Catalyst Health Solutions 10Q 2011 Q3 Quarterly report

Catalyst Health Solutions (CHSI) Inactive 10-Q2011 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from to .

Commission File Number: 0-31014

CATALYST HEALTH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware

52-2181356

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

800 King Farm Boulevard, Rockville, Maryland 20850

(Address of principal executive offices) (Zip Code)

(301) 548-2900

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 x No ¨

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 (§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 x No ¨

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.

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

As of October 25, 2011, there were 50,025,659 shares outstanding of the registrant’s common stock, par value $0.01 per share.

CATALYST HEALTH SOLUTIONS, INC.

and Subsidiaries

Third Quarter 2011 Form 10-Q

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		1

	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2011 and 2010		2

	Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2011 and 2010		3

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010		4

	Notes to Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

Item 4.	Controls and Procedures		24

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		25

Item 6.	Exhibits		25

SIGNATURES			26

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CATALYST HEALTH SOLUTIONS, INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	September 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	72,250		$	157,843
Accounts receivable, net of allowances of $4,266 and $2,599 at September 30, 2011 and December 31, 2010, respectively		358,052			205,538
Rebates receivable, net of allowances of $3,313 and $1,377 at September 30, 2011 and December 31, 2010, respectively		253,968			162,395
Inventory, net of allowances of $99 and $46 at September 30, 2011 and December 31, 2010, respectively		2,990			3,405
Income taxes receivable		8,939			3,415
Deferred income taxes		3,022			1,657
Other current assets		68,840			11,682

Total current assets		768,061			545,935
Property and equipment, net of accumulated depreciation of $23,383 and $17,485 at September 30, 2011 and December 31, 2010, respectively		47,454			30,759
Goodwill		763,033			396,995
Intangible assets, net		330,545			158,871
Restricted cash		45,000			—
Investments, net		5,087			889
Other assets		10,934			8,587

Total assets	$	1,970,114		$	1,142,036

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	436,634		$	187,401
Rebates payable		249,365			177,346
Accrued expenses and other current liabilities		103,197			64,942
Current maturities of long-term debt		7,500			7,500

Total current liabilities		796,696			437,189
Long-term debt		290,000			140,625
Deferred rent expense		2,996			2,440
Deferred income taxes		24,780			18,694
Other liabilities		31,262			4,965

Total liabilities		1,145,734			603,913


Commitments and contingencies (Note 10)

Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000 shares authorized, none issued		—			—
Common stock, $0.01 par value, 100,000 shares authorized, 49,990 and 44,980 shares issued at September 30, 2011 and December 31, 2010, respectively		500			450
Additional paid-in capital		481,572			239,699
Treasury stock, at cost, 344 shares and 271 shares at September 30, 2011 and December 31, 2010, respectively		(11,306	)		(7,791	)
Accumulated other comprehensive loss		(30	)		(30	)
Retained earnings		353,644			305,795

Total stockholders’ equity		824,380			538,123

Total liabilities and stockholders’ equity	$	1,970,114		$	1,142,036

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

CATALYST HEALTH SOLUTIONS, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	For the three months ended September 30,						For the nine months ended September 30,
	2011			2010			2011			2010
Revenue (excludes member co-payments of $598,035, $251,412, $1,269,549 and $736,789 for the three and nine months ended September 30, 2011 and 2010, respectively)	$	1,429,377		$	925,056		$	3,784,938		$	2,647,475

Direct expenses		1,345,294			863,313			3,569,678			2,479,361
Selling, general and administrative expenses		57,784			26,739			133,328			73,031

Total operating expenses		1,403,078			890,052			3,703,006			2,552,392

Operating income		26,299			35,004			81,932			95,083
Interest and other income		7			695			226			874
Interest expense		(2,431	)		(1,286	)		(5,553	)		(1,739	)

Income before income taxes		23,875			34,413			76,605			94,218
Income tax expense		8,633			12,908			28,756			35,813

Net income	$	15,242		$	21,505		$	47,849		$	58,405


Net income per share, basic	$	0.31		$	0.49		$	1.02		$	1.33
Net income per share, diluted	$	0.31		$	0.48		$	1.00		$	1.31
Weighted average shares of common stock outstanding, basic		48,883			43,928			47,092			43,800
Weighted average shares of common stock outstanding, diluted		49,424			44,586			47,642			44,522

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

CATALYST HEALTH SOLUTIONS, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	For the three months ended September 30,				For the nine months ended September 30,
	2011		2010		2011		2010
Comprehensive income:
Net income	$	15,242	$	21,505	$	47,849	$	58,405
Other comprehensive income, net of tax:
Unrealized gain on investments		—		—		—		690

Total comprehensive income	$	15,242	$	21,505	$	47,849	$	59,095

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

CATALYST HEALTH SOLUTIONS, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	47,849		$	58,405
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		6,113			4,516
Amortization of intangible and other assets		19,895			5,735
(Gain) loss on disposal of property and equipment		(23	)		14
Allowances on receivables		(1,166	)		(5	)
Deferred income taxes		4,721			2,680
Equity based compensation charges		7,489			5,252
Other non-cash income, net		(2,694	)		(534	)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable		3,043			(10,522	)
Rebates receivable		(44,767	)		(33,523	)
Income taxes payable		(5,494	)		(5,230	)
Inventory, net		415			653
Other assets		(3,457	)		(4,155	)
Accounts payable		26,323			(18,086	)
Rebates payable		21,302			40,570
Accrued expenses and other liabilities		2,266			24,248

Net cash provided by operating activities		81,815			70,018

Cash flows from investing activities:
Purchases of property and equipment		(22,657	)		(10,475	)
Business acquisitions and related payments, net of cash acquired		(490,974	)		(239,882	)
Business acquisition related restricted cash		(40,000	)		—
Restricted cash		(5,000	)		—
Sales of investments		—			11,875
Other investing activities		(3,197	)		—

Net cash used in investing activities		(561,828	)		(238,482	)


Cash flows from financing activities:
Proceeds from term loan		—			150,000
Repayments of term loan		(5,625	)		—
Borrowings under revolving credit facility		367,000			—
Repayments of revolving credit facility		(212,000	)		—
Deferred financing costs		(5,422	)		(3,633	)
Contingent consideration payments		—			(3,000	)
Proceeds from equity offering		227,093			—
Repayment of First Rx Specialty and Mail Services LLC arrangement		(8,000	)		—
Proceeds from exercise of stock options		1,388			3,080
Excess tax benefits due to option exercises and restricted stock vesting		5,465			4,929
Proceeds from shares issued under employee stock purchase plan		436			262
Purchases of treasury stock		(3,515	)		(2,573	)
Other financing activities		27,600			—

Net cash provided by financing activities		394,420			149,065

Net decrease in cash and cash equivalents		(85,593	)		(19,399	)
Cash and cash equivalents at the beginning of period		157,843			152,055

Cash and cash equivalents at the end of period	$	72,250		$	132,656


Supplemental disclosure:
Cash paid for interest	$	3,945		$	999
Cash paid for taxes	$	24,065		$	33,433

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

CATALYST HEALTH SOLUTIONS, INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by Catalyst Health Solutions, Inc., a Delaware corporation (the “Company,” “our,” “we” or “us”), in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair statement of the consolidated balance sheets, statements of operations, statements of comprehensive income and statements of cash flows for the periods presented. Operating results for the three months and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the disclosures required by accounting principles generally accepted in the United States. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on February 25, 2011.

Rebates payable and receivable

Rebates earned under arrangements with manufacturers or third party intermediaries are predominately recorded as a reduction of direct expenses. The Company refines its estimates each period based on actual collection and payment experience. Adjustments made to the rebate receivable estimates from prior periods increased direct expenses by $0.8 million for the three months ended September 30, 2011 and reduced direct expenses by $0.1 million for the nine months ended September 30, 2011. For the three months and nine months ended September 30, 2010, adjustments made to the rebate receivable estimates from prior periods reduced direct expenses by $6.1 million and $10.8 million, respectively, or approximately 0.7% and 0.4% of direct expenses. Additionally, the portion of manufacturer or third party intermediary rebates due to clients is recorded as a reduction of revenue. There were no adjustments made to the rebate payable estimates from prior periods for the three months ended September 30, 2011 and 2010. For the nine months ended September 30, 2011 and 2010, adjustments made to rebate payable estimates from prior periods increased revenue by $1.6 million and $3.0 million, respectively, or approximately 0.1% of revenue.

