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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999, OR
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: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1420563
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
13900 Riverport Dr., Maryland Heights, Missouri 63043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 770-1666
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation of S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by
non-affiliates as of February 29, 2000, was $1,075,723,976 based on 23,354,841
such shares held on such date by non-affiliates and the last sale price for the
Class A Common Stock on such date of $46.06 as reported on the Nasdaq National
Market. Solely for purposes of this computation, the Registrant has assumed that
all directors and executive officers of the Registrant and NYLIFE HealthCare
Management, Inc. are affiliates of the Registrant.
Common stock outstanding as of February 29, 2000: 23,416,226 Shares Class A
15,020,000 Shares Class B
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 2000 Annual Meeting of Stockholders, which is
expected to be filed with the Securities and Exchange Commission not later than
120 days after the registrant's fiscal year ended December 31, 1999.
Information that we have included or incorporated by reference in this
Annual Report on Form 10-K, and information that may be contained in our other
filings with the Securities and Exchange Commission (the "SEC") and our press
releases or other public statements, contain or may contain forward-looking
statements. Please refer to a discussion of our forward looking statements and
associated risks in "Item 1 --Forward Looking Statements and Associated Risks"
in this Annual Report on Form 10-K.
PART I
THE COMPANY
Item 1 - Business
Industry Overview
Prescription drug costs are the fastest growing component of health care
costs in the United States. The U.S. Health Care Financing Administration
("HCFA") estimates that prescription drugs accounted for approximately 7.9% of
U.S. health care expenditures in 1998, and are expected to increase to 11.2% by
2008. U.S. prescription drug sales for 1998 were approximately $90.6 billion,
and HCFA projects continued sales increases at an average annual growth rate of
approximately 10.6% through 2008, compared to an average annual growth rate of
approximately 6.5% for total health care costs during this period. Factors
underlying this trend include:
o increases in research and development expenditures by drug
manufacturers, resulting in many new drug introductions
o a shorter U.S. Food and Drug Administration approval cycle for new
pharmaceuticals
o high prices for new "blockbuster" drugs
o an aging population
o increased demand for prescription drugs due to increased disease
awareness by patients, effective direct-to-consumer advertising by
drug manufacturers and a growing reliance on medication in lieu of
lifestyle changes
This trend creates a significant challenge to HMOs, health employers and
unions that want to provide a drug benefit as part of the health plans they
offer to members of their respective organizations. These health benefit
providers, or "payors", engage the services of pharmacy benefit management
("PBM") companies to help them provide a cost-effective drug benefit as part of
their health plan and to better understand the impact of prescription drug
utilization on their overall health care expenditures.
In general, PBMs coordinate the distribution of outpatient pharmaceuticals
through a combination of benefit-management services, including retail drug card
programs, mail pharmacy services and formulary management programs. PBMs emerged
during the late 1980s by combining traditional pharmacy claims processing and
mail pharmacy services to create an integrated product offering that could help
manage the prescription drug benefit for payors. During the early 1990s,
numerous PBMs were created, with some providers offering a comprehensive,
integrated package of services. Currently, there are an estimated 100 PBMs
serving a population of approximately 190 million members and processing
approximately 2 billion prescriptions annually. The PBM industry processed
approximately $83 billion worth of prescriptions in 1999. The four largest PBMs
account for approximately 80% of prescription volume or member lives.
The services offered by the more sophisticated PBMs have broadened to
include disease management programs, compliance programs, outcomes research,
drug therapy management programs and sophisticated data analysis. Because these
advanced capabilities require resources that may not be available to all PBMs,
consolidation in the industry has occurred in recent years as PBMs seek to
increase scale and capability by merging with or purchasing other PBMs.
Company Overview
We are the third largest PBM in North America and the largest full-service
PBM independent of pharmaceutical manufacturer or drug store ownership in North
America. We believe independence from pharmaceutical manufacturer ownership
allows us to make unbiased formulary recommendations to our clients, balancing
both clinical efficacy and cost. We also believe our independence from drug
store ownership allows us to construct a variety of convenient and
cost-effective retail pharmacy networks for our clients, without favoring any
particular pharmacy chain.
We provide a combination of benefit management services, including retail
drug card programs, mail pharmacy services, drug formulary management programs
and other clinical management programs for approximately 9,300 clients that
include HMOs, health insurers, third-party administrators, employers and
union-sponsored benefit plans. As of January 1, 2000, some of our largest
clients include United HealthCare Corporation ("UHC"), Aetna U.S. Healthcare,
Oxford Health Plans, Blue Cross Blue Shield of Massachusetts, Blue Shield of
California and the State of New York Empire Plan Prescription Drug Program.
As of January 1, 2000, our PBM services were provided to approximately 38.5
million members, excluding approximately 9.5 million members associated with UHC
health plans who will be transitioning to another provider beginning June 1,
2000, in the United States and Canada who were enrolled in health plans
sponsored by our clients. Although membership counts are based on eligibility
data, they necessarily involve some estimates, extrapolations and
approximations. For example, some plan designs allow for family coverage under
one identification number, and we make assumptions about the average number of
persons per family in calculating our total membership. Because these
assumptions may vary between PBMs, membership counts may not be comparable
between our competitors and us. However, we believe our membership count
provides a reasonable estimation of the population we serve, and can be used as
one measure of our growth.
Our PBM offerings include:
o network claims processing, mail pharmacy services, benefit design
consultation, drug utilization review, formulary management programs,
disease management and medical and drug data analysis services, and
compliance and therapy management programs for our clients
o market research programs for pharmaceutical manufacturers
o medical information management services, which include outcome
assessments, the development of data warehouses combining medical
claims and prescription drug claims, and sophisticated decision
support tools to evaluate disease specific interventions on cost and
quality, through our wholly-owned subsidiary Practice Patterns
Science, Inc. ("PPS")
o informed decision counseling services through our Express Health
LineSM division
Our non-PBM offerings include:
o infusion therapy services through our wholly owned subsidiary, Express
Scripts Infusion Services
o distribution of pharmaceuticals requiring special handling or
packaging through our Express Scripts Specialty Distribution Services
subsidiary
Our revenues are primarily generated from the delivery of prescription
drugs through our contractual network of retail pharmacies, mail pharmacy
services and infusion therapy services. In 1999, 1998 and 1997, revenues from
the delivery of prescription drugs to our members represented 93.4%, 98.2% and
97.3%, respectively, of our total revenues. Revenues from services, such as the
administration of contracts between our clients and the clients' retail pharmacy
networks (the "Net Basis"), market research programs, the sale of medical
information management services, the sale of informed decision counseling
services and our Specialty Distribution Services comprised the remainder of our
revenues.
Our PBM services are delivered primarily through networks of retail
pharmacies that are under non-exclusive contract with us, through five mail
pharmacy service centers, which we own and operate, and through PlanetRx.com,
Inc. ("PlanetRx"). Our largest retail pharmacy network includes more than 53,000
retail pharmacies, representing more than 99% of all retail pharmacies in the
United States. In 1999, we processed approximately 211.8 million network
pharmacy claims and 10.6 million mail pharmacy prescriptions, with an estimated
total drug spending of $8.7 billion, excluding UHC network pharmacy claims of
62.1 million having an estimating total drug spending of $2.4 billion.
During the fourth quarter of 1999, we transferred substantially all of the
assets of YourPharmacy.com, Inc., our wholly-owned Internet pharmacy subsidiary,
to PlanetRx in exchange for approximately 19.9% of PlanetRx's outstanding common
stock. In conjunction with the transfer, we entered into a pharmacy agreement
pursuant to which PlanetRx will be our exclusive Internet pharmacy in the United
States for a term of 5 years, with the right to participate in our network for
10 years.
We were incorporated in Missouri in September 1986, and were reincorporated
in Delaware in March 1992. We have two classes of common stock, Class A Common
Stock and Class B Common Stock. Each share of the Class B Common Stock is
entitled to ten votes, and each share of the Class A Common Stock is entitled to
one vote. All of the issued and outstanding shares of the Class B Common Stock
are owned by NYLIFE HealthCare. Our principal executive offices are located at
13900 Riverport Drive, Maryland Heights, Missouri 63043. Our telephone number is
(314) 770-1666.
Products and Services
Pharmacy Benefit Management
Overview. Our PBM services involve the management of outpatient
prescription drug usage to foster high quality, cost-effective pharmaceutical
care through the application of managed care principles and advanced information
technologies. We offer our PBM services to our clients in the United States and
Canada. Our PBM offerings include:
o retail pharmacy network administration
o mail pharmacy services
o benefit plan design consultation
o formulary administration
o electronic point-of-sale claims processing
o drug utilization review
o the development of advanced formulary compliance and therapeutic
intervention programs
o therapy management services such as prior authorization, therapy
guidelines, step therapy protocols and formulary management
interventions
o sophisticated management information reporting and analytic services
o outcomes assessments, the development of data warehouses combining
medical claims and prescription drug claims, and sophisticated
decision support tools to evaluate disease specific interventions on
cost and quality
o informed decision counseling
o drug information through our DrugDigest.org website
During 1999, 98.5% of our revenues were derived from PBM services, compared
to 97.9% and 96.8% during 1998 and 1997, respectively. The number of retail
pharmacy network claims processed and mail pharmacy claims processed, including
UHC, has increased to 273.9 million and 10.6 million claims, respectively, in
1999, from 42.9 million and 2.1 million claims, respectively, in 1995. During
1998 and 1997, we processed 113.2 million and 73.2 million retail pharmacy
network claims, respectively, and 7.4 million and 3.9 million mail pharmacy
claims, respectively.
Retail Pharmacy Network Administration. We contract with retail pharmacies
to provide prescription drugs to members of the pharmacy benefit plans managed
by us. In the United States, these pharmacies typically discount the price at
which they will provide drugs to members in return for designation as a network
pharmacy. We manage three nationwide networks in the United States and one
nationwide network in Canada that are responsive to client preferences related
to cost containment and convenience of access for members. We also manage over
300 networks of pharmacies that we have designed to meet the specific needs of
some of our larger clients or that are under direct contract with our managed
care clients.
