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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, 1998, 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
of incorporation or organization) no.)
14000 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 March 1, 1999, was $1,207,562,195 based on 18,158,830 such
shares held on such date by non-affiliates and the last sale price for the Class
A Common Stock on such date of $66.50 as reported on the Nasdaq National Market.
Solely for purposes of this computation, the Registrant has assumed that all
directors and executive officers of the Registrant and NYLIFE HealthCare
Management, Inc. are affiliates of the Registrant.
Common stock outstanding as of March 1, 1999: 18,206,130 Shares Class A
15,020,000 Shares Class B
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 1999 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, 1998.
PART I
THE COMPANY
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 SECURITIES AND EXCHANGE COMMISSION (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, INCLUDING AS TO YEAR 2000
ISSUES.
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:
-RISKS ASSOCIATED WITH THE CONSUMMATION OF ACQUISITIONS, INCLUDING THE
ABILITY TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF ACQUIRED BUSINESSES WITH OUR
EXISTING OPERATIONS, CLIENT RETENTION ISSUES, AND RISKS INHERENT IN THE ACQUIRED
ENTITIES OPERATIONS
-RISKS ASSOCIATED WITH OBTAINING FINANCING AND CAPITAL
-RISKS ASSOCIATED WITH OUR ABILITY TO MANAGE GROWTH COMPETITION
-INCLUDING PRICE COMPETITION, COMPETITION IN THE BIDDING AND PROPOSAL
PROCESS AND OUR ABILITY TO CONSUMMATE CONTRACT NEGOTIATIONS WITH PROSPECTIVE
CLIENTS
-THE POSSIBLE TERMINATION OF CONTRACTS WITH CERTAIN KEY CLIENTS OR
PROVIDERS
-THE POSSIBLE TERMINATION OF CONTRACTS WITH CERTAIN KEY MANUFACTURERS, OR
CHANGES IN PRICING, DISCOUNT, REBATE OR OTHER PRACTICES OF PHARMACEUTICAL
MANUFACTURERS
-ADVERSE RESULTS IN LITIGATION
-ADVERSE RESULTS IN REGULATORY MATTERS, THE ADOPTION OF ADVERSE LEGISLATION
OR REGULATIONS, MORE AGGRESSIVE ENFORCEMENT OF EXISTING LEGISLATION OR
REGULATIONS, OR A CHANGE IN THE INTERPRETATION OF EXISTING LEGISLATION OR
REGULATIONS
-DEVELOPMENTS IN THE HEALTH CARE INDUSTRY, INCLUDING THE IMPACT OF
INCREASES IN HEALTH CARE COSTS, CHANGES IN DRUG UTILIZATION PATTERNS AND
INTRODUCTIONS OF NEW DRUGS
-RISKS ASSOCIATED WITH THE "YEAR 2000" ISSUE
-DEPENDENCE ON KEY MEMBERS OF MANAGEMENT
-OUR RELATIONSHIP WITH NEW YORK LIFE INSURANCE COMPANY, WHICH POSSESSES
VOTING CONTROL OF THE COMPANY
-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 COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
FAILURE TO INTEGRATE VALUERX AND DPS COULD ADVERSELY AFFECT OUR BUSINESS
On April 1, 1998, we completed our first major acquisition by acquiring
ValueRx, the pharmacy benefit management ("PBM") business of Columbia/HCA
Healthcare Corporation, for approximately $460 million in cash. This transaction
significantly increased our membership base and the complexity of our
operations. In the second quarter of 1999, we expect to complete our acquisition
of Diversified Pharmaceutical Services, Inc. and Diversified Pharmaceutical
Services (Puerto Rico), Inc. (collectively, "DPS") from SmithKline Beecham
Corporation and one of its affiliates for $700 million in cash. Consummation of
the transaction is subject to customary closing conditions, and we cannot
provide any assurance that all such conditions will be satisfied such that the
transaction may be consummated. If consummated, the transaction will
approximately double our membership base and further increase the complexity of
our operations. In light of both acquisitions, we have developed and, in the
case of ValueRx, begun to implement, an integration plan to address items such
as:
-retention of key employees
-consolidation of administrative and other duplicative functions
-coordination of sales, marketing, customerservice and clinical functions
-systems integration
-new product and service development
-client retention and other items
While we have achieved many of our integration goals to date with respect
to the acquisition of ValueRx, certain significant integration challenges
remain, including the complete integration of our information technology
systems. We cannot provide any assurance that our integration plan will
successfully address all aspects of our operations, or that we will continue to
achieve our integration goals. In the case of DPS, we cannot provide any
assurance that our integration plan will address all relevant aspects of DPS's
business or that we will be able to implement our integration plan successfully.
In addition, we assumed a certain level of client retention when deciding to
purchase ValueRx and DPS. Many clients have relatively short-term contracts, and
we cannot provide any assurance that we will be able to achieve our client
retention targets. Finally, although we conducted an extensive investigation in
evaluating our acquisitions of ValueRx and DPS, it is possible that we failed to
uncover or appropriately address material problems with ValueRx's or DPS's
operations or financial condition, or failed to discover contingent liabilities.
Any of the foregoing could materially adversely affect our results of operations
or financial condition.
FAILURE TO OBTAIN FINANCING OR CAPITAL COULD ADVERSELY AFFECT OUR BUSINESS
Our ability to consummate the DPS transaction is dependent upon, among
other things, our securing financing of approximately $1.1 billion, consisting
of an $800 million term loan facility and a $300 million revolving credit
facility, for which we have obtained a commitment from Credit Suisse First
Boston ("CSFB"). This new credit facility is intended to replace our existing
$440 million facility with Bankers Trust Company. The commitment for this new
facility is, however, subject to various conditions, which we believe are
customary for transactions of this kind, but we cannot provide any assurance
that all such conditions will be satisfied so that this credit facility can be
funded. We have also obtained a commitment from CSFB for a $150 million bridge
loan which may be needed to facilitate the closing of the acquisition. This
commitment is also subject to various conditions, which we again believe are
customary for transactions of this kind. However, we cannot provide any
assurance that all such conditions will be satisfied so that this bridge loan
facility will be funded.
We have recently filed a registration statement, which has not been
declared effective, with the SEC for a proposed primary offering of
approximately $350 million of Class A Common Stock. The proceeds of this
offering, which will be made only by means of a prospectus, would be used to
retire the bridge loan, if funded, and repay a portion of the debt outstanding
under the new credit facility, assuming it is also funded. Our ability to
complete the stock offering is subject to investors' willingness to purchase the
shares and other typical market risks, which we cannot control, as well as the
success of the Company. We cannot, therefore, provide any assurance that we will
be able to successfully complete this offering, and if we fail to complete the
offering as planned, our financial condition and future operating results could
be materially adversely affected. Again, a registration statement relating to
these securities has been filed with the Securities and Exchange Commission but
has not yet become effective. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement becomes effective.
This Report shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state. Once the
registration statement has been declared effective, a prospectus meeting the
requirements of Section 10 of the Securities Exchange Act of 1933, as amended,
may be obtained by contacting Thomas M. Boudreau, Esq., Express Scripts, Inc.,
14000 Riverport Drive, Maryland Heights, Missouri 63043.
FAILURE TO MANAGE AND MAINTAIN INTERNAL GROWTH COULD ADVERSELY AFFECT OUR
BUSINESS
We have experienced rapid internal growth over the past several years. Our
ability to effectively manage and maintain this internal growth will require
that we continue to improve our financial and management information systems as
well as identify and retain key personnel. We can provide no assurance that we
will successfully meet these requirements or that we will have access to
sufficient capital to do so. Our internal growth is also dependent upon our
ability to attract new clients and achieve growth in the membership base of our
existing clients. If we are unable to continue our client and membership growth,
our results of operations and financial position could be materially adversely
affected.
THE PBM INDUSTRY IS VERY COMPETITIVE
Pharmacy benefit management is a very competitive business. Our competitors
include several large and well-established companies which may have greater
financial, marketing and technological resources than we do. One major
competitor in the PBM business, Merck-Medco Managed Care, L.L.C., is owned by
Merck & Co., Inc., a large pharmaceutical manufacturer. Another major
competitor, PCS, Inc., is owned by Rite-Aid Corporation, a large retail pharmacy
chain. Both of these competitors may possess purchasing or other advantages over
us by virtue of their ownership. Consolidation in the PBM industry may also lead
to increased competition among a smaller number of large PBM companies.
Competition may also come from other sources in the future, including from
Internet-based providers such as Drugstore.com. We cannot predict what effect,
if any, these new competitors may have on the marketplace or on our business.