Restricted cash and contingent consideration

In connection with our acquisition of Walgreens Health Initiatives, Inc. (“WHI”) (see Note 4), we may be required to pay up to an additional $40.0 million of cash consideration. This amount was deposited into an escrow account. As this deposit is restricted in nature, it is excluded from our cash and cash equivalents. Payment of this cash consideration is based upon the achievement of client retention milestones through March 31, 2014. For the nine months ended September 30, 2011, no distributions were made from the restricted cash amount. As of September 30, 2011, we have accrued a preliminary estimate of $26.0 million for contingent consideration in other liabilities on our consolidated balance sheet. As discussed in Note 4, our valuation of all assets and liabilities related to the WHI acquisition, including contingent consideration, is preliminary and subject to change.

2.	NEW ACCOUNTING STANDARDS

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) on testing goodwill for impairment. The amendments in the ASU will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We are currently evaluating the impact of this ASU on our goodwill impairment testing process.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income.This guidance is intended to increase the prominence of other comprehensive income in financial statements by presenting it in either a single statement or two-statement approach. This new accounting pronouncement is effective for our first quarter of 2012 and we do not expect any material impact on our financial statements from its adoption.

In January 2010, the FASB issued a final ASU that sets forth additional requirements regarding disclosures of fair value measurements. The ASU requires, among other things, the gross presentation of activity within the Level 3 fair value measurement roll forward. The requirement for these new disclosures is effective for interim and annual periods beginning after December 15, 2010, which for us meant the beginning of our 2011 fiscal year. The adoption of the new disclosure guidance did not have an impact on our financial position, results of operations or cash flows.

3.	FAIR VALUE MEASUREMENTS

Summary of Financial Assets Measured on a Recurring Basis

The following tables detail the fair value measurements of our financial assets measured on a recurring basis as of September 30, 2011 and December 31, 2010 and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):


			Fair Value Measurements at Reporting Date Using
	September 30, 2011		Quoted Prices in Active Markets Using Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	139,741	$	139,741	$	—	$	—
Available for sale investments:
Auction rate securities		577		—		—		577

Total assets measured at fair value	$	140,318	$	139,741	$	—	$	577


			Fair Value Measurements at Reporting Date Using
	December 31, 2010		Quoted Prices in Active Markets Using Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	144,587	$	144,587	$	—	$	—
Available for sale investments:
Auction rate securities		577		—		—		577

Total assets measured at fair value	$	145,164	$	144,587	$	—	$	577

The valuation technique used to measure fair value for our Level 1 assets is a market approach, using market prices. The valuation technique used to measure fair value for our Level 3 assets is an income approach, using a discounted cash flow model which incorporates a number of variables that reflect current market conditions.

The following table reflects the roll forward of activity for our major classes of assets measured at fair value using Level 3 inputs (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2011		2010		2011		2010
Beginning Balance	$	577	$	577	$	577	$	11,343
Redemptions and sales during the period		—		—		—		(11,875	)
Changes in unrealized gain included in accumulated other comprehensive income		—		—		—		1,109

Ending Balance	$	577	$	577	$	577	$	577

Investments

The following is a summary of our investments (in thousands):


	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
As of September 30, 2011:
Auction rate securities	$	577	$	—	$	48	$	625
Other long-term investments		4,510		—		—		4,510

Total investments	$	5,087	$	—	$	48	$	5,135


	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
As of December 31, 2010:
Auction rate securities	$	577	$	—	$	48	$	625
Other long-term investments		312		—		—		312

Total investments	$	889	$	—	$	48	$	937

Auction rate securities

We currently have remaining $0.6 million at par value in investments related to our auction rate securities (“ARS”). Although we continue to receive timely interest payments, our ARS investments currently lack short-term liquidity and are therefore classified as non-current on our balance sheet. For each of our ARS, we evaluate the risks related to the structure, collateral and liquidity and estimate the fair value of the securities using a discounted cash flow model based on (a) the underlying structure of each security; (b) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (c) considerations of the probabilities of redemption or auction success for each period.

Other long-term investments

Other long-term investments represent our investments in non-controlled companies and are recorded at cost. There were no identified events or changes in circumstances that had a significant adverse effect on the values of these investments. If there were evidence of a decline in value, which is other than temporary, the amounts would be written down to their estimated recoverable value.

Summary of Contractual Maturities

The contractual maturities of our available-for-sale ARS at September 30, 2011 are as follows (in thousands):


	Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—
Due after one year		625		577

Total	$	625	$	577

Fair Value of Financial Liabilities

The carrying amounts of our revolving credit facility and term loan approximate fair value as of September 30, 2011. We estimate fair market value for these liabilities based on the market value.

4.	BUSINESS COMBINATIONS

Walgreens Health Initiative, Inc.

expected to be settled, and applied a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. Subsequent to our finalization of the valuation at the acquisition date, any changes to the valuation will be recorded through earnings. The cash payment for this acquisition was funded from a combination of cash on hand and amounts drawn under our revolving credit facility. The purchase price may be increased or decreased based on the net working capital of WHI. For the nine months ended September 30, 2011, we incurred approximately $12.2 million of transaction related costs, which were included in selling, general and administrative expenses in our consolidated statements of operations.

We entered into a 10-year contract with Walgreens to provide PBM services for Walgreens’ 244,000 employees and retirees, as well as 10-year agreements to administer the Walgreens Prescription Savings Club, which has approximately 2.4 million members, and to provide certain administrative support services to on-going Walgreens businesses.

The purchase price of WHI was largely determined on the basis of management’s expectations of future earnings and cash flows, resulting in the recognition of goodwill. Management’s preliminary allocation of the purchase price to the net assets acquired resulted in goodwill of $345.5 million, acquired technology of $11.0 million with an estimated useful life of 6 years, customer contract intangibles of $117.8 million with an estimated useful life of 13 years and other contract intangibles of $71.3 million with an estimated useful life of 9 years. Because valuations of acquired assets and liabilities are in process, and information may become available within the measurement period which indicates a potential change to these valuations, the purchase price allocation is subject to adjustment.

The following table summarizes the consideration transferred to acquire WHI and the preliminary amounts of identified assets acquired and liabilities assumed at the date of acquisition. The acquisition was accounted for as a purchase, and accordingly, the results of WHI operations are included in our consolidated financial statements since the date of acquisition. Amounts are in thousands.


	At June. 13, 2011
Fair value of consideration:
Cash	$	485,000
Contingent consideration		25,950

Total consideration		510,950


Preliminary valuation of identifiable assets acquired and liabilities assumed:
Current assets (primarily accounts receivable and rebates receivable)		258,851
Intangible assets		200,100
Property, plant and equipment Other long-term assets		127 261
Liabilities assumed (primarily trade payable and rebates payable)		(293,852	)

Total identified net assets		165,487

Goodwill	$	345,463

Goodwill related to this acquisition is deductible for tax purposes. The goodwill recognized is primarily attributable to the workforce of the acquired business and the operating synergies expected to be realized after our acquisition of WHI.

The acquired business contributed revenue of $323.6 million and net income of $1.5 million to us for the period from June 14, 2011 to September 30, 2011. The following table sets forth certain unaudited pro forma financial data assuming the acquisition of WHI had been completed as of the beginning of the earliest period presented, after giving effect to purchase accounting adjustments. The pro forma financial information is not necessarily indicative of the results of operations if the transaction had been in effect as of the beginning of the periods presented, nor is it necessarily an indication of trends in future results. Amounts are in thousands, except for per share data.


	For the three months ended September 30,		For the nine months ended September 30,
(Unaudited)	2010		2011		2010
Revenue	$	1,222,615	$	4,443,160	$	3,565,818
Net income	$	13,114	$	46,401	$	31,131
Net income per share, basic	$	0.27	$	0.95	$	0.64
Net income per share, diluted	$	0.27	$	0.94	$	0.64
Weighted average shares, basic		48,428		48,773		48,300
Weighted average shares, diluted		49,086		49,323		49,022

Acquisition of NLBP, LLC

On January 25, 2011, we acquired NLBP, LLC (“NLBP”), an Arizona limited liability company which has developed an electronic clinical messaging platform, for $6.2 million in cash.

The purchase price of NLBP was largely determined on the basis of management’s expectations of future earnings and cash flows, resulting in the recognition of goodwill. Management’s final allocation of the purchase price to the net assets acquired resulted in goodwill of $4.5 million, trade name intangibles of $0.2 million with an estimated useful life of 20 years, non-compete agreements of $0.6 million with an estimated life of 3 years, and acquired technology of $0.9 million with an estimated useful life of 5 years.

The acquisition was accounted for as a purchase, and accordingly, the results of NLBP operations are included in our consolidated financial statements since the date of acquisition. Goodwill related to this acquisition is deductible for tax purposes. Revenue and expenses since acquisition and unaudited pro forma financial information have not been included herein because of the immateriality of the NLBP business combination.

Acquisition of FutureScripts, LLC

On September 13, 2010, we completed the acquisition of FutureScripts, LLC and FutureScripts Secure LLC (collectively, “FutureScripts”). FutureScripts, formed in 2006, was the PBM subsidiary of Independence Blue Cross (“IBC”). FutureScripts provides pharmacy benefit management services to approximately 1 million lives and manages over 14 million prescriptions annually. We manage these pharmacy benefits under the terms of a 10-year contract. Under the terms of the acquisition agreement, we maintain the FutureScripts brand and provide IBC a full complement of services, including: claims adjudication, member services, network administration, formulary management and rebate contracting, mail and specialty drug management, clinical services, data reporting and analytics, as well as client service and sales support.

Total consideration for the acquisition of FutureScripts consisted of cash payments on September 13, 2010 of $225.5 million. The purchase price of FutureScripts was largely determined on the basis of management’s expectations of future earnings and cash flows, resulting in the recognition of goodwill. The purchase price was funded from our cash on hand. In June 2011, we received approximately $1.0 million in cash as required for certain closing date net working capital adjustments. We incurred $1.5 million of acquisition related costs, which were included in selling, general and administrative expenses in our consolidated statement of operations for the year ended December 31, 2010.

At December 31, 2010, we had provisionally estimated fair values for the assets acquired and liabilities assumed at the date of acquisition. The amounts reported were considered provisional as we were completing the valuation work required to allocate the purchase price and finalize the working capital adjustments. During the second quarter of 2011, we completed the analysis and consider purchase accounting to be final. We have recast previously presented information below as if all adjustments to purchase price allocation had occurred at September 13, 2010, the date of acquisition. (Amounts are in thousands).


	At Sept. 13, 2010
Fair value of consideration:
Cash paid at acquisition date	$	225,488
Cash received for net working capital adjustments		(966	)

Total cash consideration	$	224,522


	Provisional Amounts Recognized at Acquisition Date (a)			Measurement Period Adjustments			Amounts Recognized at Acquisition Date
Recognized amounts of assets acquired and liabilities assumed:
Cash and cash equivalents	$	1,986		$	—		$	1,986
Current assets (primarily accounts receivable and rebates receivable) (b)		66,751			(4,743	)		62,008
Property, plant and equipment		160			—			160
Intangible assets (b)		110,000			(12,448	)		97,552
Goodwill		111,228			16,045			127,273
Liabilities assumed (primarily trade payable and rebates payable) (b)		(64,637	)		180			(64,457	)

Total net assets acquired	$	225,488		$	(966	)	$	224,522

(a)	As previously reported in our 2010 Annual Report on Form 10-K.

(b)

These measurement period adjustments were recorded to reflect changes in the estimated fair value of the associated assets and liabilities and better reflect market participant assumptions about the facts and circumstances existing as of the acquisition date. The measurement period adjustments did not result from events after the acquisition date. We have not recast the acquisition adjustments to the 2010 consolidated financial statements as we do not consider them to be material.

Management’s allocation of the purchase price to the net assets acquired resulted in goodwill of $127.3 million, trade name intangibles of $16.2 million with an estimated useful life of 20 years, and customer contract intangibles of $81.4 million with an estimated useful life of 10 years. Goodwill related to this acquisition is deductible for tax purposes. The goodwill recognized is primarily attributable to the workforce of the acquired business and the operating synergies expected to be realized after our acquisition of FutureScripts.

The acquisition was accounted for as a purchase, and accordingly, the results of FutureScripts operations are included in our consolidated financial statements since the date of acquisition. The acquired business contributed revenue of $247.2 million and net income of $0.9 million to us for the period from September 13, 2010 to December 31, 2010.

The following table sets forth certain unaudited pro forma financial data assuming the acquisition of FutureScripts had been completed as of the beginning of the period presented, after giving effect to purchase accounting adjustments. The pro forma financial information is not necessarily indicative of the results of operations if the transaction had been in effect as of the beginning of the period presented, nor is it necessarily an indication of trends in future results. Amounts are in thousands, except for per share data.


(Unaudited)	For the three months ended September 30, 2010		For the nine months ended September 30, 2010
Revenue	$	1,107,101	$	3,273,450
Net income	$	21,541	$	57,613
Net income per share, basic	$	0.49	$	1.32
Net income per share, diluted	$	0.48	$	1.29
Weighted average shares, basic		43,928		43,800
Weighted average shares, diluted		44,586		44,522

Acquisition of inPharmative, Inc.

On August 25, 2010, we acquired inPharmative, Inc. for a cash payment of $16.5 million and 100,000 common stock warrants valued at approximately $1.0 million using the Black-Scholes option pricing model. In March 2011, we paid an additional $0.7 million as required for certain closing date net working capital adjustments. inPharmative, which is based in Kansas City, MO, is a provider of rebate administration technology tools to PBMs, health plans, state Medicaid programs and group purchasing organizations.

We incurred approximately $0.4 million of acquisition-related costs, which were included in selling, general and administrative expenses in our consolidated statements of operations for the year ended December 31, 2010.

The purchase price of inPharmative was largely determined on the basis of management’s expectations of future earnings and cash flows, resulting in the recognition of goodwill. Management’s final allocation of the purchase price to the net assets acquired resulted in goodwill of $12.6 million, customer relationships of $3.2 million with an estimated useful life of 12 years, technology software of $0.7 million with an estimated useful life of 3 years, and trade name intangibles of $0.5 million with an estimated useful life of 20 years. Goodwill related to this acquisition is deductible for tax purposes.

The acquisition was accounted for as a purchase, and accordingly, the results of inPharmative operations are included in our consolidated financial statements since the date of acquisition. Revenue and expenses since acquisition and unaudited pro forma financial information have not been disclosed herein because of the immateriality of the inPharmative business combination.

The following table summarizes the final consideration transferred to acquire inPharmative and the amounts of identified assets acquired and liabilities assumed at the date of acquisition. Amounts are in thousands.


	At August 25, 2010
Fair value of consideration transferred:
Cash	$	17,240
Warrants		988

Total consideration		18,228


Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash		120
Current assets (primarily accounts receivable)		966
Intangible assets		4,342
Property, plant and equipment		217
Liabilities assumed (primarily accrued expenses)		(26	)

Total identified net assets		5,619

Goodwill	$	12,609

Acquisition of Total Script, LLC

In July 2009, we purchased Total Script, LLC, a pharmacy benefit management company with a strategic focus on the small- to mid-sized employer group markets. Total consideration for the acquisition of Total Script consisted of cash payments of $13.5 million. Additionally, the purchase agreement included contingent consideration payable over a three-year period based on the achievement of certain milestones and net new business contracted. The fair value of the net contingent consideration recognized on the acquisition date, which was determined using expected present value techniques, was approximately $13.4 million. During 2010, we made contingent consideration payments of $3.2 million, based on the achievement of certain milestones and net new business acquired. Also during 2010, there were decreases of $1.1 million in the fair value of recognized amounts for the contingent consideration. There were no changes to the fair value of recognized amounts during the three months ended September 30, 2011. During the nine months ended September 30, 2011, there were decreases of $3.0 million in the fair value of recognized amounts for the remaining contingent consideration primarily due to revised assumptions regarding net new business contracted. The adjustments to the fair value of recognized amounts for contingent consideration were included in selling, general and administrative expenses in the consolidated statements of operation for the respective periods.

5.	GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the nine months ended September 30, 2011 are as follows (in thousands):


	2011
Balance as of January 1, 2011	$	396,995
Net adjustments to goodwill related to FutureScripts acquisitions		16,045
Goodwill acquired in current acquisitions		349,993

Balance as of September 30, 2011	$	763,033

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets of acquired businesses. We performed our annual goodwill impairment testing at December 31, 2010 and concluded that no impairment of goodwill existed.

The following table sets forth the components of our intangible assets (in thousands):


	September 30, 2011							December 31, 2010
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Customer relationships	$	339,263	$	(37,910	)	$	301,353	$	158,754	$	(22,071	)	$	136,683
Non-compete agreements		570		(127	)		443		155		(155	)		—
Trade names		18,199		(2,229	)		15,970		21,856		(1,358	)		20,498
Developed technology		13,248		(1,356	)		11,892		1,348		(411	)		937
Other PBM contracts		2,124		(1,237	)		887		7,036		(6,283	)		753

Total intangible assets	$	373,404	$	(42,859	)	$	330,545	$	189,149	$	(30,278	)	$	158,871

The weighted average amortization period of our intangible assets subject to amortization is 10.9 years. Customer relationships intangibles represent the estimated fair value of customer relationships at the dates of acquisition and are amortized from 5 years to 20 years. The estimated fair values are based on income-method valuation calculations. Non-compete agreements, trade names and developed technology intangibles are subject to amortization from 2 years to 20 years. The other PBM contracts class of intangibles allows us to provide PBM services, and is amortized over the expected period of future cash flow, based on management’s best estimate, which range from 5 months to 20 years.

In determining the useful life of the intangible assets for amortization purposes, we consider the period of expected cash flows used to measure the fair value of the intangible asset, adjusted as appropriate for entity-specific factors. The costs incurred to renew or extend the term of a recognized intangible asset are generally deferred, where practicable, to the extent recoverable from future cash flows. We did not incur costs to renew or extend the term of acquired intangible assets during the three or nine months ended September 30, 2011 or 2010.

In accordance with applicable accounting guidance, acquisition-related intangible amortization expense for a customer contract related to a PBM agreement has been included as an offset to revenue in the amounts of $2.4 million and $7.3 million for the three and nine months ended September 30, 2011, respectively. For both the three and nine months ended September 30, 2010, acquisition-related intangible amortization included as an offset to revenue was $0.5 million.

The following table sets forth the estimated aggregate amortization expense of our existing intangible assets for each of the five succeeding years (in thousands):


Year ended December 31,
2011 (remaining)	$	9,014
2012	$	37,065
2013	$	37,108
2014	$	36,541
2015	$	36,044

6.	FINANCING

The following table sets forth the components of our long-term debt (in thousands):


	September 30, 2011
Senior secured term loan facility due August 4, 2015 with an average interest rate of 2.24% at September 30, 2011	$	142,500
Revolving credit facility due August 4, 2015 with an average interest rate of 2.82% at September 30, 2011		155,000

Total debt		297,500
Less current maturities		(7,500	)

Long-term debt	$	290,000

the revolving credit facility and term loan facility, our senior credit facilities permit us to incur up to $100.0 million in total principal amount of additional term loan or revolving loan indebtedness under the senior credit facilities. Our obligations under our senior credit facilities are fully and unconditionally guaranteed jointly and severally by us and certain of our U.S. subsidiaries currently existing or that we may create or acquire, with certain exceptions as set forth in our amended credit agreement, pursuant to the terms of a separate guarantee and collateral agreement.

There were draw-downs of $167.0 million and repayments of $192.0 million under the revolving credit facility during the three months ended September 30, 2011. At September 30, 2011, there was $155.0 million outstanding under our revolving credit facility.

The term loan facility amortizes in nominal quarterly installments of $1.875 million on the last day of each calendar quarter, with such payments having commenced on December 31, 2010 until maturity, whereby the final installment of the term loan facility will be paid on the maturity date in an amount equal to the aggregate unpaid principal amount.

Our borrowings under our amended senior credit facilities bear interest at a rate equal to the applicable margin plus, at our option, either: (i) a base rate determined by reference to the higher of (a) the rate announced by the Administrative Agent as its prime rate, (b) the federal funds rate plus 0.5%, and (c) the Adjusted LIBO Rate determined on a daily basis for an interest period of one month, plus 1.0% per annum; or (ii) a LIBO Rate on deposits in U.S. dollars for one-, two-, three- or six-month periods. The applicable margin on loans under our new senior credit facilities is 2.0% for LIBO Rates loans and 1.0% for base rate loans. The applicable margin is subject to change depending on our total senior secured leverage ratio. We also pay the lenders a commitment fee on the unused commitments under our revolving credit facility, which is payable quarterly in arrears. The commitment fee is subject to change depending on our leverage ratio.

Our amended senior credit facilities contain negative and affirmative covenants affecting us and our existing and future subsidiaries, with certain exceptions set forth in our amended credit agreement. Negative covenants and restrictions include: restrictions on liens, debt, dividends and other restricted payments, redemptions and stock repurchases, consolidations and mergers, acquisitions, investments, loans, advances, restrictive agreements with subsidiaries, speculative hedging agreements and a leverage ratio of consolidated total debt to consolidated EBITDA. At September 30, 2011, we were in compliance with all covenants associated with our credit facilities.

At September 30, 2011, net deferred financing costs of $8.0 million related to the issuance of the credit facilities are being amortized over an average weighted period of 3.8 years and are reflected in other assets in the accompanying consolidated balance sheet.

7.	STOCKHOLDERS’ EQUITY

On April 13, 2011, we consummated a public offering of 6,325,000 shares of our common stock, par value $0.01 per share, of which 4,500,000 shares were sold by the Company and 1,825,000 shares were sold by one of our stockholders, Principal Holding Company, LLC (“Principal”), at a public offering price of $53.00 per share. Total proceeds to the Company, net of underwriting fees and direct offering costs of $11.4 million, were $227.1 million.

Stock Options

A summary of our stock option activity for the nine months ended September 30, 2011 is as follows (in thousands, except for weighted-average exercise price):


	Options			Weighted-Average Exercise Price
Outstanding at December 31, 2010		466		$	6.51
Granted		—			—
Exercised		(213	)		6.61
Forfeited or expired		—			—

Outstanding at September 30, 2011		253		$	6.43


Exercisable at September 30, 2011		253		$	6.43

The aggregate intrinsic value of exercisable stock options at September 30, 2011 was approximately $13.0 million with a weighted average remaining life of 0.8 years. The total intrinsic value of stock options exercised during the nine months ended September 30, 2011 and 2010 was approximately $10.1 million and $10.2 million, respectively.

Restricted Stock Awards

A summary of our restricted share activity for the nine months ended September 30, 2011 is as follows (in thousands, except for weighted-average fair value per share):


	Shares			Weighted- Average Fair Value Per Share
Non-vested shares outstanding at December 31, 2010		650		$	31.52
Granted		326			49.80
Vested		(232	)		31.05
Forfeited		(39	)		39.07

Non-vested shares outstanding at September 30, 2011		705		$	39.71

The fair value of restricted shares, based on our stock price at the date of grant, is expensed over the vesting period. As of September 30, 2011, the total remaining unrecognized compensation cost related to non-vested restricted shares was approximately $23.8 million with a weighted average period over which it is expected to be recognized of 2.9 years.

Common Stock Warrants

Pursuant to an acquisition in 2010, we issued 100,000 common stock warrants. These warrants, which expire on August 25, 2013, had an exercise price of $44.73 per share and were valued at approximately $1.0 million using the Black-Scholes equity-pricing model. The warrants remained issued and outstanding at September 30, 2011.

Pursuant to an acquisition in 2004, we issued common stock warrants of 55,000, 100,000 and 100,000, effective in 2007, 2006 and 2005, respectively, at an exercise price of $15.45 per share and were valued in total at approximately $2.5 million using the Black-Scholes equity-pricing model. These 255,000 common stock warrants remain issued and outstanding at September 30, 2011.

Treasury Stock

Recipients of restricted stock grants are provided the opportunity to sell a portion of those shares to the Company at the time the shares vest, in order to pay their withholding tax obligations. We account for these share purchases as treasury stock transactions using the cost method. Approximately 17,470 and 73,470 shares were purchased at a cost of approximately $0.9 million and $3.5 million for the three months and nine months ended September 30, 2011, respectively.

Employee Stock Purchase Plan

The employee stock purchase plan (“ESPP”) allows eligible employees to purchase shares of the Company’s common stock each quarter at 95% of the market value on the last day of the quarter. The ESPP is not considered compensatory and therefore no portion of the costs related to ESPP purchases is included in our stock-based compensation expense for any periods presented.

