prohibits physicians from making a referral for certain health items or services for Medicare patients if they, or their family members, have a financial relationship with the entity receiving the referral. No bill may be submitted in connection with a prohibited referral. Violations are punishable by civil monetary penalties upon both the person making the referral and the provider rendering the service. Such persons or entities are also subject to exclusion from Medicare and Medicaid. Many states have adopted laws similar to the Stark Law, which restrict the ability of physicians to refer patients to entities with which they have a financial relationship.

The False Claims Act. The Federal False Claims Act prohibits the submission of a false claim or the making of a false record or statement in order to secure a reimbursement from a government-sponsored program. In recent years, the federal government has launched several initiatives aimed at uncovering practices that violate false claims or fraudulent billing laws. Civil monetary penalties may be assessed for many types of conduct, including conduct that is outlined in the statutes above and other federal statutes in this section. Under the Deficit Reduction Act of 2005, states are encouraged to pass State False Claims Act laws similar to the Federal statute.

Sanctions for fraudulent billing, kickback violations, Stark Law violations or violations of the False Claims Act include criminal or civil penalties. If we are found to have violated any state or federal kickback, Stark Law or False Claims Act law, we could be liable for significant damages, fines or penalties and potentially be ineligible to participate in federal payor programs.

Regulation of Financial Risk Plans. We own two insurance companies: Medco Containment Life Insurance Company (“Life”) and Medco Containment Insurance Company of New York (“NY”). On a combined basis, these subsidiary insurance companies are licensed in 50 states, the District of Columbia and the Commonwealth of Puerto Rico and are subject to extensive regulatory requirements imposed under the insurance laws of the states in which they are domiciled, as well as those in which they have obtained licenses to transact insurance business. Since 2006, the Life and NY companies have been operating under contracts with CMS and currently offer several Medicare PDP options. These products involve prescription dispensing for beneficiaries enrolled in the CMS-sponsored Medicare Part D prescription drug benefit. The products involve underwriting the benefit, charging enrollees applicable premiums, providing covered prescription drugs and administering the benefit as filed with CMS. We provide two Medicare drug benefit plan options for beneficiaries, including a “standard Part D” benefit plan as mandated by statute, and a benefit plan with enhanced coverage that exceeds the standard Part D benefit plan, available for an additional premium. We also offer numerous customized benefit plan designs to employer group retiree plans under the CMS Medicare Part D prescription drug benefit.

Regulation Relating to Data Transmission and Confidentiality of Patient Identifiable Information. Dispensing of prescriptions and management of prescription drug benefits require the ability to utilize patient-specific information. Government regulation of the use of patient identifiable information has grown substantially over the past several years. At the federal level, Congress enacted the Health

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Insurance Portability and Accountability Act of 1996, or HIPAA, and the Department of Health and Human Services, or HHS, has adopted extensive regulation, governing the transmission, use and disclosure of health information by all participants in healthcare delivery, including physicians, hospitals, insurers and other payors (“Privacy Standards”). Our pharmacy operations are covered entities under the Privacy Standards and are directly subject to these requirements. In our role as a manager of the prescription benefit, we are a business associate of health plan clients, which are covered entities subject to the Privacy Standards. In February 2009, the American Recovery and Reinvestment Act of 2009 (P.L. 111-16) was signed into law, which includes several changes to the HIPAA privacy and security rules, including an increase in penalties for HIPAA violations and making business associates directly subject to the Privacy Standards. Additional legislation has been proposed in Congress to further regulate use, disclosure and Web activity involving personal information, including health information. In addition, many states have passed or are considering laws addressing the use and disclosure of health information. These proposals vary widely, some relating to only certain types of information, others to only certain uses, and yet others to only certain types of entities. Also, Medco has begun to expand into other countries which have additional and potentially more stringent requirements, such as those applicable in the European Union nations, on the retention, use, transmission or disclosure of personally identifiable information. These laws and regulations have a significant impact on our operations, products and services, and compliance with them is a major operational requirement. Regulations and legislation that severely restrict or prohibit our use of patient identifiable information could materially adversely affect our business.

Sanctions for failing to comply with HIPAA standards include criminal and civil penalties. If we are found to have violated any state or federal statute or regulation with regard to the confidentiality, dissemination or use of patient medical information, we could be liable for significant damages, fines or penalties.

Regulation Applicable to Clients. We provide services to insurers, health plans, Blue Cross/Blue Shield plans and many others whose ability to offer a prescription benefit may be subject to regulatory requirements and constraints under a number of federal or state regulations. While we may not be directly subject to these regulations, they can have a significant impact on the services we provide our clients.

• Formulary Restrictions. A number of states have enacted laws that regulate the establishment of formularies by insurers, Health Maintenance Organizations (“HMOs”) and other third-party payors. These laws relate to the development, review and update of formularies; the role and composition of pharmacy and therapeutics committees; the availability of formulary listings; the disclosure of formulary information to health plan members; and a process for allowing members to obtain non-preferred drugs without additional cost-sharing where the non-preferred drugs are medically necessary and the formulary drugs are determined to be inappropriate. Increasing regulation of formularies by states could significantly affect our ability to develop and administer formularies on behalf of our insurer, HMO and other health plan clients.

• Industry Standards for PBM, Pharmacy, and Home Health Functions. The National Committee on Quality Assurance, the American Accreditation Healthcare Commission, known as URAC, the Joint Commission on Accreditation of Healthcare Organizations and other quasi-regulatory and accrediting bodies have developed standards relating to services performed by PBMs and specialty pharmacies, including mail order, formulary, drug utilization management, specialty pharmacy and nursing care. While the actions of these bodies do not have the force of law, PBMs and many clients using PBM services seek certification from them, as do other third parties with which our subsidiaries may contract for services. These bodies may influence the federal government or states to adopt requirements or model acts that they promulgate. The federal government and some states incorporate accreditation standards of these bodies, as well as the standards of the National Association of Insurance Commissioners and the National Association of Boards of Pharmacy, into their drug utilization review regulation. Future initiatives of these bodies are uncertain, and resulting standards or legislation could impose restrictions on us or our clients in a manner that could significantly impact our business.

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• Healthcare-Related Legislation. Currently, Congress is considering a variety of healthcare-related legislation and amendments to the healthcare reform enacted in 2010 that may affect both PBMs and our clients. The results of these efforts are uncertain, and we are evaluating appropriate actions if such legislation were to be enacted.

Legislation and Regulation Affecting Drug Prices and Potentially Affecting the Market for Prescription Drug Benefit Plans and Reimbursement for Durable Medical Equipment. Recently, the federal government has increased its focus on methods drug manufacturers employ to develop pricing information, which in turn is used in setting payments under the Medicare and Medicaid programs. One element common to many payment formulas, the use of “average wholesale price,” or AWP, as a standard pricing unit throughout the industry, has been criticized as not accurately reflecting prices actually charged and paid at the wholesale or retail level. Federal and state proposals have sought to change the basis for calculating reimbursement of certain drugs by the Medicare and Medicaid programs.

These proposals and other legislative or regulatory adjustments that may be made to the program for reimbursement of drugs by Medicare and Medicaid, if implemented, could affect our ability to negotiate discounts with pharmaceutical manufacturers. They could also impact the reimbursement our specialty pharmacies receive from government payors. In addition, they may affect our relationships with pharmacies and health plans. In some circumstances, they might also impact the reimbursement that we receive from managed care organizations that contract with government health programs to provide prescription drug benefits or otherwise elect to rely on the revised pricing information. Furthermore, private payors may choose to follow the government’s example and adopt different drug pricing bases. This could affect our ability to negotiate with plans, manufacturers and pharmacies regarding discounts and rebates.

Relative to our diabetes testing supplies business, the Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bid Program (the “Program”) provides for a phased-in program for competitive bidding on certain durable medical equipment items, including mail-order diabetes testing supplies. In July 2010, as part of the Program, CMS announced new single payment amounts for diabetes testing supplies, which averaged 56% off the current fee schedule amounts for such supplies under Round 1, impacting a limited number of geographic areas. A bid under our Liberty brand was not aligned with these single payment amounts. In November 2010, CMS announced the names of the winners for Round 1, where reimbursement rates became effective January 2011 for the limited number of geographic areas. Although Liberty is not a contracted supplier in the competitively bid areas, Round 1 of the Program affects fewer than 7% of Liberty’s base membership. Moreover, Congressional action has provided CMS with additional authority to use pricing information gathered during the Program for purposes of establishing reimbursement rates in geographic areas not subject to competitive bidding. On November 30, 2011, CMS announced the parameters relating to a national mail-order competitive bid program. The 60-day bidding window began on January 30, 2012, and runs until March 30, 2012. While CMS implementation of a national mail-order competitive bid program is not expected until at least 2013, if such a program is implemented and depending upon the level of reduction in reimbursement rates of the final bid program, our operating results could be negatively affected.

Medicare Part D and Part B. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L.108-173) (the “Act”) also offers far-reaching changes to the Medicare program. Important to us, the Act established a new Medicare Part D outpatient prescription drug benefit for Medicare-eligible Americans. Qualified beneficiaries, including senior citizens and disabled individuals, have had the opportunity to enroll in Medicare Part D since January 1, 2006.

Medco’s insurance subsidiaries have been approved by CMS to participate in the Medicare Part D program as a national PDP sponsor, and Medco subsidiary pharmacies may also be providers of prescription drugs and diabetes supplies to those of our patients who are covered under Medicare Part B. In addition, we have been supporting a significant number of Medco clients who have elected to continue to offer a prescription drug benefit to their Medicare retirees as primary coverage outside of the Medicare Part D benefit and receive a government subsidy. Furthermore, we support our clients with their Medicare Advantage programs that now include the Medicare Part D benefit, and with their PDP programs as the pharmacy benefit manager.

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State Prescription Drug Assistance Programs. Many states have expanded state prescription drug assistance programs to increase access to drugs by those currently without coverage and/or supplement the Medicare Part D benefit of those with coverage to offer options for a seamless benefit. In accordance with applicable CMS requirements, we have entered into agreements with a number of state prescription drug assistance programs and collaborated to coordinate benefits with Medicare Part D plans. This endeavor supports the coordination of benefits of our clients’ Medicare Part D offerings.

Prompt Pay Regulations. Many states have adopted prompt pay regulations that require health plans to pay or deny claims within a certain timeframe. These laws generally apply to insurers and/or HMOs, although some recent initiatives have included PBMs directly. Medco currently pays pharmacies on an established two-week cycle basis as defined in the Participating Pharmacy Agreement. Pharmacies receive payment within 30 days for 100% of successful point-of-sale (POS) claims processed in a two-week cycle. Prompt pay requirements for Medicare Part D prescription drug plan claims went into effect on January 1, 2010.

Drug Importation. In the face of escalating costs for plan sponsors providing a prescription drug benefit for their employees, and uninsured individuals seeking to lower their drug costs, the issue of importing drugs from Canada or other foreign countries has received significant attention. Drug importation, sometimes called drug re-importation, occurs when prescription medicines from other countries are imported for personal use or commercial distribution. Our clients have expressed interest in the potential for drug importation to reduce their drug benefit costs. Individual importation activities are generally prohibited under U.S. law, and the FDA has issued warnings and safety alerts to a number of entities seeking to promote or facilitate systematic importation activities. However, there has been considerable legislative and political activity seeking to change the FDA requirements to enable drug importation, and we are evaluating appropriate actions if such legislation were to be enacted.

Health Management Services Regulation. All states regulate the practice of medicine and the practice of nursing. We believe our nurses in our Specialty Pharmacy business are properly licensed in the state in which they practice. We believe that the activities undertaken by specialty pharmacy nurses comply with all applicable laws or rules governing the practice of nursing or medicine. However, a federal or state regulatory authority may assert that some services provided by a PBM constitute the practice of medicine or the practice of nursing and are therefore subject to federal and state laws and regulations applicable to the practice of medicine and/or the practice of nursing.

Employees

As of year-end 2011, we had approximately 22,100 full-time employees and approximately 1,100 part-time employees, for a total of 23,200 employees worldwide. Approximately 26% of these employees are represented by labor organizations. Approximately 21% of employees are subject to the terms of 14 collective bargaining agreements, each of which has separate expiration dates and terms, with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union, AFL-CIO (American Federation of Labor — Congress of Industrial Organizations) (USW); approximately 1.0% are represented by the independent union, Association of Managed Care Pharmacists (AMCP); 0.5% are represented by the Guild for Professional Pharmacists; 0.5% are represented by the International Union of Operating Engineers, AFL-CIO (IUOE); and 2.5% are represented by the Retail, Wholesale and Department Store Union, United Food and Commercial Workers (RWDSU, UFCW). Collective bargaining agreements covering these employees expire at various dates through December 2014. Six collective bargaining agreements with various labor organizations will expire during 2012. We consider our relations with our employees and their unions to be good. Employees of our wholly-owned subsidiary, Europa Apotheek Venlo B.V., based in the Netherlands, are covered by a Works Council.

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Available Information

Medco files annual, quarterly and current reports, proxy and information statements and other information with the United States Securities and Exchange Commission (“SEC”). You may read and copy any document Medco files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E. Washington, DC 20549. You may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The SEC maintains an Internet site that contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Medco’s electronic SEC filings are available to the public at http://www.sec.gov.

Medco’s SEC filings are also available to the public through The New York Stock Exchange (“NYSE”), 20 Broad Street, New York, New York 10005. Medco’s common stock is listed on the NYSE and trades under the symbol “MHS.”

Medco’s public Internet site is http://www.medcohealth.com. Medco makes available free of charge, through the Investor Relations page of its Internet site at http://www.medcohealth.com/investor, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Medco also makes available, through the Investor Relations page of its Internet site, statements of beneficial ownership of Medco’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act. In addition, Medco makes available on the Investor Relations page of its Internet site, its most recent proxy statements and its most recent annual reports to stockholders. Medco uses the Investor Relations page of its Internet site at http://www.medcohealth.com/investor to disclose important information to the public.

Information contained on Medco’s Internet site, or that can be accessed through its Internet site, does not constitute a part of this Annual Report on Form 10-K. Medco has included its Internet site address only as an inactive textual reference and does not intend it to be an active link to its Internet site. Our corporate headquarters are located at 100 Parsons Pond Drive, Franklin Lakes, New Jersey 07417 and the telephone number at this location is (201) 269-3400.

Corporate History

Medco was originally incorporated in Delaware in June 1983. Medco became an independent publicly traded enterprise on August 19, 2003.

Item 1A. Risk Factors.

The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations, financial condition, and liquidity.

We have entered into the Merger Agreement with Express Scripts. Express Scripts and the Company may be unable to obtain regulatory approvals required for the mergers contemplated by the Merger Agreement (collectively, “the Merger”) or may be required to accept conditions that could reduce the anticipated benefits of the Merger as a condition to obtaining regulatory approvals; the length of time necessary to consummate the proposed Merger may be longer than anticipated; a condition to closing of the Merger may not be satisfied; problems may arise in successfully integrating the businesses of Express Scripts and the Company; Express Scripts may be unable to realize the synergies expected from the Merger; the Merger may involve unexpected costs; the businesses may suffer as a result of uncertainty surrounding the proposed Merger and the industry may be subject to future risks that are described elsewhere in this Annual Report on Form 10-K and in other Securities and Exchange Commission (“SEC”) reports filed by Express Scripts and the Company.

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On July 20, 2011, we entered into the Merger Agreement with Express Scripts. Our ability to complete the proposed Merger is subject to risks and uncertainties, including, but not limited to, the risk that Express Scripts and the Company may be unable to obtain regulatory approvals required for the Merger contemplated by the Merger Agreement or may be required to accept conditions that could reduce the anticipated benefits of the Merger as a condition to obtaining regulatory approvals; the risk that the length of time necessary to consummate the proposed Merger may be longer than anticipated; and the risk that a condition to closing of the Merger may not be satisfied. In addition, problems may arise in successfully integrating the businesses of Express Scripts and the Company. For example: Express Scripts may be unable to realize the synergies expected from the Merger, the Merger may involve unexpected costs, the businesses may suffer as a result of uncertainty surrounding the proposed Merger and the industry may be subject to future risks that are described elsewhere in this Annual Report on Form 10-K and in other SEC reports filed by Express Scripts and the Company.

The shareholders approved the Merger on December 21, 2011. Completion of the Merger also requires certain regulatory approvals, which remain pending as of the date of this Annual Report on Form 10-K. Current employees may experience uncertainty about their post-Merger roles with Express Scripts. This may materially adversely affect the ability of the Company to attract and retain key management, sales, marketing, technical and other personnel. In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Express Scripts following the Merger. Accordingly, we may not be able to attract or retain key employees to the same extent as we have in the past. Further, diversion of attention from ongoing operations on the part of management and employees could adversely affect our customers, suppliers and other parties with whom we have relationships. While the Merger is pending, customers and strategic partners may delay or defer decisions to use the Company’s services, which could adversely affect our revenues and earnings, as well as the market price of our common shares.

In addition, customers may experience uncertainty about their Medco services, including integration, pricing, and customer service, after the closing of the Merger. This may materially adversely affect the ability of the Company to gain new customers and retain existing customers.

Competition in the PBM, specialty pharmacy and broader healthcare industry is intense and could impair our ability to attract and retain clients.

Competition among providers of healthcare services in the markets we serve is intense. We compete with a wide variety of market participants, including national, regional and local PBMs, Blue Cross/Blue Shield plans, insurance companies, health plans, large retail pharmacy chains, large retail stores and supermarkets with in-store pharmacy operations and Web pharmacies. Our competitors include many profitable and well-established companies that have significant financial, marketing and other resources. Some of our specialty pharmacy and clinical service offerings compete with similar services provided by smaller entities in niche markets. We have entered into a definitive Merger Agreement with Express Scripts. Our other main competitors include Aetna Inc., Catalyst Health Solutions, Inc., CIGNA Corporation, CVS Caremark Corporation, Humana Inc., Prime Therapeutics LLC, SXC Health Solutions Corp., Target Corporation, UnitedHealth Group Incorporated (“UnitedHealth Group”) and Wal-Mart Stores, Inc.

We compete based on innovation and service, as well as on price. To attract new clients and retain existing clients, we must continually develop new products and services to assist clients in managing their pharmacy benefit programs. There is no guarantee that the investments we make will result in innovative products and services that are attractive to clients, or that we will be able to execute on our strategy for such products and services. Moreover, although we need to continue to expend significant resources to develop, acquire and implement new products and services in the future, we may not be able to do so. We cannot be sure we will continue to remain competitive, nor can we be sure that we will be able to market our PBM services to clients successfully at our current levels of profitability.

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Part of our ability to remain profitably competitive in winning and retaining business relies on our ability to secure competitive retail pharmacy reimbursement rates. Decreased competition among retail pharmacies may impact our ability to achieve competitive rates from retail pharmacies.

Consolidation of client entities within the markets we serve, as well as the consolidation of our competitors, or suppliers could impair our ability to attract and retain clients.

The failure to retain our key clients and their members, either as a result of economic conditions, increased competition or other factors, could result in significantly decreased revenues, harm to our reputation and decreased profitability.

Our largest client, UnitedHealth Group, represented approximately $11,700 million, or 17%, of our net revenues during 2011. Although none of our other clients individually represented more than 10% of our net revenues in 2011, our top 10 clients as of December 31, 2011, including UnitedHealth Group, represented approximately 46% of our net revenues during 2011.

On July 21, 2011, we announced that our pharmacy benefit services agreement with UnitedHealth Group would not be renewed, although we will continue to provide services under the current agreement until it expires on December 31, 2012. In addition to UnitedHealth Group, other top 10 clients representing approximately 13% of our net revenues did not renew for 2012 as a result of acquisitions by competitors or transitioning in the normal course of business. If we are not able to replace this lost business by generating new sales with comparable operating margins or successfully executing other corporate strategies, our revenues and results of operations could suffer. Any further loss of one or more of our large clients could result in declines in revenues unless replaced with new business and lead to a negative reaction in the investment community or otherwise cause harm to our reputation, resulting in stock price declines or other adverse effects.

In addition, although we believe our current liquidity and prospects for strong cash flows from operations, including effective working capital management, assist in limiting the effects on our business from current economic factors, our business may not be immune to the general risks and uncertainties affecting many other companies, such as overall U.S. and non-U.S. economic and industry conditions, global economic slowdown or geopolitical events. Our revenues and results of operations could suffer, for example, if employers drop healthcare coverage for some or all of their employees, including retirees, as a result of weakness in the economy, changes in law, or rising costs.

Government efforts to reduce healthcare costs and alter healthcare financing practices could lead to a decreased demand for our services or to reduced profitability.

During the past several years, the U.S. healthcare industry has been subject to an increase in governmental regulation at both the federal and state levels. Efforts to control healthcare costs, including prescription drug costs, are underway at the federal and state government levels. The Patient Protection and Affordable Care Act enacted on March 23, 2010 (“healthcare reform legislation”), along with associated proposed, interim final and final rule-making, may have an adverse impact on our business. For example, the federal Retiree Drug Subsidy is less valuable to our clients due to the change in tax treatment of the subsidy. As a result, our clients may choose to drop or limit retiree prescription drug coverage. Further, private plan sponsors may react to the new laws and the uncertainty surrounding them by reducing, foregoing or delaying the purchase of our PBM services. We cannot accurately predict the complete impact of healthcare reform legislation, but it could lead to a decreased demand for our services and other outcomes that could adversely impact our business and financial results.

In addition, the healthcare reform legislation significantly increased regulation of managed care plans and decreased reimbursement to Medicare managed care and fee-for-service programs. Some of these initiatives purport to, among other things, require that health plan members have greater access to drugs not included on a plan’s formulary. Moreover, to alleviate budget shortfalls, states have reduced or frozen payments to Medicaid managed care plans. While we expect the U.S. Congress and state legislatures to continue to consider legislation affecting managed care plans, we cannot predict the extent of the impact of future legislation on us. However, these initiatives could limit our business practices and impair our ability to serve our clients.

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If we are not successful in the continued execution of our retiree strategy, including the potential loss of Medicare Part D-eligible members, our business and financial results could be adversely impacted.

Our retiree strategy is multi-faceted and includes the provision of products and services in support of our clients’ Medicare Part D plans or federal Retiree Drug Subsidy. In addition, our strategy includes managing the potential loss of Medicare-eligible members covered under our programs with our PBM clients. Lastly, we participate in the Medicare Part D benefit with our own PDP. We continue to make substantial investments in the personnel and technology necessary to administer our retiree strategy.

In time, the Medicare Part D prescription benefit could have the effect of rendering existing prescription drug benefit plans less valuable to our clients and their members, which would reduce the total market for PBM services. In addition, some of our clients could decide to discontinue providing traditional prescription drug benefits to their Medicare-eligible members. If this occurs, the adverse effects of the loss of these members may outweigh any opportunities for new business generated by the Medicare Part D benefit through our clients’ Medicare Part D plans and our own PDP. Because of this uncertainty, we cannot accurately predict the long-term impact of these risks on our business, financial condition or results of operations.

Additionally, we have various contractual and regulatory compliance requirements associated with participating in Medicare Part D. Similar to our requirements with other clients, our policies and practices associated with executing our PDP are subject to audit. If material contractual or regulatory non-compliance was to be identified, monetary penalties and/or applicable sanctions, including suspension of enrollment and marketing or debarment from participation in Medicare programs, may be imposed. The Medicare Part D health plan clients we serve are subject to similar risks and could be penalized or sanctioned, which may in turn adversely impact Medco’s business and financial results.

Like many aspects of our business, the administration of the Medicare Part D program is complex. Any failure to execute the provisions of the Medicare Part D program, as well as our overall retiree strategy may have an adverse effect on our financial position, results of operations or cash flows. Pending legislation, if passed, along with associated rule-making could also have a financial impact on our CMS-approved PDP. For a description of this risk, see "—Government efforts to reduce healthcare costs and alter healthcare financing practices could lead to a decreased demand for our services or to reduced profitability.”

If we, or our suppliers or service providers fail to comply with complex and evolving laws and regulations domestically and internationally, we could suffer penalties, be required to pay substantial damages and/or make significant changes to our operations.

We are subject to numerous foreign and domestic, federal and state regulations. If we or our suppliers fail to comply with existing or future applicable domestic and international laws and regulations, we could suffer civil or criminal penalties or other damages, including the loss of our licenses to operate our mail-order pharmacies, and our ability to participate in foreign and domestic, federal and state healthcare programs. As a consequence of the severe penalties we may face, we must devote significant operational and managerial resources to comply with these laws and regulations. Although we believe we and our suppliers are substantially compliant with all existing statutes and regulations applicable to our business, different interpretations and enforcement policies related to these laws and regulations could subject our current practices to allegations of impropriety or illegality, or require us to make significant changes to our operations. Currently, the government is conducting numerous, and often overlapping audits on pharmacies and suppliers of products to Medicare and Medicaid members, as well as audits of entities contracting with the Centers for Medicare & Medicaid Services (“CMS”) under the Medicare Part D program. Accredo Health Group and Liberty are subject to such audits and face or may face recoupment demands which may result in the payment or offset of prior reimbursement from the government. In

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addition, we cannot predict the impact of future legislation and regulatory changes on our business or ensure we will be able to obtain or maintain the regulatory approvals required to operate our business. Our international business is also susceptible to a changing political and regulatory landscape. Changes in laws or interpretations in countries in which we operate may impair our ability to serve these customers and adversely impact the financial condition, liquidity and operating results of our international operations.

Moreover, our clinical research activities are subject to a number of complex and stringent regulations affecting the biotechnology and pharmaceutical industries. We offer services relating to the conduct of clinical trials and the preparation of marketing applications, and are required to comply with applicable regulatory requirements governing, among other things, the design, conduct, performance, monitoring, auditing, recording, analysis and reporting of these trials. In the United States, the Food and Drug Administration (FDA) governs these activities pursuant to the agency’s Good Clinical Practice (GCP) regulations. Although we monitor our clinical trials, registries and studies to test for compliance with applicable laws and regulations in the U.S. jurisdictions in which we operate, and have adopted standard operating procedures that are designed to satisfy regulatory requirements, our business is subject to several regulatory jurisdictions with complex and varied regulatory frameworks. Any failure to maintain compliance with GCPs or other applicable regulations could lead to a variety of sanctions including, among others, suspension or termination of a clinical study, civil penalties, criminal prosecutions or debarment from assisting in the submission of new drug applications, any of which could have a material adverse effect on our business, financial condition and results of operations.

If we do not continue to earn and retain purchase discounts, rebates and service fees from manufacturers at current levels, or maintain productive relationships with the constituents in our retail networks, our gross margins may decline.

We have contractual relationships with pharmaceutical manufacturers and wholesalers providing us with purchase discounts on drugs dispensed from our mail-order pharmacies, and service fees for activities performed for certain specialty products and, in the case of many pharmaceutical manufacturers, rebates on specified brand-name prescription drugs dispensed through mail order and retail. Most of these discounts and rebates are generally passed on to clients in the form of steeper price discounts and rebate pass-backs. Manufacturer rebates often depend on our ability to meet contractual market share or other requirements.

Our clients often have contractual rights relating to their formulary structure, and while our programs aim to maximize savings to clients, clients are often making specific choices regarding which drugs to place on their formularies. Our profitability can be impacted by these client decisions. In addition, the pharmaceutical industry (both manufacturers of brand-name drugs, as well as generic drugs) continues to consolidate and this may impact our drug purchasing costs and our profitability.

Changes in existing federal or state laws or regulations or in their interpretation by courts and agencies or the adoption of new laws or regulations (such as the Patient Protection and Affordable Care Act enacted on March 23, 2010) relating to patent term extensions, purchase discount and rebate arrangements with pharmaceutical manufacturers, as well as some of the formulary and other services we provide to pharmaceutical manufacturers, could also reduce the discounts or rebates we receive and adversely impact our business, financial condition, liquidity and operating results.

Additionally, we have contractual relationships covering over 60,000 independent and chain retail pharmacies that participate in one or more of our retail networks. If we are not successful in maintaining productive relationships with the constituents in our retail networks, our business, financial condition, liquidity and operating results could be adversely impacted.

From time to time we engage in transactions to acquire other companies or businesses and if we are unable to effectively integrate acquired businesses into ours, our operating results may be adversely affected. Even if we are successful, the integration of these businesses has required, and will likely continue to require, significant resources and management attention.

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From time to time we engage in transactions to acquire or otherwise align with other companies or businesses. In order to realize the intended benefits of both past and future transactions, we must effectively integrate these business activities into ours. If we fail to successfully integrate these business activities or if they fail to perform as we anticipated, our revenue and operating results could be adversely affected. If the due diligence of the operations of these acquired businesses performed by us or by third parties on our behalf were inadequate or flawed, or if we later discover unforeseen financial or business liabilities, the acquired businesses may not perform as expected. Operating costs, customer loss and business disruption (including difficulties in maintaining relationships with employees, customers, clients or suppliers) may be greater than we anticipated. Finally, difficulties assimilating acquired operations and products could result in the diversion of capital and management’s attention away from other business issues and opportunities. International operations are also subject to additional risks, which could include variation in local economies, export and import restrictions, currency fluctuations, trade barriers, the burden of complying with a variety of international laws, and political and economic instability.

New legislative or regulatory initiatives that restrict or prohibit the PBM industry’s ability to use patient identifiable information could limit our ability to use information critical to the operation of our business.

Many of our products and services rely on our ability to use patient identifiable information. In addition to electronically reviewing hundreds of millions of prescriptions each year, we collect and process confidential information through many of our programs and alliances, including RationalMed^® and point-of-care initiatives. There is currently substantial regulation at the federal and state levels addressing the use and disclosure of patient identifiable medical and other information. Failure to comply with standards issued pursuant to state or federal statutes or regulations may result in criminal penalties and civil sanctions. See Item 1, “Business — Government Regulation,” above. These and future regulations and legislation severely restricting or prohibiting our use of patient identifiable medical and other information could limit our ability to use information critical to the operation of our business. If we violate a patient’s privacy or are found to have violated any state or federal statute or regulation with regard to the confidentiality, dissemination or use of patient medical information, we could be liable for significant damages, fines or penalties and suffer reputational harm.

Our Specialty Pharmacy business is dependent on our relationships with a limited number of pharmaceutical and biotechnology suppliers. As such, the loss of one or more of these relationships, or limitations on our ability to provide services to these suppliers, could significantly impact our ability to sustain and/or improve our financial performance.

We derive a substantial percentage of our Specialty Pharmacy segment revenue and profitability from our relationships with a limited number of suppliers. Our agreements with these suppliers may be short-term and cancelable by either party without cause on 30 to 365 days prior notice. These agreements may limit our ability to provide services for competing drugs during the term of the agreement and allow the supplier to distribute through channels other than us. Further, certain of these agreements allow pricing and other terms of these relationships to be periodically adjusted for changing market conditions or required service levels. A termination or modification to any of these relationships could have a material adverse effect on our business, financial condition and results of operations.

Our ability to grow our Specialty Pharmacy business could be limited if we do not expand our existing base of drugs or if we lose patients.

Our Specialty Pharmacy segment focuses on the delivery of chronic and complex medications that are expensive and serve relatively small patient populations. Due to the limited patient populations utilizing the drugs our Specialty Pharmacy business handles, our future growth relies in part on expanding our base of drugs or penetration in drug categories, or disease states such as oncology. Further, a loss of patients, a reduction in demand for any reason for the drugs we currently dispense or a decrease in new specialty medications brought to market could have a material adverse effect on our business, financial condition and results of operations.

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Our Specialty Pharmacy business, certain revenues from diabetes testing supplies and our Medicare Part D offerings expose us to increased billing, cash application and credit risks. Additionally, current economic conditions may expose us to increased credit risk.

A portion of our Specialty Pharmacy business is funded through medical benefit coverage, the majority of which is provided by private insurers, as well as reimbursement by government agencies. These Specialty Pharmacy claims are generally for very high-priced medicines, and collection of payments from insurance companies, patients and other payors generally takes substantially longer than for those claims administered through a PBM benefit. Because of the high cost of these claims, complex billing requirements and the nature of the medical benefit coverage determination process, these accounts receivable are characterized by higher risk in collecting the full amounts due and applying the associated payments.

Revenues from the sale of diabetes testing supplies under our Liberty brand depend on the continued availability of reimbursement by government and private insurance plans. The government’s Medicare regulations are complex and, as a result, the billing and collection process is time-consuming and typically involves the submission of claims to multiple payors whose payment of claims may be contingent upon the payment of another payor. Because of the coordination with multiple payors and the complexity in determining reimbursable amounts, these accounts receivable have higher risk in collecting the full amounts due and applying the associated payments.

Our Medicare Part D product offerings require premium payments from members for the ongoing benefit, as well as amounts due from CMS. As a result of the demographics of the consumers covered under these programs and the complexity of the calculations, as well as the potential magnitude and timing of settlement for amounts due from CMS, these accounts receivable are subject to billing and realization risk in excess of what is experienced in the core PBM business.

Additionally, we may be subject to increased credit risk associated with state and local government agencies experiencing increased fiscal challenges. As a result of these aforementioned risks, we may be required to record bad debt expenses potentially impacting our results of operations and liquidity.

Changes in reimbursement, including reimbursement for durable medical equipment, could negatively affect our revenues and profits.

A portion of our Accredo Health Group revenues and the majority of our Liberty revenues are tied to the continued availability of reimbursement by government and private insurance plans. Any reduction in Medicare or other government program or private plan reimbursements currently available for our products would reduce our revenues and profits to the extent we are unable to generate a corresponding reduction in the cost of such products. Additionally, our profits could be affected by the imposition of more stringent regulatory requirements for Medicare or other government program reimbursement or adjustments to previously reimbursed amounts, and due to potential budget limitations being experienced by many states, we could experience reductions in our Medicaid reimbursement for certain drugs dispensed by our specialty pharmacies under our Accredo brand.

Specifically in regard to our revenues and profits associated with our diabetes testing supplies business, the Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bid Program (the “Program”), provides for a phased-in program for competitive bidding of certain durable medical equipment items, including mail-order diabetes testing supplies. In July 2010, CMS announced new single payment amounts for diabetes testing supplies, which averaged 56% off the current fee schedule amounts for such supplies under Round 1, impacting a limited number of geographic areas. Liberty’s bid was not aligned with these single payment amounts. In November 2010, CMS announced the names of the winners for Round 1, where reimbursement rates became effective January 2011 for the limited number of geographic areas. Although Liberty will not be a contracted supplier in the competitively bid areas, Round 1 of the Program affects fewer than 7% of Liberty’s base membership. On November 30, 2011, CMS announced the parameters relating to a national mail-order competitive bid program. The 60-day bidding window will begin on January 30, 2012, and run until March 30, 2012. While CMS implementation of a national mail-order competitive bid program is not expected until at least 2013, if such a program is implemented and depending upon the level of reduction in reimbursement rates of the final bid program, our operating results could be negatively affected.

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Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if the safety risk profiles of drugs increase or if drugs are withdrawn from the market, including as a result of manufacturing issues, or if prescription drugs transition to over-the-counter products.

We dispense significant volumes of brand-name and generic drugs from our mail-order pharmacies and through networks of retail pharmacies, which are the basis for our net revenues and profitability. When increased safety risk profiles or manufacturing or other supply issues of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or otherwise reduce the numbers of prescriptions for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced global consumer demand for such drugs. On occasion, products are withdrawn by their manufacturers or transition to over-the-counter products. In cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.

Demand for our clinical research services depends on the willingness of companies in the pharmaceutical and biotechnology industries to continue to outsource clinical development and on our reputation for independent, high-quality scientific research and evidence development.

Our success in providing clinical research services depends on the ability and willingness of companies in the pharmaceutical and biotechnology industries to continue to invest in research and development at rates close to or at historical levels and to otherwise outsource the services we provide. Accordingly, a general downturn in the pharmaceutical or biotechnology industries, a reduction in research and development spending by companies in these industries, including any such reduction as a result of regulatory change, or an expansion of such companies’ in-house development capabilities could materially harm our clinical research service offering. In addition, demand for our clinical research services may be affected by our pharmaceutical and biotechnology customers’ perceptions regarding the pharmaceutical outsourcing industry as a whole. For example, other pharmaceutical outsourcing companies could engage in, conduct or fail to detect malfeasance that could render our customers less willing to do business with us or any pharmaceutical outsourcing company, such as inadequately monitoring sites, producing inaccurate databases or analyses, falsifying patient records, or performing incomplete lab work. If any such event causing industry-wide reputational harm were to occur, even though outside our control, confidence in the industry generally could be impaired and the willingness of pharmaceutical and biotechnology companies to outsource services to organizations that provide clinical research services like ours could diminish.

Moreover, demand for our clinical research services depends to a significant extent on the trust our customers place in us and our reputation for independent, high-quality scientific research. To this end, we have implemented policies and procedures to, among other things, separate or “firewall” some of our clinical research and core PBM activities. In the event that our protocols or procedures are not followed, or our research designs contain undetected errors or defects that are subsequently discovered by us, our customers or a third party, or we produce inaccurate or controversial databases or analyses, our reputation with current and potential pharmaceutical and biotechnology customers could be harmed. If one or more of the foregoing events were to occur, it could have a material adverse effect on our business, financial condition and results of operations.

PBMs could be subject to claims under ERISA if they are found to be a fiduciary of a health benefit plan governed by ERISA.

PBMs typically provide services to corporations and other sponsors of health benefit plans subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA regulates employee pension benefit plans and employee welfare benefit plans, including health and medical plans. The U.S.

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Department of Labor (“DOL”), which is the agency that enforces ERISA, could assert that the fiduciary obligations imposed by the statute apply to some or all of the services provided by a PBM where the PBM had not agreed to accept fiduciary responsibility. We have settled the final two lawsuits which claim we are a fiduciary under ERISA. See Note 14, “Commitments and Contingencies — Legal Proceedings,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. If a court were to determine, in litigation brought by a private party or in a proceeding arising out of a position taken by the DOL, that we were a fiduciary in connection with services for which we had not agreed to accept fiduciary responsibility, we could potentially be subject to claims for breaching fiduciary duties and/or entering into certain “prohibited transactions” that could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Pending litigation could adversely impact our business practices and have a material adverse effect on our business, financial condition, liquidity and operating results.

We are party to various legal proceedings and are subject to litigation risks. The most significant legal proceedings to which Medco is a party are described in detail in Note 14, “Commitments and Contingencies — Legal Proceedings,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Although we believe we have meritorious defenses in each of the matters described therein, we could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our business, financial condition, liquidity and results of operations in any particular period.

Changes in industry pricing benchmarks could adversely affect our financial performance.

Legislation may lead to changes in the pricing for Medicare and Medicaid programs. See Item 1, “Business—Government Regulation—Legislation and Regulation Affecting Drug Prices and Potentially Affecting the Market for Prescription Drug Benefit Plans and Reimbursement for Durable Medical Equipment,”included in this Annual Report on Form 10-K. At least one Medicaid program has adopted, and other Medicaid programs, some states and some commercial payors may adopt, those aspects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L. 108-173) or the Deficit Reduction Act of 2005 (P.L. 109-171) that either result in or appear to result in price reductions for drugs covered by such programs. Adoption of alternative pricing sources, such as Average Sales Price (“ASP”), Average Manufacturer’s Price (“AMP”), Wholesale Acquisition Cost (“WAC”), or other alternative pricing in lieu of AWP as the measure for determining reimbursement by state Medicaid programs for the drugs sold in our Specialty Pharmacy business, could materially reduce the revenue and gross margins of this business.