Over the last several years intense competition in the marketplace has
caused many PBMs, including us, to reduce the prices charged to clients for core
services and share a larger portion of the formulary fees and related revenues
received from drug manufacturers with clients. This combination of lower pricing
and increased revenue sharing has caused our operating margins to decline (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). We expect to continue marketing our services to larger clients,
who typically have greater bargaining power than smaller clients. This might
create continuing pressure on our margins. We can give no assurance that new
services provided to these clients will fully compensate for these reduced
margins.
FAILURE TO RETAIN KEY CLIENTS AND NETWORK PHARMACIES COULD ADVERSELY AFFECT
OUR BUSINESS
We currently provide PBM services to approximately 8,500 clients. Our
acquisitions have diversified our client base and reduced our dependence on any
single client. After giving effect to the pending DPS acquisition, our top 10
clients, measured as of January 1, 1999, but excluding United HealthCare
Corporation, represent approximately 27% of our total membership base, but no
single client would, on a combined pro forma basis, represent more than
approximately 6% 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 some of our managed care clients
could be acquired by another party that is not our client. In such case, the
likelihood such client would renew its PBM contract with us could be reduced.
Assuming consummation of the pending DPS acquisition, United HealthCare
Corporation will be our largest client, with approximately 10.5 million members.
DPS's contract with United HealthCare will expire on May 24, 2000, and United
HealthCare has indicated it will be moving to another provider at that time. In
our financial analysis of the DPS acquisition, we assumed United HealthCare
would not renew its contract. However, the termination of this contract may
still materially adversely affect our business and results of operations.
Our largest national provider network consists of more than 52,000 retail
pharmacies, which represent more than 99% of the retail pharmacies in the United
States. However, the top 10 retail pharmacy chains represent approximately 41%
of the 52,000 pharmacies, with these pharmacy chains representing even higher
concentrations in certain areas of the United States. Our contracts with retail
pharmacies 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 business could be materially adversely affected. In addition,
Rite-Aid Corporation recently acquired one of our major PBM competitors, PCS,
Inc. Other 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 CERTAIN RELATIONSHIPS WITH PHARMACEUTICAL MANUFACTURERS COULD ADVERSELY
AFFECT OUR BUSINESS
We maintain contractual relationships with numerous pharmaceutical
manufacturers which provide us with discounts, rebates or formulary fees. We
also provide various services for, or services which are funded by,
pharmaceutical manufacturers. These services include compliance, therapy
management and market research programs. 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 business could be materially adversely affected. In addition,
discounts, rebates and formulary 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 forums. We cannot
predict the effect of any changes in existing laws or regulations or in their
interpretations, or the adoption of new laws or regulations, on our
relationships with pharmaceutical manufacturers.
Patents covering many brand name drugs that currently have substantial
market share will expire over the next several years, and generic drugs will be
introduced at prices that may substantially reduce the market share of these
brand name drugs. Unlike brand name drug manufacturers, manufacturers of generic
drugs do not generally offer incentive payments on their drugs to PBMs in the
form of discounts, rebates or formulary fees and programs. Although we expect
new drugs with patent protection to be introduced in the future, we can provide
no assurance such drugs will capture a significant share of the market such that
our incentive payment revenues will not be reduced.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY LITIGATION
Since 1993, retail pharmacies have filed over 100 separate lawsuits against
drug manufacturers, wholesalers and certain PBMs, challenging brand name drug
pricing practices under various state and federal antitrust laws. The plaintiffs
alleged, among other things, that the manufacturers had offered, and certain
PBMs had knowingly accepted, discounts and rebates on purchases of brand name
prescription drugs that violated the federal Sherman Act and the federal
Robinson-Patman Act. Some drug 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 class
action was recently dismissed as to drug manufacturers and wholesalers who did
not settle. With respect to the cases filed by plaintiffs who opted out of the
class action, while some drug manufacturers have settled certain of these
actions, such settlements are not part of the public record.
Neither we nor DPS is 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 cases in
which the plaintiffs are trying their claims separately.
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.
STATE AND FEDERAL REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS
Numerous state and federal laws and regulations affect our business and
operations. The categories include, but are not necessarily limited to:
-anti-remuneration laws
-the Employee Retirement Income Security Act and related regulations
-proposed comprehensive state PBM legislation
-consumer protection laws
-network access (i.e.,"any willing provider" and "due process" legislation)
-legislation imposing benefit plan design restrictions
-licensure laws
-drug pricing legislation (i.e., "mostfavored nation" pricing and
"unitary pricing" legislation)
-mail pharmacy regulations
-privacy and confidentiality legislation
-Medicare and Medicaid reimbursement regulations
-potential regulation of the PBM industry by the U.S. Food and Drug
Administration
These and other regulatory matters are discussed in more detail under "Business
- - Government Regulation" below.
We believe we are in substantial compliance with all existing legal
requirements material to the operation of our business. 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
materially adversely affect our business. We are unable to predict what
additional federal or state legislation or regulatory initiatives may be enacted
in the future relating to our business or the health care industry in general.
We also cannot predict what effect any such legislation or regulations might
have on us. We also 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 effect on our business or
results of operations.
CHANGES IN THE HEALTH CARE INDUSTRY 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.
FAILURE TO ADDRESS THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
Our business relies heavily on computers and other information systems
technology. In 1995, we began addressing the "Year 2000" issue, which generally
refers to the inability of certain computer systems to properly recognize
calendar dates beyond December 31, 1999. We developed a Year 2000 compliance
plan to address:
-internally developed application software
-vendor developed applications software
-operating system software
-utility software
-vendor/trading partner-supplied files
-externally provided data or transactions
-non-informationt technology devices
-adherence to applicable industry standards
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations" for additional information on our Year 2000 efforts.
We believe that with appropriate modifications to our existing computer
systems, updates by our vendors and trading partners and conversion to new
software in the ordinary course of our business, the Year 2000 issue will not
pose material operational problems for us. However, if the conversions are not
completed in a proper and timely manner by all affected parties, or if our logic
for communicating with noncompliant systems is ineffective, the Year 2000 issue
could result in material adverse operational and financial consequences to us.
We cannot provide any assurance that our efforts, or those of our vendors and
trading partners (who are beyond our control), will be successful in addressing
the Year 2000 issue. In addition, while DPS has represented to us that it has
implemented a Year 2000 plan for upgrading its computer systems and communicated
with its vendor/trading partners regarding such partners' Year 2000 compliance,
we cannot predict whether such plan will adequately address all of DPS's Year
2000 issues or whether DPS's vendors/trading partners will adequately address
their Year 2000 issues. Failure by DPS and its vendors/trading partners to
adequately address the Year 2000 issue could have a material adverse effect on
our business and results of operations. We also cannot provide any assurance
that our contingency plan, or that of DPS, will be complete and adequately
address all possible contingencies. The failure of our contingency plan, or that
of DPS, could result in material adverse operational and financial consequences
to us.
LOSS OF KEY MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
Our success is materially dependent upon certain key managers and, in
particular, upon the continued services of Barrett A. Toan, our President and
Chief Executive Officer. Our future operations could be materially adversely
affected if the services of Mr. Toan cease to be available. The Company and Mr.
Toan are parties to an employment agreement which currently extends to April 1,
2000, and which automatically extends for an additional two years on each April
1, unless either party gives notice of termination prior to the April 1 date. As
of the date hereof, neither we nor Mr. Toan has given such notice.
NEW YORK LIFE INSURANCE COMPANY CAN EXERCISE SIGNIFICANT CONTROL OVER OUR
BUSINESS
We have two classes of authorized common stock: Class A Common Stock and
Class B Common Stock. Our Class A Common Stock has been publicly traded on The
Nasdaq National Market since June 9, 1992. Our Class B Common Stock is entirely
owned by NYLIFE HealthCare Management, Inc. ("NYLIFE HealthCare"), an indirect
subsidiary of New York Life Insurance Company ("New York Life"). Each share of
our Class A Common Stock has one vote per share, and each share of our Class B
Common stock has ten votes per share. Consequently, although NYLIFE HealthCare
currently owns approximately 45% of the Company's total outstanding shares of
Common Stock, it possesses approximately 89% of the combined voting power of
both classes of Common Stock. NYLIFE HealthCare could reduce its Class B Common
Stock ownership to represent slightly less than 10% of the total outstanding
shares of our common stock and still control a majority of the voting power of
our common stock. Accordingly, without regard to the votes of our public
stockholders, NYLIFE HealthCare can
-elect or remove all of our directors
-amend our certificate of incorporation, except where the separate
approval of the holders of our Class A Common Stock is required
by law
-accept or reject a merger, sale of assets or other major corporate
transaction
-accept or reject any proposed acquisition of the Company
-determine the amount and timing of dividends paid to itself and holders
of our Class A Common Stock
-except as described below, otherwise control our management and
operations and decide all matters submitted for a stockholder vote
Our by-laws require that any material transaction with a related party be
approved by the Audit Committee of our Board of Directors, which currently
consists of three directors. A by-law provision, which cannot be changed without
the affirmative vote of a majority of the outstanding shares of our Class A
Common Stock, requires that a majority of directors on the Audit Committee be
persons who are not directors of New York Life or its subsidiaries (other than
us) or officers or employees of New York Life or its subsidiaries (other than
us). A material transaction is a transaction that, by itself, would be required
to be disclosed in our proxy statement. The terms of the original contracts
between us and New York Life and its subsidiaries were not negotiated at arm's
length and were not approved by the Audit Committee, but all amendments to these
original contracts with New York Life and its subsidiaries subsequent to our
initial public offering in 1992 have been approved by the Audit Committee. On
July 15, 1998, New York Life sold substantially all of its health care
businesses (other than its interest in us) to Aetna U.S. Healthcare Inc.