8.	INCOME TAXES

The income tax rates were 36.2% and 37.5% during the three months ended September 30, 2011 and 2010, respectively, and 37.5% and 38.0% during the nine months ended September 30, 2011 and 2010, respectively. These rates represent the percentage relationship of the provision for income taxes to the income before provision for income taxes. Our tax rates in 2011 were favorably impacted by the recognition of certain discrete tax items which must be recognized in the period in which they are identified. The discrete items amounted to $0.2 million and $0.3 million for the three months and nine months ended September 30, 2011, and were related to recognized tax credits and to 2010 provision-to-tax return adjustments.

9.	NET INCOME PER SHARE

Basic net income per common share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur (using the treasury stock method) if stock options, restricted stock awards and warrants to issue common stock were exercised.

The following represents a reconciliation of the number of shares used in the basic and diluted net income per share computations (amounts in thousands, except per share data):


	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Net income available to common stockholders	$	15,242	$	21,505	$	47,849	$	58,405

Calculation of shares:
Weighted average common shares outstanding, basic		48,883		43,928		47,092		43,800
Dilutive effect of stock options, restricted stock awards and warrants		541		658		550		722

Weighted average common shares outstanding, diluted		49,424		44,586		47,642		44,522


Net income per common share, basic	$	0.31	$	0.49	$	1.02	$	1.33

Net income per common share, diluted	$	0.31	$	0.48	$	1.00	$	1.31

During all periods presented, all options and warrants were included in the computation of diluted net income per share because the exercise prices were less than the average market price of our common shares.

10.

COMMITMENTS AND CONTINGENCIES

In the ordinary course of our business, we are sometimes required to provide financial guarantees related to certain customer contracts. These financial guarantees may include performance bonds, standby letters of credit or other performance guarantees. These financial guarantees represent obligations to make payments to customers if we fail to fulfill an obligation under a contractual arrangement with that customer. We have had no history of significant claims, nor are we aware of circumstances that would require us to perform under these arrangements. We believe that the resolution of any claim that might arise in the future, either individually or in the aggregate, would not have a material adverse effect on our financial condition, results of operations or cash flows.

In connection with First Rx Specialty and Mail Services, LLC, an entity that we formed in December 2008, we received $7.0 million in cash in December 2008 and $1.0 million in cash in the first quarter of 2009. We had considered the accounting for the arrangement and had recorded a liability in our consolidated balance sheet. Also, as a part of this arrangement, we recognized expense, of which approximately $0.3 million was recognized in 2011, associated with the accretion of the liability to its ultimate redemption value of $9.0 million. In accordance with the terms of the arrangement, we have paid this total liability during the second quarter of 2011.

11.

SEGMENT REPORTING

We have determined that we operate in only one segment – the PBM segment. Accordingly, no segment disclosures have been included in these Notes to Consolidated Financial Statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q (“Report”) may contain certain forward-looking statements, including without limitation, statements concerning Catalyst Health Solutions, Inc.’s (the “Company,” “our,” “we” or “us”) operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “expect,” “anticipate,” “will,” “could,” “would,” “should,” “may,” “plan,” “estimate,” “intend,” “predict,” “potential,” “continue,” and the negatives of these words and other similar expressions generally identify forward-looking statements. These forward-looking statements may include statements addressing our operations and our financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which, among other things, speak only as of their dates. These forward-looking statements are based largely on Catalyst Health Solutions, Inc.’s current expectations and are subject to a number of risks and uncertainties. Factors we have identified that may materially affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 (“Annual Report on Form 10-K”), particularly under Item 1A, “Risk Factors,” and in our other filings with the Securities and Exchange Commission (the “SEC”). In addition, other important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in our business or growth strategy or an inability to execute our strategy, including due to changes in our industry or the economy generally. In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements will, in fact, occur. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Report. Readers are urged to carefully review and consider the various disclosures made in this Report, in our Annual Report on Form 10-K and in our other filings with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

OVERVIEW

Catalyst Health Solutions, Inc. is a full-service pharmacy benefit management, or PBM, company. We operate primarily under the brand name Catalyst Rx. We are built on strong, innovative principles in the management of prescription drug benefits and our client-centered philosophy contributes to our client retention rates. Our clients include self-insured employers; state and local governments; managed care organizations, or MCOs; unions; third-party administrators, or TPAs; hospices; and individuals who contract with us to administer the prescription drug component of their overall health benefit programs.

We provide our clients access to a contracted, non-exclusive national network of approximately 65,000 pharmacies. Our primary business is to provide our clients and their members with timely and accurate benefit adjudication, while controlling pharmacy spending trends through customized plan designs, clinical programs, physician orientation programs, and member education. We use an electronic point-of-sale system of eligibility verification and plan design information and offer access to rebate arrangements for certain branded pharmaceuticals. When a member of one of our clients presents a prescription or health plan identification card to a retail pharmacist in our network, the system provides the pharmacist with access to online information regarding eligibility, patient history, health plan formulary listings, and contractual reimbursement rates. The member generally pays a co-payment to the retail pharmacy and the pharmacist fills the prescription. We electronically aggregate pharmacy benefit claims, which include prescription costs plus our claims processing fees for consolidated billing and payment. We receive payments from clients, including applicable claims processing fees, and make payments of amounts owed to the retail pharmacies pursuant to our negotiated rates.

Pharmacy benefit claims payments from our clients are recorded as revenue, and prescription costs to be paid to pharmacies are recorded as direct expenses. Under our network contracts, we generally have an independent obligation to pay pharmacies for the drugs dispensed. When we administer pharmacy reimbursement contracts and do not substantively assume a credit risk, we record only our administrative or processing fees as revenue. Rebates earned under arrangements with manufacturers or third party intermediaries are predominately recorded as a reduction of direct expenses. The portion of manufacturer or third party intermediary rebates due to clients is recorded as a reduction of revenue.

For the three months ended September 30, 2011, our revenue increased by 55% to approximately $1.4 billion from $0.9 billion for the same period in 2010. For the nine months ended September 30, 2011, our revenues increased by 43% to approximately $3.8 billion from $2.6 billion for the same period in 2010. Our increase in revenue in 2011 is primarily due to our acquisitions of WHI, FutureScripts and inPharmative, which contributed revenue of $0.5 billion and $0.9 billion for

the three months and nine months ended September 30, 2011, respectively, as well as to our initiation of services with several new PBM clients. Also, for the three and nine months ended September 30, 2011, acquisition-related intangible amortization expense of $2.4 million and $7.3 million, respectively, for a customer contract related to a PBM agreement has been included as an offset to revenue. For both the three and nine months ended September 30, 2010, acquisition-related intangible amortization included as an offset to revenue was $0.5 million. Total claims processed, excluding administrative service only (ASO) claims, increased to 24.4 million for the three months ended September 30, 2011, from 17.0 million during the same period in 2010. ASO claims were 19.9 million and 0.1 million for the three months ended September 30, 2011 and 2010, respectively. Total claims processed, excluding ASO claims, increased to 66.4 million for the nine months ended September 30, 2011, from 49.3 million during the same period in 2010. ASO claims were 24.1 million and 0.4 million for the nine months ended September 30, 2011 and 2010, respectively. For the three and nine months ended September 30, 2011, our revenue per claim processed, excluding ASO claims, increased by approximately 6.9% and 5.7% respectively, when compared to the same period in 2010. The increase in revenue per claim processed in 2011 was primarily caused by manufacturer-driven price inflation and increased use of specialty medications offset by an increase in generic utilization.

The portion of manufacturer or third party intermediary rebates due to clients is recorded as a reduction of revenue. There were no adjustments made to the rebate payable estimates from prior periods for the three months ended September 30, 2011. For the nine months ended September 30, 2011, adjustments made to rebate payable estimates from prior periods increased revenue by $1.6 million, or approximately 0.1% of revenue. For the three months ended September 30, 2010, there were no adjustments made to the rebate payable estimates from prior periods. For the nine months ended September 30, 2010, adjustments made to these rebate payable estimates from prior periods increased revenue by $3.0 million, or approximately 0.1% of revenue.

Member co-payments to pharmacies are not recorded as revenue or direct expenses. We incur no obligations for co-payments to pharmacies and have never made such payments. Under our pharmacy agreements, the pharmacy is solely obligated to collect the co-payments from the members. If we had included co-payments in our reported revenue and direct expenses, it would have resulted in an increase in our reported revenue and direct expenses of $598.0 million and $251.4 million for the three months ended September 30, 2011 and 2010, respectively, and an increase in our reported revenue and direct expenses of $1,269.5 million and $736.8 million for the nine months ended September 30, 2011 and 2010, respectively. Our operating and net income, consolidated balance sheets and statements of cash flows would not have been affected.