We are subject to a corporate integrity agreement and noncompliance may impede our ability to conduct business with the federal government.

As part of a civil settlement with the Department of Justice (“DOJ”) and other federal government agencies, in October 2006, Medco entered into a five-year corporate integrity agreement with the United States Department of Health and Human Services’ Office of the Inspector General (“OIG”) and the U.S. Office of Personnel Management Office of the Inspector General. The agreement is designed to ensure that Medco’s compliance program meets certain requirements. The agreement provides for, among other things, that Medco continue to have a Compliance Officer, a Compliance Committee, a Code of Conduct that is disseminated to employees, a toll-free number for employees to report potential violations of Covered Federal Program requirements, written policies and procedures (including the establishment of new databases), regular training for all employees with regard to Medco’s Code of Conduct, and various auditing programs. Failure to comply with the obligations of this corporate integrity agreement could result in debarment from participation in certain federal business arrangements, financial penalties and damage to Medco’s reputation. Currently, we are awaiting notification from the OIG indicating that we have completed all requirements.

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The terms and covenants relating to our existing indebtedness could adversely impact our financial performance and liquidity.

Like other companies that incur debt, we are subject to risks normally associated with debt financing, such as the insufficiency of cash flow to meet required debt service payment obligations and the inability to refinance existing indebtedness. Our credit facilities, accounts receivable financing facility and the indentures governing our senior notes contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including a maximum total debt-to-EBITDA ratio. Our continued ability to borrow under our credit facilities and accounts receivable financing facility is subject to our compliance with such financial and other covenants. If we fail to satisfy these covenants, we would be in default under the credit facilities, accounts receivable financing facility and/or indentures, and may be required to repay such debt with capital from other sources or not be able to draw down against our facility. Under such circumstances, other sources of capital may not be available to us, or be available only on unattractive terms. See Note 8, “Debt,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

In addition, as of December 31, 2011, of our total outstanding borrowings of approximately $5.0 billion, $2.2 billion is impacted by variable interest rates. Increases in interest rates on variable rate indebtedness would increase our interest expense and could adversely affect our results of operations.

We may be subject to liability claims for damages and other expenses not covered by insurance.

Our commercial professional liability insurance policies are expected to cover up to $85 million per occurrence and in the aggregate during a policy period. In addition to our commercial professional liability insurance policies, we have a retained liability component requiring certain self-insurance reserves to cover potential claims. We currently process any claims included in self-insured retention levels through a captive insurance company. A successful professional liability claim in excess of our insurance coverage, or one for which an exclusion from coverage applies, could have a material adverse effect on our financial condition and results of operations. We believe most of the claims described in Note 14, “Commitments and Contingencies—Legal Proceedings,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, are unlikely to be covered by insurance.

Failure to maintain the security of our technology infrastructure, or information systems, or those of our third party providers could adversely affect our business.

We are dependent on our infrastructure, including our information systems, for many aspects of our business operations. We also rely on third party providers to manage a significant portion of our information systems. A fundamental requirement for our business is the secure storage and transmission of personal health information and other confidential data, and we and our third party providers must maintain our business processes and information systems and the integrity of our confidential information. Although we have developed systems and processes that are designed to protect our systems and business operations against cyber incidents such as security breaches, deliberate disruptive attacks, attempts to gain unauthorized access to systems for improper purposes and unintentional events, failure to protect such systems and information, or the systems of our third party service providers, or to mitigate any such incidents or breaches may adversely affect our operations. Our efforts to secure our systems may require us to incur additional expenditures on technology, personnel and training. In the event we or our third party providers experience cyber security incidents, malfunctions in business processes, breaches of information systems, failure to maintain effective and up-to-date information systems or unauthorized and non-compliant actions by any individual, this could disrupt our business operations or impact patient safety; result in the misuse or disclosure of proprietary or other confidential information, including confidential information of our clients or members; subject us to customer and member disputes; damage our reputation; expose us to risk of loss, litigation or regulatory violations; increase expenses to repair and improve systems; or lead to other adverse consequences.

Significant disruptions to our infrastructure or any of our facilities due to failure of technology or some other catastrophic event could adversely impact our business.

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We have automated and other mail-order dispensing pharmacies, call centers, data centers and corporate facilities. All of these facilities depend on the local infrastructure and the uninterrupted operation of our computerized dispensing systems and our electronic data processing systems. Significant disruptions at any of these facilities or our suppliers’ facilities due to failure of technology or any other failure or disruption to these systems or to the infrastructure due to fire, electrical outage, natural disaster, acts of terrorism or malice, an epidemic or pandemic or some other catastrophic event could, temporarily or indefinitely, significantly reduce, or partially or totally eliminate, our ability to process and dispense prescriptions and provide products and services to our clients and members.

Business process and technology infrastructure improvements associated with our agile enterprise initiative may not be successfully or timely implemented or may fail to operate as designed and intended, causing the Company’s performance to suffer.

We rely on information technology to enhance the efficiency and effectiveness of our operations, to process, transmit, store, access and protect electronic information, to interface with our customers and suppliers, and to record and process financial transactions accurately. We have embarked on a multi-year initiative intended to transform our business and establish a more agile enterprise. This initiative includes upgrades to, and realignment of, our information systems designed to improve business processes and data management across our company by delivering a single set of integrated data, processes and technologies that are scalable and standardized across our operations. The transformation from our existing technology base to our new foundational technology platform will occur in carefully managed stages over a period of approximately three to five years. Management believes the planned system upgrades will further enhance our productivity in operations and prove to be cost-effective. However, we can offer no assurances that these system upgrades will deliver the expected benefits. If our business process improvement initiatives fail, or if we are not successful or experience delays in implementing new systems, training personnel or transitioning data, our ability to improve existing operations, process transactions accurately and efficiently, achieve anticipated cost savings and support future growth could be delayed or not fully realized. In addition, any business disruption that ensues could harm our reputation and result in the loss of customers. Moreover, it is possible the cost to complete the systems conversions may exceed current expectations and that significant costs may be incurred that will require immediate expense recognition. Failure to implement our agile enterprise initiative as planned or the incurrence of costs in excess of expectations could have a material adverse impact on our business, financial condition and results of operations.

We may be required to record a material non-cash charge to income if our recorded intangible assets or goodwill are impaired, or if we shorten intangible asset useful lives.

We have over $2.1 billion of recorded intangible assets, net, on our consolidated balance sheet as of December 31, 2011. For our PBM segment, our intangible assets primarily represent the value of client relationships that had been pushed down to our consolidated balance sheets and existed when we became an independent, publicly traded company in 2003, and to a lesser extent, our acquisitions subsequent to 2003. For our Specialty Pharmacy segment, we have intangible assets recorded primarily from our acquisition of Accredo Health, Incorporated in 2005. Under current accounting rules, intangible assets are amortized over their useful lives. These assets may become impaired with events such as the loss of significant clients or specialty product manufacturer contracts, changes in the usage of trade names, or when other changes in circumstances indicate the carrying amount may not be recoverable. For our intangible assets, if the carrying amount of the assets exceeds the undiscounted pre-tax expected future cash flows from the lowest appropriate asset grouping, we would be required to record a non-cash impairment charge to our consolidated statement of income in the amount the carrying value of these assets exceeds the discounted expected future cash flows. In addition, while our intangible assets may not be impaired, the useful lives are subject to continual assessment. This assessment may result in a reduction of the remaining weighted average useful life of these assets, resulting in potentially significant increases to non-cash amortization expense charged to our consolidated statement of income, which could have a material adverse effect on our earnings.

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We also have over $6.9 billion of recorded goodwill on our consolidated balance sheet as of December 31, 2011. Goodwill is assessed for impairment annually for each of our segments’ reporting units. This assessment includes comparing the fair value of each reporting unit to the carrying value of the assets assigned to that reporting unit. If the carrying value of the reporting unit were to exceed our estimate of fair value of the reporting unit, we would then be required to estimate the fair value of the individual assets and liabilities within the reporting unit to ascertain the fair value of goodwill. We utilize the income approach methodology, which projects future cash flows discounted to present value based on certain assumptions about future operating performance. If we determine that the fair value is less than the book value based on updates to the assumptions, we could be required to record a non-cash impairment charge to our consolidated statement of income, which could have a material adverse effect on our earnings.

We are subject to certain risks associated with our international operations.

We have international operations that conduct business in various countries throughout Europe, North America and Asia. Certain risks are inherent in these international operations, including without limitation: (1) vigorous regulation of the biotechnology and pharmaceutical industries and of the products and services that our companies test or market abroad; (2) difficulty complying with a variety of ever-changing foreign laws and regulations, or United States laws and regulations applicable abroad, some of which may conflict with one another, including but not limited to tax, labor, employment, anti-bribery and privacy and data protection laws; (3) difficulty enforcing agreements, intellectual property rights and collecting receivables through certain foreign legal systems; (4) tax rates in certain foreign countries may exceed those in the United States and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions, including restrictions on repatriation; (5) complexities of managing a multinational organization; (6) general economic and political conditions or terrorist activities in countries where we operate may have an adverse effect on our operations in those countries; (7) exposure to exchange rate fluctuations; and (8) foreign customers may have longer payment cycles than customers in the United States. If we do not respond adequately to these risks, it could have a material adverse effect on our business, financial condition and results of operations.

Anti-takeover provisions of the Delaware General Corporation Law (“DGCL”), our certificate of incorporation and our bylaws could delay or deter a change in control and make it more difficult to remove incumbent officers and directors.

Our certificate of incorporation and bylaws and various provisions of the DGCL may make it more difficult to effect a change of control of our company or remove incumbent officers and directors. The existence of these provisions may adversely affect the price of our common stock, discourage third parties from making a bid to acquire our company or reduce any premium paid to our shareholders for their common stock. Our Board of Directors has authority to issue up to 10,000,000 shares of “blank check” preferred stock and to attach special rights and preferences to this preferred stock. The issuance of this preferred stock may make it more difficult for a third party to acquire control of us.

Moreover, as a result of our ownership of insurance companies, a third party attempting to effect a change of control of our company may be required to obtain approval from the applicable state insurance regulatory officials. The need for this approval may discourage third parties from making a bid for our company or make it more difficult for a third party to acquire our company, which may adversely affect the price of our common stock.

Item 1B. Unresolved Staff Comments.

None.

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Item 2. Properties.

As of December 31, 2011, we own or lease 164 facilities throughout the United States and own or lease 18 properties in Europe. We believe our facilities are well-maintained and in good operating condition and have adequate capacity to meet our current business needs. Our existing facilities contain an aggregate of approximately 4,600,000 square feet. Our corporate headquarters office is located in Franklin Lakes, New Jersey and accommodates our executive and corporate functions.

Our PBM mail-order pharmacy operations consist of seven prescription order processing pharmacies that are located throughout the United States, one of which also performs mail-order dispensing, and our three automated dispensing pharmacies in Willingboro, New Jersey, Las Vegas, Nevada, and Whitestown, Indiana. In addition, we have two pharmacies that dispense diabetes supplies. We also have three central Specialty Pharmacy mail-order pharmacies and 73 specialty branch pharmacies.

Item 3. Legal Proceedings.

In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations, charges and proceedings, including, but not limited to, those relating to regulatory, commercial, employment, employee benefits and securities matters. Descriptions of certain legal proceedings to which the Company is a party are contained in Note 14, “Commitments and Contingencies—Legal Proceedings,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated by reference herein.

Item 4. Mine Safety Disclosures.

Not applicable.

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Executive Officers of the Company

Pursuant to General Instruction G (3) to Form 10-K, the following description of our executive officers is included as an unnumbered item in Part I of this report in lieu of being included in our Proxy Statement for our 2012 Annual Meeting of Shareholders. The executive officers of the Company, and their ages and positions as of February 1, 2012 are as follows:

Name	Age		Position
David B. Snow, Jr.		57	Chairman and Chief Executive Officer
Kenneth O. Klepper		58	President and Chief Operating Officer
Gabriel R. Cappucci		49	Senior Vice President and Controller, Chief Accounting Officer
Mary T. Daschner		53	Group President, Medicare & Medicaid Solutions
John P. Driscoll		52	President, New Markets
Robert S. Epstein		56	President, United BioSource Corporation®,
			President, Advanced Clinical Science and Research and Chief Clinical Research and Development Officer
Brian T. Griffin		52	President, International
Laizer D. Kornwasser		40	Senior Vice President, Consumer Solutions and Retail Markets
Thomas M. Moriarty		48	General Counsel, Secretary and President, Global Pharmaceutical Strategies
Karin V. Princivalle		55	Senior Vice President, Human Resources
Richard J. Rubino		54	Senior Vice President, Finance and Chief Financial Officer
Frank Sheehy		49	President, Accredo Health Group, Inc.
Jack A. Smith		64	Senior Vice President, Chief Marketing Officer
Glen D. Stettin		48	Senior Vice President, Health Businesses and Practice and Chief Medical Officer
Glenn C. Taylor		60	Group President, Health Plans
Timothy C. Wentworth		51	Group President, Employer/Key Accounts

David B. Snow, Jr. has served as Chief Executive Officer and as a director of the Company since March 2003. Mr. Snow was appointed Chairman of the Company’s Board of Directors in June 2003 and also served as the Company’s President from 2003 to 2006. Prior to joining the Company, Mr. Snow served as President and Chief Operating Officer at WellChoice, Inc. (formerly Empire BlueCross BlueShield) where he held the position of Executive Vice President and Chief Operating Officer beginning in 1999 and then held the position of President and Chief Operating Officer from 2001 through 2003. From 1993 to 1998, Mr. Snow was an Executive Vice President of Oxford Health Plans, a health maintenance organization, and was responsible for marketing, medical delivery systems, medical management and government programs. Mr. Snow has served in executive leadership roles for a number of other healthcare companies throughout his career, including American International Healthcare, Inc. and US HealthCare, Inc. He also co-founded and served as President and CEO of Managed Healthcare Systems, Inc., which was later renamed AmeriChoice. Mr. Snow is currently a director of Pitney Bowes Inc. (Chairman of the Governance Committee; Executive Compensation Committee; Executive Committee). Mr. Snow is also a director of various private companies and not-for-profit charitable organizations.

Kenneth O. Klepper has served as President and Chief Operating Officer since March 2006. He joined the Company in June 2003 and served as Executive Vice President, Chief Operating Officer from June 2003 through March 2006. Mr. Klepper oversees the Company’s sales and account groups, the Company’s Retiree Solutions group, Therapeutic Research Centers, Advanced Clinical Solutions, information technology, customer service, pharmacy operations, and Accredo Health Group, Inc. (“Accredo Health Group”), the Company’s specialty pharmacy organization. Mr. Klepper joined the Company from WellChoice, Inc. where he held the position of Senior Vice President, Process Champion from March 1995 to August 1999, and then held the position of Senior Vice President for Systems, Technology and Infrastructure from August 1999 to April 2003.

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Gabriel R. Cappucci has served as Medco’s Senior Vice President and Controller, Chief Accounting Officer since March 2008, and is directly responsible for accounting and financial reporting, client and pharmaceutical manufacturer accounts receivable, accounts payable, and client rebate and performance guarantee reporting and analysis. Mr. Cappucci joined Medco in July 1993 and has held a variety of accounting, financial reporting, and financial planning roles. Most recently, since June 2004, Mr. Cappucci was Vice President, Financial Reporting with responsibility for Medco’s financial reporting and accounting standards. Prior to joining the Company, Mr. Cappucci was a Senior Manager with KPMG LLP where he had been employed since August 1985. Mr. Cappucci is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.

Mary T. Daschner has served as Group President, Medicare & Medicaid Solutions since October 2010, and in this role is responsible for overseeing the strategy and business results for Medco’s retiree and Medicare eligible population. The current portfolio includes Medco’s national Medicare Part D plan, Medco Medicare Prescription Plan^®, as well as Part D solutions for health plans and employer clients, including Employer Group Waiver Plans (EGWPs), Prescription Drug Plans (PDPs), Medicare Advantage (MA) Plans, Retiree Drug Subsidy (RDS) and secondary wraparound products. She also served as Group President, Retiree Solutions from September 2008 to September 2010. Ms. Daschner joined the Company in December 1999, initially serving as Senior Director of Business and Product Development, and later as Vice President, Health Plans and Government Programs since 2001, where she managed service and drug trend strategy supporting more than six million UnitedHealth Group Incorporated members, including Medicare, Managed Medicaid and commercial fully insured populations. Ms. Daschner came to the Company from Senior Market Strategies, a healthcare consulting business focused on reimbursement, outcomes and patient access in the over 50 marketplace, where she served as President.

John P. Driscoll has served as President, New Markets since April 2008, and in this role is responsible for the Company’s insured solutions and business development, both domestically and internationally, and consumer-driven programs. Mr. Driscoll joined the Company in June 2003 as Senior Vice President, Product and Business Development and served as President, Insured and Emerging Markets from June 2006 to April 2008. Mr. Driscoll came to the Company from Oak Investment Partners, a venture capital firm, where he served as an advisor on healthcare investments from January 2002 through May 2003. Mr. Driscoll held the position of Executive Vice President of Walker Digital from January 2000 to December 2001. Prior to that, Mr. Driscoll served in a number of senior positions at Oxford Health Plans from 1991 through 1999, including, most recently, as its Corporate Vice President, Government Programs.

Robert S. Epstein, M.D., M.S. has served as President, United BioSource Corporation^® since September 2011 and is responsible for the strategic direction of all of UBC’s business operations. In addition, he has served as President, Advanced Clinical Science and Research and Chief Clinical Research and Development Officer since December 2010. In this role Dr. Epstein oversees Medco’s research initiatives in personalized medicine, drug safety, health economics, outcomes, and comparative effectiveness conducted by researchers worldwide. In addition, Dr. Epstein served as Senior Vice President and Chief Medical Officer from 1997 through 2010 and was appointed President of the Medco Research Institute^® in 2009. Dr. Epstein joined the Company in 1995 as Vice President of Outcomes Research. Dr. Epstein was trained as an epidemiologist and worked in public health and academia before joining the private sector. He is a past President of the International Society of Pharmacoeconomics and Outcomes Research, and has served on the Board of Directors for the Drug Information Association. In 2008, Dr. Epstein was nominated and elected to the Federal CDC EGAPP (Evaluation of Genomic Applications in Practice & Prevention) Stakeholder Committee, and the AHRQ CERT (Centers for Education and Research on Therapeutics) Committee. He has published more than 50 peer reviewed medical articles and book chapters, and serves as a reviewer for several influential medical journals.

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Brian T. Griffin has served as President, International since October 2010 and in this role is responsible for delivering innovative clinical services designed to improve patient adherence, safety and efficiency across the international healthcare system. Prior to this position, Mr. Griffin served as the Company’s Group President, Health Plans since January 2004, with responsibility for national and regional health plan clients. From January 1999 through December 2003 he served as Senior Vice President, Sales and was responsible for sales on a national basis. From November 1995 to December 1998, Mr. Griffin led the Insurance Carrier customer group and was responsible for sales within the Insurance Carrier Blue Cross/Blue Shield and Third-Party Administrator Markets. Mr. Griffin joined the Company in 1987.

Laizer D. Kornwasser has served as Senior Vice President, Consumer Solutions and Retail Markets since July 2011 and in this role is responsible for retail network and mail pharmacy strategy and margin. He oversees network pricing, negotiations, plan design and programs that maximize the retail and mail channels. Mr. Kornwasser is also responsible for the integrated care solution for Medco’s six million members with diabetes. Mr. Kornwasser joined Medco in August 2003, initially serving as Vice President of Business Development, and later as Senior Vice President of Business Development and Retail Networks. Prior to joining Medco, Mr. Kornwasser held positions at Merrill Lynch and Coopers & Lybrand, and served as an associate professor at Yeshiva University. Mr. Kornwasser is a board member of the Yeshiva of North Jersey.

Thomas M. Moriarty has served as General Counsel and Secretary since March 2008, and is responsible for overseeing the Company’s legal affairs. In addition, he has served as President, Global Pharmaceutical Strategies since March 2011 and as Senior Vice President, Pharmaceutical Strategies and Solutions from September 2007 to March 2011, with responsibility for negotiations with pharmaceutical manufacturers, drug purchasing analysis and consulting with clients on formulary drug lists and plan design. He also served as Senior Vice President, Business Development responsible for mergers and acquisitions and strategic alliances from August 2006 until March 2008. Prior to that, he was Deputy General Counsel, Vice President and Managing Counsel, responsible for mergers and acquisitions and client and commercial contracting from December 2005 until August 2006. From November 2002 until December 2005, Mr. Moriarty served as Vice President and Counsel, Client Contracting. Mr. Moriarty joined the Company in June 2000 as Assistant Counsel, Client Contracting. Prior to joining the Company, Mr. Moriarty served as Assistant General Counsel, Pharma & North America for Merial Limited (a Merck & Co., Inc. and Sanofi Aventis Company) and as Assistant Counsel for Merck & Co., Inc.

Karin V. Princivalle has served as Senior Vice President, Human Resources since joining the Company in May 2001, and is responsible for company-wide human resource activities. Ms. Princivalle joined the Company from TradeOut.com, an online business-to-business marketplace, where she served as Vice President for Human Resources from February 2000 to May 2001. Previously, she served as Vice President of Human Resources for Citigroup’s North America bankcards business from May 1998 to August 2000 and Vice President of Human Resources for Citigroup’s Consumer Businesses in Central/Eastern Europe, Middle East, Africa and Asia from March 1997 to May 1998.

Richard J. Rubino has served as Senior Vice President, Finance and Chief Financial Officer since March 2008. Mr. Rubino has oversight responsibility for all financial activities, including accounting, reporting, accounts receivable, treasury, tax, planning, analysis, procurement, audit, investor relations and financial evaluation. Prior to this position he served as Senior Vice President and Controller, Chief Accounting Officer since April 2005 and in that role was directly responsible for accounting and financial reporting, financial systems, and client and pharmaceutical manufacturer accounts receivable. From June 1998 to April 2005, Mr. Rubino served as Vice President and Controller with responsibility for accounting and financial reporting. His previous roles with the Company include Vice President, Planning with responsibility for financial, business and strategic planning, and Director of Planning. Prior to joining the Company, Mr. Rubino held various positions at International Business Machines Corporation and Price Waterhouse & Co. Mr. Rubino is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. Mr. Rubino is also a director of a not-for-profit charitable organization.

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Frank Sheehy has served as President of Accredo Health Group, the Company’s specialty pharmacy organization, since July 2011 and in this role is responsible for Accredo Health Group’s overall business results while overseeing the organization’s sales, strategy, marketing and branch operations. Prior to this position, Mr. Sheehy served as Senior Vice President, General Manager since 2004 with responsibility for management and growth of Medco’s Central/West Region’s National Account. Mr. Sheehy joined the Company as Vice President in July 1998. Prior to joining Medco, Mr. Sheehy served as Senior Vice President, General Manager for Aetna US Healthcare.

Jack A. Smith has served as Senior Vice President, Chief Marketing Officer since joining the Company in June 2003 and is responsible for all branding, corporate and product marketing and communications, medco.com^®, and related creative and production services. Mr. Smith served as the Senior Vice President, Chief Marketing Officer for WellChoice, Inc. from August 1999 to November 2002, and was the Senior Vice President, Marketing Director for RR Donnelley & Sons from June 1997 to July 1999. Mr. Smith worked as a consultant for the Gartner Group, an information and consulting company, during 2003 prior to joining the Company. He has also held marketing positions at The Readers Digest Association, Inc., Nestle USA and Unilever PLC.

Glen D. Stettin, M.D. has served as Senior Vice President, Health Businesses and Practice and Chief Medical Officer since December 2010 and in this role is responsible for Medco’s clinical practice areas and clinical PBM services, including Medco’s independent Pharmacy and Therapeutics Committee, and all of Medco’s non-research-related analytics, client reporting and data quality. Prior to this position he served as Senior Vice President and General Manager, Advanced Clinical Solutions from September 2005 to November 2010. From April 1998 to August 2005, he served as Vice President, Clinical Products. Dr. Stettin joined the Company as Senior Director, Health Strategies in 1995. Prior to joining Medco, Dr. Stettin was a clinician, researcher and instructor at the University of California, San Francisco.

Glenn C. Taylor has served as Group President, Health Plans since October 2010 and in this role is responsible for all national and regional health plan clients, including UnitedHealth Group and Federal Government clients. He also served as Group President, Key Accounts from January 2004 to September 2010. From April 2002 through December 2003, he served as Senior Vice President, Account Management. Mr. Taylor served as President of the Company’s UnitedHealth Group Division from February 1999 to April 2002. From April 1997 to January 1999, Mr. Taylor held positions with Merck & Co., Inc. as Regional Vice President of the Southeast and Central business groups. From May 1993 to March 1997, Mr. Taylor was the Company’s Senior Vice President of Sales and Account Management. Mr. Taylor joined the Company in May 1993 as a result of the Company’s acquisition of FlexRx, Inc., a pharmacy benefit manager in Pittsburgh, Pennsylvania, where Mr. Taylor was President.

Timothy C. Wentworth has served as Group President, Employer/Key Accounts since October 2010 and in this role is responsible for all activities related to Medco’s employer clients, large and small, and the company’s state, municipal and labor union clients, including sales, account management, marketing, clinical and pricing. In addition, he has served as Group President, Employer Accounts since September 2008. Prior to this position, he served as the President and Chief Executive Officer of Accredo Health Group from March 2006 to September 2008. From January 2004 to March 2006, Mr. Wentworth served as the Company’s Group President, National Accounts. From April 2002 through December 2003, he served as Executive Vice President, Client Strategy and Service and was responsible for client relationships and developing and implementing strategies to acquire and renew clients. Mr. Wentworth joined the Company as Senior Vice President, Account Management in December 1998 from Mary Kay, Inc., where he spent five years, serving initially as Senior Vice President of Human Resources and subsequently as President-International.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Market Information

The principal market for our common stock is the NYSE, where our common stock trades under the ticker symbol “MHS.” The following table sets forth the range of high and low common stock market prices for fiscal years 2011 and 2010:

	Fourth Quarter		Third Quarter		Second Quarter		First Quarter
2011
High	$	58.27	$	66.38	$	64.92	$	65.39
Low	$	44.60	$	47.78	$	53.11	$	51.80
2010
High	$	64.24	$	57.82	$	65.35	$	66.94
Low	$	50.36	$	43.45	$	53.46	$	58.96

On February 15, 2012, the closing market price of our common stock on the NYSE was $63.40.

Holders

On February 15, 2012, there were 71,048 shareholders of record.

Dividend Policy

The Company currently does not pay and does not plan to pay cash dividends.

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Comparative Stock Performance

The following graph compares the cumulative total shareholder return on the Company’s common stock with the cumulative total return (including reinvested dividends) of the Standard & Poor’s Healthcare Index and the Standard & Poor’s 500 Index for the period December 31, 2006 to December 31, 2011. The graph assumes that $100 was invested on December 31, 2006, in the Company’s common stock and in each index or composite. No cash dividends have been declared on the Company’s common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Medco Health Solutions, Inc., the S&P 500 Index, and the S&P Healthcare Index

	12/06		12/07		12/08		12/09		12/10		12/11
Medco Health Solutions, Inc.		100.00		189.75		156.85		239.18		229.30		209.21
S&P 500		100.00		105.49		66.46		84.05		96.71		98.75
S&P Healthcare		100.00		107.15		82.71		99.00		101.87		114.85

The comparisons in the graph above are provided in response to disclosure requirements of the SEC and are not intended to forecast or be indicative of future performance of the Company’s common stock.

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Share Repurchase Programs

In February 2011, the Company’s Board of Directors approved a new $3 billion share repurchase program, authorizing the purchase of up to $3 billion of the Company’s common stock over a two-year period commencing February 24, 2011 (the “2011 Program”).

The following is a summary of the Company’s share repurchase activity for the three months ended December 31, 2011:

Issuer Purchases of Equity Securities⁽¹⁾

							Approximate
					Total number of		dollar value of
					shares purchased		shares
					as part of		that may yet be
	Total number		Average		publicly		purchased under
	of shares		price paid		announced		the program
Fiscal Period	purchased		per share(2)		programs		(in thousands)
Balances at September 24, 2011						22,286,107	$	1,650,052
September 25 to October 22, 2011		—	$	—		—	$	1,650,052
October 23 to November 26, 2011		—	$	—		—	$	1,650,052
November 27 to December 31, 2011		—	$	—		—	$	1,650,052
Fourth quarter 2011 totals		—	$	—		—

(1)	All information set forth in the table above relates to the Company’s 2011 Program. The 2011 Program was announced in February 2011 and pursuant to the 2011 Program, the Company is authorized to repurchase up to $3 billion of its common stock over a two-year period commencing February 24, 2011.
(2)	Dollar amounts include transaction costs. The average per-share cost for repurchases under the 2011 Program from inception through December 31, 2011 was $60.57.

     During the fiscal year ended December 31, 2011, no equity securities of the Company were sold by the Company that were not registered under the Securities Act of 1933, as amended.

     The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth under the caption “Other Matters — Equity Compensation Plan Information” in our Proxy Statement for the 2012 Annual Meeting of Shareholders.

     Pursuant to the Merger Agreement with Express Scripts, Inc. (“Express Scripts”), the Company is not permitted to engage in share repurchases without Express Scripts’ prior written consent until the consummation of the merger or the termination of the Merger Agreement. Currently, the Company does not anticipate making additional share repurchases.

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Item 6. Selected Financial Data.

The following table presents our selected historical consolidated financial and operating data. The selected historical financial and operating data should be read in conjunction with, and is qualified in its entirety by reference to, Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K ($ and volumes in millions, except for per share data and EBITDA per adjusted prescription data):

	December 31,			December 25,			December 26,			December 27,			December 29,
As of and for Fiscal Years Ended	2011(1)(2)(3)			2010(1)			2009			2008			2007
Consolidated statement of income data:
Total product net revenues(4)	$	68,563.3		$	64,889.4		$	58,961.4		$	50,576.2		$	43,961.9
Total service net revenues		1,500.0			1,078.9			842.8			681.8			544.3
Total net revenues(4)		70,063.3			65,968.3			59,804.2			51,258.0			44,506.2
Cost of operations:
Cost of product net revenues(4)		64,919.0			61,302.4			55,523.1			47,308.2			41,402.6
Cost of service revenues		522.1			330.8			254.1			221.4			158.3
Total cost of revenues(4)		65,441.1			61,633.2			55,777.2			47,529.6			41,560.9
Selling, general and administrative expenses		1,744.7			1,550.4			1,455.5			1,425.0			1,114.1
Amortization of intangibles		291.9			287.4			305.6			285.1			228.1
Interest expense		208.5			172.5			172.5			233.7			134.2
Interest (income) and other (income) expense, net		1.3			(9.4	)		(9.9	)		(6.2	)		(34.4	)
Total costs and expenses		67,687.5			63,634.1			57,700.9			49,467.2			43,002.9
Income before provision for income taxes		2,375.8			2,334.2			2,103.3			1,790.8			1,503.3
Provision for income taxes(9) (d)		920.1			906.9			823.0			687.9			591.3
Net income	$	1,455.7		$	1,427.3		$	1,280.3		$	1,102.9		$	912.0
Earnings per share data(5) :
Basic weighted average shares outstanding		394.7			443.0			481.1			508.6			550.2
Basic earnings per share	$	3.69		$	3.22		$	2.66		$	2.17		$	1.66
Diluted weighted average shares outstanding		402.3			451.8			490.0			518.6			560.9
Diluted earnings per share	$	3.62		$	3.16		$	2.61		$	2.13		$	1.63
Adjustment for merger-related expenses(6)		0.12			—			—			—			—
Diluted earnings per share, excluding merger-related expenses	$	3.74		$	3.16		$	2.61		$	2.13		$	1.63
Adjustment for the amortization of intangible assets(7)		0.43			0.39			0.37			0.33			0.24
Diluted earnings per share, excluding all intangible amortization and merger-related expenses	$	4.17		$	3.55		$	2.98		$	2.46		$	1.87
Consolidated balance sheet data:
Working capital(8)	$	(2,068.8	)	$	(196.7	)	$	1,810.9		$	1,299.5		$	1,173.5
Goodwill	$	6,953.8		$	6,939.5		$	6,333.0		$	6,331.4		$	6,230.2
Intangible assets, net	$	2,148.0		$	2,409.8		$	2,428.8		$	2,666.4		$	2,905.0
Total assets	$	16,962.8		$	17,097.3		$	17,915.5		$	17,010.9		$	16,217.9
Total debt	$	5,044.3		$	5,027.2		$	4,015.9		$	4,602.9		$	3,494.4
Deferred tax liabilities	$	988.4		$	985.1		$	958.8		$	1,065.3		$	1,167.0
Total noncurrent liabilities	$	4,204.1		$	6,228.1		$	5,180.6		$	5,255.0		$	4,213.4
Total stockholders’ equity	$	4,009.4		$	3,986.8		$	6,387.2		$	5,957.9		$	6,875.3

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	December 31,			December 25,			December 26,			December 27,			December 29,
As of and for Fiscal Years Ended	2011(1)(2)(3)			2010(1)			2009			2008			2007
Supplemental information:
EBITDA(9)	$	3,090.6		$	2,974.2		$	2,750.5		$	2,461.1		$	2,000.1
EBITDA, excluding merger-related expenses(9)	$	3,170.8		$	2,974.2		$	2,750.5		$	2,461.1		$	2,000.1
EBITDA per adjusted prescription(9)	$	3.15		$	3.11		$	3.06		$	3.09		$	2.67
EBITDA per adjusted prescription, excluding merger-related expenses(9)	$	3.23		$	3.11		$	3.06		$	3.09		$	2.67
Net cash provided by operating activities	$	1,282.4		$	2,344.7		$	3,501.4		$	1,635.1		$	1,367.0
Net cash used by investing activities	$	(327.6	)	$	(1,019.5	)	$	(305.0	)	$	(416.2	)	$	(1,713.8	)
Net cash (used by) provided by financing activities	$	(1,579.1	)	$	(3,000.0	)	$	(1,606.6	)	$	(1,054.6	)	$	302.4
Volume information:
Generic mail-order prescriptions		73.2			67.6			59.6			58.2			47.4
Brand mail-order prescriptions		39.9			42.2			43.5			47.6			47.4
Total mail-order prescriptions		113.1			109.8			103.1			105.8			94.8
Retail prescriptions		644.3			630.3			591.4			480.2			465.0
Total prescriptions		757.4			740.1			694.5			586.0			559.8
Adjusted prescriptions(9)(f)		980.7			957.0			898.8			795.9			748.3
Adjusted mail-order penetration(10)		34.3	%		34.1	%		34.2	%		39.7	%		37.9	%
Overall generic dispensing rate		73.8	%		71.0	%		67.5	%		64.1	%		59.7	%
Retail generic dispensing rate		75.3	%		72.7	%		69.2	%		66.0	%		61.7	%
Mail-order generic dispensing rate		64.8	%		61.5	%		57.8	%		55.0	%		50.0	%

Notes to Selected Financial Data:

(1)	The consolidated data for 2011 and 2010 include the operating results of United BioSource Corporation® (“UBC”) commencing on the September 16, 2010 acquisition date.
(2)	The consolidated data for 2011 includes pre-tax merger-related expenses of $80.2 million associated with the pending Express Scripts merger, with $2.3 million in cost of product revenues and $77.9 million in SG&A expenses.
(3)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(4)	Includes retail co-payments of $9,250 million for 2011, $9,241 million for 2010, $8,661 million for 2009, $7,666 million for 2008, and $7,553 million for 2007.
(5)	Common share and per share amounts have been retrospectively adjusted for the two-for-one stock split, which became effective on January 24, 2008.
(6)	This adjustment represents the per-share effect of the aforementioned 2011 pre-tax merger-related expenses of $80.2 million, or $49.5 million after tax, associated with the pending Express Scripts merger.
(7)	This adjustment represents the per-share effect of all intangible amortization.
(8)	Calculated as current assets less current liabilities. Current liabilities include the current portion of long-term debt of $2 billion as of December 31, 2011. As of December 31, 2011, the $2 billion current portion of long-term debt matures on April 30, 2012. See Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Looking Forward,” of this Annual Report on Form 10-K for additional information.
(9)	EBITDA consists of earnings before interest income/expense, taxes, depreciation and amortization. We calculate and use EBITDA and EBITDA per adjusted prescription as indicators of our ability to generate cash from our reported operating results. These measurements are used in concert with net income and cash flows from operations, which measure actual cash generated in the period. In addition, we believe that EBITDA and EBITDA per adjusted prescription are supplemental measurement tools used by analysts and investors to help evaluate overall operating performance and the ability to incur and service debt and make capital expenditures. EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income or cash flows from operations data, as measured under U.S. generally accepted accounting principles. The items excluded from EBITDA, but included in the calculation of reported net income, are significant components of the consolidated statements of income and must be considered in performing a comprehensive assessment of

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overall financial performance. EBITDA, and the associated year-to-year trends, should not be considered in isolation. Our calculation of EBITDA may not be consistent with calculations of EBITDA used by other companies. Additionally, we have calculated the 2011 EBITDA excluding the pre-tax merger-related expenses associated with the pending Express Scripts merger, as the expenses are not considered an indicator of ongoing company performance.

EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription volume for the period. This measure is used as an indicator of EBITDA performance on a per-unit basis, providing insight into the cash-generating potential of each prescription. EBITDA, and as a result, EBITDA per adjusted prescription, are affected by the changes in prescription volumes between retail and mail order, the relative mix of brand-name, generic and specialty pharmacy drugs, as well as the level of efficiency in the business. Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions.

The following table reconciles our reported net income to EBITDA and presents EBITDA per adjusted prescription for each of the respective periods (in millions, except for EBITDA per adjusted prescription data):

	December 31,			December 25,			December 26,			December 27,			December 29,
For Fiscal Years Ended	2011(a) (b)			2010(a)			2009			2008			2007
Net income	$	1,455.7		$	1,427.3		$	1,280.3		$	1,102.9		$	912.0
Add:
Interest expense		208.5			172.5			172.5			233.7			134.2
Interest (income) and other (income) expense, net		1.3			(9.4	)		(9.9	)		(6.2	)(c)		(34.4	)
Provision for income taxes		920.1	(d)		906.9			823.0	(d)		687.9	(d)		591.3
Depreciation expense		213.1			189.5			179.0			157.7			168.9
Amortization expense		291.9			287.4			305.6			285.1			228.1
EBITDA	$	3,090.6		$	2,974.2		$	2,750.5		$	2,461.1		$	2,000.1
Adjustment for 2011 merger-related expenses(e)		80.2			—			—			—			—
EBITDA, excluding 2011 merger-related expenses	$	3,170.8		$	2,974.2		$	2,750.5		$	2,461.1		$	2,000.1
Adjusted prescriptions(f)		980.7			957.0			898.8			795.9			748.3
EBITDA per adjusted prescription	$	3.15		$	3.11		$	3.06		$	3.09		$	2.67
EBITDA per adjusted prescription, excluding 2011 merger-related expenses	$	3.23		$	3.11		$	3.06		$	3.09		$	2.67

(a)	Includes UBC’s operating results commencing on the September 16, 2010 acquisition date.
(b)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(c)	Includes a $9.8 million charge for the ineffective portion of the forward-starting interest rate swap agreements associated with the March 2008 issuance of senior notes. See Note 8, “Debt,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(d)	2011, 2009 and 2008 include tax benefits of $19 million, $22 million, and $28 million, respectively. See Note 10, “Taxes on Income,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(e)	Represents pre-tax merger-related expenses associated with the pending Express Scripts merger. See note (2) to Selected Financial Data above.
(f)	Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions.
(10)	The percentage of adjusted mail-order prescriptions to total adjusted prescriptions.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As we noted earlier on page 3 of this Annual Report on Form 10-K, this Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” (along with other sections of this Annual Report), may contain forward-looking statements. Any such forward-looking statements are not historical facts but rather are based on management’s current expectations, estimates, assumptions and projections about the business and future financial results of the PBM and specialty pharmacy industries, and other legal, regulatory and economic developments. Forward-looking statements include, among other things, information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition, and the effects of future legislation or regulations. We use words such as “anticipates,” “believes,” “plans,” “expects,” “projects,” “future,” “intends,” “may,” “will,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue” and similar expressions to identify these forward-looking statements.

Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this Annual Report on Form 10-K, except as required by law.

The risk factors discussed in Part I, Item 1A, “Risk Factors,” and other risks identified in this Annual Report on Form 10-K could cause our actual results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.

Overview

We are a leading healthcare company that is pioneering the world’s most advanced pharmacy^® and our clinical research and innovations are part of Medco making medicine smarter™ for more than 65 million members in 2011. Medco provides clinically-driven pharmacy services designed to improve the quality of care and lower total healthcare costs for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans. Our unique Medco Therapeutic Resource Centers^®, which conduct therapy management programs using Medco Specialist Pharmacists who have expertise in the medications used to treat certain chronic conditions, as well as Accredo Health Group, Medco’s Specialty Pharmacy, represent innovative models for the care of patients with chronic and complex conditions. Additionally, Medco has capabilities and expertise in post-approval safety and economics outcomes research such as Risk Evaluation and Mitigation Strategies for biotechnology and other pharmaceutical drugs through our subsidiary, United BioSource Corporation^® (“UBC”).

Our business model requires collaboration with payors, retail pharmacies, physicians, pharmaceutical manufacturers, the Centers for Medicare & Medicaid Services (“CMS”) for Medicare, and, particularly in Specialty Pharmacy, collaboration with other third-party payors such as health insurers, and state Medicaid agencies. Our programs and services help control the cost and enhance the quality of prescription drug benefits. We accomplish this by providing pharmacy benefit management (“PBM”) services through our national networks of retail pharmacies and our own mail-order pharmacies, as well as through Accredo Health Group.

The complicated environment in which we operate presents us with opportunities, challenges and risks. Our clients and members are paramount to our success; the retention of existing clients and members and winning of new clients and members poses the greatest opportunity to us and the loss thereof represents an ongoing risk. The preservation of our relationships with pharmaceutical manufacturers, biopharmaceutical manufacturers and retail pharmacies is very important to the execution of our business strategies. Our future success will be largely dependent on our ability to drive mail-order volume and increase generic dispensing rates in light of the significant brand-name drug patent expirations expected to occur over the next several years. In addition, our future success depends on our ability to continue to provide innovative and competitive clinical and other services to clients and members, including through our active participation in the Medicare Part D Prescription Drug Plan (“Medicare Part D”) benefit, our growing specialty pharmacy business, including the growth in biosimilars, our Therapeutic Resource Centers, as well as the growing service revenue businesses that include our clinical research business capabilities through UBC, our personalized medicine services and our international services.

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Additionally, our future success will depend on our continued ability to generate positive cash flows from operations with a keen focus on asset management and maximizing return on invested capital (“ROIC”). We are very focused on managing our ROIC to ensure we drive significant returns to our shareholders. We believe there is a close correlation between strong ROIC and long-term shareholder value and as such, in 2009 we began including ROIC as a component of our annual performance bonus grid.

Our financial performance benefits from the diversity of our client base and our clinically-driven business model, which we believe provides better outcomes at lower costs for our clients. We actively monitor the status of our accounts receivable and have mechanisms in place to minimize the potential for incurring material accounts receivable credit risk. To date, we have not experienced any significant deterioration in our client or manufacturer rebates accounts receivable.

Our fiscal years end on the last Saturday in December. Fiscal year 2011 is comprised of 53 weeks and fiscal years 2010 and 2009 each are comprised of 52 weeks. Unless otherwise stated, references to years in the consolidated financial statements relate to fiscal years.

When we use “Medco,” the “Company,” “we,” “us” and “our,” we mean Medco Health Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries. When we use the term “mail order,” we mean inventory dispensed through Medco’s mail-order pharmacy operations.

Agreement and Plan of Merger with Express Scripts, Inc.

On July 20, 2011, we entered into a definitive Merger Agreement with Express Scripts, Inc. (“Express Scripts”) and certain of its subsidiaries (as amended on November 7, 2011 by Amendment No. 1 thereto, the “Merger Agreement”) providing for the combination of Express Scripts and Medco under a new holding company, New Express Scripts. As a result of the transactions contemplated by the Merger Agreement, former Medco shareholders and Express Scripts shareholders will own stock in New Express Scripts. Subject to the terms and conditions set forth in the Merger Agreement, upon the closing of the transaction, each share of Medco common stock will be converted into the right to receive $28.80 in cash and 0.81 shares of New Express Scripts. Upon closing of the transaction, Express Scripts’ shareholders are expected to own approximately 59% of the combined company and Medco’s shareholders are expected to own approximately 41%. The transaction is expected to close in the first half of 2012. The merger is subject to regulatory clearance and other customary closing conditions. The shareholders approved the merger on December 21, 2011. Currently, Express Scripts and Medco are independent companies, and they will continue to be managed and operated as such until the completion of the pending merger.

Recent Acquisition

In September 2010, we extended our core capabilities in data analytics and research with the acquisition of UBC. UBC is a leader in serving life sciences industry clients and is focused on developing scientific evidence to guide the safe, effective and affordable use of medicines. UBC has the capability to conduct post-approval research in strategic locations worldwide, including North America, Europe and Asia.

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Key Indicators Reviewed By Management

Management reviews the following indicators in analyzing our consolidated financial performance: net revenues, with a particular focus on mail-order volumes and revenue; adjusted prescription volume; generic dispensing rate and generic volumes, particularly for mail order; service revenue; gross margin percentage; cash flow from operations; return on invested capital; diluted earnings per share; diluted earnings per share, excluding all intangible amortization; diluted earnings per share, excluding all intangible amortization and merger-related expenses; Specialty Pharmacy segment revenue and operating income; Earnings Before Interest and Other Income/Expense, Taxes, Depreciation, and Amortization (“EBITDA”); and EBITDA per adjusted prescription. See “—EBITDA” further below for a definition and calculation of EBITDA and EBITDA per adjusted prescription. We believe these measures highlight key business trends and are important in evaluating our overall performance.

2011 Financial Performance Summary

Our diluted earnings per share were $3.62 for 2011, and include expenses associated with the pending merger with Express Scripts. Excluding these merger-related expenses, our diluted earnings per share increased 18.4% to $3.74 for 2011. The merger-related expenses, which include investment banking fees, legal fees and employee retention expenses, amount to $80.2 million pre-tax for 2011, with $77.9 million included in selling, general and administrative (“SG&A”) expenses and $2.3 million included in cost of product net revenues. Excluding all intangible amortization and the merger-related expenses, our diluted earnings per share increased 17.5% to $4.17 for 2011. These earnings per share increases primarily reflect higher generic dispensing rates and mail-order generic volumes, a decrease in the diluted weighted average shares outstanding, increased service margin, and growth in the Specialty Pharmacy business, as well as one more week in 2011. Fiscal year 2011 included 53 weeks compared with fiscal year 2010, which included 52 weeks. These earnings per share increases are partially offset by the effect of client renewal pricing and increased SG&A expenses. The increases also reflect a first-quarter 2011 benefit associated with changes to the employee postretirement healthcare benefit plan of $30.6 million included in gross margin and SG&A expenses, partially offset by a second-quarter 2010 benefit of approximately $27 million associated with our receipt of a settlement award in a class action antitrust lawsuit brought by direct purchasers of a brand-name medication. For the year ended December 31, 2011, we generated cash flow from operations of $1,282.4 million and had cash and cash equivalents of $229.1 million on our consolidated balance sheet at December 31, 2011.

The diluted weighted average shares outstanding were 402.3 million for 2011 compared to 451.8 million for 2010, representing a decrease of 11.0%, resulting primarily from our share repurchase programs.

Our total net revenues increased 6.2% to $70,063.3 million in 2011. Product net revenues increased 5.7% to $68,563.3 million in 2011, driven by higher prices charged by brand-name pharmaceutical manufacturers, as well as higher prescription volume reflecting the extra week of volume in fiscal year 2011, partially offset by a greater mix of lower-priced generic drugs and higher client price discounts. Additionally, our service revenues increased 39.0% to $1,500.0 million in 2011, reflecting higher manufacturer service revenues primarily driven by the contributions from UBC, which was acquired in September 2010. Also included in the higher service revenues are increased client and other service revenues primarily driven by increased formulary management fees and higher claims processing administrative fees, including the effect of the extra week in fiscal year 2011.

The total adjusted prescription volume, which adjusts mail-order prescription volume for the difference in days supply between mail order and retail, increased 2.5% to 980.7 million for 2011, reflecting higher retail and mail-order volumes and the extra week in fiscal year 2011. The increase in mail-order prescription volume for 2011 is driven by an increase in generic volumes, as brand-name volumes were lower than in 2010. The adjusted mail-order penetration rate was 34.3% for 2011, compared to 34.1% for 2010.

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Our overall generic dispensing rate increased to 73.8% for 2011, from 71.0% for 2010, reflecting the impact of the introduction of new generic products in and subsequent to 2010, heightened use of previously released generics, and the effect of client plan design changes promoting the use of lower-priced and more steeply discounted generics. Higher generic volumes, which contribute to lower costs for clients and members, resulted in a reduction to net revenues of approximately $3,600 million for 2011.

Our overall gross margin percentage was 6.6% for 2011, consistent with 2010, primarily reflecting increased generic dispensing rates and mail-order generic volumes, as well as a higher mix of higher margin service revenues, offset by the effect of client renewal pricing. Also contributing is the margin component of the aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit plan of $22.6 million, offset by the aforementioned second-quarter 2010 settlement award of approximately $27 million.

SG&A expenses were $1,744.7 million for 2011 including merger-related costs of $77.9 million. Excluding the merger-related costs, SG&A expenses of $1,666.8 million for 2011 increased by $116.4 million, or 7.5%, from 2010. This increase primarily reflects SG&A expenses from UBC which was acquired in September 2010. Excluding UBC and the merger-related expenses, SG&A expenses increased by 2.6% from 2010. This increase reflects higher technology-related expenses associated with strategic initiatives, as well as the effect of the extra week in fiscal 2011. Also contributing are higher stock-based compensation expenses, partially offset by the SG&A component of the aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit plan of $8.0 million, and efficiencies across the company.

Amortization of intangible assets of $291.9 million for 2011 increased $4.5 million from 2010, primarily reflecting higher intangible amortization from the acquisition of UBC, partially offset by lower intangible amortization from scheduled accelerated amortization of certain customer relationships in the prior period.

Interest expense of $208.5 million for 2011 increased $36.0 million from 2010, primarily reflecting higher expense as a result of increased borrowings of $1 billion from our September 2010 senior notes issuance associated with the acquisition of UBC.

Interest (income) and other (income) expense, net, of $1.3 million of expense for 2011 decreased $10.7 million from ($9.4) million of income for 2010. The decrease in interest (income) and other (income) expense, net, primarily reflects a foreign currency gain that was recognized in 2010 and our net joint venture activity, as well as decreased interest income.

Our effective tax rate (defined as the percentage relationship of provision for income taxes to income before provision for income taxes) was 38.7% for 2011, compared to 38.9% for 2010.

Key Financial Statement Components

Consolidated Statements of Income

Our net revenues are comprised primarily of product net revenues and are derived principally from the sale of prescription drugs through our networks of contractually affiliated retail pharmacies and through our mail-order pharmacies, and are recorded net of certain discounts, rebates and guarantees payable to clients and members. The majority of our product net revenues are derived on a fee-for-service basis. Our Specialty Pharmacy product net revenues represent revenues from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to third-party payors and patients.

In addition, our product net revenues include premiums associated with our Medicare Part D Prescription Drug Plan (“PDP”) risk-based product offerings. These products involve prescription dispensing for beneficiaries enrolled in the CMS-sponsored Medicare Part D prescription drug benefit. Our two insurance company subsidiaries have been operating under contracts with CMS since 2006, and currently offer several Medicare PDP options. The products involve underwriting the benefit, charging enrollees applicable premiums, providing covered prescription drugs and administering the benefit as filed with CMS. We provide two Medicare drug benefit plan options for beneficiaries, including a “standard Part D” benefit plan as mandated by statute, and a benefit plan with enhanced coverage that exceeds the standard Part D benefit plan, available for an additional premium. We also offer numerous customized benefit plan designs to employer group retiree plans under the Medicare Part D prescription drug benefit.

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The PDP premiums are determined based on our annual bid and related contractual arrangements with CMS. The PDP premiums are primarily comprised of amounts received from CMS as part of a direct subsidy and an additional subsidy from CMS for low-income member premiums, as well as premium payments received from members. These premiums are recognized ratably to product net revenues over the period in which members are entitled to receive benefits. Premiums received in advance of the applicable benefit period are deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. There is a possibility that the annual costs of drugs may be higher or lower than premium revenues. As a result, CMS provides a risk corridor adjustment for the standard drug benefit that compares our actual annual drug costs incurred to the targeted premiums in our CMS-approved bid. Based on specific collars in the risk corridor, we will receive from CMS additional premium amounts or be required to refund to CMS previously received premium amounts. We calculate the risk corridor adjustment on a quarterly basis based on drug cost experience to date and record an adjustment to product net revenues with a corresponding account receivable from or payable to CMS reflected on the consolidated balance sheets.

In addition to PDP premiums, there are certain co-payments and deductibles (the “cost share”) due from members based on prescription orders by those members, some of which are subsidized by CMS in cases of low-income membership. In 2011, non-low-income members receive a cost share benefit under the coverage gap discount program with brand pharmaceutical manufacturers. The coverage gap cost share program covers 50% of the member co-payment in the coverage gap for participating brand-name drugs. For subsidies received in advance, the amount is deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. If there is cost share due from members, pharmaceutical manufacturers or CMS, the amount is accrued and recorded in client accounts receivable, net, on the consolidated balance sheets. After the end of the contract year and based on actual annual drug costs incurred, cost share amounts are reconciled with CMS and the corresponding receivable or payable is settled. The cost share is treated consistently as other co-payments derived from providing PBM services, as a component of product net revenues on the consolidated statements of income. For further details, see our critical accounting policies included in “—Use of Estimates and Critical Accounting Policies and Estimates” below and Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Premium revenues for our PDP products, which exclude member cost share, were $720 million, or 1% of total net revenues, in 2011, $687 million, or 1% of total net revenues, in 2010, and $543 million, or less than 1% of total net revenues, in 2009.

Our agreements with CMS, as well as applicable Medicare Part D regulations and federal and state laws, require us to, among other obligations: (i) comply with certain disclosure, filing, record-keeping and marketing rules; (ii) operate quality assurance, drug utilization management and medication therapy management programs; (iii) support e-prescribing initiatives; (iv) implement grievance, appeals and formulary exception processes; (v) comply with payment protocols, which include the return of overpayments to CMS and, in certain circumstances, coordination with state pharmacy assistance programs; (vi) use approved networks and formularies, and provide access to such networks to “any willing pharmacy”; (vii) provide emergency out-of-network coverage; and (viii) implement a comprehensive Medicare and Fraud, Waste and Abuse compliance program. We have various contractual and regulatory compliance requirements associated with participating in the Medicare Part D benefit. Similar to our requirements with other clients, our policies and practices associated with executing our PDP are subject to audit. If material contractual or regulatory non-compliance was to be identified, monetary penalties and/or applicable sanctions, including suspension of enrollment and marketing or debarment from participation in Medicare programs, may be imposed. Additionally, each calendar year, payment will vary based on the annual benchmark that applies as a result of Medicare Part D plan bids for the applicable year, as well as for changes in the CMS methodology for calculating risk adjustment factors.

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Service revenues consist principally of administrative fees and clinical program fees earned from clients, sales of prescription services to pharmaceutical manufacturers, performance-oriented fees paid by Specialty Pharmacy manufacturers, revenues from data analytics and research associated with UBC, and other non-product-related revenues. Service revenues are recorded when performance occurs and collectibility is assured.

Cost of revenues is comprised primarily of cost of product net revenues and is principally attributable to the dispensing of prescription drugs. Cost of product net revenues for prescriptions dispensed through our networks of retail pharmacies is comprised of the contractual cost of drugs dispensed by, and professional fees paid to, retail pharmacies in the networks, including the associated member co-payments. Our cost of product net revenues relating to drugs dispensed by our mail-order pharmacies consists primarily of the cost of inventory dispensed and our costs incurred to process and dispense the prescriptions, including the associated fixed asset depreciation. The operating costs of our call center pharmacies are also included in cost of product net revenues. In addition, cost of product net revenues includes a credit for rebates earned from brand-name pharmaceutical manufacturers whose drugs are included in our formularies. These rebates generally take the form of formulary rebates, which are earned based on the volume of a specific drug dispensed, or market share rebates, which are earned based on the achievement of contractually specified market share levels.

Our cost of product net revenues also includes the cost of drugs dispensed by our mail-order pharmacies or retail network for members covered under our Medicare PDP product offerings and are recorded at cost as incurred. We receive a catastrophic reinsurance subsidy from CMS for approximately 80% of costs incurred by individual members in excess of the individual annual out-of-pocket maximum of $4,550 for coverage year 2011, $4,550 for coverage year 2010, and $4,350 for coverage year 2009. The subsidy is reflected as an offsetting credit in cost of product net revenues to the extent that catastrophic costs are incurred. Catastrophic reinsurance subsidy amounts received in advance are deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. If there are catastrophic reinsurance subsidies due from CMS, the amount is accrued and recorded in client accounts receivable, net, on the consolidated balance sheets. After the end of the contract year and based on actual annual drug costs incurred, catastrophic reinsurance amounts are reconciled with CMS and the corresponding receivable or payable is settled. Cost of service revenues consists principally of labor and operating costs for delivery of services provided, as well as costs associated with member communication materials.

SG&A expenses reflect the costs of operations dedicated to executive management, the generation of new sales, maintenance of existing client relationships, management of clinical programs, enhancement of technology capabilities, direction of pharmacy operations, and performance of reimbursement activities, in addition to finance, legal and other staff activities, and the effect of certain legal settlements. SG&A also includes advertising expenses, which are expensed as incurred.

Interest expense is incurred on our senior unsecured bank credit facility, accounts receivable financing facility, other short-term debt, and our senior notes, and includes net interest on our interest rate swap agreements on $200 million of the $500 million of 7.25% senior notes due in 2013. In addition, it includes amortization of the effective portion of our settled forward-starting interest rate swap agreements and amortization of debt issuance costs.

Interest (income) and other (income) expense, net, includes interest income generated by cash and cash equivalent investments, and short-term and long-term investments in marketable securities, as well as other (income) expense from the effect of foreign currency translation and our joint venture activity.

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For further details, see our critical accounting policies included in “—Use of Estimates and Critical Accounting Policies and Estimates” below and Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Consolidated Balance Sheets

Our primary assets include cash and cash equivalents, short-term and long-term investments, manufacturer accounts receivable, client accounts receivable, inventories, fixed assets, deferred tax assets, goodwill and intangible assets. Cash and cash equivalents reflect the accumulation of net positive cash flows from our operations, investing and financing activities, and primarily include time deposits with banks or other financial institutions, and money market mutual funds. Our short-term and long-term investments include U.S. government securities that are held to satisfy statutory capital requirements for our insurance subsidiaries.

Manufacturer accounts receivable balances primarily include amounts due from brand-name pharmaceutical manufacturers for earned rebates and other prescription services. Client accounts receivable represent amounts due from clients, other payors and patients for prescriptions dispensed from retail pharmacies in our networks or from our mail-order pharmacies, including fees due to us, net of allowances for doubtful accounts, as well as contractual allowances and any applicable rebates and guarantees payable when these payables are settled on a net basis in the form of an invoice credit. In cases where rebates and guarantees are settled with the client on a net basis, and the rebates and guarantees payable are greater than the corresponding client accounts receivable balances, the net liability is reclassified to client rebates and guarantees payable. When these payables are settled in the form of a check or wire, they are recorded on a gross basis and the entire liability is reflected in client rebates and guarantees payable. Our client accounts receivable also includes receivables from CMS for our Medicare PDP product offerings and premiums from members. Additionally, we have receivables from Medicare and Medicaid for a portion of our Specialty Pharmacy business, and for diabetes supplies dispensed under our Liberty brand. We have an allowance for doubtful accounts associated with our accounts receivable that is estimated based upon a variety of factors, including the age of the outstanding receivables, trends of cash collections and bad debt write-offs, recent economic factors, and our historical experience of collecting the patient co-payments and deductibles.

Inventories reflect the cost of prescription products held for dispensing by our mail-order pharmacies and are recorded on a first-in, first-out basis, net of allowances for losses. Deferred tax assets primarily represent temporary differences between the financial statement basis and the tax basis of certain accrued expenses, stock-based compensation, and client rebate pass-back liabilities. Fixed assets include investments in our corporate headquarters, mail-order pharmacies, call center pharmacies, account service offices, and information technology, including capitalized software development. Goodwill and intangible assets for the PBM segment are comprised primarily of the goodwill and intangibles that had been pushed down to our consolidated balance sheets and existed when we became an independent, publicly traded enterprise in 2003, and, to a significantly lesser extent, goodwill and intangibles recorded upon our acquisitions subsequent to 2003. Goodwill and intangible assets for the Specialty Pharmacy segment include goodwill and intangible assets recorded primarily from our acquisition of Accredo Health, Incorporated (“Accredo”) in 2005.

Our primary liabilities include claims and other accounts payable, client rebates and guarantees payable, accrued expenses and other current liabilities, debt and deferred tax liabilities. Claims and other accounts payable primarily consist of amounts payable to retail network pharmacies for prescriptions dispensed and services rendered by the retail pharmacies, as well as amounts payable for mail-order prescription inventory purchases and other purchases made in the normal course of business. Client rebates and guarantees payable include amounts due to clients that will ultimately be settled in the form of a check or wire, as well as any residual liability in cases where the payable is settled as an invoice credit and exceeds the corresponding client accounts receivable balances. Accrued expenses and other current liabilities primarily consist of employee- and facility-related cost accruals incurred in the normal course of business, as well as income taxes payable. Accrued expenses and other current liabilities are also comprised of certain premiums, and may also include cost share, and catastrophic reinsurance payments received in advance from CMS for our Medicare PDP product offerings. Our debt is primarily comprised of a senior unsecured term loan facility, a senior unsecured revolving credit facility, and senior notes. In addition, we have a net deferred tax liability primarily associated with our recorded intangible assets. We do not have any material off-balance sheet arrangements, other than purchase commitments and lease obligations. See “—Commitments and Contractual Obligations” below.

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Our stockholders’ equity includes an offset for purchases of our common stock under our share repurchase programs. The accumulated other comprehensive loss component of stockholders’ equity includes: unrealized investment gains and losses, foreign currency translation adjustments resulting primarily from the translation of Europa Apotheek Venlo B.V. (“Europa Apotheek”)’s assets, liabilities and results of operations, unrealized gains and losses on effective cash flow hedges, and the net gains and losses and prior service costs and credits related to our pension and other postretirement benefit plans.

Consolidated Statements of Cash Flows

An important element of our operating cash flows is the timing of billing cycles, which are generally two-week periods of accumulated billings for retail and mail-order prescriptions. We bill the cycle activity to clients on this bi-weekly schedule and generally collect from our clients before we pay our obligations to the retail pharmacies for that same cycle. At the end of any given reporting period, unbilled PBM receivables can represent up to two weeks of dispensing activity and will fluctuate at the end of a fiscal month depending on the timing of these billing cycles. A portion of the Specialty Pharmacy business includes reimbursement by payors, such as insurance companies, under a medical benefit, or by Medicare or Medicaid. These transactions also involve higher patient co-payments than experienced in the PBM business. As a result, this portion of the Specialty Pharmacy business experiences slower accounts receivable turnover than in the aforementioned PBM cycle and has a different credit risk profile. Our operating cash flows are also impacted by timing associated with our Medicare PDP product offerings, including premiums, cost share, and catastrophic reinsurance received from CMS. In addition, our operating cash flows include tax benefits for employee stock plans up to the amount associated with compensation expense.

Ongoing operating cash flows are associated with expenditures to support our mail-order, retail pharmacy network operations, call center pharmacies and other SG&A functions. The largest components of these expenditures include payments to retail pharmacies; mail-order inventory purchases, which are paid in accordance with payment terms offered by our suppliers to take advantage of appropriate discounts; rebate and guarantee payments to clients; employee payroll and benefits; facility operating expenses and income taxes. In addition, earned brand-name pharmaceutical manufacturers’ rebates are recorded monthly based upon prescription dispensing, with actual bills rendered on a quarterly basis and paid by the manufacturers within an agreed-upon term. Payments of rebates to clients are generally made after our receipt of the rebates from the brand-name pharmaceutical manufacturers, although some clients may receive more accelerated rebate payments in exchange for other elements of pricing in their contracts.

Ongoing investing cash flows are primarily associated with capital expenditures, including technology investments, as well as purchases of securities and other assets, and proceeds from the sale of securities and other investments, which primarily relate to investment activities of our insurance companies. Acquisitions will also generally result in cash outflows from investing activities. Ongoing financing cash flows primarily include share repurchases, proceeds from employee stock plans, and the benefits of realized tax deductions in excess of tax benefits on compensation expense.

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Clients

We have clients in a broad range of industry categories, including various Blue Cross/Blue Shield plans; health plans; insurance carriers; third-party benefit plan administrators; employers; federal, state and local government agencies; and union-sponsored benefit plans. For fiscal years 2011, 2010 and 2009, our ten largest clients based on revenue accounted for approximately 46%, 47% and 49% of our net revenues, respectively. Our largest client, UnitedHealth Group Incorporated (“UnitedHealth Group”), represented approximately $11,700 million, or 17%, $11,000 million, or 17%, and $11,300 million, or 19%, of our net revenues during fiscal 2011, 2010 and 2009 respectively. On July 21, 2011, we announced that our pharmacy benefit services agreement with UnitedHealth Group would not be renewed, although we will continue to provide service under the current agreement until it expires on December 31, 2012. The UnitedHealth Group account has a lower than average mail-order penetration and, because of its size, steeper pricing than the average client, and consequently generally yields lower profitability as a percentage of net revenues than smaller client accounts. In addition, with respect to mail-order volume, which is an important contributor to our overall profitability, the mail-order volume associated with this account represented less than 10% of our overall mail-order volume for the fiscal year ended December 31, 2011. None of our other clients individually represented more than 10% of our net revenues in 2011, 2010 or 2009. In addition to UnitedHealth Group, other top 10 clients representing approximately 13% of our net revenues did not renew for 2012 as a result of acquisitions by competitors or transitioning in the normal course of business.

Segment Discussion

We have two reportable segments, PBM and Specialty Pharmacy. The PBM segment primarily involves sales of traditional prescription drugs and supplies to our clients and members or patients, either through our networks of contractually affiliated retail pharmacies or our mail-order pharmacies. The PBM segment also includes the operating results of Europa Apotheek, which primarily provides mail-order pharmacy services in Germany. Commencing on the September 16, 2010 acquisition date, the PBM segment includes the operating results of UBC, which extends our core capabilities in data analytics and research.

The Specialty Pharmacy segment includes the sale of specialty pharmacy products and services for the treatment of primarily complex and potentially life-threatening diseases, including specialty infusion services. We define the Specialty Pharmacy segment based on a product set and associated services, broadly characterized to include drugs that are usually high-cost, developed by biotechnology companies and often injectable or infusible, and may require elevated levels of patient support. When dispensed, these products frequently require ancillary administration equipment, special packaging, and a higher degree of patient-oriented customer service, including in-home nursing services and administration. Specialty pharmacy products and services are often covered through client PBM contracts. Specialty pharmacy products and services are also covered through medical benefit programs with the primary payors being insurance companies and government programs, and patients for amounts due for co-payments and deductibles.

The PBM segment is measured and managed on an integrated basis, and there is no distinct measurement that separates the performance and profitability of mail order and retail. We offer fully integrated PBM services to virtually all of our PBM clients and their members. The PBM services we provide to our clients are generally delivered and managed under a single contract for each client. The PBM and Specialty Pharmacy segments primarily operate in the United States and have relatively small activities in Puerto Rico, Germany and the United Kingdom. Additionally, UBC has the capability to conduct post-approval research in strategic locations worldwide, including North America, Europe and Asia.

As a result of the nature of our integrated PBM services and contracts, the chief operating decision maker views Medco’s PBM operations as a single segment for purposes of making decisions about resource allocations and in assessing performance.

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For segment financial information, see “— Segment Results of Operations” below and Note 13, “Segment and Geographic Data,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Consolidated Results of Operations

The following table presents selected consolidated comparative results of operations and volume performance ($ and volumes in millions):

	December 31,								December 25,								December 26,
For Fiscal Years Ended	2011(1)(2)(3)			Variance					2010(1)			Variance					2009
Net Revenues
Retail product(4)	$	41,907.3		$	1,698.0		4.2	%	$	40,209.3		$	3,612.9		9.9	%	$	36,596.4
Mail-order product		26,656.0			1,975.9		8.0	%		24,680.1			2,315.1		10.4	%		22,365.0
Total product(4)	$	68,563.3		$	3,673.9		5.7	%	$	64,889.4		$	5,928.0		10.1	%	$	58,961.4
Client and other service		972.2			148.9		18.1	%		823.3			138.3		20.2	%		685.0
Manufacturer service		527.8			272.2		N/M	*		255.6			97.8		62.0	%		157.8
Total service	$	1,500.0		$	421.1		39.0	%	$	1,078.9		$	236.1		28.0	%	$	842.8
Total net revenues(4)	$	70,063.3		$	4,095.0		6.2	%	$	65,968.3		$	6,164.1		10.3	%	$	59,804.2
Cost of Revenues
Product(4)	$	64,919.0		$	3,616.6		5.9	%	$	61,302.4		$	5,779.3		10.4	%	$	55,523.1
Service		522.1			191.3		57.8	%		330.8			76.7		30.2	%		254.1
Total cost of revenues(4)	$	65,441.1		$	3,807.9		6.2	%	$	61,633.2		$	5,856.0		10.5	%	$	55,777.2
Gross Margin(5)
Product	$	3,644.3		$	57.3		1.6	%	$	3,587.0		$	148.7		4.3	%	$	3,438.3
Product gross margin percentage		5.3	%		(0.2	)%				5.5	%		(0.3	)%				5.8	%
Service	$	977.9		$	229.8		30.7	%	$	748.1		$	159.4		27.1	%	$	588.7
Service gross margin percentage		65.2	%		(4.1	)%				69.3	%		(0.6	)%				69.9	%
Total gross margin	$	4,622.2		$	287.1		6.6	%	$	4,335.1		$	308.1		7.7	%	$	4,027.0
Gross margin percentage		6.6	%		0.0	%				6.6	%		(0.1	)%				6.7	%
Volume Information
Generic mail-order prescriptions		73.2			5.6		8.3	%		67.6			8.0		13.4	%		59.6
Brand mail-order prescriptions		39.9			(2.3	)	(5.5	)%		42.2			(1.3	)	(3.0	)%		43.5
Total mail-order prescriptions		113.1			3.3		3.0	%		109.8			6.7		6.5	%		103.1
Retail prescriptions		644.3			14.0		2.2	%		630.3			38.9		6.6	%		591.4
Total prescriptions		757.4			17.3		2.3	%		740.1			45.6		6.6	%		694.5
Adjusted prescriptions(6)		980.7			23.7		2.5	%		957.0			58.2		6.5	%		898.8
Adjusted mail-order penetration(7)		34.3	%		0.2	%				34.1	%		(0.1	)%				34.2	%
Generic Dispensing Rate Information
Retail generic dispensing rate		75.3	%		2.6	%				72.7	%		3.5	%				69.2	%
Mail-order generic dispensing rate		64.8	%		3.3	%				61.5	%		3.7	%				57.8	%
Overall generic dispensing rate		73.8	%		2.8	%				71.0	%		3.5	%				67.5	%

* Not meaningful

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(1)	Includes UBC’s operating results commencing on the September 16, 2010 acquisition date.
(2)	Includes pre-tax merger-related expenses of $2.3 million in cost of product revenues for 2011 associated with the pending Express Scripts merger.
(3)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(4)	Includes retail co-payments of $9,250 million for 2011, $9,241 million for 2010, and $8,661 million for 2009.
(5)	Represents total net revenues minus total cost of revenues.
(6)	Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions.
(7)	Represents the percentage of adjusted mail-order prescriptions to total adjusted prescriptions.

Net Revenues

Retail. The increase in retail net revenues of $1,698 million for 2011 reflects a net volume increase of $898 million primarily reflecting the extra week of volume in fiscal 2011. Also contributing to the retail net revenue variance was a net price increase of $800 million driven by higher prices charged by brand-name pharmaceutical manufacturers, partially offset by higher client price discounts. The aforementioned net price variance includes the offsetting effect of approximately $2,350 million from a greater mix of lower-priced generic drugs in 2011.

The increase in retail net revenues of $3,613 million for 2010 reflects net volume increases of $2,408 million primarily from new business. Also contributing to the higher retail net revenue variance was a net price increase of $1,205 million driven by higher prices charged by brand-name pharmaceutical manufacturers, partially offset by higher client price discounts. The aforementioned net price variance includes the offsetting effect of approximately $2,455 million from a greater mix of lower-priced generic drugs in 2010.

Mail-Order. The increase in mail-order net revenues of $1,976 million for 2011 primarily reflects a net price increase of $1,283 million driven by higher prices charged by brand-name pharmaceutical manufacturers, partially offset by higher client price discounts. Also contributing to the mail-order net revenue increase is a net volume increase of $693 million driven by higher generic volumes including the extra week of volume in fiscal 2011. The volumes of lower-priced generic drugs were higher than 2010, however, the higher-priced brand-name volumes were lower, in part as a result of the economy and plan designs and member financial incentives encouraging the use of generics. The aforementioned net price variance includes the offsetting effect of approximately $1,250 million from a greater mix of lower-priced generic drugs in 2011.

The increase in mail-order net revenues of $2,315 million for 2010 reflects a net volume increase of $1,521 million driven by higher generic volumes. The volumes of lower-priced generic drugs were higher than 2009, however, the higher-priced brand-name volumes were lower, in part as a result of the aforementioned factors. Also contributing to the mail-order net revenue increase was a net price increase of $794 million driven by higher prices charged by brand-name pharmaceutical manufacturers, partially offset by higher client price discounts. The aforementioned net price variance includes the offsetting effect of approximately $1,220 million from a greater mix of lower-priced generic drugs in 2010.

Our overall generic dispensing rate increased to 73.8% for 2011 compared to 71.0% for 2010 and 67.5% for 2009. Mail-order generic dispensing rates increased to 64.8% for 2011, compared to 61.5% for 2010 and 57.8% for 2009. Retail generic dispensing rates increased to 75.3% for 2011, compared to 72.7% for 2010 and 69.2% for 2009. These increases reflect the impact of the introduction of new generic products during these periods, and the effect of programs and client plan design changes promoting the use of lower-priced and more steeply discounted generics.

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Service revenues increased $421.1 million for 2011 reflecting higher manufacturer service revenues of $272.2 million, primarily driven by the contributions from UBC, which was acquired in September 2010. Also included in the higher service revenues are increased client and other service revenues of $148.9 million, primarily driven by increased formulary management fees and higher claims processing administrative fees.

Service revenues increased $236.1 million for 2010 as a result of higher client and other service revenues of $138.3 million and higher manufacturer service revenues of $97.8 million. The higher client and other service revenues primarily reflect higher revenues associated with Medicare Part D-related product offerings and increased revenues from formulary management fees and clinical programs, as well as higher claims processing administrative fees. The higher manufacturer service revenues primarily reflect service revenue contributions from UBC and increased Specialty Pharmacy performance-oriented fees, partially offset by reduced administrative fees from manufacturer contract revisions.

Gross Margin

Our overall gross margin increased to $4,622.2 million or 6.6% for 2011, from $4,335.1 million or 6.6% for 2010. Our product gross margin was $3,644.3 million or 5.3% for 2011, compared to $3,587.0 million or 5.5% for 2010. The 2011 product gross margin includes merger-related expenses of $2.3 million. Product gross margin reflects increased generic dispensing rates and mail-order generic volumes, as well as business efficiencies, offset by the effect of client renewal pricing. Also contributing is the margin component of the aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit plan of $22.6 million, offset by the aforementioned second-quarter 2010 settlement award of approximately $27 million. Our overall gross margin also benefited from a higher mix of higher margin service revenues. Service gross margin of $977.9 million for 2011 increased $229.8 million, compared to $748.1 million for 2010. The service gross margin dollar increase reflects the aforementioned increase in service revenues of $421.1 million for 2011, partially offset by an increase in cost of service revenues of $191.3 million, which primarily results from UBC. Service gross margin percentage was 65.2% for 2011, compared to 69.3% for 2010, with the decrease reflecting the UBC component mix driven largely by the increased UBC revenue.

Our overall gross margin increased to $4,335.1 million or 6.6% for 2010, from $4,027.0 million or 6.7% in 2009. Our product gross margin was $3,587.0 million or 5.5% for 2010, compared to $3,438.3 million or 5.8% for 2009. Product gross margin reflects increased generic dispensing rates and mail-order generic volumes, as well as favorable retail pharmacy reimbursement rates, offset by the effect of client renewal pricing. Our overall gross margin also benefited from a higher mix of higher margin service revenues. Service gross margin of $748.1 million or 69.3% for 2010 increased $159.4 million, compared to $588.7 million or 69.9% for 2009, reflecting the aforementioned increase in service revenues of $236.1 million, partially offset by an increase in cost of service revenues of $76.7 million. The cost of service revenue increases primarily reflect UBC costs, as well as higher labor and other costs associated with Medicare Part D programs.

Rebates from brand-name pharmaceutical manufacturers, which are reflected as a reduction in cost of product net revenues, totaled $6,208 million in 2011, $5,806 million in 2010 and $5,372 million in 2009, with formulary rebates representing 87.0%, 85.3% and 78.7% of total rebates, respectively. The overall increases in rebates reflect favorable pharmaceutical manufacturer rebate contract revisions and higher prices charged by brand-name pharmaceutical manufacturers, as well as improved formulary management and patient compliance, partially offset by brand-name drug volumes that have converted to generic drugs. The increases in the formulary rebate percentages of total rebates primarily reflect manufacturer contract revisions. We retained approximately $757 million, or 12.2%, of total rebates in 2011, $724 million, or 12.5%, in 2010, and $734 million, or 13.7%, in 2009. The changes in the retained rebate percentages are reflective of client mix and the associated client preferences regarding the rebate sharing aspects of their overall contract pricing structure.