Consequently, we do not anticipate entering into any material PBM or other
health care service agreements with New York Life.
New York Life has agreed that so long as it, directly or through one or
more of its majority owned subsidiaries, owns 10% or more of our outstanding
shares of Class B Common Stock, New York Life will not engage, directly or
through any of its majority owned subsidiaries, in a business that derives
substantial revenues from one or more of the following activities within the
United States (the "Protected Business"):
-the providing of PBM services (including dispensing
prescription drugs, monitoring cost and quality of
pharmacy services, establishing a network of retail
pharmacies, processing claims for prescription drugs,
performing drug utilization review and assisting in the
design of prescription drug programs for benefit plans)
-the providing of vision care
-the providing of infusion therapy services
However, New York Life and its majority owned subsidiaries may engage in the
following Protected Business activities:
-portfolio investment activities, without any of the entities in which
they invest being subject to the foregoing restrictions
-claims processing for prescription drugs in connection with processing
medical care claims under insurance policies
-acquisition of entities engaged in all or any aspect of the Protected
Business, unless any such entity derived a majority of its
consolidated revenues from the Protected Business in the fiscal year
preceding such acquisition, and operation of the businesses of such
acquired entities as they may thereafter develop or expand
The above-mentioned restrictions do not apply to any entities in which New
York Life and its subsidiaries own less than a majority equity interest.
We cannot provide any assurance that any business opportunity that comes to
the attention of New York Life or its subsidiaries and affiliates and that falls
within the scope of the Protected Business, or might otherwise be appropriate
for us to consider pursuing, will be directed to us, whether or not such
opportunity would be in our or our stockholders' best interest.
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 pharmaceuticals currently account for approximately 6.5%
of U.S. health care expenditures, and are expected to increase to 8% by 2007.
Estimated U.S. pharmaceutical sales for 1998 were approximately $75 billion, and
HCFA projects continued sales increases at an average annual growth rate of
approximately 10% through 2007, compared to an average annual growth rate of
approximately 7% for total health care costs during this period. Factors
underlying this trend include: (i) increases in research and development
expenditures by drug manufacturers, resulting in many new drug introductions,
(ii) a shorter U.S. Food and Drug Administration approval cycle for new
pharmaceuticals, (iii) high prices for new "blockbuster" drugs, (iv) an aging
population, and (v) 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.
Health benefit providers have been seeking ways to better understand and
control drug costs. PBMs help health benefit providers to provide a
cost-effective drug benefit and to better understand the impact of prescription
drug utilization on total health care expenditures. 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.
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. These advanced
capabilities require resources that may not be available to all PBMs, so further
industry consolidation may occur. If prescription drug costs continue to
escalate and become an even larger portion of overall health care expenditures,
more advanced capabilities will be needed to manage these costs so that health
benefit providers will be able to continue to offer a quality prescription drug
benefit to their members. The more sophisticated PBMs should be in the best
position to offer these services.
COMPANY OVERVIEW
We are the largest full-service PBM independent of pharmaceutical
manufacturer or drug store ownership in North America. PBMs coordinate the
distribution of outpatient pharmaceuticals through a combination of benefit
management services, including retail drug card programs, mail pharmacy
services, formulary management programs and other clinical management programs.
We provide these types of services for approximately 8,500 clients that include
HMOs, health insurers, third-party administrators, employers and union-sponsored
benefit plans. We believe our independence from pharmaceutical manufacturer
ownership allows us to make unbiased formulary recommendations to our clients,
balancing both clinical efficacy and cost. We also believe our independence from
drug store ownership allows us to construct a variety of convenient and
cost-effective retail pharmacy networks for our clients, without favoring any
particular pharmacy chain.
Before 1998, our growth was driven almost exclusively by our ability to
expand our product offerings and increase our client and membership base through
internally generated growth. From 1992 through 1997, our net revenues and net
income increased at compound annual growth rates of 58% and 49%, respectively.
While our internal growth strategy remains a major focus, we have recently
complemented our internal growth strategy with two substantial acquisitions.
These acquisitions add to the scale of our membership base and broaden our
product offerings. In April 1998, we acquired "ValueRx", the PBM business of
Columbia/HCA Healthcare Corporation. In the second quarter of 1999, we expect to
complete the acquisition of DPS, the PBM business of SmithKline Beecham
Corporation. Upon completion of our acquisition of DPS, we will continue to be
the third largest PBM in North America in terms of total members, and we will
have one of the largest managed care membership bases of any PBM.
As of January 1, 1999, our PBM services were provided to approximately 23.5
million members in the United States and Canada who were enrolled in health
plans sponsored by our clients. This total excludes members for whom we provide
only formulary management services. As of January 1, 1999, some of our largest
clients were Aetna U.S. Healthcare and the State of New York Empire Plan
Prescription Drug Program.
Our PBM services are primarily delivered through networks of retail
pharmacies that are under contract with us and through five mail pharmacy
service centers that we own and operate. Our largest retail pharmacy network
includes more than 52,000 retail pharmacies, representing more than 99% of all
retail pharmacies in the United States. In 1998, we processed approximately
113.2 million network pharmacy claims and 7.4 million mail pharmacy
prescriptions, with an estimated total drug spending of approximately $4.5
billion.
Our PBM services include:
-network claims processing, mail pharmacy services, benefit
design consultation, drug utilization review, formulary
management programs, disease management and medical and drug
data analysis services, and compliance and therapy management
programs for our clients
-market research programs for pharmaceutical manufacturers
-medical information management services, which include provider profiling
and outcome assessments, through our majority owned subsidiary
Practice Patterns Science, Inc. ("PPS")
-informed decision counseling services through our Express Health LineSM
division
Our non-PBM services include:
-infusion therapy services through our wholly owned subsidiary IVTx, Inc.
("IVTx")
-distribution of pharmaceuticals requiring special handling or packaging
through our Specialty Distribution division
Express Scripts, Inc. was incorporated in Missouri in September 1986, and
was reincorporated in Delaware in March 1992. We have two classes of common
stock, Class A Common Stock and Class B Common Stock. Each share of the Class B
Common Stock is entitled to ten votes, and each share of the Class A Common
Stock is entitled to one vote. All of the issued and outstanding shares of the
Class B Common Stock are owned by NYLIFE HealthCare. Our principal executive
offices are located at 14000 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. PBM services consist of retail pharmacy network administration, mail
pharmacy services, benefit plan design consultation, formulary administration,
electronic point-of-sale claims processing and drug utilization review. Our PBM
services also include: (i) the development of advanced formulary compliance and
therapeutic intervention programs; (ii) therapy management services such as
prior authorization, therapy guidelines, step therapy protocols and formulary
management interventions; (iii) sophisticated management information reporting
and analytic services; (iv) provider profiling and outcomes assessments; and (v)
informed decision counseling.
During 1998, 97.9% of our net revenues were derived from PBM services,
compared to 96.8% and 96.1% during 1997 and 1996, respectively. The number of
retail pharmacy network claims processed and mail pharmacy claims processed has
increased to 113.2 million and 7.4 million claims, respectively, in 1998, from
26.3 million and 1.6 million claims, respectively, in 1994. During 1997 and
1996, we processed 73.2 million and 57.8 million retail pharmacy network claims,
respectively, and 3.9 million and 2.8 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 and one
nationwide network in Canada that are responsive to client preferences related
to cost containment and convenience of access for members. We also manage
networks of pharmacies that are under direct contract with our managed care
clients or networks that we have designed to meet the specific needs of some of
our larger clients.
All retail pharmacies in our pharmacy networks communicate with us on-line
and in real time to process prescription drug claims. When a member of a plan
presents his or her identification card at a network pharmacy, the network
pharmacist sends the specified claim data in an industry-standard format through
our systems, which process the claim and respond to the pharmacy, typically
within one or two seconds. The electronic processing of the claim involves: (i)
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, (ii) performing a
concurrent drug utilization review ("DUR") analysis and alerting the pharmacist
to possible drug interactions or other indications of inappropriate prescription
drug usage, (iii) updating the member's prescription drug claim record, and (iv)
if the claim is accepted, confirming to the pharmacy that it will receive
payment for the drug dispensed.