The following tables illustrate the effects on our reported revenue and direct expenses if we had included the actual member co-payments as indicated by our claims processing system (in millions):


	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Reported revenue	$	1,429.4	$	925.1	$	3,784.9	$	2,647.5
Member co-payments		598.0		251.4		1,269.5		736.8

Total	$	2,027.4	$	1,176.5	$	5,054.4	$	3,384.3


Reported direct expenses	$	1,345.3	$	863.3	$	3,569.7	$	2,479.4
Member co-payments		598.0		251.4		1,269.5		736.8

Total	$	1,943.3	$	1,114.7	$	4,839.2	$	3,216.2

ACQUISITIONS

Our business has grown rapidly since 2000, in part due to acquisitions, with total annual PBM revenue increasing from $4.9 million in 2000 to $3.8 billion in 2010. Our business strategy is to continue to seek to expand our operations, including through making acquisitions that involve new markets and complementary products, services, technologies and businesses. We strive to timely integrate our acquisitions into our financial, organizational, management and technology structure. When successfully integrated, we expect to achieve cost savings from the consolidation of certain corporate activities and the elimination of certain duplicate components of our corporate operations.

Acquisition of Walgreens Health Initiative, Inc.

On June 13, 2011, we completed our acquisition of Walgreens Health Initiatives, Inc. (“WHI”), which was the pharmacy benefit management, or PBM, subsidiary of Walgreen Co. (“Walgreens”). The purchase price was $485.0 million in cash and up to $40.0 million in additional cash consideration payable upon the achievement of certain client retention milestones through March 31, 2014. A portion of the purchase price was dependent on retention of certain WHI clients and deemed contingent consideration for accounting purposes. The estimated fair value of the contingent consideration at the acquisition date was approximately $26.0 million. Our initial valuation is preliminary. We determined the fair value of the contingent consideration using probability assessments of the expected future cash flows over the period in which the obligation is expected to be settled, and apply a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. Subsequent to our finalization of the valuation at the acquisition date, any changes to the valuation will be recorded through earnings. The cash payment for this acquisition was funded from a combination of cash on hand and amounts drawn under our revolving credit facility. The purchase agreement calls for a purchase price adjustment which may be increased or decreased based on the net working capital of WHI.

For the nine months ended September 30, 2011, we incurred approximately $12.2 million of transaction related costs, which were included in selling, general and administrative expenses in our consolidated statement of operations.

WHI is a full service PBM providing comprehensive pharmacy benefit management services to employer groups, health plans, individual consumers and Medicare clients nationwide. We believe that the acquisition of WHI will add significant volume, which will improve our purchasing economics and benefit us, our clients and their members. In 2010, WHI processed approximately 88 million prescriptions and covered approximately 11 million lives. Through this acquisition, we believe we will also gain key strategic assets, including advanced clinical applications and service offerings, enhanced informatics and reporting technologies, complementary operating capabilities, including a leading Medicare Part D platform, and a capable and experienced management team. We believe these strategic assets will improve our competitive position, enable us to attract and win new customers and open up additional market opportunities through new services offerings. We also entered into a 10-year contract with Walgreens to provide PBM services for Walgreens’ 244,000 employees and retirees, as well as 10-year agreements to administer the Walgreens Prescription Savings Club, which has approximately 2.4 million members, and to provide certain administrative support services to on-going Walgreens businesses.

The acquisition was accounted for as a purchase, and accordingly, the results of WHI operations are included in our consolidated financial statements since the date of acquisition.

Acquisition of NLBP, LLC

On January 25, 2011, we acquired NLBP, LLC, an Arizona limited liability company which has developed an electronic clinical messaging platform, for $6.2 million in cash.

The acquisition was accounted for as a purchase, and accordingly, the results of NLBP operations are included in our consolidated financial statements since the date of acquisition.

Acquisition of FutureScripts, LLC

Total consideration for the acquisition of FutureScripts consisted of cash payments on September 13, 2010 of $225.5 million. The purchase price of FutureScripts was largely determined on the basis of management’s expectations of future earnings and cash flows, resulting in the recognition of goodwill. The purchase price was funded from our cash on hand. In June 2011, we received approximately $1.0 million in cash as required for certain closing date net working capital adjustments. We incurred $1.5 million of acquisition related costs, which were included in selling, general and administrative expenses in our consolidating statement of operations for the year ended December 31, 2010.

The acquisition was accounted for as a purchase, and accordingly, the results of FutureScripts operations are included in our consolidated financial statements since the date of acquisition.

Acquisition of inPharmative, Inc.

The acquisition was accounted for as a purchase, and accordingly, the results of inPharmative operations are included in our consolidated financial statements since the date of acquisition.

Acquisition of Total Script, LLC

In July 2009, we purchased Total Script, LLC, a pharmacy benefit management company with a strategic focus on the small- to mid-sized employer group markets. Total consideration for the acquisition of Total Script consisted of cash payments of $13.5 million. Additionally, the purchase agreement includes contingent consideration payable over a three-year period based on the achievement of certain milestones and net new business contracted. The fair value of the net contingent consideration recognized on the acquisition date, which was determined using expected present value techniques, was approximately $13.4 million. During 2010, we made contingent consideration payments of $3.2 million, based on the achievement of certain milestones and net new business acquired. Also during 2010, there were decreases of $1.1 million in the fair value of recognized amounts for the contingent consideration. There were no changes to the fair value of recognized amounts during the three months ended September 30, 2011. During the nine months ended September 30, 2011, there were decreases of $3.0 million in the fair value of recognized amounts for the remaining contingent

consideration primarily due to revised assumptions regarding net new business contracted. The adjustments to the fair value of recognized amounts for contingent consideration were included in selling, general and administrative expenses in the consolidated statements of operation for the respective periods.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Revenue. Revenue from operations for the three months ended September 30, 2011 and 2010 were approximately $1.4 billion and $0.9 billion, respectively. Revenue increased over the comparable period in 2010 by $0.5 billion. Total claims processed, excluding ASO claims, increased to 24.4 million for the three months ended September 30, 2011 from 17.0 million for the same period in 2010. Our increase in revenue and prescription volume in 2011 is primarily due to our initiation of services with several new PBM clients, as well as our acquisitions of WHI, FutureScripts and inPharmative which contributed revenue of approximately $0.5 billion. Also, for the three months ended September 30, 2011, acquisition related intangible amortization expense of $2.4 million for a customer contract related to a PBM agreement has been included as an offset to revenue. For the three months ended September 30, 2010, acquisition-related intangible amortization included as an offset to revenue was $0.5 million.

For the three months ended September 30, 2011, our revenue per claim processed, excluding ASO claims, increased by approximately 6.9% when compared to the same period in 2010. The increase in revenue per claim processed for 2011 was primarily due to manufacturer-driven price inflation and increased use of specialty medications offset by an increase in generic utilization. Additionally, the portion of manufacturer or third party intermediary rebates due to clients is recorded as a reduction of revenue. There were no adjustments made to the rebate payable estimates from prior periods for the three months ended September 30, 2011 and 2010.

Direct Expenses. Direct expenses for the three months ended September 30, 2011 and 2010 were approximately $1.3 billion and $0.9 billion, respectively. Direct expenses increased by approximately $0.4 billion over the comparable period in 2010, primarily related to the $0.5 billion increase in overall revenue. Direct expenses for the three months ended September 30, 2011 and 2010 represented 95.9% and 97.0% of total operating expenses, respectively. Additionally, rebates earned under arrangements with manufacturers or third party intermediaries are predominately recorded as a reduction of direct expenses. For the three months ended September 30, 2011, adjustments made to the rebate receivable estimates from prior periods increased direct expenses by $0.8 million. For the three months ended September 30, 2010, adjustments made to the rebate receivable estimates from prior periods reduced direct expenses by $6.1 million, or approximately 0.7% of direct expenses.

