Changes in Business

12 Months Ended

Dec. 31, 2011

Changes in Business [Abstract]

Changes in business

3. Changes in business

Proposed merger transaction. On July 20, 2011, we entered into a definitive merger agreement (the “Merger Agreement”) with Medco Health Solutions, Inc. (“Medco”), which was amended by Amendment No. 1 thereto on November 7, 2011, providing for the combination of Express Scripts and Medco under a new holding company named Aristotle Holding, Inc. (which we refer to as “New Express Scripts”). It is expected that Aristotle Holding, Inc. will be renamed Express Scripts Holding Company after the consummation of the mergers. As a result of the transactions contemplated by the Merger Agreement (“the Transaction”), Medco and Express Scripts will each become wholly owned subsidiaries of New Express Scripts and former Medco and Express Scripts stockholders will own stock in New Express Scripts, which is expected to be listed for trading on the NASDAQ. Upon closing of the Transaction, our shareholders are expected to own approximately 59% of New Express Scripts and Medco shareholders are expected to own approximately 41%. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement upon closing of the Transaction, each share of Medco common stock will be converted into (i) the right to receive $28.80 in cash, without interest and (ii) 0.81 shares of New Express Scripts stock. Based on the closing price of our stock on December 31, 2011, this payment would be in an aggregate amount of approximately $25.9 billion, composed of per share payments equal to $65.00 in cash and stock of New Express Scripts. The merger will combine the expertise of two complementary pharmacy benefit managers to accelerate efforts to lower the cost of prescription drugs and improve the quality of care. As previously disclosed by Medco and Express Scripts, the Merger Agreement was adopted by the affirmative vote of the stockholders of each of Express Scripts and Medco in December 2011. The consummation of the Transaction is subject to regulatory clearance and other customary closing conditions, and will be accounted for under the authoritative guidance for business combinations.

Consummation of the Transaction is subject to the expiration or termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and other customary conditions, including (i) the approval for listing on the Nasdaq Stock Market of the common stock of a New Express Scripts (ii) the absence of any order prohibiting or restraining the merger, (iii) the receipt of certain regulatory consents, (iv) subject to certain exceptions, the accuracy of Medco’s and Express Scripts’ representations and warranties in the Merger Agreement, (v) performance by Medco and Express Scripts of their respective obligations in the Merger Agreement, (vi) the absence of certain governmental appeals, and (vii) the delivery of customary opinions from counsel to Medco and Express Scripts to the effect that the Transaction will qualify as a tax-free exchange for federal income tax purposes.

If the Transaction is not completed we could be liable to Medco for termination fees in connection with the termination of the Merger Agreement, depending on the reasons leading to such termination, and/or the reimbursement of certain of Medco’s expenses, in amounts up to $950 million.

On September 2, 2011, Express Scripts and Medco each received a request for additional information (a “second request”) from the U.S. Federal Trade Commission (the “FTC”) in connection with the FTC’s review of the merger. A second request was anticipated by the parties to the mergers at the time of signing of the Merger Agreement. The companies have been cooperating with the FTC staff since shortly after the announcement of the merger and intend to continue to work cooperatively with the FTC staff in the review of the merger. On February 10, 2012, each of Express Scripts and Medco certified as to its substantial compliance with the second request. Completion of the merger remains subject to the expiration or termination of the waiting period under the HSR Act and other customary closing conditions. We continue to anticipate that the merger will be completed in the first half of 2012.

Acquisitions. On December 1, 2009, we completed the purchase of 100% of the shares and equity interests of certain subsidiaries of WellPoint that provide pharmacy benefit management services the “NextRx PBM Business”) in exchange for total consideration of $4,675.0 million paid in cash. The working capital adjustment was finalized during the second quarter of 2010 and reduced the purchase price by $8.3 million, resulting in a final purchase price of $4,666.7 million. The NextRx PBM Business is a national provider of PBM services, and we believe the acquisition will enhance our ability to achieve cost savings, innovations, and operational efficiencies which will benefit our customers and stockholders. The purchase price was primarily funded through a $2.5 billion underwritten public offering of senior notes completed on June 9, 2009, resulting in net proceeds of $2,478.3 million, and a public offering of 52.9 million shares of common stock completed June 10, 2009, resulting in net proceeds of $1,569.1 million. This acquisition is reported as part of our PBM segment. For the year ended December 31, 2009, we incurred transaction costs of $61.1 million related to the acquisition which are included in selling, general and administrative expense. In accordance with the accounting guidance for business combinations that became effective in 2009, the transaction costs were expensed as incurred. Our PBM operating results include those of the NextRx PBM Business beginning on December 1, 2009, the date of acquisition.

At the closing of the acquisition, we entered into the 10-year PBM agreement under which we provide pharmacy benefits management services to WellPoint and its designated affiliates which were previously provided by NextRx. The services provided under the PBM agreement include retail network pharmacy management, home delivery and specialty pharmacy services, drug formulary management, claims adjudication and other services consistent with those provided to other PBM clients. These services are provided to HMOs, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans and government health programs, which is consistent with our current customer base.

The purchase price has been allocated based upon the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. A portion of the excess of purchase price over tangible net assets acquired has been allocated to intangible assets consisting of customer contracts in the amount of $1,585.0 million. Of this amount, $65.0 million related to external customers is being amortized using the straight-line method over an estimated useful life of 10 years. An additional $1,520.0 million related to the PBM agreement with WellPoint is being amortized using a pattern of benefit method over an estimated useful life of 15 years, with a greater portion of the expense recorded in the first five years. The amortization of the value ascribed to the PBM agreement is reflected as a reduction of revenue. These assets are included in other intangible assets on the consolidated balance sheet. The acquired intangible assets were valued using an income approach.

The excess of purchase price over tangible net assets and identified intangible assets acquired has been allocated to goodwill in the amount of $2,668.9 million. The goodwill is the residual value after identified assets are separately valued and represents the result of expected buyer-specific synergies derived from our ability to drive growth in generic and mail order utilization, supply chain savings from both drug manufacturers and the retail network, and the tax benefits derived from the Section 338(h)(10) election under the Internal Revenue Code. All goodwill recognized as part of the NextRx acquisition is reported under our PBM segment.

During the second quarter of 2010, we recorded a pre-tax benefit of $30.0 million related to the amendment of a client contract which relieved us of certain contractual guarantees. This amount was originally accrued in the NextRx opening balance sheet. In accordance with business combination accounting guidance, the reversal of the accrual was recorded in revenue, since it relates to client guarantees, upon amendment of the contract during the second quarter of 2010.