MAIL PHARMACY SERVICES. We integrate our retail pharmacy services with our
mail pharmacy services. We operate five mail pharmacies, located in Maryland
Heights, Missouri; Tempe, Arizona; Albuquerque, New Mexico; Bensalem,
Pennsylvania; and Troy, New York. These pharmacies provide members with
convenient access to maintenance medications and enable us and our clients to
control drug costs through operating efficiencies and economies of scale. In
addition, through our mail service pharmacies, we are directly involved with the
prescriber and member, and are generally able to achieve a higher level of
generic substitutions and therapeutic interventions than can be achieved through
the retail pharmacy networks. This further reduces our clients' costs.
BENEFIT PLAN DESIGN AND CONSULTATION SERVICES. We offer consultation and
financial modeling services to assist the client in selecting a benefit plan
design that meets its needs for member satisfaction and cost control. The most
common benefit design options we offer to our clients are: (i) 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, (ii) generic drug
substitution incentives, (iii) incentives or requirements to use only network
pharmacies or to order certain drugs only by mail, and (iv) 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 us
and our clients to monitor the financial performance of the plan.
ADVANCED FORMULARY COMPLIANCE AND THERAPY MANAGEMENT SERVICES. We provide
advanced formulary compliance services to our clients. Formularies are lists of
drugs for which coverage is provided under the applicable plan. They are widely
used in managed health care plans and, increasingly, by other health plan
managers. We administer a number of different formularies for our clients that
often identify preferred drugs whose use is encouraged or required through
various benefit design features. Historically, many clients have selected a plan
design which includes an open formulary in which all drugs are covered by the
plan and preferred drugs, if any, are merely recommended. More advanced options
consist of restricted formularies, in which various financial or other
incentives exist for the selection of preferred drugs over their non-preferred
counterparts, or closed formularies, in which benefits are available only for
drugs listed on the formulary. Formulary preferences can be encouraged: (i) 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, (ii) through prescriber education programs, in which we or the managed
care client actively seek to educate the prescribers about the formulary
preferences, and (iii) through our OptiMedSM drug therapy management program,
which actively promotes therapeutic and generic interchanges to reduce drug
costs. We also offer the ExpressTherapeutics(R) program, an innovative
proprietary drug utilization review and clinical intervention program, to assist
clients in managing compliance with the prescribed drug therapy and
inappropriate prescribing practices. Although we derive substantial revenue from
pharmaceutical manufacturers, we recognize our primary responsibility is to the
plan sponsors, and we believe our contracts with the pharmaceutical
manufacturers provide us the flexibility to utilize the most efficacious
products.
Our National Pharmacy and Therapeutics Committee, composed of independent
physicians and pharmacists, evaluates drugs within a therapy class to determine
whether it is clinically appropriate to give formulary preference to one drug
over another. If clinical appropriateness is established to the committee's
satisfaction, it then evaluates the cost-effectiveness of drugs in the therapy
class. Once a client adopts a formulary, we administer the formulary through our
electronic claims processing system, which alerts the pharmacist if the
prescriber has not prescribed the preferred drug. We or the pharmacist can then
contact the prescriber to attempt to obtain the prescriber's consent to switch
the prescription to the preferred product.
INFORMATION REPORTING AND ANALYSIS AND DISEASE MANAGEMENT PROGRAMS. Through
the development of increasingly sophisticated management information and
reporting systems, we believe we manage prescription drug benefits more
effectively. We have developed various services to offer our clients. One
service enables a client to analyze prescription drug data to identify cost
trends and budget for expected drug costs, to assess the financial impact of
plan design changes and to identify costly utilization patterns through an
on-line prescription drug decision support tool called RxWorkbenchTM. This
service permits our clients' medically sophisticated personnel, such as a
clinical pharmacist employed by an HMO, to analyze prescription drug data
on-line.
In addition, our PPS subsidiary offers provider profiling, disease
management support services and outcomes assessments, and has developed
proprietary software to process and sort medical claims, prescription drug
claims and clinical laboratory data. This data is then used to produce
comprehensive information about treatment of patients that can be used by
managed care organizations and other companies involved in formulary management
programs to treat a particular disease in a quality, cost-effective manner. The
patient-specific data generated through all of these services can then be
compared to data in PPS's normative databases, and PPS can determine the
effectiveness of treatment and calculate the total costs of that treatment,
including the prescription drug component. The information can also be used to
analyze the practice patterns of health care providers and develop empirically
based "best practice" protocols, which recommend treatment regimens for specific
diseases.
We offer additional disease management programs to assist health benefit
plans in managing the total health care costs associated with certain diseases,
such as asthma, diabetes and cardiovascular disease. These programs are based
upon the premise that patient and provider behavior can positively influence
medical outcomes and reduce overall medical costs. Patient identification can be
accomplished through claims data analysis or self-enrollment, and risk
stratification surveys are conducted to establish a plan of care for individual
program participants. Patient education is primarily effected through a series
of telephone and written communications with nurses and pharmacists, and both
providers and patients receive progress reports on a regular basis. Outcome
surveys are conducted and results are compiled to analyze the clinical, personal
and economic impact of the program.
ELECTRONIC CLAIMS PROCESSING SYSTEM. Our electronic claims processing
system enables us to implement sophisticated intervention programs to assist in
managing prescription drug utilization. The system can be used to alert the
pharmacist to generic substitution and therapeutic intervention opportunities
and formulary compliance issues, or to administer prior authorization and
step-therapy protocol programs at the time a claim is submitted for processing.
Our claims processing system also creates a database of drug utilization
information that can be accessed both at the time the prescription is dispensed
and also on a retrospective basis to analyze utilization trends and prescribing
patterns for more intensive management of the drug benefit.
INFORMED DECISION COUNSELING SERVICES. We offer health care decision
counseling services through our Express Health LineSM division. This service
allows a member to call a toll-free telephone number and discuss a health care
matter with a care counselor who utilizes on-line decision support protocols and
other guidelines to provide information to assist the member in making an
informed decision in seeking appropriate treatment. Records of each call are
maintained on-line for future reference. The service is available 24 hours a
day. Multilingual capabilities and service for the hearing impaired are also
available. The counselors provide follow-up service to members to determine if
their situation was resolved or if the counselor may provide additional
assistance. Member satisfaction and outcomes assessments are tracked through a
combination of member surveys, a quality assurance plan and system reports.
NON-PBM SERVICES
In addition to PBM services, we also provide non-PBM services including
outpatient infusion therapy, specialty distribution and vision care to our
clients. During 1998, 2.1% of our net revenues were derived from non-PBM
services, compared to 3.2% and 3.9% during 1997 and 1996, respectively. This
decline is partially due to the acquisition of ValueRx, which significantly
increased the Company's PBM service revenues.
OUTPATIENT INFUSION THERAPY SERVICES - IVTX. 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. IVTx's clients, which include managed care
organizations, third-party administrators, insurance companies, case management
companies, unions and self-insured employers, benefit from outpatient infusion
therapy services because the length of hospital stays can be reduced. Rather
than receiving infusion therapy in a hospital, IVTx provides infusion therapy
services to patients at home, in a physician's office or in a free-standing
center operated by a managed care organization or other entity. IVTx provides
antimicrobial, cardiovascular, hematologic, nutritional, analgesic,
chemotherapeutic, hydration, endocrine, respiratory and AIDS management
treatments to patients. IVTx generally prepares the treatments in one of its
infusion therapy pharmacies, which are licensed independently of our mail
pharmacies. The treatments are either administered under the supervision of
IVTx's staff of registered nurses or licensed vocational nurses who are employed
at one of the IVTx sites or, in areas where IVTx does not have a facility,
through contracted registered nurses employed or otherwise retained by nursing
agencies. IVTx may also contract with physicians to provide consultation
services to its sites and contract for pharmacy services for patients who live
in outlying areas.
We have facilities supporting our infusion therapy operations in Houston,
Texas; Dallas, Texas; Columbia, Maryland; Maryland Heights, Missouri; Columbia,
Missouri; Northvale, New Jersey; Tempe, Arizona; and West Chester, Pennsylvania.
IVTx's information system maintains patient profiles and documents doses and
supplies dispensed, and its drug utilization review component accesses our
prescription records for members receiving both infusion and oral drug therapies
to screen for drug interactions, incompatibilities and allergies.
SPECIALTY DISTRIBUTION SERVICES. We began offering specialty distribution
services during the fourth quarter of 1997 through our Tempe, Arizona facility.