All retail pharmacies in our pharmacy networks communicate with us on-line
and in real time to process prescription drug claims. When a member of a plan
presents his or her identification card at a network pharmacy, the network
pharmacist sends the specified claim data in an industry-standard format through
our systems, which process the claim and respond to the pharmacy, typically
within one or two seconds. The electronic processing of the claim involves:
o confirming the member's eligibility for benefits under the applicable
health benefit plan and the conditions to or limitations of coverage,
such as the amount of copayments or deductibles the member must pay
o performing a concurrent drug utilization review ("DUR") analysis and
alerting the pharmacist to possible drug interactions and reactions or
other indications of inappropriate prescription drug usage
o updating the member's prescription drug claim record
o if the claim is accepted, confirming to the pharmacy that it will
receive payment for the drug dispensed
Mail Pharmacy. We integrate our retail pharmacy services with our mail
pharmacy services. We operate five mail pharmacies, located in Maryland Heights,
Missouri; Tempe, Arizona; Albuquerque, New Mexico; Bensalem, Pennsylvania; and
Troy, New York. These pharmacies provide members with convenient access to
maintenance medications and enable our clients and us to control drug costs
through operating efficiencies and economies of scale. In addition, through our
mail service pharmacies, we are directly involved with the prescriber and
member, and are generally able to achieve a higher level of generic
substitutions and therapeutic interventions than can be achieved through the
retail pharmacy networks. This further reduces our clients' costs.
Internet Pharmacy. In October 1999, we entered into an agreement with
PlanetRx whereby PlanetRx became our exclusive Internet pharmacy in the United
States for a term of five years, with a right to participate in our pharmacy
network for ten years.
Benefit Plan Design and Consultation. We offer consultation and financial
modeling to assist the client in selecting a benefit plan design that meets its
needs for member satisfaction and cost control. The most common benefit design
options we offer to our clients are:
o financial incentives and reimbursement limitations on the drugs
covered by the plan, including drug formularies, flat dollar or
percentage of prescription cost copayments, deductibles or annual
benefit maximum
o generic drug substitution incentives
o incentives or requirements to use only network pharmacies or to order
certain drugs only by mail
o reimbursement limitations on the number of days' supply of a drug that
can be obtained
The selected benefit design is entered into our electronic claims
processing system, which applies the plan design parameters as claims are
submitted and enables our clients and us to monitor the financial performance of
the plan.
Formulary Development, Compliance and Therapy Management. Formularies are
lists of drugs for which coverage is provided under the applicable plan. They
are widely used in managed health care plans and, increasingly, by other health
plan managers. We have over 10 years of formulary development expertise and an
extensive clinical pharmacy department.
The foremost consideration in the formulary development process is the
clinical appropriateness of the drug, not the cost of the drug. In developing
formularies, we first make a rigorous therapeutic assessment of the drug's
clinical effectiveness. After the clinical recommendation is made, it is
evaluated on an economic basis. No drug is added to the formulary until our
National Pharmacy & Therapeutics Committee, a panel of 17 independent physicians
and 4 of our pharmacists, approves it. This panel does not consider any
information regarding the discount/rebate arrangement that might be negotiated
with the manufacturer.
Once a client selects and adopts a formulary, we administer the formulary
through a variety of mechanisms. We administer a number of different formularies
for our clients that often identify preferred drugs whose use is encouraged or
required through various benefit design features. Historically, many clients
have selected a plan design that includes an open formulary in which all drugs
are covered by the plan and preferred drugs, if any, are merely recommended.
More advanced options consist of restricted formularies, in which various
financial or other incentives exist for the selection of preferred drugs over
their non-preferred counterparts, or closed formularies, in which benefits are
available only for drugs listed on the formulary. Formulary preferences can be
encouraged:
o by restricting the formulary through plan design features, such as
tiered copayments, which require the member to pay a higher amount for
a non-preferred drug
o through prescriber education programs, in which we or the managed care
client actively seek to educate the prescribers about the formulary
preferences
o through our drug choice management program, which actively promotes
therapeutic and generic interchanges to reduce drug costs
We also provide formulary compliance services to our clients. For example,
if the doctor has not prescribed the preferred drug on a client formulary, we
notify the pharmacist through our claims processing system. The pharmacist or we
can then contact the doctor to attempt to obtain the doctor's consent to switch
the prescription to the preferred product. The doctor has the final decision
making authority in prescribing the medication. The doctor will consider the
substitution in light of the patient's medical history, and writes a new
prescription or denies the substitution.
We also offer innovative proprietary drug utilization review and clinical
intervention programs, to assist clients in managing compliance with the
prescribed drug therapy and inappropriate prescribing practices.
Although we derive substantial revenue from pharmaceutical manufacturers,
we recognize our primary responsibility is to the plan sponsors, and we believe
our contracts with the pharmaceutical manufacturers provide us the flexibility
to utilize the most efficacious products. We contract with pharmaceutical
manufacturers only after our National Pharmacy and Therapeutics Committee has
performed its evaluation.
Information Reporting and Analysis and Disease Management Programs. Through
the development of increasingly sophisticated management information and
reporting systems, we believe we manage prescription drug benefits more
effectively. We have developed various services to offer our clients. One
service enables a client to analyze prescription drug data to identify cost
trends and budget for expected drug costs, to assess the financial impact of
plan design changes and to identify costly utilization patterns through an
on-line prescription drug decision support tool called InformRxTM. This service
permits our clients' medically sophisticated personnel, such as a clinical
pharmacist employed by an HMO, to analyze prescription drug data on-line.
In addition, our PPS subsidiary builds sophisticated data warehouses
combining medical claims, prescription drug claims, and clinical laboratory data
to provide decision support to the health care industry. Proprietary PPS
applications enable users to quickly evaluate shifts in medical conditions
afflicting membership and the effectiveness of interventions from a cost and
quality of care perspective. PPS users can evaluate the impact of new
prescription drugs on the cost and results of treating specific medical
conditions. Working with leading health care organizations, PPS continues to
push the sophistication of data warehouse and the applications to provide
insight into the subtleties of health care delivery.
We offer additional disease management and education programs to assist
health benefit plans and our members in managing the total health care costs
associated with certain diseases, such as asthma, diabetes and cardiovascular
disease. These programs are based upon the premise that patient and provider
behavior can positively influence medical outcomes and reduce overall medical
costs. Patient identification can be accomplished through claims data analysis
or self-enrollment. Risk stratification surveys are conducted to establish a
plan of care for individual program participants. Patient education is primarily
effected through a series of telephone and written communications with nurses
and pharmacists, and both providers and patients receive progress reports on a
regular basis. Outcome surveys are conducted and results are compiled to analyze
the clinical, personal and economic impact of the program.
Electronic Claims Processing System. Our electronic claims processing
system enables us to implement sophisticated intervention programs to assist in
managing prescription drug utilization. The system can be used to alert the
pharmacist to generic substitution and therapeutic intervention opportunities
and formulary compliance issues, or to administer prior authorization and
step-therapy protocol programs at the time a claim is submitted for processing.
Our claims processing system also creates a database of drug utilization
information that can be accessed both at the time the prescription is dispensed
and also on a retrospective basis to analyze utilization trends and prescribing
patterns for more intensive management of the drug benefit.
Informed Decision Counseling. We offer health care decision counseling
services through our Express Health LineSM division. This service allows a
member to call a toll-free telephone number and discuss a health care matter
with a care counselor who utilizes on-line decision support protocols and other
guidelines to provide information to assist the member in making an informed
decision in seeking appropriate treatment. Records of each call are maintained
on-line for future reference. The service is available 24 hours a day. Some
multilingual capabilities and service for the hearing impaired are also
available. The counselors provide follow-up service to members to determine if
their situation was resolved or if the counselor may provide additional
assistance. Member satisfaction and outcomes assessments are tracked through a
combination of member surveys, a quality assurance plan and system reports.
Consumer Health and Medical Information. In July 1999, we launched an
Internet site, DrugDigest.org, to provide a comprehensive source of
non-commercial, fact-based health and medical information. DrugDigest.org
enables a consumer to stay informed about the wide variety of medicines on the
market today, understand their treatment options and take an active role in
their healthcare. These services are offered through reference material on
drugs, vitamins, medical research and disease management, discussion groups,
"Ask the pharmacist" feature, and an e-Letter program enabling consumers to
register and receive news and research on medical conditions most important to
them.
Non-PBM
In addition to PBM services, we also provide non-PBM services including
outpatient infusion therapy, and specialty distribution to our clients. During
1999, 1.5% of our revenues were derived from non-PBM services, compared to 2.1%
and 3.2% during 1998 and 1997, respectively. This decline is partially due to
the acquisitions of ValueRx and DPS, which significantly increased our PBM
service revenues.
Express Scripts Infusion Services. We provide infusion therapy services
which involve the administration of prescription drugs and other products to a
patient by catheter, feeding tube or intravenously, through our wholly owned
subsidiary, IVTx, Inc., operating under the name Express Scripts Infusion
Services. Infusion Services' clients, which include managed care organizations,
third-party administrators, insurance companies, case management companies,
unions and self-insured employers, benefit from outpatient infusion therapy
services because the length of hospital stays can be reduced. Rather than
receiving infusion therapy in a hospital, Infusion Services provides infusion
therapy services to patients at home, in a physician's office or in a
free-standing center operated by a managed care organization or other entity.
Infusion Services provides antimicrobial, cardiovascular, hematologic,
nutritional, analgesic, chemotherapeutic, hydration, endocrine, respiratory and
AIDS management treatments to patients. Infusion Services generally prepares the
treatments in one of its infusion therapy pharmacies, which are licensed
independently of our mail pharmacies. The treatments are either administered
under the supervision of Infusion Services' staff of registered nurses or
licensed vocational nurses who are employed at one of the Infusion Services
sites or, in areas where Infusion Services does not have a facility, through
contracted registered nurses employed or otherwise retained by nursing agencies.
Infusion Services may also contract for pharmacy services for patients who live
in outlying areas.
We have facilities supporting our infusion services operations in Houston,
Texas; Dallas, Texas; Columbia, Maryland; Maryland Heights, Missouri; Columbia,
Missouri; Springfield, New Jersey; and West Chester, Pennsylvania. Infusion
Services' information system maintains patient profiles and documents doses and
supplies dispensed, and its drug utilization review component accesses our
prescription records for members receiving both infusion and oral drug therapies
to screen for drug interactions, incompatibilities and allergies.
Express Scripts Specialty Distribution Services. We provide specialty
distribution services by assisting pharmaceutical manufacturers with the
distribution of, and creation of a database of information for, products
requiring special handling/packaging or products targeted to a specific
physician or patient population or to indigent patients. These services are
provided in our Tempe, Arizona facility and a new facility located next to our
Corporate Headquarters in Maryland Heights, Missouri.
Suppliers
We maintain an extensive inventory in our mail pharmacies of brand name and
generic pharmaceuticals. If a drug is not in our inventory, we can generally
obtain it from a supplier within one or two business days. We purchase our
pharmaceuticals either directly from manufacturers or through wholesalers.
