SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2004

OR

o 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     000-25769

ACCREDO HEALTH, INCORPORATED

(Exact name of registrant as specified in its charter)

1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134

(Address of principal executive offices)
(Zip Code)

(901) 385-3688

(Registrant’s telephone number, including area code)

NO CHANGE

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   þ     No  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ     No  o

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

ACCREDO HEALTH, INCORPORATED
INDEX

     Note: Items 1, 2, 3 and 5 of Part II are omitted because they are not applicable.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ACCREDO HEALTH, INCORPORATED

See accompanying notes to condensed consolidated financial statements.

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ACCREDO HEALTH, INCORPORATED

See accompanying notes to condensed consolidated financial statements.

4

ACCREDO HEALTH, INCORPORATED

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of Accredo Health, Incorporated ( the “Company” or “Accredo” ) have been included. Operating results for the three and six-month periods ended December 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2005.

     The balance sheet at June 30, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.

2. STOCKHOLDERS’ EQUITY

     During the three and six-month periods ended December 31, 2004, employees exercised stock options to acquire 25,072 and 299,900 shares of Accredo common stock, respectively. The weighted average exercise price was $15.38 per share for the three-month period and $10.74 per share for the six-month period.

     Employees of the Company also acquired 35,011 shares of Accredo common stock during the period pursuant to the provisions of the Company’s Employee Stock Purchase Plan at a price of approximately $23.56 per share. Shares acquired under the plan were purchased on December 31, 2004 from employee funds accumulated via payroll deductions from July through December 2004.

3. PRO FORMA NET INCOME EFFECT OF COMPANY STOCK OPTION PLANS

     The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Pro forma information regarding net income is required by Statement of Financial Accounting Standards No. 123 (SFAS 123) and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. Significant assumptions used by the Company in the Black-Scholes option-pricing model computations are as follows for the three-month and six-month periods ended December 31:

     The Black-Scholes option model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

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     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the three-month and six-month periods ended December 31 is as follows (in thousands, except share data):

     The Financial Accounting Standards Board issued Statement No. 123 (revised 2004), Share-Based Payment, on December 16, 2004. SFAS 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share based payments. The standard is effective for awards granted, modified, or settled after the first reporting period beginning after June 15, 2005. The Company will adopt SFAS 123(R) using the modified prospective method in the fiscal quarter ended September 30, 2005.

4. COMPREHENSIVE INCOME

     Comprehensive income includes changes in the fair value of certain derivative financial instruments that qualify for hedge accounting. Comprehensive income for all periods presented is as follows (in thousands):

     The adjustments made in computing comprehensive income are reflected as a component of stockholders’ equity under the heading “accumulated other comprehensive income”.

5. CONTINGENCIES

     The Company, David D. Stevens and Joel R. Kimbrough are named as defendants in a putative class action lawsuit filed in the United States District Court for the Western District of Tennessee, Memphis Division. A Consolidated Amended Complaint was filed on September 15, 2004. Defendants filed a Motion to Dismiss the Consolidated Amended Complaint on November 1, 2004. The lawsuit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)(5) promulgated thereunder, and Section 20 of the Securities Exchange Act of 1934. The putative class representatives seek to represent a class of individuals and entities that purchased Company stock during the period June 16, 2002 through April 7, 2003 and who supposedly suffered damages from the alleged violations of the securities laws. The Company believes that the claims asserted in the putative class action lawsuits are without merit.

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     In addition, two purported derivative lawsuits were filed in the Circuit Court of Shelby County, Tennessee for the Thirtieth Judicial District at Memphis. These actions were consolidated and a Consolidated Derivative Complaint was filed on July 28, 2003. The derivative action names certain current and former Company officers and directors (David D. Stevens, John R. Grow, Kyle J. Callahan, Kevin L. Roberg, Kenneth R. Masterson, Kenneth J. Melkus, Dick R. Gourley, Nancy-Ann DeParle, Joel R. Kimbrough, Thomas W. Bell, Jr., and Patrick J. Welsh) as defendants. The derivative lawsuit alleges that the defendants breached fiduciary duties owed to the Company by engaging in the same alleged conduct that is the basis of the putative class action lawsuits. On behalf of the Company, the derivative complaint seeks compensatory damages from the defendants and the disgorgement of profits, benefits and other compensation received by the defendants. The Company has filed a motion to dismiss the Consolidated Derivative Complaint and the parties are awaiting the Court’s ruling on this motion. The Company believes that the claims asserted in the derivative lawsuit are without merit.

