UNITED
STATES
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, 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: 0-20199
EXPRESS
SCRIPTS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction
of
incorporation or organization) |
43-1420563
(I.R.S.
employer identification no.) |
|
13900
Riverport Dr., Maryland Heights, Missouri
(Address
of principal executive offices) |
63043
(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:
Common
Stock, $0.01 par value
(Title of
Class)
Preferred
Share Purchase Rights
(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. [ ]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes X
No
___
The
aggregate market value of Registrant’s voting stock held by non-affiliates as of
June 30, 2004, was $6,027,976,464 based on 76,081,995 such shares held on
such date by non-affiliates and the average sale price for the Common Stock on
such date of $79.23 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 New York Life Insurance Company are
affiliates of the Registrant. The Registrant has no non-voting common
equity.
|
Common
stock outstanding as of January 31, 2005: |
73,375,592 |
Shares |
DOCUMENTS
INCORPORATED BY REFERENCE
|
Part
III incorporates by reference portions of the definitive proxy statement
for the Registrant’s 2005 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,
2004. |
Information
included in or incorporated by reference in this Annual Report on Form 10-K,
other filings with the Securities and Exchange Commission (the “SEC”) and our
press releases or other public statements, contain or may contain forward
looking statements. Please refer to a discussion of our forward looking
statements and associated risks in “Item 1 —Forward Looking Statements and
Associated Risks” in this Annual Report on Form 10-K.
PART
I
THE
COMPANY
Item
1 — Business
Industry
Overview
Prescription
drugs are playing an ever-greater role in healthcare and today constitute the
first line of treatment for many medical conditions. As pharmaceutical research
opens the potential for even more effective drugs, demand can be expected to
increase. For millions of people, prescription drugs equate to the hope of
improved health and quality of life. At the same time, rising prescription drug
costs are gradually shaping one of the most persistent challenges to health care
financing. Even as pharmaceutical development opens new paths to better
healthcare, we confront the possibility that high costs may limit access to
these therapies.
Prescription
drug costs, the fastest growing component of health care costs in the United
States, accounted for approximately 11.6% of U.S. health care expenditures in
2004 and are expected to increase to about 23.1% in 2013 according to U.S.
Centers for Medicare & Medicaid (“CMS”) estimates. Based upon information
included in our 2003
Annual Drug Trend report,
described below under “Company Operations—Clinical Support”, annual per member
drug spending rose 15.5% in 2003. In response to cost pressures being exerted on
health benefit providers such as HMOs, health insurers, employers and unions,
pharmacy benefit management (“PBM”) companies develop innovative strategies
designed to keep medications affordable.
We help
health benefit providers address access and affordability concerns resulting
from rising drug costs. We manage the cost of the drug benefit by performing the
following functions:
| |
• |
evaluating
drugs for price, value and efficacy in order to assist clients in
selecting a cost-effective formulary; |
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• |
leveraging
purchasing volume to deliver discounts to health benefit providers;
|
| |
• |
promoting
the use of generics and low-cost brands; and
|
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• |
offering
cost-effective mail pharmacy services which result in drug-cost savings
for plan sponsors and co-payment savings for
members. |
We work
with clients, manufacturers, pharmacists and physicians to increase efficiency
in the drug distribution chain, to manage costs in the pharmacy benefit, and to
improve members’ health outcomes and satisfaction.
PBMs
combine retail pharmacy claims processing, formulary management and mail
pharmacy services to create an integrated product offering to manage the
prescription drug benefit for payers. Some PBMs have broadened their service
offerings to include disease management programs, compliance programs, outcomes
research, drug therapy management programs, sophisticated data analysis and
specialty distribution services.
Company
Overview
We are
one of the largest PBMs in North America and we provide a full range of pharmacy
benefit management services, including retail drug card programs, mail pharmacy
services, drug formulary management programs and other clinical management
programs for thousands of client groups that include HMOs, health insurers,
third-party administrators, employers, union-sponsored benefit plans and
government health programs.
Our PBM
services include:
| |
• |
retail
network pharmacy management |
| |
• |
mail
pharmacy services, including distribution of specialty
drugs |
| |
• |
benefit
design consultation |
| |
• |
drug
utilization review |
| |
• |
formulary
management programs |
| |
• |
compliance
and therapy management programs for our clients
|
Non-PBM
services provided through our Pharma Business Solutions (“PBS”) segment include:
| |
• |
distribution
of pharmaceuticals requiring special handling or packaging
|
| |
• |
distribution
of pharmaceuticals to low-income patients through manufacturer-sponsored
and company-sponsored generic patient assistance programs
|
| |
• |
distribution
of sample units to physicians and verification of practitioner licensure
through our wholly owned subsidiary, Phoenix Marketing Group, LLC
(“PMG”) |
Our
revenues are generated primarily from the delivery of prescription drugs through
our contracted network of retail pharmacies, mail pharmacy services and
specialty distribution services. In 2004, 2003 and 2002, revenues from the
delivery of prescription drugs to our members represented 98.5%, 98.6% and 98.5%
of our total revenues, respectively. Revenues from services, such as the
administration of some clients’ retail pharmacy networks, sample distribution
services and certain services provided by our specialty distribution subsidiary
comprised the remainder of our revenues.
Prescription
drugs are dispensed to members of the health plans we serve primarily through
networks of retail pharmacies that are under non-exclusive contracts with us and
through seven mail pharmacy service centers and seven specialty drug pharmacies
that we operated as of December 31, 2004. More than 57,700 retail pharmacies,
representing more than 98%
o of all
United States retail pharmacies, participate in one or more of our
networks. In 2004, we processed 398.8 million network pharmacy claims
and dispensed 39.1 million mail pharmacy prescriptions. We also dispensed 3.5
million specialty distribution prescriptions.
We were
incorporated in Missouri in September 1986, and were reincorporated in Delaware
in March 1992. Our principal executive offices are located at 13900 Riverport
Drive, Maryland Heights, Missouri 63043. Our telephone number is (314) 770-1666
and our web site is www.express-scripts.com. Through our website, we make
available access to our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, all amendments to those reports (when
applicable), and other filings with the SEC. Such access is free of charge and
is available as soon as reasonably practicable after such information is filed
with the SEC. In addition, the SEC maintains an internet site (www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers filing electronically with the SEC (which includes us).
Information included on our website is not part of this annual
report.
Products
and Services
Pharmacy
Benefit Management Services
Overview.
Our PBM services involve the management of outpatient prescription drug usage to
foster high quality, cost-effective pharmaceutical care through the application
of managed care principles and advanced information technologies. We offer our
PBM services to our clients in the United States and Canada. Our PBM services
include:
| |
• |
retail
network pharmacy management |
| |
• |
mail
pharmacy services, including distribution of specialty
drugs |
| |
• |
benefit
design consultation |
| |
• |
drug
utilization review |
| |
• |
formulary
management programs |
| |
• |
compliance
and therapy management programs for our clients
|
We
consult with our clients to assist them in selecting plan design features that
balance the client’s requirements for cost control with member convenience. For
example, some clients receive a smaller discount on pricing in the retail
pharmacy network or mail pharmacy in exchange for receiving all or a larger
share of the pharmaceutical manufacturer rebates. Other clients receive a
greater discount on pricing at the retail pharmacy network or mail pharmacy in
exchange for a smaller share of the pharmaceutical manufacturer
rebates.
During
2004, 98.4% of our revenues were derived by our PBM operations, compared to
98.5% and 98.8% during 2003 and 2002, respectively. The number of retail
pharmacy network claims processed and mail pharmacy claims dispensed increased
to 398.8 million and 39.1 million, respectively, in 2004 from 378.9 million and
32.3 million claims, respectively, in 2003.
Retail
Pharmacy Network Administration. We
contract with retail pharmacies to provide prescription drugs to members of the
pharmacy benefit plans we manage. In the United States, we negotiate with
pharmacies to discount the price at which they will provide drugs to members. We
manage nationwide networks in the United States that are responsive to client
preferences related to cost containment and convenience of access for members.
We also manage networks of pharmacies that are customized for or under direct
contract with specific clients. We manage one nationwide network in Canada.
All
retail pharmacies in our pharmacy networks communicate with us online 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 member and prescription information in an industry-standard
format through our systems, which process the claim and respond to the pharmacy.
The electronic processing of the claim includes, among other things, the
following:
| |
• |
confirming
the member’s eligibility for benefits under the applicable health benefit
plan and the conditions to or limitations of coverage
|
| |
• |
performing
a concurrent drug utilization review and alerting the pharmacist to
possible drug interactions and reactions or other indications of
inappropriate prescription drug usage |
| |
• |
updating
the member’s prescription drug claim record
|
| |
• |
if
the claim is accepted, confirming to the pharmacy that it will receive
payment for the drug dispensed |
| |
• |
informing
the pharmacy of the co-payment amount to be collected from the member
based upon the client’s plan design |
Mail
Pharmacy. As of
December 31, 2004, we operated seven mail pharmacies located in Maryland
Heights, Missouri; Albuquerque, New Mexico; Bensalem, Pennsylvania; Harrisburg,
Pennsylvania; Troy, New York; and two in Tempe, Arizona. These pharmacies
provide members with convenient access to maintenance and specialty medications
and enable us to manage our clients’ drug costs through operating efficiencies
and economies of scale. In addition, CuraScript Pharmacy, Inc. and CuraScript
PBM Services, Inc. (collectively, “CuraScript) operate seven specialty
distribution pharmacies located in Orlando, Florida; Omaha, Nebraska;
Pleasanton, California; Pittsburgh, Pennsylvania; Bethel Park, Pennsylvania;
Amherst, New York; and Brewster, New York. Through our mail service pharmacies
we are directly involved with the prescriber and member and, as a result, we
believe we are generally able to achieve a higher level of generic substitutions
and therapeutic interventions than can be achieved through the retail pharmacy
networks.
Benefit
Plan Design and Consultation. We offer
consultation and financial modeling to assist our clients in selecting benefit
plan designs that meet their needs for member satisfaction and cost control. The
most common benefit design options we offer to our clients are:
| |
• |
financial
incentives and reimbursement limitations on the drugs covered by the plan,
including drug formularies, tiered co-payments, deductibles or annual
benefit maximums |
| |
• |
generic
drug utilization incentives |
| |
• |
incentives
or requirements to use only network pharmacies or to order certain
maintenance drugs (i.e. therapies for diabetes, high blood pressure, etc.)
only by mail |
| |
• |
reimbursement
limitations on the amount of a drug that can be obtained in a specific
period |
The
client’s choice of benefit design is entered into our electronic claims
processing system, which applies the plan design parameters as claims are
submitted and enables our clients and us to monitor the financial performance of
the plan.
Formulary
Development, Compliance and Therapy Management.
Formularies are lists of drugs for which coverage is provided under the
applicable plan. We have many years of formulary development expertise and
maintain an extensive clinical pharmacy department.
Our
foremost consideration in the formulary development process is the clinical
appropriateness of the drug. In developing formularies, we first perform a
rigorous assessment of the available evidence regarding the drug’s safety and
clinical effectiveness. No drug is added to the formulary until it is approved
by our National Pharmacy & Therapeutics Committee - a panel composed of
nineteen independent physicians and pharmacists in active clinical practice,
representing a variety of specialties and practice settings, typically with
major academic affiliations. We fully comply with the Committee’s clinical
recommendations. The Committee does not consider any information regarding the
discount or rebate arrangement that we might negotiate with the manufacturer in
making its clinical recommendation. This is designed to ensure that the clinical
recommendation is not affected by our purchasing arrangements. After the
clinical recommendation is made, the drugs are evaluated on an economic basis to
determine optimal cost-effectiveness.
We
administer a number of different formularies for our clients that identify drugs
whose use is encouraged through various benefit design features. Historically,
many clients selected a plan design that included an open formulary in which all
drugs were covered by the plan. Today, an increasing number of our clients are
selecting formularies in which various financial or other incentives, such as
three-tier co-payments, exist for the selection of formulary drugs over their
non-formulary counterparts. Some clients select closed formularies, in which
benefits are available only for drugs listed on the formulary. In 2004, about
60% of all claims fell into three-tier or closed categories compared to 54% for
2003 and 52% for 2002. Use of formulary drugs can be encouraged in the following
ways:
| |
• |
by
restricting the formulary through plan design features, such as tiered
co-payments, which require the member to pay a higher amount for a
non-formulary drug |
| |
• |
through
prescriber education programs, in which we or the client actively seek to
educate the prescribers about formulary drugs
|
| |
• |
through
our drug choice management program, which promotes lower cost therapeutic
and generic interchanges to clinically appropriate cost-effective products
|
Once the
formulary has been selected by the client, clients can participate in one of the
rebate arrangements we offer. The level of participation in our rebate programs
varies by client (see “Products and Services - Pharmacy Benefit Management
Services - Overview”). In situations where we pay all or a portion of rebates to
the client, our clients have a contractual right to audit our calculation of
their rebate payment to ensure they have received the amount to which they are
entitled.
We have
two different types of rebate contracts with pharmaceutical manufacturers. The
rebates paid by pharmaceutical manufacturers under both types of contracts are a
function of the brand drugs dispensed to our clients’ members in our retail
pharmacy networks and from our mail order pharmacies. The contracts primarily
differ in the manner in which the rebates are calculated.
The first
type of rebate contract is called the “preferred savings grid” (“PSG”) program.
Under the PSG program, rebates are based on the characteristics of the formulary
design selected by the client. The second type of rebate contract is called the
“market share” program. Under the market share program we negotiate with
manufacturers for rebates to be paid based upon the market share of the brand
drugs sold by those manufacturers in our clients’ plans, as compared to the
national market share of the drugs. In both cases manufacturers pay us
administrative fees for certain services we perform in administering the
formulary program.
We also
provide formulary compliance services to our clients. For example, if a doctor
has prescribed a drug which is not on a client’s formulary, we notify the
pharmacist through our claims processing system. The pharmacist may then contact
the doctor to attempt to obtain the doctor’s consent to change the prescription
to the appropriate formulary product. For those clients that choose to enroll in
our drug choice management program, we may contact the physician’s office to
provide information about drugs which are on the clients’ formulary and to
request that the physician consider changing the prescription to the appropriate
formulary drug. The doctor has the final decision-making authority in
prescribing the medication and we never recommend a change to a higher cost
medication. The doctor will consider the recommended substitution in light of
the patient’s medical history and approve or deny the recommended
substitution.
We also
offer innovative clinical intervention programs to assist and manage patient
quality of life, client drug trend, and physician communication/education. These
programs encompass comprehensive point of service and retrospective drug
utilization review, proactive patient prescription compliance education,
physician profiling, academic detailing, prior authorization, disease care
management, and clinical guideline dissemination to physicians.
Historically,
we received funding from pharmaceutical manufacturers in support of certain
formulary support programs, such as our drug choice management program and our
therapy adherence program. Starting in January 2003, we began eliminating
manufacturer funding for these programs and as of October 1, 2003, such funding
was completely phased out. We continue to provide formulary support programs for
our clients without this targeted manufacturer funding.
Information
Reporting and Analysis and Disease Management Programs. Through
the use of sophisticated information and reporting systems we are better able to
manage the prescription drug benefit. We analyze prescription drug data to
identify cost trends and budget for expected drug costs, assess the financial
impact of plan design changes and assist clients in identifying costly
utilization patterns through an online prescription drug decision support
tool.
We offer
disease management and education programs to members in managing clinical
outcomes and the total health care costs associated with certain conditions such
as asthma, diabetes and cardiovascular disease. These programs are based on the
premise that better informed patient and physician behavior can positively
influence medical outcomes and reduce overall medical costs. We identify
patients who may benefit from these programs through claims data analysis or
self-enrollment.
We offer
a tiered approach to member education and wellness, ranging from information
provided through our Internet site, to educational mailings, to our intensive
one-on-one registered nurse or pharmacist counseling. The programs include
providing patient profiles directly to their physicians, as well as measurements
of the clinical, personal and economic outcomes of the programs.
Electronic
Claims Processing System. A
significant tool in providing our PBM services is our electronic claims
processing system which enables us to implement sophisticated intervention
programs to assist in managing prescription drug utilization. The system can
alert the pharmacist to generic substitution and therapeutic intervention
opportunities as well as formulary compliance issues, or 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.
Consumer
Health and Drug Information. In 1999,
we launched www.DrugDigest.org, a public website dedicated to helping consumers
make informed decisions about using drugs. During 2004, the Health on the Net
Foundation granted DrugDigest.org HON Code accreditation for providing
reliable
online health information. Also in
2004, it was rated among the best websites for unbiased drug information by
Business Week, Reader’s Digest, the Wall Street Journal and other
publications.
Much of
the information on DrugDigest.org is written by pharmacists - primarily doctors
of pharmacy who are also affiliated with academic institutions. All the
materials used on DrugDigest.org are reviewed for accuracy and timeliness. In
2004, DrugDigest.org expanded its offerings to include not only drug safety
information, but also interactive tools that give consumers a more active role
in maintaining their own health. The consumer-friendly information on
DrugDigest.org includes:
| |
· |
a
drug interaction checker |
| |
· |
a
drug side effect comparison tool |
| |
· |
audible
drug name pronunciations |
| |
· |
comparisons
of different drugs used to treat the same health
condition |
| |
· |
information
on health conditions and their treatments |
| |
· |
instructional
videos showing administration of specific drug dosage forms
|
| |
· |
monographs
on drugs and dietary supplements |
| |
· |
photographs
of pills and capsules |
Many
features of DrugDigest.org are available in the limited-access member website at
www. express-scripts.com. The member website gives our clients’ members access
to personalized current and, in many cases, previous drug histories. Members can
use the interactive tools from DrugDigest.org to check for drug interactions and
find possible side effects for all of the drugs they take.
To
facilitate communications between members and physicians, health condition
information from DrugDigest.org has been compiled into “For Your Physician
Visit”, which is available on the member website. Using it, members complete and
print appropriate checklists on conditions such as diabetes and depression.
Discussing the completed checklists gives both the member and the physician a
better understanding of the member’s true health status.
Additional
tools that are available through express-scripts.com assist members in choosing
and managing their prescription benefits. In the member website, individual
profiles include specific enrollment and copayment information. Through Express
Choice and Express Preview, members can compare benefit packages and estimate
annual prescription costs even before the plan’s benefit year begins. They can
determine how variables such as generic usage, mandatory mail programs and step
therapy would affect their costs. The separate Price Check feature informs
members of current prescription costs based on exact benefit structures and also
alerts members if more cost-effective options are available for the prescribed
drug.
Non-PBM
Services
In
addition to PBM services, we also provide certain non-PBM services through our
Pharma Business Solutions unit including:
| |
• |
distribution
of pharmaceuticals requiring special handling or packaging on behalf of
pharmaceutical manufacturers |
| |
• |
distribution
of pharmaceuticals to low-income patients through manufacturer-sponsored
and company-sponsored generic patient assistance programs
|
| |
• |
distribution
of sample units to physicians and verification of practitioner licensure
through our wholly owned PMG subsidiary |
In 2004,
we filled 3.5 million specialty distribution prescriptions, compared to 3.6
million in 2003 and 3.1 million in 2002. During 2004, 1.6% of our revenues were
derived from non-PBM services, compared to 1.5% and 1.2% during 2003 and 2002,
respectively.
Express
Scripts Specialty Distribution Services. We
provide specialty distribution services, consisting of the distribution of, and
creation of a database of information for, products requiring special handling
or packaging, products targeted to a specific physician or patient population,
and products distributed to low-income patients. Our services include
eligibility, fulfillment, inventory, insurance verification/authorization and
payment. Specialty distribution revenues are derived from administrative fees
received from drug manufacturers and from buying and selling pharmaceuticals. We
also administer sample card programs for certain manufacturers where the
ingredient costs of pharmaceuticals dispensed from retail pharmacies are
included in revenues, as well as costs of revenues. SDS services are provided
from our Maryland Heights, Missouri facility.
Phoenix
Marketing Group. PMG is a
leader in sample accountability, database management and practitioner
verification services for the pharmaceutical industry, operating the nation’s
largest prescription drug sample fulfillment business.
Segment
Information.
Information
regarding our segments appears in Note 13 of the notes to our consolidated
financial statements.
Suppliers
We
maintain a large inventory of brand name and generic pharmaceuticals in our mail
pharmacies. If a drug is not in our inventory, we can generally obtain it from a
supplier within one business day. We purchase our pharmaceuticals either
directly from manufacturers or through wholesalers. Currently, approximately 95%
of our branded pharmaceutical purchases are through one wholesaler. 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
provider of PBM services to several market segments and our clients include
HMOs, health insurers, third-party administrators, employers, union-sponsored
benefit plans and government health programs. Our top five clients represented
22.8%, 17.8%, and 19.6% of revenues during 2004, 2003 and 2002 respectively.
None of our clients accounted for 10% or more of our consolidated revenues in
fiscal years 2004, 2003 or 2002.
Medicare
Prescription Drug Coverage
The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
“Act”) was signed into law by President Bush on December 8, 2003. The Act
created a new voluntary prescription drug benefit under the Medicare program by
adding a new Part D to the Social Security Act. Beginning on January 1, 2006,
eligible Medicare beneficiaries will be able to obtain prescription drug
coverage under Part D by enrolling in a prescription drug plan (“PDP”) in their
geographic region. The Act also established a Medicare managed care program
called “Medicare Advantage,” which will replace the current Medicare + Choice
program. Enrollees in a Medicare Advantage plan that offers prescription drug
coverage will be able to obtain drug coverage through the plan and will not be
eligible to enroll in a PDP.
The Act
imposes various requirements on PDP sponsors and Medicare Advantage plans that
offer drug coverage, including requirements relating to the prescription drug
benefits offered, the disclosure of negotiated price concessions made available
by drug manufacturers, pharmacy access and participation, and the development
and application of formularies. Additional requirements are contained in
regulations issued under the Act by CMS on January 21, 2005. To the extent that
Express Scripts serves as a PDP sponsor or provides services to PDP sponsors and
Medicare Advantage plans, it will be required to comply with the applicable
provisions of the Act and CMS regulations.
The Act
also created a voluntary Medicare prescription drug discount card program which
will expire on December 31, 2005. Under the program, eligible Medicare
beneficiaries are able to obtain a discount card from private card sponsors
endorsed by CMS. The discount card enables the beneficiary to purchase covered
prescription drugs at participating network pharmacies for negotiated prices
under arrangements made by the card sponsor with pharmacies and drug
manufacturers.
Together
with the National Association of Chain Drugstores (“NACDS”), we sponsor a
prescription drug discount card through Pharmacy Care Alliance, Inc. (“PCA”), a
jointly controlled organization. We provide PBM services to PCA, including the
negotiation of discounts from individual retailers and pharmaceutical
manufacturers, the enrollment of cardholders and the processing of claims. We
also provide services to several of our clients who have submitted their own
applications. The Act and the Medicare discount card program regulations issued
by CMS contain various requirements that apply to our activities in connection
with the program, including requirements relating to the types of drugs covered
by a discount card program, disclosure to CMS of certain information related to
prices and rebates negotiated by the sponsor with pharmacies and drug
manufacturers, and oversight of endorsed card programs by CMS.
Acquisitions
and Joint Ventures
On
January 30, 2004, we purchased the capital stock of CuraScript for a purchase
price of approximately $333.4 million. CuraScript is one of the nation’s largest
specialty pharmacy services companies, serving over 175 managed care
organizations, 30 Medicaid programs and the Medicare program, and operating
seven specialty pharmacies throughout the United States. The acquisition
enhances our ability to provide comprehensive clinical services in many disease
states.
On
December 19, 2002, we entered into an agreement with Managed Pharmacy Benefits,
Inc. (“MPB”) under which we acquired certain assets from MPB for approximately
$11.1 million in cash, plus the assumption of certain liabilities. MPB is a St.
Louis-based PBM and subsidiary of Medicine Shoppe International, Inc., a
franchisor of apothecary-style retail pharmacies, owned by Cardinal Health, Inc.
On April
12, 2002, we completed the acquisition of National Prescription Administrators,
Inc., a privately held full-service PBM, and certain related entities
(collectively “NPA”), for a purchase price of approximately $466.0 million,
which included the issuance of 552,000 shares of our common stock (fair value of
$26.4 million upon the transaction announcement date), transaction costs and a
working capital purchase price adjustment of $46.8 million. The addition of NPA
brought us a strong presence in providing service to union and government
populations.
On
February 25, 2002, we purchased (through PMG) substantially all of the assets
utilized in the operation of Phoenix Marketing Group (Holdings), Inc., a
wholly-owned subsidiary of Access Worldwide Communications, Inc. for $34.1
million in cash, including acquisition-related costs, plus the assumption of
certain liabilities. PMG, one of the largest prescription drug sample
fulfillment companies, works with over 50 pharmaceutical manufacturers worldwide
to deliver sample medicines and clinical information to physicians’
offices.
All of
our acquisitions have been accounted for using the purchase method of
accounting.
Company
Operations
General. As of
December 31, 2004, we operated seven mail pharmacies, nine member
service/pharmacy help desk call centers out of leased and owned facilities; and
CuraScript operated seven specialty distribution pharmacies. Electronic pharmacy
claims processing takes place at facilities owned by EDS and by IBM. At our
Canadian facilities, we have sales and marketing, client services, pharmacy help
desk, clinical, provider relations and certain management information systems
capabilities.
Sales
and Marketing. In the
United States, our sales managers and directors market and sell PBM services,
supported by a team of client-service representatives, clinical pharmacy
managers and benefit analysis consultants. This team works with clients to make
prescription drug use safer and more affordable. A dedicated sales staff
cross-markets specialty pharmacy services to our PBM clients. In Canada,
marketing and sales efforts are conducted by our staff based in Mississauga,
Ontario.