During 1999, approximately 78.7% of our pharmaceutical purchases were through
one wholesaler, most of which were brand name pharmaceuticals. Generic
pharmaceuticals are generally purchased directly from manufacturers. We believe
that alternative sources of supply for most generic and brand name
pharmaceuticals are readily available.
Clients
We are a major provider of PBM services to the managed care industry,
including several large HMOs, and the employer industry, both directly and
through third-party administrators. Excluding UHC, some of our largest managed
care clients are Aetna U.S. Healthcare, Inc. ("Aetna"), Oxford Health Plans,
Blue Cross Blue Shield of Massachusetts and Blue Shield of California. Some of
our largest employer groups include the State of New York Empire Plan
Prescription Drug Program (through a subcontracting relationship with CIGNA
HealthCare), and the State of Ohio Bureau of Workers' Compensation Fund. We also
market our PBM services through preferred provider organizations, group
purchasing organizations, health insurers, third-party administrators of health
plans and union-sponsored benefit plans.
With the completion of the DPS acquisition, UHC became our largest client,
with approximately 9.5 million members. Our contract with UHC will expire on May
31, 2000, and UHC has indicated it will be moving to another provider at that
time. We negotiated a transition arrangement with UHC, whereby their members
will be transitioned to their new provider beginning in June 2000 and continuing
throughout the remainder of 2000. In our financial analysis of the DPS
acquisition, we assumed UHC would not renew its contract. However, if we are
unable to reduce our costs on a basis commensurate with our expectations and
manage the transition of this large client to another provider both efficiently
and effectively, the termination of this contract may materially adversely
affect our business and results of operations.
Acquisitions and Strategic Alliances
On October 13, 1999, YourPharmacy.com, Inc. ("YPC"), our wholly-owned
subsidiary, completed its contribution of certain operating assets constituting
its e-commerce business in prescription and non-prescription drugs and health
and beauty aids to PlanetRx in exchange for 19.9%, or 10,369,990 shares, of the
common equity of PlanetRx (the "Shares"). In addition, PlanetRx assumed certain
obligations of YPC. Simultaneously, PRX Acquisition Corp. ("Acquisition Sub")
merged into PlanetRx and shareholders of PlanetRx received stock in PRX
Holdings, Inc. ("Holdings"), which changed its name to "PlanetRx.com Inc."
Additionally, PlanetRx assumed options granted to YPC employees which converted
into options to purchase approximately 1.8 million shares of PlanetRx common
stock. The consummation of the transaction occurred immediately preceding the
closing of PlanetRx's initial public offering ("IPO") of common stock. Based on
the IPO price of $16 per share, YPC received consideration valued at
approximately $166 million. The terms of the transaction were determined
pursuant to arms-length negotiations.
Pursuant to the Contribution Agreement, PlanetRx appointed our designee,
Barrett A. Toan, our President and Chief Executive Officer, to its board of
directors on October 19, 1999. It also agreed to include our designee in the
group of nominees that it recommends for election at each meeting of its
stockholders to elect directors as long as our percentage beneficial ownership
is not less than 5%.
In connection with the IPO, YPC agreed not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock for 180 days after October 7, 1999, except with the prior written
consent of the lead underwriters for the PlanetRx IPO. The lead underwriter,
however, may in its sole discretion, at any time without notice, release all or
any portion of the shares subject to lock-up agreements.
On August 31, 1999, we entered into an agreement with PlanetRx pursuant to
which we designated PlanetRx as our exclusive Internet pharmacy in the United
States for a term of five years, with a right to participate in our pharmacy
network for ten years. The agreement also provides for various co-operative
marketing activities between PlanetRx and us. Pursuant to this agreement,
PlanetRx will make certain payments to us annually over the term of the
agreement, with a minimum payment obligation of $11,650,000 annually for five
years, plus reimbursement of certain expenses in the amount of $3,000,000, with
a potential five year extension (subject to certain conditions), plus an
incremental fee based on our members' activity on PlanetRx's website. We have
committed to exclusively co-brand and co-market PlanetRx as our online pharmacy.
Co-branding includes, but is not limited to, placing PlanetRx's name, logo and
other information about PlanetRx on our website and marketing and sales
materials. Co-marketing includes our promoting PlanetRx as our online pharmacy
in our marketing and sales activities. The agreement became effective on October
13, 1999. As part of the relationship, PlanetRx agreed to certain exclusivity
provisions that preclude it from directly or indirectly operating as a pharmacy
benefit manager.
On April 1, 1999, we acquired DPS from SmithKline Beecham Corporation and
one of its affiliates for $715 million in cash, which reflects a purchase price
adjustment for closing working capital and transaction costs. We financed the
acquisition and refinanced all of our existing indebtedness through a $1.05
billion credit facility and a $150 million senior subordinated bridge credit
facility. The acquisition positioned us as the third largest PBM in North
America in terms of total members and provided us with one of the largest
managed care membership bases of any PBM. In addition, the acquisition provides
us with enhanced clinical capabilities, systems and technologies.
On April 1, 1998, we acquired the PBM business known as "ValueRx" from
Columbia/HCA Healthcare Corporation for approximately $460 million in cash,
which includes approximately $15 million in transaction costs and executive
severance costs. Historically, while ValueRx, like us, served all segments of
the PBM market, we primarily focused on managed care and smaller self-funded
plan sponsors, and ValueRx concentrated on health insurance carriers and large
employer and union groups. We believe the ValueRx acquisition has provided and
will continue to provide us with additional resources and expertise, which will
allow us to better serve our clients and competitively pursue new business in
all segments of the PBM market.
In January 1996, we acquired the pharmacy claim processing business of
Eclipse Claims Services, Inc., one of the largest processors of prescription
drug claims in Canada. In connection with this acquisition, we entered into
five-year exclusive contracts to provide PBM services in Canada to both
Prudential Insurance Company of America's Canadian Operations ("Prudential") and
Aetna Life Insurance Company of Canada ("Aetna"). The assets of Prudential were
previously acquired by London Life Insurance Company ("London Life"), with whom
we reached an agreement whereby we would be the exclusive provider of PBM
services to London Life. In late 1997, London Life was acquired by Great-West
Lifeco. Inc. ("Great-West"), who receives PBM services from one of our
competitors in Canada. Great-West decided not to continue using our services,
and we have transitioned their business to another provider.
On December 31, 1995, we entered into a series of agreements with American
HealthCare Systems Purchasing Partners, L.P. (now known as Premier Purchasing
Partners, L.P.; the "Premier Partnership"), a health care group purchasing
organization affiliated with APS Healthcare, Inc. (now known as Premier, Inc.;
"Premier"). Premier is the largest voluntary health care alliance in the U.S.,
formed as a result of the mergers in late 1995 of three predecessor alliances,
American HealthCare Systems, Premier Health Alliance and SunHealth Alliance. The
Premier alliance includes approximately 215 integrated health care systems that
own or operate approximately 800 hospitals and are affiliated with another
approximately 900 hospitals. Among other things, the agreements designate us as
Premier's exclusive preferred provider of outpatient PBM services to
shareholders of Premier and their affiliated health care entities, plans and
facilities which participate in the Partnership's purchasing programs. The term
of the agreement is ten years, subject to early termination by the Partnership
at five years, upon payment to us of an early termination fee equal to the
unamortized portion of the advance discount, calculated as of the effective date
of termination, attributable to the issuance of our Class A Common Stock to the
Premier Partnership for all issuances other than the initial issuance of shares
(the May, 1996 issuance discussed below). Assuming no additional issuances of
our Class A Common Stock to the Premier Partnership, if the Premier Partnership
elects to terminate the agreements effective December 31, 2000, no termination
fee will be due.
Under the terms of our agreements, Premier is required to promote us as its
preferred PBM provider. An individual Premier member or affiliated managed care
plan is not required to enter into an agreement with us, but if it does so, the
term of the agreement would be for five years. We now provide service to a
number of Premier affiliates. In May 1996, as a result of the number of Premier
plan members receiving our PBM services and the outcome of certain joint drug
purchasing initiatives, we issued 454,546 shares of our Class A Common Stock to
the Premier Partnership. The Premier Partnership could become entitled to
receive up to an additional 4,500,000 shares of our Class A Common Stock,
depending upon the number of members in Premier-affiliated managed care plans
that contract for our PBM services during the term of our agreement. A
calculation is made on April 1 of each year to determine if a stock issuance
will be made. Premier has asserted that is has earned certain additional shares.
We disagree with this contention, and we are in discussions with Premier
concerning this matter. To date, we have not issued any additional shares. If
the Premier Partnership earns stock totaling over 5% of our total voting stock,
it is entitled to have its designee nominated for election to our Board of
Directors.
In November 1995, we entered into a ten-year strategic alliance with The
Manufacturers Life Insurance Company ("Manulife") one of the largest providers
of group health insurance policies in Canada, pursuant to which we are the
exclusive provider of PBM services to Manulife. As a result of this alliance,
Manulife can earn up to approximately 474,000 shares of our Class A Common
Stock, depending on its achievement of certain pharmacy claim volumes from 1996
to 2000. To date, we have not issued any shares to Manulife. In addition, if
Manulife does not terminate the alliance in either year 6 or year 10 of the
agreement, in each of such years it will receive a warrant to purchase up to
237,000 shares of our Class A Common Stock exercisable at 85% of the then fair
market value of such shares. The actual number of shares will depend upon claims
volume in such years. See Note 3 of Notes to Consolidated Financial Statements
in Item 8 herein for additional discussion concerning Manulife.
Company Operations
General. In our various facilities in the United States, we own and operate
five mail pharmacies and six member service/pharmacy help desk call centers.
Electronic pharmacy claims processing is principally directed through our
Maryland Heights, Missouri facility then routed to the appropriate computer
platform at our Maryland Heights, Missouri or Tempe, Arizona facility or at
facilities operated by EDS and Perot Systems, which maintains certain of our
computer hardware. At our Canadian facility, we have sales and marketing, client
services, pharmacy help desk, clinical, provider relations and certain
management information systems capabilities.
Sales and Marketing. We market and sell our PBM services in the United
States primarily through an internal staff of sales directors and sales managers
located in various cities throughout the United States. The sales
representatives are supported by a staff of client service representatives,
clinical pharmacy managers and business analyst consultants who focus on
assisting our clients in managing the rising trend in pharmacy costs. Marketing
and sales in Canada are conducted by representatives located in Mississauga,
Ontario. Although we cross-sell our infusion services to our PBM clients,
Infusion Services and Specialty Distribution Services also employ personnel to
sell these specific products.