     The Company and the Company’s 80% owned joint venture in California provided contract pharmacy and related billing services to a local California pharmacy that was recently audited by the California Department of Health Services (Department) concerning its MediCal billing for clotting factor supplied to the pharmacy by the Company or the Company’s joint venture. The audit is for the period January 2, 2001 to March 5, 2003 with dates of payment from March 26, 2001 to April 21, 2003. Although the joint venture is not currently involved with the audits, the contract pharmacy relationship is implicated and the pharmacy is seeking indemnification from the joint venture. Since the initiation of the audit, the state agency has temporarily withheld MediCal payments from the pharmacy and has alleged, among other things, overbilling and false claims. In December 2004, the Department notified the pharmacy that it had completed its audit and assessed the pharmacy approximately $13.5 million in alleged overbilling and overpayment received by the pharmacy from MediCal. Over 80% of the assessment was for claims allegedly submitted in excess of acquisition cost. The remaining portion of the assessment cited overpayments for lack of documentation and false claims. The Department stated in its letter that the pharmacy received reimbursement for services that were falsely represented as provided by the pharmacy. The pharmacy has appealed the assessment. The Company believes the assessment is without merit and expects the pharmacy and the joint venture to vigorously defend against these allegations through judicial proceedings, if necessary. Since false claim statutes are implicated, the pharmacy could also be assessed fines and penalties. Due to the uncertainty about the issues involved in this matter, based on the facts and circumstances known to date, the Company believes some amount of monetary loss is reasonably possible in the range of zero to $20 million.

     The Company and the Company’s 80% owned joint venture in California also provided contract pharmacy and related billing services to a second local California pharmacy. The California Department of Health Services is also auditing this pharmacy. The Company has recently received a letter from the Department asking for information in connection with the audit. The Company anticipates that this audit will involve issues that are the same as or similar to those involved in the audit described in the preceding paragraph. The Company is in the process of gathering information responsive to the Department’s letter and cannot determine at this time whether it will incur any liability associated with this audit.

     Also, from time to time, the Company is involved in lawsuits, claims, audits, and investigations arising in the normal course of business. In the Company’s opinion, in the aggregate these lawsuits, claims, audits and investigations should not have a material adverse effect on the Company’s business, financial condition, or results of operations. In addition, the business that the Company acquired from Gentiva Health Services, Inc. has several lawsuits and claims related to its historical operations by Gentiva, which are being controlled by Gentiva and for which the Company is entitled to indemnification from liability by Gentiva.

6. ACQUISITIONS

     On October 17, 2003, the Company acquired certain assets, including inventory and accounts receivable, of Alpha Therapeutic Services, Inc. (ATS) from Baxter Healthcare Corporation. ATS, located in the City of Industry, California, provides pharmaceutical care for certain chronic, long-term patient populations including those requiring IVIG and blood related disorders such as hemophilia. As a result of the acquisition, we have increased our market share in these products. The aggregate purchase price paid was $35.7 million. Total assets acquired were $4.2 million. The excess of the total purchase price over the fair value of the assets acquired was allocated as follows: $30.8 million to goodwill and $0.7 million to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The results of the ATS operations have been included in the consolidated financial statements since October 18, 2003.