Client
and Patient Services. Although
we contract with health plans, the ultimate recipients of many of our services
are the members of these health plans. We believe that client satisfaction is
dependent upon member satisfaction. Members can call us toll-free, 24 hours
a day, 7 days a week, to obtain information about their prescription drug plan
from our trained member service representatives.
Provider
Relations. Our
Provider Relations group is responsible for contracting and administering our
pharmacy networks. To participate in our retail pharmacy networks, pharmacies
must meet certain qualifications, including the requirement that all applicable
state licensing requirements are being maintained. Pharmacies can contact our
pharmacy help desk toll-free, 24 hours a day, 7 days a week, for
information and assistance in filling prescriptions for our clients’ members. In
addition, our Provider Relations group audits pharmacies in the retail pharmacy
networks to determine compliance with the terms of their contracts.
Clinical
Support. We
employ physicians, registered nurses, doctors of pharmacy and registered
pharmacists to provide clinical support for our PBM services. Assisted by
experienced data analysts, these health professionals provide direct clinical
input for pharmacy services such as formulary development and management, drug
information programs, clinical interventions with physicians and members,
development of drug therapy guidelines and evaluation of drugs for inclusion in
clinically-sound therapeutic intervention programs.
The
mission of our research team is to conduct timely, rigorous and objective
research that supports evidence-based pharmacy benefit management. Using
pharmacy and medical claims data together with member surveys, the research
department conducts studies to evaluate clinical, economic and member impact of
pharmacy benefits. Topics of ongoing interest center on the impact of clinical
offerings, the evolution of pharmacy benefit designs and the cost-effectiveness
of drug therapies. For example, the release of our 2003 Drug Trend Report in
June 2004 marked our eighth consecutive year of tracking prescription drug
trends. Based on a large sample of our membership, the Report not only examines
trends in pharmaceutical utilization and cost, it also investigates the factors
that underlie those trends. The current Drug Trend Report and results of our
other studies are shared at our annual Outcomes Conference. We also present at
other client forums, speak at professional meetings and publish in
health-related journals.
Information
Systems. Our
Information Systems department supports our pharmacy claims processing systems
and other management information systems that are essential to our operations.
Uninterrupted point-of-sale electronic retail pharmacy claims processing is a
significant operational requirement for us. All domestic claims are presently
processed through systems which are maintained, managed and operated
domestically by EDS at their facilities. Canadian claims are processed through
systems maintained, managed and operated by IBM. Disaster recovery services for
all US systems are provided through our EDS services agreement and SunGard
Availability Services. We have substantial capacity for growth in our US and
Canadian claims processing facilities.
Competition
We
believe the primary competitive factors in each of our businesses are price,
quality and scope of service. We believe our principal competitive advantages
are our strong managed care and employer group customer base that supports the
development of more sophisticated PBM services, and our commitment to provide
flexible and distinctive service to our clients.
There are
other PBMs in the United States, many of which are smaller than us and offer
their services on a local or regional basis. We also compete with a number of
large, national companies, including Medco Health Solutions, Inc. (“Medco”) and
CaremarkRx, Inc. (“Caremark”), as well as large health insurers and certain HMOs
which have their own PBM capabilities. Several of these competitors may have
greater financial, marketing and technological resources than us.
Consolidation,
including the acquisition of AdvancePCS by Caremark in 2004, has been, and may
continue to be an important factor in the PBM industry. We believe the size of
our membership base provides us with the necessary economies of scale to compete
effectively in a consolidating market.
Some of
our PBM services, such as disease management services, 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
Many
aspects of our businesses are regulated 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 operating
our business in substantial compliance with all existing legal requirements
material to the operation of our businesses. There are, however, significant
uncertainties involving the application of many of these legal requirements to
our business. In addition, there are numerous proposed health care laws and
regulations at the federal and state levels, many of which could adversely
affect our business or financial position. We are unable to predict what
additional federal or state legislation or regulatory initiatives may be enacted
in the future relating to our business or the health care industry in general,
or what effect any such legislation or regulations might have on us. We cannot
provide any assurance that federal or state governments will not impose
additional restrictions or adopt interpretations of existing laws that could
have a material adverse effect on our consolidated results of operations,
consolidated financial position and/or consolidated cash flow from
operations.
Pharmacy
Benefit Management Regulation Generally.
Certain
federal and state laws and regulations affect or may affect aspects of our PBM
business. Among the laws and regulations that impact or may impact our business
are the following:
Anti-Kickback
Laws. Subject
to certain exceptions and “safe harbors,” the federal anti-kickback statute
generally prohibits, among other things, knowingly and willfully paying or
offering any payment or other remuneration to induce a person to purchase,
lease, order, or arrange for (or recommend purchasing, leasing, or ordering)
items (including prescription drugs) or services reimbursable in whole or in
part under Medicare, Medicaid or another federal health care program. The
anti-kickback statute also generally prohibits soliciting or receiving payments
or other remuneration for these purposes. Several states also have similar laws,
some of which apply similar anti-kickback prohibitions to items or services
reimbursable by HMOs, private insurers and other non-governmental payors. These
state laws vary and have been infrequently interpreted by courts or regulatory
agencies. Sanctions for violating these federal and state anti-kickback laws may
include criminal and civil fines and exclusion from participation in the
Medicare and Medicaid programs.
The
federal anti-kickback statute has been interpreted broadly by courts, the Office
of Inspector General (“OIG”) within the Department of Health and Human Services,
and administrative bodies. Because of the federal statute’s broad scope, federal
regulations establish certain “safe harbors” from liability. Safe harbors exist
for certain properly reported discounts received from vendors, certain
investment interests, certain payments for personal services, certain properly
disclosed payments made by vendors to group purchasing organizations, and
certain discount and payment arrangements with HMO risk contractors serving
Medicaid and Medicare members. A practice that does not fall within a safe
harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. In the absence of an applicable exception or safe harbor, a violation
of the statute may occur even if only one purpose of a payment arrangement is to
induce patient referrals or purchases. Among the practices that have been
identified by the OIG as potentially improper under the statute are certain
“product conversion programs” in which benefits were 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. See Item 3 - Legal Proceedings for discussion of current proceedings
relating to these laws or regulations.
The OIG
issued the final Compliance Program Guidance for Pharmaceutical Manufacturers
(the “Guidance”) on April 28, 2003. The Guidance, which represents OIG’s general
views and is not legally binding, contains guidelines for the design and
operation of voluntary programs by pharmaceutical manufacturers to promote
compliance with the laws relating to federal health care programs. In addition,
the Guidance identifies certain risk areas for pharmaceutical manufacturers,
including certain types of arrangements between manufacturers and PBMs,
pharmacies, physicians and others that have the potential to implicate the
anti-kickback statute. The Guidance contains a discussion of how manufacturers
can structure their arrangements with PBMs, such as rebate programs and
formulary support activities, to comply with the anti-kickback
statute.
Stark
Law. The
federal physician self-referral law, known as the “Stark Law,” prohibits
physicians from referring Medicare or Medicaid beneficiaries for “designated
health services” (which include, among other things, outpatient prescription
drugs) to an entity with which the physician or an immediate family member of
the physician has a financial relationship and prohibits the entity receiving a
prohibited referral from presenting a claim to Medicare or Medicaid for the
designated health service furnished under the prohibited referral. Our mail
service pharmacies dispense certain outpatient prescription drugs that may be
directly or indirectly reimbursed by the Medicare or Medicaid programs,
potentially making us subject to the Stark Law’s requirements with respect to
such pharmacy operations.
Possible
penalties for violation of the Stark Law include denial of payment, refund of
amounts collected in violation of the statute, civil monetary penalties and
Medicare and Medicaid program exclusion. The Stark Law contains certain
statutory exceptions for physician referrals and physician financial
relationships, and the CMS has promulgated regulations under the Stark Law which
provide some guidance on interpretation of the scope of and exceptions to the
Stark Law.
State
Self-Referral Laws. Our
mail pharmacy services may also be subject to statutes and regulations that
prohibit payments for referral of individuals from or by physicians to health
care providers with whom the physicians have a financial relationship. These
state laws and their exceptions may vary from the federal Stark Law and vary
significantly from state to state. Some of these state statutes and regulations
apply to items and services reimbursed by private payors. Violation of these
laws may result in prohibition of payment for items or services provided, loss
of pharmacy or health care provider licenses, fines and criminal penalties.
State self-referral laws are often vague, and, in many cases, have not been
widely interpreted by courts or regulatory agencies.
False
Claims Act and Related Criminal Provisions. The
federal False Claims Act (the “False Claims Act”) imposes civil penalties for
knowingly making or causing to be made false claims with respect to governmental
programs, such as Medicare and Medicaid, for services not rendered, or for
misrepresenting actual services rendered, in order to obtain higher
reimbursement. Private individuals may bring qui tam or “whistle blower” suits
against providers under the False Claims Act, which authorizes the payment of a
portion of any recovery to the individual bringing suit. Such actions are
initially required to be filed under seal pending their review by the Department
of Justice. A few federal district courts have recently interpreted the False
Claims Act as applying to claims for reimbursement that violate the
anti-kickback statute or federal physician self-referral law under certain
circumstances. The False Claims Act generally provides for the imposition of
civil penalties and for treble damages, resulting in the possibility of
substantial financial penalties for small billing errors that are replicated in
a large number of claims, as each individual claim could be deemed to be a
separate violation of the False Claims Act. Criminal provisions that are similar
to the False Claims Act provide that if a corporation is convicted of presenting
a claim or making a statement that it knows to be false, fictitious or
fraudulent to any federal agency it may be fined. Some states also have enacted
statutes similar to the False Claims Act which may include criminal penalties,
substantial fines, and treble damages.
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 respect to which we have agreements to provide PBM
services. We believe that the conduct of our business is not generally subject
to the fiduciary obligations of ERISA, and our agreements with our clients
provide that we are not the fiduciary of the applicable plan. However, there can
be no assurance that the U.S. Department of Labor (the “DOL”), which is the
agency that enforces ERISA, would not assert that the fiduciary obligations
imposed by ERISA apply to certain aspects of our operations or that courts in
private ERISA litigation would not so rule.
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-kickback statutes discussed
in the preceding paragraphs; in particular, ERISA lacks the statutory and
regulatory “safe harbor” exceptions incorporated into many of the
above-discussed statutes. Like the health care anti-kickback laws, the
corresponding provisions of ERISA are broadly written and their application to
particular cases is often uncertain. See Item 3 - Legal Proceedings for
discussion of current proceedings relating to these laws or regulations.
Effective
January 2004, the DOL issued claims procedure regulations (“Claims Rules”) that
create standards applicable to our clients that are regulated under ERISA for
initial and appeal level decisions, time frames for decision making, and
enhanced disclosure rights for claimants. We have implemented, and will
implement in the future, changes to our operational processes, as necessary to
accommodate our clients’ compliance needs.
FDA
Regulation. The U.S.
Food and Drug Administration (the “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 PBMs. The FDA withdrew the Draft Guidance in the fall of 1998, stating that
it would reconsider the basis for such Guidance. The FDA has not addressed the
issue since the withdrawal of the Guidance. The FDA also enforces federal laws
restricting the importation of prescription drugs into the United States from
Canada and other countries.
Comprehensive
PBM Regulation.
Legislation regulating PBM activities in a comprehensive manner is being
considered in a number of states. In addition, certain organizations, such as
the National Association of Insurance Commissioners (“NAIC,” an organization of
state insurance regulators), and the National Committee on Quality Assurance
(“NCQA,” an accreditation organization) as well as certain state pharmacy boards
are considering proposals to regulate PBMs and/or PBM activities, such as
formulary development and utilization management. While the actions of the NAIC
would not have the force of law, they may influence states to adopt model
legislation that such organizations promulgate. In addition, standards
established by NCQA could materially impact us directly as a PBM, and indirectly
through the impact on our managed care and health insurance clients.
Consumer
Protection Laws. Most
states have consumer protection laws that previously 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. See Item 3 - Legal Proceedings for discussion of current
proceedings relating to these laws or regulations.
Network
Access Legislation. A
majority of states now have some form of legislation affecting our ability to
limit access to a pharmacy provider network or removal of a network provider.
Such legislation may require us or our clients to admit any retail pharmacy
willing to meet the plan’s price and other terms for network participation (“any
willing provider” legislation); or may provide that a provider may not be
removed from a network except in compliance with certain procedures (“due
process” legislation). We have not been materially affected by these statutes.
Legislation
Affecting Plan Design. Some
states have enacted legislation that prohibits managed care plan sponsors from
implementing certain restrictive benefit plan design features, and many states
have introduced legislation to regulate various aspects of managed care plans,
including provisions relating to the pharmacy benefit. For example, some states,
under so-called “freedom of choice” legislation, provide that members of the
plan may not be required to use network providers, but must instead be provided
with benefits even if they choose to use non-network providers. Other states
have enacted legislation purporting to prohibit health plans from offering
members financial incentives for use of mail service pharmacies. Legislation has
been introduced in some states to prohibit or restrict therapeutic intervention,
or to require coverage of all FDA approved drugs. Other states mandate coverage
of certain benefits or conditions, and require health plan coverage of specific
drugs if deemed medically necessary by the prescribing physician. Such
legislation does not generally apply to us directly, but it may apply to certain
of our clients, such as HMOs and health insurers. If such legislation were to
become widely adopted and broad in scope, it could have the effect of limiting
the economic benefits achievable through pharmacy benefit management. This
development could have a material adverse effect on our consolidated results of
operations, consolidated financial position and/or consolidated cash flow from
operations.
Licensure
Laws. Many
states have licensure or registration laws governing certain types of managed
care organizations, including PPOs, TPAs, and companies that provide utilization
review services. The scope of these laws differs from state to state, and the
application of such laws to the activities of PBMs often is unclear. We have
registered under such laws in those states in which we have concluded, after
discussion with the appropriate state agency, that such registration is
required. Because of increased regulatory requirements on some of our managed
care clients affecting prior authorization of drugs before coverage is approved,
we have obtained utilization review licenses in selected states through our
subsidiary, ESI Utilization Management Co. In addition, accreditation agencies’
requirements for managed care organizations and Medicare + Choice regulations
may affect the services we provide to such organizations.
Legislation
and Regulation Affecting Drug Prices. Some
states have adopted so-called “most favored nation” legislation providing that a
pharmacy participating in the state Medicaid program must give the state the
best price that the pharmacy makes available to any third party plan. Such
legislation may adversely affect our ability to negotiate discounts in the
future from network pharmacies. Other states have enacted “unitary pricing”
legislation, which mandates that all wholesale purchasers of drugs within the
state be given access to the same discounts and incentives. Such legislation has
been introduced in the past but not enacted in Missouri, Arizona, Pennsylvania,
New York, and New Mexico, all states where we operate mail service pharmacies.
Such legislation, if enacted in a state where one of our mail service pharmacies
is located, could adversely affect our ability to negotiate discounts on our
purchase of prescription drugs to be dispensed by our mail service pharmacies.
In
addition, various federal and state Medicaid agencies and other enforcement
officials are investigating the effects of pharmaceutical industry pricing
practices such as how average wholesale price (“AWP”) is calculated and how
pharmaceutical manufacturers report their “best price” on a drug under the
federal Medicaid rebate program. AWP is a standard pricing measure (calculated
by a third-party such as First Data Bank) used throughout the industry, as well
as by us, as a basis for calculating drug prices under our contracts with health
plans and pharmacies and rebates with pharmaceutical manufacturers. Changes to
the AWP standard have been suggested that could alter the calculation of drug
prices for federal programs. We are unable to predict whether any such changes
will be adopted, and if so, if such changes would have a material adverse impact
on our consolidated results of operations, consolidated financial position
and/or consolidated cash flow from operations.
Further,
the federal Medicaid rebate program requires participating drug manufacturers to
provide rebates on all drugs purchased by state Medicaid programs. Manufacturers
of brand name products must provide a rebate equivalent to the greater of (a)
15.1% of the “average manufacturer price” (“AMP”) paid by wholesalers for
products distributed to the retail pharmacy class of trade and (b) the
difference between AMP and the “best price” available to essentially any
customer other than the Medicaid program, with certain exceptions. We negotiate
rebates with drug manufacturers and, in certain circumstances, sell services to
drug manufacturers. Investigations have been commenced by certain governmental
entities which question whether “best prices” were properly calculated, reported
and paid by the manufacturers to the Medicaid programs. We are not responsible
for such calculations, reports or payments. There can be no assurance, however,
that our ability to negotiate rebates with, or sell services to, drug
manufacturers will not be materially adversely affected by such investigations
in the future.
Regulation
of Financial Risk Plans.
Fee-for-service prescription drug plans generally are not subject to financial
regulation by the states. However, if a 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 PBM. 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.
State
Fiduciary Legislation. Statutes
have been introduced in several states which purport to declare that a PBM is a
fiduciary with respect to its clients. The fiduciary obligations that such
statutes would impose would be similar, but not identical, to the scope of
fiduciary obligations under ERISA. To date only two jurisdictions -- Maine and
the District of Columbia - have enacted such a statute. Our trade association,
Pharmaceutical Care Management Association (“PCMA”) has filed suit in federal
courts in Maine and the District of Columbia alleging, among other things, that
the statute is preempted by ERISA with respect to welfare plans that are subject
to ERISA. In the Maine case the magistrate has recommended that the District
Court judge find that the statute is not pre-empted by ERISA. That decision is
not final. Widespread enactment of such statutes could have a material adverse
effect upon our financial condition, results of operations and cash
flows.
Regulation
of Disease Management Services. Our
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 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.
ERISA
Preemption. Many of
the state laws described above may be preempted in whole or in part by ERISA,
with respect to self-funded plans which provides for comprehensive federal
regulation of employee benefit plans. However, the scope of ERISA preemption is
uncertain and is subject to conflicting court rulings, and we provide services
to certain clients, such as governmental entities, that are not subject to
ERISA. Other state laws may be invalid in whole or in part as an
unconstitutional attempt by a state to regulate interstate commerce, but the
outcome of challenges to these laws on this basis is uncertain. Accordingly,
compliance with state laws and regulations remains a significant operational
requirement for us.
Mail
Pharmacy Regulation. Our
mail service pharmacies are located in Arizona, Missouri, New Mexico, New York,
New Jersey, Pennsylvania, California, Texas, and Florida, and we are licensed to
do business as a pharmacy in each such state. Most of the states into which we
deliver pharmaceuticals have laws 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 in which the mail service pharmacy is
located, although certain states require that we also employ a pharmacist
licensed in that state. We believe we have registered each of our pharmacies in
every state in which such registration is required.
Other
statutes and regulations affect our mail service operations including the
federal and state anti-kickback laws, federal Stark Law and state physician
self-referral laws described above. Federal and state 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 delivery of drugs and medicines through the mail to a degree that
could have an adverse effect on our mail service operations.
HIPAA
and Other Privacy 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 and in some cases provide access to such
data to pharmaceutical manufacturers. Various federal and state laws, including
the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)
(discussed below), currently regulate and restrict the use and disclosure of
confidential medical information and new legislation is proposed from time to
time in various states. To date, no such laws have been adopted that adversely
impact our ability to provide our services, but there can be no assurance that
federal or state governments will not enact legislation, impose restrictions or
adopt interpretations of existing laws that could have a material adverse effect
on our operations.
In
December 2000, the Department of Health and Human Services (“HHS”) issued final
privacy regulations, pursuant to HIPAA, which, among other things, imposes
restrictions on the use and disclosure of individually identifiable health
information by certain entities. The compliance date for the final privacy
regulations was April 14, 2003. We believe we are in compliance, in all material
respects, with the regulations to the extent they apply to us. HHS issued final
regulations establishing certain electronic transaction standards and code sets
in August 2000, with some modifications published in February 2003. The
compliance deadline for these regulations was October 16, 2002 (or, for certain
small health care plans and entities that submitted an appropriate plan for
compliance to the Secretary of HHS, October 16, 2003) and we believe we are in
compliance, in all material respects. Final security regulations under HIPAA
were published on February 20, 2003, and for most entities, the compliance date
for these regulations is April 21, 2005. We have a plan in place that will
ensure that we are in compliance with these regulations, to the extent they
apply to us, by the final compliance date.
Non-PBM
Regulatory Environment.
Our
non-PBM activities operate in a regulatory environment that is quite similar to
that of our PBM activities. In particular, one of our subsidiaries, PMG,
conducts certain activities, including the distribution of drug samples, that
are subject to the requirements of the federal Prescription Drug Marketing Act
and many of the other federal and state laws and regulations discussed above.
We are
unable to predict accurately what additional federal or state legislation or
regulatory initiatives may be enacted in the future relating to our businesses
or the health care industry in general, or what effect any such legislation or
regulations might have on us. There can be no assurance that federal or state
governments will not impose additional restrictions or adopt interpretations of
existing laws that could have a material adverse effect on our business or
financial position.
Service
Marks and Trademarks
We, and
our subsidiaries, have registered the service marks “Express Scripts”, “Charting
the Future of Pharmacy”, “PERx”, “National Prescription Administrators,”
“PERxCare”, “RxWorkbench”, “DrugDigest”, “ValueRx”, “Value Health, Inc.”,
“CuraScript”, “CareLogic”, “OncoScripts”, and “Diversified”, among others, with
the United States Patent and Trademark Office. Our rights to these marks will
continue so long as we comply with the usage, renewal filing and other legal
requirements relating to the renewal of service marks. We are in the process of
applying for registration of several other trademarks and service marks. If we
are unable to obtain any additional registrations, we believe there would be no
material adverse effect on our business.
Insurance
Our PBM
operations, including the dispensing of pharmaceutical products by our mail
service pharmacies, and the services rendered in connection with our disease
management and our non-PBM operations, may subject us to litigation and
liability for damages. Commercial insurance coverage has become more difficult
to obtain, and accordingly, our retained liability has increased. We have
established certain self-insurance reserves to cover potential claims. 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,
together with our self-insurance reserves, will be adequate to cover future
claims. A claim, or claims, in excess of our insurance coverage could have a
material adverse effect upon our consolidated results of operations,
consolidated financial position and/or consolidated cash flow from operations.
Employees
As of
January 1, 2005, we employed a total of 10,662 employees in the U.S. and 166
employees in Canada. Approximately 1,500 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,
members of the American Federation of State, County and Municipal Employees at
our Harrisburg, Pennsylvania and East Hanover, New Jersey facilities and members
of the United Food and Commercial Workers Union at our Albuquerque, New Mexico
facility. We believe our relationships with our employees and the unions that
represent them are good.
Executive
Officers of the Registrant
Our
executive officers and their ages as of February 1, 2005 are as follows:
|
Name |
|
Age |
|
Position |
|
Barrett
A. Toan |
|
57 |
|
Chairman
of the Board
and
Chief Executive Officer |
|
George
Paz |
|
49 |
|
President
|
|
Edward
Stiften |
|
50 |
|
Senior
Vice President, Chief Financial Officer |
|
David
A. Lowenberg |
|
55 |
|
Chief
Operating Officer |
|
Thomas
M. Boudreau |
|
53 |
|
Senior
Vice President, General Counsel and Secretary |
|
C.
K. Casteel |
|
54 |
|
Senior
Vice President - Supply Chain Management |
|
Edward
Ignaczak |
|
39 |
|
Senior
Vice President - Sales and Account Management |
| Patrick
McNamee |
|
45 |
|
Senior
Vice President, Chief Information Officer |
|
Domenic
A. Meffe |
|
40 |
|
Senior
Vice President - Specialty Pharmacy Services |
|
Douglas
Porter |
|
46 |
|
Senior
Vice President - Client and Patient Services |
|
Agnes
Rey-Giraud |
|
40 |
|
Senior
Vice President - Product Management |
|
Edward
J. Tenholder |
|
53 |
|
Senior
Vice President, Chief Administration Officer |
|
Darryl
E. Weinrich |
|
39 |
|
Vice
President, Chief Accounting Officer and
Controller |
Mr. Toan
was elected Chairman of the Board of Directors in November 2000, Chief Executive
Officer in March 1992, a director in October 1990 and served as President
between October 1990 and April 2002. Mr. Toan
will retire as Chief Executive Officer on April 1, 2005.
Mr. Paz
was elected President in October 2003. Mr. Paz joined us and was elected Senior
Vice President and Chief Financial Officer in January 1998. Mr. Paz will replace
Mr. Toan as Chief Executive Officer on April 1, 2005.
Mr.
Stiften was elected Senior Vice President and Chief Financial Officer in April
2004. Prior to joining us, Mr. Stiften worked for BJC HealthCare, a hospital and
health care organization, serving as Vice President and Chief Financial Officer
since 1998.
Mr.
Lowenberg was elected our Chief Operating Officer in September 1999, and served
as our Senior Vice President and Director of Site Operations from October 1994
until September 1999.
Mr.
Boudreau was elected Senior Vice President, General Counsel and Secretary in
October 1994. He has served as General Counsel since June 1994.
Mr.
Casteel was elected Senior Vice President - Supply Chain Management in September
2002. Prior to joining us, Mr. Casteel worked for WorldCom, Inc., a
telecommunications company, serving as Vice President, Law and Public Policy,
between January 2001 and September 2002, and as Regional Executive, Public
Policy, between January 1996 and January 2001.
Mr.
Ignaczak was elected Senior Vice President - Sales and Account Management in
December 2002. Mr. Ignaczak joined us in April 1998 and served as the Vice
President and General Manager of our National Employer Division between April
1998 and December 2002.