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The following table presents additional selected comparative results of operations ($ in millions):

	December 31,							December 25,								December 26,
For Fiscal Years Ended	2011(1)(2)(3)		Variance					2010(1)			Variance					2009
Gross margin(4)	$	4,622.2	$	287.1		6.6	%	$	4,335.1		$	308.1		7.7	%	$	4,027.0
Selling, general and administrative expenses		1,744.7		194.3		12.5	%		1,550.4			94.9		6.5	%		1,455.5
Amortization of intangibles		291.9		4.5		1.6	%		287.4			(18.2	)	(6.0	)%		305.6
Interest expense		208.5		36.0		20.9	%		172.5			—		—			172.5
Interest (income) and other (income) expense, net		1.3		10.7		N/M	*		(9.4	)		0.5		(5.1	)%		(9.9	)
Income before provision for income taxes		2,375.8		41.6		1.8	%		2,334.2			230.9		11.0	%		2,103.3
Provision for income taxes		920.1		13.2		1.5	%		906.9			83.9		10.2	%		823.0
Net income	$	1,455.7	$	28.4		2.0	%	$	1,427.3		$	147.0		11.5	%	$	1,280.3
Diluted weighted average shares outstanding		402.3		(49.5	)	(11.0	)%		451.8			(38.2	)	(7.8	)%		490.0
Diluted earnings per share	$	3.62	$	0.46		14.6	%	$	3.16		$	0.55		21.1	%	$	2.61

*	Not meaningful
(1)	Includes UBC’s operating results commencing on the September 16, 2010 acquisition date.
(2)	Includes pre-tax merger-related expenses of $80.2 million in 2011 associated with the pending Express Scripts merger, with $77.9 million in SG&A expenses and $2.3 million in gross margin. Merger-related expenses are $49.5 million after tax.
(3)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(4)	Represents total net revenues minus total cost of revenues.

Selling, General and Administrative Expenses

SG&A expenses were $1,744.7 million for 2011 including merger-related expenses of $77.9 million. The merger-related expenses primarily include investment banking fees, legal fees and employee retention expenses. Excluding the merger-related costs, SG&A expenses of $1,666.8 million for 2011 increased by $116.4 million, or 7.5%, from 2010. This increase primarily reflects SG&A expenses from UBC which was acquired in September 2010. Excluding UBC and the merger-related expenses, SG&A expenses increased by 2.6% from 2010. This increase reflects higher technology-related expenses associated with strategic initiatives, as well as the effect of the extra week in fiscal 2011. Also contributing are higher stock-based compensation expenses, partially offset by the SG&A component of the aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit plan of $8.0 million, and efficiencies across the company.

SG&A expenses for 2010 were $1,550.4 million and increased from 2009 by $94.9 million, or 6.5%, primarily reflecting UBC SG&A expenses and the associated third-quarter 2010 acquisition closing expenses, and higher professional fees and technology-related expenses associated with strategic initiatives, as well as higher stock-based compensation and depreciation expenses.

Amortization of Intangibles

Amortization of intangible assets of $291.9 million for 2011 increased $4.5 million from 2010, primarily reflecting higher intangible amortization from the acquisition of UBC, partially offset by lower intangible amortization from scheduled accelerated amortization of certain customer relationships in the prior periods.

Amortization of intangible assets of $287.4 million for 2010 decreased $18.2 million from 2009, primarily reflecting lower amortization of certain customer relationships, as well as lower Specialty Pharmacy intangible amortization, partially offset by an increase resulting from the acquisition of UBC.

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Interest Expense

Interest expense of $208.5 million for 2011 increased $36.0 million from 2010, primarily reflecting higher expense as a result of increased borrowings of $1 billion from our September 2010 senior notes issuance associated with the acquisition of UBC.

Interest expense of $172.5 million for 2010 was consistent with 2009, reflecting higher expense as a result of increased borrowings from our September 2010 senior notes issuance associated with the acquisition of UBC, offset by lower interest rates on the floating rate components of outstanding debt.

The weighted average interest rate on our indebtedness was approximately 3.5% for 2011, compared to approximately 3.9% for 2010, reflecting lower interest rates on the floating rate components of outstanding debt, partially offset by a higher mix of fixed rate compared with variable rate outstanding debt. The weighted average annual interest rate on our indebtedness was consistent at approximately 3.9% for 2010 compared to 3.8% for 2009, and reflects a higher mix of fixed rate compared with variable rate outstanding debt, partially offset by lower interest rates on the floating rate components of outstanding debt.

Interest (Income) and Other (Income) Expense, Net

Interest (income) and other (income) expense, net, of $1.3 million of expense for 2011 decreased $10.7 million from ($9.4) million of income for 2010. The decrease in interest (income) and other (income) expense, net, primarily reflects a foreign currency gain that was recognized in 2010 and our net joint venture activity, as well as decreased interest income.

Interest (income) and other (income) expense, net, of ($9.4) million of income for 2010 decreased $0.5 million from ($9.9) million of income for 2009, primarily reflecting decreased interest income driven by lower interest rates earned on lower average operating cash balances, and our joint venture activity, partially offset by foreign currency favorability.

Provision for Income Taxes

Our effective tax rate (defined as the percentage relationship of provision for income taxes to income before provision for income taxes) was 38.7% for 2011, compared to 38.9% for 2010. The effective tax rates reflect the benefit from certain tax credits in 2011 and statute of limitations expirations in 2011 and 2010.

Our effective tax rate (defined as the percentage relationship of provision for income taxes to income before provision for income taxes) was 38.9% for 2010 compared to 39.1% for 2009, reflecting lower state income taxes and increased 2010 statute of limitations expirations, partially offset by a fourth-quarter 2009 income tax benefit of $22 million.

Net Income and Earnings per Share

Net income as a percentage of net revenues was 2.1% for 2011. Excluding merger-related expenses, net income as a percentage of net revenues was also 2.1% for 2011, consistent with 2.2% in 2010 and 2.1% in 2009, reflecting the aforementioned factors.

Diluted earnings per share were $3.62 for 2011 including the aforementioned merger-related expenses. Excluding merger-related expenses, our diluted earnings per share increased 18.4% to $3.74 for 2011. Excluding all intangible amortization and the merger-related expenses, our diluted earnings per share increased 17.5% to $4.17 for 2011. The diluted earnings per share increases reflect the aforementioned consolidated results of operations trending factors, as well as lower diluted weighted average shares outstanding.

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Diluted earnings per share increased 21.1% to $3.16 for 2010, from $2.61 per share for 2009. Excluding all amortization of intangible assets, our 2010 diluted earnings per share increased 19.1% to $3.55, compared to $2.98 per share in 2009. The diluted earnings per share increases reflect the aforementioned consolidated results of operations trending factors, as well as lower diluted weighted average shares outstanding.

The diluted weighted average shares outstanding were 402.3 million for 2011, 451.8 million for 2010, and 490.0 million for 2009. The decreases for each year result from the repurchase of approximately 285.5 million shares of stock in connection with our share repurchase programs since inception in 2005 through the end of 2011, compared to equivalent amounts of 256.2 million and 186.3 million shares repurchased inception-to-date through the ends of 2010 and 2009, respectively. There were approximately 29.3 million shares repurchased in 2011, compared to 69.9 million in 2010 and 27.3 million in 2009.

Segment Results of Operations

PBM Segment

The PBM segment primarily involves sales of traditional prescription drugs and supplies to our clients and members or patients, either through our networks of contractually affiliated retail pharmacies or our mail-order pharmacies. The following table presents selected PBM segment comparative results of operations ($ in millions):

	December 31,								December 25,								December 26,
For Fiscal Years Ended	2011(1)(2)(3)			Variance					2010(1)			Variance					2009
Product net revenues	$	55,198.1		$	1,554.8		2.9	%	$	53,643.3		$	4,117.1		8.3	%	$	49,526.2
Service revenues		1,420.6			444.9		45.6	%		975.7			225.2		30.0	%		750.5
Total net revenues		56,618.7			1,999.7		3.7	%		54,619.0			4,342.3		8.6	%		50,276.7
Total cost of revenues		52,877.8			1,817.7		3.6	%		51,060.1			4,108.6		8.8	%		46,951.5
Total gross margin(4)	$	3,740.9		$	182.0		5.1	%	$	3,558.9		$	233.7		7.0	%	$	3,325.2
Gross margin percentage		6.6	%		0.1	%				6.5	%		(0.1	)%				6.6	%
Selling, general and administrative expenses		1,466.0			210.9		16.8	%		1,255.1			96.8		8.4	%		1,158.3
Amortization of intangibles		249.9			5.2		2.1	%		244.7			(13.4	)	(5.2	)%		258.1
Operating income	$	2,025.0		$	(34.1	)	(1.7	)%	$	2,059.1		$	150.3		7.9	%	$	1,908.8

(1)	Includes UBC’s operating results commencing on the September 16, 2010 acquisition date.
(2)	Includes pre-tax merger-related expenses of $80.2 million for 2011 associated with the pending Express Scripts merger,with $77.9 million in SG&A expenses and $2.3 million in total cost of revenues.
(3)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(4)	Represents total net revenues minus total cost of revenues.

PBM total net revenues of $56,618.7 million for 2011 increased $1,999.7 million compared to the revenues of $54,619.0 million for 2010. The increase primarily reflects higher mail-order generic and retail volumes driven by the extra week of volume in fiscal 2011, as well as higher prices charged by brand-name pharmaceutical manufacturers, partially offset by a greater mix of lower-priced generic drugs and higher client price discounts. Also contributing to the total net revenue increase is increased service revenues primarily driven by the contributions from UBC, which was acquired in September 2010. PBM total net revenues of $54,619.0 million for 2010 increased $4,342.3 million compared to the revenues of $50,276.7 million for 2009. The increase primarily reflects higher mail-order generic and retail volume driven by new business, as well as higher prices charged by brand-name pharmaceutical manufacturers, partially offset by a greater mix of lower-priced generic drugs and higher client price discounts.

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Gross margin was 6.6% of net revenues for 2011, compared to 6.5% for 2010, primarily reflecting increased generic dispensing rates and mail-order generic volumes, as well as a higher mix of higher margin service revenues, and the margin component of the aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit plan. The gross margin percentage increase was offset by the effect of client renewal pricing, and the aforementioned second-quarter 2010 settlement award. The 2011 gross margin includes merger-related expenses of $2.3 million. Gross margin was 6.5% of net revenues for 2010 compared to 6.6% for 2009, primarily reflecting higher retail volumes, and the effect of client renewal pricing. The gross margin percentage decline was partially offset by increased generic dispensing rates and mail-order generic volumes, as well as favorable retail pharmacy reimbursement rates and a higher mix of higher margin service revenue.

SG&A expenses were $1,466.0 million for 2011, and include the aforementioned merger-related expenses of $77.9 million. Excluding merger-related expenses, SG&A expenses were $1,388.1 million for 2011, and increased from 2010 by $133.0 million, primarily reflecting UBC SG&A expenses and higher technology-related expenses associated with strategic initiatives, including the effect of the extra week in fiscal 2011. Also contributing are higher stock-based compensation expenses, partially offset by the SG&A component of the aforementioned first-quarter 2011 benefit associated with the postretirement healthcare benefit plan of $8.0 million. Excluding UBC and the merger-related expenses, SG&A expenses increased by $55.4 million, or 4.5%, over 2010. SG&A expenses for 2010 were $1,255.1 million, and increased from 2009 by $96.8 million. The increase primarily reflects UBC SG&A expenses and the associated third-quarter 2010 acquisition closing expenses, and higher professional fees and technology-related expenses associated with strategic initiatives.

Amortization of intangible assets was $249.9 million for 2011, compared to $244.7 million for 2010. The increase primarily reflects higher intangible amortization from the acquisition of UBC, partially offset by lower intangible amortization from scheduled accelerated amortization of certain customer relationships in the prior periods. Amortization of intangible assets was $244.7 million for 2010, compared to $258.1 million for 2009. The decrease primarily reflects lower intangible amortization from certain customer relationships, partially offset by increases resulting from the acquisitions of UBC.

Operating income of $2,025.0 million for 2011 decreased $34.1 million, or 1.7%, compared to 2010. Excluding the aforementioned $80.2 million of merger-related expenses, operating income of $2,105.2 million for 2011 increased $46.1 million, or 2.2%, compared to 2010. Operating income of $2,059.1 million for 2010 increased $150.3 million, or 7.9%, compared to 2009. The changes in operating income reflected the aforementioned factors.

For additional information on the PBM segment, see Note 13, “Segment and Geographic Data,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Specialty Pharmacy Segment

The Specialty Pharmacy segment includes the sale of specialty pharmacy products and services for the treatment of chronic and complex (potentially life-threatening) diseases. The following table presents selected Specialty Pharmacy segment comparative results of operations ($ in millions):

	December 31,								December 25,								December 26,
For Fiscal Years Ended	2011(1)			Variance					2010			Variance					2009
Product net revenues	$	13,365.2		$	2,119.1		18.8	%	$	11,246.1		$	1,810.9		19.2	%	$	9,435.2
Service revenues		79.4			(23.8	)	(23.1	)%		103.2			10.9		11.8	%		92.3
Total net revenues		13,444.6			2,095.3		18.5	%		11,349.3			1,821.8		19.1	%		9,527.5
Total cost of revenues		12,563.3			1,990.2		18.8	%		10,573.1			1,747.4		19.8	%		8,825.7
Total gross margin(2)	$	881.3		$	105.1		13.5	%	$	776.2		$	74.4		10.6	%	$	701.8
Gross margin percentage		6.6	%		(0.2	)%				6.8	%		(0.6	)%				7.4	%
Selling, general and administrative expenses		278.7			(16.6	)	(5.6	)%		295.3			(1.9	)	(0.6	)%		297.2
Amortization of intangibles		42.0			(0.7	)	(1.6	)%		42.7			(4.8	)	(10.1	)%		47.5
Operating income	$	560.6		$	122.4		27.9	%	$	438.2		$	81.1		22.7	%	$	357.1

(1)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(2)	Represents total net revenues minus total cost of revenues.

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Specialty Pharmacy total net revenues of $13,444.6 million for 2011 increased $2,095.3 million, compared to revenues of $11,349.3 million for 2010, primarily reflecting growth in prescription volumes including the extra week of volume in fiscal 2011, increases in manufacturer brand pricing, broader utilization of specialty products, and the impact of recently introduced drugs. Specialty Pharmacy total net revenues of $11,349.3 million for 2010 increased $1,821.8 million compared to revenues of $9,527.5 million for 2009, primarily reflecting increases in manufacturer brand pricing, as well as growth in prescription volumes from new and existing clients.

Gross margins were 6.6% of net revenues for 2011, compared to 6.8% for 2010, primarily reflecting product and channel mix effects experienced in 2011 as compared to 2010. Gross margin was 6.8% of net revenues for 2010 compared to 7.4% of net revenues for 2009, primarily reflecting product, channel and new-client mix.

SG&A expenses of $278.7 million for 2011 decreased $16.6 million compared to $295.3 million for 2010. This decrease primarily reflects lower employee labor and related expenses. SG&A expenses of $295.3 million for 2010 decreased $1.9 million compared to 2009, primarily reflecting lower employee and related expenses, partially offset by higher professional fees. Amortization of intangible assets was $42.0 million for 2011, $42.7 million for 2010, and $47.5 million for 2009.

Operating income of $560.6 million for 2011 increased $122.4 million, or 27.9%, compared to operating income of $438.2 million for 2010. Operating income of $438.2 million for 2010 increased $81.1 million, or 22.7%, compared to operating income of $357.1 million for 2009. The changes in operating income reflected the aforementioned factors.

See Note 13, “Segment and Geographic Data,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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Liquidity and Capital Resources

Cash Flows

The following table presents selected data from our consolidated statements of cash flows ($ in millions):

	December 31,						December 25,						December 26,
For Fiscal Years Ended	2011(1)			Variance			2010(1)			Variance			2009
Net cash provided by operating activities	$	1,282.4		$	(1,062.3	)	$	2,344.7		$	(1,156.7	)	$	3,501.4
Net cash used by investing activities		(327.6	)		691.9			(1,019.5	)		(714.5	)		(305.0	)
Net cash used by financing activities		(1,579.1	)		1,420.9			(3,000.0	)		(1,393.4	)		(1,606.6	)
Net (decrease) increase in cash and cash equivalents		(624.3	)		1,050.5			(1,674.8	)		(3,264.6	)		1,589.8
Cash and cash equivalents at beginning of year		853.4			(1,674.8	)		2,528.2			1,589.8			938.4
Cash and cash equivalents at end of year	$	229.1		$	(624.3	)	$	853.4		$	(1,674.8	)	$	2,528.2

⁽¹⁾ Includes UBC’s operating results commencing on the September 16, 2010 acquisition date.

Operating Activities. Net cash provided by operating activities of $1,282.4 million for 2011 primarily reflects net income of $1,455.7 million, with non-cash adjustments for depreciation, amortization and stock-based compensation of $675.1 million. In addition, there were net cash inflows of $146.6 million from a decrease in inventories, net, reflecting continued initiatives to optimize inventory levels. These increases were partially offset by net cash outflows of $314.7 million from an increase in prepaid expenses and other current assets primarily due to the timing of a significant prepaid client rebate, and net cash outflows of $303.7 million from an increase in client accounts receivable, net, and net cash outflows of $221.1 million from an increase in manufacturer accounts receivable, net, both primarily due to the timing of payments and business growth. Additionally, there were net cash outflows from a decrease in claims and other accounts payable of $155.7 million primarily due to the timing of our payment cycles.

The $1,062.3 million decrease in net cash provided by operating activities for 2011 compared to 2010 is primarily due to decreased cash flows of $441.8 million from client rebates and guarantees payable due to the timing of payments, and decreased cash flows of $197.3 million from the collection of income taxes receivable, primarily from the IRS, in the first quarter of 2010 for the 2003 through 2005 tax years. There were also decreased cash flows of $316.2 million from prepaid expenses and other current assets primarily resulting from the timing of the aforementioned prepaid client rebate.

Net cash provided by operating activities of $2,344.7 million for 2010 primarily reflects net income of $1,427.3 million, with non-cash adjustments for depreciation, amortization and stock-based compensation of $632.0 million. In addition, there were net cash inflows of $271.0 million from a decrease in inventories, net, reflecting continued initiatives to optimize inventory levels, $346.3 million from an increase in client rebates and guarantees payable, reflecting timing of payments, and $194.3 million from a net decrease in income taxes receivable, primarily resulting from the receipt of the tax refund noted above. These increases were partially offset by net cash outflows of $550.2 million from an increase in client accounts receivable, net, and net cash outflows of $129.7 million from an increase in manufacturer accounts receivable, net, both primarily due to business growth. Additionally, client accounts receivable, net, increased approximately $204.0 million from timing associated with a receivable from CMS for our Medicare PDP product offerings.

The $1,156.7 million decrease in net cash provided by operating activities for 2010 compared to 2009 is primarily due to our residual working capital opportunities not being as significant in 2010 as compared to 2009. This is primarily reflected in a decrease in cash flows of $300.4 million from inventories, net, and $223.1 million from manufacturer accounts receivable. Additionally, there was a decrease in cash flows of $646.1 million from claims and other accounts payable due to higher retail volumes and business growth in 2009 compared to 2010, and the timing of payments associated with our retail pharmacy claims. There were also decreased cash flows of $258.1 million from prepaid expenses and other current assets resulting from the timing of a significant prepaid client rebate, and $101.9 million from client rebates and guarantees payable. These decreases were partially offset by increased cash flows of $179.2 million from income taxes receivable due to the aforementioned tax refund received in 2010.

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Investing Activities. The net cash used by investing activities of $327.6 million for 2011 is primarily attributable to capital expenditures of $324.6 million associated with capitalized software development in connection with client-related programs and our Medicare PDP product offerings, technology initiatives, and pharmacy operations hardware investments. The $691.9 million decrease in net cash used by investing activities for 2011 compared to 2010 is primarily due to a decrease in acquisitions of businesses, net of cash acquired of $737.5 million, largely related to the acquisition of UBC in September 2010, and a $15.2 million increase in the proceeds from the sale of securities and other investments. These decreases in net cash used by investing activities were partially offset by a $74.5 million increase in capital expenditures.

The net cash used by investing activities of $1,019.5 million for 2010 is primarily attributable to acquisitions of businesses, net of cash acquired of $752.5 million, primarily for the acquisition of UBC in September 2010, and capital expenditures of $250.1 million associated with: capitalized software development in connection with client-related programs and our Medicare PDP product offerings; technology and pharmacy operations hardware investments; and the construction of our third automated dispensing pharmacy in Whitestown, Indiana. Net cash used by investing activities also includes purchases of securities and other assets of $58.4 million. These cash outflows were partially offset by proceeds from the sale of securities and other investments of $41.5 million. The $714.5 million increase in net cash used by investing activities for 2010 compared to 2009 is primarily due to the UBC acquisition, a $45.7 million decrease in proceeds from the sale of securities and other investments, and an increase in capital expenditures of $11.3 million. These increases in net cash used by investing activities were partially offset by a $95.0 million decrease in purchases of securities and other assets.

Financing Activities. The net cash used by financing activities of $1,579.1 million for 2011 primarily results from $1,786.6 million in share repurchases, partially offset by net proceeds from employee stock plans of $145.8 million and excess tax benefits from stock-based compensation arrangements of $42.9 million. The decrease in net cash used by financing activities of $1,420.9 million for 2011 compared to 2010 primarily results from lower share repurchases of $2,338.2 million and higher net proceeds from employee stock plans of $45.7 million, partially offset by lower net proceeds from long-term debt of $973.2 million reflecting our underwritten public offering in September 2010.

The net cash used by financing activities of $3,000.0 million for 2010 primarily results from $4,124.8 million in share repurchases and repayments on long-term debt of $3,730.5 million, partially offset by proceeds from long-term debt of $4,703.7 million. Proceeds from long-term debt of $4,703.7 million consist of $998.7 million from our underwritten public offering of senior notes discussed below and proceeds from our revolving credit facility of $3,705.0 million. Repayments on long-term debt consist of repayments on our revolving credit facilities. The increase in net cash used by financing activities of $1,393.4 million for 2010 compared to 2009 primarily results from higher share repurchases of $2,886.3 million and lower net proceeds from employee stock plans of $52.1 million, partially offset by higher net proceeds from long-term debt of $973.2 million, including revolving credit facilities, and higher net proceeds from short-term debt of $592.0 million.

On September 10, 2010, we completed an underwritten public offering of $500 million aggregate principal amount of 5-year senior notes at a price to the public of 99.967 percent of par value, and $500 million aggregate principal amount of 10-year senior notes at a price to the public of 99.780 percent. The 5-year senior notes bear interest at a rate of 2.75% per annum, with an effective interest rate of 2.757%, and mature on September 15, 2015. The 10-year senior notes bear interest at a rate of 4.125% per annum, with an effective interest rate of 4.152%, and mature on September 15, 2020. Medco may redeem all or part of these notes at any time or from time to time at its option at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest to the redemption date or (ii) a “make-whole” amount based on the yield of a comparable U.S. Treasury security plus 20 basis points for the notes due 2015, and 25 basis points for the notes due 2020. We pay interest on the notes semi-annually on March 15 and September 15 of each year. We used the net proceeds from the offering for general corporate purposes, which included funding the UBC acquisition described in Note 3, “Acquisition of Businesses,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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Total cash and short-term investments as of December 31, 2011 were $231.7 million, including $229.1 million in cash and cash equivalents. Total cash and short-term investments as of December 25, 2010 were $910.1 million, including $853.4 million in cash and cash equivalents. The decrease of $678.4 million in cash and short-term investments for 2011 primarily reflects the use of cash associated with share repurchase activity and capital expenditures, partially offset by net cash inflows from operating activities. Net cash inflows from operating activities were lower as a result of the 53-week fiscal year in 2011 resulting in a low cash point at year-end 2011 due to the timing of our client billing and retail pharmacy reimbursement cycle, as well as the timing of a prepaid client rebate.

Share Repurchase Programs

Since 2005, when we commenced our first share repurchase program, we have executed share repurchases of 285.5 million shares at a cost of $12.8 billion and at an average per-share cost of $45.00 through fiscal year-end 2011. In February 2011, our Board of Directors approved a new $3 billion share repurchase program, authorizing the purchase of up to $3 billion of our common stock over a two-year period commencing February 24, 2011. During fiscal year 2011, we repurchased 29.3 million shares at a cost of $1,786.6 million with an average per-share cost of $60.93 under our share repurchase programs.

Pursuant to the Merger Agreement with Express Scripts, we are not permitted to engage in share repurchases without Express Scripts’ prior written consent until the consummation of the merger or the termination of the Merger Agreement. Currently, we do not anticipate making additional share repurchases.

Also see Part II, Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities,” for more information.

Looking Forward

On July 20, 2011, we entered into a definitive Merger Agreement with Express Scripts and certain of its subsidiaries (as amended on November 7, 2011 by Amendment No. 1 thereto, the “Merger Agreement”) providing for the combination of Express Scripts and Medco under a new holding company, New Express Scripts. Subject to the terms and conditions set forth in the Merger Agreement, upon the closing of the transaction, each share of Medco common stock will be converted into the right to receive $28.80 in cash and 0.81 shares of New Express Scripts. Upon closing of the transaction, Express Scripts’ shareholders are expected to own approximately 59% of the combined company and Medco’s shareholders are expected to own approximately 41%. The transaction is expected to close in the first half of 2012. The merger is subject to regulatory clearance and other customary closing conditions. The shareholders approved the merger on December 21, 2011. Currently, Express Scripts and Medco are independent companies, and they will continue to be managed and operated as such until the completion of the pending merger.

We believe that our current liquidity and prospects for strong cash flows from operations, including effective working capital management, assist in limiting the effects on our business from economic factors. The senior unsecured credit facility matures on April 30, 2012 and therefore we have classified all outstanding balances related to the facility as current portion of long-term debt on the consolidated balance sheet as of December 31, 2011. At December 31, 2011, we had additional committed borrowing capacity under our revolving credit facility of $999 million, borrowing capacity under our 364-day accounts receivable financing facility of $600 million, and uncommitted borrowing capacity under our credit lines of $450 million. Our accounts receivable financing facility is renewable annually in July at the option of both Medco and the banks and was renewed on July 25, 2011.

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On January 23, 2012, we refinanced our $2 billion unsecured revolving credit facility with a 364-day $2 billion senior unsecured revolving credit facility, which may be increased by an amount up to $0.5 billion at the Company’s option. In addition to replacing the Company’s existing $2 billion senior unsecured revolving credit facility, the new credit facility is available to support our general corporate activities, working capital requirements and capital expenditures. As of January 23, 2012, the Company had $999 million available for borrowing under the new revolving credit facility, exclusive of $1 million in issued letters of credit and consistent with our previous unsecured revolving credit facility. The Company may, at its option, extend the maturity date of the new credit facility by an additional 364 days, whereupon any outstanding revolving loans will be converted to term loans during the extension period. The $1 billion term loan portion of the April 30, 2007 senior unsecured credit facility remains outstanding and is due to be repaid by April 30, 2012. The Company anticipates repayment of the $1 billion senior unsecured term loan at maturity.

Our ability to incur indebtedness is limited by the terms of the Merger Agreement, which generally provides that, without Express Scripts’ prior written consent, we may not incur new indebtedness in excess of $300 million over our existing credit facilities and lines of credit, but that we may refinance such existing credit facilities and other lines of credit on substantially the same terms and principal amounts as we currently maintain.

We have clients in various industries, including governmental agencies. We actively monitor the status of our accounts receivable and have mechanisms in place to minimize the potential for incurring material accounts receivable credit risk. To date, we have not experienced any significant deterioration in our client or manufacturer rebates accounts receivable.

Fiscal year 2011 consists of 53 weeks.

Pursuant to the Merger Agreement with Express Scripts, we are not permitted to pay dividends or engage in share repurchases without Express Scripts’ prior written consent until the consummation of the merger or the termination of the Merger Agreement. Currently, we do not anticipate making additional share repurchases.

Financing Facilities

We have senior unsecured bank credit facilities consisting of a $1 billion, 5-year senior unsecured term loan and a $2 billion, 5-year senior unsecured revolving credit facility. The term loan matures on April 30, 2012, at which time the entire facility is required to be repaid. We anticipate repaying the $1 billion senior unsecured term loan at maturity. If there are pre-payments on the term loan prior to the maturity date, that portion of the loan would be extinguished. At our current debt ratings, the credit facilities bear interest at London Interbank Offered Rate (“LIBOR”) plus a 0.45 percent margin, with a 10 basis point commitment fee due on the unused portion of the revolving credit facility.

The outstanding balance under the revolving credit facility was $1.0 billion as of December 31, 2011 and December 25, 2010. There were draw-downs of $11.7 billion and repayments of $11.7 billion under the revolving credit facility during 2011. As of December 31, 2011, we had $999.0 million available for borrowing under our revolving credit facility, after giving effect to prior net draw-downs of $1 billion and $1.0 million in issued letters of credit. As of December 25, 2010, we had $993.5 million available for borrowing under our revolving credit facility, after giving effect to prior net draw-downs of $1 billion and $6.5 million in issued letters of credit.

On January 23, 2012, we entered into a new $2 billion 364-day senior unsecured revolving credit facility, which is available to support our general corporate activities, working capital requirements and capital expenditures. See Note 15, “Subsequent Event — Debt Refinancing” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information.

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Accounts Receivable Financing Facility and Other Short-Term Debt

Through a wholly-owned subsidiary, we have a $600 million, 364-day renewable accounts receivable financing facility that is collateralized by our pharmaceutical manufacturer rebates accounts receivable. During 2011, we drew down $1,443 million and repaid $1,443 million under the facility, which resulted in no amounts outstanding and $600 million available for borrowing under the facility as of December 31, 2011. During 2010, we drew down $550 million and repaid $550 million under the facility, which resulted in no amounts outstanding and $600 million available for borrowing under the facility as of December 25, 2010. We pay interest on amounts borrowed under the agreement based on the funding rates of the bank-related commercial paper programs that provide the financing, plus an applicable margin and liquidity fee determined by our credit rating. This facility is renewable annually at the option of both Medco and the banks and was renewed on July 25, 2011. Additionally, we had short-term debt of $42.7 million and $23.6 million outstanding as of December 31, 2011 and December 25, 2010, respectively, under a $47.9 million and $23.6 million short-term revolving credit facility, respectively. The weighted average annual interest rate on amounts outstanding under the short-term revolving credit facility was 2.24% and 1.72% at December 31, 2011 and December 25, 2010, respectively.

Credit Lines

We currently have access to four uncommitted credit lines that we utilize from time to time to meet daily working capital needs and to take advantage of lower interest rates. Borrowings under these arrangements cannot exceed $450 million in total. These credit lines are supplemental, typically utilized for overnight borrowings, and not considered replacements of our committed credit facilities. There were no amounts outstanding under our credit lines as of December 31, 2011 and December 25, 2010.

Interest Rates

The weighted average annual interest rate on our indebtedness was approximately 3.5% for 2011 compared to 3.9% for 2010, reflecting lower interest rates on the floating rate components of outstanding debt, partially offset by a higher mix of fixed rate compared with variable rate outstanding debt. The weighted average annual interest rate on our indebtedness was consistent at approximately 3.9% for 2010 compared to 3.8% for 2009, reflecting a higher mix of fixed rate compared with variable rate outstanding debt, partially offset by lower interest rates on the floating rate components of outstanding debt. Several factors could change the weighted average annual interest rate, including but not limited to, a change in our debt ratings, reference rates used under our senior unsecured bank credit facilities, accounts receivable financing facility and swap agreements, and the mix of our debt.

Swap Agreements

In December 2007, we entered into forward-starting interest rate swap agreements to manage our exposure to changes in benchmark interest rates and to mitigate the impact of fluctuations in the interest rates prior to the issuance of the long-term fixed rate financing described above. The cash flow hedges entered into were for a notional amount of $500 million on the then-current 10-year treasury interest rate, and for a notional amount of $250 million on the then-current 30-year treasury interest rate. In March 2008, following the issuance of $300 million aggregate principal amount of 5-year senior notes and $1.2 billion aggregate principal amount of 10-year senior notes, the cash flow hedges were settled for $45.4 million and included a $9.8 million ineffective portion that was immediately expensed and recorded as an increase to interest (income) and other (income) expense, net, for the year ended December 27, 2008. The effective portion was recorded in accumulated other comprehensive income and is reclassified to interest expense over the ten-year period in which we hedged our exposure to variability in future cash flows. The unamortized effective portion reflected in accumulated other comprehensive loss as of December 31, 2011 and December 25, 2010 was $13.7 million and $15.9 million, net of tax, respectively.

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In 2004, we entered into five interest rate swap agreements on $200 million of the $500 million in 7.25% senior notes due in 2013. These swap agreements were entered into as an effective hedge to (i) convert a portion of the senior note fixed rate debt into floating rate debt; (ii) maintain a capital structure containing appropriate amounts of fixed and floating rate debt; and (iii) lower the interest expense on these notes in the near term. The fair value of our obligation under our interest rate swap agreements, represented net receivables of $12.9 million and $16.9 million as of December 31, 2011 and December 25, 2010, respectively, which are reported in other noncurrent assets, with offsetting amounts reported in long-term debt, net, on our consolidated balance sheets. We do not expect our future cash flows to be affected to any significant degree by a sudden change in market interest rates.

Covenants

All of the senior notes discussed above are subject to customary affirmative and negative covenants, including limitations on sale/leaseback transactions; limitations on liens; limitations on mergers and similar transactions; and a covenant with respect to certain change of control triggering events. The 6.125% senior notes and the 7.125% senior notes are also subject to an interest rate adjustment in the event of a downgrade in the ratings to below investment grade. In addition, the senior unsecured bank credit facilities and the accounts receivable financing facility are subject to covenants, including, among other items, maximum leverage ratios. We were in compliance with all covenants at December 31, 2011 and December 25, 2010.

Debt Ratings

Medco’s debt ratings, all of which represent investment grade, reflect the following as of the filing date of this Annual Report on Form 10-K: Moody’s Investors Service, Baa3; Standard & Poor’s, BBB+; and Fitch Ratings, BBB.

Non-GAAP Measures

EBITDA

We calculate and use EBITDA and EBITDA per adjusted prescription as indicators of our ability to generate cash from our reported operating results. These measurements are used in concert with net income and cash flows from operations, which measure actual cash generated in the period. In addition, we believe that EBITDA and EBITDA per adjusted prescription are supplemental measurement tools used by analysts and investors to help evaluate overall operating performance and the ability to incur and service debt and make capital expenditures. EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income or cash flows from operations data, as measured under U.S. generally accepted accounting principles. The items excluded from EBITDA, but included in the calculation of reported net income, are significant components of the consolidated statements of income and must be considered in performing a comprehensive assessment of overall financial performance. EBITDA, and the associated year-to-year trends, should not be considered in isolation. Our calculation of EBITDA may not be consistent with calculations of EBITDA used by other companies. Additionally, we have calculated the 2011 EBITDA excluding the pre-tax merger-related expenses associated with the pending Express Scripts merger, as the expenses are not considered an indicator of ongoing company performance.

EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription volume for the period. This measure is used as an indicator of EBITDA performance on a per-unit basis, providing insight into the cash-generating ability of each prescription. EBITDA, and as a result, EBITDA per adjusted prescription, are affected by the changes in prescription volumes between retail and mail order, the relative mix of brand-name, generic and specialty pharmacy drugs, as well as the level of efficiency in the business. Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions.

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The following table reconciles our reported net income to EBITDA and presents EBITDA per adjusted prescription for each of the respective periods (in millions, except for EBITDA per adjusted prescription data):

	December 31,			December 25,			December 26,
For Fiscal Years Ended	2011(1)(2)			2010(1)			2009
Net income	$	1,455.7		$	1,427.3		$	1,280.3
Add:
Interest expense		208.5			172.5			172.5
Interest (income) and other (income) expense, net		1.3			(9.4	)		(9.9	)
Provision for income taxes		920.1	(3)		906.9			823.0	(3)
Depreciation expense		213.1			189.5			179.0
Amortization expense		291.9			287.4			305.6
EBITDA	$	3,090.6		$	2,974.2		$	2,750.5
Adjustment for 2011 merger-related expenses(4)		80.2			—			—
EBITDA, excluding 2011 merger-related expenses	$	3,170.8		$	2,974.2		$	2,750.5
Adjusted prescriptions(5)		980.7			957.0			898.8
EBITDA per adjusted prescription	$	3.15		$	3.11		$	3.06
EBITDA per adjusted prescription, excluding 2011 merger-related expenses	$	3.23		$	3.11		$	3.06

(1)	Includes UBC’s operating results commencing on the September 16, 2010 acquisition date.
(2)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(3)	2011 and 2009 include tax benefits of $19 million and $22 million, respectively. See Note 10, “Taxes on Income,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(4)	Represents pre-tax merger-related expenses associated with the pending Express Scripts merger.
(5)	Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three times the amount of product days supplied compared with retail prescriptions.

EBITDA and EBITDA per adjusted prescription were $3,090.6 million and $3.15, respectively, for 2011 including the aforementioned merger-related expenses. Excluding merger-related expenses, 2011 EBITDA and EBITDA per adjusted prescription were $3,170.8 million and $3.23, respectively. For 2011 excluding merger-related expenses compared to 2010, EBITDA increased 6.6%, compared to an increase in net income of 5.5%, and an increase in EBITDA per adjusted prescription of 3.9%. The higher rate of increase for EBITDA compared with net income primarily reflects the aforementioned higher interest and depreciation expenses. The lower rate of increase for EBITDA per adjusted prescription compared to EBITDA primarily reflects client renewal pricing, partially offset by higher generic dispensing rates.

For 2010 compared to 2009, EBITDA increased by 8.1%, compared to an increase in net income of 11.5%, and an increase in EBITDA per adjusted prescription of 1.6%. The lower rate of increase for EBITDA compared with net income primarily reflects the aforementioned lower intangible amortization expense, as well as a lower effective tax rate. The lower rate of increase for EBITDA per adjusted prescription compared to EBITDA reflects higher retail volumes and client renewal pricing, partially offset by higher generic dispensing rates.

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Diluted EPS, Excluding All Intangible Amortization and Merger-Related Expenses

We use diluted earnings per share, excluding all intangible amortization, as a supplemental measure of operating performance. We believe that diluted earnings per share, excluding all intangible amortization, is a valuable supplemental measurement tool used by analysts and investors to compare our overall operating performance with our industry peers. Additionally, we have calculated the 2011 diluted EPS excluding the merger-related expenses associated with the pending Express Scripts merger, as the expenses are not considered an indicator of ongoing company performance. The following table reconciles our reported diluted earnings per share to diluted earnings per share, excluding all intangible amortization and the merger-related expenses associated with the pending Express Scripts merger, for the respective periods:

	December 31,		December 25,		December 26,
For Fiscal Years Ended	2011(1)		2010		2009
Diluted earnings per share	$	3.62	$	3.16	$	2.61
Adjustment for merger-related expenses(2)		0.12		—		—
Diluted earnings per share, excluding merger-related expenses	$	3.74	$	3.16	$	2.61
Adjustment for the amortization of intangible assets(3)		0.43		0.39		0.37
Diluted earnings per share, excluding all intangible amortization and merger-related expenses	$	4.17	$	3.55	$	2.98

(1)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(2)	This adjustment represents the per-share effect of 2011 pre-tax merger-related expenses of $80.2 million, or $49.5 million after tax, associated with the pending Express Scripts merger.
(3)	This adjustment represents the per-share effect of all intangible amortization.

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Commitments and Contractual Obligations

The following table presents our commitments and contractual obligations as of December 31, 2011, as well as our long-term debt obligations ($ in millions):

Payments Due By Period

	Total		2012			2013-2014		2015-2016		Thereafter
Long-term debt obligations (1)	$	5,000.0	$	2,000.0	(2)	$	800.0	$	500.0	$	1,700.0
Interest payments on long-term debt obligations(3)		847.8		179.8			266.2		222.0		179.8
Operating lease obligations(4)		192.8		60.3			83.3		27.4		21.8
Prescription drug purchase commitments(5)		883.1		274.3			608.8		—		—
Other(6)		105.8		67.8			38.0		—		—
Total	$	7,029.5	$	2,582.2		$	1,796.3	$	749.4	$	1,901.6

(1)	Long-term debt obligations exclude $11.3 million in total unamortized discounts on our senior notes, and the fair value of interest rate swap agreements of $12.9 million on $200 million of the $500 million in 7.25% senior notes.
(2)	At December 31, 2011 we had $1 billion outstanding on our revolving credit facility and $1 billion outstanding on our term loan due to be paid by April 30, 2012. On January 23, 2012, we entered into a new $2 billion 364-day senior unsecured revolving credit facility, replacing our existing $2 billion senior unsecured revolving credit facility. The $1 billion term loan remains outstanding and is anticipated to be repaid on April 30, 2012.
(3)	The variable component of interest expense for the senior unsecured credit facility is based on the December 2011 LIBOR. The LIBOR fluctuates and may result in differences in the presented interest expense on long-term debt obligations.
(4)	Primarily reflects contractual operating lease commitments to lease pharmacy and call center pharmacy facilities, offices and warehouse space, as well as pill dispensing and counting devices and other operating equipment for use in our mail-order pharmacies and computer equipment for use in our data centers and corporate headquarters.
(5)	Represents fixed contractual commitments to purchase inventory from certain biopharmaceutical manufacturers associated with our Specialty Pharmacy business.
(6)	Consists of purchase commitments for diabetes supplies of $28.7 million, technology-related agreements of $23.9 million and advertising commitments of $0.6 million. Additionally, $52.6 million represents various purchase obligations anticipated to be fully settled by 2014, most of which are included in other noncurrent liabilities in the audited consolidated balance sheet as of December 31, 2011.

We have a remaining minimum pension funding requirement of $17.1 million under the Internal Revenue Code (“IRC”) during 2012.

As of December 31, 2011, we had letters of credit outstanding of approximately $6.4 million, of which $1.0 million were issued under our senior unsecured revolving credit facility and are primarily collateral for the deductible portion of our workers’ compensation coverage.

As of December 31, 2011, we have total gross liabilities for income tax contingencies of $140.7 million on our consolidated balance sheet. The majority of the income tax contingencies are subject to statutes of limitations that are scheduled to expire by the end of 2016. In addition, approximately 14% of the income tax contingencies are anticipated to settle over the next twelve months.

For additional information regarding operating lease obligations, long-term debt, pension and other postretirement obligations, and information on deferred income taxes, see Notes 6, 8, 9 and 10, respectively, to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than purchase commitments and lease obligations. See “—Commitments and Contractual Obligations” above.

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Interest Rate and Foreign Exchange Risk

We have floating rate debt with our bank credit facility and accounts receivable financing facility, and investments in marketable securities that are subject to interest rate volatility, which is our principal market risk. In addition, we have interest rate swap agreements on $200 million of the $500 million in 7.25% senior notes. As a result of these interest rate swap agreements, the $200 million of senior notes is subject to interest rate volatility. A 25 basis point change in the weighted average interest rate relating to the credit facilities’ balances outstanding and interest rate swap agreements as of December 31, 2011, which are subject to variable interest rates based on LIBOR, and the accounts receivable financing facility, which is subject to the commercial paper rate, would yield a change of approximately $5.5 million in annual interest expense. We do not expect our future cash flows to be affected to any significant degree by a sudden change in market interest rates.

We operate our business primarily within the United States and execute the vast majority of our transactions in U.S. dollars. However, as a result of our acquisitions of Europa Apotheek, based in the Netherlands, and UBC, with operations in Europe and Asia, we have become subject to foreign currency translation risk. As of December 31, 2011, approximately 38% of the accumulated other comprehensive loss component of our stockholders’ equity represents an unrecognized foreign currency translation loss, reflecting the weakened euro since the Europa Apotheek acquisition.

Use of Estimates and Critical Accounting Policies and Estimates

Use of Estimates

The preparation of consolidated financial statements requires companies to include certain amounts that are based on management’s best estimates and judgments. In preparing the consolidated financial statements, management reviewed its accounting policies and believes that these accounting policies are appropriate for a fair presentation of our financial position, results of operations and cash flows. Several of these accounting policies contain estimates, the most significant of which are discussed below. Actual results may differ from those estimates, and it is possible that future results of operations for any particular period could be materially affected by the ultimate actual results. We discuss the impact and any associated risks related to these policies on our business operations throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Critical Accounting Policies and Estimates

We describe below what we believe to be our critical accounting policies and estimates. (See also Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.)

Revenue Recognition. Our product net revenues are derived principally from sales of prescription drugs to our clients and members, either through our networks of contractually affiliated retail pharmacies or through our mail-order pharmacies. Our Specialty Pharmacy product net revenues represent revenues from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to third-party payors and patients.

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We recognize product revenues when the prescriptions are dispensed through our networks of contractually affiliated retail pharmacies or through our mail-order pharmacies and received by members and patients. We have determined that our responsibilities under our client contracts to adjudicate member claims properly and control clients’ drug spend, our separate contractual pricing relationships and responsibilities to the retail pharmacies in our networks, and our interaction with clients’ members, among other indicators, qualify us as the principal under the indicators set forth in Authoritative Guidance in most of our transactions with clients. Our responsibilities under our client contracts include validating that the patient is a member of the client’s plan and that the prescription drug is in the applicable formulary, instructing the pharmacist as to the prescription price and the co-payment due from the patient who is a member of a client’s plan, identifying possible adverse drug interactions for the pharmacist to address with the physician prior to dispensing, suggesting medically appropriate generic alternatives to control drug cost to our clients and their members, and approving the prescription for dispensing. We recognize revenues from our retail network contracts where we are the principal, and our mail-order pharmacies, on a gross reporting basis, in accordance with Authoritative Guidance at the prescription price (ingredient cost plus dispensing fee) negotiated with our clients, including the portion of the price to be settled directly by the member (co-payment) plus our administrative fees. Although we generally do not have credit risk with respect to retail co-payments, all of the above indicators of gross treatment are present. In addition, we view these co-payments as a plan design mechanism that we evaluate in concert with our clients to help them manage their retained prescription drug spending costs, and the level of co-payments does not affect our rebates or margin on the transaction. In the limited instances where the terms of our contracts and nature of our involvement in the prescription fulfillment process do not qualify us as a principal under Authoritative Guidance, our revenues on those transactions consist of the administrative fee paid to us by our clients.

We deduct from our revenues the manufacturers’ rebates that are earned by our clients based on their members’ utilization of brand-name formulary drugs. We estimate these rebates at period-end based on actual and estimated claims data and our estimates of the manufacturers’ rebates earned by our clients. We base our estimates on the best available data at period-end and recent history for the various factors that can affect the amount of rebates due to the client. We adjust our rebates payable to clients to the actual amounts paid when these rebates are paid, generally on a quarterly basis, or as significant events occur. We record any cumulative effect of these adjustments against revenues as identified, and adjust our estimates prospectively to consider recurring matters. Adjustments generally result from contract changes with our clients, differences between the estimated and actual product mix subject to rebates or whether the product was included in the applicable formulary. Historically, the effect of these adjustments has not been material to our results of operations. We also deduct from our revenues discounts offered and guarantees regarding the level of service we will provide to the client or member or the minimum level of rebates or discounts the client will receive, as well as other payments made to our clients. Other contractual payments include, for example, implementation allowances and payments related to performance guarantees. Where we provide implementation or other allowances to clients upon contract initiation, we capitalize these payments and amortize them, generally on a straight-line basis, over the life of the contract as a reduction of revenue. Payments are capitalized only in cases where they are refundable upon cancellation or relate to noncancelable contracts.

Our product net revenues also include premiums associated with our Medicare PDP risk-based product offerings. These products involve prescription dispensing for beneficiaries enrolled in the CMS-sponsored Medicare Part D prescription drug benefit. Our two insurance company subsidiaries have been operating under contracts with CMS since 2006, and currently offer several Medicare PDP options. The products involve underwriting the benefit, charging enrollees applicable premiums, providing covered prescription drugs and administering the benefit as filed with CMS. We provide two Medicare drug benefit plan options for beneficiaries, including a “standard Part D” benefit plan as mandated by statute, and a benefit plan with enhanced coverage that exceeds the standard Part D benefit plan, available for an additional premium. We also offer numerous customized benefit plan designs to employer group retiree plans under the Medicare Part D prescription drug benefit.

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The PDP premiums are determined based on our annual bid and related contractual arrangements with CMS. The PDP premiums are primarily comprised of amounts received from CMS as part of a direct subsidy and an additional subsidy from CMS for low-income member premiums, as well as premium payments received from members. These premiums are recognized ratably to product net revenues over the period in which members are entitled to receive benefits. Premiums received in advance of the applicable benefit period are deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. There is a possibility that the annual costs of drugs may be higher or lower than premium revenues. As a result, CMS provides a risk corridor adjustment for the standard drug benefit that compares our actual annual drug costs incurred to the targeted premiums in our CMS-approved bid. Based on specific collars in the risk corridor, we will receive from CMS additional premium amounts or be required to refund to CMS previously received premium amounts. We calculate the risk corridor adjustment on a quarterly basis based on drug cost experience to date and record an adjustment to product net revenues with a corresponding account receivable from or payable to CMS reflected on the consolidated balance sheets.

In addition to PDP premiums, there are certain co-payments and deductibles (the “cost share”) due from members based on prescription orders by those members, some of which are subsidized by CMS in cases of low-income membership. In 2011, non-low-income members receive a cost share benefit under the coverage gap discount program with brand pharmaceutical manufacturers. The coverage gap cost share program covers 50% of the member co-payment in the coverage gap for participating brand-name drugs. For subsidies received in advance, the amount is deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. If there is cost share due from members, pharmaceutical manufacturers or CMS, the amount is accrued and recorded in client accounts receivable, net, on the consolidated balance sheets. After the end of the contract year and based on actual annual drug costs incurred, cost share amounts are reconciled with CMS and the corresponding receivable or payable is settled. The cost share is treated consistently as other co-payments derived from providing PBM services, as a component of product net revenues on the consolidated statements of income. For further details, see Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Premium revenues for our PDP products, which exclude member cost share, were $720 million, or 1% of total net revenues, in 2011, $687 million, or 1% of total net revenues, in 2010, and $543 million, or less than 1% of total net revenues, in 2009.

Our agreements with CMS, as well as applicable Medicare Part D regulations and federal and state laws, require us to, among other obligations: (i) comply with certain disclosure, filing, record-keeping and marketing rules; (ii) operate quality assurance, drug utilization management and medication therapy management programs; (iii) support e-prescribing initiatives; (iv) implement grievance, appeals and formulary exception processes; (v) comply with payment protocols, which include the return of overpayments to CMS and, in certain circumstances, coordination with state pharmacy assistance programs; (vi) use approved networks and formularies, and provide access to such networks to “any willing pharmacy”; (vii) provide emergency out-of-network coverage; and (viii) implement a comprehensive Medicare and Fraud, Waste and Abuse compliance program. We have various contractual and regulatory compliance requirements associated with participating in the Medicare Part D benefit. Similar to our requirements with other clients, our policies and practices associated with executing our PDP are subject to audit. If material contractual or regulatory non-compliance was to be identified, monetary penalties and/or applicable sanctions, including suspension of enrollment and marketing or debarment from participation in Medicare programs, may be imposed. Additionally, each calendar year, payment will vary based on the annual benchmark that applies as a result of Medicare Part D plan bids for the applicable year, as well as for changes in the CMS methodology for calculating risk adjustment factors.

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Service revenues consist principally of administrative fees and clinical program fees earned from clients, sales of prescription services to pharmaceutical manufacturers, performance-oriented fees paid by Specialty Pharmacy manufacturers, revenues from data analytics and research associated with UBC, and other non-product-related revenues. Service revenues are recorded when performance occurs and collectibility is assured.

Rebates Receivable and Payable. Rebates receivable from pharmaceutical manufacturers are earned based upon the dispensing of prescriptions at either pharmacies in our retail networks or our mail-order pharmacies, are recorded as a reduction of cost of revenues and are included in manufacturer accounts receivable, net. We accrue rebates receivable by multiplying estimated rebatable prescription drugs dispensed by the pharmacies in our retail networks, or dispensed by our mail-order pharmacies, by the contractually agreed manufacturer rebate amount, which in certain cases may be based on estimated market share data. We adjust rebates receivable estimates to actual, with the difference recorded to cost of revenues, when third-party market share data is available and final rebatable prescriptions are calculated, and rebates are billed to the manufacturer, generally 20 to 90 days subsequent to the end of the applicable quarter. Historically, the effect of adjustments resulting from the reconciliation of our estimated rebates recognized and recorded to actual amounts billed has not been material to our results of operations. Rebates payable to clients are estimated and accrued based upon the prescription drugs dispensed by the pharmacies in our retail networks or by our mail-order pharmacies. Rebates are generally settled on a quarterly basis with clients in the form of an invoice credit, check or wire after collection of rebates receivable from manufacturers, at which time rebates payable are revised to reflect amounts due.

Client Accounts Receivable, Net. Client accounts receivable, net, includes billed and estimated unbilled receivables from clients for the PBM and Specialty Pharmacy segments. Unbilled PBM receivables are primarily from clients and are typically billed within 14 days based on the contractual billing schedule agreed upon with each client. At the end of any given reporting period, unbilled PBM receivables from clients may represent up to two weeks of dispensing activity and will fluctuate at the end of a fiscal month depending on the timing of these billing cycles. Client accounts receivable, net, also includes a reduction for rebates and guarantees payable to clients when such are settled on a net basis in the form of an invoice credit. In cases where rebates and guarantees are settled with the client on a net basis, and the rebates and guarantees payable are greater than the corresponding client accounts receivable balances, the net liability is reclassified to client rebates and guarantees payable. When these payables are settled in the form of a check or wire, they are recorded on a gross basis and the entire liability is reflected in client rebates and guarantees payable. Our client accounts receivable also includes receivables from CMS for our Medicare Part D product offerings and premiums from members. At December 31, 2011 and December 25, 2010, the CMS receivable was approximately $86.0 million and $216.1 million, respectively. A component of the PBM business includes diabetes supplies dispensed under our Liberty brand with the associated receivables primarily reimbursed from government agencies and insurance companies. As a result, this component of the PBM business experiences slower accounts receivable turnover.

Allowance for Doubtful Accounts. We estimate the allowance for doubtful accounts for our PBM and Specialty Pharmacy segments based upon a variety of factors, including the age of the outstanding receivables, trends of cash collections and bad debt write-offs, recent economic factors, and our historical experience of collecting the patient co-payments and deductibles. When circumstances related to specific collection patterns change, estimates of the recoverability of receivables are adjusted. The allowance associated with the majority of our PBM segment has historically been negligible because of the contractual obligation for clients to pay outstanding accounts receivable in short duration. The allowance for our PBM segment also reflects amounts associated with member premiums for our Medicare Part D product offerings and amounts related to Liberty for diabetes supplies, which are primarily reimbursed by government agencies and insurance companies.

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The relatively higher allowance for the Specialty Pharmacy segment reflects a different credit risk profile than the PBM business, and is characterized by reimbursement through medical coverage, including government agencies, and higher patient co-payments. The products and services are often covered through medical benefit programs with the primary payors being insurance companies and government programs. These payors typically have a longer processing cycle because the high dollar-value of specialty claims triggers additional documentation requirements and clinical reviews. Additionally, patient co-payments and deductibles are typically higher reflecting the higher product costs.

Income Taxes. Deferred tax assets and liabilities are recorded based on temporary differences between the financial statement basis and the tax basis of assets and liabilities using presently enacted tax rates. We evaluate tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in the financial statements. If applicable, we recognize interest and penalties associated with uncertain tax positions as a component of the provision for income taxes in the consolidated statement of income. Any differences between the liabilities established for the tax positions and the amounts ultimately settled are reflected in the consolidated financial statements when the respective audit is completed or when the applicable statutes of limitations have expired.

Goodwill and Intangible Assets. Goodwill primarily represents, for our PBM segment, the excess of acquisition costs over the fair value of our net assets that had been pushed down to our consolidated balance sheets and existed when we became an independent, publicly traded enterprise in 2003, and, to a significantly lesser extent, our acquisitions subsequent to 2003. For our Specialty Pharmacy segment, goodwill primarily reflects a portion of the excess of the purchase price we paid to acquire Accredo in 2005 over the fair value of tangible net assets acquired. Goodwill is assessed for impairment annually for each of our segment’s reporting units. This assessment includes comparing the fair value of each reporting unit to the carrying value of the assets assigned to the reporting unit. If the carrying value of the reporting unit were to exceed our estimate of fair value of the reporting unit, we would then be required to estimate the fair value of the individual assets and liabilities within the reporting unit to ascertain the fair value of goodwill. We would be required to record an impairment charge to the extent recorded goodwill exceeds the fair value amount of goodwill resulting from this allocation. In September 2011, the FASB issued guidance that simplified how an entity tests goodwill for impairment. The revised guidance provides an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment. The guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011, with early adoption permitted. We performed the quantitative impairment test for all reporting units in the third quarter of 2011 and we early adopted the FASB’s guidance in 2011. The most recent assessment for impairment of goodwill for each of the designated reporting units was performed as of September 24, 2011. The goodwill was determined not to be impaired and there have been no significant subsequent changes in events or circumstances.

Our intangible assets for our PBM segment primarily represent the value of Medco’s client relationships that had been pushed down to our consolidated balance sheets and existed when we became an independent, publicly traded enterprise in 2003 and to a lesser extent, intangible assets recorded upon our acquisitions subsequent to 2003. For our Specialty Pharmacy segment, we have intangible assets recorded primarily from our acquisition of Accredo in 2005. Our intangible assets are reviewed for impairment whenever events, such as losses of significant clients or specialty product manufacturer contracts, or when other changes in circumstances indicate the carrying amount may not be recoverable. When these events occur, we compare the carrying amount of the assets to the undiscounted pre-tax expected future cash flows derived from the lowest appropriate asset grouping. If this comparison indicates that impairment exists, the amount of the impairment would be calculated using discounted expected future cash flows.

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As of December 31, 2011, the weighted average useful life of intangible assets subject to amortization is 22 years in total. The weighted average useful life is approximately 22 years for the PBM intangible assets and approximately 21 years for the Specialty Pharmacy segment-acquired intangible assets. The Company expenses the costs to renew or extend contracts associated with intangible assets in the period the costs are incurred. For PBM client relationships, the weighted average contract period prior to the next renewal date as of December 31, 2011 is approximately 1.9 years. The Company has experienced client retention rates of approximately 99% over the past two years.

See Note 7, “Goodwill and Intangible Assets,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Pension and Other Postretirement Benefit Plans. The determination of our obligation and expense for pension and other postretirement benefits is based on management’s assumptions, which are developed with the assistance of actuaries, including an appropriate discount rate, expected long-term rate of return on plan assets, and rates of increase in compensation and healthcare costs.

We reassess our benefit plan assumptions on a regular basis. For both the pension and other postretirement benefit plans, the discount rate is determined annually and is evaluated and modified to reflect, at the end of our fiscal year, the prevailing market rate of a portfolio of high-quality corporate bond investments that would provide the future cash flows needed to settle benefit obligations as they come due. At December 31, 2011, the discount rate utilized was 4.10% for our pension plans, and 3.30% for our other postretirement benefit plans.

The expected rate of return for the pension plan represents the average rate of return to be earned on the plan assets over the period the benefits included in the benefit obligation are to be paid. The expected return on plan assets is determined by multiplying the expected long-term rate of return by the fair value of the plan assets and contributions, offset by expected return on expected benefit payments. In developing the expected rate of return, we consider long-term compounded annualized returns of historical market data, as well as historical actual returns on our plan assets. Using this reference information, we develop forward-looking return expectations for each asset class and a weighted average expected long-term rate of return for a targeted portfolio allocated across these investment categories. As a result of this analysis, for 2012, the expected rate of return assumption will be 7.5% for our pension plan.

Actuarial assumptions are based on management’s best estimates and judgment. The following analysis indicates the sensitivity of pension and postretirement benefit costs for the year ending December 31, 2011 and associated obligation balances as of fiscal year-end 2011, to changes in rate assumptions. A reasonably possible increase of 50 basis points in the assumed discount rate, with other assumptions held constant, would have increased net pension and postretirement benefit cost by an estimated $0.2 million, and would have decreased the year-end benefit obligations by approximately $10.1 million. A reasonably possible decrease of 50 basis points in the assumed discount rate, with other assumptions held constant, would have decreased net pension and postretirement benefit cost by an estimated $0.2 million, and would have increased the year-end benefit obligations by approximately $10.1 million. A reasonably possible increase of 50 basis points in the expected rate of return assumption, with other assumptions held constant, would have decreased net pension cost by an estimated $1.0 million. A reasonably possible decrease of 50 basis points in the expected rate of return assumption, with other assumptions held constant, would have increased net pension cost by an estimated $1.0 million. See Note 9, “Pension and Other Postretirement Benefits,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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Contingencies. In the ordinary course of business, we are involved in litigation, claims, government inquiries, investigations, charges and proceedings, including, but not limited to, those relating to regulatory, commercial, employment, employee benefits and securities matters. In accordance with the Financial Accounting Standards Board (“FASB”)’s standard on accounting for contingencies, we record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. Our recorded reserves are based on estimates developed with consideration given to the potential merits of claims, the range of possible settlements, advice from outside counsel, and management’s strategy with regard to the settlement of or defense against such claims. See Note 14, “Commitments and Contingencies,” to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Stock-Based Compensation. We account for stock-based compensation in accordance with a standard issued by the FASB and guidance issued by the Securities and Exchange Commission (“SEC”), which require the measurement and recognition of compensation expense for all stock-based compensation awards made to employees and directors, including employee stock options and employee stock purchase plans.

The standard requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The portion of the value that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period. As stock-based compensation expense recognized in our audited consolidated statements of income is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The standard requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

In addition, the standard requires that the benefits of realized tax deductions in excess of tax benefits on compensation expense, which amounted to $42.9 million, $52.0 million and $64.3 million for fiscal years 2011, 2010 and 2009, respectively, be reported as a component of cash flows from financing activities. We classify stock-based compensation within cost of product net revenues and SG&A expenses to correspond with the financial statement components in which cash compensation paid to employees and directors is recorded.

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Recently Adopted Financial Accounting Standard

Testing Goodwill for Impairment

In September 2011, the FASB issued an accounting standard intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. Under the amendments in this standard, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. Our early adoption of this standard in 2011 had no impact on our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Recently Issued Accounting Pronouncement

Presentation of Comprehensive Income

In June 2011, the FASB issued an accounting standard with respect to the presentation of other comprehensive income in financial statements. The main provisions of the standard provide that an entity that reports other comprehensive income has the option to present comprehensive income in either a single statement or in a two-statement approach. A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In the two-statement approach, an entity must present the components of net income and total net income in the first statement, followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In December 2011, the FASB issued additional guidance on this standard which deferred the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both the interim and annual financial statements. The Company will be required to adopt this standard retrospectively for interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the adoption of this standard in fiscal year 2012 to have a material impact on its consolidated financial statements.

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CONDENSED INTERIM FINANCIAL DATA (UNAUDITED)

(In millions, except for per share amounts)

2011	4th Quarter(1)(2)			3rd Quarter(1)			2nd Quarter		1st Quarter
Product net revenues(4)	$	18,574.6		$	16,602.8		$	16,724.1	$	16,661.8
Service revenues		413.6			378.7			349.9		357.8
Total net revenues(4)		18,988.2			16,981.5			17,074.0		17,019.6
Cost of operations:
Cost of product net revenues(4)		17,552.0			15,692.1			15,846.0		15,828.9
Cost of service revenues		156.8			122.3			122.6		120.4
Total cost of revenues(4)		17,708.8			15,814.4			15,968.6		15,949.3
Selling, general and administrative expenses		481.7			455.6			420.3		387.1
Amortization of intangibles		72.3			73.2			73.3		73.2
Interest expense		52.1			52.2			52.3		51.9
Interest (income) and other (income) expense, net		(0.4	)		(2.6	)		1.9		2.3
Total costs and expenses		18,314.5			16,392.8			16,516.4		16,463.8
Income before provision for income taxes		673.7			588.7			557.6		555.8
Provision for income taxes		249.3			233.3			214.8		222.7
Net income	$	424.4		$	355.4		$	342.8	$	333.1
Basic weighted average shares outstanding		387.8			388.0			397.6		405.5
Basic earnings per share	$	1.09		$	0.92		$	0.86	$	0.82
Diluted weighted average shares outstanding		394.7			394.9			405.1		414.2
Diluted earnings per share	$	1.08		$	0.90		$	0.85	$	0.80
Adjustment for merger-related expenses(5)		0.06			0.06			—		—
Diluted earnings per share, excluding merger-related expenses	$	1.14		$	0.96		$	0.85	$	0.80
Adjustment for the amortization of intangible assets(6)		0.11			0.11			0.11		0.11
Diluted earnings per share, excluding all intangible amortization and merger-related expenses	$	1.25		$	1.07		$	0.96	$	0.91

2010	4th Quarter		3rd Quarter(3)			2nd Quarter			1st Quarter
Product net revenues(7)	$	16,580.5	$	16,062.0		$	16,163.3		$	16,083.7
Service revenues		349.7		257.8			244.2			227.2
Total net revenues(7)		16,930.2		16,319.8			16,407.5			16,310.9
Cost of operations:
Cost of product net revenues(7)		15,637.1		15,127.2			15,284.5			15,253.6
Cost of service revenues		131.9		73.1			61.3			64.6
Total cost of revenues(7)		15,769.0		15,200.3			15,345.8			15,318.2
Selling, general and administrative expenses		428.5		395.0			376.4			350.6
Amortization of intangibles		75.0		71.2			70.7			70.5
Interest expense		49.5		43.4			38.8			40.7
Interest (income) and other (income) expense, net		0.9		(2.6	)		(6.3	)		(1.4	)
Total costs and expenses		16,322.9		15,707.3			15,825.4			15,778.6
Income before provision for income taxes		607.3		612.5			582.1			532.3
Provision for income taxes		228.8		241.0			225.2			211.8
Net income	$	378.5	$	371.5		$	356.9		$	320.5
Basic weighted average shares outstanding		421.4		429.9			453.0			467.7
Basic earnings per share	$	0.90	$	0.86		$	0.79		$	0.69
Diluted weighted average shares outstanding		430.2		437.1			462.0			478.2
Diluted earnings per share	$	0.88	$	0.85		$	0.77		$	0.67
Adjustment for the amortization of intangible assets(6)		0.11		0.10			0.10			0.09
Diluted earnings per share, excluding all intangible amortization	$	0.99	$	0.95		$	0.87		$	0.76

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(1)	Includes pre-tax merger-related expenses of $36.6 million for the third quarter and $43.6 million for the fourth quarter associated with the pending Express Scripts merger, with $35.6 million and $42.3 million, respectively, in SG&A expenses, and $1.0 million and $1.3 million, respectively, in cost of product net revenues.
(2)	14-week fiscal quarter. All other fiscal quarters are comprised of 13 weeks.
(3)	The third quarter of 2010, and all subsequent periods, includes the operating results of UBC commencing on the September 16, 2010 acquisition date.
(4)	Includes retail co-payments of $2,342 million for the fourth quarter, $2,140 million for the third quarter, $2,255 million for the second quarter and $2,513 million for the first quarter of 2011.
(5)	This adjustment represents the per-share effect of the aforementioned 2011 pre-tax merger-related expenses of $36.6 million, or $22.0 million after tax, for the third quarter, and $43.6 million, or $27.5 million after tax, for the fourth quarter, associated with the pending Express Scripts merger.
(6)	This adjustment represents the per-share effect of all intangible amortization.
(7)	Includes retail co-payments of $2,275 million for the fourth quarter, $2,216 million for the third quarter, $2,279 million for the second quarter and $2,471 million for the first quarter of 2010.

2011 includes pre-tax merger-related expenses of $36.6 million for the third quarter and $43.6 million for the fourth quarter associated with the pending Express Scripts merger, with $35.6 million and $42.3 million, respectively, in SG&A expenses, and $1.0 million and $1.3 million, respectively, in cost of product net revenues. The first-quarter 2011 includes a benefit associated with changes to the employee postretirement healthcare benefit plan of $30.6 million, with $22.6 million in gross margin and $8.0 million in SG&A expenses. The fourth quarter of 2011 includes an income tax benefit of $19 million.

The second quarter of 2010 includes a benefit of approximately $27 million associated with the receipt of a settlement award in a class action antitrust lawsuit brought by direct purchasers of a brand-name medication.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

A description of quantitative and qualitative disclosures about market risk is contained in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Interest Rate and Foreign Exchange Risk.”

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS*

Report of Independent Registered Public Accounting Firm	81
Consolidated Balance Sheets as of December 31, 2011 and December 25, 2010	82
Consolidated Statements of Income for the Years Ended December 31, 2011, December 25, 2010 and December 26, 2009	83
Consolidated Statements of Stockholders’ Equity for the Years Ended December 26, 2009, December 25, 2010 and December 31, 2011	84
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, December 25, 2010 and December 26, 2009	85
Notes to Consolidated Financial Statements	86

* Selected quarterly financial data for the fiscal years ended December 31, 2011 and December 25, 2010 is included herein under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Condensed Interim Financial Data (Unaudited).”

See Item 9A, “Controls and Procedures,” for Management’s Annual Report on Internal Control over Financial Reporting.

See Item 15, “Exhibits, Financial Statement Schedules,” for financial statement Schedule II, Valuation and Qualifying Accounts.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Medco Health Solutions, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Medco Health Solutions, Inc. and its subsidiaries (the “Company”) at December 31, 2011 and December 25, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Florham Park, NJ
February 21, 2012

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MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)

	December 31,				December 25,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	229.1			$	853.4
Short-term investments		2.6				56.7
Manufacturer accounts receivable, net		2,132.7				1,895.1
Client accounts receivable, net		2,737.6				2,553.1
Inventories, net		897.8				1,013.2
Prepaid expenses and other current assets		400.7				75.8
Deferred tax assets		280.0				238.4
Total current assets		6,680.5				6,685.7
Property and equipment, net		1,108.4				993.6
Goodwill		6,953.8				6,939.5
Intangible assets, net		2,148.0				2,409.8
Other noncurrent assets		72.1				68.7
Total assets	$	16,962.8			$	17,097.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Claims and other accounts payable	$	3,375.5			$	3,495.4
Client rebates and guarantees payable		2,357.7				2,453.2
Accrued expenses and other current liabilities		973.4				910.2
Short-term debt		42.7				23.6
Current portion of long-term debt		2,000.0				—
Total current liabilities		8,749.3				6,882.4
Long-term debt, net		3,001.6				5,003.6
Deferred tax liabilities		988.4				985.1
Other noncurrent liabilities		214.1				239.4
Total liabilities		12,953.4				13,110.5
Commitments and contingencies (See Note 14)
Stockholders’ equity:
Preferred stock, par value $0.01— authorized: 10,000,000 shares; issued and outstanding: 0		—				—
Common stock, par value $0.01— authorized: 2,000,000,000 shares; issued: 673,083,808 shares at December 31, 2011 and 666,836,033 shares at December 25, 2010		6.7				6.7
Accumulated other comprehensive loss		(57.6	)			(53.5	)
Additional paid-in capital		8,820.6				8,463.0
Retained earnings		8,092.6				6,636.9
		16,862.3				15,053.1
Treasury stock, at cost: 285,620,728 shares at December 31, 2011 and 256,298,405 shares at December 25, 2010		(12,852.9	)			(11,066.3	)
Total stockholders’ equity		4,009.4				3,986.8
Total liabilities and stockholders’ equity	$	16,962.8			$	17,097.3

The accompanying notes are an integral part of these consolidated financial statements.

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MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except for per share data)

	December 31,		December 25,			December 26,
For Fiscal Years Ended	2011		2010			2009
Product net revenues (Includes retail co-payments of $9,250 for 2011, $9,241 for 2010, and $8,661 for 2009)	$	68,563.3	$	64,889.4		$	58,961.4
Service revenues		1,500.0		1,078.9			842.8
Total net revenues		70,063.3		65,968.3			59,804.2
Cost of operations:
Cost of product net revenues (Includes retail co-payments of $9,250 for 2011, $9,241 for 2010, and $8,661 for 2009)		64,919.0		61,302.4			55,523.1
Cost of service revenues		522.1		330.8			254.1
Total cost of revenues		65,441.1		61,633.2			55,777.2
Selling, general and administrative expenses		1,744.7		1,550.4			1,455.5
Amortization of intangibles		291.9		287.4			305.6
Interest expense		208.5		172.5			172.5
Interest (income) and other (income) expense, net		1.3		(9.4	)		(9.9	)
Total costs and expenses		67,687.5		63,634.1			57,700.9
Income before provision for income taxes		2,375.8		2,334.2			2,103.3
Provision for income taxes		920.1		906.9			823.0
Net income	$	1,455.7	$	1,427.3		$	1,280.3
Basic weighted average shares outstanding		394.7		443.0			481.1
Basic earnings per share	$	3.69	$	3.22		$	2.66
Diluted weighted average shares outstanding		402.3		451.8			490.0
Diluted earnings per share	$	3.62	$	3.16		$	2.61

The accompanying notes are an integral part of these consolidated financial statements.

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MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Shares in thousands; $ in millions, except for per share data)

	Shares of						Accumulated
	Common		Shares of		$0.01 Par Value		Other
	Stock		Treasury		Common		Comprehensive			Additional
	Issued		Stock		Stock		Income (Loss)			Paid-in Capital		Retained Earnings		Treasury Stock			Total
Balances at December 27, 2008		652,387		159,061	$	6.5	$	(63.8	)	$	7,788.9	$	3,929.3	$	(5,703.0	)	$	5,957.9
Comprehensive income:
Net income		—		—		—		—			—		1,280.3		—			1,280.3
Other comprehensive income (loss)(1):
Unrealized loss on investments, net of tax		—		—		—		(0.1	)		—		—		—			(0.1	)
Foreign currency translation gain (loss)		—		—		—		2.9			—		—		—			2.9
Amortization of unrealized loss on cash flow hedge, net of tax		—		—		—		1.9			—		—		—			1.9
Defined benefit plans, net of tax:
Net prior service cost		—		—		—		(2.4	)		—		—		—			(2.4	)
Net gain (loss)		—		—		—		17.3			—		—		—			17.3
Other comprehensive income (loss)		—		—		—		19.6			—		—		—			19.6
Total comprehensive income (loss)		—		—		—		19.6			—		1,280.3		—			1,299.9
Stock option activity, including tax benefit		6,997		—		0.1		—			298.4		—		—			298.5
Issuance of common stock under employee stock purchase plan		461		—		—		—			20.8		—		—			20.8
Restricted stock unit activity, including tax benefit		1,002		—		—		—			48.6		—		—			48.6
Treasury stock acquired		—		27,293		—		—			—		—		(1,238.5	)		(1,238.5	)
Balances at December 26, 2009		660,847		186,354		6.6		(44.2	)		8,156.7		5,209.6		(6,941.5	)		6,387.2
Comprehensive income:
Net income		—		—		—		—			—		1,427.3		—			1,427.3
Other comprehensive income (loss)(1):
Foreign currency translation gain (loss)		—		—		—		(11.0	)		—		—		—			(11.0	)
Amortization of unrealized loss on cash flow hedge, net of tax		—		—		—		2.2			—		—		—			2.2
Defined benefit plans, net of tax:
Net prior service cost		—		—		—		(2.4	)		—		—		—			(2.4	)
Net gain (loss)		—		—		—		1.9			—		—		—			1.9
Other comprehensive income (loss)		—		—		—		(9.3	)		—		—		—			(9.3	)
Total comprehensive income (loss)		—		—		—		(9.3	)		—		1,427.3		—			1,418.0
Stock option activity, including tax benefit		4,267		—		0.1		—			239.5		—		—			239.6
Issuance of common stock under employee stock purchase plan		415		—		—		—			24.2		—		—			24.2
Restricted stock unit activity, including tax benefit		1,307		—		—		—			42.6		—		—			42.6
Treasury stock acquired		—		69,944		—		—			—		—		(4,124.8	)		(4,124,8	)
Balances at December 25, 2010		666,836		256,298		6.7		(53.5	)		8,463.0		6,636.9		(11,066.3	)		3,986.8
Comprehensive income:
Net income		—		—		—		—			—		1,455.7		—			1,455.7
Other comprehensive income (loss)(1):
Foreign currency translation gain and other		—		—		—		1.8			—		—		—			1.8
Amortization of unrealized loss on cash flow hedge, net of tax		—		—		—		2.2			—		—		—			2.2
Defined benefit plans, net of tax:
Net activity due to curtailments, net of tax		—						17.3										17.3
Net prior service cost		—		—		—		(0.9	)		—		—		—			(0.9	)
Net gain (loss)		—		—		—		(24.5	)		—		—		—			(24.5	)
Other comprehensive income (loss)		—		—		—		(4.1	)		—		—		—			(4.1	)
Total comprehensive income (loss)		—		—		—		(4.1	)		—		1,455.7		—			1,451.6
Stock option activity, including tax benefit		4,919		—		—		—			275.5		—		—			275.5
Issuance of common stock under employee stock purchase plan		477		—		—		—			25.5		—		—			25.5
Restricted stock unit activity, including tax benefit		852		—		—		—			56.6		—		—			56.6
Treasury stock acquired		—		29,323		—		—			—		—		(1,786.6	)		(1,786.6	)
Balances at December 31, 2011		673,084		285,621	$	6.7	$	(57.6	)	$	8,820.6	$	8,092.6	$	(12,852.9	)	$	4,009.4

⁽¹⁾ See Note 2, “Summary of Significant Accounting Policies—Other Comprehensive Income and Accumulated Other Comprehensive Income,” for more information.

The accompanying notes are an integral part of these consolidated financial statements.

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MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

	December 31,			December 25,			December 26,
For Fiscal Years Ended	2011			2010			2009
Cash flows from operating activities:
Net income	$	1,455.7		$	1,427.3		$	1,280.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		213.1			189.5			179.0
Amortization of intangibles		291.9			287.4			305.6
Deferred income taxes		(80.0	)		(114.2	)		(222.1	)
Stock-based compensation on employee stock plans		170.1			155.1			146.0
Tax benefit on employee stock plans		85.6			94.9			106.2
Excess tax benefits from stock-based compensation arrangements		(42.9	)		(52.0	)		(64.3	)
Other		136.3			131.2			138.3
Net changes in assets and liabilities (net of acquisition effects, 2011 and 2010 only):
Manufacturer accounts receivable, net		(221.1	)		(129.7	)		93.4
Client accounts receivable, net		(303.7	)		(550.2	)		(515.4	)
Income taxes receivable		(3.0	)		194.3			15.1
Inventories, net		146.6			271.0			571.4
Prepaid expenses and other current assets		(314.7	)		1.5			259.6
Other noncurrent assets		(8.2	)		(5.4	)		12.8
Claims and other accounts payable		(155.7	)		(18.9	)		627.2
Client rebates and guarantees payable		(95.5	)		346.3			448.2
Accrued expenses and other current and noncurrent liabilities		7.9			116.6			120.1
Net cash provided by operating activities		1,282.4			2,344.7			3,501.4
Cash flows from investing activities:
Capital expenditures		(324.6	)		(250.1	)		(238.8	)
Purchases of securities and other assets		(44.7	)		(58.4	)		(153.4	)
Acquisitions of businesses, net of cash acquired		(15.0	)		(752.5	)		—
Proceeds from sale of securities and other investments		56.7			41.5			87.2
Net cash used by investing activities		(327.6	)		(1,019.5	)		(305.0	)
Cash flows from financing activities:
Proceeds from long-term debt		11,687.2			4,703.7			—
Repayments on long-term debt		(11,687.2	)		(3,730.5	)		—
Proceeds from accounts receivable financing facility and other		1,462.1			557.8			15.8
Repayments under accounts receivable financing facility		(1,443.0	)		(550.0	)		(600.0	)
Debt issuance costs		(0.3	)		(8.3	)		(0.4	)
Purchases of treasury stock		(1,786.6	)		(4,124.8	)		(1,238.5	)
Excess tax benefits from stock-based compensation arrangements		42.9			52.0			64.3
Net proceeds from employee stock plans		145.8			100.1			152.2
Net cash used by financing activities		(1,579.1	)		(3,000.0	)		(1,606.6	)
Net (decrease) increase in cash and cash equivalents		(624.3	)		(1,674.8	)		1,589.8
Cash and cash equivalents at beginning of year		853.4			2,528.2			938.4
Cash and cash equivalents at end of year	$	229.1		$	853.4		$	2,528.2
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$	203.5		$	162.0		$	168.2
Cash paid during the year for income taxes	$	930.3		$	660.8		$	913.9

The accompanying notes are an integral part of these consolidated financial statements.

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MEDCO HEALTH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BACKGROUND AND BASIS OF PRESENTATION

Medco Health Solutions, Inc., (“Medco” or the “Company”) is a leading healthcare company that is pioneering the world’s most advanced pharmacy^® and its clinical research and innovations are part of Medco making medicine smarter™ for more than 65 million members in 2011. Medco provides clinically-driven pharmacy services designed to improve the quality of care and lower total healthcare costs for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans. The Company’s unique Medco Therapeutic Resource Centers^®, which conduct therapy management programs using Medco Specialist Pharmacists who have expertise in the medications used to treat certain chronic conditions, as well as Accredo Health Group, Medco’s Specialty Pharmacy, represent innovative models for the care of patients with chronic and complex conditions. Additionally, Medco has capabilities and expertise in post-approval safety and economics outcomes research such as Risk Evaluation and Mitigation Strategies for biotechnology and other pharmaceutical drugs through the Company’s subsidiary, United BioSource Corporation^® (“UBC”).

The Company’s business model requires collaboration with payors, retail pharmacies, physicians, pharmaceutical manufacturers, the Centers for Medicare & Medicaid Services (“CMS”) for Medicare, and, particularly in Specialty Pharmacy, collaboration with other third-party payors such as health insurers, and state Medicaid agencies. The Company’s programs and services help control the cost and enhance the quality of prescription drug benefits. The Company accomplishes this by providing pharmacy benefit management (“PBM”) services through its national networks of retail pharmacies and its own mail-order pharmacies, as well as through Accredo Health Group.

On July 20, 2011, the Company entered into a definitive Merger Agreement with Express Scripts, Inc. (“Express Scripts”) and certain of its subsidiaries (as amended on November 7, 2011 by Amendment No. 1 thereto, the “Merger Agreement”) providing for the combination of Express Scripts and Medco under a new holding company, New Express Scripts. As a result of the transactions contemplated by the Merger Agreement, former Medco shareholders and Express Scripts shareholders will own stock in New Express Scripts. Subject to the terms and conditions set forth in the Merger Agreement, upon the closing of the transaction, each share of Medco common stock will be converted into the right to receive $28.80 in cash and 0.81 shares of New Express Scripts. Upon closing of the transaction, Express Scripts’ shareholders are expected to own approximately 59% of the combined company and Medco’s shareholders are expected to own approximately 41%. The transaction is expected to close in the first half of 2012. The merger is subject to regulatory clearance and other customary closing conditions. The shareholders approved the merger on December 21, 2011. Currently, Express Scripts and Medco are independent companies, and they will continue to be managed and operated as such until the completion of the pending merger.

The accompanying consolidated financial statements include pre-tax merger-related expenses of $80.2 million in 2011 associated with the pending Express Scripts merger, with $77.9 million in selling, general and administrative (“SG&A”) expenses and $2.3 million in total cost of revenues.

The accompanying consolidated financial statements include the operating results of UBC commencing on the September 16, 2010 acquisition date.

When the term “mail order” is used, Medco means inventory dispensed through Medco’s mail-order pharmacy operations.

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Reclassifications. Certain prior period amounts have been reclassified to conform to the current period presentation. Specifically, on the consolidated balance sheets, income taxes receivable has been combined with prepaid expenses and other current assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently Adopted Financial Accounting Standard.

Testing Goodwill for Impairment. In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. Under the amendments in this standard, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company’s early adoption of this standard in 2011 had no impact on its audited consolidated financial statements included in this Annual Report on Form 10-K.

Recently Issued Accounting Pronouncement.

Presentation of Comprehensive Income. In June 2011, the FASB issued an accounting standard with respect to the presentation of other comprehensive income in financial statements. The main provisions of the standard provide that an entity that reports other comprehensive income has the option to present comprehensive income in either a single statement or in a two-statement approach. A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In the two-statement approach, an entity must present the components of net income and total net income in the first statement, followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In December 2011, the FASB issued additional guidance on this standard which deferred the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both the interim and annual financial statements. The Company will be required to adopt this standard retrospectively for interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the adoption of this standard in fiscal year 2012 to have a material impact on its consolidated financial statements.

Fiscal Years. The Company’s fiscal years end on the last Saturday in December. Fiscal year 2011 is comprised of 53 weeks. Fiscal years 2010 and 2009 each are comprised of 52 weeks. Unless otherwise stated, references to years in the consolidated financial statements relate to fiscal years.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Investments in affiliates over which the Company has significant influence, but neither a controlling interest nor a majority interest in the risks or rewards of the investee, are accounted for using the equity method. The Company’s equity investments are not significant. See Note 1, “Background and Basis of Presentation,” for recent acquisitions. Intercompany accounts have been eliminated in consolidation.

Cash and Cash Equivalents. Cash includes currency on hand and time deposits with banks or other financial institutions. Cash equivalents represent money market mutual funds, a form of highly liquid investments with original maturities of less than three months. As a result of the Company’s normal

87

payment cycle, cash disbursement accounts representing outstanding checks not yet presented for payment of $1,693.1 million and $1,155.3 million are included in claims and other accounts payable, and client rebates and guarantees payable at December 31, 2011 and December 25, 2010, respectively, including certain amounts reclassified from cash. No overdraft or unsecured short-term loan exists in relation to these negative balances.

Short-Term and Long-Term Investments. The Company holds short-term and long-term investments in U.S. government securities to satisfy the statutory capital requirements for the Company’s insurance subsidiaries. The majority of these long-term and short-term investments are classified as held-to-maturity securities and reported at amortized cost. The Company has no exposure to or investments in any instruments associated with the sub-prime loan market.

Fair Value Measurements and Fair Value of Financial Instruments. The Company accounts for and reports the fair value of certain assets and liabilities in accordance with FASB standards. See Note 4, “Fair Value Disclosures,” for more information.

Accounts Receivable. The Company separately reports accounts receivable due from manufacturers and accounts receivable due from clients. Manufacturer accounts receivable, net, includes billed and estimated unbilled receivables from manufacturers for earned rebates and other prescription services. Unbilled rebates receivable from manufacturers are generally billed beginning 20 days from the end of each quarter.

Client accounts receivable, net, includes billed and estimated unbilled receivables from clients for the PBM and Specialty Pharmacy segments. Unbilled PBM receivables are primarily from clients and are typically billed within 14 days based on the contractual billing schedule agreed upon with each client. At the end of any given reporting period, unbilled PBM receivables from clients may represent up to two weeks of dispensing activity and will fluctuate at the end of a fiscal month depending on the timing of these billing cycles. Client accounts receivable, net, also includes a reduction for rebates and guarantees payable to clients when such are settled on a net basis in the form of an invoice credit. In cases where rebates and guarantees are settled with the client on a net basis, and the rebates and guarantees payable are greater than the corresponding client accounts receivable balances, the net liability is reclassified to client rebates and guarantees payable. When these payables are settled in the form of a check or wire, they are recorded on a gross basis and the entire liability is reflected in client rebates and guarantees payable. The Company’s client accounts receivable also includes receivables from CMS for the Company’s Medicare Part D Prescription Drug Program (“Medicare Part D”) product offerings and premiums from members. At December 31, 2011 and December 25, 2010, the CMS receivable was approximately $86.0 million and $216.1 million, respectively.

As of December 31, 2011 and December 25, 2010, identified net Specialty Pharmacy accounts receivable, primarily due from payors and patients, amounted to $508.8 million and $524.5 million, respectively. A portion of the Specialty Pharmacy business includes reimbursement by payors, such as insurance companies, under a medical benefit, or by Medicare or Medicaid. These transactions also involve higher patient co-payments than experienced in the PBM business. As a result, this portion of the Specialty Pharmacy business, which yields a higher margin than the PBM business, experiences slower accounts receivable turnover than in the aforementioned PBM cycle and has a different credit risk profile. See Note 13, “Segment and Geographic Data,” for more information on the Specialty Pharmacy segment.

The Company’s allowance for doubtful accounts as of December 31, 2011 and December 25, 2010 of $124.6 million and $149.7 million, respectively, include $94.3 million and $97.9 million, respectively, related to the Specialty Pharmacy segment. The relatively higher allowance for the Specialty Pharmacy segment reflects a different credit risk profile than the PBM business, and is characterized by reimbursement through medical coverage, including government agencies, and higher patient co-payments. The Company’s allowance for doubtful accounts also reflects amounts associated with member premiums for the Company’s Medicare Part D product offerings and amounts for certain supplies reimbursed by government agencies and insurance companies. The Company regularly reviews and analyzes the adequacy of the allowances based on a variety of factors, including the age of the outstanding receivable and the collection history. When circumstances related to specific collection patterns change, estimates of the recoverability of receivables are adjusted. The increase in the reserve balance reflects increased coverage of aged balances.

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Concentrations of Risks. In 2011, 2010 and 2009, UnitedHealth Group Incorporated (“UnitedHealth Group”), the Company’s largest client, represented 17%, 17% and 19% of net revenues, respectively. On July 21, 2011, the Company announced that its pharmacy benefit services agreement with UnitedHealth Group would not be renewed, although the Company will continue to provide services under the current agreement until it expires on December 31, 2012. The UnitedHealth Group account has a lower than average mail-order penetration and, because of its size, steeper pricing than the average client, and consequently generally yields lower profitability as a percentage of net revenues than smaller client accounts. In addition, with respect to mail-order volume, which is an important contributor to the Company’s overall profitability, the mail-order volume associated with this account represented less than 10% of the Company’s overall mail-order volume for 2011, 2010 and 2009. The goodwill and intangible asset carrying amounts, and the expected useful lives of the intangible assets were not impacted by the pending expiration of the UnitedHealth Group contract. None of the Company’s other clients individually represented more than 10% of the net revenues or net client accounts receivable in 2011, 2010 or 2009.

For fiscal years 2011, 2010 and 2009, our ten largest clients based on revenue, including UnitedHealth Group, accounted for approximately 46%, 47% and 49% of our net revenues, respectively. In addition to UnitedHealth Group, other top 10 clients representing approximately 13% of our net revenues did not renew for 2012 as a result of acquisitions by competitors or transitioning in the normal course of business.

The Company has credit risk associated with certain accounts receivable, which consists of amounts owed by various governmental agencies, insurance companies and private patients. The Company has clients in various industries, including governmental agencies. Certain of the governmental agencies, particularly at the state level, are experiencing increased fiscal challenges. The Company actively monitors the status of its accounts receivable and has mechanisms in place to minimize the potential for incurring material accounts receivable credit risk. Concentration of credit risk relating to these accounts receivable, excluding the largest client noted above, is limited by the diversity and number of patients and payors.

As of December 31, 2011 and December 25, 2010, two brand-name pharmaceutical manufacturers represented approximately 42% of manufacturer accounts receivable, net, at the end of each fiscal year. Both manufacturers have strong investment grade ratings and have consistently paid their receivable balance within the contracted payment terms. To date, the Company has not experienced any significant deterioration in its client or manufacturer rebates accounts receivables.

The Company purchases its pharmaceuticals either from its primary wholesaler, AmerisourceBergen Corporation which accounted for approximately 63% and 64% of the Company’s overall 2011 and 2010 drug purchases, respectively, or directly from pharmaceutical manufacturers. Most of the purchases from the Company’s primary wholesaler were for brand-name medicines. The Company believes that alternative sources of supply for most generic and brand-name pharmaceuticals are readily available, except to the extent that brand-name drugs are available to the market exclusively through the manufacturer.

The Company derives a substantial percentage of its Specialty Pharmacy segment revenue and profitability from its relationships with a limited number of suppliers. Specialty and generic pharmaceuticals are often purchased directly from manufacturers.

Inventories, Net. Inventories, net, are located in the Company’s mail-order pharmacies and in warehouses, consist solely of finished product (primarily prescription drugs), and are valued at the lower of first-in, first-out (FIFO) cost or market.

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Property and Equipment, Net. Property and equipment, net, is stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method for assets with useful lives as follows: buildings, 45 years; machinery, equipment and office furnishings, three to 15 years; and computer software, three to five years. Leasehold improvements are amortized over the shorter of the remaining life of the lease or the useful lives of the assets. The costs of computer software developed or obtained for internal use are capitalized and amortized on a straight-line basis over three to five years. Costs for general and administrative expenses, overhead, maintenance and training, as well as the cost of software coding that does not add functionality to existing systems, are expensed as incurred.

Net Revenues. Product net revenues consist principally of sales of prescription drugs and supplies to clients and members, either through the Company’s networks of contractually affiliated retail pharmacies or through the Company’s mail-order pharmacies. The majority of the Company’s product net revenues are derived on a fee-for-service basis. Specialty pharmacy product net revenues represent revenues from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to third-party payors and patients. The Company recognizes product revenues when the prescriptions are dispensed through retail pharmacies in the Company’s networks of contractually affiliated retail pharmacies or the Company’s mail-order pharmacies and received by members and patients. The Company evaluates client contracts using the indicators of Authoritative Guidance to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through the retail pharmacy network. The Company acts as a principal in most of its transactions with clients and revenues are recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with clients, including the portion of the price allocated by the client to be settled directly by the member (co-payment), as well as the Company’s administrative fees (“Gross Reporting”). Gross reporting is appropriate because the Company (a) has separate contractual relationships with clients and with pharmacies, (b) is responsible to validate and economically manage a claim through its claims adjudication process, (c) commits to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (d) manages the overall prescription drug relationship with the patients, who are members of clients’ plans, and (e) has credit risk for the price due from the client. In limited instances where the Company adjudicates prescriptions at pharmacies that are under contract directly with the client and there are no financial risks to the Company, such revenue is recorded at the amount of the administrative fee earned by the Company for processing the claim.

The Company’s product net revenues also include premiums associated with the Company’s Medicare prescription drug program (“PDP”) risk-based product offerings. These products involve prescription dispensing for beneficiaries enrolled in the CMS-sponsored Medicare Part D prescription drug benefit. The Company’s two insurance company subsidiaries have been operating under contracts with CMS since 2006, and currently offer several Medicare PDP options. The products involve underwriting the benefit, charging enrollees applicable premiums, providing covered prescription drugs and administering the benefit as filed with CMS. The Company provides two Medicare drug benefit plan options for beneficiaries, including a “standard Part D” benefit plan as mandated by statute, and a benefit plan with enhanced coverage that exceeds the standard Part D benefit plan, available for an additional premium. The Company also offers numerous customized benefit plan designs to employer group retiree plans under the Medicare Part D prescription drug benefit.

The PDP premiums are determined based on the Company’s annual bid and related contractual arrangements with CMS. The PDP premiums are primarily comprised of amounts received from CMS as part of a direct subsidy and an additional subsidy from CMS for low-income member premiums, as well as premium payments received from members. These premiums are recognized ratably to product net revenues over the period in which members are entitled to receive benefits. Premiums received in advance of the applicable benefit period are deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. There is a possibility that the annual costs of drugs may be higher or lower than premium revenues. As a result, CMS provides a risk corridor adjustment for the standard drug benefit that compares the Company’s actual annual drug costs incurred to the targeted premiums in the Company’s CMS-approved bid. Based on specific collars in the risk corridor, the Company will receive from CMS additional premium amounts or be required to refund to CMS previously received premium amounts. The Company calculates the risk corridor adjustment on a quarterly basis based on drug cost experience to date and records an adjustment to product net revenues with a corresponding account receivable from or payable to CMS reflected on the consolidated balance sheets.

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In addition to PDP premiums, there are certain co-payments and deductibles (the “cost share”) due from members based on prescription orders by those members, some of which are subsidized by CMS in cases of low-income membership. In 2011, non-low-income members receive a cost share benefit under the coverage gap discount program with brand pharmaceutical manufacturers. The coverage gap cost share program covers 50% of the member co-payment in the coverage gap for participating brand-name drugs. For subsidies received in advance, the amount is deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. If there is cost share due from members, pharmaceutical manufacturers or CMS, the amount is accrued and recorded in client accounts receivable, net, on the consolidated balance sheets. After the end of the contract year and based on actual annual drug costs incurred, cost share amounts are reconciled with CMS and the corresponding receivable or payable is settled. The cost share is treated consistently as other co-payments derived from providing PBM services, as a component of product net revenues on the consolidated statements of income. Premium revenues for our PDP products, which exclude member cost share, were $720 million, or 1% of total net revenues, in 2011, $687 million, or 1% of total net revenues, in 2010, and $543 million, or less than 1% of total net revenues, in 2009.

The Company’s agreements with CMS, as well as applicable Medicare Part D regulations and federal and state laws, require the Company to, among other obligations: (i) comply with certain disclosure, filing, record-keeping and marketing rules; (ii) operate quality assurance, drug utilization management and medication therapy management programs; (iii) support e-prescribing initiatives; (iv) implement grievance, appeals and formulary exception processes; (v) comply with payment protocols, which include the return of overpayments to CMS and, in certain circumstances, coordination with state pharmacy assistance programs; (vi) use approved networks and formularies, and provide access to such networks to any willing pharmacy; (vii) provide emergency out-of-network coverage; and (viii) adopt a comprehensive Medicare and Fraud, Waste and Abuse compliance program. The Company has various contractual and regulatory compliance requirements associated with participating in the Medicare Part D benefit. Similar to the Company’s requirements with other clients, the Company’s policies and practices associated with executing its PDP are subject to audit. If material contractual or regulatory non-compliance was to be identified, monetary penalties and/or applicable sanctions, including suspension of enrollment and marketing or debarment from participation in Medicare programs, may be imposed. Additionally, each calendar year, payment will vary based on the annual benchmark that applies as a result of Medicare Part D plan bids for the applicable year, as well as for changes in the CMS methodology for calculating risk adjustment factors.

Rebates and guarantees regarding the level of service the Company will provide to the client or member or the minimum level of rebates or discounts the client will receive are deducted from product net revenues as they are earned by the client. Rebates are generally credited or paid to clients subsequent to collections from pharmaceutical manufacturers, although there are certain instances where rebates are paid on a more accelerated basis. Other contractual payments made to clients are generally made upon initiation of contracts as implementation allowances, which may, for example, be designated by clients as funding for their costs to transition their plans to the Company. The Company considers payments to be an integral part of the Company’s pricing of a contract and believes that they represent variability in the timing of cash flows that does not change the underlying economics of the contract. Accordingly, these payments are capitalized and amortized as a reduction of product net revenues, generally on a straight-line basis, over the life of the contract where the payments are refundable upon cancellation of the contract or relate to noncancelable contracts. Amounts capitalized are assessed periodically for recoverability based on the profitability of the contract.

Service revenues consist principally of administrative fees and clinical program fees earned from clients, sales of prescription services to pharmaceutical manufacturers, performance-oriented fees paid by Specialty Pharmacy manufacturers, revenues from data analytics and research associated with UBC, and other non-product-related revenues. Service revenues are recorded by the Company when performance occurs and collectibility is assured.

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Cost of Revenues. Cost of product net revenues includes the cost of inventory dispensed from the mail-order pharmacies, along with direct dispensing costs and associated depreciation. Cost of product net revenues also includes ingredient costs of drugs dispensed by and professional fees paid to retail network pharmacies. In addition, cost of product net revenues includes the operating costs of the Company’s call center pharmacies, which primarily respond to member and retail pharmacist inquiries regarding member prescriptions, as well as physician calls. Cost of product net revenues also includes an offsetting credit for rebates earned from pharmaceutical manufacturers whose drugs are included on the Company’s preferred drug lists, which are also known as formularies. Rebates receivable from pharmaceutical manufacturers are accrued in the period earned by multiplying estimated rebatable prescription drugs dispensed through the Company’s retail networks and through the Company’s mail-order pharmacies by the contractually agreed manufacturer rebate amount.

Rebates receivable estimates are adjusted to actual, with the difference recorded to cost of revenues, upon billing to the manufacturer, generally 20 to 90 days subsequent to the end of the applicable quarter. These bills are not issued until the necessary specific eligible claims and third-party market share data are received and thoroughly analyzed. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized and recorded to actual amounts billed has not been material to the Company’s results of operations.

The Company’s cost of product net revenues also includes the cost of drugs dispensed by the Company’s mail-order pharmacies or retail network for members covered under the Company’s Medicare PDP product offerings and are recorded at cost as incurred. The Company receives a catastrophic reinsurance subsidy from CMS for approximately 80% of costs incurred by individual members in excess of the individual annual out-of-pocket maximum of $4,550 for coverage year 2011, $4,550 for coverage year 2010 and $4,350 for coverage year 2009. The subsidy is reflected as an offsetting credit in cost of product net revenues to the extent that catastrophic costs are incurred. Catastrophic reinsurance subsidy amounts received in advance are deferred and recorded in accrued expenses and other current liabilities on the consolidated balance sheets. If there are catastrophic reinsurance subsidies due from CMS, the amount is accrued and recorded in client accounts receivable, net, on the consolidated balance sheets. After the end of the contract year and based on actual annual drug costs incurred, catastrophic reinsurance amounts are reconciled with CMS and the corresponding receivable or payable is settled. Cost of service revenues consist principally of labor and operating costs for delivery of services provided, as well as costs associated with member communication materials.

Goodwill. Goodwill of $6,953.8 million at December 31, 2011 and $6,939.5 million at December 25, 2010 primarily represents, for the PBM segment, the excess of acquisition costs over the fair value of the Company’s net assets that had been pushed down to the consolidated balance sheets of the Company and existed when the Company became an independent, publicly traded enterprise in 2003, and, to a significantly lesser extent, the Company’s acquisitions subsequent to 2003. For the Specialty Pharmacy segment, goodwill primarily reflects a portion of the excess of the purchase price the Company paid to acquire Accredo Health, Incorporated (“Accredo”) in 2005 over the fair value of tangible net assets acquired. The Company’s goodwill balance is assessed for impairment annually using a two-step fair-value based test or whenever events or other changes in circumstances indicate the carrying amount may not be recoverable, by comparing the fair value of each segment’s reporting units to the carrying value of the assets and liabilities assigned to each reporting unit. If the carrying value of the reporting unit were to exceed the Company’s estimate of the fair value of the reporting unit, the Company would then be required to estimate the fair value of the individual assets and liabilities within the reporting unit for purposes of calculating the fair value of goodwill. The Company would be required to record an impairment charge to the extent recorded goodwill exceeds the fair value amount of goodwill resulting from this allocation. The goodwill and intangible asset carrying amounts, and the expected useful lives of the intangible assets were not impacted by the pending expiration of the UnitedHealth Group contract. In September 2011, the FASB issued guidance that simplified how an entity tests goodwill for impairment.

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The revised guidance provides an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment. The guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company performed the quantitative impairment test for all reporting units in the third quarter of 2011 and early adopted the FASB’s guidance in 2011. See Note 7, “Goodwill and Intangible Assets,” for more information.

Intangible Assets, Net. Intangible assets, net, of $2,148.0 million at December 31, 2011 and $2,409.8 million at December 25, 2010 primarily represent, for the PBM segment, the value of Medco’s client relationships that had been pushed down to the consolidated balance sheets of the Company and existed when the Company became an independent, publicly traded enterprise in 2003, and to a lesser extent, intangible assets recorded upon the Company’s acquisitions subsequent to 2003. Additionally, for the Specialty Pharmacy segment, intangible assets primarily include the portion of the excess of the purchase price paid by the Company to acquire Accredo in 2005 over tangible net assets acquired. The Company’s intangible assets are initially recorded at fair value at the acquisition date and subsequently carried at amortized cost. The Company reviews intangible assets for impairment whenever events, such as losses of significant clients or specialty product manufacturer contracts, or when other changes in circumstances indicate the carrying amount may not be recoverable. When these events occur, the carrying amount of the assets is compared to the pre-tax undiscounted expected future cash flows derived from the lowest appropriate asset grouping. If this comparison indicates impairment exists, the amount of the impairment would be calculated using discounted expected future cash flows. See Note 7, “Goodwill and Intangible Assets,” for more information.

Income Taxes. Deferred tax assets and liabilities are recorded based on temporary differences between the financial statement basis and the tax basis of assets and liabilities using presently enacted tax rates. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. If applicable, the Company recognizes interest associated with uncertain tax positions as a component of the provision for income taxes in the consolidated statement of income. See Note 10, “Taxes on Income,” for more information.

Use of Estimates. The consolidated financial statements include certain amounts that are based on management’s best estimates and judgments. Estimates are used in determining such items as accruals for rebates receivable and payable, client guarantees, depreciable/useful lives, allowance for doubtful accounts, testing for impairment of goodwill and intangible assets, stock-based compensation, income taxes, pension and other postretirement benefit plan assumptions, amounts recorded for contingencies, and other reserves, as well as CMS-related activity, including the risk corridor adjustment and cost share and catastrophic reinsurance subsidies. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Operating Segments. The Company has two reportable segments, PBM and Specialty Pharmacy. See Note 13, “Segment and Geographic Data,” for more information. The PBM and Specialty Pharmacy segments primarily operate in the United States and have relatively small activities in Puerto Rico, Germany and the United Kingdom. Additionally, UBC has the capability to conduct post-approval research in strategic locations worldwide, including North America, Europe and Asia.

Earnings per Share (“EPS”). Basic EPS is computed by dividing net income by the weighted average number of shares of common stock issued and outstanding during the reporting period. The Company treats stock options and restricted stock units granted by the Company as potential common shares outstanding in computing diluted earnings per share. Under the treasury stock method on a grant by grant basis, the amount the employee or director must pay for exercising the award, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefit that would be recorded in additional paid-in capital when the award becomes deductible, are assumed to be used to repurchase shares at the average market price during the period.

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The Company granted options of 6.5 million shares in fiscal 2011, 6.0 million shares in fiscal 2010 and 6.6 million shares in fiscal 2009. For the years ended December 31, 2011, December 25, 2010 and December 26, 2009, there were outstanding options to purchase 12.0 million, 6.1 million and 5.1 million shares of Medco stock, respectively, which were not dilutive to the EPS calculations when applying the treasury stock method. For all periods presented, the outstanding options which were not dilutive to the EPS calculations when applying the treasury stock method primarily reflect the share price being below the option exercise price. These outstanding options may be dilutive to future EPS calculations.

The following is a reconciliation of the number of weighted average shares used in the basic and diluted EPS calculations (amounts in millions):

Fiscal Years	2011		2010		2009
Basic weighted average shares outstanding		394.7		443.0		481.1
Dilutive common stock equivalents:
Outstanding stock options and restricted stock units		7.6		8.8		8.9
Diluted weighted average shares outstanding		402.3		451.8		490.0

The decreases in the basic weighted average shares outstanding and diluted weighted average shares outstanding for each year result from the repurchase of approximately 285.5 million shares of stock in connection with the Company’s share repurchase programs since inception in 2005 through the end of 2011, compared to equivalent amounts of 256.2 million and 186.3 million shares repurchased inception-to-date through the ends of 2010 and 2009, respectively. The Company repurchased approximately 29.3 million shares, 69.9 million shares and 27.3 million shares in fiscal years 2011, 2010 and 2009, respectively. In accordance with the FASB’s earnings per share standard, weighted average treasury shares are not considered part of the basic or diluted shares outstanding.

Other Comprehensive Income and Accumulated Other Comprehensive Income. Other comprehensive income includes unrealized investment gains and losses, foreign currency translation adjustments, unrealized gains and losses on effective cash flow hedges, prior service costs or credits and actuarial gains or losses associated with pension or other postretirement benefits that arise during the period, as well as the amortization of prior service costs or credits and actuarial gains or losses, which are reclassified as a component of net benefit expense, and the tax effect allocated to each component of other comprehensive income.

The accumulated other comprehensive income (“AOCI”) component of stockholders’ equity includes: unrealized investment gains and losses, net of tax; foreign currency translation adjustments; unrealized gains and losses on effective cash flow hedges, net of tax; and the net gains and losses and prior service costs and credits related to the Company’s pension and other postretirement benefit plans, net of tax. The year-end balances in AOCI related to the Company’s pension and other postretirement benefit plans consist of amounts that have not yet been recognized as components of net periodic benefit cost in the consolidated statements of income.

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The amounts recognized in AOCI at December 26, 2009, December 25, 2010 and December 31, 2011 and the components and allocated tax effects included in other comprehensive income in fiscal 2010 and 2011 are as follows ($ in millions):

				Foreign			Net Unrealized
	Unrealized			Currency			Gains (Losses) on			Net Activity			Net Prior
	Gains (Losses)			Translation			Effective Cash			Due to			Service Benefit			Net Actuarial			Total
	on Investments			Gains (Losses)(1)			Flow Hedges			Curtailments			(Cost)			Gains (Losses)			AOCI
Balances at December 26, 2009, net of tax	$	(0.3	)	$	(12.6	)	$	(18.1	)	$	—		$	20.1		$	(33.3	)	$	(44.2	)
Fiscal 2010 activity:
Before tax amount		(0.1	)		(11.0	)		3.6			—			(4.0	)		3.0			(8.5	)
Tax benefit		0.1			—			(1.4	)		—			1.6			(1.1	)		(0.8	)
Net-of-tax change		—			(11.0	)		2.2	(2)		—			(2.4	)		1.9			(9.3	)
Balances at December 25, 2010, net of tax	$	(0.3	)	$	(23.6	)	$	(15.9	)	$	—		$	17.7		$	(31.4	)	$	(53.5	)
Fiscal 2011 activity:
Before tax amount		0.4			1.5			3.6			28.9			(1.5	)		(40.9	)		(8.0	)
Tax benefit		(0.1	)		—			(1.4	)		(11.6	)		0.6			16.4			3.9
Net-of-tax change		0.3			1.5			2.2	(2)		17.3			(0.9	)		(24.5	)		(4.1	)
Balances at December 31, 2011, net of tax	$	—		$	(22.1	)	$	(13.7	)	$	17.3		$	16.8		$	(55.9	)	$	(57.6	)

(1)	This primarily represents the unrealized net foreign currency translation gains (losses) resulting from the Europa Apotheek subsidiary.
(2)	Consists of the amortization of the unrealized loss on the effective portion of the cash flow hedges.

See Note 9, “Pension and Other Postretirement Benefits,” for additional information on the reclassification adjustments included within the components of other comprehensive income related to the Company’s defined benefit plans.

Contingencies. In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations, charges and proceedings, including, but not limited to, those relating to regulatory, commercial, employment, employee benefits and securities matters. In accordance with the FASB’s standard on accounting for contingencies, the Company records accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company’s recorded reserves are based on estimates developed with consideration given to the potential merits of claims, the range of possible settlements, advice from outside counsel, and management’s strategy with regard to the settlement of or defense against such claims. See Note 14, “Commitments and Contingencies,” for additional information.

Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with a standard issued by the FASB and guidance issued by the United States Securities and Exchange Commission (“SEC”), which require the measurement and recognition of compensation expense for all stock-based compensation awards made to employees and directors.

The standard requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The portion of the value that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period. As stock-based compensation expense recognized in our audited consolidated statements of income is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The standard requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

In addition, the standard requires that the benefits of realized tax deductions in excess of tax benefits on compensation expense, which amounted to $42.9 million, $52.0 million and $64.3 million for fiscal years 2011, 2010 and 2009, respectively, be reported as a component of cash flows from financing activities. The Company classifies stock-based compensation within cost of product net revenues and selling, general and administrative expenses to correspond with the financial statement components in which cash compensation paid to employees and directors is recorded.

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Foreign Currency Translation. The Company’s consolidated financial statements are presented in U.S. dollars. In 2010, the Company acquired UBC, which has operations in Europe and Asia. The Company also has a subsidiary, Europa Apotheek Venlo B.V. (“Europa Apotheek”), which is based in the Netherlands, with the Euro as its local currency. Assets and liabilities of Europa Apotheek, and of UBC’s foreign operations, are translated into U.S. dollars at the exchange rates in effect at balance sheet dates, and revenues and expenses are translated at the weighted average exchange rates prevailing during the month of the transaction. Adjustments resulting from translating net assets are reported as a separate component of AOCI within stockholders’ equity.

3. ACQUISITION OF BUSINESSES

United BioSource Corporation^®. On September 16, 2010, the Company acquired all of the outstanding common stock of UBC for approximately $708 million in cash. Additionally, in connection with the acquisition, the Company paid approximately $32 million consisting of pay downs of acquired debt and other items. UBC is a leader in serving life sciences industry clients and is focused on developing scientific evidence to guide the safe, effective and affordable use of medicines. UBC has the capability to conduct post-approval research in strategic locations worldwide, including North America, Europe and Asia. This acquisition extends Medco’s core capabilities in data analytics and research with a view to further accelerating pharmaceutical knowledge, advancing patient safety and furthering evidence-based medicine. The Company funded the transaction with the net proceeds of Medco’s September 2010 senior notes offering. See Note 8, “Debt,” for more information.

The transaction was accounted for under the applicable provisions of FASB’s business combinations standard at the time of the acquisition. The purchase price was allocated based upon the preliminary estimates of the fair value of net assets acquired at the date of the acquisition. A portion of the excess of the purchase price over tangible net assets acquired, amounting to $540.3 million, has been allocated to goodwill, and $236.0 million has been allocated to intangible assets, which are being amortized using the straight-line method over an estimated weighted average useful life of 12.1 years. Additionally, there is a deferred tax liability of $87.3 million associated with the fair value amounts allocated to intangible assets. The amount allocated to goodwill reflects the benefits Medco expects to realize from the growth of UBC’s operations. None of the goodwill is expected to be deductible for income tax purposes. See Note 7, “Goodwill and Intangible Assets,” for disclosure of goodwill by reportable segment. UBC’s operating results from the date of acquisition of September 16, 2010 through December 31, 2011 are included in the accompanying audited consolidated financial statements. Pro forma financial statement results including the results of UBC would not differ materially from the Company’s historically reported financial statement results.

4. FAIR VALUE DISCLOSURES

Fair Value Measurements

Fair Value Hierarchy. The inputs used to measure fair value fall into the following hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.

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The Company utilizes the best available information in measuring fair value. The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets recorded at fair value on a recurring basis ($ in millions):

Fair Value Measurements at Reporting Date

	December 31,
Description	2011			Level 1		Level 2
Fair value of interest rate swap agreements	$	12.9	(1)		—	$	12.9

⁽¹⁾ Reported in other noncurrent assets on the consolidated balance sheet.

Fair Value Measurements at Reporting Date

	December 25,
Description	2010			Level 1		Level 2
Money market mutual funds	$	225.0	(1)	$	225.0	$	—
Fair value of interest rate swap agreements		16.9	(2)		—		16.9

(1)	Reported in cash and cash equivalents on the consolidated balance sheet.
(2)	Reported in other noncurrent assets on the consolidated balance sheet.

The Company’s money market mutual funds are invested in funds that seek to preserve principal, are highly liquid, and therefore are recorded on the consolidated balance sheets at the principal amounts deposited, which equals the asset values quoted by the money market fund custodians. The fair value of the Company’s obligation under its interest rate swap agreements, which hedge interest costs on the senior notes, is based upon observable market-based inputs that reflect the present values of the differences between estimated future fixed rate payments and future variable rate receipts, and therefore are classified within Level 2. Historically, there have not been significant fluctuations in the fair value of the Company’s financial assets.

Fair Value of Financial Instruments

The term loan and revolving credit obligations under the Company’s senior unsecured bank credit facilities have a floating interest rate and as a result, the carrying amounts of the debt, as well as the short-term and long-term investments approximated fair values as of December 31, 2011 and December 25, 2010. The Company estimates fair market value for these assets and liabilities based on their market values or estimates of the present value of their future cash flows.

The carrying amounts and the fair values of the Company’s senior notes are shown in the following table ($ in millions):

	December 31, 2011				December 25, 2010
	Carrying		Fair		Carrying		Fair
	Amount(1)		Value		Amount(1)		Value
7.25% senior notes due 2013	$	499.1	$	540.2	$	498.7	$	567.2
6.125% senior notes due 2013		299.5		316.0		299.2		327.1
2.75% senior notes due 2015		499.9		499.1		499.8		496.1
7.125% senior notes due 2018		1,191.2		1,416.7		1,190.1		1,412.2
4.125% senior notes due 2020		499.0		503.8		498.9		481.3

⁽¹⁾ Reported in long-term debt, net, on the consolidated balance sheets, net of unamortized discount.

The fair values of the senior notes are based on observable relevant market information such as quoted prices. Fluctuations between the carrying amounts and the fair values of the senior notes for the periods presented are associated with changes in market interest rates.

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5. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consist of the following ($ in millions):

	December 31,			December 25,
	2011			2010
Land and buildings	$	326.3		$	322.2
Machinery, equipment and office furnishings		856.2			796.4
Computer software		1,387.2			1,246.0
Leasehold improvements		121.6			119.3
Construction in progress(1)		140.1			67.2
		2,831.4			2,551.1
Less accumulated depreciation		(1,723.0	)		(1,557.5	)
Property and equipment, net	$	1,108.4		$	993.6

⁽¹⁾ Primarily represents capitalized software development.

Depreciation expense for property and equipment totaled $213.1 million, $189.5 million and $179.0 million in fiscal years 2011, 2010 and 2009, respectively.