Member Services. Although we sell our services to clients, the ultimate
recipient of many of our services are the members of health plans sponsored by
our clients. We believe, therefore, that client satisfaction is dependent upon
member satisfaction. Members can call us toll-free, 24 hours a day, 7 days a
week, to obtain information about their prescription drug plan. We employ member
service representatives who are trained to respond to member inquiries.
Provider Relations. Our Provider Relations group is responsible for
contracting and administering our pharmacy networks. To participate in our
retail pharmacy networks, pharmacists must meet certain qualifications and are
periodically required to represent to us that their applicable state licensing
requirements are being maintained and that they are in good standing. Pharmacies
can contact our various pharmacy help desks toll-free, 24 hours a day, 7 days a
week, for information and assistance in filling prescriptions for members. In
addition, our Provider Relations group audits selected pharmacies in the retail
pharmacy networks to determine compliance with the terms of the contract with
our clients or us.
Clinical Support. Our Health Management Services Department employs
clinical pharmacists, data analysts and outcomes researchers who provide
technical support for our PBM services. These staff members assist in providing
high level clinical pharmacy services such as formulary development, drug
information programs, clinical interventions with physicians, development of
drug therapy guidelines and the evaluation of drugs for inclusion in clinically
sound therapeutic intervention programs. The Health Management Services
Department also analyzes and prepares reports on clinical pharmacy data for our
clients and conducts specific data analyses to evaluate the cost-effectiveness
of certain drug therapies.
Information Systems. Our Information Systems department supports our
pharmacy claims processing systems and other management information systems that
are essential to our operations. Uninterrupted point-of-sale electronic retail
pharmacy claims processing is a significant operational requirement for us, and
we are in the process of integrating the systems acquired with the ValueRx and
DPS acquisitions into an enhanced version of the system used by DPS. All claims
are presently processed through our systems at our Maryland Heights, Missouri
facility and Tempe, Arizona facility, or at facilities operated by Electronic
Data Systems Corporation ("EDS") and Perot Systems Corporation ("Perot Systems")
(EDS maintains the computer hardware for the DPS systems at its facility in
Plano, Texas and Perot Systems maintains the computer hardware for the ValueRx
systems at its facility in Richardson, Texas). Our outsourcing arrangements with
Perot and EDS will be consolidated under EDS in the second quarter of 2000. Our
historical claims processing systems located in our Maryland Heights, Missouri
and Tempe, Arizona facilities are designed to be redundant, which enables us to
do substantially all claims processing in one facility if the other facility is
unable to process claims. Disaster recovery services for the ValueRx and DPS
systems are provided by a third party. We have substantial capacity for growth
in our claims processing facilities.
Competition
We believe the primary competitive factors in each of our businesses are
price, quality of service and breadth of available services. We believe our
principal competitive advantages are our size, our independence from
pharmaceutical manufacturer and drug store ownership, our strong managed care
and employer group customer base which supports the development of advanced PBM
services and our commitment to provide flexible and distinctive service to our
clients. We believe our independence from pharmaceutical manufacturer ownership
allows us to make unbiased formulary recommendations to our clients, balancing
both clinical efficacy and cost, and our independence from drug store ownership
allows us to construct a variety or convenient and cost-effective retail
pharmacy networks for our clients, without favoring any particular pharmacy
chain. Some clients have indicated that this independence has been an important
factor in their decision making process.
There are a large number of companies offering PBM services in the United
States. Most of these companies are smaller than us and offer their services on
a local or regional basis. We do, however, compete with a number of large,
national companies, including Merck-Medco Managed Care, L.L.C. (a subsidiary of
Merck & Co., Inc.), PCS, Inc. (a subsidiary of Rite-Aid Corporation), Caremark
Rx, Inc., and Advance ParadigM, Inc., as well as numerous insurance and Blue
Cross and Blue Shield plans and certain HMOs which have their own PBM
capabilities. Several of these other companies may have greater financial,
marketing and technological resources than us.
In general, consolidation is a critical factor in the pharmaceutical
industry, and particularly so in the PBM segment. Competitors that are owned by
pharmaceutical manufacturers or drug store chains may have pricing advantages
that are unavailable to us and other independent PBMs. However, we believe
independence from pharmaceutical manufacturer and drug store ownership is
important to certain clients, and we believe this independence provides us an
advantage in marketing to those clients.
Some of our PBM services, such as disease management services, informed
decision counseling services and medical information management services,
compete with those being offered by pharmaceutical manufacturers, other PBMs,
large national companies, specialized disease management companies and
information service providers. Our non-PBM services compete with a number of
large national companies as well as with local providers.
Government Regulation
Various aspects of our businesses are governed by federal and state laws
and regulations. Since sanctions may be imposed for violations of these laws,
compliance is a significant operational requirement. We believe we are in
substantial compliance with all existing legal requirements material to the
operation of our businesses. There are, however, significant uncertainties
involving the application of many of these legal requirements to our business.
In addition, there are numerous proposed health care laws and regulations at the
federal and state levels, many of which could adversely affect our business. We
are unable to predict what additional federal or state legislation or regulatory
initiatives may be enacted in the future relating to our business or the health
care industry in general, or what effect any such legislation or regulations
might have on us. We cannot provide any assurance that federal or state
governments will not impose additional restrictions or adopt interpretations of
existing laws that could have a material adverse affect on our business or
financial position.
Pharmacy Benefit Management Regulation Generally. Certain federal and
related state laws and regulations affect or may affect aspects of our PBM
business. Among these are the following:
FDA Regulation. The U.S. Food and Drug Administration ("FDA") generally
has authority to regulate drug promotional materials that are disseminated "by
or on behalf of" a drug manufacturer. In January, 1998, the FDA issued a Notice
and Draft Guidance regarding its intent to regulate certain drug promotion and
switching activities of pharmacy benefit managers that are controlled, directly
or indirectly, by drug manufacturers. The position taken by the FDA in the Draft
Guidance was that promotional materials used by an independent PBM or managed
care organization may be subject to FDA regulation depending upon the
circumstances, including the nature of the relationship between the PBM, the HMO
and the manufacturer. We, along with various other parties, submitted written
comments to the FDA regarding the basis for FDA regulation of PBM and HMO
activities. It was our position that, while the FDA may have jurisdiction to
regulate drug manufacturers, the Draft Guidance went beyond the FDA's
jurisdiction. After extending the comment period due to numerous industry
objections to the proposed Draft, the FDA withdrew the Draft Guidance in the
fall of 1998, stating that it would reconsider the basis for such a Guidance.
The FDA has not addressed the issue since the withdrawal and has not indicated
when or even if it will continue to address the issue. However, there can be no
assurance that the FDA will not again attempt to assert jurisdiction over
certain aspects of our PBM business in the future and, in such event, the impact
could materially adversely affect our operations.
Anti-Remuneration/Fraud and Abuse Laws. Federal law prohibits, among
other things, an entity from paying or receiving, subject to certain exceptions
and "safe harbors," any remuneration to induce the referral of individuals
covered by federally funded health care programs, including Medicare, Medicaid
and CHAMPUS or the purchase (or the arranging for or recommending of the
purchase) of items or services for which payment may be made under Medicare,
Medicaid, CHAMPUS or other federally-funded health care programs. Several states
also have similar laws that are not limited to services for which Medicare or
Medicaid payment may be made. State laws vary and have been infrequently
interpreted by courts or regulatory agencies. Sanctions for violating these
federal and state anti-remuneration laws may include imprisonment, criminal and
civil fines, and exclusion from participation in the Medicare and Medicaid
programs.
The federal statute has been interpreted broadly by courts, the Office
of Inspector General ("OIG") within the Department of Health and Human Services,
and administrative bodies. Because of the federal statute's broad scope, federal
regulations establish certain "safe harbors" from liability. Safe harbors exist
for certain properly reported discounts received from vendors, certain
investment interests, certain properly disclosed payments made by vendors to
group purchasing organizations, and certain discount and payment arrangements
between PBMs and HMO risk contractors serving Medicaid and Medicare members. A
practice that does not fall within a safe harbor is not necessarily unlawful,
but may be subject to scrutiny and challenge. In the absence of an applicable
exception or safe harbor, a violation of the statute may occur even if only one
purpose of a payment arrangement is to induce patient referrals or purchases.
Among the practices that have been identified by the OIG as potentially improper
under the statute are certain "product conversion programs" in which benefits
are given by drug manufacturers to pharmacists or physicians for changing a
prescription (or recommending or requesting such a change) from one drug to
another. Such laws have been cited as a partial basis, along with state consumer
protection laws discussed below, for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail
pharmacies in connection with such programs.
To our knowledge, these anti-remuneration laws have not been applied to
prohibit PBMs from receiving amounts from drug manufacturers in connection with
drug purchasing and formulary management programs, to therapeutic intervention
programs conducted by independent PBMs, or to the contractual relationships such
as those we have with certain of our clients. It has recently been reported that
the U.S. Attorney's Office in Philadelphia has issued subpoenas to Merck-Medco
and PCS, both PBMs, and Schering-Plough Corp., a pharmaceutical manufacturer. We
have not been served with any such subpoena, nor are we privy to information
concerning the scope of information being requested by these subpoenas. However,
the U.S. Attorney's Office has been quoted to the effect that one issue being
investigated is whether certain practices engaged in by those PBMs violate
certain anti-remuneration statutes. We believe that we are in substantial
compliance with the legal requirements imposed by such laws and regulations, and
we believe that there are material differences between drug-switching programs
that have historically been challenged under these laws and the programs we
offer to our clients. However, there can be no assurance that we will not be
subject to scrutiny or challenge under such laws or regulations. Any such
challenge could have a material adverse effect on us.
ERISA Regulation. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which we have
agreements to provide PBM services. We believe that the conduct of our business
is not subject to the fiduciary obligations of ERISA, and our agreements with
our clients support this contention by providing that we are not the fiduciary
of the applicable plan. However, there can be no assurance that the U.S.
Department of Labor, which is the agency that enforces ERISA, would not assert
that the fiduciary obligations imposed by the statute apply to certain aspects
of our operations.
In addition to its fiduciary provisions, ERISA imposes civil and criminal
liability on service providers to health plans and certain other persons if
certain forms of illegal remuneration are made or received. These provisions of
ERISA are similar, but not identical, to the health care anti-remuneration
statutes discussed in the immediately preceding section; in particular, ERISA
lacks the statutory and regulatory "safe harbor" exceptions incorporated into
the health care statute. Like the health care anti-remuneration laws, the
corresponding provisions of ERISA are broadly written and their application to
particular cases is often uncertain. We have implemented policies, which include
disclosure to health plan sponsors with respect to any commissions paid by us
that might fall within the scope of such provisions, and accordingly believe we
are in substantial compliance with these provisions of ERISA. However, we can
provide no assurance that our policies in this regard would be found by the
appropriate enforcement authorities to meet the requirements of the statute.