Mr.
McNamee joined us and was elected Senior Vice President and Chief Information
Officer in February 2005. Prior to joining us, Mr. McNamee worked for Misys
Healthcare Systems, a healthcare technology company, as President and General
Manager, Physician Systems, from September 2003 through February 2005. Mr.
McNamee was employed by various subsidiaries of General Electric Corporation
from July 1989 through September 2003, including as President, GE OEC Medical
Systems, a surgery x-ay manufacturing business, from July 2002 through September
2003; Senior Vice President, Chief Information Officer and Chief Quality
Officer, NBC broadcast network from March 2001 to July 2002; and Chief
Information Officer and General Manager of e-Business, GE Transportation
Systems, a transportation manufacturing business, from March 1999 through March
2001.
Mr. Meffe
joined the Company as a result of our January 2004 acquisition of CuraScript, a
specialty pharmacy business and PBM company. Mr. Meffe was elected Senior Vice
President - Specialty Pharmacy Services in February 2004. Mr. Meffe served as
President and Chief Operating Officer of CuraScript since August 2000. Prior to
being elected President and CEO of CuraScript, Mr. Meffe served as president of
Coram Prescription Services, a division of Coram Healthcare Corporation, between
October 1997 and August 2000.
Mr.
Porter joined us and was elected Senior Vice President - Member and Client
Services in July 2002 and assumed additional responsibilities as Senior Vice
President - Client and Patient Services in September, 2004. Prior to
joining us, Mr. Porter worked for CIGNA HealthCare, a managed healthcare
company, as Vice President - Employer Services between March 2001 and June 2002
and as Vice President - Transformation between October 1999 and February 2001.
Ms.
Rey-Giraud was elected Senior Vice President of Product Management in December
2003 and served as Senior Vice President - Program Development between July 2002
and December 2003. Ms. Rey-Giraud served as Vice President and General Manager -
eBusiness between January 2000 and July 2002 and has served on the RxHub, LLC,
Board of Directors since February 2000 (See “Rx-Hub”). Ms. Rey-Giraud joined us
in May 1999 as a Senior Director of Administration and Operations.
Mr.
Tenholder was elected Senior Vice President and Chief Administration Officer in
December 2003. Mr. Tenholder served as Executive Vice President and Chief
Operating Officer of Blue Cross and Blue Shield of Missouri, a managed
healthcare company, from October 1997 to December 2000. Mr. Tenholder will
retire as Chief Administration Officer on June 30, 2005.
Mr. Weinrich was elected Vice President, Chief Accounting Officer and
Controller in May 2003. Mr. Weinrich previously served as Vice President and
Treasurer from April 2001 to May 2003, Assistant Treasurer from August 2000 to
April 2001 and Director of SEC Reporting from April 1998 to August 2000.
Forward
Looking Statements and Associated Risks
Information
that we have included or incorporated by reference in this Annual Report on Form
10-K, and information that may be contained in our other filings with the SEC
and our press releases or other public statements, contain or may contain
forward-looking statements. These forward-looking statements include, among
others, statements of our plans, objectives, expectations or
intentions.
Our
forward-looking statements involve risks and uncertainties. Our actual results
may differ significantly from those projected or suggested in any
forward-looking statements. We do not undertake any obligation to release
publicly any revisions to such forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. Factors that might cause such a difference to occur
include, but are not limited to:
| |
• |
costs
of and adverse
results in litigation, including a number of pending class action cases
that challenge certain of our business
practices |
| |
• |
risks
arising from investigations of certain PBM practices and pharmaceutical
pricing, marketing and distribution practices currently being conducted by
the U.S. Attorney's offices in Philadelphia and Boston, and by other
regulatory agencies including the Department of Labor, and various state
attorneys general |
| |
• |
risks
and uncertainties
regarding the implementation and the ultimate terms of the Medicare
prescription drug benefit, including financial risks to us if we
participate in the program on a risk-bearing
basis |
| |
• |
risks
associated with our acquisitions (including our acquisition of CuraScript)
which include integration risks and costs, risks of client retention and
repricing of client contracts, and risks associated with the operations of
acquired businesses |
| |
• |
risks
associated with our ability to maintain growth rates, or to control
operating or capital costs |
| |
• |
continued
pressure on margins resulting from client demands for lower prices,
enhanced service offerings and/or higher service levels, and the possible
termination of, or unfavorable modification to, contracts with key clients
or providers |
| |
• |
competition
in the PBM industry, and our ability to consummate contract negotiations
with prospective clients, as well as competition from new competitors
offering services that may in whole or in part replace services that we
now provide to our customers |
| |
• |
adverse
results in regulatory matters, the adoption of new legislation or
regulations (including increased costs associated with compliance with new
laws and regulations), more aggressive enforcement of existing legislation
or regulations, or a change in the interpretation of existing legislation
or regulations |
| |
• |
increased
compliance risks relating to our contracts with the DoD TRICARE Plan and
various state governments and agencies |
| |
• |
the
possible loss, or adverse modification of the terms, of contracts with
pharmacies in our retail pharmacy
networks |
| |
• |
risks
associated with the use and protection of the intellectual property we use
in our business |
| |
• |
risks
associated with our leverage and debt service obligations, including the
effect of certain covenants in our borrowing agreements |
| |
• |
risks
associated with our ability to continue to develop new products, services
and delivery channels |
| |
• |
general
developments in the health care industry, including the impact of
increases in health care costs, changes in drug utilization and cost
patterns and introductions of new drugs |
| |
• |
increase
in credit risk relative to our clients due to adverse economic
trends |
| |
• |
risks
associated with our inability to attract and retain qualified
personnel |
• 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.
Failure
to Maintain Growth Rates, or to Control Operating or Capital Costs, Could
Adversely Affect Our Business
We have
experienced rapid growth over the past several years. Our ability to maintain
our growth rate is dependent upon our ability to attract new clients, achieve
growth in the membership base of our existing clients as well as cross-sell
additional services to our existing clients. If we are unable to continue our
client and membership growth, and manage our operating and capital costs, our
consolidated results of operations, consolidated financial position and/or
consolidated cash flow from operations could be materially adversely affected.
Client
Demands for Enhanced Service Levels or Possible Loss or Unfavorable Modification
of Contracts with Clients or Providers, Could Pressure Margins
As our
clients face the continued rapid growth in prescription drug costs, they may
demand additional services and enhanced service levels to help mitigate the
increase in spending. We operate in a very competitive PBM environment, and we
may not be able to increase our fees to compensate for these increased services,
which could put pressure on our margins.
We
currently provide PBM services to thousands of client groups. Our contracts with
clients generally do not have terms longer than three years and, in some cases,
are terminable by the client on relatively short notice. Our larger clients
generally seek bids from other PBM providers in advance of the expiration of
their contracts. If several of these large clients elect not to extend their
relationship with us, and we are not successful in generating sales to replace
the lost business, our future business and operating results could be materially
adversely affected. In addition, we believe the managed care industry is
undergoing substantial consolidation, and another party that is not our client
could acquire some of our managed care clients. In such case, the likelihood
such client would renew its PBM contract with us could be reduced.
More than
57,700 retail pharmacies, which represent more than 98% of all United States
retail pharmacies, participate in one or more of our networks. However, the top
ten retail pharmacy chains represent approximately 50.5% of the total number of
stores in our largest network, and these pharmacy chains represent even higher
concentrations in certain areas of the United States. Our contracts with retail
pharmacies, which are non-exclusive, are generally terminable on relatively
short notice. If one or more of the top pharmacy chains elects to terminate its
relationship with us, our members’ access to retail pharmacies and our business
could be materially adversely affected. In addition, many 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 consolidated results
of operations, consolidated financial position and/or consolidated cash flow
from operations.
Competition
in the PBM Industry Could Reduce Membership and Profit Margins
The PBM
business is very competitive. Our competitors include large and well-established
companies that may have greater financial, marketing and technological resources
than we do. Competition may also come from other sources in the future. We
cannot predict what effect, if any, these new competitors may have on the
marketplace or on our business.
Over the
last several years competition in the marketplace has caused many PBMs,
including us, to reduce the prices charged to clients for core services and
share a larger portion of the formulary fees and related revenues received from
pharmaceutical manufacturers with clients. This combination of lower pricing and
increased revenue sharing, as well as increased demand for enhanced service
offerings and higher service levels, have put pressure on operating margins. We
expect to continue marketing our services to larger clients, who typically have
greater bargaining power than smaller clients. This might create continuing
pressure on our margins. We can give no assurance that new services provided to
these clients will fully compensate for these reduced margins.
Changes
in State and Federal Regulations Could Restrict Our Ability to Conduct Our
Business
Numerous
state and federal laws and regulations affect our business and operations. The
categories include, but are not necessarily limited to:
| |
• |
health
care fraud and abuse laws and regulations, which prohibit certain types of
payments and referrals as well as false claims made in connection with
health benefit programs |
| |
• |
ERISA
and related regulations, which regulate many health care plans
|
| |
• |
state
legislation regulating PBMs or imposing fiduciary status on
PBMs |
| |
• |
consumer
protection and unfair trade practice laws and regulations
|
| |
• |
network
pharmacy access laws, including “any willing provider” and “due process”
legislation, that affect aspects of our pharmacy network contracts
|
| |
• |
legislation
imposing benefit plan design restrictions, which limit how our clients can
design their drug benefit plans |
| |
• |
various
licensure laws, such as managed care and third party administrator
licensure laws |
| |
• |
drug
pricing legislation, including “most favored nation” pricing and “unitary
pricing” legislation |
| |
• |
pharmacy
laws and regulations |
| |
• |
privacy
and confidentiality laws and regulations, including those under HIPAA
|
| |
• |
the
Medicare prescription drug coverage law |
| |
• |
other
Medicare and Medicaid reimbursement regulations
|
| |
• |
potential
regulation of the PBM industry by the U.S. Food and Drug Administration
|
| |
• |
pending
legislation regarding importation of drug products into the United States
|
These and
other regulatory matters are discussed in more detail under “Business —
Government Regulation” above.
We
believe we are operating our business in substantial compliance with all
existing legal requirements material to the operation of our business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to our business, and a number of state and federal law
enforcement agencies and regulatory agencies have initiated investigations or
litigation that involve certain aspects of our business or our competitors’
businesses. Accordingly, we cannot provide any assurance that one or more of
these agencies will not interpret these laws differently, or, if there is an
enforcement action brought against us, that our interpretation would prevail. In
addition, there are numerous proposed healthcare laws and regulations at the
federal and state levels, many of which could materially affect our ability to
conduct our business or adversely affect our consolidated results of operations.
We are unable to predict what additional federal or state legislation or
regulatory initiatives may be enacted in the future relating to our business or
the healthcare industry in general, or what effect any such legislation or
regulations might have on us.
The
Office of Inspector General (“OIG”) of HHS issued the final Compliance Program
Guidance for Pharmaceutical Manufacturers (the “Guidance”) on April 28, 2003.
The Guidance, which represents OIG’s general views and is not legally binding,
contains guidelines for the design and operation of voluntary programs by
pharmaceutical manufacturers to promote compliance with the laws relating to
federal health care programs. In addition, the Guidance identifies certain risk
areas for pharmaceutical manufacturers, including certain types of arrangements
between manufacturers and PBMs, pharmacies, physicians and others that have the
potential to implicate the anti-kickback statute. The Guidance contains a
discussion of how manufacturers can structure their arrangements with PBMs, such
as rebate programs and formulary support activities, to comply with the
anti-kickback statute.
The U.S.
Attorney General’s Office in Philadelphia is conducting an investigation into
certain PBM business practices. Medco and AdvancePCS (since acquired by
Caremark) have received subpoenas in connection with this investigation. The
U.S. Attorney’s office has also intervened in a qui
tam
(“whistle blower”) proceeding, challenging certain of Medco’s business
practices. We have received a subpoena from the U.S. Attorney’s Office in
Boston, as have other PBMs including Caremark and Wellpoint Health Systems. We
have also received a letter of inquiry from the Department of Labor. We cannot
predict what effect, if any, these investigations may ultimately have on us or
on the PBM industry generally (See Item 3 -Legal Proceedings).
The State
of Maine and the District of Columbia have each enacted statutes that purport to
declare that a PBM is a fiduciary with respect to its clients. Our trade
association, PCMA has filed suit in Federal District Courts in Maine and the
District of Columbia alleging, among other things, that these statutes are
preempted by ERISA with respect to welfare plans that are subject to ERISA. Both
courts have issued preliminary injunctions enjoining enforcement of these
statutes. Neither court has made a final ruling, but a magistrate in the Maine
case has recommended to the District Court that the court uphold the Maine
statute.
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 and in some cases provide access to such
data to pharmaceutical manufacturers. Various federal and state laws, including
the HIPAA (discussed below), currently regulate and restrict the use and
disclosure of confidential medical information and new legislation is proposed
from time to time in various states. To date, no such laws have been adopted
that adversely impact our ability to provide our services, but there can be no
assurance that federal or state governments will not enact legislation, impose
restrictions or adopt interpretations of existing laws that could have a
material adverse effect on our operations.
In
December 2000, HHS issued final privacy regulations, pursuant to HIPAA, which,
among other things, imposes restrictions on the use and disclosure of
individually identifiable health information by certain entities. The compliance
date for the final privacy regulations was April 14, 2003. We believe we are in
compliance, in all material respects, with the regulations to the extent they
apply to us. We are required to comply with certain aspects of these
regulations. For example, we are a “business associate” under HIPAA in some
instances with respect to our health plan clients and a “covered entity” under
HIPAA when service is provided through our mail service pharmacies. Other HIPAA
requirements relate to electronic transaction standards and code sets and the
security of protected health information when it is maintained or transmitted
electronically. HHS issued final regulations establishing certain electronic
transaction standards and code sets in August 2000, with some modifications
published in February 2003. The compliance deadline for these regulations was
October 16, 2002 (or, for certain small health care plans and entities that
submitted an appropriate plan for compliance to the Secretary of HHS, October
16, 2003). Final security regulations under HIPAA were published on February 20,
2003, and for most entities, the compliance date for these regulations is April
21, 2005.
Loss
of Relationships with Pharmaceutical Manufacturers and Changes in the Regulation
of Discounts and Formulary Fees Provided to Us by Pharmaceutical Manufacturers
Could Decrease Our Profits
We
maintain contractual relationships with numerous pharmaceutical manufacturers
that provide us with:
| |
• |
discounts
at the time we purchase the drugs to be dispensed from our mail pharmacies
|
| |
• |
rebates
based upon sales of drugs from our mail pharmacies and through pharmacies
in our retail networks |
| |
• |
administrative
fees for managing rebate programs, including the development and
maintenance of formularies which include the particular manufacturer’s
products |
If
several of these contractual relationships are terminated or materially altered
by the pharmaceutical manufacturers, our operating results could be materially
adversely affected. In addition, formulary fee programs have been the subject of
debate in federal and state legislatures and various other public and
governmental forums. Changes in existing laws or regulations or in
interpretations of existing laws or regulations or the adoption of new laws or
regulations relating to any of these programs may materially adversely affect
our business.
In 2003,
we ceased accepting funding from pharmaceutical manufacturers for formulary
support programs. We will continue to provide formulary support programs without
this targeted manufacturer funding.
Pending
and Future Litigation Could Subject Us to Significant Monetary Damages and/or
Require Us to Change Our Business Practices
We are
subject to risks relating to litigation and other proceedings in connection with
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 our non-PBM operations. A list of a number of the more
significant proceedings pending against us is included under Item 3 - Legal
Proceedings. These proceedings generally seek unspecified monetary damages and
injunctive relief on behalf of a class of plaintiffs that are either our clients
or individual members of health plans. While we believe that these suits are
without merit and intend to contest them vigorously, we can give no assurance
that an adverse outcome in one or more of these suits would not have a material
adverse effect on our financial condition, or would not require us to make
material changes to our business practices. We are presently responding to
several subpoenas and requests for information from governmental agencies. See
Item 3 - Legal Proceedings. We cannot predict with certainty what the result of
any such inquiry might be. In addition to potential monetary liability arising
from these suits and proceedings, we are incurring costs in the defense of the
suits and in providing documents to government agencies. Certain of the costs
are covered by our insurance, but certain other costs are not insured. Such
costs have become material to our financial performances and we can give no
assurance that such costs will not increase in the future.
Commercial
insurance coverage has become more difficult to obtain and premiums have
increased substantially. Accordingly, our retained liability has increased, and
we have established certain self-insurance reserves to cover potential claims.
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, together with our self-insurance reserves, will be adequate to cover
future claims. A claim, or claims, in excess of our insurance coverage could
have a material adverse effect upon our consolidated results of operations,
consolidated financial position and/or consolidated cash flow from
operations.
Our
Leverage and Debt Service Obligations Could Impede Our Operations and
Flexibility
As of
December 31, 2004, we had consolidated debt of approximately $434.1 million and
our debt to equity ratio was 36.3%. In February 2004, we negotiated an $800
million credit facility and refinanced our borrowings under our previous bank
credit facility. We have substantial interest expense and future repayment
obligations.
Our level
of debt and the limitations imposed on us by our debt agreements could have
important consequences, including the following:
| |
• |
we
will have to use a portion of our cash flow from operations for debt
service rather than for our operations |
| |
• |
we
may from time to time incur additional indebtedness under our revolving
credit facility, which is subject to a variable interest rate, making us
vulnerable to increases in interest rates |
| |
• |
we
could be less able to take advantage of significant business
opportunities, such as acquisition opportunities, and react to changes in
market or industry conditions |
| |
• |
we
could be more vulnerable to general adverse economic and industry
conditions |
| |
• |
we
may be disadvantaged compared to competitors with less leverage
|
Furthermore,
our ability to satisfy our obligations, including our debt service requirements,
will be dependent upon our future performance. Factors which could affect our
future performance include, without limitation, prevailing economic conditions
and financial, business and other factors, many of which are beyond our control
and which affect our consolidated results of operations, consolidated financial
position and/or consolidated cash flow from operations.
Our bank
credit facility is secured by the capital stock of each of our existing and
subsequently acquired domestic subsidiaries, excluding Great Plains Reinsurance
Co., NPA of New York IPA, Inc., ValueRx of Michigan, Inc., Diversified NY IPA,
Inc., and Diversified Pharmaceutical Services (Puerto Rico), Inc., and 65% of
the stock of our Canadian subsidiaries. If we are unable to meet our obligations
under this bank credit facility, these creditors could exercise their rights as
secured parties and take possession of the pledged capital stock of these
subsidiaries. This would materially adversely affect our consolidated results of
operations and consolidated financial condition.
Failure
to Develop New Products, Services and Delivery Channels May Adversely Affect Our
Business
We
operate in a highly competitive environment. We develop new products and
services from time to time to assist our clients in managing the pharmacy
benefit. If we are unsuccessful in developing innovative products and services,
our ability to attract new clients and retain existing clients may suffer.
Technology
is also an important component of our business, as we continue to utilize new
and better channels, such as the Internet, to communicate and interact with our
clients, members and business partners. If our competitors are more successful
than us in employing this technology, our ability to attract new clients, retain
existing clients and operate efficiently may suffer.
Efforts
to Reduce Health Care Costs and Alter Health Care Financing Practices Could
Adversely Affect Our Business
Certain
proposals have been made in the United States to control health care costs,
including prescription drug costs, in response to increases in prescription drug
utilization rates and drug prices. These proposals include “single-payer”
government funded health care, and price controls on prescription drugs. If
these or similar efforts are successful or if prescription drug utilization
rates were to decrease significantly, whether due to a reversal in the growing
role of prescription drugs in medical treatment or otherwise, our business and
consolidated results of operations could be materially adversely affected.
We have
designed our business model 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 periodically considers
proposals to reform the U.S. health care system. These proposals may increase
government involvement in health care and regulation of PBM services, or
otherwise change the way our clients do business. Health plan sponsors 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 consolidated
results of operations, consolidated financial position and/or consolidated cash
flow from operations.
Uncertainty
Regarding Implementation and Impact of Government Initiatives
The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
"Act") was signed into law by President Bush on December 8, 2003. The Act
created a new voluntary prescription drug benefit under the Medicare program by
adding a new Part D to the Social Security Act. Beginning on January 1, 2006,
eligible Medicare beneficiaries will be able to obtain prescription drug
coverage under Part D by enrolling in a prescription drug plan (“PDP”) in their
geographic region. The Act also established a Medicare managed care program
called “Medicare Advantage,” which will replace the current Medicare + Choice
program. Enrollees in a Medicare Advantage plan that offers prescription drug
coverage will be able to obtain drug coverage through the plan and will not be
eligible to enroll in a PDP.
The Act
imposes various requirements on PDP sponsors and Medicare Advantage plans that
offer drug coverage, including requirements relating to the prescription drug
benefits offered, the disclosure of negotiated price concessions made available
by drug manufacturers, pharmacy access and participation, and the development
and application of formularies. Additional requirements are contained in
regulations issued under the Act by CMS on
January 21, 2005. To the extent that Express Scripts serves as a PDP sponsor or
provides services to PDP sponsors and Medicare Advantage plans, it will be
required to comply with the applicable provisions of the Act and CMS
regulations.
The Act
also created a voluntary Medicare prescription drug discount card program. Under
the program, eligible Medicare beneficiaries are able to obtain a discount card
from private card sponsors endorsed by CMS. The discount card enables the
beneficiary to purchase covered prescription drugs at network pharmacies for
negotiated prices under arrangements made by the card sponsor with pharmacies
and drug manufacturers. The Medicare discount card program will continue in
effect through December 31, 2005 (with certain provisions for a transition of
beneficiaries to Part D coverage that applies after that date).
Together
with the National Association of Chain Drugstores (“NACDS”), we sponsor a
prescription drug discount card through Pharmacy Care Alliance, Inc. (“PCA”), a
jointly controlled organization. We provide PBM services to PCA, including the
negotiation of discounts from individual retailers and pharmaceutical
manufacturers, the enrollment of cardholders and the processing of claims. We
also provide services to several of our clients who have submitted their own
applications. The Act and the Medicare discount card program regulations issued
by CMS contain various requirements that apply to Express Scripts’ activities in
connection with the program, including requirements relating to the types of
drugs covered by a discount card program, disclosure to CMS of certain
information related to prices and rebates negotiated by the sponsor with
pharmacies and drug manufacturers, and oversight of endorsed card programs by
CMS. There are many uncertainties about the financial and regulatory risks of
participating in the Medicare prescription drug program, and we can give no
assurance that these risks will not be material to our business in future
periods.
Failure
to Integrate Recent Acquisitions Could Adversely Affect Our
Business
In
January 2004, we acquired CuraScript for approximately $333.4 million. We have
integrated this business with our other operations. There are risks associated
with integrating and operating newly acquired businesses. We can give no
assurance that we will successfully operate this new business.
Increased
Credit Risk Relative to Our Clients
We
recorded revenues of $15.1 billion during 2004 and we bill substantial amounts
to many of our clients. A deterioration of credit risks of any of our larger
clients could impact our ability to collect revenue or provide future services,
which could negatively impact the results of our operations. While we are
focused on managing working capital, we can give no assurances that the
deterioration of the credit risks relative to our clients would not have an
adverse impact on our consolidated results of operations, consolidated financial
position and/or consolidated cash flow from operations.
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.
|
PBM
Facilities |
|
Non-PBM
Facilities |
|
Maryland
Heights, Missouri (six facilities) |
|
Maryland
Heights, Missouri (two facilities) |
|
Tempe,
Arizona (three facilities) |
|
Lincoln
Park, New Jersey (two facilities) |
|
Bloomington,
Minnesota (two facilities) |
|
Montville,
New Jersey |
|
Bensalem,
Pennsylvania (two facilities) |
|
PineBrook,
New Jersey |
|
Troy,
New York |
|
|
|
Farmington
Hills, Michigan(1) |
|
|
|
Albuquerque,
New Mexico |
|
|
|
Horsham,
Pennsylvania |
|
|
|
Montreal,
Quebec |
|
|
|
Mississauga,
Ontario |
|
|
|
East
Hanover, New Jersey |
|
|
|
Swatara,
Pennsylvania |
|
|
|
St.
Mary’s, Georgia |
|
|
|
Orlando,
Florida |
|
|
|
Omaha,
Nebraska |
|
|
|
Pleasanton,
California |
|
|
|
Houston,
Texas |
|
|
|
Pittsburg,
Pennsylvania |
|
|
|
Brewster,
New York |
|
|
|
Amherst,
New York |
|
|
|
Bethel
Park, Pennsylvania |
|
|
| |
|
|
(1)
Lease agreements, under which we utilize this facility representing
approximately 9,000 square feet, will be renegotiated or will expire during
2005.
Our
Maryland Heights, Missouri facility houses our corporate offices. We believe our
facilities generally have been well maintained and are in good operating
condition. At January 1, 2005, our existing facilities comprise approximately
1,993,000 square feet in the aggregate.
We own
and lease computer systems at the processing centers. In late 1999, we entered
into an agreement with EDS to outsource our information systems operations.
Through December 31, 2006, EDS has responsibility for operating and maintaining
the computer systems. Our software for claims processing and 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. Uninterruptible power supply and diesel generators
allow our computers, telephone systems and mail pharmacy at each major site to
continue to function during a power outage. To protect against loss of data and
extended downtime, we store software and redundant files at both on-site and
off-site facilities on a regular basis and have contingency operation plans in
place. We cannot, however, provide any assurance that our contingency or
disaster recovery plans would adequately address all relevant
issues.