6. LEASES

The Company leases mail-order pharmacy and call center pharmacy facilities, offices and warehouse space under various operating leases. In addition, the Company leases pill dispensing and counting devices and other operating equipment for use in its mail-order pharmacies, as well as computer equipment for use in its data centers and corporate headquarters. Rental expense was $109.0 million, $90.2 million and $75.3 million for fiscal years 2011, 2010 and 2009, respectively. As of December 31, 2011, the minimum aggregate rental commitments under noncancelable leases, excluding renewal options, are as follows ($ in millions):

Fiscal Years Ending December
2012	$	60.3
2013		47.2
2014		36.1
2015		17.4
2016		10.0
Thereafter		21.8
Total	$	192.8

In the normal course of business, operating leases are generally renewed or replaced by new leases.

7. GOODWILL AND INTANGIBLE ASSETS

The changes in the Company’s carrying amount of goodwill for the years ended December 25, 2010 and December 31, 2011 are as follows ($ in millions):

				Specialty
	PBM			Pharmacy			Total
Balances as of December 26, 2009	$	4,417.1		$	1,915.9		$	6,333.0
Goodwill acquired		614.8	(1)		1.3			616.1
Translation adjustments and other		(9.2	)		(0.4	)		(9.6	)
Balances as of December 25, 2010	$	5,022.7		$	1,916.8		$	6,939.5
Goodwill acquired		16.0			0.0			16.0
Translation adjustments and other		10.1			(11.8	)		(1.7	)
Balances as of December 31, 2011	$	5,048.8		$	1,905.0		$	6,953.8

⁽¹⁾ Primarily represents the portion of the excess of the purchase price paid by the Company to acquire UBC. See Note 3, “Acquisition of Businesses,” for more information.

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The following is a summary of the Company’s intangible assets ($ in millions):

	December 31, 2011						December 25, 2010
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Value		Amortization		Net		Value		Amortization		Net
Client relationships	$	3,454.5	$	2,362.3	$	1,092.2	$	3,447.6	$	2,169.7	$	1,277.9
Trade names		656.1		92.0		564.1		656.4		68.0		588.4
Manufacturer relationships		529.9		141.7		388.2		528.2		101.1		427.1
Patient relationships		286.5		201.8		84.7		283.1		171.3		111.8
Other intangible assets		57.1		38.3		18.8		39.1		34.5		4.6
Total	$	4,984.1	$	2,836.1	$	2,148.0	$	4,954.4	$	2,544.6	$	2,409.8

For intangible assets existing as of December 31, 2011, aggregate intangible asset amortization expense in each of the five succeeding fiscal years is estimated as follows ($ in millions):

Fiscal Years Ending December
2012	$	283.4
2013		278.6
2014		275.8
2015		257.9
2016		85.9
Total	$	1,181.6

The annual intangible asset amortization expense for intangible assets existing as of December 31, 2011 is estimated to be $283.4 million in 2012, a net $8.5 million decrease from $291.9 million in 2011.

As of December 31, 2011, the weighted average useful life of intangible assets subject to amortization is 22 years in total. The weighted average useful life is approximately 22 years for the PBM intangible assets and approximately 21 years for the Specialty Pharmacy segment-acquired intangible assets. The Company expenses the costs to renew or extend contracts associated with intangible assets in the period the costs are incurred. For PBM client relationships, the weighted average contract period prior to the next renewal date as of December 31, 2011 is approximately 1.9 years. The Company has experienced client retention rates of approximately 99% over the past two years.

The most recent assessment for impairment of goodwill for each of the designated reporting units was performed as of September 24, 2011. The goodwill was determined not to be impaired and there have been no significant subsequent changes in events or circumstances. The Company utilized the income approach methodology, which projects future cash flows discounted to present value based on certain assumptions about future operating performance. Discount rates were based on the estimated weighted average cost of capital at the reporting unit level and ranged from 8% to 13%. In order to validate the reasonableness of the estimated fair values, the Company performed a reconciliation of the aggregate fair values of all reporting units to market capitalization as of the valuation date using a reasonable control premium. If the Company determines that the fair value is less than the book value based on updates to the assumptions, the Company could be required to record a non-cash impairment charge to the consolidated statement of income, which could have a material adverse effect on the Company’s earnings. The Company periodically reviews the composition of its reporting units. Reporting units are revised due to changes in reporting structures and the manner in which the Company operates its business activities. The goodwill and intangible asset carrying amounts, and the expected useful lives of the intangible assets were not impacted by the pending expiration of the UnitedHealth Group contract.

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8. DEBT

The Company’s debt consists of the following ($ in millions):

	December 31,		December 25,
	2011		2010
Short-term debt:
Accounts receivable financing facility	$	—	$	—
Other		42.7		23.6
Total short-term debt		42.7		23.6
Current portion of long-term debt		2,000.0		—
Long-term debt:
Senior unsecured revolving credit facility		—		1,000.0
Senior unsecured term loan		—		1,000.0
7.25% senior notes due 2013, net of unamortized discount		499.1		498.7
6.125% senior notes due 2013, net of unamortized discount		299.5		299.2
2.75% senior notes due 2015, net of unamortized discount		499.9		499.8
7.125% senior notes due 2018, net of unamortized discount		1,191.2		1,190.1
4.125% senior notes due 2020, net of unamortized discount		499.0		498.9
Fair value of interest rate swap agreements		12.9		16.9
Total long-term debt		3,001.6		5,003.6
Total debt	$	5,044.3	$	5,027.2

The following provides additional information regarding the Company’s debt:

2.75% and 4.125% Senior Notes. On September 10, 2010, the Company completed an underwritten public offering of $500 million aggregate principal amount of 5-year senior notes at a price to the public of 99.967 percent of par value, and $500 million aggregate principal amount of 10-year senior notes at a price to the public of 99.780 percent. The 5-year senior notes bear interest at a rate of 2.75% per annum, with an effective interest rate of 2.757%, and mature on September 15, 2015. The 10-year senior notes bear interest at a rate of 4.125% per annum, with an effective interest rate of 4.152%, and mature on September 15, 2020. Medco may redeem all or part of these notes at any time or from time to time at its option at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest to the redemption date or (ii) a “make-whole” amount based on the yield of a comparable U.S. Treasury security plus 20 basis points for the notes due 2015, and 25 basis points for the notes due 2020. The Company pays interest on the notes semi-annually on March 15 and September 15 of each year. The Company used the net proceeds from the offering for general corporate purposes, which included funding the UBC acquisition described in Note 3, “Acquisition of Businesses.”

6.125% and 7.125% Senior Notes. On March 18, 2008, the Company completed an underwritten public offering of $300 million aggregate principal amount of 5-year senior notes at a price to the public of 99.425 percent of par value, and $1.2 billion aggregate principal amount of 10-year senior notes at a price to the public of 98.956 percent. The 5-year senior notes bear interest at a rate of 6.125% per annum, with an effective interest rate of 6.261%, and mature on March 15, 2013. The 10-year senior notes bear interest at a rate of 7.125% per annum, with an effective interest rate of 7.274%, and mature on March 15, 2018. Medco may redeem all or part of these notes at any time or from time to time at its option at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest to the redemption date or (ii) a “make-whole” amount based on the yield of a comparable U.S. Treasury security plus 50 basis points. The Company pays interest on both series of senior notes semi-annually on March 15 and September 15 of each year.

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In December 2007, the Company entered into forward-starting interest rate swap agreements to manage its exposure to changes in benchmark interest rates and to mitigate the impact of fluctuations in the interest rates prior to the issuance of the long-term fixed rate financing described above. The cash flow hedges entered into were for a notional amount of $500 million on the then-current 10-year treasury interest rate, and for a notional amount of $250 million on the then-current 30-year treasury interest rate. In March 2008, following the issuance of $300 million aggregate principal amount of 5-year senior notes and $1.2 billion aggregate principal amount of 10-year senior notes, the cash flow hedges were settled for $45.4 million and included a $9.8 million ineffective portion that was immediately expensed and recorded as an increase to interest (income) and other (income) expense, net, for the year ended December 27, 2008. The effective portion was recorded in accumulated other comprehensive income and is reclassified to interest expense over the ten-year period in which the Company hedged its exposure to variability in future cash flows. The effective portion reclassified to interest expense in 2011, 2010 and 2009 amounted to $3.6 million in each fiscal year. The effective portion expected to be reclassified to interest expense in 2012 amounts to $3.6 million. The unamortized effective portion reflected in accumulated other comprehensive loss as of December 31, 2011 and December 25, 2010 was $13.7 million and $15.9 million, net of tax, respectively.

Five-Year Credit Facilities. On April 30, 2007, the Company entered into a senior unsecured credit agreement, which is available for general working capital requirements. The facility consists of a $1 billion, 5-year senior unsecured term loan and a $2 billion, 5-year senior unsecured revolving credit facility. The facility matures on April 30, 2012, and therefore the Company classified all outstanding balances related to the facility, representing $1.0 billion under the revolving credit facility and the $1.0 billion senior unsecured term loan, as current portion of long-term debt on the consolidated balance sheet as of December 31, 2011. The Company refinanced the $2 billion unsecured revolving credit facility on January 23, 2012 and anticipates repaying the $1 billion senior unsecured term loan at maturity.

There were draw-downs of $11,687.2 million and repayments of $11,687.2 million under the revolving credit facility during 2011. As of December 31, 2011, the Company had $999.0 million available for borrowing under the revolving credit facility, after giving effect to prior net draw-downs of $1 billion and $1 million in issued letters of credit. As of December 25, 2010, the outstanding balance under the revolving credit facility was $1.0 billion and the Company had $993.5 million available for borrowing under the facility, after giving effect to prior net draw-downs of $1 billion and $6.5 million in issued letters of credit.

On January 23, 2012, the Company entered into a new $2 billion 364-day senior unsecured revolving credit facility, which is available to support the Company’s general corporate activities, working capital requirements and capital expenditures. See Note 15, “Subsequent Event — Debt Refinancing” for more information.

7.25% Senior Notes. In August 2003, in connection with Medco’s spin-off, the Company completed an underwritten public offering of $500 million aggregate principal amount of 10-year senior notes at a price to the public of 99.195 percent of par value. The senior notes bear interest at a rate of 7.25% per annum, with an effective interest rate of 7.365%, and mature on August 15, 2013. Medco may redeem all or part of these notes at any time or from time to time at its option at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed, or (ii) the sum of the present values of 107.25% of the principal amount of the notes being redeemed, plus all scheduled payments of interest on the notes discounted to the redemption date at a semi-annual equivalent yield to a comparable U.S. Treasury security for such redemption date plus 50 basis points.

The Company entered into five interest rate swap agreements in 2004. These swap agreements, in effect, converted $200 million of the $500 million of 7.25% senior notes to variable interest rate debt. The swaps have been designated as fair value hedges and have an expiration date of August 15, 2013, consistent with the maturity date of the senior notes. The fair value of the derivatives outstanding, which is based upon observable market-based inputs that reflect the present values of the difference between estimated future fixed rate payments and future variable rate receipts, represented net receivables of $12.9 million and $16.9 million as of December 31, 2011 and December 25, 2010, respectively, which are reported in other noncurrent assets, with offsetting amounts reported in long-term debt, net, on the Company’s consolidated balance sheets. These are the amounts that the Company would have received

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from third parties if the derivative contracts had been settled. Under the terms of these swap agreements, the Company receives a fixed rate of interest of 7.25% on $200 million and pays variable interest rates based on the six-month LIBOR plus a weighted average spread of 3.05%. The payment dates under the agreements coincide with the interest payment dates on the hedged debt instruments and the difference between the amounts paid and received is included in interest expense. Interest expense was reduced by $7.5 million, $7.3 million and $5.1 million in fiscal years 2011, 2010 and 2009, respectively, as a result of the swap agreements. The weighted average LIBOR associated with the swap agreements was 0.5%, 0.5% and 1.6% for fiscal years 2011, 2010, and 2009, respectively.

Accounts Receivable Financing Facility and Other Short-Term Debt. Through a wholly-owned subsidiary, the Company has a $600 million, 364-day renewable accounts receivable financing facility that is collateralized by the Company’s pharmaceutical manufacturer rebates accounts receivable. During 2011, the Company drew down $1,443 million and repaid $1,443 million under the facility, which resulted in no amounts outstanding and $600 million available for borrowing under the facility as of December 31, 2011. During 2010, the Company drew down $550 million and repaid $550 million under the facility, which resulted in no amounts outstanding and $600 million available for borrowing under the facility as of December 25, 2010. The Company pays interest on amounts borrowed under the agreement based on the funding rates of the bank-related commercial paper programs that provide the financing, plus an applicable margin and liquidity fee determined by the Company’s credit rating. This facility is renewable annually at the option of both Medco and the banks and was renewed on July 25, 2011. Additionally, the Company had short-term debt of $42.7 million and $23.6 million outstanding as of December 31, 2011 and December 25, 2010, respectively, under a $47.9 million and $23.6 million short-term revolving credit facility, respectively. The weighted average annual interest rate on amounts outstanding under the short-term revolving credit facility was 2.24% and 1.72% at December 31, 2011 and December 25, 2010, respectively.

Covenants. All of the senior notes discussed above are subject to customary affirmative and negative covenants, including limitations on sale/leaseback transactions; limitations on liens; limitations on mergers and similar transactions; and a covenant with respect to certain change of control triggering events. The 6.125% senior notes and the 7.125% senior notes are also subject to an interest rate adjustment in the event of a downgrade in the ratings to below investment grade. In addition, the senior unsecured bank credit facilities and the accounts receivable financing facility are subject to covenants, including, among other items, maximum leverage ratios. The Company was in compliance with all covenants at December 31, 2011 and December 25, 2010.

Aggregate Maturities and Interest Expense. The aggregate maturities of long-term debt are as follows ($ in millions):

Fiscal Years Ending December
2012	$	2,000.0
2013		800.0
2014		—
2015		500.0
2016		—
2017-2020		1,700.0
Total	$	5,000.0

Interest expense on total debt was $208.5 million in 2011, $172.5 million in 2010 and $172.5 million in 2009.

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9. PENSION AND OTHER POSTRETIREMENT BENEFITS

Net Pension and Postretirement Benefit Cost. The Company has various plans covering the majority of its employees. The net (credit) cost for the Company’s pension plans consisted of the following components ($ in millions):

Fiscal Years	2011			2010			2009
Service cost	$	4.6		$	25.6		$	24.3
Interest cost		10.2			13.5			13.2
Expected return on plan assets		(15.4	)		(12.2	)		(9.9	)
Amortization of prior service cost		—			0.2			0.2
Net amortization of actuarial losses		—			2.1			5.4
Settlement (gain)/loss		3.0			—			—
Curtailment (gain)/loss		(9.7	)		—			—
Net pension (credit) cost	$	(7.3	)	$	29.2		$	33.2

In January 2011, the Company amended its defined benefit pension plans, freezing the benefit for all participants effective in the first quarter of 2011. After the plan freeze, participants do not accrue any benefits under the plans, and new hires are not eligible to participate in the defined benefit pension plans. However, account balances continue to be credited with interest until paid out. The plan freeze resulted in a gain of $9.7 million, pre-tax, recognized in the first quarter of 2011. The freeze of the defined benefit pension plans coincided with an enhanced 401(k) plan company match.

The Company maintains an unfunded postretirement healthcare benefit plan for a limited number of retirees. The net credit for these postretirement benefits consisted of the following components ($ in millions):

Fiscal Years	2011			2010			2009
Service cost	$	0.3		$	1.4		$	1.2
Interest cost		0.2			0.9			0.8
Amortization of prior service credit		(1.5	)		(4.2	)		(4.2	)
Net amortization of actuarial losses		0.6			0.5			0.5
Curtailment (gain)/loss		(30.6	)		—			—
Net postretirement benefit credit	$	(31.0	)	$	(1.4	)	$	(1.7	)

In January 2011, the Company amended its postretirement healthcare benefit plan, discontinuing the benefit for all active nonretirement-eligible employees. The Company had previously reduced and capped the benefit through a 2003 plan amendment, the effect of which resulted in a prior service credit reflected as a component of accumulated other comprehensive loss in stockholders’ equity. The prior service credit is associated with the plan in place before the Company became an independent, publicly traded company in 2003. The elimination of the postretirement healthcare benefit for all active nonretirement-eligible employees was accounted for as a curtailment of the plan and resulted in a gain of $30.6 million, pre-tax, $22.6 million of which is reported in cost of product net revenues and $8.0 million of which is reported in SG&A expenses on the audited consolidated statement of income for the year ended December 31, 2011.

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Changes in Plan Assets, Benefit Obligation and Funded Status. Summarized information about the funded status and the changes in plan assets and benefit obligation is as follows ($ in millions):

	Pension Benefits						Other Postretirement Benefits
Fiscal Years	2011			2010			2011			2010
Fair value of plan assets at beginning of year	$	189.4		$	147.6		$	—		$	—
Actual return on plan assets		(0.3	)		21.1			—			—
Company contributions		30.5			27.8			0.6			0.6
Employee contributions		—			—			0.5			0.5
Benefits paid		(16.2	)		(7.1	)		(1.1	)		(1.1	)
Fair value of plan assets at end of year	$	203.4		$	189.4		$	—		$	—
Benefit obligation at beginning of year(1)	$	253.6		$	214.5		$	18.6		$	15.6
Service cost		4.6			25.6			0.3			1.4
Interest cost		10.2			13.5			0.2			0.9
Employee contributions		—			—			0.5			0.5
Actuarial (gains) losses		28.4			7.1			0.6			1.3
Benefits paid		(16.2	)		(7.1	)		(1.1	)		(1.1	)
Curtailments		(53.1	)		—			(16.2	)		—
Benefit obligation at end of year(1)	$	227.5		$	253.6		$	2.9		$	18.6
Underfunded status at end of year	$	(24.1	)	$	(64.2	)	$	(2.9	)	$	(18.6	)

⁽¹⁾ For other postretirement benefits, represents the accumulated postretirement benefit obligation.

The pension and other postretirement benefits liabilities recognized at December 31, 2011 and December 25, 2010 are as follows ($ in millions):

	Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010
Accrued expenses and other current liabilities	$	(0.1	)	$	(0.1	)	$	(0.5	)	$	(0.6	)
Other noncurrent liabilities		(24.0	)		(64.1	)		(2.4	)		(18.0	)
Total pension and other postretirement liabilities	$	(24.1	)	$	(64.2	)	$	(2.9	)	$	(18.6	)

The accumulated benefit obligation for defined benefit pension plans was $227.5 million and $200.7 million at December 31, 2011 and December 25, 2010, respectively, and the projected benefit obligation for defined benefit pension plans was $227.5 million and $253.6 million at December 31, 2011 and December 25, 2010, respectively. The accumulated benefit obligation and the projected benefit obligation amounts are the same as of December 31, 2011 as a result of the plan freeze.

Net actuarial gains and losses reflect experience differentials relating to differences between expected and actual returns on plan assets, differences between expected and actual demographic changes, differences between expected and actual healthcare cost increases, and the effects of changes in actuarial assumptions. Net actuarial gains and losses, in excess of certain thresholds, are amortized into the consolidated statement of income over the 11-year average remaining service life of participants for the defined benefit pension plans and the 17-year average remaining life expectancy of retirees for the postretirement healthcare benefit plan.

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The net gain or loss net prior service cost or credit recognized in other comprehensive income and reclassification adjustments for the periods presented, pre-tax, are as follows ($ in millions):

				Other Postretirement
	Pension Benefits			Benefits
Balances at December 26, 2009, pre-tax	$	47.3		$	(25.5	)
Loss (gain) arising during period		(1.7	)		1.3
Amortization of actuarial loss included in net periodic benefit cost		(2.1	)		(0.5	)
Amortization of prior service (cost) credit		(0.2	)		4.2
Balances at December 25, 2010, pre-tax	$	43.3		$	(20.5	)
(Loss) gain recognized due to curtailments		(41.1	)		30.6
Prior service cost recognized due to curtailment		(2.2	)		(16.2	)
Loss recognized due to settlement		(3.0	)		—
Unrecognized loss (gain) arising during period		44.0			0.5
Amortization of actuarial loss included in net periodic benefit cost		—			(0.6	)
Amortization of prior service (cost) credit		—			1.5
Balances at December 31, 2011, pre-tax	$	41.0		$	(4.7	)

See Note 2, “Summary of Significant Accounting Policies—Other Comprehensive Income and Accumulated Other Comprehensive Income,” for more information.

Actuarial Assumptions. Actuarial weighted average assumptions used in determining plan information are as follows:

	Pension Benefits									Other Postretirement Benefits
	2011			2010			2009			2011			2010			2009
Weighted average assumptions used to determine benefit obligations at fiscal year-end:
Discount rate		4.10	%		5.10	%		5.70	%		3.30	%		5.30	%		5.85	%
Salary growth rate(1)		—			4.50	%		4.50	%		—			—			—
Weighted average assumptions used to determine net cost for the fiscal year ended:
Discount rate		5.10	%		5.70	%		6.00	%		5.30	%		5.85	%		6.00	%
Expected long-term rate of return on plan assets		8.00	%		8.00	%		8.25	%		—			—			—
Salary growth rate		4.50	%		4.50	%		4.50	%		—			—			—

⁽¹⁾ The salary growth rate assumption is not applicable for determination of the benefit obligation at year-end 2011 as a result of the plan freeze.

The expected rate of return for the pension plan represents the average rate of return to be earned on the plan assets over the period the benefits included in the benefit obligation are to be paid. The expected return on plan assets is determined by multiplying the expected long-term rate of return by the fair value of the plan assets and contributions, offset by expected return on expected benefit payments. In developing the expected rate of return, the Company considers long-term compounded annualized returns of historical market data, as well as historical actual returns on our plan assets. Using this reference information, the Company develops forward-looking return expectations for each asset class and a weighted average expected long-term rate of return for a targeted portfolio allocated across these investment categories.

Future costs of the amended postretirement benefit healthcare plan are being capped based on 2004 costs. As a result, employer liability is not affected by healthcare cost trend.

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Pension Plan Assets. The Company believes the oversight of the investments held under its pension plans is rigorous and the investment strategies are prudent. The investment objectives of the Company’s qualified pension plan are designed to generate total asset returns both sufficient to meet its expected future benefit obligations, as well as returns greater than its policy benchmark reflecting the target weights of the asset classes used in its strategic asset allocation investment policy. The plan’s targeted strategic allocation to each asset class was determined through an asset/liability modeling study. The strategic asset allocation targets approximately 70 percent in equity securities and 30 percent in fixed income and diversification within specific asset classes of these broad categories. The Company believes that the portfolio’s equity weighting strategy is consistent with investment goals and risk management practices applicable to the long-term nature of the plan’s benefit obligation. The precise amount for which the benefit obligations will be settled depends on future events, including interest rates and the life expectancy of the plan’s members. The obligations are estimated using actuarial assumptions, based on the current economic environment.

The following tables set forth the target allocation for 2012 by asset class and the plan assets at fair value at the year-end 2011 and year-end 2010 reporting dates by level within the fair value hierarchy ($ in millions):

				Percent of
	Target			Plan Assets
	Allocation			at Year-end			December 31,
Asset Class	2012			2011			2011		Level 1(1) (2)		Level 2(3)
U.S. equity securities		50 — 60	%		55	%
U.S. large-cap							$	63.3	$	—	$	63.3	(4)
U.S. small/mid-cap								48.7		29.0		19.7	(5)
International equity securities		12 — 18	%		14	%		28.3		28.3		—
Fixed income		27 — 33	%		31	%		63.1		30.3		32.8	(6)
Total					100	%	$	203.4	$	87.6	$	115.8

	Percent of
	Plan Assets
	at Year-end			December 25,
Asset Class	2010			2010		Level 1(1) (2)		Level 2(3)
U.S. equity securities		58	%
U.S. large-cap				$	60.4	$	19.8	$	40.6	(4)
U.S. small/mid-cap					50.0		29.7		20.3	(5)
International equity securities		15	%		28.4		28.4		—
Fixed income		27	%		50.6		25.1		25.5	(6)
Total		100	%	$	189.4	$	103.0	$	86.4

(1)	See Note 4, “Fair Value Disclosures,” for a description of the fair value hierarchy.
(2)	Investments classified as Level 1 are valued at the readily available quoted price from an active market where there is significant transparency in the executed quoted price. These investments consist of mutual funds valued at the net asset value of shares held by the pension plan at year-end.
(3)	Assets classified as Level 2 include units held in common collective trust funds and mutual funds, which are valued based on the net asset values reported by the funds’ investment managers, and a short-term fixed income investment fund which is valued using other significant observable inputs such as quoted prices for comparable securities.
(4)	Consists of a common collective trust that invests in common stock of S&P 500 companies and mutual funds that invest in US large-cap common stock.
(5)	Consists of a mutual fund that invests in US mid-cap common stock.
(6)	Primarily consists of a common collective trust that invests in passive bond market index lending funds and a short-term investment fund.

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Cash Flows.

Employer Contributions. The Company expects to contribute a cash payment for the remaining minimum pension funding requirement of $17.1 million under the Internal Revenue Code (“IRC”) during 2012.

Estimated Future Benefit Payments. As of December 31, 2011, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid ($ in millions):

			Other
	Pension		Postretirement
Fiscal Years	Benefits		Benefits
2012	$	19.2	$	0.5
2013	$	17.9	$	0.4
2014	$	17.3	$	0.4
2015	$	16.5	$	0.3
2016	$	15.6	$	0.3
2017-2021	$	74.1	$	0.9

Other Plans. The Company sponsors defined contribution retirement plans for all eligible employees, as defined in the plan documents. These plans are qualified under Section 401(k) of the IRC. Contributions to the plans are based on employee contributions and a Company matching contribution. The Company’s matching contributions to the plans were $58.7 million in 2011, $44.8 million in 2010 and $37.6 million in 2009.

10. TAXES ON INCOME

Provision for Income Taxes. The components of the provision for income taxes are as follows ($ in millions):

Fiscal Years	2011			2010			2009
Current provision:
Federal	$	818.8		$	841.9		$	844.9
State		138.7			136.1			170.1
Foreign		2.4			0.4			(2.6	)
Total		959.9			978.4			1,012.4
Deferred provision (benefit):
Federal		(32.8	)		(62.2	)		(145.9	)
State		(2.9	)		(7.7	)		(42.3	)
Foreign		(4.1	)		(1.6	)		(1.2	)
Total		(39.8	)		(71.5	)		(189.4	)
Total provision for income taxes	$	920.1		$	906.9		$	823.0

A reconciliation of the Company’s effective tax rates and the U.S. statutory rate is as follows:

Fiscal Years	2011			2010			2009
U.S. statutory rate applied to pretax income		35.0	%		35.0	%		35.0	%
Differential arising from:
State taxes, net of federal benefit		3.7			3.6			3.9
Other		—			0.3			0.2
Effective tax rate		38.7	%		38.9	%		39.1	%

The Company’s 2011 effective tax rate reflects increased statute of limitations expirations and benefit from certain tax credits. The Company’s 2010 effective tax rate reflects lower state income taxes and reductions associated with statute of limitations expirations. The Company’s 2009 effective tax rate reflects a fourth-quarter 2009 income tax benefit of $22 million, primarily reflecting state-related tax items.

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The Company may achieve additional state income tax savings in future quarters. To the extent that these state tax savings are realized, they will be recorded as a reduction to the provision for income taxes at the time the audit by the respective state taxing jurisdiction is complete or when the applicable statute of limitations has expired.

Deferred Income Taxes. Deferred income taxes at year-end consisted of ($ in millions):

	December 31, 2011				December 25, 2010
	Assets		Liabilities		Assets		Liabilities
Intangible assets	$	—	$	757.2	$	—	$	856.0
Accelerated depreciation		—		324.4		—		241.2
Allowance for doubtful accounts		88.3		—		40.3		—
Accrued expenses		91.3		—		63.3		—
Accrued rebates		40.3		—		96.5		—
Stock-based compensation		163.1		—		141.2		—
Other		103.7		113.5		92.5		83.3
Total deferred taxes	$	486.7	$	1,195.1	$	433.8	$	1,180.5
Net deferred income taxes			$	708.4			$	746.7
Recognized as:
Current deferred tax asset	$	280.0			$	238.4
Noncurrent deferred tax liability			$	988.4			$	985.1

Other. Income taxes payable of $19.8 million and $53.9 million as of December 31, 2011 and December 25, 2010, respectively, are reflected in accrued expenses and other current liabilities on the audited consolidated balance sheets. Liabilities for income tax contingencies are primarily included in other noncurrent liabilities on the audited consolidated balance sheets. The Company has recorded a deferred tax asset associated with $80.2 million of merger-related expenses which are currently assumed to be tax deductible.

In the third quarter of 2006, the IRS commenced a routine examination of the Company’s U.S. income tax returns for the period subsequent to the spin-off, from August 20, 2003 through December 31, 2005, which was completed in December 2009. In the fourth quarter of 2008, the IRS commenced a routine examination of the Company’s 2006 and 2007 U.S. income tax returns, which was completed in November 2010. The IRS proposed and the Company has recorded certain adjustments to the Company’s 2006 and 2007 tax returns, which did not have a material impact on the consolidated financial statements. In the fourth quarter of 2011, the IRS commenced a routine examination of the Company’s 2008 and 2009 U.S. income tax returns. The Company is also undergoing various routine examinations by state and local tax authorities for various filing periods.

Liabilities for Income Tax Contingencies. The Company’s total gross liabilities for income tax contingencies as of December 31, 2011 amounted to $140.7 million, remain subject to audit, and may be released on audit closure or as a result of the expiration of statutes of limitations. A reconciliation of the beginning and ending gross liabilities for income tax contingencies is as follows ($ in millions):

Fiscal Years	2011			2010			2009
Liabilities, beginning of year	$	118.8		$	99.9		$	78.3
Gross increases, acquisition effects		—			0.7			—
Gross increases, prior period tax positions		6.1			19.5			35.6
Gross decreases, prior period tax positions		(3.3	)		(12.4	)		(8.4	)
Gross increases, current period tax positions		36.2			34.1			18.7
Settlements		—			(8.5	)		(14.6	)
Lapse of statutes of limitations		(17.1	)		(14.5	)		(9.7	)
Liabilities, end of year	$	140.7		$	118.8		$	99.9

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For the year ended December 31, 2011, there was a net increase of $21.9 million in the total gross liabilities for income tax contingencies primarily associated with current period tax positions. For the year ended December 25, 2010, there was a net increase of $18.9 million in the total gross liabilities for income tax contingencies primarily associated with current and prior period tax positions. As of December 31, 2011, if the Company’s liabilities for income tax contingencies were reversed into income from expense, income tax expense would be reduced by $90.0 million, net of federal income tax expense. The majority of the income tax contingencies are subject to statutes of limitations that are scheduled to expire by the end of 2016. In addition, approximately 14% of the income tax contingencies are anticipated to settle over the next twelve months.

The Company had approximately $7.5 million and $8.6 million accrued at December 31, 2011 and December 25, 2010, respectively, for interest related to liabilities for income tax contingencies. The Company’s results of operations include income, net, related to the reduction in interest liabilities for income tax contingencies of $1.1 million in 2011, $2.2 million in 2010 and $3.4 million in 2009. The Company has had no significant penalties for liabilities for income tax contingencies.

11. STOCK-BASED COMPENSATION

Overview. The Compensation Committee of the Company’s Board of Directors regularly reviews the Company’s compensation structure and practices, including the timing of its stock-based awards. The Audit Committee of the Company’s Board of Directors also reviews the Company’s option-granting practices from time to time. The Company grants options to employees and directors to purchase shares of Medco common stock at the fair market value on the date of grant. The options generally vest over three years (director options vest in one year) and expire within 10 years from the date of the grant. Vested options held by employees may expire earlier following termination of employment. The post-termination exercise period varies from three months for a voluntary termination to the full remaining term for termination of employment following a change in control. Directors always have the full term to exercise vested options. All option exercises are subject to restrictions on insider trading, and directors, officers and certain other employees with regular access to material information are subject to quarterly restrictions on trading. Under the terms of the Medco Health Solutions, Inc. 2002 Stock Incentive Plan, as of December 31, 2011, 19.9 million shares of the Company’s common stock are available for awards. The Accredo Health, Incorporated 2002 Long-Term Incentive Plan was terminated as of December 25, 2010.

The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Medco volatility assumption is based on the Company’s stock price volatility. The Company uses historical data to estimate the expected option life. The expected option life represents the period of time that options granted are expected to be outstanding. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted average fair value of options granted for fiscal years 2011, 2010 and 2009 was $16.58, $16.15 and $11.40, respectively. The weighted average assumptions utilized for options granted during the periods presented are as follows:

Fiscal Years	2011			2010			2009
Medco stock options Black-Scholes assumptions (weighted average):
Expected dividend yield		—			—			—
Risk-free interest rate		2.1	%		2.3	%		2.0	%
Expected volatility		25.1	%		23.0	%		27.0	%
Expected life (years)		5.1			5.2			5.0

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Stock Option Plans. Summarized information related to stock options held by the Company’s employees and directors is as follows:

						Weighted
						Average		Aggregate
	Number of			Weighted		Remaining		Intrinsic
	Shares			Average		Contractual		Value
	(in thousands)			Exercise Price		Term		(in millions)
Outstanding at December 25, 2010		27,635.8		$	40.91
Granted		6,540.4			62.06
Exercised		(4,913.2	)		31.22
Forfeited		(581.4	)		57.86
Outstanding at December 31, 2011		28,681.6		$	47.05		6.53	$	335.6
Exercisable at December 31, 2011		16,778.3		$	38.55		5.28	$	305.8

The total intrinsic value of options exercised during fiscal years 2011, 2010 and 2009 was $146.1 million, $128.7 million and $202.6 million, respectively.

The portion of the value that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period. Net income, as reported, includes stock-based compensation expense related to stock options for fiscal years 2011, 2010 and 2009 of $52.1 million ($84.4 million pre-tax), $48.5 million ($78.4 million pre-tax) and $45.3 million ($74.8 million pre-tax), respectively. As of December 31, 2011, there was $121.5 million of total unrecognized compensation cost related to outstanding stock options. That cost is expected to be recognized over a weighted average period of 1.8 years. The total grant date fair value of shares vested during fiscal years 2011, 2010 and 2009 was $78.6 million, $78.2 million and $70.0 million, respectively. The Company expects the majority of outstanding non-vested options to vest. The activity related to non-vested options is as follows:

				Weighted
	Number of			Average
	Shares			Grant-Date
	(in thousands)			Fair Value(1)
Non-vested at December 25, 2010		11,410.8		$	14.48
Granted		6,540.4			16.58
Vested		(5,554.6	)		14.15
Forfeited		(493.3	)		15.56
Non-vested at December 31, 2011		11,903.3		$	15.88

⁽¹⁾ Reflects the weighted average Black-Scholes option value.

Restricted Stock Units. The Company grants restricted stock units to employees and directors. Restricted stock units generally vest after three years (director restricted stock units vest in one year). The fair value of restricted stock units granted is determined by the product of the number of shares granted and the grant-date market price of the Company’s common stock. The fair value of the restricted stock units is expensed on a straight-line basis over the requisite service period. Net income, as reported, includes stock-based compensation expense related to restricted stock units for fiscal years 2011, 2010 and 2009 of $50.5 million ($81.9 million pre-tax), $45.2 million ($73.0 million pre-tax) and $41.2 million ($68.1 million pre-tax), respectively.

Upon vesting, certain employees and directors may defer conversion of the restricted stock units to common stock. Restricted stock units granted to directors are required to be deferred until their service on the Board of Directors ends. Summarized information related to restricted stock units held by the Company’s employees and directors is as follows:

				Aggregate
	Number of			Intrinsic
	Shares			Value
Restricted Stock Units	(in thousands)			(in millions)
Outstanding at December 25, 2010		5,071.2
Granted		1,779.9
Converted		(1,360.4	)
Forfeited		(205.8	)
Outstanding at December 31, 2011		5,284.9		$	295.4
Vested and deferred at December 31, 2011		642.3		$	35.9

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The weighted average grant-date fair value of restricted stock units granted during fiscal years 2011, 2010 and 2009 was $62.61, $61.60 and $40.71, respectively. The total intrinsic value of restricted stock units converted during fiscal years 2011, 2010 and 2009 was $77.4 million, $120.1 million and $66.9 million, respectively.

Summarized information related to non-vested restricted stock units held by the Company’s employees and directors is as follows:

				Weighted
	Number of			Average
	Shares			Grant-Date
Non-vested Restricted Stock Units	(in thousands)			Fair Value
Non-vested at December 25, 2010		4,392.6		$	50.43
Granted		1,779.9			62.61
Vested		(1,324.1	)		49.98
Forfeited		(205.8	)		55.42
Non-vested at December 31, 2011		4,642.6		$	54.98

As of December 31, 2011, there was $117.4 million of total unrecognized compensation cost related to non-vested restricted stock units. That cost is expected to be recognized over a weighted average period of 1.9 years. The total grant-date fair value of restricted stock units vested during fiscal years 2011, 2010 and 2009 was $66.2 million, $73.5 million and $50.7 million, respectively. The Company expects the majority of non-vested restricted stock units to vest.

12. SHARE REPURCHASE PROGRAMS

Since 2005, when the Company commenced its first share repurchase program, the Company executed share repurchases of 285.5 million shares at a cost of $12.8 billion and at an average per-share cost of $45.00 through the end of fiscal 2011.

In February 2011, the Company’s Board of Directors approved a new $3 billion share repurchase program, authorizing the purchase of up to $3 billion of the Company’s common stock over a two-year period commencing February 24, 2011. During fiscal year 2011, the Company repurchased 29.3 million shares at a cost of $1,786.6 million with an average per-share cost of $60.93 under its share repurchase programs.

Pursuant to the Merger Agreement with Express Scripts dated July 20, 2011, the Company is not permitted to engage in share repurchases without Express Scripts’ prior written consent until the consummation of the merger or the termination of the Merger Agreement. Currently, the Company does not anticipate making additional share repurchases.

13. SEGMENT AND GEOGRAPHIC DATA

Reportable Segments. The Company has two reportable segments, PBM and Specialty Pharmacy. The PBM segment primarily involves sales of traditional prescription drugs and supplies to the Company’s clients and members or patients, either through the Company’s networks of contractually affiliated retail pharmacies or the Company’s mail-order pharmacies. The PBM segment also includes the operating results of Europa Apotheek, which primarily provides mail-order pharmacy services in Germany. Commencing on the September 16, 2010 acquisition date, the PBM segment includes the operating results of UBC, which extends the Company’s core capabilities in data analytics and research.

The Specialty Pharmacy segment includes the sale of specialty pharmacy products and services for the treatment of primarily complex and potentially life-threatening diseases, including specialty infusion services. The Company defines the Specialty Pharmacy segment based on a product set and associated services, broadly characterized to include drugs that are usually high-cost, developed by biotechnology companies and often injectable or infusible, and may require elevated levels of patient support. When

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dispensed, these products frequently require ancillary administration equipment, special packaging, and a higher degree of patient-oriented customer service, including in-home nursing services and administration. Specialty pharmacy products and services are often covered through client PBM contracts. Specialty pharmacy products and services are also covered through medical benefit programs with the primary payors being insurance companies and government programs, and patients for amounts due for co-payments and deductibles.