Gross margin is calculated as revenue less direct expenses. Factors that can result in changes in gross margins include generic substitution rates, changes in the utilization of preferred drugs with higher discounts and changes in the volume of prescription dispensing at lower-cost network pharmacies. Our gross margin increased to $84.1 million for the three months ended September 30, 2011 from $61.7 million for the comparable period in 2010. Gross margin as a percentage of revenue was 5.9% and 6.7% for the three months ended September 30, 2011 and 2010, respectively. In 2011, gross margin percentages were reduced primarily by the impact of WHI, FutureScripts and new client implementations and renewals. The decreases were somewhat offset by gross margin improvements resulting from an increased level of generic substitution and higher network discount rates.

Selling, General and Administrative.For the three months ended September 30, 2011, selling, general and administrative expenses increased by approximately $31.0 million over the same period in the prior year to $57.8 million, or 4.1% of operating expenses. For the three months ended September 30, 2010, selling, general and administrative expenses was $26.7 million, or 3.0% of operating expenses. The increase in selling, general and administrative expenses was primarily associated with the incremental costs related to acquisitions, our growth and the associated personnel, facility and vendor costs to serve and implement new clients. For the three months ended September 30, 2011, we incurred approximately $16.2 million of WHI transaction and integration related costs.

Selling, general and administrative expenses of $57.8 million for the three months ended September 30, 2011, consisted of $22.0 million in compensation and benefits, which includes $2.2 million in non-cash compensation, $18.7 million in professional fees, which includes $13.4 million of transition and integration related costs, $3.7 million in facility costs, $2.0 million in travel expenses, $1.0 million in insurance and other corporate expenses, $0.5 million in non-employee non-cash compensation expense, $0.6 million in recruitment and temporary help, $0.9 in other and $8.4 million in depreciation and amortization.

Selling, general and administrative expenses of $26.7 million for the three months ended September 30, 2010, consisted of $13.2 million in compensation and benefits, which includes $1.1 million in non-cash compensation, $4.1 million in professional fees and technology services, $2.6 million in facility costs, $1.6 million in travel expenses, $1.0 million in insurance and other corporate expenses, $0.3 million in non-employee non-cash compensation expense, $0.4 million in recruitment and temporary help, $0.5 million in other and $3.0 million in depreciation and amortization.

Interest and Other Income. Interest income decreased by $0.7 million for the three months ended September 30, 2011. The decrease was primarily due to changes in our average balances and reductions in average market interest rates in short-term investments during the period.

Interest Expense.Interest expense increased to $2.4 million for the three months ended September 30, 2011 from $1.3 million in the comparable period in 2010. The increase was primarily attributable to interest expense associated with our credit facilities and the amortization of related financing costs.

Income Tax Expense. The income tax rate of 36.2% during the three months ended September 30, 2011 and 37.5% for the three months ended September 30, 2010 represent the percentage relationship of the provision for income taxes to the income before provision for income taxes. Our tax rate in 2011 was favorably impacted by the recognition of certain discrete tax items which were recognized in the quarter.

Net Income.Net income for the three months ended September 30, 2011 decreased by approximately $6.3 million over the same period in 2010 to $15.2 million. The decrease in net income was primarily a result of reduced gross margin percentages and an increase in selling, general and administrative expenses, much of which relates to the integration of WHI.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Revenue. Revenue from operations for the nine months ended September 30, 2011 and 2010 were $3.8 billion and $2.6 billion, respectively. Revenue increased over the comparable period in 2010 by approximately $1.2 billion. Total claims processed, excluding ASO claims, increased to 66.4 million for the nine months ended September 30, 2011 from 49.3 million for the same period in 2010. Our increase in revenue and prescription volume in 2011 was primarily due to our initiation of services with several new PBM clients, as well as our acquisitions of WHI, FutureScripts and inPharmative which contributed revenue of $0.9 billion. Also, for the nine months ended September 30, 2011, acquisition related intangible amortization expense of $7.3 million for a customer contract related to a PBM agreement has been included as an offset to revenue. For the nine months ended September 30, 2010, acquisition-related intangible amortization included as an offset to revenue was $0.5 million.

For the nine months ended September 30, 2011, our revenue per claim processed, excluding ASO claims, increased by approximately 5.7% when compared to the same period in 2010. The increase in revenue per claim processed for 2011 was primarily due to manufacturer-driven price inflation and increased use of specialty medications offset by an increase in generic utilization. Additionally, the portion of manufacturer or third party intermediary rebates due to clients is recorded as a reduction of revenue. For the nine months ended September 30, 2011, adjustments were made to the rebate payable estimates from prior periods which increased revenue by approximately $1.6 million, or approximately 0.1% of revenue. For the nine months ended September 30, 2010, adjustments made to the rebate payable estimates from prior periods increased revenue by approximately $3.0 million, or approximately 0.1% of revenue.

Direct Expenses. Direct expenses for the nine months ended September 30, 2011 and 2010 were $3.6 billion and $2.5 billion, respectively. Direct expenses increased by $1.1 billion over the comparable period in 2010, primarily related to the $1.2 billion increase in overall revenue. Direct expenses for the nine months ended September 30, 2011 and 2010 represented 96.4% and 97.1% of total operating expenses, respectively. Additionally, rebates earned under arrangements with manufacturers or third party intermediaries are predominately recorded as a reduction of direct expenses. For the nine months ended September 30, 2011, adjustments made to the rebate receivable estimates from prior periods reduced direct expenses by $0.1 million. For the nine months ended September 30, 2010, adjustments made to the rebate receivable estimates from prior periods reduced direct expenses by $10.8 million, or approximately 0.4% of direct expenses.

Gross margin is calculated as revenue less direct expenses. Factors that can result in changes in gross margins include generic substitution rates, changes in the utilization of preferred drugs with higher discounts and changes in the volume of prescription dispensing at lower cost network pharmacies. Our gross margin increased to $215.3 million for the nine months ended September 30, 2011 from $168.1 million for the comparable period in 2010. Gross margin as a percentage of revenue was 5.7% and 6.3% for the nine months ended September 30, 2011 and 2010. In 2011, gross margin percentages were reduced primarily by the impact of WHI, FutureScripts and new client implementations and renewals. The decreases were somewhat offset by gross margin improvements resulting from an increased level of generic substitution and higher network discount rates.

Selling, General and Administrative.For the nine months ended September 30, 2011, selling, general and administrative expenses increased by approximately $60.3 million over the same period in the prior year to $133.3 million, or 3.6% of operating expenses. For the nine months ended September 30, 2010, selling, general and administrative expenses was $73.0 million, or 2.9% of operating expenses. The increase in selling, general and administrative expenses was primarily associated with the incremental costs related to acquisitions, our growth and the associated personnel, facility and vendor costs to serve and implement new clients. For the nine months ended September 30, 2011, we incurred $34.1 million of WHI transaction and integration related costs.

Selling, general and administrative expenses of $133.3 million for the nine months ended September 30, 2011, consisted of $52.1 million in compensation and benefits, which includes $6.0 million in non-cash compensation, $42.9 million in professional fees, which includes $29.9 million of transition and integration related cost, $10.0 million in facility costs, $4.9 million in travel expenses, $2.9 million in insurance and other corporate expenses, $1.4 million in non-employee non-cash compensation expense, $2.0 million in recruitment and temporary help, $0.5 million in other, which includes an offset of $3.0 million for an adjustment to the fair value of contingent consideration, and $16.6 million in depreciation and amortization.

Selling, general and administrative expenses of $73.0 million for the nine months ended September 30, 2010, consisted of $37.3 million in compensation and benefits, which includes $4.0 million in non-cash compensation, $9.6 million in professional fees and technology services, $7.5 million in facility costs, $3.8 million in travel expenses, $2.6 million in insurance and other corporate expenses, $1.3 million in non-employee non-cash compensation expense, $0.8 million in recruitment and temporary help, $1.8 million in other and $8.3 million in depreciation and amortization.

Interest and Other Income. Interest and other income decreased to $0.2 million for the nine months ended September 30, 2011 from $0.9 million in the comparable period in 2010. The decrease was primarily due to changes in our average balances and reductions in average market interest rates in short-term investments during the period.

Interest Expense.Interest expense increased to $5.6 million for the nine months ended September 30, 2011 from $1.7 million in the comparable period in 2010. The increase was primarily attributable to interest expense associated with our credit facilities and the amortization of related financing costs.

Income Tax Expense. The income tax rate of 37.5% during the nine months ended September 30, 2011 and 38.0% during the comparable period in 2010 represent the percentage relationship of the provision for income taxes to the income before provision for income taxes. Our tax rate in 2011 was favorably impacted by the recognition of certain discrete tax items which were recognized during the period.