Item
3 — Legal Proceedings
We and/or
our subsidiaries are defendants in a number lawsuits that purport to be class
actions. Each case seeks damages in an unspecified amount, and the allegations
are such that the Company cannot at this time estimate with any certainty the
damages that the plaintiffs seek to recover. None of the cases has yet been
certified by the court as a class action. We are unable to evaluate with
reasonable certainty the effect that unfavorable outcomes might have on our
financial condition or consolidated results of operations; however, there can be
no assurance that an unfavorable outcome in one or more of these cases would not
have a materially adverse effect on such condition or results. In addition, the
expenses of defending these cases may have a material effect on our financial
results.
These
matters are:
| |
· |
Minshew
v. Express Scripts
(Cause No. Civ.4:02-CV-1503, United States District Court for the Eastern
District of Missouri). On December 12, 2001, this putative class action
lawsuit was filed in the United States District Court for the District of
Arizona. The case was subsequently transferred to the Federal District
Court for the Eastern District of Missouri. The plaintiff asserts that
certain of our business practices, including those relating to our
contracts with pharmaceutical manufacturers for retrospective discounts on
pharmaceuticals and those related to our retail pharmacy network
contracts, violate fiduciary duties that we allegedly owe to certain of
our clients under the Federal Employee Retirement Income Security Act
(ERISA). The putative class consists of health benefit plans that are
self-funded by an employer client. The complaint seeks money damages and
injunctive relief on behalf of this class of health plans. Discovery is
proceeding in this case. This case has been consolidated with Mixon
and another case in the Eastern District of Missouri. Plaintiffs have
filed motions for class certification and partial summary judgment on the
issue of our fiduciary status under ERISA. |
| |
· |
International
Association of Firefighters, Local No. 22, et al. v. National Prescription
Administrators and Express Scripts, Inc.
(Cause No. L03216-02, Superior Court of New Jersey, Law Division, Camden
County). On or about August 16, 2002, we were served with this lawsuit
alleging that our subsidiary, NPA, had breached agreements with two
benefit plans to whom NPA had provided services under an umbrella
agreement with a labor coalition client. We were also named as a defendant
under a theory of de
facto merger.
The plaintiffs purport to bring the action on behalf of a class of
similarly situated plans. The lawsuit alleges that NPA had not paid the
plans the rebates to which they were entitled under the agreement. Claims
for unspecified money damages are asserted under the New Jersey Consumer
Fraud Act (‘the CFA”), and for breach of contract and unjust enrichment.
We have filed answers denying liability. On July 23, 2004, summary
judgment was granted in favor of NPA and ESI on the customer fraud counts.
Plaintiff filed a motion to certify a class of all members of the labor
coalition, approximately 80 plans. We have filed a response opposing the
motion. |
| |
· |
City
of Paterson, et al. v. Benecard Prescription Services, et.
al.
(Cause No. L-005908-02, Superior Court of New Jersey, Law Division, Camden
County). On or about September 13, 2002, plaintiffs filed this action
against Benecard Prescription Services (“Benecard”) and our subsidiary,
NPA, alleging violations of the New Jersey Consumer Protection Act. The
allegations by the plaintiffs assert that various business practices of
the defendants violated the statute. Neither we nor NPA owns any interest
in Benecard, which is an independent entity. Subsequently, Plaintiff added
ESI as a defendant and added claims for common law fraud, negligent
misrepresentation, and breach of contract. Plaintiffs purport to represent
a class of similarly situated plaintiffs and seek unspecified monetary
damages. Both NPA and ESI have filed answers denying liability. On March
7, 2004, our motion for summary judgment on the consumer protection counts
was granted. Benecard’s motion for partial summary judgment dismissing the
class action allegations was granted. ESI has also filed a motion for
partial summary judgment on the class action allegations.
|
| |
· |
Deborah
R. Bauer v. Express Scripts, Inc.
(Civil Action File No. 2002CV60672, Superior Court of Fulton County,
Georgia). Plaintiff filed suit on October 29, 2002, claiming that we
misclassified the prescription drug tamoxifen citrate as a brand drug.
Plaintiff claims that tamoxifen citrate is a generic drug for purposes of
determining the proper co-payment under her health plan. She seeks to
prosecute her claim on behalf of a nationwide class of tamoxifen citrate
users who are members of health benefit plans using our services.
Plaintiff’s motion for class certification, which we opposed, was denied
by the court. Summary judgment has been granted in favor of Express
Scripts, and no appeal was taken from this
judgment. |
| |
· |
Jerry
Beeman, et al. v. Caremark, et al. (Cause
No. 021327, United States District Court for the Central District of
California). On December 12, 2002, we were served with a complaint against
us and several other pharmacy benefit management companies. The complaint,
filed by several California pharmacies as a putative class action, alleges
rights to sue as a private attorney general under California law. The
complaint alleges that we, and the other defendants, failed to comply with
statutory obligations under California Civil Code Section 2527 to provide
our California clients with the results of a bi-annual survey of retail
drug prices. On July 12, 2004, the case was dismissed with prejudice on
the grounds that the plaintiffs lacked standing to bring the action.
Plaintiffs have filed an appeal to the U.S. Court of Appeals for the Ninth
Circuit. |
| |
· |
Anthony
Bradley, et al v. First Health Services Corporation, et al
(Cause No. BC319292, Superior Court for the State of California, County of
Los Angeles) On July 30, 2004, plaintiffs filed a complaint as a putative
class action, alleging rights to sue as a private attorney general under
California law. The complaint alleges that we, and the other
defendants, failed to comply with statutory obligations under California
Civil Code Section 2527 to provide our California clients with the results
of a bi-annual survey of retail drug prices. Plaintiffs request injunctive
relief, unspecified monetary damages and attorneys fees. Several of the
plaintiffs are the same as in Beeman,
et al v. Caremark, et al,
and the relief sought is substantially the same as that sought in
Beeman.
We have filed a motion to dismiss the
complaint. |
| |
· |
Lynch
v. National Prescription Administrators, et al.
(Cause No. 03 CV 1303, United States District Court for the Southern
District of New York). This action was filed on February 26, 2003. The
plaintiff, a trustee of the Health and Welfare Fund and the Retiree Health
and Welfare Fund of the Patrolmen’s Benevolent Association of the City of
New York, alleges that certain business practices of NPA and the Company
violate duties said to be owed to the class members, including duties
under ERISA, state common law, and state consumer protection statutes. The
putative class consists of all current and former self-funded ERISA and
non-ERISA employee benefit plans for which NPA or the Company served as
PBM. The suit seeks unspecified monetary damages and declaratory and
injunctive relief. We have filed answers denying liability. We have filed
a motion for summary judgment on behalf of
ESI. |
| |
· |
American
Federation of State, County & Municipal Employees (AFSCME) v.
AdvancePCS, et al. (Cause
No. BC292227, Superior Court of the State of California for the County of
Los Angeles). This action was filed on March 17, 2003. The case purports
to be a class action on behalf of AFSCME, its California member unions
having non-ERISA health plans, and all California public employees who
participate in non-ERISA health plans. The complaint alleges that certain
business practices engaged in by us and other PBM defendants violated
California’s Unfair Competition Law. The suit seeks unspecified monetary
damages and injunctive relief. This case was coordinated with the
Irwin
case in this court, as described below. A stipulated dismissal has been
signed by the parties and filed with the court. However, a judgment has
not been entered and if a judgment is entered, plaintiffs retain the right
to appeal. |
| |
· |
Irwin
v. AdvancePCS, et al.
(Cause No. RG030886393, Superior Court of the State of California for
Alameda County). This action was filed on March 26, 2003. This case is
brought by plaintiff alleging his right to sue as a private attorney
general under California law. This case purports to be a class action
against us and other PBM defendants on behalf of self-funded, non-ERISA
health plans; and individuals with no prescription drug benefits that have
purchased drugs at retail rates. The complaint alleges that certain
business practices engaged in by us and by other PBM defendants violated
California’s Unfair Competition Law. The suit seeks unspecified monetary
damages and injunctive relief. This case has been coordinated with the
AFSCME
case in Los Angeles County Superior Court. |
| |
· |
North
Jackson Pharmacy, Inc., et al. v. Express Scripts
(Civil Action No. CV-03-B-2696-NE, United States District Court for the
Northern District of Alabama). This action was filed on October 1, 2003.
This case purports to be a class action against us on behalf of
independent pharmacies within the United States. The complaint alleges
that certain of our business practices violate the Sherman Antitrust Act,
15 U.S.C §1, et. seq. The suit seeks unspecified monetary damages
(including treble damages) and injunctive relief.
|
| |
· |
Mixon
v. Express Scripts, Inc.
(Civil Action No. 4:03CV1519, United States District Court for the Eastern
District of Missouri). This case was filed on October 23, 2003, and it
purports to be class action on behalf of participants or beneficiaries of
any ERISA plan which required the participant or beneficiary to pay a
percentage co-payment on prescription drugs during the period from October
1, 1997 to the present. The case alleges that certain of our business
practices, including those relating to our contracts with pharmaceutical
manufacturers for retrospective discounts on pharmaceuticals and those
related to our retail pharmacy network contracts, violated alleged
fiduciary duties under ERISA. The plaintiff seeks an accounting and
unspecified damages. We filed a motion to dismiss this case on standing
grounds which was denied. This case has been coordinated with Minshew in
the Eastern District of Missouri. |
| |
· |
Wagner
et al. v. Express Scripts
(Cause No. 04cv01018 (WHP))United States District Court for the Southern
District of New York). This action was filed on December 31, 2004. This
case purports to be a class action filed on behalf of all individuals who
receive health benefits through the New York health insurance program. The
complaint alleges that certain business practices constitute a breach of
fiduciary duty and violate the New York State statute regulating deceptive
trade practices. The complaint seeks injunctive relief and unspecified
monetary damages. This case was removed to federal district court. This
case was consolidated with Scheuerman
and we have filed a motion to dismiss both
cases. |
| |
· |
Scheuerman,
et al v. Express Scripts
(Cause No. 04-CV-0626 (FIS) (RFT)) United States District Court for the
Southern District of New York) This action was filed on April 26, 2004.
This case purports to be a class action filed on behalf of all individuals
who receive health benefits through the New York Health Insurance Program.
The complaint alleges that certain business practices constitute a breach
of fiduciary injunction relief and unspecified monetary damages. This case
has been removed to federal district court. This case was consolidated
with Wagner
and we have filed a motion to dismiss both
cases. |
| |
· |
People
of the State of New York, et al v. Express Scripts, Inc.
(Cause No. 4669-04, Supreme Court of the State of New York, County of
Albany) On August 4, 2004, the State of New York filed a complaint against
ESI and Cigna Life Insurance Co. The complaint alleges certain
breaches of contract and violations of civil law in connection with our
management of the prescription drug plan for the State of New York and its
employees. The complaint also alleges certain violations of civil
law in connection with the Company’s therapeutic interchange programs. The
State has requested injunctive relief, unspecified monetary damages and
attorney’s fees. We have filed a motion to dismiss the
complaint. |
| |
· |
Correction
Officers’ Benevolent Association of the City of New York, et al v. Express
Scripts, Inc.
(Cause No. 04-Civ-7098 (WHP)), United States District Court for the
Southern District of New York) On August 5, 2004, plaintiffs filed a
complaint alleging that certain of our business practices violate duties
owed to the class members including fiduciary duties, breach of covenant
of good faith and fair dealing, deceptive trade practices, breach of
contract, and unjust enrichment. The complaint purports to be a class
action filed on behalf of all non-ERISA health plans with members who are
employees of the City of New York and the members of those plans.
Plaintiffs request unspecified compensatory and punitive damages,
equitable relief and attorney’s fees. This case has been removed to
federal court and we have filed a motion to
dismiss. |
| |
· |
Shareholder
lawsuits: Sylvia
Childress, et al v. Express Scripts, Inc., et al
(Cause No. 04-CV-01191, United States District Court for the Eastern
District of Missouri) Lidia
Garcia, et al v. Express Scripts, Inc., et al
(Cause No. 04-CV-1009, United States District Court for the Eastern
District of Missouri); Robert
Espriel, et al v. Express Scripts, Inc., et al
(Cause No. 04-CV-01084, United States District Court for the Eastern
District of Missouri); Raymond
Hoffman, et al v. Express Scripts, Inc., et al
(Cause No. 04-CV-01054, United States District Court for the Eastern
District of Missouri); John
R. Nicholas, et al v. Express Scripts, Inc., et al
(Cause No. 04-CV-1295, United States District Court for the Eastern
District of Missouri); John
Keith Tully, et al v. Express Scripts, Inc., et al
(Cause No. 04-CV-01338, United States District Court for the Eastern
District of Missouri). All of these suits are brought against Express
Scripts and certain of its officers alleging violations of federal
securities law. The complaints allege that ESI failed to disclose certain
alleged improper business practices and issued false and misleading
financial statements. The complaints allege that they are brought on
behalf of purchasers of Express Scripts stock during the period October
29, 2003 to August 3, 2004. The complaints request unspecified
compensatory damages, equitable relief and attorney’s fees. Three of these
cases have been consolidated. |
| |
· |
Derivative
lawsuits: Scott Rehm, Derivatively on behalf of nominal Defendant, Express
Scripts, Inc. v. Stuart Bascomb, et al
(Cause No. 4:04-cv-01319-HEA, United States District Court for the Eastern
District of Missouri) (filed 8/27/04); Charles
Manzione, Derivatively on Behalf of Express Scripts, Inc. v. Barrett Toan
et al
United States District Court for the Eastern District of Missouri) (filed
10/22/04); Gary
Miller Derivatively
on behalf of nominal Defendant, Express Scripts, Inc. v. Stuart Bascomb,
et al
(Cause No 042-08632, Missouri Circuit Court, City of St. Louis) (filed
10/29/04). Judith
Deserio, Derivatively on behalf of Nominal Defendant, Express Scripts,
Inc. v. Stuart L. Bascomb, et al
(Cause No. 042-09374, Missouri Circuit Court, City of St. Louis) (filed
12-22-04); Isidore
Mendelovitz, Derivatively and on Behalf of Nominal Defendant, Express
Scripts, Inc. v. Gary G. Benanav, et al
(Cause No. 04-CV-8610, United States District Court for the Southern
District of New York) (filed 11-1-04). Plaintiffs have filed shareholder
derivative lawsuits against current and former directors and officers of
Express Scripts. The cases make various allegations including that the
defendants caused Express Scripts to issue false and misleading
statements, insider selling, breach of fiduciary duty, abuse of control,
gross mismanagement, waste of corporate assets and unjust enrichment.
Plaintiffs demand unspecified compensatory damages, equitable relief and
attorney’s fees. Several cases have been removed to federal
court. |
| |
· |
United
Food and Commercial Workers Unions and Employers Midwest Health Benefits
Fund, et al v. National Prescription Administrators, Inc., et
al
(Cause No. 04-CV-7472, United States District Court for the Southern
District of New York) On September 21, 2004, plaintiffs filed a complaint
against NPA and Express Scripts. The complaint alleges that certain of our
business practices violate duties to the class members including duties
under ERISA, state common law and state consumer protection statutes. The
complaint purports to be a class action filed on behalf of all current
former self-funded ERISA and non-ERISA funds for which ESI or NPA served
as the PBM. Plaintiffs request unspecified compensatory damages, equitable
relief and attorney’s fees. We have filed a motion to transfer to the
Eastern District of Missouri, and a motion to dismiss some of the
claims. |
| |
· |
Central
Laborers’ Welfare Fund, et al v. Express Scripts, Inc., et
al
(Cause No. 04-L-554, Twentieth Judicial Circuit Court, St. Clair County,
Illinois) On September 27, 2004, plaintiffs filed a complaint against
Express Scripts and NPA. The complaint alleges that certain of our
business practices constitute a breach of contract, breach of covenant of
good faith and fair dealing, breach of fiduciary duty and unjust
enrichment. The complaint purports to be a class action filed on behalf of
all former and current self-funded private and governmental health plans
that contracted with ESI or NPA since January 1, 1997. Plaintiffs request
unspecified compensatory damages, equitable relief and attorney’s fees.
ESI has filed a motion to transfer to the Eastern District of Missouri.
Plaintiffs have filed a petition for multi-district litigation (“MDL”)
treatment of this case and seven others, including Minshew,
Lynch,
Mixon
and Scheuerman,
in the Southern District of Illinois. ESI has filed a response opposing
the MDL consolidation; other plaintiffs have either opposed consolidation
or sought consolidation in other jurisdictions. This motion is scheduled
to be heard on March 31, 2005. |
On April
22, 2002, we received an administrative subpoena duces
tecum issued
by the U.S. Attorney’s Office in Boston, Massachusetts. On April 26, 2002, a
substantially identical subpoena was issued to our wholly-owned subsidiary, DPS.
The subpoenas stated that they are issued in connection with an investigation of
various health care offenses and other federal crimes. The U.S. Attorney’s
Office informed our counsel that neither we nor DPS was a target of the
investigation. The subpoenas requested information pertaining to our and DPS’
relationship with TAP Pharmaceuticals, and specifically with respect to TAP’s
two principal drugs, Lupron and Prevacid. On February 13, 2003, we received an
additional administrative subpoena duces
tecum from the
U.S. Attorney’s Office in Boston, Massachusetts. This additional subpoena
requests information relating to our formulary development process and our
business relationships with certain group buying entities and pharmaceutical
manufacturers, among other matters. We are cooperating with the
investigation.
On
February 9, 2004, the Company received a letter from the Kansas City, Missouri
office of the DOL indicating that DOL is undertaking an investigation of the
Company to determine whether any person has violated Title I of ERISA and
directing the Company to produce documents relating to various aspects of the
Company’s business. The Company is cooperating with the
investigation.
On July
21, 2004, we received a Civil Investigative Demand from the Attorney General of
the State of Vermont. A total of 27 states and the District of Columbia
have now issued substantially identical civil investigative demands. The
civil investigative demands received to date seek documents regarding a wide
range of our business practices. We are cooperating with this multi-state
investigation.
In
addition, in the ordinary course of our business there have arisen various legal
proceedings, investigations or claims now pending against our subsidiaries and
us. The effect of these actions on future financial results is not subject to
reasonable estimation because considerable uncertainty exists about the
outcomes. Where insurance coverage is not available for such claims, or in our
judgment, is not cost-effective, we maintain self-insurance reserves to reduce
our exposure to future legal costs, settlements and judgments related to
uninsured claims. Our self-insured reserves are based upon estimates of the
aggregate liability for the costs of uninsured claims incurred and the retained
portion of insured claims using certain actuarial assumptions followed in the
insurance industry and our historical experience. It is not possible to predict
with certainty the outcome of these claims, and we can give no assurance that
any losses in excess of our insurance and any self-insurance reserves will not
be material.
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 2004.
PART
II
Item
5 — Market For Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Market
Information. Our
Common Stock is traded on the Nasdaq National Market (“Nasdaq”) under the symbol
“ESRX”. The high and low prices, as reported by the Nasdaq, are set forth below
for the periods indicated.
| |
Fiscal
Year 2004 |
|
Fiscal
Year 2003 |
|
Common
Stock |
High |
|
Low |
|
High |
|
Low |
|
|
First
Quarter |
$ |
76.19 |
|
$ |
63.12 |
|
$ |
57.50 |
|
$ |
46.33 |
|
|
Second
Quarter |
|
81.20 |
|
|
72.80 |
|
|
75.25 |
|
|
52.80 |
|
|
Third
Quarter |
|
77.90 |
|
|
59.84 |
|
|
75.45 |
|
|
57.63 |
|
|
Fourth
Quarter |
|
79.49 |
|
|
58.30 |
|
|
67.40 |
|
|
52.03 |
|
In May
2004 our stockholders approved our Amended and Restated Certificate of
Incorporation, which consolidated and renamed our classes of common stock. Prior
to the amendment we had 181,000,000 authorized shares of common stock. As a
result, we now have 275,000,000 shares of Common Stock authorized.
Holders. As of
December 31, 2004, there were 358 stockholders of record of our Common Stock. We
estimate there are approximately 51,984 beneficial owners of our Common Stock.
Dividends. The
Board of Directors has not declared any cash dividends on our common stock since
the initial public offering. The Board of Directors does not currently intend to
declare any cash dividends in the foreseeable future. The terms of our existing
credit facility and the indenture under which our public debt was issued contain
certain restrictions on our ability to declare or pay cash dividends.
Recent
Sales of Unregistered Securities
On
December 30, 2004, UBS AG, London Branch exercised a stock warrant to purchase
100,000 shares of unregistered, $0.01 par common stock at a price of $13.2272
per share. The proceeds from the sale will be used for general corporate
purposes. We did not register these transactions under the Securities Act of
1933 in reliance on the exemption from registration provided by Section 4(2)
thereof. These transactions did not involve any public offering of common stock,
and the warrant holders had adequate access to information about the Company
through our public filings with the Securities and Exchange
Commission.
Issuer
Repurchase of Equity Securities
The
following is a summary of our stock repurchasing activity during the three
months ended December 31, 2004 (share data in thousands):
|
Period |
Shares
purchased |
Average
price
paid
per
share |
Shares
purchased
as
part of a
publicly
announced
program |
Maximum
shares
that
may yet be purchased under
the
program |
| |
|
|
|
|
|
|
|
|
10/1/2004
- 10/31/2004 |
|
- |
|
$ |
- |
|
|
- |
|
|
3,414 |
|
11/1/2004
- 11/30/2004 |
|
240 |
|
|
70.51 |
|
|
240 |
|
|
3,174 |
|
|
12/1/2004
- 12/31/2004 |
|
2,116 |
|
|
75.22 |
|
|
2,116 |
|
|
1,058 |
|
|
Fourth
quarter 2004 total |
|
2,356 |
|
$ |
74.74 |
|
|
2,356 |
|
|
|
|
We have a
stock repurchase program, announced on October 25, 1996, under which our Board
of Directors has approved the repurchase of a total of 10.0 million shares.
During 2004, our Board of Directors authorized a 4.0 million share increase
to the existing 10.0 million share repurchase program. Subsequently, in 2005,
our Board of Directors authorized an additional 5.0 million share increase,
which increased our total shares to 19.0 million and shares available for
repurchase under the program to 6.1 million. There is no limit on the duration
of the program. During 2004, we used internally generated cash to repurchase 4.8
million shares for $336.4 million. Approximately 12.9 million of the 19.0
million total shares have been repurchased through December 31, 2004.
Additional purchases, if any, will be made in such amounts and at such times as
we deem appropriate based upon prevailing market and business conditions,
subject to restrictions on the amount of stock repurchases contained in our bank
credit facility.
Item
6 - Selected Financial Data
The
following selected financial data should be read in conjunction with our
Consolidated Financial Statements, including the related notes, and “Item 7 —
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”.
|
(in
thousands, except per share data) |
2004(8) |
|
2003 |
|
2002(2) |
|
2001(3) |
|
2000(4) |
|
|
Statement
of Operations Data (for the Year Ended December
31): |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Revenues:(6) |
$ |
15,114,728 |
|
$ |
13,294,517 |
|
$ |
12,270,513 |
|
$ |
8,588,000 |
|
$ |
6,090,633 |
|
|
Other
revenues |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
10,423 |
|
| |
|
15,114,728 |
|
|
13,294,517 |
|
|
12,270,513 |
|
|
8,588,000 |
|
|
6,101,056 |
|
|
Cost
of revenues(6) |
|
14,170,538 |
|
|
12,428,179 |
|
|
11,447,095 |
|
|
7,992,132 |
|
|
5,562,089 |
|
| |
|
944,190 |
|
|
866,338 |
|
|
823,418 |
|
|
595,868 |
|
|
538,967 |
|
|
Selling,
general and administrative |
|
451,198 |
|
|
417,213 |
|
|
451,692 |
|
|
358,691 |
|
|
338,755 |
|
|
Operating
income |
|
492,992 |
|
|
449,125 |
|
|
371,726 |
|
|
237,177 |
|
|
200,212 |
|
|
Other
(expense) income, net |
|
(42,349 |
) |
|
(43,823 |
) |
|
(43,723 |
) |
|
(29,535 |
) |
|
(206,470 |
) |
|
Income
(loss) before income taxes |
|
450,643 |
|
|
405,302 |
|
|
328,003 |
|
|
207,642 |
|
|
(6,258 |
) |
|
Provision
for income taxes |
|
172,436 |
|
|
154,674 |
|
|
125,167 |
|
|
82,942 |
|
|
2,868 |
|
|
Income
(loss) before cumulative effect of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
change |
|
278,207 |
|
|
250,628 |
|
|
202,836 |
|
|
124,700 |
|
|
(9,126 |
) |
|
Cumulative
effect of accounting change, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax |
|
- |
|
|
(1,028 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Net
income (loss) |
$ |
278,207 |
|
$ |
249,600 |
|
$ |
202,836 |
|
$ |
124,700 |
|
$ |
(9,126 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of
accounting
change |
$ |
3.64 |
|
$ |
3.22 |
|
$ |
2.60 |
|
$ |
1.60 |
|
$ |
(0.12 |
) |
|
Cumulative
effect of accounting change |
|
- |
|
|
(0.01 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Net
income (loss) |
$ |
3.64 |
|
$ |
3.21 |
|
$ |
2.60 |
|
$ |
1.60 |
|
$ |
(0.12 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
cumulative effect of
accounting
change |
$ |
3.59 |
|
$ |
3.17 |
|
$ |
2.55 |
|
$ |
1.56 |
|
$ |
(0.12 |
) |
|
Cumulative
effect of accounting change |
|
- |
|
|
(0.01 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Net
income (loss) |
$ |
3.59 |
|
$ |
3.16 |
|
$ |
2.55 |
|
$ |
1.56 |
|
$ |
(0.12 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
76,376 |
|
|
77,830 |
|
|
77,866 |
|
|
77,857 |
|
|
76,392 |
|
|
Diluted(5) |
|
77,516 |
|
|
78,928 |
|
|
79,667 |
|
|
79,827 |
|
|
76,392 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (as of December 31): |
|
Cash
and cash equivalents |
$ |
166,054 |
|
$ |
396,040 |
|
$ |
190,654 |
|
$ |
177,715 |
|
$ |
53,204 |
|
|
Working
capital |
|
(370,394 |
) |
|
(66,273 |
) |
|
(149,936 |
) |
|
(32,414 |
) |
|
(117,775 |
) |
|
Total
assets |
|
3,600,086 |
|
|
3,409,174 |
|
|
3,206,992 |
|
|
2,500,245 |
|
|
2,276,664 |
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt |
|
22,056 |
|
|
- |
|
|
3,250 |
|
|
- |
|
|
- |
|
|
Long-term
debt |
|
412,057 |
|
|
455,018 |
|
|
562,556 |
|
|
346,119 |
|
|
396,441 |
|
|
Stockholders’
equity |
|
1,196,314 |
|
|
1,193,993 |
|
|
1,002,855 |
|
|
831,997 |
|
|
705,244 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Data (for the Year Ended December 31): |
|
Network
pharmacy claims processed |
|
398,756 |
|
|
378,927 |
|
|
354,880 |
|
|
293,996 |
|
|
299,584 |
|
|
Mail
pharmacy prescriptions filled |
|
39,080 |
|
|
32,337 |
|
|
27,170 |
|
|
20,493 |
|
|
15,183 |
|
|
Specialty
distribution prescriptions filled |
|
3,506 |
|
|
3,610 |
|
|
3,082 |
|
|
1,889 |
|
|
1,120 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by operating activities |
$ |
496,230 |
|
$ |
457,924 |
|
$ |
425,970 |
|
$ |
280,990 |
|
$ |
245,910 |
|
|
Cash
flows used in investing activities |
|
(397,021 |
) |
|
(42,848 |
) |
|
(548,728 |
) |
|
(76,719 |
) |
|
(73,578 |
) |
|
Cash
flows (used in) provided by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
activities |
|
(330,366 |
) |
|
(212,468 |
) |
|
135,623 |
|
|
(79,549 |
) |
|
(251,627 |
) |
|
EBITDA(7) |
|
563,032 |
|
|
503,155 |
|
|
453,764 |
|
|
315,358 |
|
|
278,250 |
|
| (1) |
Earnings
per share and weighted average shares outstanding have been restated to
reflect the two-for-one stock split effective June 22,
2001. |
| (2) |
Includes
the acquisition of Phoenix Marketing Group effective February 25, 2002,
National Prescription Administrators and certain related entities
effective April 12, 2002 and Managed Pharmacy Benefits, Inc. effective
December 20, 2002. |
| (3) |
Includes
the acquisition of Centre d’autorisation et de paiement des services de
sante, Inc. by our Canadian subsidiary effective March 1, 2001.
|
| (4) |
Includes
a non-cash write-off of $165,207 ($103,089 net of tax) of our investment
in PlanetRx.com, Inc. Includes an ordinary gain of $1,500 ($926 net of
tax) on the restructuring of our interest rate swap agreements. These
items resulted in a net $1.33 decrease in basic and diluted earnings per
share. |
| (5) |
In
accordance with Financial Accounting Standards Board Statement No. 128,
“Earnings Per Share,” basic weighted average shares were used to calculate
2000 diluted EPS as the 2000 net loss and the actual diluted weighted
average shares (78,066 as of December 31, 2000) cause diluted EPS to be
anti-dilutive. |
| (6) |
Excludes
estimated retail pharmacy co-payments of $5,545,889, $5,276,148,
$4,349,861, $2,880,671, and $1,031,731 for the years ended December 31,
2004, 2003, 2002, 2001, and 2000, respectively. These are amounts we
instructed retail pharmacies to collect from members. We have no
information regarding actual copayments collected.
|
| (7) |
EBITDA
is earnings before other income (expense), interest, taxes, depreciation
and amortization, or operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted indicator of a
company’s ability to service indebtedness and is frequently used to
evaluate a company’s performance. EBITDA, however, should not be
considered as an alternative to net income, as a measure of operating
performance, as an alternative to cash flow, as a measure of liquidity or
as a substitute for any other measure computed in accordance with
accounting principles generally accepted in the United States. In
addition, our definition and calculation of EBITDA may not be comparable
to that used by other companies. |
| (8) |
Includes
the acquisition of Curascript effective January 30,
2004. |
We have
provided below a reconciliation of EBITDA to net income and to net cash provided
by operating activities as we believe they are the most directly comparable
measures calculated under Generally Accepted Accounting Principles:
| |
Year
Ended December 31, |
|
|
(in
thousands) |
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
Net
income |
$ |
278,207 |
|
$ |
249,600 |
|
$ |
202,836 |
|
$ |
124,700 |
|
$ |
(9,126 |
) |
|
Income
taxes |
|
172,436 |
|
|
154,674 |
|
|
125,167 |
|
|
82,942 |
|
|
2,868 |
|
|
Depreciation
and amortization |
|
70,040 |
|
|
54,030 |
|
|
82,038 |
|
|
78,181 |
|
|
78,038 |
|
|
Interest
expense, net |
|
37,835 |
|
|
38,027 |
|
|
39,174 |
|
|
27,701 |
|
|
41,263 |
|
|
Undistributed
loss from joint venture |
|
4,514 |
|
|
5,796 |
|
|
4,549 |
|
|
1,834 |
|
|
- |
|
|
Write-off
of marketable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
165,207 |
|
|
Cumulative
effect of accounting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change,
net of tax |
|
- |
|
|
1,028 |
|
|
- |
|
|
- |
|
|
- |
|
|
EBITDA |
|
563,032 |
|
|
503,155 |
|
|
453,764 |
|
|
315,358 |
|
|
278,250 |
|
|
Current
income taxes |
|
(153,287 |
) |
|
(120,236 |
) |
|
(95,284 |
) |
|
(63,849 |
) |
|
(44,960 |
) |
|
Change
in operating assets and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities |
|
80,843 |
|
|
84,091 |
|
|
62,533 |
|
|
10,971 |
|
|
19,273 |
|
|
Interest
expense less amortization |
|
(30,223 |
) |
|
(34,963 |
) |
|
(35,275 |
) |
|
(25,090 |
) |
|
(37,082 |
) |
|
Bad
debt expense |
|
6,208 |
|
|
(2,573 |
) |
|
17,865 |
|
|
8,356 |
|
|
12,843 |
|
|
Tax
benefit from employee stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation |
|
10,855 |
|
|
26,893 |
|
|
16,940 |
|
|
20,769 |
|
|
15,456 |
|
|
Amortization
of unearned comp. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
employee plans |
|
11,783 |
|
|
8,318 |
|
|
9,760 |
|
|
10,490 |
|
|
1,286 |
|
|
Undistributed
loss from joint venture |
|
(4,514 |
) |
|
(5,796 |
) |
|
(4,549 |
) |
|
(1,834 |
) |
|
- |
|
|
Other,
net |
|
11,533 |
|
|
(965 |
) |
|
216 |
|
|
5,819 |
|
|
844 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities |
$ |
496,230 |
|
$ |
457,924 |
|
$ |
425,970 |
|
$ |
280,990 |
|
$ |
245,910 |
|
Item
7 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
As one of
the largest full-service pharmacy benefit management (“PBM”) companies, we
provide health care management and administration services on behalf of our
clients, which include health maintenance organizations, health insurers,
third-party administrators, employers, union-sponsored benefit plans and
government health programs. Our integrated PBM services include network claims
processing, mail pharmacy services, specialty mail pharmacy claim fulfillment,
benefit design consultation, drug utilization review, formulary management,
disease management, and drug data analysis services. We also provide non-PBM
services, through our Pharma Business Solutions unit, which include distribution
of specialty pharmaceuticals requiring special handling or packaging where we
have been selected by the pharmaceutical manufacturer as part of a limited
distribution network; distribution of pharmaceuticals to low-income patients
through manufacturer-sponsored and company-sponsored generic patient assistance
programs, and distribution of sample units to physicians and verification of
practitioner licensure.
We report
two segments, PBM and non-PBM. We derive revenues primarily from the sale of PBM
services in the United States and Canada. Revenue generated by our segments can
be classified as either tangible product revenue or service revenue. We earn
tangible product revenue from the sale of prescription drugs by retail
pharmacies in our retail pharmacy networks and from dispensing prescription
drugs from our mail pharmacies. Service revenue includes administrative fees
associated with the administration of retail pharmacy networks contracted by
certain clients, market research programs, informed decision counseling
services, certain specialty distribution services, and sample fulfillment and
sample accountability services. Tangible product revenue generated through both
our PBM and non-PBM segments represented 98.5%, 98.6%, and 98.5% of revenues,
respectively, for the years ended December 31, 2004, 2003, and 2002,
respectively.
Our
business has grown through strategic acquisitions over the last few years. On
January 30, 2004, we acquired the capital stock of CuraScript Pharmacy, Inc. and
CuraScript PBM Services, Inc. (collectively, “CuraScript”), for $333.4 million
in cash. We acquired certain assets and liabilities of National Prescription
Administrators, Inc. and certain related entities (“NPA”) on April 12, 2002 for
approximately $466.0 million in cash and Express Scripts stock. We also acquired
certain assets and liabilities of Phoenix Marketing Group in February 2002 and
of Managed Pharmacy Benefits, Inc. (“MPB”), a PBM subsidiary of Medicine Shoppe
International, Inc., in December 2002. Consequently, our operating results
include those of CuraScript from January 30, 2004, MPB from December 19, 2002,
NPA from April 12, 2002, and PMG from February 25, 2002. In addition to growth
through acquisitions, we have been successful in adding significant new clients
in recent years, including the contracts we were awarded by the Department of
Defense (“DoD”) TRICARE Management Activity in 2003 to provide retail pharmacy
services under the TRICARE Retail Pharmacy program (starting in June 2004) and
in 2002 to provide mail pharmacy services under the TRICARE Mail Order Pharmacy
program.
TREND
FACTORS AFFECTING THE BUSINESS
Prescription
drug costs have risen considerably over the past several years, as a result of
inflation of brand-name products, the introduction of new products by
pharmaceutical manufacturers and higher utilization of drugs. As a result, we
face continuing pressures on margins resulting from client demands for better
management of pharmacy trends, enhanced service offerings and/or higher service
levels on contract renewals, and unfavorable modifications to contracts with key
clients or providers.
Our
business model is built around the alignment of interests with our clients and
members in making the use of prescription drugs safer and more affordable. As a
result, the increased utilization of generics and mail pharmacy services,
including specialty drugs, translates into lower pharmacy trends for our clients
and provide opportunities to increase our profitability. We expect stronger
gross profit in 2005 than in 2004 as a result of increased generic and mail
pharmacy service utilization, better management of ingredient costs, increased
labor efficiencies, and the consolidation of various facilities which will
increase operating efficiencies and improve service to clients.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates and assumptions are based
upon a combination of historical information and various other assumptions
believed to be reasonable under the particular circumstances. Actual results may
differ from our estimates. Certain of the accounting policies that most impact
our consolidated financial statements and that require our management to make
difficult, subjective or complex judgments are described below. This should be
read in conjunction with Note 1, “Summary of Significant Accounting Policies”
and with the other notes to the consolidated financial statements.
REBATE
ACCOUNTING
ACCOUNTING
POLICY
We
administer a rebate program based on actual market share performance in which
rebates and the associated receivable from pharmaceutical manufacturers are
estimated quarterly based on our estimate of the number of rebatable
prescriptions and the rebate per prescription. The portion of rebates payable to
clients is estimated quarterly based on historical allocation percentages and
our estimate of rebates receivable from pharmaceutical manufacturers. With
respect to our market share rebate program, estimates are adjusted to actual
when amounts are received from manufacturers and the portion payable to clients
is paid.
FACTORS
AFFECTING ESTIMATE
The
factors that could impact our estimates of rebates, rebates receivable and
rebates payable are as follows:
|
· |
Differences
between the actual and the estimated number of rebatable
prescriptions; |
|
· |
Differences
between estimated aggregate allocation percentages and actual rebate
allocation percentages calculated on a client-by-client
basis; |
|
· |
Differences
between actual and estimated market share of a manufacturer’s brand drug
for our clients as compared to the national market
share; |
|
· |
Drug
patent expirations; and |
|
· |
Changes
in drug utilization patterns. |
Historically,
adjustments to our original estimates have been immaterial.
UNBILLED
REVENUE AND RECEIVABLES
ACCOUNTING
POLICY
We bill
our clients based upon the billing schedules established in client contracts. At
the end of a period, any unbilled revenues related to the sale of prescription
drugs that have been adjudicated with retail pharmacies are estimated based on
the amount we will pay to the pharmacies and historical gross
margin.
FACTORS
AFFECTING ESTIMATE
Unbilled
amounts are estimated based on historical margin. Historically, adjustments to
our original estimates have been immaterial. Significant differences between
actual and estimated margin could impact subsequent adjustments.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
ACCOUNTING
POLICY
We
provide an allowance for doubtful accounts equal to estimated uncollectible
receivables. This estimate is based on the current status of each customer’s
receivable balance.
FACTORS
AFFECTING ESTIMATE
We record
allowances for doubtful accounts based on a variety of factors including the
length of time the receivables are past due, the financial health of the
customer and historical experience. Our estimate could be impacted by changes in
economic and market conditions as well as changes to our customer’s financial
conditions.
SELF-INSURANCE
RESERVES
ACCOUNTING
POLICY
We accrue
self-insurance reserves based upon estimates of the aggregate liability of claim
costs in excess of our insurance coverage. Reserves are estimated using certain
actuarial assumptions followed in the insurance industry and our historical
experience. The majority of these claims are legal claims and our liability
estimate is primarily related to the cost to defend these claims. We do not
accrue for settlements, judgments, monetary fines or penalties until such
amounts are probable and estimable, in compliance with Financial Accounting
Standard No. (“FAS”) 5, “Accounting for Contingencies.” Under FAS 5, if the
range of possible loss is broad, the liability accrual should be based on the
lower end of the range.
FACTORS
AFFECTING ESTIMATE
Self-insurance
reserves are based on management’s estimates of the costs to defend legal
claims. We do not have significant experience with certain of these types of
cases. As such, differences between actual costs and management’s estimates
could be significant. In addition, actuaries do not have a significant history
with the PBM industry. Changes to assumptions used in the development of these
reserves can affect net income in a given period. In addition, changes in the
legal environment and number and nature of claims could impact our
estimate.
In
addition, we consider the following information about our accounting policies
important for an understanding of our results of operations:
|
· |
Revenues
from dispensing prescriptions from our mail pharmacies are recorded when
prescriptions are shipped. These revenues include the co-payment received
from members of the health plans we serve. |
|
· |
Revenues
from the sale of prescription drugs by retail pharmacies are recognized
when the claim is processed. We do not include member co-payments to
retail pharmacies in revenue or cost of
revenue. |
|
· |
When
we have an independent contractual obligation to pay our network pharmacy
providers for benefits provided to our clients’ member, we act as a
principal in the arrangement and we include the total payments we have
contracted to receive from these clients as revenue and the total payments
we make to the network pharmacy providers as cost of
revenue. |
|
· |
When
we merely administer a client’s network pharmacy contracts, to which we
are not a party and under which we do not assume credit risk, we earn an
administrative fee for collecting payments from the client and remitting
the corresponding amount to the pharmacies in the client’s network. In
these transactions, drug ingredient cost is not included in our revenues
or in our cost of revenues. |
|
· |
We
administer two rebate programs through which we receive rebates and
administrative fees from pharmaceutical manufacturers.
|
|
· |
Gross
rebates and administrative fees earned for the administration of our
rebate programs, performed in conjunction with claim processing services
provided to clients, are recorded as a reduction of cost of revenue and
the portion of the rebate payable to customers is treated as a reduction
of revenue. |
|
· |
When
we earn rebates and administrative fees in conjunction with formulary
management services, but do not process the underlying claims, we record
rebates received from manufacturers, net of the portion payable to
customers, in revenue. |
|
· |
We
distribute pharmaceuticals through patient assistance programs and earn a
fee from the manufacturer for administrative and pharmacy services for the
delivery of certain drugs free of charge to doctors for their low-income
patients |
|
· |
We
earn a fee for the distribution of consigned pharmaceuticals requiring
special handling or packaging where we have been selected by the
pharmaceutical manufacturer as part of a limited distribution
network |
|
· |
Non-PBM
product revenues include revenues earned through administering sample card
programs for certain manufacturers. We include ingredient cost of those
drug samples dispensed from retail pharmacies in our Specialty
Distribution Services ("SDS") revenues and the associated costs for these
samples card programs in cost of revenues. |
|
· |
Non-PBM
revenues include administrative fees for the verification of practitioner
licensure and the distribution of consigned drug samples to doctors based
on orders received from pharmaceutical sales
representatives. |
RESULTS
OF OPERATIONS
PBM
OPERATING INCOME
| |
Year
Ended December 31, |
|
|
(in
thousands) |
2004 |
|
Increase/
(Decrease) |
2003 |
|
Increase/
(Decrease) |
2002 |
|
|
Product
revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
revenues |
$ |
9,387,269 |
|
|
3.9% |
|
$ |
9,037,246 |
|
|
7.3% |
|
$ |
8,423,861 |
|
|
Mail
revenues |
|
5,390,541 |
|
|
35.2% |
|
|
3,988,141 |
|
|
10.4% |
|
|
3,612,485 |
|
|
Service
revenues |
|
100,729 |
|
|
38.2% |
|
|
72,878 |
|
|
(15.4) |
% |
|
86,094 |
|
|
Total
PBM revenues |
|
14,878,539 |
|
|
13.6% |
|
|
13,098,265 |
|
|
8.0% |
|
|
12,122,440 |
|
|
Cost
of PBM revenues |
|
13,983,645 |
|
|
13.9% |
|
|
12,282,169 |
|
|
8.3% |
|
|
11,342,685 |
|
|
PBM
gross profit |
|
894,894 |
|
|
9.7% |
|
|
816,096 |
|
|
4.7% |
|
|
779,755 |
|
|
PBM
SG&A expenses |
|
440,267 |
|
|
9.3% |
|
|
402,801 |
|
|
(8.3) |
% |
|
439,422 |
|
|
PBM
operating income |
$ |
454,627 |
|
|
10.0% |
|
$ |
413,295 |
|
|
21.4% |
|
$ |
340,333 |
|
Network
claims increased by 19.8 million or 5.2% in 2004 over 2003. The increase in
network claims is primarily due to the implementation of our contract with the
DoD TRICARE Retail Pharmacy (“TRICARE”) program in June 2004. Revenues for the
TRICARE program are included in service revenue (see discussion below). The
increase in network claims due to the implementation of our TRICARE contract was
partially offset by client specific losses from 2003 (see discussion below).
Network
pharmacy revenues increased $350.0 million, or 3.9%, in 2004 over 2003,
primarily due to the following factors:
| |
· |
Average
revenue per claim increased 4.9% in 2004 over 2003 resulting in a $437.8
million increase in overall network pharmacy revenues. Increases in
average revenue per network pharmacy claim were due to drug price
inflation and to the transition of one of our clients from use of their
retail pharmacy network to an ESI retail pharmacy network in the first
quarter of 2004. These increases were partially offset by a higher mix of
generic claims and an increase in the average co-payment per retail
pharmacy claims. As mentioned in our Critical Accounting Policies above,
we do not include member co-payments to retail pharmacies in revenue or
cost of revenue. Generic claims represented 51.9% of total network claims
processed during 2004 as compared to 48.1% during 2003.
|
| |
· |
Network
pharmacy claims included in network pharmacy revenues decreased slightly
compared to 2003, resulting in an $87.8 million decrease in network
pharmacy revenues. The decrease in network pharmacy claims volume is
mainly due to client losses from 2003. One client, emerging from
bankruptcy, discontinued providing retiree benefits, one client was lost
through a competitive bidding process, and a one-year contract with a
state agency expired, as expected, as future claims will be processed by
the state. These decreases were partially offset by new business which
started during 2004. |
Network
pharmacy revenue increased $613.4 million, or 7.3%, in 2003 over 2002 and
network pharmacy claims processed increased 6.8%, partially attributable to the
full year inclusion of NPA in our 2003 results. The increase from NPA
represented 63.6% of the increase in network pharmacy revenues and 44.4% of the
increase in claims volume. Network pharmacy revenues in 2003 were also impacted
by the following factors:
| |
· |
Higher
network claim volume due to organic growth represented 51.8% of the
increase in revenues. |
| |
· |
Increases
from NPA and higher claims volume was partially offset by net decreases in
ingredient cost which reduced network pharmacy revenues by approximately
15.6%. Drug price inflation was more than offset by higher generics, a
higher percentage of clients utilizing their retail pharmacy networks, and
higher member copayments. Generic claims represented 48.1% of total
network claims processed during 2003 as compared to 45.1% during 2002.
|
The
$1,402.4 million, or 35.2%, increase in mail pharmacy revenues in 2004 over 2003
is attributable to the following factors:
| |
· |
Excluding
CuraScript, we processed an additional 5.8 million claims in 2004 over
2003, resulting in a $716.9 million increase in mail pharmacy revenues.
The increase in mail order claim volume is primarily due to the
implementation of new clients, including the contract with the DoD TRICARE
Management Activity Program in March 2003, as well as increased usage of
our mail order pharmacies by members of existing clients.
|
| |
· |
The
acquisition of CuraScript resulted in additional mail order claims of 0.9
million and a $619.7 million increase in mail order revenues in 2004
over 2003. |
| |
· |
Excluding
CuraScript, average revenue per mail order claim increased by
approximately 1.4% in 2004 over 2003, representing additional mail
pharmacy revenue of $65.8 million. Increases in mail order revenue per
claim from inflation was almost completely offset by the impact of our
contract with the DoD TRICARE Management Activity Program and by increases
in our generic fill rate to 40.5% for 2004 from 37.2% for the same period
of 2003. Under our contract with the DoD we earn a fee per prescription
filled by our mail order facility. Revenues and cost of revenues from the
DoD contract do not include ingredient cost as inventory is replenished by
the DoD through agreements with its suppliers. As a result, these claims
have a dilutive effect on the average revenue per mail pharmacy claim.
|
The
$375.7 million increase in mail pharmacy revenues in 2003 over 2002 was
attributable to the following factors:
| |
· |
Higher
mail order claim volume represented 153.9% of the increase in mail order
revenue. The increase in mail order volume is primarily due to the
implementation of our contract with the DoD TRICARE Management Activity
Program in March 2003 |
| |
· |
The
full year inclusion of NPA in our 2003 results increased mail order
revenues by 33.0% |
| |
· |
These
increases were partially offset by net reductions in mail order ingredient
costs which reduced mail order revenues by 86.9%.
|
PBM
service revenues include amounts received from clients for therapy management
services such as prior authorization and step therapy protocols and
administrative fees earned for processing claims for clients utilizing their own
retail pharmacy networks. The $27.9 million, or 38.2%, increase in PBM service
revenues in 2004 as compared to 2003 is primarily due to the implementation of
the TRICARE program in June 2004. The increase from the implementation of the
TRICARE contract was partially offset by the elimination of revenues from
pharmaceutical manufacturers in support of certain clinical programs. This
funding was completely phased out as of October 1, 2003. The decrease
in service revenue in 2003 as compared to 2002 resulting from the phase out of
these programs was partially offset by a $9.9 million increase in prescription
revenues earned by our Canadian PBM.
PBM cost
of revenues increased $1,701.5 million, or 13.9%, in 2004 over 2003 as a result
of the following:
| |
· |
The
addition of CuraScript’s specialty mail pharmacy in January 2004 resulted
in an increase in PBM cost of revenues representing approximately 33.7% of
the total change. |
| |
· |
Net
increases in the average ingredient cost per claim, mainly due to
inflation and to the transition of one of our clients from their network
to an ESI retail pharmacy network in the first quarter of 2004 (as
discussed above), represented 32.9% of the increase in PBM cost of
revenues. |
| |
· |
Excluding
CuraScript, increases in network and mail order claims volume, represented
approximately 31.2% of the increase in PBM cost of
revenues. |
PBM cost
of revenues increased $939.5 million, or 8.3%, in 2003 over 2002 as a result of
the following:
| |
· |
Higher
claim volumes represented approximately 54.3% of the increase in cost of
revenues. Higher volumes are a result of the implementation of our
contract with the DoD in March 2003 and increased utilization of
prescription drugs by members. |
| |
· |
The
full year inclusion of NPA in 2003 represented 52.8% of the increase in
PBM cost of revenues. |
| |
· |
Higher
processing costs represented approximately 6.1% of the increase in cost of
revenues. Processing costs increased partially due to the operation of two
mail order pharmacies in Tempe, Arizona. In order to service the DoD
TRICARE contract we constructed a new facility, but we had not yet closed
the older Tempe facility (this facility was closed in 2004).
|
| |
· |
These
increases were partially offset by net reductions in ingredient cost which
reduced PBM cost of revenues 13.2%. |
Our PBM gross
profit increased $78.8 million, or 9.7%, in 2004 over 2003 and $36.3 million, or
4.7%, in 2003 over 2002. Increases in revenues from network inflation and higher
mail order volumes were partially offset by inflationary increases in cost of
revenues and margin pressures arising from the current competitive environment.