Factors Used to Identify Reportable Segments. The Specialty Pharmacy segment was formed as a result of the 2005 acquisition of Accredo in response to a management desire to manage the acquired business together with Medco’s pre-existing specialty pharmacy activity as a separate business from Medco’s PBM operations. This acquisition complemented the pre-existing Medco specialty pharmacy operation, which was evolving in 2005.

Selected Segment Income and Asset Information. Total net revenues and operating income are measures used by the chief operating decision maker to assess the performance of each of the Company’s operating segments. The following tables present selected financial information about the Company’s reportable segments, including a reconciliation of operating income to income before provision for income taxes ($ in millions):

	December 31, 2011(1)						December 25, 2010							December 26, 2009
			Specialty						Specialty							Specialty
For Fiscal Years Ended:	PBM(2)(3)		Pharmacy		Total(2)(3)		PBM(2)		Pharmacy		Total(2)			PBM		Pharmacy		Total
Product net revenues	$	55,198.1	$	13,365.2	$	68,563.3	$	53,643.3	$	11,246.1	$	64,889.4		$	49,526.2	$	9,435.2	$	58,961.4
Service revenues		1,420.6		79.4		1,500.0		975.7		103.2		1,078.9			750.5		92.3		842.8
Total net revenues		56,618.7		13,444.6		70,063.3		54,619.0		11,349.3		65,968.3			50,276.7		9,527.5		59,804.2
Total cost of revenues		52,877.8		12,563.3		65,441.1		51,060.1		10,573.1		61,633.2			46,951.5		8,825.7		55,777.2
Selling, general and administrative expenses		1,466.0		278.7		1,744.7		1,255.1		295.3		1,550.4			1,158.3		297.2		1,455.5
Amortization of intangibles		249.9		42.0		291.9		244.7		42.7		287.4			258.1		47.5		305.6
	$	2,025.0	$	560.6	$	2,585.6	$	2,059.1	$	438.2	$	2,497.3		$	1,908.8	$	357.1	$	2,265.9
Operating income
Reconciling items to income before provision for income taxes:
Interest expense						208.5						172.5							172.5
Interest (income) and other (income) expense, net						1.3						(9.4	)						(9.9	)
Income before provision for income taxes					$	2,375.8					$	2,334.2						$	2,103.3
Capital expenditures	$	300.3	$	24.3	$	324.6	$	219.2	$	30.9	$	250.1		$	209.1	$	29.7	$	238.8

(1)	53-week fiscal year. All other fiscal years are comprised of 52 weeks.
(2)	Includes UBC’s operating results commencing on the September 16, 2010 acquisition date.
(3)	Includes pre-tax merger-related expenses of $80.2 million for 2011 associated with the pending Express Scripts merger, with $77.9 million in SG&A expenses and $2.3 million in total cost of revenues.

	As of December 31, 2011						As of December 25, 2010
			Specialty						Specialty
Identifiable Assets:	PBM		Pharmacy		Total		PBM		Pharmacy		Total
Total identifiable assets	$	13,393.1	$	3,569.7	$	16.962.8	$	13,360.3	$	3,737.0	$	17,097.3

Geographic Information. The Company’s net revenues from its foreign operations represented less than 1% of the Company’s consolidated net revenues for fiscal years 2011, 2010 and 2009. All other revenues are earned in the United States.

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14. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations, charges and proceedings, including, but not limited to, those relating to regulatory, commercial, employment, employee benefits and securities matters. The significant matters are described below.

There is uncertainty regarding the possible course and outcome of the proceedings discussed below. Although it is not feasible to predict or determine the final outcome of any proceedings with certainty, the Company believes there is no litigation pending against the Company that could have, individually or in the aggregate, a material adverse effect on the Company’s business, financial condition, liquidity and operating results. However, there can be no assurances that an adverse outcome in any of the proceedings described below will not result in material fines, penalties and damages, changes to the Company’s business practices, loss of (or litigation with) clients or a material adverse effect on the Company’s business, financial condition, liquidity and operating results. It is also possible that future results of operations for any particular quarterly or annual period could be materially adversely affected by the ultimate resolution of one or more of these matters, or changes in the Company’s assumptions or its strategies related to these proceedings. The Company continues to believe that its business practices comply in all material respects with applicable laws and regulations and is vigorously defending itself in the actions described below. The Company believes that most of the claims made in these proceedings would not likely be covered by insurance.

In accordance with the FASB’s standard on accounting for contingencies, the Company records accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. These assessments can involve a series of complex judgments about future events and may rely heavily on estimates and assumptions that have been deemed reasonable by management. Due to the uncertainty surrounding the issues involved in each of the below matters and based on the facts and circumstances of each matter known to date, the Company believes that an estimate of any loss or range of loss that may be incurred cannot be made at this time.

Government Proceedings and Requests for Information. The Company is aware of the existence of three qui tam matters—two are sealed and in the third, the government has declined to intervene and the complaint has been unsealed. The sealed first action is filed in the Eastern District of Pennsylvania and it appears to allege that the Company billed government payors using invalid or out-of-date national drug codes. The sealed second action is filed in the District of New Jersey and appears to allege that the Company charged government payors a different rate than it reimbursed pharmacies; engaged in duplicate billing; refilled prescriptions too soon; and billed government payors for prescriptions written by unlicensed physicians and physicians with invalid Drug Enforcement Agency authorizations. The Department of Justice has not yet made any decision as to whether it will intervene in either of these matters. The matters are under seal and U.S. District Court orders prohibit the Company from answering inquiries about the complaints. The Company was notified of the existence of these two qui tam matters during settlement negotiations on an unrelated matter with the Department of Justice in 2006. The Company does not know the identities of the relators in either of these matters. The Company is not able to predict with certainty the timing or outcome of these matters.

The third qui tam matter in which the government has declined to intervene, relates to PolyMedica Corporation, a subsidiary of the Company acquired in the fourth quarter of 2007. This matter is progressing as a civil litigation, United States of America ex. rel. Lucas W. Matheny and Deborah Loveland vs. Medco Health Solutions, Inc., et al., in the U.S. District Court for the Southern District of Florida, although the government could decide to intervene at any point during the course of the litigation. The complaint largely includes allegations regarding the application of invoice payments. In July 2010, the U.S. District Court for the Southern District of Florida dismissed the action without prejudice. The plaintiffs re-filed the complaint and upon a motion to dismiss, the U.S. District Court for the Southern District of Florida dismissed the complaint with prejudice in October 2010. The matter is currently on appeal.

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In April 2010, the Attorney General for the State of California requested information from the Company about a former consultant who was engaged by the Company in 2004 and again later in a year-to-year contract that ended in 2009. The Company has been, and will continue to voluntarily provide information related to this request, including providing various documents and making certain current and former employees available for depositions. In March 2011, the Company received a subpoena from the SEC’s Los Angeles Regional Office staff requesting the production of documents relating to an ongoing investigation of the California Public Pension Funds. The Company is cooperating with both the SEC and the California Attorney General’s office. The Company is not able to predict with certainty the timing or outcome of these matters.

In July 2011, Medco received a subpoena duces tecum from the United States Department of Justice, District of Delaware, requesting information from Medco concerning its arrangements with Astra Zeneca concerning four Astra Zeneca drugs. The Company is cooperating with the inquiry. The Company is not able to predict with certainty the timing or outcome of this matter.

ERISA and Similar Litigation. As disclosed in Note 14, “Commitments and Contingencies,” to the Company’s audited consolidated financial statements included in Part II, Item 8 of its Annual Report on Form 10-K for the fiscal year ended December 25, 2010, the Gruer series of lawsuits were settled on a class action basis in 2010, however, the plaintiffs in two of the remaining actions in the Gruer series of cases, Blumenthal v. Merck-Medco Managed Care, L.L.C., et al., and United Food and Commercial Workers Local Union No. 1529 and Employers Health and Welfare Plan Trust v. Medco Health Solutions, Inc. and Merck & Co., Inc., elected to opt out of the settlement. In June 2010, the Company filed for summary judgment against both of these plaintiffs. In June 2011, the Court issued its opinion dismissing several of the plaintiffs’ fiduciary claims while letting others survive pending further discovery. Plaintiff, United Food and Commercial Workers Local Union No. 1529 and Employers Health and Welfare Plan Trust, subsequently filed a motion with the Court asking it to reconsider its dismissal of one of the fiduciary claims. In September 2011, the Company settled both of these matters for a de minimus amount.

The Company does not believe that it is a fiduciary under ERISA (except in those instances in which it has expressly contracted to act as a fiduciary for limited purposes), and believes that its business practices comply with all applicable laws and regulations.

Antitrust and Related Litigation. In August 2003, a lawsuit captioned Brady Enterprises, Inc., et al. v. Medco Health Solutions, Inc., et al. was filed in the U.S. District Court for the Eastern District of Pennsylvania against Merck & Co., Inc. (“Merck”) and the Company. The plaintiffs, who seek to represent a national class of retail pharmacies that had contracted with the Company, allege that the Company has conspired with, acted as the common agent for, and used the combined bargaining power of plan sponsors to restrain competition in the market for the dispensing and sale of prescription drugs. The plaintiffs allege that, through the alleged conspiracy, the Company has engaged in various forms of anticompetitive conduct, including, among other things, setting artificially low reimbursement rates to such pharmacies. The plaintiffs assert claims for violation of the Sherman Act and seek treble damages and injunctive relief. The plaintiffs’ motion for class certification is currently pending before the Multidistrict Litigation Court.

In October 2003, a lawsuit captioned North Jackson Pharmacy, Inc., et al. v. Medco Health Solutions, Inc., et al. was filed in the U.S. District Court for the Northern District of Alabama against Merck and the Company. In their Second Amended Complaint, the plaintiffs allege that Merck and the Company engaged in price fixing and other unlawful concerted actions with others, including other PBMs, to restrain trade in the dispensing and sale of prescription drugs to customers of retail pharmacies who participate in programs or plans that pay for all or part of the drugs dispensed, and conspired with, acted

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as the common agent for, and used the combined bargaining power of plan sponsors to restrain competition in the market for the dispensing and sale of prescription drugs. The plaintiffs allege that, through such concerted action, Merck and the Company engaged in various forms of anticompetitive conduct, including, among other things, setting reimbursement rates to such pharmacies at unreasonably low levels. The plaintiffs assert claims for violation of the Sherman Act and seek treble damages and injunctive relief. The plaintiffs’ motion for class certification has been granted, but this matter has been consolidated with other actions where class certification remains an open issue.

In December 2005, a lawsuit captioned Mike’s Medical Center Pharmacy, et al. v. Medco Health Solutions, Inc., et al. was filed against the Company and Merck in the U.S. District Court for the Northern District of California. The plaintiffs seek to represent a class of all pharmacies and pharmacists that had contracted with the Company and California pharmacies that had indirectly purchased prescription drugs from Merck and make factual allegations similar to those in the Alameda Drug Company action discussed below. The plaintiffs assert claims for violation of the Sherman Act, California antitrust law and California law prohibiting unfair business practices. The plaintiffs demand, among other things, treble damages, restitution, disgorgement of unlawfully obtained profits and injunctive relief.

In April 2006, the Brady plaintiffs filed a petition to transfer and consolidate various antitrust actions against PBMs, including North Jackson, Brady, and Mike’s Medical Center before a single federal judge. The motion was granted in August 2006. These actions are now consolidated for pretrial purposes in the U.S. District Court for the Eastern District of Pennsylvania. The consolidated action is known as In re Pharmacy Benefit Managers Antitrust Litigation. The plaintiffs’ motion for class certification in certain actions is currently pending before the Multidistrict Litigation Court.

In January 2004, a lawsuit captioned Alameda Drug Company, Inc., et al. v. Medco Health Solutions, Inc., et al. was filed against the Company and Merck in the Superior Court of California. The plaintiffs, which seek to represent a class of all California pharmacies that had contracted with the Company and that had indirectly purchased prescription drugs from Merck, allege, among other things, that since the expiration of a 1995 consent injunction entered by the U.S. District Court for the Northern District of California, if not earlier, the Company failed to maintain an Open Formulary (as defined in the consent injunction), and that the Company and Merck had failed to prevent nonpublic information received from competitors of Merck and the Company from being disclosed to each other. The plaintiffs further allege that, as a result of these alleged practices, the Company had been able to increase its market share and artificially reduce the level of reimbursement to the retail pharmacy class members, and that the prices of prescription drugs from Merck and other pharmaceutical manufacturers that do business with the Company had been fixed and raised above competitive levels. The plaintiffs assert claims for violation of California antitrust law and California law prohibiting unfair business practices. The plaintiffs demand, among other things, compensatory damages, restitution, disgorgement of unlawfully obtained profits and injunctive relief. In the complaint, the plaintiffs further allege, among other things, that the Company acted as a purchasing agent for its plan sponsor customers, resulting in a system that serves to suppress competition.

Other Matters

In the ordinary course of business, the Company is involved in disputes with clients, retail pharmacies and suppliers, which may involve litigation, claims, arbitrations and other proceedings and the Company is subject to government audits and recoupment demands. Although it is not feasible to predict or determine the final outcome of any proceedings with certainty, the Company does not believe that any of these disputes could have, individually or in the aggregate, a material adverse effect on the Company’s business, financial condition, liquidity or operating results. In addition, the Company entered into an indemnification and insurance matters agreement with Merck in connection with the Company’s spin-off in 2003, which may require the Company in some instances to indemnify Merck.

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Twenty-two lawsuits have been filed since the announcement of the merger on July 21, 2011 described in Note 1, “Background and Basis of Presentation,” to the accompanying audited consolidated financial statements that name as defendants the Company, the Company’s Board of Directors, and Express Scripts. The purported class action complaints allege, among other things, a breach of fiduciary duty in connection with the approval of the pending Merger Agreement between the Company and Express Scripts.

On November 7, 2011, Express Scripts and Medco Health Solutions, Inc. entered into a Memorandum of Understanding with plaintiffs to settle the shareholder litigation pending in the United States District Court for the District of New Jersey and the Delaware Court of Chancery regarding their proposed merger. Pursuant to the Memorandum of Understanding, Express Scripts and Medco agreed to enter into the Amendment and to hold the special meetings of their respective stockholders to vote on the proposed mergers on such date or dates as determined by Medco and Express Scripts, but in no event prior to December 21, 2011. The shareholder meetings subsequently took place on December 21, 2011, at which time the respective stockholders voted to approve the merger.

Also pursuant to the Memorandum of Understanding, the parties entered into a Stipulation of Settlement, which was preliminarily approved by the United States District Court for the District of New Jersey on December 21, 2011, subject to further consideration by the District Court at a Settlement Hearing scheduled to take place on April 16, 2012. Under the terms of the Stipulation of Settlement, plaintiffs must file papers in support of their application for attorneys’ fees no later than forty-five (45) days prior to the Settlement Hearing, making any such papers due by March 2, 2012.

Purchase Commitments

As of December 31, 2011, the Company has contractual commitments to purchase inventory from certain biopharmaceutical manufacturers associated with the Company’s Specialty Pharmacy business, and are contracts for fixed amounts totaling $883.1 million through 2014. The Company also has purchase commitments for diabetes supplies of $28.7 million, technology-related agreements of $23.9 million and advertising commitments of $0.6 million.

Insurance

The Company maintains insurance coverage with deductibles and self-insurance that management considers adequate for its needs under current circumstances, including commercial professional liability coverage of $85 million per occurrence and in the aggregate during a policy period. Such coverage reflects market conditions (including cost and availability) existing at the time coverage is written. In addition to the Company’s commercial professional liability insurance policies, the Company has a retained liability component requiring certain self-insurance reserves to cover potential claims. The Company currently processes any claims included in self-insured retention levels through a captive insurance company. The Company’s PBM operations, including, for example, the dispensing of prescription drugs by its mail-order pharmacies, may subject the Company to litigation and liability for damages. Historically, the Company has not had any professional liability claims that have exceeded its insurance coverage amount, and any claims have not been material. The Company believes that its insurance coverage protection for these types of claims is adequate. However, the Company might not be able to maintain its professional and general liability insurance coverage in the future, and insurance coverage might not be available on acceptable terms or adequate to cover any or all potential professional liability claims. A successful professional liability claim in excess of the Company’s insurance coverage, or one for which an exclusion from coverage applies, could have a material adverse effect on the Company’s financial condition and results of operations.

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15. SUBSEQUENT EVENT — DEBT REFINANCING

On January 23, 2012, the Company completed a new bank financing for a $2 billion 364-day senior unsecured revolving credit facility (“new credit facility”) which may be increased by an amount up to $0.5 billion at the Company’s option. In addition to replacing the Company’s existing $2 billion senior unsecured revolving credit facility, the new credit facility is available to support the Company’s general corporate activities, working capital requirements and capital expenditures. At current debt ratings, the new credit facility will bear interest at LIBOR plus a 1.375 percent margin, with a 15 basis point commitment fee due on the unused revolving credit facility. The Company may, at its option, extend the maturity date of the new credit facility by an additional 364 days, whereupon any outstanding revolving loans will be converted to term loans during the extension period.

During the term of the new credit facility, the Company will be subject to customary affirmative and negative covenants, including limits on the ability of subsidiaries that are not guarantors of the Company’s indebtedness to incur additional indebtedness, limits on the ability of the Company and its subsidiaries to create liens and, except for the Merger, engage in any consolidation or merger or otherwise liquidate or dissolve or enter into transactions with affiliates.

Upon the occurrence of a change in control, such as the Merger, all amounts outstanding under the new credit facility shall become immediately due and payable and the new credit facility shall be immediately terminated.

As of January 23, 2012, the Company had $999 million available for borrowing under the new revolving credit facility, exclusive of $1 million in issued letters of credit. The $1 billion term loan portion of the April 30, 2007 senior unsecured credit facility remains outstanding and is due to be repaid by April 30, 2012. The Company anticipates repayment of the $1 billion senior unsecured term loan at maturity.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all information presented in this Annual Report on Form 10-K. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments.

Audit Committee’s Responsibility

The Audit Committee of the Board of Directors, which is comprised solely of independent directors in accordance with the requirements of the New York Stock Exchange, the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Company’s corporate governance policies, meets regularly with our independent registered public accounting firm, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the related audit efforts. The Audit Committee is responsible for the engagement of our independent registered public accounting firm. Our independent registered public accounting firm and internal auditors have free access to the Audit Committee.

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Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this Report, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the objectives described above were met as of the end of the period covered by this Annual Report on Form 10-K.

Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (the “COSO criteria”).

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is set forth in Part II, Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation of the Company’s controls performed during the quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

On January 23, 2012, the Company entered into a $2.0 billion short term credit agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A. and Citicorp North America, Inc., as syndication agents, Mizuho Corporate Bank, Ltd. (“Mizuho”) and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), as documentation agents, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mizuho and BTMU, as lead arrangers and joint bookrunners, and the lenders party thereto.

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Pursuant to the terms of the New Credit Agreement, the Company has been provided with a 364-day revolving credit facility with commitments up to $2.0 billion, which may be increased by an amount up to $0.5 billion at the Company’s option. The revolving credit facility includes a $0.5 billion sublimit for the issuance of standby letters of credit and a $0.1 billion sublimit for a swingline facility. The revolving credit facility expires on January 21, 2013, provided that the Company may, at its option, extend the maturity date by an additional 364 days. If the Company extends the maturity date, any outstanding revolving loans will be converted to term loans during such extension period. The Company may continually borrow, prepay and re-borrow loans during the life of the New Credit Agreement and may terminate the New Credit Agreement at any time, without incurring prepayment penalties, upon prior written notice and prepayment in full of all outstanding loans.

The proceeds of the New Credit Agreement may be used for (i) refinancing the revolving credit facility provided under the Company’s existing Credit Agreement, dated as of April 30, 2007, with Bank of America, N.A., as administrative agent, Banc of America Securities LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and joint bookrunners, and the lenders party thereto (the “Existing Credit Agreement”), as described below, (ii) general corporate and working capital purposes (including acquisitions) and (iii) financing the repurchase of shares of the Company’s common stock under the Company’s existing share repurchase program. Letters of credit may only be used to support general corporate and working capital purposes (including acquisitions).

On January 23, 2012, the Company used part of the proceeds of the New Credit Agreement to refinance the $2.0 billion revolving credit facility provided under the Existing Credit Agreement, and to pay related fees and expenses incurred in connection with the refinancing. The Company did not pay any prepayment premium in connection with the refinancing of the revolving credit facility under the Existing Credit Agreement. The $1.0 billion term loan facility provided under the Existing Credit Agreement remains in place.

During the term of the New Credit Agreement, the Company will be subject to customary affirmative and negative covenants, including limits on the ability of subsidiaries that are not guarantors of the Company’s indebtedness to incur additional indebtedness, limits on the ability of the Company and its subsidiaries to create liens and, except for the Merger contemplated by the Merger Agreement, engage in any consolidation or merger or otherwise liquidate or dissolve or enter into transactions with affiliates.

Upon the occurrence of an event of default, the administrative agent and the lenders will have the option of terminating their commitments and declaring immediately due and payable all amounts outstanding under the New Credit Agreement. The New Credit Agreement contains customary events of default including nonpayment of principal, interest, fees or other amounts, breach of representations and warranties, breach of covenants, cross-default to other indebtedness and certain bankruptcy events.

Upon the occurrence of a change in control, all amounts outstanding under the New Credit Agreement shall become immediately due and payable and the revolving credit facility provided under the New Credit Agreement shall be immediately terminated. As defined in the New Credit Agreement, a change in control includes the transactions contemplated by the Merger Agreement.

The description of the New Credit Agreement contained in this Item 9B does not purport to be complete and is qualified in its entirety by reference to the credit agreement filed as Exhibit 10.2 to this Annual Report on Form 10-K, which is incorporated herein by reference.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required by this Item 10 is incorporated by reference from the information provided under the sections entitled “Matters to be Considered at the Annual Meeting—Proposal 1. Election of Directors,” “Corporate Governance and Related Matters—Board and Committee Membership—Audit Committee,” “Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance,” and “Audit Committee Report” in our Proxy Statement for the 2012 Annual Meeting of Shareholders (the “2012 Proxy Statement”). Information required by this Item 10 with respect to executive officers of the Company is contained under the heading “Executive Officers of the Company” in Part I of this Form 10-K.

The Company has adopted a Code of Conduct applicable to all directors, employees and officers (including the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or person performing similar functions). The Company’s Code of Conduct is available on our website at http://www.medcohealth.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Conduct by posting such information on our website at http://www.medcohealth.com.

Item 11. Executive Compensation.

Information required by this Item 11 is incorporated by reference to the discussion under the headings “Director Compensation,” “Executive Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Corporate Governance and Related Matters—Compensation Committee Interlocks and Insider Participation” in our 2012 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

Information required by this Item 12 is incorporated by reference to the discussion under the caption “Ownership of Securities” and “Other Matters—Equity Compensation Plan Information” in our 2012 Proxy Statement.

Rule 10b5-1 Sales Plans. Medco’s comprehensive compliance program includes a broad policy against insider trading. Executive officers are prohibited from trading in Company stock during the period that begins on the first day of the last month of the fiscal period and ends on the third trading day after the release of earnings. In addition, executive officers are required to pre-clear all of their trades. Medco’s executive officers are also subject to share ownership guidelines and retention requirements. The ownership targets are based on a multiple of salary (5, 3 or 1.5 times salary), but are expressed as a number of shares. The targets are determined using base salary and the closing price of our stock on the date of our Annual Meeting of Shareholders. The number of shares required to be held has been calculated using a $63.41 stock price, the closing price of our stock on the date of the 2011 Annual Meeting of Shareholders.

To facilitate compliance with the ownership guidelines and retention requirements, Medco’s Board of Directors authorized the use of prearranged trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934. Rule 10b5-1 permits insiders to adopt predetermined plans for selling specified amounts of stock or exercising stock options under specified conditions and at specified times. Executive officers may only enter into a trading plan during an open trading window and they must not possess material nonpublic information regarding the Company at the time they adopt the plan. Using trading plans, insiders can diversify their investment portfolios while avoiding concerns about transactions occurring at a time when they might possess material nonpublic information. Under Medco’s policy, sales instructions made pursuant to a written trading plan may be executed during a blackout period. In addition, the use of trading plans provides Medco with a greater ability to monitor trading and compliance with its stock ownership guidelines. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under these plans may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving our company.

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All trading plans adopted by Medco executives are reviewed and approved by the Office of the General Counsel. For ease of administration, executives have been permitted to add new orders to existing plans rather than requiring the adoption of a new plan. Once modified, a plan cannot be changed for at least 90 days. Both new plans and modifications are subject to a mandatory “waiting period” designed to safeguard the plans from manipulation or market timing. Since July 21, 2011, as a result of the pending merger with Express Scripts, directors and executive officers have not been permitted to enter into new trading plans.

The following table, which we are providing on a voluntary basis, sets forth the Rule 10b5-1 sales plans entered into by our executive officers in effect as of February 10, 2012 ⁽¹⁾:

	Number of Shares			Number of Shares		Projected		Projected
	to be Sold Under			Sold Under the		Beneficial		Aggregate
Name and Position	the Plan(2)		Timing of Sales Under the Plan	Plan(3)		Ownership(4)		Holdings(5)
Frank Sheehy President, Accredo Health Group		29,751	Option exercise of an aggregate of 29,751 shares shall occur in various tranches when stock reaches a specific price.		0		22,897		65,253
Timothy C. Wentworth Group President, Employer/Key Accounts		84,280	Option exercise of an aggregate of 84,280 shares shall occur in various tranches when stock reaches a specific price.		45,715		90,144		329,101

(1)	This table does not include any trading plans entered into by any executive officer that have been terminated or expired by their terms or have been fully executed through February 10, 2012.
(2)	This column reflects the number of shares remaining to be sold as of February 10, 2012.
(3)	This column reflects the number of shares sold under the plan through February 10, 2012.
(4)	This column reflects an estimate of the number of whole shares each identified executive officer will beneficially own following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of February 10, 2012, and includes shares of our common stock subject to options or restricted stock units that were then vested or exercisable and unvested options and restricted stock units that are included in a current trading plan for sales periods that begin after the applicable vesting date. Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since February 10, 2012 outside of the plan.
(5)	This column reflects an estimate of the total aggregate number of whole shares each identified executive officer will have an interest in following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of February 10, 2012, and includes shares of our common stock subject to options (whether or not currently exercisable) or restricted stock units (whether or not vested). Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since February 10, 2012 outside of the plan.

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The following table, which we are providing on a voluntary basis, sets forth the Rule 10b5-1 sales plans entered into by our directors in effect as of February 10, 2012⁽¹⁾:

				Number of
	Number of			Shares Sold		Projected		Projected
	Shares to be Sold			Under the		Beneficial		Aggregate
Name and Position	Under the Plan(2)		Timing of Sales Under the Plan	Plan(3)		Ownership(4)		Holdings(5)
John L. Cassis Director		16,000	Option exercise of 16,000 shall occur if stock reaches a specific price.		0		58,900		66,500

(1)	This table does not include any trading plans entered into by any director that have been terminated or expired by their terms or have been fully executed through February 10, 2012.
(2)	This column reflects the number of shares remaining to be sold as of February 10, 2012.
(3)	This column reflects the number of shares sold under the plan through February 10, 2012.
(4)	This column reflects an estimate of the number of whole shares each identified director will beneficially own following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of February 10, 2012, and includes shares of our common stock subject to options or restricted stock units that were then vested or exercisable and unvested options and restricted stock units that are included in a current trading plan for sales periods that begin after the applicable vesting date. Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since February 10, 2012 outside of the plan.
(5)	This column reflects an estimate of the total aggregate number of whole shares each identified director will have an interest in following the sale of all shares under the Rule 10b5-1 sales plans currently in effect. This information reflects the beneficial ownership of our common stock as of February 10, 2012, and includes shares of our common stock subject to options (whether or not currently exercisable) or restricted stock units (whether or not vested). Options cannot be exercised and restricted stock units cannot be converted prior to vesting. The estimates reflect option exercises and sales under the plan, but do not reflect any changes to beneficial ownership that may have occurred since February 10, 2012 outside of the plan.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required by this item is incorporated by reference to the discussions under the captions “Transactions with Related Persons” and “Corporate Governance and Related Matters—Director Independence,” in our 2012 Proxy Statement.

Item 14. Principal Accounting Fees and Services.

Information about the fees for 2011 and 2010 for professional services rendered by our independent registered public accounting firm is incorporated by reference to the discussion under the heading “Proposal 2. Ratification of Independent Registered Public Accounting Firm” of our Proxy Statement for the 2012 Annual Meeting of Shareholders. Our Audit Committee’s policy on pre-approval of audit and permissible non-audit services of our independent auditors is incorporated by reference to the discussion under the heading “Proposal 2. Ratification of Independent Registered Public Accounting Firm” of our 2012 Proxy Statement.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report:

(1) Financial Statements. The following financial statements are filed as part of this report under Item 8, “Financial Statements and Supplementary Data”:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2011 and December 25, 2010

Consolidated Statements of Income for the Years Ended December 31, 2011, December 25, 2010, and December 26, 2009

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2011, December 25, 2010, and December 26, 2009

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, December 25, 2010 and December 26, 2009

Notes to Consolidated Financial Statements

(2) Financial Statement Schedule:

Schedule II—Valuation and Qualifying Accounts

All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements and notes thereto in Item 8 above.

(3) Exhibits:

Exhibit
Number	Exhibit Description
2.1	Agreement and Plan of Merger, dated July 20, 2011, by and among Express Scripts, Inc., Medco Health Solutions, Inc., Aristotle Holding, Inc., Aristotle Merger Sub, Inc. and Plato Merger Sub, Inc. Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed July 22, 2011.
2.2	Amendment No. 1 to Agreement and Plan of Merger, dated as of November 7, 2011, by and among Medco Health Solutions, Inc., Express Scripts, Inc., Aristotle Holding, Inc., Aristotle Merger Sub, Inc. and Plato Merger Sub, Inc. Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed November 8, 2011.
3.1	Amended and Restated Certificate of Incorporation of Medco Health Solutions, Inc., amended as of May 24, 2011. Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed May 26, 2011.
3.2	Amended and Restated Bylaws of Medco Health Solutions, Inc., amended as of May 24, 2011. Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed May 26, 2011.
4.1	Form of Medco Health Solutions, Inc. common stock certificate. Incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 3 to Form 10, File No. 001-31312, filed July 25, 2003.

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Exhibit
Number	Exhibit Description
4.2	Indenture between the Registrant and U.S. Bank Trust National Association, as Trustee, relating to the Registrant’s 7.25% senior notes due 2013. Incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003, File No. 001-31312.
4.3	Indenture between the Registrant and U.S. Bank Trust National Association, as Trustee, relating to the Registrant’s 6.125% senior notes due 2013, 7.125% senior notes due 2018, 2.75% senior notes due 2015 and 4.125% senior notes due 2020. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed March 18, 2008.
4.4	The instruments defining the rights of the holders of the 6.125% senior notes due 2013 and the 7.125% senior notes due 2018 are incorporated by reference to Exhibits 4.2 and 4.3 to the Registrant’s Current Report on Form 8-K filed March 18, 2008, respectively.
4.5	The instruments defining the rights of the holders of the 2.75% senior notes due 2015 and the 4.125% senior notes due 2020 are incorporated by reference to Exhibits 4.1 and 4.2 to the Registrant’s Current Report on Form 8-K filed September 10, 2010, respectively.
10.1	Credit Agreement, dated as of April 30, 2007, among the Registrant, the lenders party thereto and Bank of America, N.A., as administrative agent and Citicorp North America, Inc. and JPMorgan Chase Bank, N.A., as Co-Syndication Agents. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 2, 2007.
10.2*	Credit Agreement, dated as of January 23, 2012, among Medco Health Solutions, Inc., as borrower, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A. and Citicorp North America, Inc., as syndication agents, Mizuho Corporate Bank, Ltd. (“Mizuho”) and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), as documentation agents, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mizuho and BTMU, as lead arrangers and joint bookrunners, and the lenders party thereto.
10.3	Second Amended and Restated Receivables Purchase Agreement dated July 28, 2008, among Medco Health Receivables, LLC, the financial institutions and commercial paper conduits party thereto and Citicorp North America, Inc., as administrative agent. Incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K filed February 24, 2009.
10.4	Amendment No. 1 dated July 27, 2009 to Second Amended and Restated Receivables Purchase Agreement dated July 28, 2008, among Medco Health Receivables, LLC, the financial institutions and commercial paper conduits party thereto and Citicorp North America, Inc., as administrative agent. Incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K filed February 23, 2010.
10.5	Amendment No. 2 dated July 26, 2010 to Second Amended and Restated Receivables Purchase Agreement dated July 28, 2008, among Medco Health Receivables, LLC, the financial institutions and commercial paper conduits party thereto and Citicorp North America, Inc., as administrative agent. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed November 2, 2010.

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Exhibit
Number	Exhibit Description
10.6	Amendment No. 3 dated November 3, 2010 to Second Amended and Restated Receivables Purchase Agreement dated July 28, 2008, among Medco Health Receivables, LLC, the financial institutions and commercial paper conduits party thereto and Citicorp North America, Inc., as administrative agent. Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed February 22, 2011.
10.7	Amendment No. 4 dated July 25, 2011 to Second Amended and Restated Receivables Purchase Agreement dated July 28, 2008, among Medco Health Receivables, LLC, the financial institutions and commercial paper conduits party thereto and Citicorp North America, Inc., as administrative agent. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed October 26, 2011.
10.8†	Medco Health Solutions, Inc. 2002 Stock Incentive Plan, as amended and restated as of May 24, 2011. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 26, 2011.
10.9†	Medco Health Solutions, Inc. 2006 Change in Control Executive Severance Plan, as amended. Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed July 26, 2011.
10.10	Indemnification and Insurance Matters Agreement between Merck & Co., Inc. and the Registrant. Incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003, File No. 001-31312.
10.11	Tax Responsibility Allocation Agreement, dated as of August 12, 2003, between Merck & Co., Inc. and the Registrant. Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003, File No. 001-31312.
10.12†	Employment Agreement with David B. Snow, Jr., dated as of February 10, 2009. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 13, 2009.
10.13†	Assignment and Assumption Agreement, dated as of December 27, 2009 to the February 10, 2009 Employment Agreement with David B. Snow, Jr. Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed February 23, 2010.
10.14†	Amendment to the Employment Agreement with David B. Snow, Jr. dated May 24, 2011. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 26, 2011.
10.15†	Medco Health Solutions, Inc. Executive Annual Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed February 8, 2005, File No. 001-31312.
10.16†	Performance Goals for 2012 under the Registrant’s Executive Annual Incentive Plan. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed February 3, 2012.
10.17†	Form of terms and conditions for director stock option and restricted stock unit awards. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed February 8, 2005, File No. 001-31312.

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Exhibit
Number	Exhibit Description
10.18†	Form of terms and conditions of the 2008 Restricted Stock Unit Grants under the Medco Health Solutions, Inc. 2002 Stock Incentive Plan. Incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed February 19, 2008.
10.19†	Form of terms and conditions of 2008 Non-Qualified Stock Option Grants under the Medco Health Solutions, Inc. 2002 Stock Incentive Plan. Incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed February 19, 2008.
10.20†	Medco Health Solutions, Inc. Deferred Compensation Plan for Directors. Incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K filed February 19, 2008.
10.21	Settlement Agreement and Mutual Releases, dated as of October 23, 2006, entered into by and among the United States of America, acting through the United States Department of Justice, on behalf of the Office of the Inspector General of the Department of Health and Human Services, the Office of Personnel Management, and the Department of Defense TRICARE Management Activity; Medco Health Solutions, Inc.; Diane M. Collins; and relators George Bradford Hunt, Walter William Gauger and Joseph Piacentile. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 27, 2006.
10.22	Settlement Agreement and Mutual Releases, dated as of October 23, 2006, entered into by and among the United States of America, acting through the United States Department of Justice, on behalf of the Office of the Inspector General of the Department of Health and Human Services and the Office of Personnel Management; Medco Health Solutions, Inc.; and relator Karl S. Schumann. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed October 27, 2006.
10.23	Settlement Agreement and Mutual Releases, dated as of October 23, 2006, entered into by and among the United States of America, acting through the United States Department of Justice, on behalf of the Office of the Inspector General of the Department of Health and Human Services and Medco Health Solutions, Inc. Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed October 27, 2006.
10.24	Corporate Integrity Agreement, dated as of October 23, 2006, between the Office of the Inspector General of the Department of Health and Human Services and the Office of the Inspector General of the Office of Personnel Management and Medco Health Solutions, Inc. Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed October 27, 2006.
12.1*	Statement of Consolidated Ratios of Earnings to Fixed Charges.
21.1*	List of Subsidiaries.
23.1*	Consent of PricewaterhouseCoopers LLP, dated February 21, 2012.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

126

Exhibit
Number	Exhibit Description
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase.
101.LAB*	XBRL Taxonomy Extension Label Linkbase.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase.

†	Management contract or compensatory plan or arrangement
*	Filed herewith
**	Furnished herewith

127

MEDCO HEALTH SOLUTIONS, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
($ in millions)

Allowance for Doubtful Accounts Receivable:

	Balance at
	Beginning									Balance at
	of Period		Other		Provision		Write-offs(1)			End of Period
Fiscal Year Ended December 31, 2011	$	149.7	$	1.8	$	143.6	$	(170.5	)	$	124.6
Fiscal Year Ended December 25, 2010	$	133.3	$	2.8	$	130.5	$	(116.9	)	$	149.7
Fiscal Year Ended December 26, 2009	$	120.0	$	0.2	$	133.1	$	(120.0	)	$	133.3

⁽¹⁾ Uncollectible accounts, net of recoveries.

128

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Medco Health Solutions, Inc.

/s/ David B. Snow, Jr.

Name: David B. Snow, Jr.

Title: Chairman and Chief Executive Officer

Date: February 21, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Dated: February 21, 2012	/s/ David B. Snow, Jr.
	Name: David B. Snow, Jr.
	Title: Chairman and Chief Executive Officer
Dated: February 21, 2012	/s/ Richard J. Rubino
	Name: Richard J. Rubino
	Title: Senior Vice President, Finance and Chief Financial Officer
Dated: February 21, 2012	/s/ Gabriel R. Cappucci
	Name: Gabriel R. Cappucci
	Title: Senior Vice President and Controller, Chief Accounting Officer
Dated: February 21, 2012	/s/ Howard W. Barker, Jr.
	Name: Howard W. Barker, Jr.
	Title: Director
Dated: February 21, 2012	/s/ John L. Cassis
	Name: John L. Cassis
	Title: Director
Dated: February 21, 2012	/s/ Michael Goldstein
	Name: Michael Goldstein
	Title: Director
Dated: February 21, 2012	/s/ Charles M. Lillis, Ph.D.
	Name: Charles M. Lillis, Ph.D.
	Title: Director

129

Dated: February 21, 2012	/s/ Myrtle S. Potter
	Name: Myrtle S. Potter
	Title: Director
Dated: February 21, 2012	/s/ William L. Roper, M.D., M.P.H.
	Name: William L. Roper, M.D., M.P.H.
	Title: Director
Dated: February 21, 2012	/s/ David D. Stevens
	Name: David D. Stevens
	Title: Director
Dated: February 21, 2012	/s/ Blenda J. Wilson, Ph.D.
	Name: Blenda J. Wilson, Ph.D.
	Title: Director

130