Express Scripts 2011 Annual Report Download - page 43

Express Scripts 2011 Annual Report 41
EXECUTIVE SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS
Our results in 2011 reflect the successful execution of our business model, which emphasizes the alignment of our
financial interests with those of our clients through greater use of generics and low-cost brands, home delivery and specialty
pharmacy. We saw lower claims volume than initially expected during 2011 due to a stagnant macroeconomic environment
which negatively impacted claims utilization and organic growth. Offsetting these lower claims volumes, we benefited from
better management of ingredient costs through actions such as renegotiation of supplier contracts and increased competition
among generic manufacturers, as well as higher generic fill rate (74.2% in 2011 compared to 71.6% in 2010). In addition,
through the research performed by us and guided by our Consumerology® Advisory Board, we are providing our clients
with additional tools designed to generate higher generic fill rates, further increase the use of our home delivery and
specialty pharmacy services and drive greater adherence.
The positive trends we saw in 2011, including lower drug purchasing costs and increased generic usage, are
expected to continue to offset the negative impact of various marketplace forces affecting pricing and plan structure and the
current adverse economic environment, among other factors, and thus continue to generate improvements in our results of
operations in the future. Additionally, as the regulatory environment evolves, we will continue to make significant
investments designed to keep us ahead of the competition. These projects include preparation for HIPAA changes,
Medicare regulations and the Health Reform Laws. In addition, we accelerated spending on certain projects to complete
them in 2011, in order to create additional capacity to complete integration activities for the proposed merger with Medco
in 2012.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our
estimates and assumptions are based upon a combination of historical information and various other assumptions believed
to be reasonable under the particular circumstances. Actual results may differ from our estimates. The accounting policies
described below represent those policies that management believes most impact our consolidated financial statements, are
important for an understanding of our results of operations, or require our management to make difficult, subjective or
complex judgments. This should be read in conjunction with Note 1 – Summary of significant accounting policies and with
the other notes to the consolidated financial statements.
GOODWILL AND INTANGIBLE ASSETS
ACCOUNTING POLICY
Goodwill and intangible asset balances arise primarily from the allocation of the purchase price of businesses
acquired based on the fair market value of assets acquired and liabilities assumed on the date of the acquisition. Goodwill is
evaluated for impairment annually or when events or circumstances occur indicating that goodwill might be impaired. We
determine reporting units based on component parts of our business one level below the segment level. Our reporting units
represent businesses for which discrete financial information is available and reviewed regularly by segment management.
In the fourth quarter of 2011, we elected to early adopt new guidance related to goodwill impairment testing,
which simplifies how an entity tests goodwill for impairment. The new guidance provides an option to first assess
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. The following events and circumstances are considered when evaluating whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount:
macroeconomic conditions, such as a deterioration in general economic conditions, fluctuations in foreign
exchange rates and/or other developments in equity and credit markets
industry and market considerations, such as a deterioration in the environment in which an entity operates
cost factors, such as an increase in pharmaceuticals, labor or other costs
overall financial performance, such as negative or declining cash flows or a decline in actual or forecasted
revenue
other relevant entity-specific events, such as material changes in management or key personnel
events affecting a reporting unit, such as a change in the composition or carrying amount of its net assets
including acquisitions and dispositions
impacts of a sustained decrease in the share price, considered in both absolute terms and relative to peers