Gross profit for 2003 was negatively impacted by a non-recurring reduction of
$15.0 million relating to previously collected pharmaceutical manufacturer funds
which we decided to share with our clients.
Selling,
general and administrative expense (“SG&A”) for our PBM segment increased
$37.5 million, or 9.3%, in 2004 as compared to 2003 primarily as a result of the
following factors:
| |
· |
An
increase of $28.8 million in legal fees from $10.5 million in 2003 to
$39.3 million in 2004. As previously reported, we are a defendant in
litigation involving our contract to provide prescription drug benefits
for the employees and retirees of the State of New York. In
addition, we have received civil investigative demands from the Attorneys
General of 25 states and the District of Columbia. In light of these
developments, several shareholder class action lawsuits and additional
class action lawsuits were filed against the Company (see “—Legal
Proceedings”). Based on these developments, we recorded a $25.0 million
increase in legal reserves during 2004 (see “—Critical Accounting
Policies”). |
| |
· |
The
acquisition of CuraScript in January 2004 which increased SG&A by
$26.0 million in 2004 over 2003. |
| |
· |
A
$12.0 million increase in the PCA Loan reserve recorded in December 2004
against the unsecured borrowings by PCA under the line of credit extended
by ESI (see “—Liquidity and Capital Resources”).
|
| |
· |
These
increases in SG&A for 2004 were partially offset by lower management
incentive compensation due to the recording of the PCA Loan reserve, and
by cost saving measures implemented during 2004.
|
Selling,
general and administrative expense (“SG&A”) for our PBM segment decreased
$36.6 million, or 8.3%, in 2003 as compared to 2002 primarily as a result of the
following factors:
| |
· |
Depreciation
and amortization expense decreased by approximately $24.5 million. During
2002 we shortened the useful lives of certain assets associated with our
legacy information systems, which resulted in approximately $23.5 million
of additional depreciation and amortization
expense. |
| |
· |
Bad
debt expense decreased by $20.4 million. In 2002, we increased our
allowance for doubtful accounts for several specific customers
experiencing financial difficulties. In 2003, we reversed $4.4 million of
the reserve established during 2002 for a large client in bankruptcy when
we received payment on this client’s obligations and determined that such
reserve was no longer necessary. |
| |
· |
Contribution
expense decreased by $13.0 million. In 2002, we established a charitable
foundation and recorded contributions of $13.8 million.
|
PBM
operating income increased $41.3 million, or 10.0%, in 2004 over 2003 and $73.0
million, or 21.4%, in 2003 over 2002, based on the various factors described
above.
NON-PBM
OPERATING INCOME
| |
Year
Ended December 31, |
|
|
(in
thousands) |
2004 |
|
Increase/
Decrease |
2003 |
|
Increase/
Decrease |
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Product
revenues |
$ |
114,856 |
|
|
32.3% |
|
$ |
86,799 |
|
|
55.5% |
|
$ |
55,806 |
|
|
Service
revenues |
|
121,333 |
|
|
10.9% |
|
|
109,453 |
|
|
18.6% |
|
|
92,267 |
|
|
Total
non-PBM revenues |
|
236,189 |
|
|
20.4% |
|
|
196,252 |
|
|
32.5% |
|
|
148,073 |
|
|
Non-PBM
cost of revenues |
|
186,893 |
|
|
28.0% |
|
|
146,010 |
|
|
39.8% |
|
|
104,410 |
|
|
Non-PBM
gross profit |
|
49,296 |
|
|
(1.9% |
) |
|
50,242 |
|
|
15.1% |
|
|
43,663 |
|
|
Non-PBM
SG&A expense |
|
10,931 |
|
|
(24.2% |
) |
|
14,412 |
|
|
17.5% |
|
|
12,270 |
|
|
Non-PBM
operating income |
$ |
38,365 |
|
|
7.1% |
|
$ |
35,830 |
|
|
14.1% |
|
$ |
31,393 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-PBM
product revenues increased $28.1 million, or 32.3%, in 2004 over 2003 and $31.0
million, or 55.5%, in 2003 over 2002. The increase in 2004 is primarily due to a
higher mix of specialty distribution volumes in which we include ingredient cost
of pharmaceuticals dispensed in our revenues. This increase in SDS product
revenues was partially offset by the discontinuance, during 2003, of two patient
assistance programs (“PAP”) where we received fees for the delivery of certain
drugs to doctors for their indigent patients. The increase in 2003 is primarily
due to higher volumes for SDS, including the sample card programs we administer
for certain manufacturers, where we include the ingredient cost of
pharmaceuticals dispensed from retail pharmacies in our SDS revenues.
Non-PBM
service revenues increased $11.9 million, or 10.9%, in 2004 over 2003 and $17.2
million, or 18.6%, in 2003 over 2002. The increase in 2004 reflects new
eligibility and service programs initiated during 2004. The increase in 2003 is
primarily due to additional volume in SDS, including new PAPs, initiated during
2003, where eligibility and other services are being provided. This increase was
partially offset by the discontinuance, during the third quarter of 2003, of two
atient
assistance programs where we received fees for the delivery of certain drugs to
doctors for their indigent patients
Non-PBM
cost of revenues increased $40.9 million, or 28.0%, in 2004 over 2003, and $41.6
million, or 39.8%, in 2003 over 2002. These increases are mainly due to the
additional volume in sample card programs where we include the ingredient costs
of pharmaceuticals dispensed from retail pharmacies in our Non-PBM revenues and
cost of revenues (as discussed above). The percentage increase in non-PBM cost
of revenues grew faster than the percentage increase in revenues due to the
additional volume in the sample card program (discussed above) where we include
the ingredient costs of pharmaceuticals dispensed from retail pharmacies in our
SDS revenues and cost of revenues. The percentage increase in the non-PBM cost
of revenues was partially offset by PMG, which does not purchase samples from
the manufacturers, but records an administrative fee for verification of
practitioner licensure and distribution of samples to those practitioners based
on orders received from pharmaceutical sales representatives.
Gross
profit decreased $1.0 million, or 1.9%, in 2004 from 2003. Gross profit
increased $6.6 million, or 15.1%, from 2003 over 2002.
Non-PBM
SG&A decreased $3.5 million, or 24.2%, from 2003 to 2004, due to efforts to
control costs by integrating certain functions within our PMG and SDS
operations. Non-PBM SG&A increased $2.1 million, or 17.5%, in 2003 over
2002, due to the increases in non-PBM infrastructure required to support the
growth of our non-PBM business.
Non-PBM
operating income increased $2.5 million, or 7.1%, in 2004 over 2003 and $4.4
million, or 14.1%, in 2003 over 2002.
OTHER
(EXPENSE) INCOME, NET
In
February 2001, we entered into an agreement with AdvancePCS and Medco Health
Solutions, Inc. (formerly, Merck-Medco, L.L.C; “Medco”) to form RxHub, LLC
(“RxHub”), an electronic exchange enabling physicians who use electronic
prescribing technology to link to pharmacies, PBMs and health plans. We own
one-third of the equity of RxHub (as do each of the other two founders) and have
committed to invest up to $20 million over five years with approximately $17.4
million invested through December 31, 2004. We have recorded our investment in
RxHub under the equity method of accounting, which requires our percentage
interest in RxHub’s results to be recorded in our Consolidated Statement of
Operations. Our percentage of RxHub’s loss for 2004, 2003 and 2002 is $4.5
million ($2.8 million net of tax), $5.8 million ($3.6 million net of tax) and
$4.5 million ($2.8 million net of tax), respectively, and has been recorded
in other (expense) income, net in our Consolidated Statement of Operations.
Net
interest expense remained relatively consistent from 2004 to 2003, decreasing
$0.2 million. This was the net effect of several factors. In 2004, we redeemed
$250.0 million the Senior Notes, and as a result, we recorded a $12.3 million
charge to interest expense for the redemption premium and the write-off of
deferred financing fees. In addition, we wrote-off $3.6 million in deferred
financing fees as a result of refinancing our entire credit facility during the
first quarter of 2004 (see “—Liquidity and Capital Resources”). These increases
were offset by lower interest expense as a result of the redemption of our
Senior Notes. Net interest expense decreased $1.1 million, or 2.9%, in 2003 as
compared to 2002 as the impact of reduced debt balances resulting from the
repurchase of our Senior Notes on the open market and the prepayment of Term B
loans during 2003 (see “—Liquidity and Capital Resources”) were partially offset
by premium payments and deferred financing fee write-offs. In 2003, we recorded
in interest expense a premium of $3.9 million paid to repurchase $35.4 million
of our Senior Notes on the open market. We also recorded the write-off of $1.3
million of deferred financing fees as an increase in interest expense in
compliance with FAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.”
PROVISION
FOR INCOME TAXES
Our
effective tax rate increased slightly to 38.3% in 2004, from 38.2% for 2003 and
2002.
NET
INCOME AND EARNINGS PER SHARE
Net
income increased $28.6 million, or 11.5%, for the year ended December 31, 2004
over 2003 and increased $46.8 million, or 23.1%, for the year ended December 31,
2003 over 2002. During 2003, we recorded a cumulative effect of change in
accounting principle of $1.0 million, net of tax, related to our implementation
of FAS 143, “Asset Retirement Obligations,” (see “—Other Matters”).
Basic and
diluted earnings per share increased 13.4% and 13.6%, respectively for the
twelve months ended December 31, 2004 over 2003 and 23.5% and 23.9%,
respectively for the twelve months ended December 31, 2003 over 2002.
We
account for employee stock options in accordance with Accounting Principles
Board No. 25, “Accounting for Stock Issued to Employees.” We account for options
using the intrinsic value method and have not recognized compensation expense
for options granted. Had we used the fair value method and recognized
compensation expense based on the fair value of options determined on the grant
date, our net income and earnings per share for the twelve months ended December
31, 2004, 2003 and 2002 would have been $269.6 million, or $3.46 per diluted
share, $237.7 million, or $3.00 per diluted share, and $191.5 million, or $2.39
per diluted share, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
OPERATING
CASH FLOW AND CAPITAL EXPENDITURES
During
2004, net cash provided by operations increased $38.3 million to $496.2 million
from $457.9 million in 2003. This increase reflects increased earnings of $28.6
million, a $16.0 million increase in depreciation and amortization, partially
due to the acquisition of CuraScript in January 2004, and a $12.0 million
increase as a result of establishing our PCA Loan reserve. These increases were
partially offset by a $15.3 million decrease in deferred taxes and a $2.2
million decrease from net changes in our working capital components. The
decrease from changes in our working capital components was primarily due to a
$76.4 million decrease from a higher inventory balance relating to increased
mail volume. Inventory days on hand remained consistent at December 31, 2004
compared to December 31, 2003. This decrease was offset by a $73.8 million
increase resulting from the timing of payments to vendors. Net cash provided by
operations in 2003 increased $31.9 million to $457.9 million from $426.0 million
in 2002. This increase reflected increased earnings of $46.8 million and net
changes in our working capital components, including an increase of $75.3
million resulting from improved inventory management, an increase of $67.1
million through management of payments to vendors and a decrease of $87.0
million from timing of billings and collections. These increases were partially
offset by decreases in depreciation and amortization and bad debt
expense.
As a
percent of accounts receivable, our allowance for doubtful accounts was 2.9% and
2.7% at December 31, 2004 and 2003, respectively. The allowance at December 31,
2004 was higher, as a percentage of accounts receivable, specifically for the
acquisition of Curascript on January 30, 2004.
Our
capital expenditures in 2004 decreased $1.6 million, or 3.0%, as compared to
2003 and in 2003 decreased $8.2 million, or 13.4%, as compared to 2002. Higher
capital expenditures in 2002 as compared to 2003 and 2004 are partially due to
the construction of a new Tempe mail order facility in order to manage growth.
We spent $5.7 million in 2003 and $11.9 million in 2002 related to this project.
These decreases are partially offset by $9.0 million capitalized in 2004 due to
the development of a new Patient Care Contact Center in St. Marys, Georgia. We
expect to continue to invest in technology that we believe will provide
efficiencies in operations, facilitate growth and enhance the service we provide
to our clients. We expect future anticipated capital expenditures will be funded
primarily from operating cash flow, or, to the extent necessary, with borrowings
under our revolving credit facility, discussed below.
STOCK
REPURCHASE PROGRAM
We have a
stock repurchase program, announced on October 25, 1996, under which our Board
of Directors has approved the repurchase of a total of 10.0 million shares.
During 2004, our Board of Directors authorized a 4.0 million share increase
to the existing 10.0 million share repurchase program. Subsequently, in 2005,
our Board of Directors authorized an additional 5.0 million share increase,
which increased the total shares available for repurchase under the program to
6.1 million. There is no limit on the duration of the program. During 2004, we
used internally generated cash to repurchase 4.8 million shares for $336.4
million. Through December 31, 2004, approximately 12.9 million of the 19.0
million total shares have been repurchased under the program and 7.0 million
shares have been reissued in connection with employee compensation plans.
Additional share purchases, if any, will be made in such amounts and at such
times as we deem appropriate based upon prevailing market and business
conditions, subject to restrictions on the amount of stock repurchases contained
in our bank credit facility.
ACQUISITIONS
AND RELATED TRANSACTIONS
On
January 30, 2004, we acquired the outstanding capital stock of CuraScript, for
approximately $333.4 million, which includes a purchase price adjustment
for closing working capital and transaction costs. CuraScript is one of the
nation’s largest specialty pharmacy services companies and has enhanced our
ability to provide comprehensive pharmaceutical management services to our
clients and their members. CuraScript operates seven specialty pharmacies
throughout the United States and serves over 175 managed care organizations, 30
Medicaid programs and the Medicare program. The transaction was accounted for
under the provisions of FAS 141, “Business Combinations.” The purchase price has
been preliminarily allocated based upon the estimated fair value of net assets
acquired at the date of the acquisition. A portion of the excess of purchase
price over tangible net assets acquired has been preliminarily allocated to
intangible assets, consisting of customer contracts in the amount of $28.7
million and non-competition agreements in the amount of $2.7 million, which are
being amortized using the straight-line method over estimated useful lives of
ten years and three years, respectively. These assets are included in other
intangible assets. In addition, the excess of purchase price over tangible net
assets and identified intangible assets acquired has been preliminarily
allocated to goodwill in the amount of $286.0 million and trade names in the
amount of $1.3 million, which are not being amortized. The $333.4
million purchase price was financed with $210.0 million of cash on hand and
the remainder by adding $125.0 million in Term C loans through an amendment of
our Bank Credit Facility. Our PBM operating results include those of CuraScript
from January 30, 2004, the date of acquisition.
Goodwill
is evaluated for impairment annually or when events or circumstances occur
indicating that goodwill might be impaired. In addition, we evaluate whether
events or circumstances have occurred that indicate the remaining estimated
useful lives of other intangible assets may warrant revision or that the
remaining balance of an asset may not be recoverable. The measurement of
possible impairment is based on the ability to recover the balance of assets
from expected future operating cash flows on an undiscounted basis. Impairment
losses, if any, would be determined based on the present value of the cash flows
using discount rates that reflect the inherent risk of the underlying business.
No such impairment existed at December 31, 2004 or 2003.
We
regularly review potential acquisitions and affiliation opportunities. We
believe available cash resources, bank financing or the issuance of additional
common stock could be used to finance future acquisitions or affiliations. There
can be no assurance we will make new acquisitions or establish new affiliations
in 2004 or thereafter.
In
January 2004, we entered into an agreement to provide PBM services for the
Medicare discount program of Pharmacy Care Alliance, Inc. (“PCA”), a nonstock,
not-for-profit entity jointly controlled by the National Association of Chain
Drugstores (“NACDS”) and us. Our PBM services include the negotiation of
discounts from individual retailers and pharmaceutical manufacturers, the
enrollment of cardholders and the processing of prescription claims.
During
2004, we entered into a lending agreement with PCA, whereby we committed to lend
up to $17.0 million to PCA in the form of a revolving line of credit
available through March 31, 2005. Requests for borrowings on the revolving line
of credit require the unanimous consent of PCA’s board of directors, which
consists of representatives from NACDS and from our management team, or its
designated representatives. PCA will utilize the revolving line of credit to
fund its operating expenditures. NACDS has agreed to guarantee $2.0 million on
the revolving line of credit. As of December 31, 2004, we have loaned PCA
$14.6 million.
In
regard to the revolving line of credit extended to PCA, the collectibility of
any unsecured borrowings will be a function of PCA’s success in enrolling new
members for its Medicare discount program. Through December 31, 2004,
enrollment has fallen short of expectations, with approximately 213,000 members
enrolled to date. In addition, utilization has been lower than expected. As a
result, in December 2004 we recorded a $12.0 million reserve against this
receivable, resulting in a net receivable of $2.6 million, which is included in
other long-term assets on our Consolidated Balance Sheet.
BANK
CREDIT FACILITY
At
December 31, 2003, our credit facility with a commercial bank syndicate
consisted of $250.0 million of Term B loans and a $150.0 million revolving
credit facility (of which no debt was outstanding at December 31, 2003). In
January 2004, we added a $125.0 million Term C Loan to partially fund the
acquisition of CuraScript, in early February 2004 we borrowed $50.0 million on
the revolving credit facility under our then existing credit agreement, and on
February 13, 2004, we refinanced our entire credit facility. We negotiated an
$800.0 million credit facility with a bank syndicate which includes $200.0
million of Term A loans, $200.0 million of Term B loans and a $400.0
million revolving credit facility. The proceeds from the $800.0 million credit
facility were used to prepay borrowings on the revolver, Term B and Term C loans
outstanding under our previous credit facility. In June, September, and December
of 2004, we made scheduled payments on our Term A and Term B loans totaling
$15.0 million and $1.5 million, respectively. As of December 31, 2004,
we had net borrowings of $50.0 million under our revolving credit facility.
Our new
credit facility requires us to pay interest periodically on the London Interbank
Offered Rates (“LIBOR”) or base rate options, plus a margin. The margin on the
Term A loans and on amounts outstanding under the revolving credit facility is
dependent on our credit rating and our ratio of debt to earnings before
interest, taxes, depreciation and amortization (“EBITDA”). The Term B loan
interest is based on the LIBOR or alternative base rate options plus a margin of
1.5% or 0.25% per annum, respectively. To alleviate interest rate volatility, we
have an interest rate swap arrangement (see Note 7 to our consolidated financial
statements). Under our new credit facility we are required to pay commitment
fees on the unused portion of the $400.0 million revolving credit facility
($350.0 million at December 31, 2004). The commitment fee will range from
0.2% to 0.5% depending on our credit rating and our consolidated leverage ratio.
The commitment fee is currently 0.25% per annum.
At
December 31, 2004, the weighted average interest rate on the new facility was
3.59%. Our new credit facility contains covenants that limit the indebtedness we
may incur, the common shares we may repurchase and dividends we may pay. The
covenants also include a minimum interest coverage ratio and a maximum leverage
ratio. At December 31, 2004, we are in compliance with all covenants associated
with our credit facility.
To
alleviate interest rate volatility on our variable rate loans, we have entered
into interest rate swap arrangements, which are discussed in “—Market Risk”
below.
BONDS
In June
1999, we issued $250.0 million of 9.625% Senior Notes due 2009, of which
approximately $45.5 million in principal had been repurchased on the open market
through December 31, 2003. During 2004, we redeemed all of our outstanding
Senior Notes ($204.4 million) at a redemption price of 104.8125% by using
internally generated cash and a portion of our $400 million revolving credit
facility. As a result of the redemption, we recorded in interest expense,
charges of approximately $12.3 million ($7.6 million after-tax) representing a
redemption premium of $9.8 million and the write-off of unamortized deferred
financing fees.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
The
following table sets forth our schedule of current maturities of our long-term
debt, excluding the deferred interest rate swap gain of $0.5 million as of
December 31, 2004, and future minimum lease payments due under noncancellable
operating leases (in thousands):
| |
Payments
Due by Period as of December 31, 2004 |
|
|
Contractual
obligations |
Total |
2005 |
2006
- 2007 |
2008
- 2009 |
After
2009 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
$ |
434,063 |
|
$ |
22,056 |
|
$ |
69,112 |
|
$ |
295,112 |
|
$ |
47,783 |
|
|
Future minimum
lease
Payments
(1) |
|
107,116 |
|
|
22,845 |
|
|
39,029 |
|
|
20,163 |
|
|
25,079 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
$ |
541,179 |
|
$ |
44,901 |
|
$ |
108,141 |
|
$ |
315,275 |
|
$ |
72,862 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In
July 2004, we entered into a capital lease with the Camden County Joint
Development Authority in association with the development of our new Patient
Care Contact Center in St. Marys, Georgia. At December 31, 2004, our lease
obligation is $13.5 million. In accordance with FASB Interpretation Number 39,
“Offsetting of Amounts Related to Certain Contracts,” our lease obligation has
been offset against $13.5 million of industrial revenue bonds issued to us by
the Camden County Joint Development Authority.
OTHER
MATTERS
In
December 2004, the Financial Accounting Standards Board (“FASB”) revised FAS
123, “Share-Based Payment” (“FAS 123R”), which replaced FAS 123, “Accounting for
Stock-Based Compensation”, and superseded Accounting Principles Board No.
(“APB”) 25, “Accounting for Stock Issued to Employees.” FAS 123R will require
compensation cost related to share-based payment transactions to be recognized
in the financial statements. As permitted by FAS 123, we currently follow the
guidance of APB 25, which allows the use of the intrinsic value method of
accounting to value share-based payment transactions with employees. FAS 123R
requires measurement of the cost of share-based payment transactions to
employees at the fair value of the award on the grant date and recognition of
expense over the requisite service or vesting period. FAS 123R allows
implementation using a modified version of prospective application, under which
compensation expense for the unvested portion of previously granted awards and
all new awards will be recognized on or after the date of adoption. FAS 123R
also allows companies to implement by restating previously issued financial
statements, basing the amounts on the expense previously calculated and reported
in their pro forma footnote disclosures required under FAS 123. We will adopt
FAS 123R using the modified prospective method beginning July 1, 2005. The
impact of adopting FAS 123R on our consolidated results of operations is not
expected to differ materially from the pro forma disclosures currently required
by FAS 123 (see note 12).
In
January 2003, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest
Entities.” FIN 46 requires a variable interest entity be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity’s activities or entitled to receive a majority of the
entity’s residual returns or both. The consolidation provisions of FIN 46 were
originally effective for financial periods ending after July 15, 2003. In
October 2003, the FASB issued Staff Position FIN 46-6, “Effective Date of FIN
46,” which delayed the implementation date to financial periods ending after
December 31, 2003. In December 2003, the FASB published a revision to FIN 46
(“FIN 46R”) to clarify some of the provisions of FIN 46, and to exempt certain
entities from its requirements. We do not have any variable interest entities
requiring consolidation under FIN 46 and FIN 46R. Therefore, adoption of these
standards did not have a material impact on our consolidated financial position,
consolidated results of operations or our consolidated cash flows.
In
January 2003, we adopted FAS 143, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. FAS 143 requires the
capitalization of the fair value of any legal or contractual obligations
associated with the retirement of tangible, long-lived assets in the period in
which the liabilities are incurred and the capitalization of a corresponding
amount as part of the book value of the related long-lived asset. In subsequent
periods, we are required to adjust asset retirement obligations based on changes
in estimated fair value, and the corresponding increases in asset book values
are depreciated over the useful life of the related asset. As required by FAS
143, we recorded an asset retirement obligation ($3.1 million at January 1,
2003) primarily related to equipment and leasehold improvements installed in
leased, mail-order facilities in which we have a contractual obligation to
remove the improvements and equipment upon surrender of the property to the
landlord. For certain of our leased facilities, we are required to remove
equipment and convert the facilities back to office space upon surrender of the
property. We also recorded a net increase in fixed assets (net of accumulated
depreciation) of $1.4 million and a $1.7 million ($1.0 million, net of tax) loss
from the cumulative effect of change in accounting principle. The $1.4 million
asset is being depreciated, on a straight-line basis, over the remaining term of
the leases, which range from seven months to ten years.
In April
2002, FAS 145 was issued. In rescinding FAS 4, “Reporting Gains and Losses from
Extinguishment of Debt,” and FAS 64 “Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,” FAS 145 eliminates the required classification of
gains and losses from extinguishment of debt as extraordinary. We adopted this
provision of FAS 145 in January 2003. During 2003, we prepaid $75.0 million of
our Term B notes and purchased $35.4 million of our Senior Notes on the open
market. As a result of the Term B prepayments and Senior Note repurchase, we
wrote-off $1.3 million (pre-tax) of deferred financing fees and incurred a
pre-tax charge of $3.9 million, representing a premium on the Senior Notes.
The write-off of deferred financing fees and the Senior Note premium have been
recorded as increases in interest expense. Losses on debt prepayments from the
write-off of deferred financing fees of $1.7 million ($1.0 million, net of
taxes) and $0.6 million ($0.4 million, net of taxes) for 2002 and 2001,
respectively, have been reclassified to conform to the presentation required by
FAS 145. Implementation of FAS 145 did not have an impact on our consolidated
financial position, consolidated results of operations or our consolidated cash
flows.
We make
available through our website (www.express-scripts.com), access to our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, all amendments to those reports (when applicable), and other filings with
the SEC. Such access is free of charge and is available as soon as reasonably
practicable after such information is filed with the SEC. In addition, the SEC
maintains an internet site (www.sec.gov) containing reports, proxy and
information statements, and other information regarding issuers filing
electronically with the SEC (which includes us).
IMPACT
OF INFLATION
Changes
in prices charged by manufacturers and wholesalers for pharmaceuticals affect
our revenues and cost of revenues. Most of our contracts provide that we bill
clients based on a generally recognized price index for pharmaceuticals, and
accordingly we have been able to recover price increases from our clients under
the terms of our agreements.
MARKET
RISK
We use an
interest rate swap agreement to manage our interest rate risk on future variable
interest payments. At December 31, 2004, our swap agreement fixes the variable
interest rate payments on approximately $20.0 million of debt under our
credit facility. Under our swap agreement, we agree to receive a variable rate
of interest on the notional principal amount of approximately $20.0 million
based upon a three month LIBOR rate in exchange for payment of a fixed rate of
6.25% per annum. The swap will mature in April 2005.
Our
present interest rate swap agreement is a cash flow hedge which requires us to
pay fixed-rates of interest, and which hedge against changes in the amount of
future cash flows associated with variable interest obligations. Accordingly,
the fair value of our swap agreement is $0.4 million and $2.5 million at
December 31, 2004 and 2003, respectively. The balance as of December 31, 2004 is
reported on the balance sheet in current liabilities; and the balance as of
December 31, 2003 is reported on the balance sheet in other liabilities. The
related deferred loss on our swap agreements, $0.3 million and $1.5 million, net
of taxes, at December 31, 2004 and 2003, respectively, is deferred in
stockholders’ equity as a component of other comprehensive income. This deferred
loss is then recognized as an adjustment to interest expense over the same
period in which the related interest payments being hedged are recorded in
income. The loss associated with the ineffective portion of this agreement is
immediately recognized as an expense. For the years ended December 31, 2004 and
2003, the losses on the ineffective portion of our swap agreement were not
material to the consolidated financial statements.
A
sensitivity analysis is used to determine the impact interest rate changes will
have on the fair value of the interest rate swap, measuring the change in the
net present value arising from the change in the interest rate. The fair value
of the swap is then determined by calculating the present value of all cash
flows expected to arise thereunder, with future interest rate levels implied
from prevailing mid-market yields for money-market instruments, interest rate
futures and/or prevailing mid-market swap rates. Anticipated cash flows are then
discounted on the assumption of a continuously compounding zero-coupon yield
curve. A 10 basis point decline in interest rates at December 31, 2004
would have caused an immaterial change in the fair value of the
swap.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
Response
to this item is included in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Market
Risk” above.
Item
8 — Consolidated Financial Statements and Supplementary
Data
Report of Independent Registered Public
Accounting Firm
To the
Board of Directors and Stockholders of Express Scripts, Inc.:
We have
completed an integrated audit of Express Scripts, Inc.’s 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated
financial statements and financial statement schedule
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Express Scripts, Inc. and its subsidiaries at December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public
Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
Internal
control over financial reporting
Also, in
our opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting, appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December
31, 2004 based on
criteria established in Internal
Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal
Control - Integrated Framework issued
by COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
described in Management’s Report on Internal Control Over Financial Reporting,
management has excluded CuraScript from its assessment of internal control over
financial reporting as of December 31, 2004 because it was acquired by the
Company in a purchase business combination during 2004. We have also excluded
CuraScript from our audit of internal control over financial reporting.
CuraScript is a wholly-owned subsidiary whose total assets and total revenues
represent 11.6% and
4.2%, respectively, of the related consolidated financial statement amounts as
of and for the year ended December 31, 2004.
/s/PricewaterhouseCoopers
LLP
St.
Louis, MO
March 2,
2005
EXPRESS
SCRIPTS, INC.
CONSOLIDATED
BALANCE SHEET
| |
December
31, |
|
|
(in
thousands, except share data) |
2004 |
|
2003 |
|
Assets |
|
|
|
|
|
Current
assets: |
|
|
|
|
|
Cash
and cash equivalents |
$ |
166,054 |
|
$ |
396,040 |
|
|
Receivables,
net |
|
1,057,222 |
|
|
1,011,154 |
|
|
Inventories |
|
158,775 |
|
|
116,375 |
|
|
Deferred
taxes |
|
33,074 |
|
|
15,346 |
|
|
Prepaid
expenses and other current assets |
|
27,892 |
|
|
21,220 |
|
|
Total
current assets |
|
1,443,017 |
|
|
1,560,135 |
|
|
Property
and equipment, net |
|
181,166 |
|
|
177,312 |
|
|
Goodwill,
net |
|
1,708,935 |
|
|
1,421,493 |
|
|
Other
intangible assets, net |
|
245,270 |
|
|
232,059 |
|
|
Other
assets |
|
21,698 |
|
|
18,175 |
|
|
Total
assets |
$ |
3,600,086 |
|
$ |
3,409,174 |
|
| |
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity |
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
Claims
and rebates payable |
$ |
1,236,775 |
|
$ |
1,145,028 |
|
|
Accounts
payable |
|
322,885 |
|
|
264,875 |
|
|
Accrued
expenses |
|
231,695 |
|
|
216,505 |
|
|
Current
maturities of long-term debt |
|
22,056 |
|
|
- |
|
|
Total
current liabilities |
|
1,813,411 |
|
|
1,626,408 |
|
|
Long-term
debt |
|
412,057 |
|
|
455,018 |
|
|
Other
liabilities |
|
178,304 |
|
|
133,755 |
|
|
Total
liabilities |
|
2,403,772 |
|
|
2,215,181 |
|
| |
|
|
|
|
|
|
|
Commitments
and Contingencies (Notes 3 and 10) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 5,000,000 shares authorized, and no
shares |
|
|
|
|
|
|
|
issued
and outstanding |
|
- |
|
|
- |
|
|
Common
Stock, $0.01 par value, 275,000,000 and 181,000,000 shares
authorized,
respectively, and 79,787,000 and 79,795,000 shares |
|
|
|
|
|
|
|
issued
and outstanding, respectively |
|
798 |
|
|
798 |
|
|
Additional
paid-in capital |
|
467,353 |
|
|
484,663 |
|
|
Unearned
compensation under employee compensation plans |
|
(18,177 |
) |
|
(23,302 |
) |
|
Accumulated
other comprehensive income |
|
8,266 |
|
|
3,638 |
|
|
Retained
earnings |
|
1,142,757 |
|
|
864,550 |
|
| |
|
1,600,997 |
|
|
1,330,347 |
|
|
Common
Stock in treasury at cost, 5,929,000 and 2,223,000 |
|
|
|
|
|
|
|
shares,
respectively |
|
(404,683 |
) |
|
(136,354 |
) |
|
Total
stockholders’ equity |
|
1,196,314 |
|
|
1,193,993 |
|
|
Total
liabilities and stockholders’ equity |
$ |
3,600,086 |
|
$ |
3,409,174 |
|
See
accompanying Notes to Consolidated Financial Statements.
EXPRESS
SCRIPTS, INC.
CONSOLIDATED
STATEMENT OF OPERATIONS
| |
Year
Ended December 31, |
|
|
(in
thousands, except per share data) |
2004 |
2003 |
2002 |
| |
|
|
|
|
|
|
|
Revenues
1 |
$ |
15,114,728 |
|
$ |
13,294,517 |
|
$ |
12,270,513 |
|
|
Cost
of revenues 1 |
|
14,170,538 |
|
|
12,428,179 |
|
|
11,447,095 |
|
|
Gross
profit |
|
944,190 |
|
|
866,338 |
|
|
823,418 |
|
|
Selling,
general and administrative |
|
451,198 |
|
|
417,213 |
|
|
451,692 |
|
|
Operating
income |
|
492,992 |
|
|
449,125 |
|
|
371,726 |
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
Undistributed
loss from joint venture |
|
(4,514 |
) |
|
(5,796 |
) |
|
(4,549 |
) |
|
Interest
income |
|
3,837 |
|
|
3,390 |
|
|
4,716 |
|
|
Interest
expense |
|
(41,672 |
) |
|
(41,417 |
) |
|
(43,890 |
) |
| |
|
(42,349 |
) |
|
(43,823 |
) |
|
(43,723 |
) |
|
Income
before income taxes |
|
450,643 |
|
|
405,302 |
|
|
328,003 |
|
|
Provision
for income taxes |
|
172,436 |
|
|
154,674 |
|
|
125,167 |
|
|
Income
before cumulative effect |
|
|
|
|
|
|
|
|
|
|
of
accounting change |
|
278,207 |
|
|
250,628 |
|
|
202,836 |
|
|
Cumulative
effect of accounting change, net of tax |
|
- |
|
|
(1,028 |
) |
|
- |
|
|
Net
income |
$ |
278,207 |
|
$ |
249,600 |
|
$ |
202,836 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share: |
|
|
|
|
|
|
|
|
|
|
Before
cumulative effect of accounting change |
$ |
3.64 |
|
$ |
3.22 |
|
$ |
2.60 |
|
|
Cumulative
effect of accounting change |
|
- |
|
|
(0.01 |
) |
|
- |
|
|
Net
income |
$ |
3.64 |
|
$ |
3.21 |
|
$ |
2.60 |
|
|
Weighted
average number of common shares |
|
|
|
|
|
|
|
|
|
|
outstanding
during the period - Basic EPS |
|
76,376 |
|
|
77,830 |
|
|
77,866 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share: |
|
|
|
|
|
|
|
|
|
|
Before
cumulative effect of accounting change |
$ |
3.59 |
|
$ |
3.17 |
|
$ |
2.55 |
|
|
Cumulative
effect of accounting change |
|
- |
|
|
(0.01 |
) |
|
- |
|
|
Net
income |
$ |
3.59 |
|
$ |
3.16 |
|
$ |
2.55 |
|
|
Weighted
average number of common shares |
|
|
|
|
|
|
|
|
|
|
outstanding
during the period - Diluted EPS |
|
77,516 |
|
|
78,928 |
|
|
79,667 |
|
1
Excludes estimated retail pharmacy co-payments of $5,545,889, $5,276,148 and
$4,349,861 for the years ended December 31, 2004, 2003, and 2002, respectively.
These are amounts we instructed retail pharmacies to collect from members. We
have no information regarding actual co-payments collected.
See
accompanying Notes to Consolidated Financial Statements
EXPRESS
SCRIPTS, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| |
Number
of
Shares |
|
Amount |
|
|
(in
thousands) |
Common
Stock |
|
Common
Stock |
Additional
Paid-in
Capital |
Unearned
Compensation
Under
Employee
Compensation
Plans |
Accumulated
Other
Comprehensive
Income |
Retained
Earnings |
Treasury
Stock |
Total |
|
|
Balance
at December 31, 2001 |
|
79,230 |
|
$ |
792 |
|
$ |
492,229 |
|
$ |
(15,452 |
) |
$ |
(4,593 |
) |
$ |
412,114 |
|
$ |
(53,093 |
) |
$ |
831,997 |
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
202,836 |
|
|
- |
|
|
202,836 |
|
|
Other
comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
167 |
|
|
- |
|
|
- |
|
|
167 |
|
|
Realized
and unrealized losses on derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
instruments, net of taxes |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
4 |
|
|
- |
|
|
- |
|
|
4 |
|
|
Comprehensive
income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
171 |
|
|
202,836 |
|
|
- |
|
|
203,007 |
|
|
Treasury
stock acquired |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(107,121 |
) |
|
(107,121 |
) |
|
Common
stock issued under employee plans |
|
52 |
|
|
- |
|
|
2,895 |
|
|
(2,487 |
) |
|
- |
|
|
- |
|
|
2,270 |
|
|
2,678 |
|
|
Amortization
of unearned compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
employee plans |
|
- |
|
|
- |
|
|
- |
|
|
9,760 |
|
|
- |
|
|
- |
|
|
- |
|
|
9,760 |
|
|
Exercise
of stock options |
|
- |
|
|
- |
|
|
(29,978 |
) |
|
- |
|
|
- |
|
|
- |
|
|
53,906 |
|
|
23,928 |
|
|
Tax
benefit relating to employee stock compensation |
|
- |
|
|
- |
|
|
16,940 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
16,940 |
|
|
Shares
not issued under contractual agreements (Note 4) |
|
- |
|
|
- |
|
|
(4,734 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(4,734 |
) |
|
Stock
issued for NPA acquisition |
|
552 |
|
|
6 |
|
|
26,394 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
26,400 |
|
|
Balance
at December 31, 2002 |
|
79,834 |
|
|
798 |
|
|
503,746 |
|
|
(8,179 |
) |
|
(4,422 |
) |
|
614,950 |
|
|
(104,038 |
) |
|
1,002,855 |
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
249,600 |
|
|
- |
|
|
249,600 |
|
|
Other
comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
6,019 |
|
|
- |
|
|
- |
|
|
6,019 |
|
|
Realized
and unrealized losses on derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
instruments; net of taxes |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,041 |
|
|
- |
|
|
- |
|
|
2,041 |
|
|
Comprehensive
income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
8,060 |
|
|
249,600 |
|
|
- |
|
|
257,660 |
|
|
Treasury
stock acquired |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(143,041 |
) |
|
(143,041 |
) |
|
Common
stock issued under employee plans, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
forfeitures
and stock redeemed for taxes |
|
(39 |
) |
|
- |
|
|
1,512 |
|
|
(23,441 |
) |
|
- |
|
|
- |
|
|
21,467 |
|
|
(462 |
) |
|
Amortization
of unearned compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
employee plans |
|
- |
|
|
- |
|
|
- |
|
|
8,318 |
|
|
- |
|
|
- |
|
|
- |
|
|
8,318 |
|
|
Exercise
of stock options |
|
- |
|
|
- |
|
|
(47,488 |
) |
|
- |
|
|
- |
|
|
- |
|
|
89,258 |
|
|
41,770 |
|
|
Tax
benefit relating to employee stock compensation |
|
- |
|
|
- |
|
|
26,893 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
26,893 |
|
|
Balance
at December 31, 2003 |
|
79,795 |
|
|
798 |
|
|
484,663 |
|
|
(23,302 |
) |
|
3,638 |
|
|
864,550 |
|
|
(136,354 |
) |
|
1,193,993 |
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
278,207 |
|
|
- |
|
|
278,207 |
|
|
Other
comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
3,348 |
|
|
- |
|
|
- |
|
|
3,348 |
|
|
Realized
and unrealized losses on derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
instruments; net of taxes |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1,280 |
|
|
- |
|
|
- |
|
|
1,280 |
|
|
Comprehensive
income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
4,628 |
|
|
278,207 |
|
|
- |
|
|
282,835 |
|
|
Treasury
stock acquired |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(336,377 |
) |
|
(336,377 |
) |
|
Common
stock issued under employee plans, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
forfeitures
and stock redeemed for taxes |
|
(8 |
) |
|
(1 |
) |
|
578 |
|
|
(6,658 |
) |
|
- |
|
|
- |
|
|
9,424 |
|
|
3,343 |
|
|
Amortization
of unearned compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
employee plans |
|
- |
|
|
- |
|
|
- |
|
|
11,783 |
|
|
- |
|
|
- |
|
|
- |
|
|
11,783 |
|
|
Exercise
of stock options |
|
- |
|
|
- |
|
|
(30,213 |
) |
|
- |
|
|
- |
|
|
- |
|
|
58,624 |
|
|
28,411 |
|
|
Exercise
of stock warrants |
|
- |
|
|
1 |
|
|
1,470 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1,471 |
|
|
Tax
benefit relating to employee stock compensation |
|
- |
|
|
- |
|
|
10,855 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
10,855 |
|
|
Balance
at December 31, 2004 |
|
79,787 |
|
$ |
798 |
|
$ |
467,353 |
|
$ |
(18,177 |
) |
$ |
8,266 |
|
$ |
1,142,757 |
|
$ |
(404,683 |
) |
$ |
1,196,314 |
|
See accompanying Notes to Consolidated Financial Statements
EXPRESS
SCRIPTS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
| |
Year
Ended December 31, |
|
|
(in
thousands) |
2004 |
2003 |
2002 |
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
Net
income |
$ |
278,207 |
|
$ |
249,600 |
|
$ |
202,836 |
|
|
Adjustments
to reconcile net income to net cash |
|
|
|
|
|
|
|
|
|
|
provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
70,040 |
|
|
54,030 |
|
|
82,038 |
|
|
Deferred
income taxes |
|
19,149 |
|
|
34,438 |
|
|
29,883 |
|
|
Bad
debt expense |
|
6,208 |
|
|
(2,573 |
) |
|
17,865 |
|
|
Tax
benefit relating to employee stock compensation |
|
10,855 |
|
|
26,893 |
|
|
16,940 |
|
|
Amortization
of unearned compensation
under
employee plans |
|
11,783 |
|
|
8,318 |
|
|
9,760 |
|
|
Cumulative
effect of accounting change |
|
- |
|
|
1,663 |
|
|
- |
|
|
PCA
Loan - loss reserve |
|
12,000 |
|
|
- |
|
|
- |
|
|
Other,
net |
|
7,145 |
|
|
2,464 |
|
|
4,115 |
|
|
Changes
in operating assets and liabilities, net of |
|
|
|
|
|
|
|
|
|
|
changes
resulting from acquisitions: |
|
|
|
|
|
|
|
|
|
|
Receivables |
|
(9,120 |
) |
|
(23,183 |
) |
|
63,812 |
|
|
Inventories |
|
(32,303 |
) |
|
44,108 |
|
|
(31,191 |
) |
|
Other
current and non-current assets |
|
(6,670 |
) |
|
7,077 |
|
|
(15,065 |
) |
|
Claims
and rebates payable |
|
90,969 |
|
|
93,294 |
|
|
26,243 |
|
|
Other
current and non-current liabilities |
|
37,967 |
|
|
(38,205 |
) |
|
18,734 |
|
|
Net
cash provided by operating activities |
|
496,230 |
|
|
457,924 |
|
|
425,970 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment |
|
(51,516 |
) |
|
(53,105 |
) |
|
(61,303 |
) |
|
Proceeds
from sale of property and equipment |
|
- |
|
|
6,455 |
|
|
- |
|
|
Acquisitions,
net of cash acquired, and investment in joint venture |
|
(331,558 |
) |
|
3,871 |
|
|
(487,982 |
) |
|
Loan
to PCA |
|
(14,050 |
) |
|
- |
|
|
- |
|
|
Other |
|
103 |
|
|
(69 |
) |
|
557 |
|
|
Net
cash used in investing activities |
|
(397,021 |
) |
|
(42,848 |
) |
|
(548,728 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt |
|
(745,955 |
) |
|
(160,430 |
) |
|
(205,000 |
) |
|
Proceeds
from long-term debt |
|
675,564 |
|
|
50,000 |
|
|
425,000 |
|
|
Proceeds
from revolving credit line, net |
|
50,000 |
|
|
- |
|
|
- |
|
|
Treasury
stock acquired |
|
(336,377 |
) |
|
(143,041 |
) |
|
(107,121 |
) |
|
Deferred
financing fees |
|
(6,036 |
) |
|
(224 |
) |
|
(3,862 |
) |
|
Net
proceeds from employee stock plans |
|
30,967 |
|
|
41,227 |
|
|
26,606 |
|
|
Other |
|
1,471 |
|
|
- |
|
|
- |
|
|
Net
cash (used in) provided by financing activities |
|
(330,366 |
) |
|
(212,468 |
) |
|
135,623 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation adjustment |
|
1,171 |
|
|
2,778 |
|
|
74 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents |
|
(229,986 |
) |
|
205,386 |
|
|
12,939 |
|
|
Cash
and cash equivalents at beginning of year |
|
396,040 |
|
|
190,654 |
|
|
177,715 |
|
|
Cash
and cash equivalents at end of year |
$ |
166,054 |
|
$ |
396,040 |
|
$ |
190,654 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental
data: |
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for: |
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
135,951 |
|
|
88,641 |
|
|
93,170 |
|
|
Interest |
|
24,249 |
|
|
37,107 |
|
|
38,461 |
|
See
accompanying Notes to Consolidated Financial Statements
EXPRESS
SCRIPTS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary
of significant accounting policies
Organization
and operations. We are
one of the largest full-service pharmacy benefit management (“PBM”) companies in
North America, providing health care management and administration services on
behalf of clients that include health maintenance organizations, health
insurers, third-party administrators, employers, union-sponsored benefit plans
and government health programs. Our integrated PBM services include network
claims processing, mail pharmacy services, specialty prescription fulfillment,
benefit design consultation, drug utilization review, formulary management,
disease management and drug data analysis services. We also provide non-PBM
services through our Pharma Business Solutions (“PBS”) unit. Non-PBM services
include distribution services through our Express Scripts Specialty Distribution
Services subsidiary (“SDS”), drug sample fulfillment and sample accountability
services through our Phoenix Marketing Group, Inc. (“PMG”)
subsidiary.
Basis
of presentation. The
consolidated financial statements include our accounts and those of our
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in affiliated companies, 20% to
50% owned, are accounted for under the equity method. Certain amounts in prior
years have been reclassified to conform with the 2003 classifications (see -
"Cash and cash equivalents"). The
preparation of the consolidated financial statements conforms to generally
accepted accounting principles in the U.S., and requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from those
estimates and assumptions.
Cash
and cash equivalents. Cash and
cash equivalents include cash on hand and investments with original maturities
of three months or less. We have banking relationships resulting in certain cash
disbursement accounts being maintained by banks not holding our cash
concentration accounts. As a result, cash disbursement accounts carrying
negative book balances of $160.3 million and $201.2 million (representing
outstanding checks not yet presented for payment) have been reclassified to
claims and rebates payable, accounts payable and accrued expenses at December
31, 2004 and 2003, respectively. At December 31, 2003, the entire $201.2 million
negative book balance was previously included in Claims and Rebates Payable on
the Consolidated Balance Sheet. To conform to current presentation, $32.5
million and $0.7 million of the December 31, 2003 negative book balance has been
reclassified to Accounts Payable and Accrued Expenses, respectively. This
reclassification restores balances to cash and current liabilities for
liabilities to our vendors which have not been defeased. No overdraft or
unsecured short-term loan exists in relation to these negative
balances.
Accounts
receivable. Based on
our revenue recognition policies discussed below, certain claims at the end of a
period are unbilled. Revenue and unbilled receivables for those claims are
estimated each period based on the amount to be paid to network pharmacies and
historical gross margin. Estimates are adjusted to actual at the time of
billing. In addition, revenue and unbilled receivables for rebates based on
market share performance are calculated quarterly based on an estimate of
rebatable prescriptions and the rebate per prescription. These estimates are
adjusted to actual when the number of rebatable prescriptions and the rebate per
prescription have been determined and the billing to the manufacturers has been
completed. Historically, adjustments to our original estimates have been
immaterial. As of December 31, 2004 and 2003, unbilled receivables were $664.5
million and $603.5 million, respectively. Unbilled receivables are billed to
clients typically within 30 days based on the contractual billing schedule
agreed upon with the client.
We
provide an allowance for doubtful accounts equal to estimated uncollectible
receivables. This estimate is based on the current status of each customer’s
receivable balance as well as current economic and market conditions. As of
December 31, 2004 and 2003, we have an allowance for doubtful accounts of $31.4
million and $28.6 million, respectively.
Inventories.
Inventories consist of prescription drugs and medical supplies that are stated
at the lower of first-in first-out cost or market.
Property
and equipment.
Property and equipment is carried at cost and is depreciated using
the straight-line method over estimated useful lives of seven years for
furniture and three to five years for equipment and purchased computer software.
Leasehold improvements are amortized on a straight-line basis over the term of
the lease or the useful life of the asset, if shorter. Expenditures for repairs,
maintenance and renewals are charged to income as incurred. Expenditures that
improve an asset or extend its estimated useful life are capitalized. When
properties are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in income. Research and development expenditures relating to the
development of software for internal purposes are charged to expense until
technological feasibility is established in accordance with Statement of
Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use”. Thereafter, the remaining software production
costs up to the date placed into production are capitalized and included as
Property and Equipment. Amortization of the capitalized amounts commences on the
date placed into production, and is computed on a product-by-product basis using
the straight-line method over the remaining estimated economic life of the
product but not more than five years. Reductions, if any, in the carrying value
of capitalized software costs to net realizable value are expensed.
Marketable
securities. All
investments not included as cash and cash equivalents are accounted for under
Financial Accounting Standards Board Statement No. (“FAS”) 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Management determines the
appropriate classification of our marketable securities at the time of purchase
and reevaluates such determination at each balance sheet date. All marketable
securities at December 31, 2004 and 2003 were recorded in other assets on our
Consolidated Balance Sheet.
Securities
bought and held principally for the purpose of selling them in the near term are
classified as trading securities. Trading securities are reported at fair value,
which is based upon quoted market prices, with unrealized holding gains and
losses included in earnings. We held trading securities, consisting primarily of
mutual funds, of $17.7 million and $12.9 million at December 31, 2004 and 2003,
respectively. We maintain our trading securities to offset changes in certain
liabilities related to our deferred compensation plan discussed in Note 12. Net
gains recognized on the trading portfolio were $1.8 million, $2.1 million, and
$2.3 million in 2004, 2003 and 2002, respectively.
Goodwill. Goodwill
is evaluated for impairment annually or when events or circumstances occur
indicating that goodwill might be impaired. We perform our annual impairment
testing during the fourth quarter of each year. No impairment test performed to
date has indicated any impairment.
