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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, 2000, 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 January 31, 2001, was $3,582,603,430 based on 38,600,441
such shares held on such date by non-affiliates and the last sale price for the
Class A Common Stock on such date of $92.8125 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 are affiliates of the
Registrant and has assumed that NYLIFE LLC is not an affiliate of the
Registrant. On such date, NYLIFE LLC was the beneficial owner of 8,120,000
shares of the Registrant's Class A Common Stock, having an aggregate market
value of $753,637,500.
Common stock outstanding as of January 31, 2001: 38,786,311 Shares Class A
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 2001 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, 2000.
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 8% of
U.S. health care expenditures in 1998, and are expected to increase to 11% 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 11% through 2008, compared to an average annual growth rate of
approximately 6% for total health care costs during this period. Based upon
information in our 1999 Annual Drug Trend report, described below under
"--Clinical Support", we estimate that average drug spending will grow at an
annual rate of 15% from 2000 through 2004 and average per member drug spend will
grow at a compound annual rate of 15% from 1995 through 2004, and that per
member drug spend in 2004 will be approximately $760 compared to $387 in 1999
and $216 in 1995. 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 for HMOs, health insurers,
employers and unions that provide a drug benefit as part of the health plans
they offer to members of their respective organizations. Certain of 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. There are an estimated 60 PBMs serving a
population of approximately 180 million members and processing approximately 2.5
billion prescriptions annually. The PBM industry processed approximately $98
billion worth of prescriptions in 2000. The three largest PBMs account for
approximately 55% 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.
Company Overview
We are the third largest PBM in North America. We are independent from
pharmaceutical manufacturer ownership, and believe our independence is important
as it allows us to make unbiased formulary recommendations to our clients,
balancing both clinical efficacy and cost.
We provide a full range of pharmacy benefit management services, including
retail drug card programs, mail pharmacy services, drug formulary management
programs and other clinical management programs for approximately 19,000 client
groups that include HMOs, health insurers, third-party administrators,
employers, union-sponsored benefit plans and government health programs. As of
January 1, 2001, some of our largest clients include Aetna U.S. Healthcare,
Oxford Health Plans, Blue Cross Blue Shield of Massachusetts, the State of
Georgia, Blue Shield of California and Mutual of Omaha.
As of January 1, 2001, our PBM services were provided to approximately 43.5
million members in the United States and Canada who were enrolled in health
plans sponsored by our clients. In computing the number of members we serve we
make certain estimates and adjustments. We believe different PBMs use different
factors in making these estimates and adjustments. We also believe, however,
that these numbers are a reasonable approximation of the actual number of
members served by us.
Our PBM services include:
o network pharmacy management, mail pharmacy services, benefit
design consultation, drug utilization review, formulary
management programs, disease management, 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 services 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 wholly owned subsidiary Express Scripts
Specialty Distribution Services
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 2000, 1999 and 1998, revenues from
the delivery of prescription drugs to our members represented 94.1%, 93.4% and
98.2% of our total revenues, respectively. Revenues from services, such as the
administration of contracts between our clients and the clients' retail pharmacy
networks, 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.
Prescription drugs are dispensed to members of the health plans we serve
primarily through networks of retail pharmacies that are under non-exclusive
contract with us and through five mail pharmacy service centers that we operate
out of leased facilities. More than 55,000 retail pharmacies, representing more
than 99% of all United States retail pharmacies, participate in one or more of
our networks. In 2000, we processed approximately 241.8 million network pharmacy
claims and 15.2 million mail pharmacy prescriptions, with an estimated total
drug spending of $11.2 billion, excluding United HealthCare ("UHC") network
pharmacy claims of 57.8 million having an estimating total drug spending of $2.7
billion. Our contract with UHC expired on May 31, 2000 and we transitioned the
UHC membership to another provider throughout 2000.
We were incorporated in Missouri in September 1986, and were reincorporated
in Delaware in March 1992. 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 Services
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 services include:
o retail network pharmacy 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 and
express-scripts.com websites
During 2000, 98.7% of our revenues were derived from PBM services, compared
to 98.5% and 97.9% during 1999 and 1998, respectively. The number of retail
pharmacy network claims processed and mail pharmacy claims processed, excluding
UHC, has increased to 241.8 million and 15.2 million claims, respectively, in
2000, from 57.8 million and 2.8 million claims, respectively, in 1996. During
1999 and 1998, we processed 211.3 million, excluding UHC, and 113.2 million
retail pharmacy network claims, respectively, and 10.6 million and 7.4 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 four nationwide networks in the United States that are
responsive to client preferences related to cost containment and convenience of
access for members. We also manage over 400 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. We manage one nationwide
network in Canada.