Net Income.Net income for the nine months ended September 30, 2011 decreased by approximately $10.6 million over the same period in 2011 to $47.8 million. The decrease in net income was primarily a result of reduced gross margins percentages and an increase in selling, general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

Our sources of funds are primarily cash flows from operating activities. We have in the past also raised funds by borrowing on bank debt and, most recently, through the proceeds of a public offering of shares of our common stock. During the last several years, we have generated positive cash flow from operations and anticipate similar results for the remainder of 2011. At September 30, 2011, our cash and cash equivalents were $72.3 million. The net decrease of $85.6 million in our cash and cash equivalents since the end of fiscal 2010 resulted primarily from the cash provided by our operating activities and financing activities offset by cash used in the acquisition of WHI.

On April 14, 2011, we amended and restated our existing senior credit facilities which were originally entered into on August 4, 2010 consisting of a revolving credit facility and term loan facility. The original term loan facility had a principal amount of $150.0 million and remains unchanged subsequent to the amendment. The original revolving credit facility had an aggregate revolving commitment of $200.0 million, and was subsequently amended to increase that commitment to $400.0 million. Each of our revolving credit facility and our term loan facility matures on August 4, 2015. In addition to the revolving credit facility and term loan facility, our senior credit facilities permit us to incur up to $100.0 million in total principal amount of additional term loan or revolving loan indebtedness under the senior credit facilities. Our obligations under our senior credit facilities are fully and unconditionally guaranteed jointly and severally by us and certain of our U.S. subsidiaries currently existing or that we may create or acquire, with certain exceptions as set forth in our amended credit agreement, pursuant to the terms of a separate guarantee and collateral agreement.

During the nine months ended September 30, 2011, we borrowed $367.0 million under our revolving credit facility and made $212.0 million of repayments. The outstanding balance under the revolving credit facility at September 30, 2011 was $155.0 million, down $25.0 million from June 30, 2011. The term loan facility balance at September 30, 2011 was $142.5 million and amortizes in nominal quarterly installments of $1.875 million on the last day of each calendar quarter, with such payments having commenced on December 31, 2010 until maturity, whereby the final installment of the term loan facility will be paid on the maturity date in an amount equal to the aggregate unpaid principal amount. We anticipate repaying the term loan and revolving credit facility through our operating cash flows.

Net Cash Provided by Operating Activities.Our operating activities generated $81.8 million of cash from operations in the nine-month period ended September 30, 2011, an $11.8 million change from the $70.0 million cash provided in the comparable prior year period. This $81.8 million in cash provided by operating activities in 2011 reflects $47.8 million in net income, plus $34.3 million in net non-cash charges and a $0.3 million net decrease in cash provided by changes in working capital and other assets and liabilities. This $0.3 million net decrease in cash provided by changes in working capital, net of effects from acquisitions, was primarily due to changes in rebates receivable of $44.7 million, income taxes payable of $5.5 million and other assets of $3.4 million, offset by changes in accounts receivable of $3.0 million, accounts payable of $26.3 million, rebates payable of $21.3 million, accrued expense and other liabilities of $2.3 and inventory of $0.4 million. The changes in rebates receivable reflect the impact of the timing of the collection of these receivables. The changes in accounts payable reflect the temporary benefit in the timing of payments of these payables.

The $70.0 million in cash provided by operating activities in 2010 reflects $58.4 million in net income, plus $17.7 million in net non-cash charges and a $6.1 million net decrease in cash provided by changes in working capital and other assets and liabilities. This $6.1 million net decrease in cash provided by changes in working capital, net of effects from acquisitions, was primarily due to changes in accounts receivable of $10.5 million, rebates receivable of $33.5 million, income tax receivable $5.2 million, accounts payable of $18.1 million and other assets of $4.2 million, offset by changes in rebates payable of $40.6 million, accrued liabilities of $24.2 million and inventory of $0.6 million. The changes in accounts receivable and rebates receivable reflect the impact the timing of the collection of these receivables. The changes in rebates payable reflect the temporary benefit in the timing of payments of these payable. The change in accounts payable reflects the reduction in a previous realized temporary benefit in the timing of payments of our accounts payable.

Net Cash Used in Investing Activities.Net cash used in investing activities for the nine months ended September 30, 2011 was $561.8 million compared to $238.5 million of cash used in the prior year period. The cash used in the current period reflects expenditures of $491.0 million for business acquisitions, $40.0 million in business acquisition related restricted cash, $5.0 million in restricted cash, $22.6 million in capital expenditures, and other investing activities of $3.2 million. The $238.5 million of net cash provided for the nine months ended September 30, 2010 reflects expenditures of $239.9 million for business acquisitions and $10.5 million in capital expenditures, offset by marketable securities sales of $11.9 million.

Net Cash Provided by Financing Activities.Net cash provided by financing activities for the nine months ended September 30, 2011 was $394.4 million compared to $149.1 million in the prior year period. In the current period, we received $227.1 million from an equity offering, $155.0 million from net borrowings on our revolving credit facility, $1.4

million from the exercise of stock options, $0.4 million in proceeds from issuance of common stock pursuant to our employee stock purchase plan, an income tax benefit of $5.4 million related to the exercise of stock options and restricted stock vesting, and other financing activities of $27.6 million. Additionally, we purchased $3.5 million of treasury stock during the nine months ended September 30, 2011, incurred $5.4 million in deferred financing cost related to our credit facilities, made a scheduled $5.6 million payment on our term loan, and repaid obligations of $8.0 million related to the First Rx Specialty and Mail Services, LLC arrangement. In the prior year period, we received $150.0 million from term loan proceeds, $3.1 million from the exercise of stock options, $0.3 million in proceeds from issuance of common stock pursuant to our employee stock purchase plan and had an income tax benefit of $4.9 million related to the exercise of stock options and restricted stock vesting. Additionally, we purchased $2.6 million of treasury stock during the nine months ended September 30, 2010, incurred $3.6 million in deferred financing cost related to our new credit facilities, and made a $3.0 million contingent consideration payment.

We anticipate continuing to generate positive operating cash flow which, combined with available cash resources, should be sufficient to meet our planned working capital, debt service, capital expenditures and operating expenses. However, there can be no assurance that we will not require additional capital. Even if such funds are not required, we may seek additional equity or debt financing. We cannot be assured that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.

RECENT ACCOUNTING STANDARDS

For a discussion of new accounting standards affecting us, refer to Note 2 of our Notes to Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe we have minimal market risk inherent in our financial position. We do not hold any derivative financial instruments for trading purposes. Our market risk primarily represents the potential loss arising from adverse changes in market interest rates. Our results from operations could be impacted by decreases in interest rates on our cash and cash equivalents. Additionally, we may be exposed to market risk from changes in interest rates related to our term loan facility and debt outstanding under our credit facility. We do not expect our cash flows to be affected to any significant degree by a sudden change in market interest rates.

We operate our business within the United States and Puerto Rico and execute all of our transactions in U.S. dollars and therefore do not have any foreign currency exchange risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting for our quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will be excluding WHI from our assessment of internal controls over financial reporting in 2011 because it was acquired by us in a business combination during 2011.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

In the ordinary course of business, we may become subject to legal proceedings and claims. We are not aware of any legal proceedings or claims, which, in the opinion of management, will have a material effect on our financial condition, results of operations or cash flows.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, and in our other filings with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission are not the only risks we face. Additional risks and uncertainties not currently known to us, including those related to estimates, or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 6. Exhibits


Exhibit No.		Description

10.2		Employment Agreement by and between Catalyst Health Solutions, Inc. and Deirdre Kramer (1)

10.3		Employment Agreement by and between Catalyst Health Solutions, Inc. and Timothy R. Pearson (2)

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes Oxley Act of 2002**

101.INS		XBRL Taxonomy Instance Document**

101.SCH		XBRL Taxonomy Extension Schema Document**

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document**

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document**

*	Filed herewith.

**	Furnished herewith, not filed.

(1)	Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report filed on July 14, 2011.

(2)	Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q Quarterly Report filed on August 5, 2011.

SIGNATURES

Pursuant to the requirements 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.


	CATALYST HEALTH SOLUTIONS, INC.

November 4, 2011	By:	/s/ David T. Blair
		David T. Blair
		Chief Executive Officer

November 4, 2011	By:	/s/ Timothy R. Pearson
		Timothy R. Pearson
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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