Proposed Changes in Canadian Healthcare System. In Canada, the provincial
health plans provide universal coverage for basic health care services, but
prescription drug coverage under the government plans is provided only for the
elderly and the indigent. In late 1997, a proposal was made by a federal
government health care task force to include coverage for prescription drugs
under the provincial health insurance plans, which was endorsed by the federal
government's Health Minister. This report was advisory in nature, and not
binding upon the federal or provincial governments. We believe this initiative
is dormant at the present time, and we are unable to determine the likelihood of
adoption of the proposal in the future.
Numerous state laws and regulations also affect aspects of our PBM
business. Among these are the following:
Comprehensive PBM Regulation. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced in the past in California, New Jersey, Colorado, Texas and Virginia.
Such legislation, if enacted in a state in which we have a significant
concentration of business, could adversely impact our operations.
Consumer Protection Laws. Most states have consumer protection laws
that have been the basis for investigations and multi-state settlements relating
to financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with seventeen states on October 25, 1995, Merck-Medco
Managed Care, LLC ("Medco"), the PBM subsidiary of pharmaceutical manufacturer
Merck & Co., agreed to have pharmacists affiliated with Medco mail service
pharmacies disclose to physicians and patients the financial relationships
between Merck, Medco, and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another. We
believe that our contractual relationships with drug manufacturers and retail
pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no assurance
can be given that we will not be subject to scrutiny or challenge under one or
more of these laws.
Network Access Legislation. A majority of states now have some form of
legislation affecting our ability to limit access to a pharmacy provider network
or from removing network providers. Such legislation may require us or our
clients to admit any retail pharmacy willing to meet the plan's price and other
terms for network participation ("any willing provider" legislation); or may
provide that a provider may not be removed from a network except in compliance
with certain procedures ("due process" legislation). We have not been materially
affected by these statutes because we maintain a large network of over 53,000
retail pharmacies and will admit any duly licensed pharmacy that meets our
participation criteria, which address such matters as adequacy of insurance
coverage, minimum hours of operation, and the absence of disciplinary actions by
relevant state and federal agencies.
Legislation Affecting Plan Design. Some states have enacted legislation
that prohibits certain types of managed care plan sponsors from implementing
certain restrictive design features, and many states have introduced legislation
to regulate various aspects of managed care plans, including provisions relating
to the pharmacy benefit. For example, some states, under so-called "freedom of
choice" legislation, provide that members of the plan may not be required to use
network providers, but must instead be provided with benefits even if they
choose to use non-network providers. Other states have enacted legislation
purporting to prohibit health plans from offering members financial incentives
for use of mail service pharmacies. Legislation has been introduced in some
states to prohibit or restrict therapeutic intervention, or to require coverage
of all FDA approved drugs. Other states mandate coverage of certain benefits or
conditions, and require coverage of specific drugs if deemed medically necessary
by the prescribing physician. Such legislation does not generally apply to us,
but it may apply to certain of our clients (HMOs and health insurers). If such
legislation were to become widely adopted and broad in scope, it could have the
effect of limiting the economic benefits achievable through pharmacy benefit
management. This could have a material adverse effect on our business.
Licensure Laws. Many states have licensure or registration laws
governing certain types of ancillary health care organizations, including PPOs,
TPAs, and companies that provide utilization review services. The scope of these
laws differs significantly from state to state, and the application of such laws
to the activities of pharmacy benefit managers often is unclear. We have
registered under such laws in those states in which we have concluded, after
discussion with the appropriate state agency, that such registration is
required. Because of increased regulatory requirements on some of our managed
care clients affecting prior authorization of drugs before coverage is approved,
we have elected to obtain utilization review licenses in selected states through
our new ESI Utilization Management Co. In addition, accreditation agencies'
requirements on managed care organizations may also affect those delegated
services we provide to such organizations.
Legislation Affecting Drug Prices. Some states have adopted so-called
"most favored nation" legislation providing that a pharmacy participating in the
state Medicaid program must give the state the best price that the pharmacy
makes available to any third party plan. Such legislation may adversely affect
our ability to negotiate discounts in the future from network pharmacies. Other
states have enacted "unitary pricing" legislation, which mandates that all
wholesale purchasers of drugs within the state be given access to the same
discounts and incentives. Such legislation has been introduced in the past but
not enacted in Missouri, Arizona, Pennsylvania, New York, and New Mexico, all
states where we operate mail service pharmacies. Such legislation, if enacted in
a state where one of our mail service pharmacies is located, could adversely
affect our ability to negotiate discounts on our purchase of prescription drugs
to be dispensed by our mail service pharmacies.
Regulation of Financial Risk Plans. Fee-for-service prescription drug
plans are generally not subject to financial regulation by the states. However,
if the PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. In those cases in which we have contracts in which we
are materially at risk to provide the pharmacy benefit, we believe we have
complied with all applicable laws.
Many of these state laws may be preempted in whole or in part by ERISA,
which provides for comprehensive federal regulation of employee benefit plans.
However, the scope of ERISA preemption is uncertain and is subject to
conflicting court rulings, and in any event we provide services to certain
clients, such as governmental entities, that are not subject to the preemption
provisions of ERISA. Other state laws may be invalid in whole or in part as an
unconstitutional attempt by a state to regulate interstate commerce, but the
outcome of challenges to these laws on this basis is uncertain. Accordingly,
compliance with state laws and regulations is a significant operational
requirement for us.
Mail Pharmacy Regulation. Our mail service pharmacies are located in
Arizona, Missouri, New Mexico, New York and Pennsylvania, and we are licensed to
do business as a pharmacy in each such state. Many of the states into which we
deliver pharmaceuticals have laws and regulations that require out-of-state mail
service pharmacies to register with, or be licensed by, the board of pharmacy or
similar regulatory body in the state. These states generally permit the mail
service pharmacy to follow the laws of the state within which the mail service
pharmacy is located, although two states require that we also employ a
pharmacist licensed in their state. We have registered our pharmacies in every
state in which, to our knowledge, such registration is required.
One state has a statute that purports to prohibit residents from
obtaining prescription drugs by mail if the mail order business of the company
dispensing the drugs represents more than a specified percentage of the
company's total volume of pharmacy business. The statute is ambiguous in certain
respects, but we do not believe our mail order volume exceeds the threshold
percentage. We are licensed as a pharmacy in that state. No enforcement action
has been taken under the statute against us, and to our knowledge, no such
enforcement action is contemplated. Approximately 2.4% of our revenues come from
mail delivery of prescription drugs into that state. If an enforcement action
were commenced against us under that statute, we would consider all of our
alternatives, including challenging the validity of the statute. A bill is
pending in that state to repeal the mail service prohibition.
Other statutes and regulations affect our mail service operations.
Federal statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide clients with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the transmission of drugs and medicines through the mail
to a degree that could have an adverse effect on our mail service operations.
Regulation of Informed Decision Counseling and Disease Management
Services. Our health care decision support counseling and disease management
programs are affected by many of the same types of state laws and regulations as
our other activities. In addition, all states regulate the practice of medicine
and the practice of nursing. We do not believe our informed decision counseling
or disease management activities constitute either the practice of medicine or
the practice of nursing. However, there can be no assurance that a regulatory
agency in one or more states may not assert a contrary position, and we are not
aware of any controlling legal precedent for services of this kind.
Privacy and Confidentiality Legislation. Most of our activities involve
the receipt or use of confidential, medical information concerning individual
members. In addition, we use aggregated and anonymized data for research and
analysis purposes. Regulations have been proposed at the federal level and
legislation has been proposed, and in some cases enacted, in several states to
restrict the use and disclosure of confidential medical information. To date, no
such legislation has been enacted that adversely impacts our ability to provide
our services, but there can be no assurance that federal or state governments
will not enact legislation, impose restrictions or adopt interpretations of
existing laws that could have a material adverse effect on our operations.
In November 1999, the Department of Health and Human Services ("HHS")
issued draft privacy regulations, pursuant to the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"), which impose extensive restrictions on
the use and disclosure of individually identifiable health information. HHS has
received comments to the proposed regulations and it is not known when they will
be finalized. At such time as the regulations are finalized, we expect that
there will be a two-year implementation period within which we must comply. We
are unable to predict accurately what effect the final regulations may have on
us, and there can be no assurance that the restrictions and duties imposed by
the regulations will not have a material adverse effect on our business, results
of operations or financial condition.
Non-PBM Regulatory Environment. Our non-PBM activities operate in a
regulatory environment that is quite similar to that of our PBM activities.
Regulation of Infusion Therapy Services. Our infusion therapy services
business is subject to many of the same or similar federal and state laws and
regulations affecting our pharmacy benefit management business, including
anti-remuneration, physician self-referral, and other fraud and abuse type laws
and regulations. In addition, some states require that providers of infusion
therapy services be licensed. We are licensed as a home health agency and
pharmacy in Texas, as a residential service agency and pharmacy in Maryland, and
as a pharmacy in New Jersey, Missouri, Arizona and Pennsylvania. We are also
licensed as a non-resident pharmacy in various states. We believe that we are in
substantial compliance with such licensing requirements.
The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), a non-profit, private organization, has established written standards
for health care organizations and home care services, including standards for
services provided by home infusion therapy companies. All of our infusion
therapy facilities have received JCAHO accreditation, which allows us to market
infusion therapy services to Medicare and Medicaid programs. If we expand our
home infusion therapy services to other states or to Medicare or Medicaid
programs, we may be required to comply with other applicable laws and
regulations.
Future Regulation. We are unable to predict accurately what additional
federal or state legislation or regulatory initiatives may be enacted in the
future relating to our businesses or the health care industry in general, or
what effect any such legislation or regulations might have on us. There can be
no assurance that federal or state governments will not impose additional
restrictions or adopt interpretations of existing laws that could have a
material adverse effect on our business or financial position.
Service Marks and Trademarks
We, and our subsidiaries, have registered the service marks "Express
Scripts", "PERx", "ExpressComp", "ExpressReview", "ExpressTherapeutics", "IVTx",
"PERxCare", "PERxComp", "RxWizard", "PTE", "ValueRx", "Value Health, Inc." and
"Diversified", among others, with the United States Patent and Trademark Office.
Our rights to these marks will continue so long as we comply with the usage,
renewal filing and other legal requirements relating to the renewal of service
marks. We are in the process of applying for registration of several other
trademarks and service marks. If we are unable to obtain any additional
registrations, we believe there would be no material adverse effect on our
business.
Insurance
Our PBM operations, including the dispensing of pharmaceutical products by
our mail service pharmacies, and the services rendered in connection with our
disease management and informed decision counseling services, and our non-PBM
operations, such as the products and services provided in connection with our
infusion therapy programs (including the associated nursing services), may
subject us to litigation and liability for damages. We believe that our
insurance protection is adequate for our present business operations, but there
can be no assurance that we will be able to maintain our professional and
general liability insurance coverage in the future or that such insurance
coverage will be available on acceptable terms or adequate to cover any or all
potential product or professional liability claims. A successful product or
professional liability claim in excess of our insurance coverage, or one for
which an exclusion from coverage applies, could have a material adverse effect
upon our financial position or results of operations.
Employees
As of March 1, 2000, we employed a total of 4,529 employees in the U.S. and
77 employees in Canada. Approximately 504 of the U.S. employees are members of
collective bargaining units. Specifically, we employ members of the Service
Employees International Union at our Bensalem, Pennsylvania facility, members of
the United Auto Workers Union at our Farmington Hills, Michigan facility, and
members of the United Food and Commercial Workers Union ("UFCW") at our
Albuquerque, New Mexico facility. We believe our relationships with our
employees and our unions are good.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of the Annual Report on Form 10-K, the
information regarding our executive officers required by Item 401 of Regulation
S-K is hereby included in Part I of this report.
Our executive officers and their ages as of March 1, 2000 are as follows:
Name Age Position
Howard L. Waltman 67 Chairman of the Board
Barrett A. Toan 52 President, Chief Executive
Officer and Director
David A. Lowenberg 50 Chief Operating Officer
Terrence D. Arndt 56 Senior Vice President of Marketing
Stuart L. Bascomb 58 Executive Vice President - Sales
and Provider Relations and
Director
Thomas M. Boudreau 48 Senior Vice President, General
Counsel and Secretary
Mabel F. Chen 57 Senior Vice President and
Director of Site Operations
Robert W. (Joe) Davis 53 Senior Vice President and Chief
Information Systems Officer
Mark O. Johnson 46 Senior Vice President of
Administration
Linda L. Logsdon 52 Executive Vice President of
Health Management Services
George Paz 44 Senior Vice President and Chief
Financial Officer
Joseph W. Plum 52 Vice President and Chief
Accounting Officer
Mr. Waltman was elected Chairman of the Board in March 1992. Mr. Waltman
has been one of our directors since our inception in September 1986. From
September 1992 to December 31, 1995, Mr. Waltman served as the Chairman of the
Board of NYLCare Health Plans, Inc., which was an indirect wholly-owned
subsidiary of New York Life Insurance Company at the time.
Mr. Toan was elected Chief Executive Officer in March 1992 and President
and a director in October 1990. Mr. Toan has been an executive employee of ours
since May 1989.
Mr. Lowenberg was elected our Chief Operating Officer in September 1999,
also served as Director of Site Operations from October 1994 until September
1999 and Vice President in November 1993. Mr. Lowenberg also served as General
Manager of the Tempe facility from March 1993 until January 1995.
Mr. Arndt joined us and was elected Senior Vice President of Marketing in
April 1999. Prior to joining us, Mr. Arndt was President and Chief Operating
Officer of EDI USA from July 1997 to April 1999. Mr. Arndt served as Vice
President of Business Development for Card Establishment Services, a former
division of CitiBank owned by the firm of Welsh, Carson, Anderson and Stowe,
from July 1994 to July 1997.
Mr. Bascomb was elected Executive Vice President in March 1989 and a
director in January 2000, and also served as Chief Financial Officer and
Treasurer from March 1992 until May 1996. Since May 1996, Mr. Bascomb has served
as Executive Vice President - Sales and Provider Relations.
Mr. Boudreau was elected Senior Vice President, General Counsel and
Secretary in October 1994. He has served as General Counsel since June 1994.
From September 1984 until June 1994, Mr. Boudreau was a partner in the St. Louis
law firm of Husch & Eppenberger.
Ms. Chen was elected Senior Vice President and Director of Site Operations
in November 1999. From March 1996 until November 1999, Ms. Chen served as Vice
President and General Manager of our Tempe facility. From January 1995 until
joining Express Scripts, Ms. Chen served as the Director of Medicaid for the
State of Arizona.
Mr. Davis was elected Senior Vice President and Chief Information Systems
Officer in September 1997. Mr. Davis served as Director of Technical Services
and Computer Operations from July 1993 until July 1995, and as Vice President
and General Manager of our St. Louis Operations from July 1995 until September
1997.
Mr. Johnson was elected Senior Vice President of Integration in May 1999,
and has served as Senior Vice President of Administration since February 2000.
Prior to joining us, Mr. Johnson served as President of DPS from May 1998 to
April 1999 and Senior Vice President, Client Service and Sales of DPS from May
1997 to May 1998. From August 1996 to May 1997, Mr. Johnson was President and
Chief Executive Officer of American Day Treatment Center, Inc. and also served
as Executive Vice President, Operations and Chief Operating Officer from March
1992 to August 1996.
Ms. Logsdon was elected Executive Vice President of Health Management
Services in May 1999, and served as Senior Vice President of Health Management
Services from May 1997 until May 1999. Ms. Logsdon served as Vice President of
Demand and Disease Management from November 1996 until May 1997. Prior to
joining us in November 1996, Ms. Logsdon served as Vice President of Corporate
Services and Chief Operating Officer of United HealthCare's Midwest
Companies-GenCare/Physicians Health Plan/MetraHealth, a St. Louis-based health
maintenance organization, from February 1995 to October 1996, and as Deputy
Director/Vice President of GenCare Health Systems, Inc., also a St. Louis-based
health maintenance organization, from June 1992 to February 1995.
Mr. Paz joined us and was elected Senior Vice President and Chief Financial
Officer in January 1998. Prior to joining us, Mr. Paz was a partner in the
Chicago office of Coopers & Lybrand from December 1995 to December 1997, and
served as Executive Vice President and Chief Financial Officer of Life Partners
Group, Inc., a life insurance company, from October 1993 until December 1995.
Mr. Plum was elected Vice President in October 1994 and has served as Chief
Accounting Officer since March 1992 and Corporate Controller since March 1989.
Forward Looking Statements and Associated Risks
Information that we have included or incorporated by reference in this
Annual Report on Form 10-K, and information that may be contained in our other
filings with the SEC and our press releases or other public statements, contain
or may contain forward-looking statements. These forward-looking statements
include, among others, statements of our plans, objectives, expectations or
intentions.
Our forward-looking statements involve risks and uncertainties. Our actual
results may differ significantly from those projected or suggested in any
forward-looking statements. We do not undertake any obligation to release
publicly any revisions to such forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. Factors that might cause such a difference to occur
include, but are not limited to:
o risks associated with the implementation of our Internet strategy
o risks associated with the integration of ValueRx and DPS
o risks associated with our leverage and debt service obligations
o risks associated with our ability to manage and maintain internal
growth
o competition, including price competition, competition in the bidding
and proposal process and our ability to consummate contract
negotiations with prospective clients
o the possible termination of contracts with key clients or providers
o the possible loss of relationships with pharmaceutical manufacturers,
or changes in pricing, discount, rebate or other practices of
pharmaceutical manufacturers
o adverse results in litigation
o adverse results in regulatory matters, the adoption of adverse
legislation or regulations, more aggressive enforcement of existing
legislation or regulations, or a change in the interpretation of
existing legislation or regulations
o developments in the health care industry, including the impact of
increases in health care costs, changes in drug utilization patterns
and introductions of new drugs
o dependence on key members of management
o our relationship with New York Life Insurance Company, which possesses
voting control of us
o other risks described from time to time in our filings with the SEC
These and other relevant factors, including any other information included or
incorporated by reference in this Report, and information that may be contained
in our other filings with the SEC, should be carefully considered when reviewing
any forward-looking statement. The occurrence of any of the following risks,
among others, could materially adversely affect our business, results of
operations and financial condition.
Failure to Implement Our Internet Strategy Could Adversely Affect Our Business
We continue to implement and refine our Internet strategy, which will
generally web-enable all components of the pharmacy benefit delivery equation.
To the extent we do not successfully implement this strategy, we may be at a
competitive disadvantage compared to our competitors, which may adversely affect
our ability to attract and retain clients.
Failure to Integrate ValueRx and DPS Could Adversely Affect Our Business
On April 1, 1998, we completed our first major acquisition by acquiring
Value Health, Inc. and Managed Prescription Network, Inc. (collectively,
"ValueRx"), the PBM business of Columbia/HCA Healthcare Corporation, for
approximately $460 million in cash. This transaction significantly increased our
membership base and the complexity of our operations. On April 1, 1999, we
completed our acquisition of Diversified Pharmaceutical Services, Inc. and
Diversified Pharmaceutical Services (Puerto Rico), Inc. (collectively, "DPS")
from SmithKline Beecham Corporation and one of its affiliates for $715 million
in cash. In light of both acquisitions, we have developed and are implementing
an integration plan to address items such as:
o retention of key employees
o consolidation of administrative and other duplicative functions
o coordination of sales, marketing, customer service and clinical
functions
o systems integration
o new product and service development
o client retention and other items o facility consolidation
While we have achieved many of our integration goals to date with
respect to the acquisitions, certain significant integration challenges remain,
including the complete integration of our information technology systems. We
cannot provide any assurance that our integration plan will successfully address
all aspects of our operations, or that we will continue to achieve our
integration goals. In addition, we assumed specific financial targets when
deciding to purchase ValueRx and DPS. We cannot provide any assurance that we
will be able to achieve our targets. Failure to do so could materially adversely
affect our results of operations or financial condition.
Our Leverage and Debt Service Obligations Could Impede Our Operations and
Flexibility
We have significant leverage, which means that the amount of our
outstanding debt is large compared to the net book value of our assets, and we
have substantial repayment obligations and interest expense. As of December 31,
1999, we have total consolidated debt of approximately $636 million ($606
million after our $30 million repayment in January 2000). We may incur
additional indebtedness in the future.
Our level of debt and the limitations imposed on us by our debt agreements
could have important consequences, including the following:
o we will have to use a substantial portion of our cash
flow from operations for debt service rather than for
our operations
o we may not be able to obtain additional debt financing
for future working capital, capital expenditures or
other corporate purposes
o approximately 21% of the debt under our bank credit
facility is at a variable interest rate, making us
vulnerable to increases in interest rates
o we could be less able to take advantage of significant
business opportunities, such as acquisition
opportunities, and react to changes in market or
industry conditions
o we could be more vulnerable to general adverse economic
and industry conditions
o we may be disadvantaged compared to competitors with
less leverage
Furthermore, our ability to satisfy our obligations, including our debt
service requirements, will be dependent upon our future performance. Factors
which could affect our future performance include, without limitation,
prevailing economic conditions and financial, business and other factors, many
of which are beyond our control and which affect our business and operations.
Our bank credit facility is secured by the capital stock of each of our
existing and subsequently acquired domestic subsidiaries, excluding Practice
Patterns Science, Great Plains Reinsurance Company, ValueRx of Michigan, Inc.,
Diversified NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico),
Inc., and 65% of the stock of our foreign subsidiaries. If we are unable to meet
our obligations under this bank credit facility, these creditors could exercise
their rights as a secured party and take possession of the pledged capital stock
of these subsidiaries. This would materially adversely affect our results of
operations and financial condition.
Failure to Manage and Maintain Internal Growth Could Adversely Affect
Our Business
We have experienced rapid internal growth over the past several years. Our
ability to effectively manage and maintain this internal growth will require
that we continue to improve our financial and management information systems as
well as identify and retain key personnel. We can provide no assurance that we
will successfully meet these requirements or that we will have access to
sufficient capital to do so. Our internal growth is also dependent upon our
ability to attract new clients and achieve growth in the membership base of our
existing clients. If we are unable to continue our client and membership growth,
our results of operations and financial position could be materially adversely
affected.
Competition Could Reduce Our Membership and Our Profit Margins
Pharmacy benefit management is a very competitive business. Our competitors
include several large and well-established companies that may have greater
financial, marketing and technological resources than we do. One major
competitor in the PBM business, Merck-Medco Managed Care, L.L.C., is owned by
Merck & Co., Inc., a large pharmaceutical manufacturer. Another major
competitor, PCS, Inc., is owned by Rite-Aid Corporation, a large retail pharmacy
chain. Both of these competitors may possess purchasing or other advantages over
us by virtue of their ownership, and could succeed in taking away some of our
clients. Consolidation in the PBM industry may also lead to increased
competition among a smaller number of large PBM companies. Competition may also
come from other sources in the future, including from Internet-based providers
such as Drugstore.com, or from Internet-based connectivity companies, such as
Healtheon/WebMD. We cannot predict what effect, if any, these new competitors
may have on the marketplace or on our business.
Over the last several years intense competition in the marketplace has
caused many PBMs, including us, to reduce the prices charged to clients for core
services and share a larger portion of the formulary fees and related revenues
received from drug manufacturers with clients. This combination of lower pricing
and increased revenue sharing has caused our operating margins to decline (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). We expect to continue marketing our services to larger clients,
who typically have greater bargaining power than smaller clients. This might
create continuing pressure on our margins. We can give no assurance that new
services provided to these clients will fully compensate for these reduced
margins.
Failure to Retain Key Clients and Network Pharmacies Could Adversely Affect Our
Business and Limit Our Access to Retail Pharmacies
We currently provide PBM services to approximately 9,300 clients, including
several large clients. Our acquisitions have diversified our client base and
reduced our dependence on any single client. Our top 10 clients, measured as of
January 1, 2000, but excluding UHC, represent approximately 28% of our total
membership base, but no single client represents more than approximately 4% of
our membership base. Our contracts with clients generally do not have terms of
longer than three years and, in some cases, are terminable by either party on
relatively short notice. Our larger clients generally distribute requests for
proposals and seek bids from other PBM providers in advance of the expiration of
their contracts. If several of these large clients elect not to extend their
relationship with us, and we are not successful in generating sales to replace
the lost business, our future business and operating results could be materially
adversely affected. In addition, we believe the managed care industry is
undergoing substantial consolidation, and another party that is not our client
could acquire some of our managed care clients. In such case, the likelihood
such client would renew its PBM contract with us could be reduced.
As of January 1, 2000, UHC represents our largest client, with
approximately 9.5 million members, which accounts for approximately 20% of our
membership base. Our contract with UHC expires on May 31, 2000, and UHC will
begin moving to another provider at that time. We have developed a migration
plan to transition the UHC membership to their new provider beginning in June
2000 and continuing its migration of members through the end of 2000. In our
financial analysis of the DPS acquisition, we assumed UHC would not renew its
contract. However, if we are unable to reduce our costs on a basis commensurate
with our expectations and manage the transition of this large client to another
provider both efficiently and effectively based upon our migration plan, the
termination of this contract may materially adversely affect our business and
results of operations.
Our largest national provider network consists of more than 53,000 retail
pharmacies, which represent more than 99% of the retail pharmacies in the United
States. However, the top 10 retail pharmacy chains represent approximately 42%
of the 53,000 pharmacies, with these pharmacy chains representing even higher
concentrations in certain areas of the United States. Our contracts with retail
pharmacies, which are non-exclusive, are generally terminable by either party on
relatively short notice. If one or more of the top pharmacy chains elects to
terminate its relationship with us, our members' access to retail pharmacies and
our business could be materially adversely affected. In addition, large pharmacy
chains either own PBMs today, as is the case with Rite-Aid Corporation who owns
one of our major competitors, PCS, Inc., or could attempt to acquire a PBM in
the future. Ownership of PBMs by retail pharmacy chains could have material
adverse effects on our relationships with such pharmacy chains and on our
business and results of operations.
Loss of Relationships with Pharmaceutical Manufacturers and Changes in the
Regulation of Discounts and Rebates Provided to Us by Pharmaceutical
Manufacturers Could Decrease Our Profits
We maintain contractual relationships with numerous pharmaceutical
manufacturers that provide us with:
o discounts at the time we purchase the drugs to be
dispensed from our mail pharmacies
o rebates based upon sales of drugs from our mail
pharmacies and through pharmacies in our retail
networks
o administrative fees based upon the development and
maintenance of formularies which include the particular
manufacturer's products
These fees are all commonly referred to as formulary fees or formulary
management fees.
We also provide various services for, or services which are funded wholly
or partially by, pharmaceutical manufacturers. These services include:
o compliance programs, which involve instruction and
counseling of patients concerning the importance of
compliance with the drug treatment regimen prescribed
by their physician
o therapy management programs, which involve education of
patients having specific diseases, such as asthma and
diabetes, concerning the management of their condition
o market research programs in which we provide
information to manufacturers concerning drug
utilization patterns.
These arrangements are generally terminable by either party on relatively short
notice. If several of these arrangements are terminated or materially altered by
the pharmaceutical manufacturers, our operating results could be materially
adversely affected. In addition, formulary fee programs, as well as some of the
services we provide to the pharmaceutical manufacturers, have been the subject
of debate in federal and state legislatures and various other public and
governmental forums. Changes in existing laws or regulations or in their
interpretations, or the adoption of new laws or regulations, relating to any of
these programs may materially adversely affect our business.
Patents covering many brand name drugs that currently have substantial
market share will expire over the next several years, and generic drugs will be
introduced at prices that may substantially reduce the market share of these
brand name drugs. Unlike brand name drug manufacturers, manufacturers of generic
drugs do not generally offer incentive payments on their drugs to PBMs in the
form of discounts, rebates or other formulary fees. Although we expect new drugs
with patent protection to be introduced in the future, we can provide no
assurance such drugs will capture a significant share of the market such that
our incentive payment revenues will not be reduced.
Pending and Future Litigation Could Materially Affect Our Relationships
with Pharmaceutical Manufacturers or Subject Us to Significant Monetary Damages
Since 1993, retail pharmacies have filed over 100 separate lawsuits against
drug manufacturers, wholesalers and certain PBMs, challenging brand name drug
pricing practices under various state and federal antitrust laws. The plaintiffs
alleged, among other things, that the manufacturers had offered, and certain
PBMs had knowingly accepted, discounts and rebates on purchases of brand name
prescription drugs that violated the Federal Sherman Act and the Federal
Robinson-Patman Act. Some manufacturers settled certain of these actions,
including a Sherman Act case brought on behalf of a nationwide class of retail
pharmacies. The class action settlements generally provided for commitments by
the manufacturers in their discounting practices to retail pharmacies. The
Sherman Act class action was dismissed as to these drug manufacturers and
wholesalers who did not settle. With respect to the cases filed by plaintiffs
who opted out of the class action, while some drug manufacturers have settled
certain of these actions, such settlements are not part of the public record.
The Robinson-Patman Act cases are still pending.
We are not currently a party to any of these proceedings. To date, we do
not believe any of these settlements have had a material adverse effect on our
business. However, we cannot provide any assurance that the terms of the
settlements will not materially adversely affect us in the future or that we
will not be made a party to any separate lawsuit. In addition, we cannot predict
the outcome or possible ramifications to our business of the Robinson-Patman Act
cases.
We are also subject to risks relating to litigation and liability for
damages in connection with our PBM operations, including the dispensing of
pharmaceutical products by our mail pharmacies, the services rendered in
connection with our formulary management and informed decision counseling
services, and our non-PBM operations, including the products and services
provided in connection with our infusion therapy programs (and the associated
nursing services). We believe our insurance protection is adequate for our
present operations. However, we cannot provide any assurance that we will be
able to maintain our professional and general liability insurance coverage in
the future or that such insurance coverage will be available on acceptable terms
to cover any or all potential product or professional liability claims. A
successful product or professional liability claim in excess of our insurance
coverage could have a material adverse effect on our business.
Changes in State and Federal Regulations Could Restrict Our Ability to Conduct
Our Business
Numerous state and federal laws and regulations affect our business and
operations. The categories include, but are not necessarily limited to:
o health care fraud and abuse laws and regulations, which prohibit
certain types of referral and other payments
o the Employee Retirement Income Security Act and related regulations,
which regulate many health care plans
o proposed comprehensive state PBM legislation
o consumer protection laws and regulations
o pharmacy network access laws, including "any willing provider" and
"due process" legislation, that regulate aspects of our pharmacy
network contracts
o legislation imposing benefit plan design restrictions, which limit how
our clients can design their drug benefit plans
o various licensure laws, such as managed care and third party
administrator licensure laws
o drug pricing legislation, including "most favored nation" pricing and
"unitary pricing" legislation
o mail pharmacy laws and regulations
o privacy and confidentiality laws and regulations
o Medicare prescription drug coverage proposals
o other Medicare and Medicaid reimbursement regulations
o potential regulation of the PBM industry by the U.S. Food and Drug
Administration
These and other regulatory matters are discussed in more detail under "Business
- - Government Regulation" above.