     On July 21, 2004, the Company acquired all of the outstanding stock of HRA Holding Corporation and its wholly owned subsidiary, Hemophilia Resources of America, Inc. (HRA). HRA specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with hemophilia and related bleeding disorders. The acquisition of HRA increased the Company’s market leading position in the distribution of hemophilia related products. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $165.8 million and was funded by the Company’s increased credit facility. This transaction was accounted for using the purchase method of

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accounting. Total assets acquired and liabilities assumed were $24.0 million and $6.6 million, respectively. The excess of the purchase price, including acquisition costs of approximately $0.3 million, over the fair value of the net assets acquired of $17.4 million was allocated as follows: $145.1 million to goodwill and $2.5 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. Final resolution of the working capital adjustment, as defined in the merger agreement, may result in the payment of additional consideration. The Company also paid $0.8 million as consideration for an agreement with a selling shareholder not to compete with the Company for a period of ten years. The transition and integration of HRA business activities commenced during the September 2004 quarter and will continue throughout the remainder of fiscal 2005. The results of HRA have been included in the consolidated financial statements since July 21, 2004.

     On July 1, 2004, the Company acquired all of the outstanding stock of Home Health Care Resources, Inc. (HHCR). HHCR specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with autoimmune disorders and hemophilia. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $26.8 million. In addition, it appears that HHCR will be paid additional consideration amounting to $3 million related to an earn-out payment based on the achievement of certain financial results for the six months ended December 31, 2004. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $4.3 million and $0.8 million, respectively. The excess of the purchase price over the fair value of the net assets acquired of $3.5 million was allocated as follows: $22.7 million to goodwill and $0.3 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The Company also paid $0.3 million as consideration for an agreement with the selling shareholders not to compete with the Company for a period of ten years. The results of HHCR have been included in the consolidated financial statements since July 1, 2004.

7. EARNINGS PER SHARE

     The Company presents earnings per share in accordance with SFAS No. 128, Earnings Per Share. All per share amounts have been calculated using the weighted average number of shares outstanding during each period. Diluted earnings per share are adjusted for the impact of common stock equivalents using the treasury stock method when the effect is dilutive. Options to purchase approximately 4.1 million and 2.1 million shares of common stock were outstanding at December 31, 2004 and December 31, 2003, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common shares and, therefore, the effect would be antidilutive. A reconciliation of the basic and diluted weighted average shares outstanding is as follows at December 31:

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

FORWARD LOOKING STATEMENTS

     Some of the information in this quarterly report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully for the following reasons:

	•	the statements discuss our future expectations;
	•	the statements contain projections of our future earnings or of our financial condition; and
	•	the statements state other “forward-looking” information.

Specifically, this report contains, among others, forward-looking statements about:

	•	our expectations regarding our product mix for periods following December 31, 2004;
	•	our expectations regarding our payor mix for periods following December 31, 2004;
	•	our expectations regarding the movement of patients to us pursuant to our strategic alliance with Medco Health Solutions, Inc. following December 31, 2004;
	•	our expectations regarding the scope and cost of our capital expenditures following December 31, 2004;
	•	our sources and availability of funds to satisfy our working capital needs;
	•	the implementation or interpretation of current or future regulations and legislation relating to the industry in which we operate;
	•	our critical accounting policies; and
	•	our expectations regarding the percentage of our revenues attributable to federal and state programs.

     The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause our actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in Part I, Item 2 of this report under the sub-heading “Risk Factors.”

     You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we currently expect or anticipate. You should be aware that the occurrence of any of the events described in the risk factors discussed elsewhere in this quarterly report and other events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition and business. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

     The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

     We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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OVERVIEW

     For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Form 10-K for the fiscal year ended June 30, 2004.

     We provide specialty retail pharmacy services for the treatment of patients with costly, chronic diseases. We derive revenues primarily from the retail sale of drugs to patients. We focus almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. The following table presents the percentage of our total revenues generated from sales with respect to the diseases that we primarily serve:

     We anticipate that our revenue mix for the March 2005 quarter will be similar to the revenue mix in the December 2004 quarter as a result of revenues from the seasonal drug Synagis® for the treatment of RSV. Most Synagis® sales occur from October through March of the following year. In our fiscal fourth quarter (June 2005), we anticipate that our RSV revenues will represent a much smaller percentage of our overall revenues with an offsetting increase in the percentage of our revenues from the other diseases listed above.

     Reimbursement for the products we sell comes from governmental payors, Medicare and Medicaid, and non-governmental payors. The following table presents the percentage of our total revenues reimbursed by these payors: