Express Scripts 2011 Annual Report Download - page 70

Express Scripts 2011 Annual Report
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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.
4. Discontinued operations
On September 17, 2010, we completed the sale of our PMG line of business. Upon classification as a
discontinued operation in the second quarter of 2010, an impairment charge of $28.2 million was recorded to reflect
goodwill and intangible asset impairment and the subsequent write-down of PMG assets to fair market value. The
loss on the sale as well as other charges related to discontinued operations during the third quarter of 2010 totaled
$8.3 million. These charges are included in the ―Net (loss) income from discontinued operations, net of tax‖ line
item in the accompanying statement of operations for the year ended December 31, 2010.
Prior to being classified as a discontinued operation, PMG was included in our EM segment. PMG was
headquartered in Lincoln Park, New Jersey and provided outsourced distribution and verification services to
pharmaceutical manufacturers.
The results of operations for PMG are reported as discontinued operations for all periods presented in the
accompanying consolidated statements of operations in accordance with applicable accounting guidance.
Additionally, for all periods presented, cash flows of our discontinued operations are segregated in our
accompanying consolidated statement of cash flows. No assets or liabilities of discontinued operations were held at
December 31, 2011 or 2010.