We believe we are operating our business in substantial compliance with
all existing legal requirements material to the operation of our business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to our business, and we cannot provide any assurance
that a regulatory agency charged with enforcement of any of these laws or
regulations will not interpret them differently or, if there is an enforcement
action brought against us, that our interpretation would prevail. In addition,
there are numerous proposed health care laws and regulations at the federal and
state levels, many of which could materially affect our ability to conduct our
business or adversely affect our results of operations. We are unable to predict
what additional federal or state legislation or regulatory initiatives may be
enacted in the future relating to our business or the health care industry in
general, or what effect any such legislation or regulations might have on us.
Efforts to Reduce Health Care Costs and Alter Health Care Financing Practices
Could Adversely Affect Our Business
Efforts are being made in the United States to control health care costs,
including prescription drug costs, in response to, among other things, increases
in prescription drug utilization rates and drug prices. If these efforts are
successful or if prescription drug utilization rates were to decrease
significantly, our business and results of operations could be materially
adversely affected.
We have designed our business to compete within the current structure of
the U.S. health care system. Changing political, economic and regulatory
influences may affect health care financing and reimbursement practices. If the
current health care financing and reimbursement system changes significantly,
our business could be materially adversely affected. Congress is currently
considering proposals to reform the U.S. health care system. These proposals may
increase governmental involvement in health care and PBM services, and otherwise
change the way our clients do business. Health care organizations may react to
these proposals and the uncertainty surrounding them by reducing or delaying
purchases of cost control mechanisms and related services that we provide. We
cannot predict what effect, if any, these proposals may have on our business.
Other legislative or market-driven changes in the health care system that we
cannot anticipate could also materially adversely affect our business.
Loss of Key Management Could Adversely Affect Our Business
Our success is materially dependent upon certain key managers and, in
particular, upon the continued services of Barrett A. Toan, our President and
Chief Executive Officer. Our future operations could be materially adversely
affected if the services of Mr. Toan cease to be available. We are party to an
employment agreement with Mr. Toan that currently extends to March 31, 2002.
This agreement automatically extends for an additional year on April 1, 2001 and
on each April 1 thereafter unless either party gives notice of termination at
least 30 days prior to such April 1. As of the date hereof, neither Mr. Toan has
nor we have given such notice.
New York Life Insurance Company Can Control Our Business and Limit Our Ability
to Enter Into Selected Business Transactions
We have two classes of authorized common stock: Class A Common Stock and
Class B Common Stock. Our Class A Common Stock has been publicly traded on The
Nasdaq National Market since June 9, 1992. Our Class B Common Stock is entirely
owned by NYLIFE HealthCare Management, Inc. ("NYLIFE HealthCare"), an indirect
subsidiary of New York Life Insurance Company ("New York Life"). Each share of
our Class A Common Stock has one vote per share, and each share of our Class B
Common stock has ten votes per share. Consequently, although NYLIFE HealthCare
currently owns approximately 39% of our total outstanding shares of Common
Stock, it possesses approximately 86% of the combined voting power of both
classes of Common Stock. NYLIFE HealthCare could reduce its Class B Common Stock
ownership to represent slightly less than 10% of the total outstanding shares of
our common stock and still control a majority of the voting power of our common
stock. Accordingly, without regard to the votes of our public stockholders,
NYLIFE HealthCare can
o elect or remove all of our directors
o amend our certificate of incorporation, except where the separate
approval of the holders of our Class A Common Stock is required by law
o accept or reject a merger, sale of assets or other major corporate
transaction
o accept or reject any proposed acquisition of ours
o determine the amount and timing of dividends paid to itself and
holders of our Class A Common Stock
o except in limited circumstances, otherwise control our management and
operations and decide all matters submitted for a stockholder vote
Our Class B common stock will automatically convert into the same number of
shares of our Class A common stock upon transfer by NYLIFE HealthCare to any
entity other than an affiliate of New York Life or otherwise at the option of
NYLIFE HealthCare. We cannot assure you, however, that our Class B common stock
would automatically convert into our Class A common stock if New York Life were
to transfer the stock of NYLIFE HealthCare to someone who is not an affiliate of
New York Life.
Item 2 - Properties
We operate our United States and Canadian PBM and non-PBM businesses out of
leased and owned facilities throughout the United States and Canada. All of our
facilities are leased except for our Albuquerque, New Mexico facility, which we
own.
PBM Facilities Non-PBM Facilities
Maryland Heights, Missouri Maryland Heights, Missouri
Earth City, Missouri Earth City, Missouri
Tempe, Arizona Columbia, Missouri
Bloomington, Minnesota Dallas, Texas
Plymouth, Minnesota Houston, Texas
Bensalem, Pennsylvania Columbia, Maryland
Troy, New York Tempe, Arizona
Farmington Hills, Michigan Springfield, New Jersey
Albuquerque, New Mexico West Chester, Pennsylvania
Horsham, Pennsylvania
Mississauga, Ontario
Our Maryland Heights, Missouri facility houses our corporate offices.
Express Scripts Infusion Services and Specialty Distribution Services corporate
offices are also located at our Maryland Heights, Missouri facility. Our
Specialty Distribution services are operated out of our facility in Tempe,
Arizona and a separate facility in Maryland Heights, Missouri. We believe our
facilities have been generally well maintained and are in good operating
condition. Our existing facilities contain approximately 1,100,000 square feet
in area, in the aggregate.
We own computer systems for both the Maryland Heights, Missouri and Tempe,
Arizona sites. In late 1999, we entered into a five year agreement with EDS to
outsource our IS operations. Under the terms of the agreement, EDS has
responsibility for operating and maintaining the computer systems. Our software
for drug utilization review and other products has been developed internally by
us or purchased under perpetual, nonexclusive license agreements with third
parties. Our computer systems at each site are extensively integrated and share
common files through local and wide area networks. An uninterruptable power
supply and diesel generator allow our computers, telephone systems and mail
pharmacy at each site to continue to function during a power outage. To protect
against loss of data and extended downtime, we store software and redundant
files at both on-site and off-site facilities on a regular basis and have
contingency operation plans in place. We cannot, however, provide any assurance
that our contingency or disaster recovery plans would adequately address all
relevant issues.
Item 3 - Legal Proceedings
As discussed in detail in our Quarterly Report on Form 10-Q for the period
ended June 30, 1998, filed with the Securities and Exchange Commission on August
13, 1998 (the "Second Quarter, 1998 10-Q"), we acquired all of the outstanding
capital stock of Value Health, Inc., a Delaware corporation ("Value Health"),
and Managed Prescription Network, Inc., a Delaware corporation ("MPN") from
Columbia HCA/HealthCare Corporation ("Columbia") and its affiliates on April 1,
1998 (the "Acquisition"). Value Health, MPN and/or their subsidiaries
(collectively, the "Acquired Entities"), were party to various legal
proceedings, investigations or claims at the time of the Acquisition. The effect
of these actions on our future financial results is not subject to reasonable
estimation because considerable uncertainty exists about the outcomes.
Nevertheless, in the opinion of management, the ultimate liabilities resulting
from any such lawsuits, investigations or claims now pending should not
materially affect our consolidated financial position, results of operations or
cash flows. A brief description of the most notable of the proceedings follows:
Bash, et al. v. Value Health, Inc., et al., No. 3:97cv2711 (JCH)(D.Conn.)
("Bash"). On December 15, 1995, a purported shareholder class action lawsuit was
filed by Irwin Bash and Leykin, Hyman & Bash Associates in the United States
District Court for the District of New Mexico against Diagnostek, Inc.
("Diagnostek"), Nunzio P. DeSantis, William Baron, and Courtland Miller (all
former Diagnostek officers). Also named as defendants in Bash are Value Health,
Inc. ("Value Health"), Robert E. Patricelli, William J. McBride and Steven J.
Shulman (certain of Value Health's former officers). The Bash Complaint asserts
that Value Health and certain other defendants made false or misleading
statements to the public in connection with Value Health's acquisition of
Diagnostek in 1995, and that Diagnostek and certain of its former officers and
directors made false or misleading statements concerning its financial condition
prior to the acquisition of Value Health. The Bash Complaint asserts claims
under the Securities Act of 1933 and the Securities Exchange Act of 1934, as
well as common law claims, and seeks certification of a class consisting of all
persons (with certain exclusions) who purchased or otherwise acquired (a)
Diagnostek common stock from March 27, 1994 through July 28, 1995; (b) Value
Health common stock pursuant to a Proxy and Prospectus and merger in which their
Diagnostek shares were converted into Value Health shares; and (c) Value Health
common stock from March 27, 1995 through November 7, 1995. The Bash Complaint
does not specify the amount of damages sought. On March 26, 1996, the former
Diagnostek officers filed a motion seeking either dismissal of the case or a
transfer to the District of Connecticut, where the earlier-filed Freedman action
(discussed below) was pending. In the late summer of 1997, the Bash plaintiffs
filed an Amended Complaint that deleted those allegations that overlapped with
the allegations contained in an earlier lawsuit filed against Diagnostek and
certain of its former officers. A formal order approving the settlement of this
earlier lawsuit was entered by the United States District Court for the District
of New Mexico on November 21, 1997. In addition, defendants filed a renewed
motion to transfer the action to Connecticut. On October 24, 1997, an answer was
filed on behalf of Value Health, Diagnostek, and the former directors and
officers of Value Health who had been named as defendants. On November 28, 1997,
the New Mexico court entered an order transferring the action to Connecticut. On
February 4, 1998, the court ordered that plaintiffs in the Freedman action,
discussed below, share all discovery obtained from the defendants and third
parties in their lawsuit with the plaintiffs in the Bash lawsuit. On March 17,
1998, the defendants filed a motion to consolidate this lawsuit with the
Freedman lawsuit discussed below, and the court granted the motion on April 24,
1998.
Freedman, et al. v. Value Health, Inc., et al., No. 3:95 CV 2038
(JCH)(D.Conn). On September 22 and 25, 1995, two related lawsuits were filed
against Value Health and certain other defendants in the United States District
Court for the District of Connecticut. On February 16, 1996, a single,
consolidated class action complaint was filed covering both suits (the "Freedman
Complaint"), naming as defendants Value Health, Robert E. Patricelli, William J.
McBride, Steven J. Shulman, David M. Wurzer, David J. McDonnell, Walter J.
McNerny, Rodman W. Moorhead, III, Constance P. Newman, and John L. Vogelstein,
all former Value Health directors and officers, and Nunzio P. DeSantis, the
former president of Diagnostek. The Freedman Complaint alleges that Value Health
and certain other defendants