This service assists pharmaceutical manufacturers with the distribution of, and
creation of a database of information for, products requiring special
handling/packaging or products targeted to a specific physician or patient
population.
VISION CARE SERVICES. Until September 1998, we offered a managed vision
care program through a network of approximately 9,000 vision care providers
consisting primarily of optometrists and a smaller number of ophthalmologists.
In addition to administering the network, we ground and edged lenses, assembled
eyeglasses and distributed eyeglasses and contact lenses from our vision lab
formerly located in Earth City, Missouri.
We entered into an agreement, effective September 1, 1998, with Cole
Managed Vision ("Cole"), a subsidiary of Cole National Corporation, pursuant to
which Cole provides certain vision care services for our clients and their
members. The agreement enables us to focus on our PBM business while still
offering a vision care service to our members by transferring certain functions
performed by our Express Scripts Vision Corporation to Cole. The Cole vision
program is offered to substantially all of our PBM clients, and we receive a fee
from Cole based on usage of the vision benefit by members. In conjunction with
the Cole agreement, we also announced plans to close the operations of our
wholly owned subsidiary, PhyNet, Inc., a vision program management service
organization.
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 1998, approximately 56.2% of our pharmaceutical purchases were through
one wholesaler, most of which were brand name pharmaceuticals. Generic
pharmaceuticals are generally purchased directly from manufacturers. We believe
that alternative sources of supply for most generic and brand name
pharmaceuticals are readily available.
CLIENTS
We are a major provider of PBM services to the managed care industry,
including several large HMOs, and the employer industry, both directly and
through third-party administrators. Currently, some of our largest managed care
clients are Aetna U.S. Healthcare, Inc. ("Aetna"; the plans we service are
composed primarily of the plans of the former NYLCare Health Plans, Inc.
("NYLCare") entity, which was a wholly owned subsidiary of New York Life),
Coventry Corporation ("Coventry"), and Blue Cross Blue Shield of Massachusetts
(which should begin service with us during the third quarter of 1999). Some of
our largest employer groups include the State of New York Empire Plan
Prescription Drug Program (through a subcontracting relationship with CIGNA
HealthCare), and the State of Ohio Bureau of Workers' Compensation Fund. We also
market our PBM services through preferred provider organizations, group
purchasing organizations, health insurers, third-party administrators of health
plans and union-sponsored benefit plans.
We provide PBM services, including informed decision counseling, and
non-PBM services, including infusion therapy services, to HMOs owned or managed
by Aetna/NYLCare, and provide PBM services to insurance plans underwritten and
administered by Aetna/NYLCare. Of our net revenues from PBM services in 1998,
4.8% was for services provided to members of HMOs owned or managed by NYLCare or
insurance policies administered by NYLCare while NYLCare was a subsidiary of New
York Life. Of our net revenues for non-PBM services in 1998, 21.5% was for
services provided to members of HMOs owned or managed by NYLCare and insurance
policies administered by NYLCare while NYLCare was a subsidiary of New York
Life. In connection with Aetna's purchase of NYLCare, we and Aetna reached an
agreement to extend our PBM service agreements with HMOs, excluding the informed
decision counseling component, and our infusion therapy agreements through
December 31, 2003, with new pricing to take effect after December 31, 1999. The
informed decision counseling and vision care (through our alliance with Cole)
agreements will continue through December 31, 1999. We also expect to continue
to provide PBM services to members of the NYLCare indemnity programs until such
members are converted to Aetna policies, which is anticipated to occur during
1999. See Item 7 herein and see Note 4 of Notes to Consolidated Financial
Statements in Item 8 herein for additional discussion concerning Aetna/NYLCare.
Upon completion of our pending acquisition of DPS (assuming all conditions
necessary for the consummation are satisfied), United HealthCare Corporation
will become our largest client, with approximately 10.5 million members. DPS's
contract with United HealthCare will expire in May, 2000, and United HealthCare
has indicated it will be moving to another provider at that time. In our
financial analysis of the DPS acquisition, we assumed United HealthCare would
not renew its contract. However, the loss of this contract and related
transition issues may still materially adversely affect our business and results
of operations.
ACQUISITIONS AND STRATEGIC ALLIANCES
On February 9, 1999, we announced that we had executed a definitive
agreement to acquire DPS from SmithKline Beecham Corporation and one of its
affiliates for $700 million in cash. We expect to complete the acquisition
during the second quarter of 1999. We intend to finance the acquisition and
refinance all of our existing indebtedness through a $1.1 billion credit
facility and a $150 million senior subordinated bridge credit facility. Goodwill
and customer contract amortization from the DPS acquisition will be tax
deductible. Upon completion of our acquisition of DPS, we will continue to be
the third largest PBM in North America in terms of total members and we will
have one of the largest managed care membership bases of any PBM. In addition,
the acquisition will provide us with enhanced clinical capabilities, systems and
technologies. Consummation of the transaction is subject to customary closing
conditions, and we cannot provide any assurance that all such conditions will be
satisfied such that the transaction may be consummated as planned.
On April 1, 1998, we acquired the PBM business known as "ValueRx" from
Columbia/HCA Healthcare Corporation for approximately $460 million in cash
(including approximately $15 million in transaction costs and executive
severance costs). Historically, while both we and ValueRx served all segments of
the PBM market, we primarily focused on managed care and smaller self-funded
plan sponsors, and ValueRx concentrated on health insurance carriers and large
employer and union groups. We believe the ValueRx acquisition has provided and
will continue to provide us with additional resources and expertise, which will
allow us to better serve our clients and competitively pursue new business in
all segments of the PBM market.
In January 1996, we acquired the pharmacy claim processing business of
Eclipse Claims Services, Inc., one of the largest processors of prescription
drug claims in Canada. In connection with this acquisition, we entered into
five-year exclusive contracts to provide PBM services in Canada to both
Prudential Insurance Company of America's Canadian Operations ("Prudential") and
Aetna Life Insurance Company of Canada ("Aetna"). The assets of Prudential were
previously acquired by London Life Insurance Company ("London Life"), with whom
we reached an agreement whereby we would be the exclusive provider of PBM
services to London Life. In late 1997, London Life was acquired by Great-West
Lifeco. Inc. ("Great-West"), who receives PBM services from one of our
competitors in Canada. Great-West decided not to continue using our services,
and we have agreed to transition their business to another provider. The
transition should be substantially completed during the second or third quarter
of 1999.
On December 31, 1995, we entered into a series of agreements with American
HealthCare Systems Purchasing Partners, L.P. (now known as Premier Purchasing
Partners, L.P.; the "Premier Partnership"), a health care group purchasing
organization affiliated with APS Healthcare, Inc. (now known as Premier, Inc.;
"Premier"). Premier is the largest voluntary health care alliance in the U.S.,
formed as a result of the mergers in late 1995 of three predecessor alliances,
American HealthCare Systems, Premier Health Alliance and SunHealth Alliance. The
Premier alliance includes approximately 215 integrated health care systems that
own or operate approximately 800 hospitals and are affiliated with another
approximately 900 hospitals. Among other things, the agreements designate us as
Premier's exclusive preferred provider of outpatient PBM services to
shareholders of Premier and their affiliated health care entities, plans and
facilities which participate in the Partnership's purchasing programs. The term
of the agreement is ten years, subject to early termination by the Partnership
at five years, upon payment of an early termination fee to us. Premier is
required to promote us as its preferred PBM provider. An individual Premier
member or affiliated managed care plan is not required to enter into an
agreement with us, but if it does so, the term of the agreement would be for
five years. Under the terms of the agreements with the Partnership, we now
provide service to a number of Premier affiliates. In May 1996, as a result of
the number of Premier plan members receiving our PBM services and the outcome of
certain joint drug purchasing initiatives, we issued 454,546 shares of our Class
A Common Stock to the Premier Partnership. The Premier Partnership could become
entitled to receive up to an additional 4,500,000 shares of our Class A Common
Stock, depending upon the number of members in Premier-affiliated managed care
plans that contract for our PBM services. A calculation is made on April 1 of
each year to determine if a stock issuance will be made. If the Premier
Partnership earns stock totaling over 5% of our total voting stock, it is
entitled to have its designee nominated for election to our Board of Directors.
As of the date hereof, the Premier Partnership has not reached this 5%
threshold. See Note 3 of Notes to Consolidated Financial Statements in Item 8
herein for additional discussion concerning Premier.
In November 1995, we entered into a ten-year strategic alliance with The
Manufacturers Life Insurance Company ("Manulife") one of the largest providers
of group health insurance policies in Canada, pursuant to which we are the
exclusive provider of PBM services to Manulife. As a result of this alliance,
Manulife can earn up to approximately 474,000 shares of our Class A Common
Stock, depending on its achievement of certain pharmacy claim volumes from 1996
to 2000. To date, we have not issued any shares to Manulife. In addition, if
Manulife does not terminate the alliance in either year 6 or year 10 of the
agreement, in each of such years it will receive a warrant to purchase up to
237,000 shares of our Class A Common Stock exercisable at 85% of the then fair
market value of such shares. The actual number of shares will depend upon claims
volume in such years. See Note 3 of Notes to Consolidated Financial Statements
in Item 8 herein for additional discussion concerning Manulife.
In January 1995, we entered into an exclusive three-year agreement to
provide PBM services to Coventry Corporation, pursuant to which Coventry
received 50,000 shares of our Class A Common Stock. In December 1997, Coventry
extended its agreement for an additional two years. In connection with such
extension, we issued, as an advance discount, a seven-year warrant to purchase
an additional 50,000 shares of our Class A Common Stock, exercisable at a price
of $26.4544 per share (90% of the per share market value at the time of
renewal).
COMPANY OPERATIONS
GENERAL. In our various facilities in the United States, we own and operate
five mail pharmacies and five member service/pharmacy help desk call centers
(four of which are linked to create a virtual call center environment).
Electronic pharmacy claims processing is principally directed through our
Maryland Heights, Missouri facility then routed to the appropriate computer
platform at our Maryland Heights, Missouri or Tempe, Arizona facility or at
facilities operated by Perot Systems, which maintains certain of our computer
hardware. At our Canadian facility, we have sales and marketing, client
services, pharmacy help desk, clinical, provider relations and certain
management information systems capabilities.
SALES AND MARKETING; CLIENT SERVICE. We market our PBM services in the
United States primarily through an internal staff of regional marketing
representatives and sales personnel located in various cities throughout the
United States. The marketing representatives are supported by a staff of client
service representatives. Our sales and marketing personnel and client service
representatives are organized by type of business served (i.e., managed care
group, employer group, etc.). Marketing in Canada is conducted by marketing
representatives located in Mississauga, Ontario, who are assisted by our
personnel based in the United States. Although we cross-sell our IVTx services
to our PBM clients, IVTx employs its own sales and marketing and client service
personnel to take advantage of individual market opportunities.
MEMBER SERVICES. We believe client satisfaction is dependent upon member
satisfaction. Members can call us toll-free, 24 hours a day, to obtain
information about their prescription drug plan. We employ member service
representatives who are trained to respond to member inquiries.
PROVIDER RELATIONS. Our Provider Relations group is responsible for
contracting and administering our pharmacy networks. To participate in our
retail pharmacy networks, pharmacists must meet certain qualifications and are
periodically required to represent to us that their applicable state licensing
requirements are being maintained and that they are in good standing. Pharmacies
can contact our various pharmacy help desks toll-free, 24 hours a day, for
information and assistance in filling prescriptions for members. In addition,
our Provider Relations group audits selected pharmacies in the retail pharmacy
networks to determine compliance with the terms of the contract with us or our
clients.
CLINICAL SUPPORT. Our Health Management Services Department employs
clinical pharmacists, data analysts and outcomes researchers who provide
technical support for our PBM services. These staff members assist in providing
high level clinical pharmacy services such as formulary development, drug
information programs, clinical interventions with physicians, development of
drug therapy guidelines and the evaluation of drugs for inclusion in clinically
sound therapeutic intervention programs. The Health Management Services
Department also analyzes and prepares reports on clinical pharmacy data for our
clients and conducts specific data analyses to evaluate the cost-effectiveness
of certain drug therapies.
INFORMATION SYSTEMS. Our Information Systems department supports our
pharmacy claims processing systems and other management information systems
which are essential to our operations. Uninterrupted point-of-sale electronic
retail pharmacy claims processing is a significant operational requirement for
us, and we are in the process of integrating the systems acquired with the
ValueRx acquisition with our historical systems located at our Maryland Heights,
Missouri and Tempe, Arizona facilities. Substantially all claims are presently
directed through our Maryland Heights, Missouri facility then routed to the
appropriate computer platform at our Maryland Heights, Missouri or Tempe,
Arizona facility, or at facilities operated by Perot Systems (Perot Systems
maintains the computer hardware for the ValueRx systems at its facility in
Richardson, Texas). Our historical claims processing systems located in our
Maryland Heights, Missouri and Tempe, Arizona facilities are designed to be
redundant, which enables us to do substantially all claims processing in one
facility if the other facility is unable to process claims. Disaster recovery
services for the ValueRx systems are provided by a third party. We have
substantial capacity for growth in our claims processing facilities.
COMPETITION
We believe the primary competitive factors in each of our businesses are
price, quality of service and breadth of available services. We believe our
principal competitive advantages are our size, our independence from
pharmaceutical manufacturer and drug store ownership, our strong managed care
and employer group customer base which supports the development of advanced PBM
services and our commitment to provide flexible and distinctive service to our
clients.
There are a large number of companies offering PBM services in the United
States. Most of these companies are smaller than us and offer their services on
a local or regional basis. We do, however, compete with a number of large,
national companies, including Merck-Medco Managed Care, L.L.C. (a subsidiary of
Merck & Co., Inc.), PCS, Inc. (a subsidiary of Rite-Aid Corporation), Caremark
International Inc. (a subsidiary of MedPartners, Inc.), and Advance ParadigM,
Inc., as well as numerous insurance and Blue Cross and Blue Shield plans and
certain HMOs which have their own PBM capabilities. Several of these other
companies may have greater financial, marketing and technological resources than
us.
In general, consolidation is a critical factor in the pharmaceutical
industry, and particularly so in the PBM segment. Competitors that are owned by
pharmaceutical manufacturers or drug store chains may have pricing advantages
that are unavailable to us and other independent PBMs. However, we believe
independence from pharmaceutical manufacturer and drug store ownership is
important to certain clients, and we believe this independence provides us an
advantage in marketing to those clients.
On February 9, 1999, we announced that we had executed a definitive
agreement to purchase DPS for $700 million. As more particularly discussed above
and in Item 7, consummation of the transaction is subject to customary closing
conditions, but is expected to occur during the second quarter of 1999.
Some of our PBM services, such as disease management services, informed
decision counseling services and medical information management services,
compete with those being offered by pharmaceutical manufacturers, other PBMs,
large national companies, specialized disease management companies and
information service providers. Our non-PBM services compete with a number of
large national companies as well as with local providers.
GOVERNMENT REGULATION
Various aspects of our businesses are governed by federal and state laws
and regulations. Since sanctions may be imposed for violations of these laws,
compliance is a significant operational requirement. We believe we are in
substantial compliance with all existing legal requirements material to the
operation of our businesses. There are, however, significant uncertainties
involving the application of many of these legal requirements to our business.
In addition, there are numerous proposed health care laws and regulations at the
federal and state levels, many of which could adversely affect our business. We
are unable to predict what additional federal or state legislation or regulatory
initiatives may be enacted in the future relating to our business or the health
care industry in general, or what effect any such legislation or regulations
might have on us. We cannot provide any assurance that federal or state
governments will not impose additional restrictions or adopt interpretations of
existing laws that could have a material adverse affect on our business or
financial position.
PHARMACY BENEFIT MANAGEMENT REGULATION GENERALLY. Certain federal and
related state laws and regulations affect or may affect aspects of our PBM
business. Among these are the following:
FDA REGULATION. The U.S. Food and Drug Administration ("FDA") generally has
authority to regulate drug promotional materials that are disseminated "by or on
behalf of" a drug manufacturer. In January, 1998, the FDA issued a Notice and
Draft Guidance regarding its intent to regulate certain drug promotion and
switching activities of pharmacy benefit managers that are controlled, directly
or indirectly, by drug manufacturers. The position taken by the FDA in the Draft
Guidance was that promotional materials used by an independent PBM may be
subject to FDA regulation depending upon the circumstances, including the nature
of the relationship between the PBM and the manufacturer. We, along with various
other parties, submitted written comments to the FDA regarding the basis for FDA
regulation of PBM 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
objections to the proposed Draft, the FDA essentially withdrew the Draft
Guidance in the fall of 1998, stating that it would reconsider the basis for
such a Guidance. The FDA has not addressed the issue since the withdrawal and
has not indicated when or even if it will continue to address the issue.
However, there can be no assurance that the FDA will not again attempt to assert
jurisdiction over certain aspects of our PBM business in the future and, in such
event, the impact could materially adversely affect our operations.
ANTI-REMUNERATION LAWS. Medicare and Medicaid 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 Medicare or Medicaid
beneficiaries 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, or other federally-funded state 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
(HHS), 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, and certain properly disclosed payments made by
vendors to group purchasing organizations. HHS has previously announced a
proposed safe harbor that would protect certain discount and payment
arrangements between PBMs and HMO risk contractors serving Medicaid and Medicare
members, and an interim final rule is currently being developed by HHS. 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. 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 been challenged under these laws and the
programs we offer to our clients. However, there can be no assurance that we
will not be subject to scrutiny or challenge under such laws or regulations. Any
such challenge could have a material adverse effect on us.
ERISA REGULATION. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which we have
agreements to provide PBM services. We believe that the conduct of our business
is not subject to the fiduciary obligations of ERISA, but 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 report was endorsed by the
federal government's Health Minister. This report was advisory in nature, and
not binding upon the federal or provincial governments. We believe this
initiative is dormant at the present time, and we are unable to determine the
likelihood of adoption of the proposal in the future.
Numerous state laws and regulations also affect aspects of our PBM
business. Among these are the following:
COMPREHENSIVE PBM REGULATION. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced in the past in California and Virginia, and bills were recently
proposed in Texas and Colorado. Such legislation, if enacted in a state in which
we have a significant concentration of business, could adversely impact our
operations.
CONSUMER PROTECTION LAWS. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with seventeen states on October 25, 1995, Merck-Medco
Managed Care, LLC ("Medco"), the PBM subsidiary of pharmaceutical manufacturer
Merck & Co., agreed to have pharmacists affiliated with Medco mail service
pharmacies disclose to physicians and patients the financial relationships
between Merck, Medco, and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another. We
believe that our contractual relationships with drug manufacturers and retail
pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no assurance
can be given that we will not be subject to scrutiny or challenge under one or
more of these laws.
NETWORK ACCESS LEGISLATION. A majority of states now have some form of
legislation affecting our ability to limit access to a pharmacy provider network
or from removing network providers. Such legislation may require us or our
client to admit any retail pharmacy willing to meet the plan's price and other
terms for network participation ("any willing provider" legislation); or may
provide that a provider may not be removed from a network except in compliance
with certain procedures ("due process" legislation). We have not been materially
affected by these statutes because we maintain a large network of over 52,000
retail pharmacies and will admit any licensed pharmacy that meets our
credentialling criteria, involving such matters as adequate insurance coverage,
minimum hours of operation, and the absence of disciplinary actions by the
relevant state agencies.
LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have enacted
legislation that prohibits the plan sponsor 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. Such legislation does not generally apply to us, but it may apply to
certain of our clients (HMOs and health insurers). If such legislation were to
become widely adopted and broad in scope, it could have the effect of limiting
the economic benefits achievable through pharmacy benefit management. This could
have a material adverse effect on our business.
LICENSURE LAWS. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including PPOs, TPAs, and
companies that provide utilization review services. The scope of these laws
differs significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers often is unclear. We have registered
under such laws in those states in which we have concluded, after discussion
with the appropriate state agency, that such registration is required.
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, and New York, and is presently
being considered in New Mexico, all states where the Company operates mail
service pharmacies. Such legislation, if enacted in a state where one of our
mail service pharmacies is located, could adversely affect our ability to
negotiate discounts on our purchase of prescription drugs to be dispensed by our
mail service pharmacies.
REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug plans
are generally not subject to financial regulation by the states. However, if the
PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. In those cases in which we have contracts in which we
are materially at risk to provide the pharmacy benefit, we believe we have
complied with all applicable laws.
Many of these state laws may be preempted in whole or in part by ERISA,
which provides for comprehensive federal regulation of employee benefit plans.
However, the scope of ERISA preemption is uncertain and is subject to
conflicting court rulings, and in any event we provide services to certain
clients, such as governmental entities, that are not subject to the preemption
provisions of ERISA. Other state laws may be invalid in whole or in part as an
unconstitutional attempt by a state to regulate interstate commerce, but the
outcome of challenges to these laws on this basis is uncertain. Accordingly,
compliance with state laws and regulations is a significant operational
requirement for us.
MAIL PHARMACY REGULATION. Our mail service pharmacies are located in
Arizona, Missouri, New Mexico, New York and Pennsylvania, and we are licensed to
do business as a pharmacy in each such state. Many of the states into which we
deliver pharmaceuticals have laws and regulations that require out-of-state mail
service pharmacies to register with, or be licensed by, the board of pharmacy or
similar regulatory body in the state. These states generally permit the mail
service pharmacy to follow the laws of the state within which the mail service
pharmacy is located, although one state also requires that we employ a
pharmacist licensed in that state. Another state has proposed a similar
requirement. We have registered in every state in which, to our knowledge, such
registration is required.
One state has a statute that purports to prohibit residents from obtaining
prescription drugs by mail if the mail order business of the company dispensing
the drugs represents more than a specified percentage of the company's total
volume of pharmacy business. The statute is ambiguous in certain respects, but
we do not believe our mail order volume exceeds the threshold percentage. We are
licensed as a pharmacy in that state. No enforcement action has been taken under
the statute against us, and to our knowledge, no such enforcement action is
contemplated. Approximately 2.5% of our revenues come from mail delivery of
prescription drugs into that state. If an enforcement action were commenced
against us under that statute, we would consider all of our alternatives,
including challenging the validity of the statute.
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. Legislation has been proposed at the federal level and 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.
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 state laws and regulations
affecting our pharmacy benefit management business. 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 have registered the service marks "Express Scripts", "PERx",
"ExpressComp", "ExpressReview", "ExpressTherapeutics", "IVTx", "PERxCare",
"PERxComp", "RxWizard", "PTE", "ValueRx" and "Value Health, Inc.", with the
United States Patent and Trademark Office. Our rights to these marks will
continue so long as we comply with the usage, renewal filing and other legal
requirements relating to the renewal of service marks. We are in the process of
applying for registration of several other trademarks and service marks. If we
are unable to obtain any additional registrations, we believe there would be no
material adverse effect on our business.
INSURANCE
Our PBM operations, including the dispensing of pharmaceutical products by
our mail service pharmacies, and the services rendered in connection with our
disease management and informed decision counseling services, and our non-PBM
operations, such as the products and services provided in connection with our
infusion therapy programs (including the associated nursing services), may
subject us to litigation and liability for damages. We believe that our
insurance protection is adequate for our present business operations, but there
can be no assurance that we will be able to maintain our professional and
general liability insurance coverage in the future or that such insurance
coverage will be available on acceptable terms or adequate to cover any or all
potential product or professional liability claims. A successful product or
professional liability claim in excess of our insurance coverage, or one for
which an exclusion from coverage applies, could have a material adverse effect
upon our financial position or results of operations.
EMPLOYEES
As of March 1, 1999, we employed a total of 3,283 employees in the U.S. and
71 employees in Canada. Approximately 375 of the U.S. employees are members of
collective bargaining units. Specifically, we employ members of the Service
Employees International Union at our Bensalem, Pennsylvania facility, members of
the United Auto Workers Union at our Farmington Hills, Michigan facility, and
members of the United Food and Commercial Workers Union ("UFCW") at our
Albuquerque, New Mexico facility. One of our collective bargaining agreements
with the UFCW expires on July 1, 1999. We have not begun negotiations with the
UFCW for this contract at this time.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of the Annual Report on Form 10-K, the
information regarding executive officers of the Company required by Item 401 of
Regulation S-K is hereby included in Part I of this report.
The executive officers of the Company and their ages as of March 1, 1999,
are as follows:
NAME AGE POSITION
Howard L. Waltman 66 Chairman of the Board
Barrett A. Toan 51 President, Chief Executive
Officer and Director
Stuart L. Bascomb 57 Executive Vice President
Thomas M. Boudreau 47 Senior Vice President of
Administration, General Counsel
and Secretary
Patrick J. Byrne 43 Senior Vice President Plymouth
Site Operations
Robert W. (Joe) Davis 52 Senior Vice President and Chief
Information Systems Officer
Linda L. Logsdon 51 Senior Vice President of Health
Management Services
David A. Lowenberg 49 Senior Vice President and
Director of Site Operations
George Paz 43 Senior Vice President and Chief
Financial Officer
Jean-Marc Quach 40 Senior Vice President and Chief
of Staff
Kurt D. Blumenthal 54 Vice President of Finance
Joseph W. Plum 51 Vice President and Chief
Accounting Officer
Mr. Waltman was elected Chairman of the Board of the Company in March 1992.
Mr. Waltman has been a director of the Company since its inception in September
1986. From September 1992 to December 31, 1995, Mr. Waltman served as the
Chairman of the Board of NYLCare Health Plans, Inc., which was an indirect
wholly-owned subsidiary of New York Life Insurance Company at the time.
Mr. Toan was elected Chief Executive Officer in March 1992 and President
and a director in October 1990. Mr. Toan has been an executive employee of the
Company since May 1989.
Mr. Bascomb was elected Executive Vice President of the Company in March
1989, and also served as Chief Financial Officer and Treasurer from March 1992
until May 1996.
Mr. Boudreau was elected Senior Vice President, General Counsel and
Secretary of the Company in October 1994. He has served as General Counsel of
the Company since June 1994. From September 1984 until June 1994, Mr. Boudreau
was a partner in the St. Louis law firm of Husch & Eppenberger.
Mr. Byrne was elected Senior Vice President Plymouth Site Operations in
May, 1998. From April 1996 until October 1997, Mr. Byrne served as Vice
President of Underwriting for ValueRx, and then served as Vice President and
General Manager for the National Employer Business Unit of ValueRx for the
period November 1997 until May 1998. From 1991 until March 1996, Mr. Byrne was a
Director of Finance for United Healthcare Corporation.
Mr. Davis was elected Senior Vice President and Chief Information Systems
Officer of the Company in September 1997. Mr. Davis served as Director of
Technical Services and Computer Operations of the Company from July 1993 until
July 1995, and as Vice President and General Manager of St. Louis Operations of
the Company from July 1995 until September 1997.
Ms. Logsdon was elected Senior Vice President of Health Management Services
in May, 1997, and served as Vice President of Demand and Disease Management from
November 1996 until that time. Prior to joining the Company in November 1996,
Ms. Logsdon served as Vice President of Corporate Services and Chief Operating
Officer of United HealthCare's Midwest Companies-GenCare/Physicians Health
Plan/MetraHealth, a St. Louis-based health maintenance organization, from
February 1995 to October 1996, and as Deputy Director/Vice President of GenCare
Health Systems, Inc., also a St. Louis-based health maintenance organization,
from June 1992 to February 1995.
Mr. Lowenberg was elected Senior Vice President and Director of Site
Operations of the Company in October, 1994 and Vice President of the Company in
November 1993. Mr. Lowenberg also served as General Manager of the Tempe
facility from March 1993 until January 1995.
Mr. Paz joined the Company and was elected Senior Vice President and Chief
Financial Officer in January 1998. Prior to joining the Company, Mr. Paz was a
partner in the Chicago office of Coopers & Lybrand from December 1995 to
December 1997, and served as Executive Vice President and Chief Financial
Officer of Life Partners Group, Inc., a life insurance company, from October
1993 until December 1995.
Mr. Quach was elected Senior Vice President and Chief of Staff in May 1998.
Prior to joining the Company, Mr. Quach was the Director of Marketing for Roche
Diagnostics during the period April 1996 to May 1998. Mr. Quach served as the
Director of Pharmacy for NYLCare Health Plans, Inc. for the period September
1991 to April 1996, which was an indirect wholly-owned subsidiary of New York
Life Insurance Company at the time.
Mr. Blumenthal was elected Vice President of Finance in May 1995, and
served as Acting Chief Financial Officer of the Company from July 1996 to
January 1998. From August 1993 to February 1995, Mr. Blumenthal served as the
Chief Financial Officer of President Baking Co.
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.
ITEM 2 - PROPERTIES
We operate our United States and Canadian PBM and non-PBM businesses
out of leased and owned facilities throughout the United States and Canada. All
of our facilities are leased except for our Albuquerque, New Mexico facility,
which we own.
PBM FACILITIES NON-PBM FACILITIES
Maryland Heights, Missouri Maryland Heights, Missouri
Earth City, Missouri Columbia, Missouri
Tempe, Arizona Dallas, Texas
Plymouth, Minnesota Houston, Texas
Bensalem, Pennsylvania Columbia, Maryland
Troy, New York Tempe, Arizona
Farmington Hills, Michigan Northvale, New Jersey
Albuquerque, New Mexico West Chester, Pennsylvania
Mississauga, Ontario
Our Maryland Heights, Missouri facility houses our corporate offices.
IVTx's corporate offices are also located at our Maryland Heights, Missouri
facility. The non-PBM specialty distribution services are operated out of our
facility in Tempe, Arizona. We believe our facilities have been generally well
maintained and are in good operating condition. Our existing facilities contain
approximately 600,000 square feet in area, in the aggregate.
During 1998, we entered into an operating lease for a new corporate
headquarters facility to be located adjacent to our existing Maryland Heights,
Missouri facility, which will contain approximately 140,000 square feet in area.
The new building is presently under construction and we anticipate taking
possession during the second quarter of 1999. We are continuing to evaluate our
future requirements for additional space.
We own computer systems for both the Maryland Heights, Missouri and Tempe,
Arizona sites. Computer systems to process the traditional ValueRx business are
located at Perot Systems' facility in Richardson, Texas. Perot Systems maintains
the computer hardware on our behalf. Our software for drug utilization review
and other products has been developed internally by us or purchased under
perpetual, nonexclusive license agreements with third parties. Our computer
systems at each site are extensively integrated and share common files through
local and wide area networks. An uninterruptable power supply and diesel
generator allow our computers, telephone systems and mail pharmacy at each site
to continue to function during a power outage. To protect against loss of data
and extended downtime, we store software and redundant files at both on-site and
off-site facilities on a regular basis and have contingency operation plans in
place. We cannot, however, provide any assurance that our contingency or
disaster recovery plans would adequately address all relevant issues.
ITEM 3 - LEGAL PROCEEDINGS
As discussed in detail in our Quarterly Report on Form 10-Q for the period
ended June 30, 1998, filed with the Securities and Exchange Commission on August
13, 1998 (the "Second Quarter 10-Q"), we acquired all of the outstanding capital
stock of Value Health, Inc., a Delaware corporation ("VHI"), and Managed
Prescription Network, Inc., a Delaware corporation ("MPN") from Columbia
HCA/HealthCare Corporation ("Columbia") and its affiliates on April 1, 1998 (the
"Acquisition"). VHI, 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 update of the most notable of the
proceedings follows:
VHI and several of its subsidiaries are party to two securities litigation
matters, BASH, ET AL. V. VALUE HEALTH, INC., ET AL., No. 3:97cv2711 (JCH)
(D.Conn.), and FREEDMAN, ET AL. V. VALUE HEALTH, INC., ET AL., No. 3:95 CV 2038
(JCH) (D.Conn). The two lawsuits, filed in 1995, allege that VHI and certain
other defendants made false or misleading statements to the public in connection
with VHI's acquisition of Diagnostek, Inc. in 1995. On April 24, 1998, the two
lawsuits were consolidated. On February 18, 1999, the court granted plaintiffs'
motions for class certification and certified a class consisting of (i) all
persons who purchased or otherwise acquired shares of VHI 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. Expert discovery is to be
completed by June 17, 1999, and any dispositive motions must be filed within 30
days thereafter.
In connection with the Acquisition, Columbia has agreed to defend and hold
us and our affiliates (including VHI) harmless from and against any liability
that may arise in connection with either of the foregoing proceedings.
Consequently, we do not believe we will incur any material liability in
connection with these matters.
In addition, in the ordinary course of our business, there have arisen
various legal proceedings, investigations or claims now pending against us and
our subsidiaries unrelated to the Acquisition. 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 price fixing of 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 were recently
dismissed by the court on a motion for directed verdict. 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 1998.
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 has been traded on the Nasdaq
National Market ("Nasdaq") tier of The Nasdaq Stock Market under the symbol
"ESRX" since June 9, 1992. Prior to that time, there was no public market for
our Class A Common Stock. The high and low prices, as reported by the Nasdaq,
are set forth below for the periods indicated. These prices reflect the
two-for-one split on October 30, 1998, in the form of a 100% stock dividend to
holders of record on October 20, 1998.
Fiscal Year 1998 Fiscal Year 1997
Class A Common Stock High Low High Low
First Quarter $ 42.750 $ 27.000 $ 19.125 $ 15.625
Second Quarter 45.000 35.500 24.500 16.375
Third Quarter 45.250 31.625 27.250 20.750
Fourth Quarter 69.000 33.875 32.375 25.313
Our Class B Common Stock has no established public trading market, but
those shares will automatically convert to Class A Common Stock on a share for
share basis upon transfer thereof to any entity other than New York Life
Insurance Company or one of its affiliates.
HOLDERS. As of March 1, 1999, there were 209 stockholders of record of our
Class A Common Stock, and 1 holder of record of our Class B Common Stock. We
estimate there are approximately 9,000 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 contains, and the terms of the credit
facility we intend to consummate in connection with the pending DPS acquisition
will contain, certain restrictions on our ability to declare or pay cash
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6 - SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998(2) 1997 1996 1995 1994
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STATEMENT OF OPERATIONS DATA:
Net revenues $ 2,824,872 $ 1,230,634 $ 773,615 $ 544,460 $ 384,504
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Costs and expenses:
Cost of revenues 2,584,997 1,119,167 684,882 478,283 338,151
Selling, general and administrative 148,990 62,617 49,103 37,300 25,882
Corporate restructuring 1,651 -