TEXT-S&P rates Express Scripts Holding 'BBB+'

Overview
-- Express Scripts Holding Co. (formerly Aristotle Holdings Inc.,
a subsidiary of Express Scripts Inc.) has become the parent company of Express
Scripts Inc. and Medco Health Solutions Inc. following the acquisition of
Medco by Express Scripts.
-- We are assigning a 'BBB+' corporate credit rating to Express Scripts
Holding Co.
-- Separately, the corporate credit ratings on Express Scripts Inc. and
Medco Health Solutions Inc. will be withdrawn at the same time.
-- Our outlook on Express Scripts Holding Co. is negative, reflecting
numerous integration challenges the company will face while its credit metrics
are stretched.

Rating Action
On May 31, 2012, Standard & Poor's Ratings Services assigned its 'BBB+'
corporate credit rating to St. Louis-based pharmacy benefit management (PBM)
services provider Express Scripts Holding Co. The corporate credit ratings on
Express Scripts Inc. and Medco Health Solutions Inc. will be withdrawn. The
rating action follows the acquisition of Medco Health Solutions by Express
Scripts and the subsequent failure of an injunction to block the deal by the
National Association of Chain Drug Stores, the National Community Pharmacists
Association, and independent pharmacies. All of our issue-level ratings for
Express Scripts Holding Co. are unchanged. The rating outlook is negative.

Rationale
The ratings on St. Louis-based pharmacy benefit management (PBM) services
provider Express Scripts Holding Co. reflect Standard & Poor's Ratings
Services' expectations for low-single-digit organic revenue growth in 2012,
with slightly improved margins when adjusted for unusual items. We believe the
sluggish U.S. economy will pressure drug utilization and growth in members
covered by plan sponsor clients, resulting in relatively low organic revenue
growth. Sales will be further pressured by the ongoing conversion of branded
drugs to generics, which hurt sales but generally results in increased profits
and cash flow. We expect some sales dip from the inability of Express Scripts
and customer Walgreens to reach an agreement on a new contract; the old one
expired Jan. 1, 2012. While we suspect many Express Scripts' customers using
Walgreens pharmacies will seek other in-network pharmacies, some customer loss
is likely. Our assessment of Express Scripts includes a "satisfactory"
business risk profile and "intermediate" financial risk profile.

Adjusted EBITDA margins steadily increased to 5.8% for the year ended 2011
from 5.5% one year earlier, partially because of the trend of drugs going
generic and increases in higher-profit mail-order prescriptions. We expect
these trends to continue to improve margins in 2012 and beyond. Express
Scripts is one of the largest providers in the specialty pharmacy services
business; these chronic drugs provide relatively stable revenues, and could be
more profitable if biosimilars are readily available in future.

Express Scripts' completed its acquisition of Medco Health Solutions Inc. on
April 2, 2012 for $29.1 billion. The acquisition introduces integration risk,
in addition to a temporarily stretched financial risk profile. Express Scripts
will need to rationalize the combined back-office functions, distribution
capabilities, and claims adjudication platforms while maintaining its existing
customer base. We believe the acquisition can bolster the company's market
position and diversify its customer base, and improve Express Scripts'
negotiating leverage with manufacturers and retail pharmacies.

Express Scripts' "satisfactory" business risk profile (as we define the term)
is supported by its solid position in the growing PBM industry and long-term
trends toward generic and mail-order drugs. Despite Express Scripts' solid
customer retention (in excess of 95%), the industry remains highly
competitive. Clients increasingly focus on controlling rising drug spending
and expect PBMs to achieve cost savings for them. Pricing could come under
pressure as commercial and government payors try to offset rising health care
costs, in particular for prescription drugs. Roughly one-third of Express
Scripts' clients are up for renewal every year; however, its 10-year contract
with WellPoint for the NextRx business skews this estimate downward.

We remain alert to potential shifts in the PBM industry, such as direct
government negotiations of drug prices, which could reduce the added value
PBMs provide and pressure margins. We note, however, that past regulatory
efforts did little to slow the PBM industry's growth or profitability. We are
not aware of anything in the 2010 Patient Protection and Affordable Care Act
that would negatively alter the PBM business model when implemented. In fact,
the industry could eventually benefit from approximately 32 million newly
insured customers, although we do not expect a significant ramp-up in
enrollment before 2014, when federal incentives take effect.

Our ratings reflect the company's "intermediate" financial risk profile. Pro
forma for the Medco acquisition, we estimate that leverage is above 3x; an
intermediate financial risk profile is partially defined as debt to EBITDA of
2x to 3x and funds from operations (FFO) to debt of 30% to 45%. However, we
believe the company will quickly repay debt and return to its stated
debt-to-EBITDA target of 1x to 2x within 18 to 24 months of the acquisition,
which would likely cause us to view the company's financial risk profile as
"modest". A modest financial risk profile is partially defined as debt to
EBITDA of 1.5x to 2x and funds from operations (FFO) to debt of 45% to 60%.

Liquidity
We currently view Express Scripts' liquidity as "strong", with sources of cash
likely to exceed mandatory uses of cash over the next 12 to 24 months.
Relevant aspects of Express Scripts' liquidity are:
-- Sources of liquidity will exceed uses by more than 1.5x.
-- Sources of liquidity as of March 31, 2012, included cash on hand of
$9.6 billion; however, most of this was used to fund the Medco acquisition.
-- We expect Express Scripts to maintain roughly $2 billion of cash on
its balance sheet.
-- We expect more than $3 billion of operating cash flow in 2012, and
more than $4 billion of operating cash flow in 2013, the first full year of
the combined entity.
-- We expect the company to maintain significant availability under its
$1.5 billion revolver maturing in August 2016.
-- We expect future uses of cash to include annual capital expenditures
of about $350 million, although 2012 could be slightly higher because of
integration expenses.
-- We believe Express Scripts will repurchase very little of its common
stock until its debt leverage returns to historical levels after the Medco
acquisition.
-- The company is subject to 3.5x minimum interest coverage and 3.5x
maximum leverage covenants.
-- We expect operating performance to remain well above covenant levels,
and expect ongoing access to capital markets to accommodate maturing debt.
Outlook
Our rating outlook on Express Scripts is negative. We believe its decision to
partly fund the Medco acquisition with equity will keep debt leverage at a
manageable, but high, level in the near term. Still, the company will face a
number of integration challenges while its financial risk profile is
stretched. We could lower our ratings on Express Scripts if we do not believe
debt leverage will fall below 2x within 18 to 24 months after the acquisition.
This could be caused by substantial missteps in the integration of claims
adjudication platforms or unanticipated contract losses. We could revise our
outlook to stable if the company is on a trajectory to reduce debt leverage to
1x to 2x within two years, and rationalizes the combined back-office
functions, distribution capabilities, and claims adjudication platforms while
maintaining its existing customer base.

Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Ratings List
Express Scripts Holding Company
New Ratings
Corporate Credit Rating BBB+/Negative/--

Ratings Unchanged
Senior Unsecured BBB+

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