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 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 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.
Benefit Plan Design and Consultation. We offer consultation and financial
modeling to assist our clients in selecting a benefit plan design that meets
their 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. We have
over 10 years of formulary development expertise and an extensive clinical
pharmacy department.
Our 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 perform 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 composed of 17 independent
physicians, our Chief Medical Officer and five of our pharmacists, approves it.
This panel does not consider any information regarding the discount or formulary
fee arrangement that might be negotiated with the manufacturer in making its
clinical recommendation. This ensures that the clinical recommendation is not
affected by the purchasing arrangement.
We administer a number of different formularies for our clients that
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. Other 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 clinically
appropriate cost-effective products 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 recommended substitution in light of the patient's medical history
and approve or deny 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 by identifying potential
and inappropriate prescribing practices.
Information Reporting and Analysis and Disease Management Programs. Through
the use of sophisticated information and reporting systems, we are better able
to manage the prescription drug benefit. We are able 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 assist clients to identify
costly utilization patterns through an on-line prescription drug decision
support tool called ProActSM. This service allows our clients 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 warehouses and the applications to provide
insight into the subtleties of health care delivery.
We offer 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. We
identify patients who may benefit from these programs through claims data
analysis or self-enrollment. We conduct risk stratification surveys to establish
a plan of care for individual program participants. We provide patient education
primarily through a series of telephone and written communications with nurses
and pharmacists, and both providers and patients receive progress reports on a
regular basis. We conduct outcome surveys 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 health care matters with
a care counselor. The care counselor utilizes on-line decision support protocols
and other guidelines to provide the member information to assist them in making
an informed decision in seeking appropriate treatment. Records of each call are
kept on-line for future reference. This service is available 24 hours a day and
staffed by registered nurses. Some multilingual capabilities and service for the
hearing impaired are also available. The care counselors make a follow-up phone
call to determine the outcome of the initial call and offer additional
assistance if needed. Member satisfaction and cost savings associated with
redirections to appropriate care levels are measured through a combination of
member surveys and system reports.
Consumer Health and Medical Information. In the summer of 1999, we launched
an Internet site, DrugDigest.org to provide a comprehensive source of
non-commercial, fact-based drug information. DrugDigest currently has a
comprehensive portfolio of consumer-friendly drug information. This portfolio
includes information about adverse drug interactions, drug side effects, drug
administration tips, and other information useful in helping Express Scripts
members and their health care professionals make informed medication decisions.
In the coming year, DrugDigest will expand its coverage of prescription,
over-the-counter, and herbal medications. The information and features available
in our web-based ExpressChoice will allow enrollees to examine a more
personalized version of DrugDigest that will include information about their
enrollment benefits and drug costs and will generally, allow members and
clients to more effectively manage their pharmacy benefit. Finally, the
DrugDigest team is expanding their activities into disease management. By
tightly coupling pharmaceutical and medical information, members will experience
an even deeper understanding of how their medications impact their overall
medical care.
Non-PBM Services
In addition to PBM services, we also provide non-PBM services including
specialty distribution services and outpatient infusion therapy to our clients.
During 2000, 1.3% of our revenues were derived from non-PBM services, compared
to 1.5% and 2.1% during 1999 and 1998, respectively. This slight decline is
partially due to the inclusion of Diversified Pharmaceutical Services ("DPS")
for a full year in 2000 versus only nine months of 1999 and as a result of an
increase in PBM revenues due to the conversion of clients from networks
contracted by our client to one contracted by us. The decline from 1998 to 1999
is due to the acquisitions of ValueRx and DPS, which significantly increased our
PBM service revenues.
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, products targeted to a specific physician
or patient population and products distributed to indigent patients. Our
services may include eligibility, fulfillment, inventory, insurance
verification/authorization and reimbursement. These services are provided in our
Maryland Heights, Missouri facility located next to our Corporate Headquarters.
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. Our clients benefit from outpatient infusion therapy services because
the length of hospital stays can be reduced. Rather than receiving infusion
therapy in a hospital, we provide 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. We have facilities supporting our infusion
services operations in Houston, Texas; Irvine, Texas; Columbia, Maryland;
Maryland Heights, Missouri; Columbia, Missouri; Springfield, New Jersey; and
West Chester, Pennsylvania.
Segment Information. Information regarding our segments appears in Note 12
of the notes to our consolidated financial
statements, which is incorporated by reference herein.
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 2000, approximately 60.0% 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, government plans and large employers. Some of our
largest managed care clients are Aetna U.S. Healthcare, Inc., Oxford Health
Plans, Blue Cross Blue Shield of Massachusetts and Blue Shield of California.
Some of our largest employer groups include the State of Georgia and the State
of New York Empire Plan Prescription Drug Program (through a subcontracting
relationship with CIGNA HealthCare). 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.
In connection with our 1999 acquisition of Diversified Pharmaceutical
Services ("DPS"), we acquired the contract to serve approximately 9.5 million
UHC members. The contract with UHC expired on May 31, 2000. We developed a
migration plan to transition the UHC members to their new provider through 2000.
We believe the termination and transition of this contract did not materially
adversely affect our business and results of operations.
Medicare Prescription Drug Coverage
The federal Medicare program provides a comprehensive medical benefit
program for individuals age 65 and over. Today Medicare covers only a few
outpatient prescription drugs. Key policy makers on both sides of the political
aisle have proposed changes to the Medicare program that would result in at
least partial coverage for most outpatient prescription drugs. The Medicare
population is large, and prescription drug utilization among seniors is
substantially higher on average than that of other age groups.
Many of the Medicare prescription drug proposals lack important details
regarding the administration of the plan. We believe that a Medicare
prescription drug benefit could provide us with substantial new business
opportunities, but at the same time any such program could adversely affect
other aspects of our business. For example, some of our clients sell medical
policies to seniors that provide a prescription drug benefit that we administer.
Other clients provide a prescription drug benefit to their retirees. Depending
on the plan that is ultimately adopted, a Medicare prescription drug benefit
could make such policies or plans less valuable to seniors, adversely affecting
that segment of our business. While we believe that there could be opportunities
for new business under a Medicare plan that would more than offset any adverse
effects, we can give no assurance that this would be the case.
Joint Venture and Acquisitions
On February 22, 2001, we announced that we entered into an agreement with
AdvancePCS and Merck-Medco to form RxHub LLC ("RxHub"). RxHub is intended to
develop an electronic exchange enabling physicians who use electronic
prescribing technology to link to pharmacies, PBMs and health plans, which their
patients use. The company is designed to operate as a utility for the conduit of
information among all parties engaging in electronic prescribing. We will own
one-third of the equity of RxHub (as will each of the other two founders), and
have committed to invest up to $20 million over the next five years with
approximately $6 million committed for 2001. We will record our investment in
RxHub under the equity method of accounting, which requires our percentage
interest in RxHub's results to be recorded in our Consolidated Statement of
Operations. RxHub will be operated to cover its expected operating costs and to
return the cost of capital to the founders.
As previously announced the shareholders of Centre d'autorisation et de
paiement des services de sante, a leading Quebec-based PBM commonly referred to
as CAPSS, accepted an offer made by our Canadian subsidiary, ESI Canada, Inc.,
to acquire all of the outstanding shares of CAPSS, subject to satisfaction of
certain conditions, for approximately CAN$25 million (approximately US$16.5
million). The transaction, which will be accounted for under the purchase method
of accounting, will be funded with our operating cash flow. We expect to close
the transaction during March 2001 and it will add approximately 1.5 million
lives to ESI Canada's membership base. The transaction is not expected to be
dilutive to earnings in 2001 and is expected to be slightly accretive in 2002.
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. 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 HCA
- - The HealthCare Corporation (formerly known as Columbia/HCA Healthcare) for
approximately $460 million in cash. 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.
Company Operations
General. We operate five mail pharmacies and eight member service/pharmacy
help desk call centers out of leased facilities. Electronic pharmacy claims
processing takes place at our Maryland Heights, Missouri and Tempe, Arizona
facilities, which are maintained, managed and operated by Electronic Data
Systems ("EDS"), or at facilities owned by EDS. 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 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 from our trained
member service representatives.
Provider Relations. Our Provider Relations group is responsible for
contracting and administering our pharmacy networks. To participate in our
retail pharmacy networks, pharmacies 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 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 division 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 division conducts specific data analyses to
evaluate drug therapies, and analyzes and prepares reports on clinical pharmacy
data for our clients. For example, in June 2000 we released our 1999 Drug Trend
Report, marking our fourth consecutive year of publishing such a report. Based
on a large sample of our membership base, the report examines trends in
pharmaceutical utilization and cost and the factors that underlie those trends.
The division also evaluates pharmacy plan design strategies and clinical
offerings and conducts outcomes research studies to inform client
decision-making.
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. All
claims are presently processed through systems which are maintained, managed and
operated by EDS at our Maryland Heights, Missouri facility and Tempe, Arizona
facility, or at facilities owned by EDS, who maintains certain computer hardware
for us at its facility in Plano, Texas. Disaster recovery services for all
systems are provided through our EDS services agreement. 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 scope of available services. We believe our
principal competitive advantages are our independence from pharmaceutical
manufacturer ownership, our strong managed care and employer group customer base
which supports the development of more sophisticated PBM services, and our
commitment to provide flexible and distinctive service to our clients.
There are other PBMs in the United States, most of which 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., ("Merck-Medco");
AdvancePCS and CaremarkRx, Inc.; as well as large health insurers 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
addition, a competitor that is owned by a pharmaceutical manufacturer may have
pricing advantages that are unavailable to us and other independent PBMs.
However, we believe our independence from pharmaceutical manufacturer ownership
allows us to make unbiased formulary recommendations to our clients, balancing
both clinical efficacy and cost.
Consolidation has been, and may continue to be, an important factor in all
aspects of the pharmaceutical industry, including the PBM segment. We believe
the size of our membership base provides us with the necessary economies of
scale to compete effectively in a consolidating market.
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 or
financial position. 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 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. 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, business or financial
position.
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. In late 1999, it was reported that
the U.S. Attorney's Office in Philadelphia had issued subpoenas to Merck-Medco
and PCS (now AdvancePCS), 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 generally 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 previously in a number of states, and currently in Georgia. In
addition, certain quasi-regulatory organizations, such as the National
Association of Boards of Pharmacy ("NABP", an organization of state boards of
pharmacy), the National Association of Insurance Commissioners ("NAIC", an
organization of state insurance regulators), and the National Committee on
Quality Assurance ("NCQA", an accreditation organization) are considering
proposals to regulate PBMs and/or PBM activities, such as formulary development
and utilization management. While the actions of the NABP and NAIC would not
have the force of law, they may influence states to adopt any requirements or
model acts they promulgate. In addition, standards established by NCQA could
materially impact us directly as a PBM, and indirectly through the impact on our
health plan clients.
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 removal of a network provider. 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.
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 health plan coverage of specific drugs if deemed
medically necessary by the prescribing physician. Such legislation does not
generally apply to us directly, but it may apply to certain of our clients, such
as 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 development 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
obtained utilization review licenses in selected states through our new ESI
Utilization Management Co. In addition, accreditation agencies' requirements for
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.
In addition, various federal and state Medicaid agencies have raised the
issue of how average wholesale price ("AWP") is calculated. AWP is a standard
pricing unit used throughout the industry, as well as by us, as the basis for
calculating drug prices under our health plans and pharmacies and rebates with
pharmaceutical manufacturers. Changes to the standard have been suggested that
could alter the calculation of drug prices for federal programs. We are unable
to predict whether any such changes will be adopted, and if so, if such changes
would have a material adverse impact on our financial operations.
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 the state laws described above 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 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 remains 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 that state. We have registered our pharmacies in every
state in which such registration is required.
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 December 2000, the Department of Health and Human Services issued final
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 by certain
entities. We will be required to comply with certain aspects of the regulations.
We have retained a consulting firm to assist us in assessing the steps we will
have to take in complying with these regulations, which provide for a two year
implementation period. While this assessment is not yet complete, we believe
compliance with these regulations will have a significant impact on our business
operations. We have not yet completed an assessment of the costs we will incur
in complying with these regulations, and can give no assurance that such costs
will not be material to us.
Even without new legislation and beyond the final federal regulations,
individual health plan sponsor customers could prohibit us from including their
patients' medical information in our various databases of medical data. They
could also prohibit us from offering services that involve the compilation of
such information.
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", "ExpressTherapeutics", "IVTx", "PERxCare", "RxWorkbench",
"PTE", "InformRX", "M.U.S.I.C.", "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 February 1, 2001, we employed a total of 5,259 employees in the U.S.
and 87 employees in Canada. Approximately 652 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 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, 2001 are as
follows:
Name Age Position
Barrett A. Toan 53 Chairman of the Board,
President and Chief Executive
Officer
David A. Lowenberg 51 Chief Operating Officer
Terrence D. Arndt 57 Senior Vice President of Marketing
Stuart L. Bascomb 59 Executive Vice President - Sales
and Provider Relations and
Director
Thomas M. Boudreau 49 Senior Vice President, General
Counsel and Secretary
Mabel F. Chen 58 Senior Vice President and
Director of Site Operations
Edward J. Tenholder 49 Senior Vice President and Chief
Information Systems Officer
Mark O. Johnson 47 Senior Vice President of
Integration and Administration
Linda L. Logsdon 53 Executive Vice President of
Health Management Services
George Paz 45 Senior Vice President and Chief
Financial Officer
Joseph W. Plum 53 Vice President and Chief
Accounting Officer
Mr. Toan was elected Chairman of the Board of Directors in November 2000,
Chief Executive Officer in March 1992 and President and a director in October
1990.
Mr. Lowenberg was elected Express Scripts, Inc.'s Chief Operating Officer
in September 1999, and served as our Director of Site Operations from October
1994 until September 1999.
Mr. Arndt joined Express Scripts, Inc. and was elected Senior Vice
President of Marketing in April 1999. Prior to joining Express Scripts, Inc.,
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. Mr. Bascomb has served as Executive Vice President -
Sales and Provider Relations since May 1996 and served as Chief Financial
Officer and Treasurer from March 1992 until May 1996.
Mr. Boudreau was elected Senior Vice President, General Counsel and
Secretary in October 1994. He has served as General Counsel since June 1994.
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 Express Scripts, Inc.'s Tempe facility. From
January 1995 until joining Express Scripts, Ms. Chen served as the Director of
Medicaid for the State of Arizona.
Mr. Tenholder was elected Senior Vice President and Chief Information
Systems Officer in December 2000. Mr. Tenholder served as Executive Vice
President and Chief Operating Officer of Blue Cross and Blue Shield of Missouri
from October 1997 to December 2000. From April 1994 to October 1997, Mr.
Tenholder was Senior Vice President, Client Services and Operations of Right
Choice Managed Care, Inc.
Mr. Johnson joined Express Scripts, Inc. and was elected Senior Vice
President of Integration in May 1999, and has served as Senior Vice President of
Integration and Administration since February 2000. Prior to joining Express
Scripts, Inc., 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 Express Scripts, Inc. 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.
Mr. Paz joined Express Scripts, Inc. and was elected Senior Vice President
and Chief Financial Officer in January 1998. Prior to joining Express Scripts,
Inc., Mr. Paz was a partner in the Chicago office of Coopers & Lybrand from
December 1995 to December 1997.
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 our ability to maintain internal growth
rates, or to control operating or capital costs
o continued pressure on margins resulting from client demands for
enhanced service offerings and higher service levels
o competition, including price competition, and our ability to
consummate contract negotiations with prospective clients, as
well as competition from new competitors offering services that
may in whole or in part replace services that we now provide to
our customers
o adverse results in regulatory matters, the adoption of new
legislation or regulations (including increased costs associated
with compliance with new laws and regulations, such as privacy
regulations under the Health Insurance Portability and
Accountability Act (HIPAA)), more aggressive enforcement of
existing legislation or regulations, or a change in the
interpretation of existing legislation or regulations
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 or other practices
of pharmaceutical manufacturers
o adverse results in litigation
o risks associated with our leverage and debt service obligations
o risks associated with our ability to continue to develop new
products, services and delivery channels
o developments in the health care industry, including the impact of
increases in health care costs, changes in drug utilization and
cost patterns and introductions of new drugs
o risks associated with our financial commitment relating to
the RxHub venture
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 Maintain Internal Growth Rates, or to Control Operating or Capital
Costs, Could Adversely Affect Our Business
We have experienced rapid internal growth over the past several years. Our
ability to maintain this internal growth rate is dependent upon our ability to
attract new clients, achieve growth in the membership base of our existing
clients as well as cross-sell additional services to our existing clients. If we
are unable to continue our client and membership growth, and manage our
operating and capital costs, our results of operations and financial position
could be materially adversely affected.
Competition in the PBM Industry Could Reduce Our Client Membership and Our
Profit Margins
Pharmacy benefit management is a very competitive business. Our competitors
include 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 is a large pharmaceutical manufacturer, which may give
them purchasing or other advantages over us by virtue of this ownership
structure, and enable them to succeed in taking away some of our clients.
Consolidation in the PBM industry, such as the recently completed acquisition of
PCS, Inc. by Advance Paradigm, Inc., 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 connectivity
companies. 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 pharmaceutical manufacturers with clients. This combination of
lower pricing and increased revenue sharing, as well as increased demand for
enhanced service offerings and higher service levels, has caused our operating
margins to decline. 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.
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 network pharmacy 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, including those under the
Federal Health Insurance Portability and Accountability Act of
1996 ("HIPAA")
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
o pending legislation regarding importation of drug products into
the United States
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 healthcare 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 healthcare industry in
general, or what affect any such legislation or regulations might have on us.
We are aware through reports in the press and other sources that a U.S.
Assistant Attorney General in Philadelphia is conducting an investigation into
certain practices of PBMs. These reports have indicated that some of our PBM
competitors have received subpoenas in connection with this investigation during
1999. We have not received a subpoena or been requested to testify or produce
documents in connection with this investigation. Press reports indicate that a
possible subject of the investigation is contractual relationships between the
PBMs and pharmaceutical manufacturers. We cannot predict what effect, if any,
this investigation may ultimately have on us or on the PBM industry generally.
In December 2000, the Department of Health and Human Services issued final
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 by certain
entities. We will be required to comply with certain aspects of the regulations.
We have retained a consulting firm to assist us in assessing the steps we will
have to take in complying with these regulations, which provide for a two year
implementation period. While this assessment is not yet complete, we believe
compliance with these regulations will have a significant impact on our business
operations. We have not yet completed an assessment of the costs we will incur
in complying with these regulations, and can give no assurance that such costs
will not be material to us.
The federal Medicare program provides a comprehensive medical benefit
program for individuals age 65 and over, but currently covers only a few
outpatient prescription drugs. Currently key policy makers on both sides of the
political aisle have proposed various changes to the Medicare program that would
result in at least partial coverage for most prescription drugs. We believe that
a Medicare prescription drug benefit could provide us with substantial new
business opportunities, but at the same time any such program could adversely
affect other aspects of our business. For instance, some of our clients sell
medical policies to seniors that provide a prescription drug benefit that we
administer. Other clients provide a prescription drug benefit to their retirees.
Depending on the plan that is ultimately adopted, a Medicare prescription drug
benefit could make such policies or plans less valuable to seniors, adversely
affecting that segment of our business. While we believe that there would be
opportunities for new business under a Medicare plan that would more than offset
any adverse effects, we can give no assurance that this would be the case.
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 19,000 client groups.
Our acquisitions have diversified our client base and reduced our dependence on
any single client. Our top 10 clients, measured as of January 1, 2001, represent
approximately 29% of our total membership base, but no single client represents
more than approximately 5% 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.
More than 55,000 retail pharmacies, which represent more than 99% of all
United States retail pharmacies, participate in one or more of our networks.
However, the top 10 retail pharmacy chains represent approximately 38% of the
55,000 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, 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 Formulary Fees 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 formulary fees 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 of existing laws or regulations or the adoption of new laws or
regulations relating to any of these programs, may materially adversely affect
our business.
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. 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 defendants who did not settle won the
Sherman Act class action on a directed verdict. With respect to the cases filed
by plaintiffs who opted out of the class action, some drug manufacturers have
settled certain of these actions, but 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 (see Item 3 - Legal Proceedings).
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.
Our Leverage and Debt Service Obligations Could Impede Our Operations and
Flexibility
As of December 31, 2000, our net debt to net capitalization ratio is 32.7%,
which means that the amount of our outstanding debt is significant compared to
the net book value of our assets, and we have substantial interest expense and
future repayment obligations. As of December 31, 2000, we had total consolidated
debt of approximately $396.4 million. 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 portion of our cash flow from operations
for debt service rather than for our operations
o we may from time to time incur indebtedness under our credit
facility, which is subject to 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, Inc., Great Plains Reinsurance Co., 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 secured parties 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 Continue to Develop New Products, Services and Delivery Channels May
Adversely Affect Our Business
We operate in a highly competitive environment. We, as well as our
competitors, continually develop new products and services to assist our clients
in managing the pharmacy benefit. If we are unsuccessful in continuing to
develop innovative products and services, our ability to attract new clients and
retain existing clients may suffer.
Technology is also an important component of our business, as we continue
to utilize new and better channels, such as the Internet, to communicate and
interact with our clients, members and business partners. If our competitors are
more successful than us in employing this technology, our ability to attract new
clients, retain existing clients and operate efficiently may suffer.
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.
Our Commitment to Invest in RxHub Could Impede Our Ability to Pursue Other
Opportunities
We have entered into a joint venture agreement with AdvancePCS and
Merck-Medco to form RxHub, which is designed to operate as a utility for the
conduit of information between pharmacies, PBMs and health plans. In doing so,
we have committed to invest up to $20 million over the next five years to fund
the venture. Committing our future cash flow to this investment my limit our
ability to invest in other opportunities.
Item 2 - Properties
We operate our United States and Canadian PBM and non-PBM businesses out of
leased facilities throughout the United States and Canada.
PBM Facilities Non-PBM Facilities
Maryland Heights, Missouri Maryland Heights, Missouri
Earth City, Missouri Columbia, Missouri
Tempe, Arizona Irvine, Texas
Bloomington, Minnesota Houston, Texas
Bensalem, Pennsylvania Columbia, Maryland
Troy, New York Springfield, New Jersey
Farmington Hills, Michigan West Chester, Pennsylvania
Albuquerque, New Mexico
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. Specialty
Distribution Services is operated out of our 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
1,300,000 square feet in area, in the aggregate.
We own and lease computer systems at the processing centers. In late 1999,
we entered into a five year agreement with EDS to outsource our information
systems 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. Uninterruptable power supply and
diesel generators allow our computers, telephone systems and mail pharmacy at
each major 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
HCA-The Healthcare Corporation (formerly, "Columbia HCA/HealthCare Corporation")
("HCA") 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 by 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 made false or misleading statements to the public
in connection with Value Health's acquisition of Diagnostek in 1995. The
Freedman Complaint asserts claims under the Securities Act of 1933 and the
Securities Exchange Act of 1934, and seeks certification of a class consisting
of all persons (with certain exceptions) who purchased shares of Value Health
common stock during the period March 27, 1995 (the date certain adverse
developments were disclosed by Value Health). The Freedman Complaint does not
specify the amount of damages sought. On March 17, 1998, the defendants filed a
motion to consolidate this lawsuit with the Bash lawsuit, discussed above, and
the motion was granted on April 24, 1998.
In the consolidated Bash and Freedman action, the court granted plaintiffs'
motions for class certification and certified a class consisting of (i) all
persons who purchased or otherwise acquired shares of Value Health during the
period from April 3, 1995, through and including November 7, 1995, including
those who acquired shares in connection with the Diagnostek merger; and (ii) all
persons who purchased or otherwise acquired shares of Diagnostek during the
period from March 27, 1995, through and including July 28, 1995. Fact discovery
in the consolidated lawsuit is complete, and expert discovery will be completed
over the course of the next several months. Motions for summary judgment were
filed by both the plaintiffs and the defendants, and a hearing on the motions is
scheduled for February 28, 2001. No trial date has been set.
In connection with the Acquisition, HCA has agreed to defend and hold the
Company and its affiliates (including Value Health) harmless from and against
any liability that may arise in connection with either of the foregoing
proceedings. Consequently, the Company does not believe it will incur any
material liability in connection with the foregoing matters.
In addition, in the ordinary course of our business, there have arisen
various legal proceedings, investigations or claims now pending against our
subsidiaries unrelated to the Acquisition and us. The effect of these actions on
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 will not materially affect our consolidated
financial position, results of operations or cash flows.
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 Robinson-Patman Act. Some
plaintiffs also filed claims against the drug manufacturers and drug wholesalers
alleging a conspiracy not to discount pharmaceutical drugs in violation of
Section 1 of the Sherman Act, and these claims were certified as a class action.
Some of the drug manufacturers settled both the Sherman Act and the Robinson
Patman claims against them. The class action Sherman Act settlements generally
provide that the manufacturers will not refuse to pay discounts or rebates to
retail pharmacies based on their status as such. Settlements with plaintiffs who
opted out of the class are not part of the public record. The drug manufacturer
and wholesaler defendants in the class action who did not settle went to trial
and were dismissed by the court on a motion for directed verdict. That dismissal
was affirmed by the Court of Appeals for the Seventh Circuit. One aspect of the
case was remanded to the trial court and has now been dismissed. Plaintiffs who
opted out of the class action will still have the opportunity to try their
Sherman Act claims in separate lawsuits. The class action did not involve the
Robinson-Patman claims, so many of those matters are still pending. We are not a
party to any of these proceedings. To date, we do not believe any 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. In addition, we cannot predict the outcome or possible
ramifications to our business of the cases in which the plaintiffs are trying
their claims separately, and we cannot provide any assurance that we will not be
made a party to any such separate lawsuits in the future.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters
Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters
Market Information. Our Class A Common Stock is traded on the Nasdaq
National Market ("Nasdaq") tier of The Nasdaq Stock Market under the symbol
"ESRX". The high and low prices, as reported by the Nasdaq, are set forth below
for the periods indicated.
Fiscal Year 2000 Fiscal Year 1999
Class A Common Stock High Low High Low
First Quarter $ 67.0000 $ 28.5000 $ 105.5000 $ 59.1250
Second Quarter 66.6250 34.6250 91.0000 55.0000
Third Quarter 78.0000 56.2500 92.3750 61.5000
Fourth Quarter 107.0000 63.7500 88.6875 44.3750
Our Class B Common Stock has no established public trading market and there
are no shares outstanding as of December 31, 2000.
Holders. As of January 31, 2001, there were 403 stockholders of record of
our Class A Common Stock. We estimate there are approximately 30,000 beneficial
owners of the Class A Common Stock.
Dividends. The Board of Directors has not declared any cash dividends on
our common stock since the initial public offering. The Board of Directors does
not currently intend to declare any cash dividends in the foreseeable future.
The terms of our existing credit facility and the indenture under which our
public debt was issued contain certain restrictions on our ability to declare or
pay cash dividends.
Recent Sales of Unregistered Securities
None.
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and "Item 7
- --Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Year Ended December 31,
(in thousands, except per share data) 2000(2) 1999(3) 1998(4) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues:
Revenues $ 6,776,441 $ 4,285,104 $ 2,824,872 $ 1,230,634 $ 773,615
Other revenues 10,423 3,000 - - -
------------------------------------------------------------------------
6,786,864 4,288,104 2,824,872 1,230,634 773,615
-------------------------------------------------------- ---------------
Costs and expenses:
Cost of revenues 6,247,192 3,826,905 2,584,997 1,119,167 684,882
Selling, general and administrative 339,460 294,194 148,990 62,617 49,103
Non-recurring charges - 30,221 1,651 - -
------------------------------------------------------------------------
6,586,652 4,151,320 2,735,638 1,181,784 733,985
------------------------------------------------------------------------
Operating income 200,212 136,784 89,234 48,850 39,630
Other (expense) income, net (204,680) 128,682 (12,994) 5,856 3,450
------------------------------------------------------------------------
(Loss) income before income taxes (4,468) 265,466 76,240 54,706 43,080
Provision for income taxes 3,553 108,098 33,566 21,277 16,932
------------------------------------------------------------------------
(Loss) income before extraordinary loss (8,021) 157,368 42,674 33,429 26,148
Extraordinary loss on early retirement of
debt (1,105) (7,150) - - -
------------------------------------------------------------------------
Net (loss) income $ (9,126) $ 150,218 $ 42,674 $ 33,429 $ 26,148
========================================================================
Basic earnings per share:(1)
Before extraordinary loss $ (0.21) $ 4.36 $ 1.29 $ 1.02 $ 0.81
Extraordinary loss on early retirement of
debt (0.03) (0.20) - - -
-------------------------------------------------------------------------
Net (loss) income $ (0.24) $ 4.16 $ 1.29 $ 1.02 $ 0.81
=========================================================================
Diluted earnings per share:(1)
Before extraordinary loss $ (0.21) $ 4.25 $ 1.27 $ 1.01 $ 0.80
Extraordinary loss on early retiremen of
debt (0.03) (0.19) - - -
-------------------------------------------------------------------------
Net (loss) income $ (0.24) $ 4.06 $ 1.27 $ 1.01 $ 0.80
=========================================================================
Weighted average shares outstanding:(1)
Basic 38,196 36,095 33,105 32,713 32,160
Diluted(5) 38,196 37,033 33,698 33,122 32,700
- ------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $ 53,204 $ 132,630 $ 122,589 $ 64,155 $ 25,211
Working capital (117,775) (34,003) 117,611 166,062 128,259
Total assets 2,276,664 2,487,311 1,095,461 402,508 300,425
Debt:
Short-term debt - - 54,000 - -
Long-term debt 396,441 635,873 306,000 - -
Stockholders' equity 705,244 699,482 249,694 203,701 164,090
- -----------------------------------------------------------------------------------------------------------------------
Selected Data:
Pharmacy benefit covered lives(6) 43,500 48,000 23,500 12,300 10,000