Other
intangible assets. Other
intangible assets include, but are not limited to, customer contracts,
non-compete agreements, deferred financing fees, trade names and certain advance
discounts paid to clients under contractual agreements. Other intangible assets,
excluding customer contracts, are recorded at cost. Customer contracts are
valued based on discounted cash flows over the expected life of the intangible
asset. Excluding trade names which have an indefinite life, other intangible
assets are amortized on a straight-line basis, which approximates the pattern of
benefit, over periods from two to 20 years (see Note 6). The amount
reported is net of accumulated amortization of $127.0 million, and $106.2
million at December 31, 2004 and 2003, respectively. Amortization expense for
customer contracts and non-compete agreements included in selling, general and
administrative expenses was $17.8 million, $13.7 million and $12.5 million for
the years ended December 31, 2004, 2003 and 2002, respectively. Amortization
expense for deferred financing fees included in interest expense was $1.3
million, $1.8 million and $2.2 million for the years ended December 31, 2004,
2003 and 2002, respectively. Amortization expense for advance discounts paid to
customers is recorded against revenue and was $8.3 million, $8.2 million and
$4.8 million for the year ended December 31, 2004, 2003 and 2002,
respectively.
Impairment
of long lived assets. We
evaluate whether events and circumstances have occurred that indicate the
remaining estimated useful life of long lived assets, including intangible
assets and the loan to Pharmacy Care Alliance (described in Note 2), may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. Impairment losses, if any, would be determined based on the present value
of the cash flows using discount rates that reflect the inherent risk of the
underlying business. No such impairment existed as of December 31, 2004 and
2003.
Self-insurance
reserves. We
maintain insurance coverage for claims that arise in the normal course of
business. Where insurance coverage is not available, or, in our judgment, is not
cost-effective, we maintain self-insurance reserves to reduce our exposure to
future legal costs, settlements and judgments. Self-insured losses are accrued
based upon estimates of the aggregate liability for the costs of uninsured
claims incurred using certain actuarial assumptions followed in the insurance
industry and our historical experience (see Note 10). It is not possible to
predict with certainty the outcome of these claims, and we can give no
assurances that any losses, in excess of our insurance and any self-insurance
reserves, will not be material.
Fair
value of financial instruments. The
carrying value of cash and cash equivalents, accounts receivable, claims and
rebates payable, and accounts payable approximated fair values due to the
short-term maturities of these instruments. The fair value, which approximates
the carrying value, of our bank credit facility was estimated using either
quoted market prices or the current rates offered to us for debt with similar
maturity. The fair value of the interest rate swaps (an obligation of $0.4
million and $2.5 million at December 31, 2004 and 2003, respectively) was based
on quoted market prices, which reflect the present values of the difference
between estimated future fixed rate payments and future variable rate receipts.
During the second quarter of 2004, we redeemed all of our outstanding Senior
Notes ($204.4 million) at a redemption price of 104.8125% (see Note 7). The fair
value of our Senior Notes at December 31, 2003, $220.8 million, was estimated
based on quoted market prices.
Revenue
recognition. Revenues
from our pharmacy benefit management (“PBM”) segment are earned by dispensing
prescriptions from our mail pharmacies, processing claims for prescriptions
filled by retail pharmacies in our networks, and by providing services to drug
manufacturers, including administration of discount programs (see also “—Rebate
Accounting”).
Revenues
from dispensing prescriptions from our mail pharmacies, which include the
co-payment received from members of the health plans we serve, are recorded when
prescriptions are shipped. At the time of shipment, our earnings process is
complete: the obligation of our customer to pay for the drugs is fixed, and, due
to the nature of the product, the member may not return the drugs nor receive a
refund.
Revenues
related to the sale of prescription drugs by retail pharmacies in our networks
consist of the amount the client has contracted to pay us (which excludes the
co-payment) for the dispensing of such drugs together with any associated
administrative fees. These revenues are recognized when the claim is processed.
When we independently have a contractual obligation to pay our network pharmacy
providers for benefits provided to our clients’ members, we act as a principal
in the arrangement and we include the total payments we have contracted to
receive from these clients as revenue, and payments we make to the network
pharmacy providers as cost of revenue in compliance with Emerging Issues Task
Force (“EITF”) Issue No. 99-19, “Reporting Gross Revenue as a Principal vs. Net
as an Agent.” When a prescription is presented by a member to a retail pharmacy
within our network, we are solely responsible for confirming member eligibility,
performing drug utilization review, reviewing for drug-to-drug interactions,
performing clinical intervention, (which may involve a call to the member’s
physician), communicating plan provisions to the pharmacy, directing payment to
the pharmacy and billing the client for the amount they are contractually
obligated to pay us for the prescription dispensed, as specified within our
client contracts. We also provide benefit design and formulary consultation
services to clients. We have separately negotiated contractual relationships
with our clients and with network pharmacies, and under our contracts with
pharmacies we assume the credit risk of our clients’ ability to pay for drugs
dispensed by these pharmacies to clients’ members. Our clients are not obligated
to pay the pharmacies as we are primarily obligated to pay retail pharmacies in
our network the contractually agreed upon amount for the prescription dispensed,
as specified within our provider contracts. In addition, under most of our
client contracts, we realize a positive or negative margin represented by the
difference between the negotiated ingredient costs we will receive from our
clients and the separately negotiated ingredient costs we will pay to our
network pharmacies. These factors indicate we are a principal as defined by EITF
99-19 and, as such, we record ingredient cost billed to clients in revenue and
the corresponding ingredient cost paid to network pharmacies in cost of
revenues.
If we
merely administer a client’s network pharmacy contracts, to which we are not a
party and under which we do not assume credit risk, we record only our
administrative fees as revenue. For these clients, we earn an administrative fee
for collecting payments from the client and remitting the corresponding amount
to the pharmacies in the client’s network. In these transactions we act as a
conduit for the client. Because we are not the principal in these transactions,
drug ingredient cost is not included in our revenues or in our cost of
revenues.
In retail
pharmacy transactions, amounts paid to pharmacies and amounts charged to clients
are always exclusive of the applicable co-payment. Under our pharmacy
agreements, the pharmacy is solely obligated to collect the co-payment from the
member based on the amount we advise them to collect. We have no information
regarding actual co-payments collected. As such, we do not include member
co-payments to retail pharmacies in our revenue or in our cost of revenue.
Retail pharmacy co-payments, which we instructed retail pharmacies to collect
from members, of $5.5 billion, $5.3 billion and $4.3 billion for the years
ended December 31, 2004, 2003, and 2002, respectively, are excluded from
revenues and cost of revenues.
We bill
our clients based upon the billing schedules established in client contracts. At
the end of a period, any unbilled revenues related to the sale of prescription
drugs that have been adjudicated with retail pharmacies are estimated based on
the amount we will pay to the pharmacies and historical gross margin. Those
amounts due from our clients are recorded as revenue as they are contractually
due to us for past transactions. Adjustments are made to these estimated
revenues to reflect actual billings at the time clients are billed;
historically, these adjustments have not been material.
Certain
implementation and other fees paid to clients upon the initiation of a
contractual agreement are considered an integral part of overall contract
pricing and are recorded as a reduction of revenue. Where they are refundable
upon early termination of the contract, these payments are capitalized and
amortized as a reduction of revenue on a straight-line basis over the life of
the contract.
Revenues
from our non-PBM segment, PBS, are derived from the distribution of
pharmaceuticals requiring special handling or packaging where we have been
selected by the pharmaceutical manufacturer as part of a limited distribution
network, the distribution of pharmaceuticals through patient assistance programs
where we receive a fee from the pharmaceutical manufacturer for administrative
and pharmacy services for the delivery of certain drugs free of charge to
doctors for their indigent patients, sample fulfillment and sample
accountability services. Revenues earned by PBS include administrative fees
received from pharmaceutical manufacturers for dispensing or distributing
consigned pharmaceuticals requiring special handling or packaging and
administrative fees for verification of practitioner licensure and distribution
of consigned drug samples to doctors based on orders received from
pharmaceutical sales representatives. We also administer sample card programs
for certain manufacturers and include the ingredient costs of those drug samples
dispensed from retail pharmacies in PBS revenues, and the associated costs for
these sample card programs in cost of revenues. Because manufacturers are
independently obligated to pay us and we have an independent contractual
obligation to pay our network pharmacy providers for free samples dispensed to
patients under sample card programs, we include the total payments from these
manufacturers (including ingredient costs) as revenue, and payments to the
network pharmacy provider as cost of revenue. These transactions require us to
assume credit risk.
Our PMG
subsidiary records an administrative fee for verifying practitioner licensure
and then distributing consigned drug samples to doctors based on orders received
from pharmaceutical sales representatives.
Rebate
accounting. We
administer two rebate programs through which we receive rebates and
administrative fees from pharmaceutical manufacturers. Rebates earned for the
administration of these programs, performed in conjunction with claim processing
and mail pharmacy services provided to clients, are recorded as a reduction of
cost of revenue and the portion of the rebate payable to customers is treated as
a reduction of revenue. When we earn rebates and administrative fees in
conjunction with formulary management services, but do not process the
underlying claims, we record rebates received from manufacturers, net of the
portion payable to customers, in revenue. We record rebates and administrative
fees receivable from the manufacturer and payable to clients when the
prescriptions covered under contractual agreements with the manufacturers are
dispensed; these amounts are not dependent upon future pharmaceutical sales.
With
respect to rebates based on actual market share performance, we estimate rebates
and the associated receivable from pharmaceutical manufacturers quarterly based
on our estimate of the number of rebatable prescriptions and the rebate per
prescription. The portion of rebates payable to clients is estimated quarterly
based on historical sharing percentages and our estimate of rebates receivable
from pharmaceutical manufacturers. These estimates are adjusted to actual when
amounts are received from manufacturers and the portion payable to clients is
paid.
With
respect to rebates that are not based on market share performance, no estimation
is required because the manufacturer billing amounts and the client portion are
determinable when the drug is dispensed. We pay all or a contractually agreed
upon portion of such rebates to our clients.
Cost
of revenues. Cost of
revenues includes product costs, network pharmacy claims payments and other
direct costs associated with dispensing prescriptions, including shipping and
handling (see also “—Revenue Recognition” and “—Rebate
Accounting”).
Income
taxes. Deferred
tax assets and liabilities are recognized based on temporary differences between
financial statement basis and tax basis of assets and liabilities using
presently enacted tax rates.
Earnings
per share. Basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed in
the same manner as basic earnings per share but adds the number of additional
common shares that would have been outstanding for the period if the potential
dilutive common shares had been issued. The following is the reconciliation
between the number of weighted average shares used in the basic and diluted
earnings per share calculation for all periods (amounts in
thousands):
| |
2004 |
2003 |
2002 |
|
Weighted
average number of common shares |
|
|
|
|
|
|
|
outstanding
during the period - Basic EPS |
|
76,376 |
|
|
77,830 |
|
|
77,866 |
|
|
Outstanding
stock options |
|
874 |
|
|
1,008 |
|
|
1,536 |
|
|
Executive
deferred compensation plan |
|
48 |
|
|
56 |
|
|
38 |
|
|
Restricted
stock awards |
|
218 |
|
|
34 |
|
|
227 |
|
|
Weighted
average number of common shares |
|
|
|
|
|
|
|
|
|
|
outstanding
during the period - Diluted EPS |
|
77,516 |
|
|
78,928 |
|
|
79,667 |
|
The above
shares are all calculated under the “treasury stock” method in accordance with
FAS 128, “Earnings Per Share.”
Foreign
currency translation. The
financial statements of ESI Canada, our Canadian operations, are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period for revenues,
expenses, gains and losses. The functional currency for ESI Canada is the local
currency and cumulative translation adjustments (credit balances of $8.5 million
and $5.2 million at December 31, 2004 and 2003, respectively) are recorded
within the other comprehensive income component of stockholders’ equity.
Employee
stock-based compensation. We
account for employee stock options in accordance with Accounting Principles
Board No. (“APB”) 25, “Accounting for Stock Issued to Employees.” Under APB 25,
we apply the intrinsic value method of accounting and, therefore, have not
recognized compensation expense for options granted, because we grant options at
a price equal to market value at the time of grant. During 1996, FAS 123,
“Accounting for Stock-Based Compensation” became effective for us. FAS 123
prescribes the recognition of compensation expense based on the fair value of
options determined on the grant date. However, FAS 123 grants an exception that
allows companies currently applying APB 25 to continue using that method. We
have, therefore, elected to continue applying the intrinsic value method under
APB 25. In December 2004, the Financial Accounting Standards Board (“FASB”)
revised FAS 123 (“FAS 123R”), “Share-Based Payment”, which replaces FAS 123,
“Accounting for Stock-Based Compensation”, and supersedes APB 25. FAS 123R will
require compensation cost related to share-based payment transactions to be
recognized in the financial statements. We will adopt FAS 123R using the
modified prospective method beginning July 1, 2005 (see “New Accounting
Guidance”).
The
following table shows stock-based compensation expense included in net income
and pro forma stock-based compensation expense, net income and earnings per
share had we elected to record compensation expense based on the fair value of
options at the grant date for the years ended December 31, 2004, 2003 and 2002
(see also Note 12):
|
(in
thousands, except per share data) |
2004 |
2003 |
2002 |
|
Stock-based
compensation, net of tax |
|
|
|
|
|
|
|
As
reported |
$ |
6,520 |
|
$ |
4,437 |
|
$ |
5,102 |
|
|
Pro
forma |
|
15,134 |
|
|
16,294 |
|
|
16,479 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
As
reported |
$ |
278,207 |
|
$ |
249,600 |
|
$ |
202,836 |
|
|
Pro
forma |
|
269,593 |
|
|
237,743 |
|
|
191,458 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share |
|
|
|
|
|
|
|
|
|
|
As
reported |
$ |
3.64 |
|
$ |
3.21 |
|
$ |
2.60 |
|
|
Pro
forma |
|
3.53 |
|
|
3.05 |
|
|
2.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share |
|
|
|
|
|
|
|
|
|
|
As
reported |
$ |
3.59 |
|
$ |
3.16 |
|
$ |
2.55 |
|
|
Pro
forma |
|
3.46 |
|
|
3.00 |
|
|
2.39 |
|
Comprehensive
income. In
addition to net income, our components of comprehensive income (net of taxes)
are foreign currency translation adjustments and realized and unrealized losses
on derivative financial instruments designated as cash flow hedges. We have
displayed comprehensive income within the Statement of Changes in Stockholders’
Equity.
Segment
reporting. The
segment information is derived from the management approach which designates the
internal organization that is used by our chief operating decision-maker for
making operating decisions and assessing performance as the source of our
reportable segments (see Note 13).
New
accounting guidance. In
December 2004, the Financial Accounting Standards Board (“FASB”) revised FAS
123. FAS 123R will require compensation cost related to share-based payment
transactions to be recognized in the financial statements. As permitted by FAS
123, we currently follow the guidance of APB 25, which allows the use of the
intrinsic value method of accounting to value share-based payment transactions
with employees. FAS 123R requires measurement of the cost of share-based payment
transactions to employees at the fair value of the award on the grant date and
recognition of expense over the requisite service or vesting period. FAS 123R
allows implementation using a modified version of prospective application, under
which compensation expense for the unvested portion of previously granted awards
and all new awards will be recognized on or after the date of adoption. FAS 123R
also allows companies to implement by restating previously issued financial
statements, basing the amounts on the expense previously calculated and reported
in their pro forma footnote disclosures required under FAS 123. We will adopt
FAS 123R using the modified prospective method beginning July 1, 2005. The
impact of adopting FAS 123R on our consolidated results of operations is not
expected to differ materially from the pro forma disclosures currently required
by FAS 123 (see "Employee stock-based compensation").
In
January 2003, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest
Entities.” FIN 46 requires a variable interest entity be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity’s activities or entitled to receive a majority of the
entity’s residual returns or both. The consolidation provisions of FIN 46 were
originally effective for financial periods ending after July 15, 2003. In
October 2003, the FASB issued Staff Position FIN 46-6, “Effective Date of FIN
46,” which delayed the implementation date to financial periods ending after
December 31, 2003. In December 2003, the FASB published a revision to FIN 46
(“FIN 46R”) to clarify some of the provisions of FIN 46, and to exempt certain
entities from its requirements. We do not have any variable interest entities
requiring consolidation under FIN 46 and FIN 46R. Therefore, adoption of these
standards did not have a material impact on our consolidated financial position,
consolidated results of operations or our consolidated cash flows.
In
January 2003, we adopted FAS 143, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs and requires the accrual of the
fair value (discounted to a net present value) of any legal or contractual
obligations associated with the retirement of tangible, long-lived assets in the
period in which the liabilities are incurred and capitalization of the fair
value as part of the book value of the related long-lived asset. In subsequent
periods, we are required to adjust asset retirement obligations based on changes
in estimated fair value, and record the corresponding increases in asset book
values. The liabilities are accreted over the life of the obligation and the
related assets are depreciated over their useful lives. As required by FAS 143,
we recorded an asset retirement obligation ($3.1 million at January 1, 2003)
primarily related to equipment and leasehold improvements installed in leased,
mail-order facilities in which we have a contractual obligation to remove the
improvements and equipment upon surrender of the property to the landlord. For
certain of our leased facilities, we are required to remove equipment and
convert the facilities back to office space. We also recorded a net increase in
fixed assets (net of accumulated depreciation) of $1.4 million and a $1.7
million ($1.0 million, net of tax) loss from the cumulative effect of change in
accounting principle. The $1.4 million asset is being depreciated, on a
straight-line basis, over the remaining term of the leases, which range from
seven months to ten years.
In April
2002, FAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections,” was issued. In rescinding FAS
4, “Reporting Gains and Losses from Extinguishment of Debt,” and FAS 64
“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” FAS 145
eliminates the required classification of gains and losses from extinguishment
of debt as extraordinary. We adopted this provision of FAS 145 in January 2003.
During the second quarter of 2004, we redeemed all of our outstanding Senior
Notes ($204.4 million) at a redemption price of 104.8125% by using internally
generated cash and a portion of our $400 million revolving credit facility. As a
result of the redemption, we recorded in interest expense charges of
approximately $12.3 million ($7.6 million after-tax) representing a
redemption premium of $9.8 million and the write-off of unamortized deferred
financing fees. During 2003, we repurchased $35.4 million of our outstanding
Senior Notes and prepaid $75.0 million of our Term B notes. As a result, we
wrote-off deferred financing fees of $1.3 million and incurred a charge of $3.9
million representing a premium on the purchase of the Senior Notes in 2003. The
write-off of deferred financing fees and the premium on the repurchase of the
Senior Notes have been recorded as increases in interest expense. Losses on debt
prepayments for periods prior to January 2003 have been reclassified to conform
to the presentation required by FAS 145. Implementation of FAS 145 did not
have an impact on our consolidated financial position, consolidated results of
operations or our consolidated cash flows.
2. Changes in
business
Acquisitions.
On
January 30, 2004, we acquired the outstanding capital stock of CuraScript
Pharmacy, Inc. and CuraScript PBM Services, Inc. (collectively, “CuraScript”),
for approximately $333.4 million which includes a purchase price adjustment
for closing working capital and transaction costs. CuraScript is one of the
nation’s largest specialty pharmacy services companies and enhances our ability
to provide comprehensive clinical services to our clients and their members.
CuraScript operates seven specialty pharmacies throughout the United States and
serves over 175 managed care organizations, 30 Medicaid programs and the
Medicare program. The transaction was accounted for under the provisions of FAS
141, “Business Combinations.” The purchase price has been preliminarily
allocated based upon the estimated fair value of net assets acquired at the date
of the acquisition. A portion of the excess of purchase price over tangible net
assets acquired has been preliminarily allocated to intangible assets,
consisting of customer contracts in the amount of $28.7 million and
non-competition agreements in the amount of $2.7 million, which are being
amortized using the straight-line method over estimated useful lives of ten
years and three years, respectively. These assets are included in other
intangible assets. In addition, the excess of purchase price over tangible net
assets and identified intangible assets acquired has been preliminarily
allocated to goodwill in the amount of $286.0 million and trade names in the
amount of $1.3 million, which are not being amortized. The $333.4 million
purchase price was financed with $210.0 million of cash on hand and the
remainder by adding $125.0 million in Term C loans through an amendment of our
Bank Credit Facility. Our PBM operating results include those of CuraScript from
January 30, 2004, the date of acquisition.
On
December 19, 2002, we entered into an agreement with Managed Pharmacy Benefits,
Inc. ("MPB") under which we acquired certain assets from MPB for approximately
$11.1 million in cash plus the assumption of certain liabilities. MPB is a St.
Louis-based pharmacy benefit manager and subsidiary of Medicine Shoppe
International, Inc., a franchisor of apothecary-style retail pharmacies, owned
by Cardinal Health, Inc. The transaction was accounted for under the provisions
of FAS 141. The purchase price has been allocated based upon the estimated fair
value of net assets acquired at the date of the acquisition. A portion of the
excess of purchase price over tangible net assets acquired has been allocated to
intangible assets other than goodwill in the amount of $2.5 million. This asset
is included in other intangible assets on the balance sheet and is being
amortized using the straight-line method over the estimated useful life of 20
years. In addition, the excess of the purchase price over tangible net assets
and identified intangible assets acquired has been allocated to goodwill in the
amount of $15.0 million, which is not being amortized. The transaction was
structured as a purchase of assets, making amortization expense of intangible
assets, including goodwill, tax deductible.
On April
12, 2002, we completed the acquisition of National Prescription Administrators
and certain affiliated entities (collectively “NPA”), a privately held
full-service PBM, for a purchase price of approximately $466 million, which
includes the issuance of 552,000 shares of our common stock (fair value of $26.4
million upon the transaction announcement date), transaction costs and a working
capital purchase price adjustment of $46.8 million received during the third and
fourth quarters of 2002. The transaction was accounted for under the provisions
of FAS 141. The purchase price has been allocated based upon the estimated fair
value of net assets acquired at the date of the acquisition. A portion of the
excess of the purchase price over tangible net assets acquired has been
allocated to intangible assets consisting of customer contracts in the amount of
$76.3 million and non-competition agreements in the amount of $2.9 million,
which are being amortized using the straight-line method over the estimated
useful lives of 20 years and five years, respectively. These assets are
classified as other intangible assets. In addition, the excess of the purchase
price over tangible net assets and identified intangible assets acquired has
been allocated to goodwill in the amount of $438.5 million which is not being
amortized. During 2003 we finalized the allocation of the purchase price to
tangible and intangible net assets resulting in a $39.7 million increase in
goodwill. The increase in goodwill reflects adjustments to true-up opening
balance sheet receivables and liabilities, and to adjust fixed assets to fair
market value. The acquisition of NPA was funded with the proceeds of a new $325
million Term B loan facility, $78 million of cash on hand, the issuance of
552,000 shares of our common stock (fair value of $26.4 million upon the
transaction announcement date), and $25 million in borrowings under our
revolving credit facility. We have filed an Internal Revenue Code Section
338(h)(10) election, making amortization expense of intangible assets, including
goodwill, tax deductible.
On
February 25, 2002, we purchased substantially all of the assets utilized in the
operation of Phoenix Marketing Group (Holdings), Inc. (“Phoenix”), a
wholly-owned subsidiary of Access Worldwide Communications, Inc., for $34.1
million in cash, including acquisition-related costs, plus the assumption of
certain liabilities. The acquisition has been accounted for under the provisions
of FAS 141. The purchase price has been allocated based upon the estimated fair
value of net assets acquired at the date of the acquisition. A portion of the
excess of purchase price over tangible net assets acquired has been allocated to
intangible assets, consisting of customer contracts in the amount of $4.0
million and non-competition agreements in the amount of $0.2 million, which are
being amortized using the straight-line method over the estimated useful lives
of eight years and four years, respectively, and a trade name in the amount of
$1.7 million, which is not being amortized. These assets are included in other
intangible assets. In addition, the excess of purchase price over tangible net
assets and identified intangible assets acquired was allocated to goodwill in
the amount of $22.1 million, which is not being amortized. The transaction was
structured as a purchase of assets, making amortization expense of intangible
assets, including goodwill, tax deductible.
The
following unaudited pro forma information presents a summary of our combined
results of operations and those of NPA and Phoenix as if the acquisitions had
occurred at the beginning of the periods presented, along with certain pro forma
adjustments to give effect to amortization of other intangible assets, interest
expense on acquisition debt and other adjustments. The following pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transactions been effected on the assumed date,
nor is it necessarily an indication of trends in future results (in thousands,
except per share data):
| |
Year
Ended
December
31,
2002 |
|
|
Total
revenues |
$ |
12,915,670 |
|
|
Net
income |
|
204,937 |
|
|
Basic
earnings per share |
|
2.63 |
|
|
Diluted
earnings per share |
|
2.57 |
|
Medicare
discount card program. In
January 2004, we entered into an agreement to provide PBM services for the
Medicare discount program of Pharmacy Care Alliance, Inc. (“PCA”), a nonstock,
not-for-profit entity jointly controlled by the National Association of Chain
Drugstores (“NACDS”) and us. Our PBM services include the negotiation of
discounts from individual retailers and pharmaceutical manufacturers, the
enrollment of cardholders and the processing of prescription claims.
During
2004, we entered into a lending agreement with PCA, whereby we committed to lend
up to $17.0 million to PCA in the form of a revolving line of credit
available through March 31, 2005. Requests for borrowings on the revolving line
of credit require the unanimous consent of PCA’s board of directors, which
consists of representatives from NACDS and from our management team, or its
designated representatives. PCA will utilize the revolving line of credit to
fund its operating expenditures. NACDS has agreed to guarantee $2.0 million on
the revolving line of credit. As of December 31, 2004, we have loaned PCA
$14.6 million.
In regard to the revolving line of credit extended to PCA, the collectibility of
any unsecured borrowings will be a function of PCA’s success in enrolling new
members for its Medicare discount program. Through December 31, 2004,
enrollment has fallen short of expectations, with approximately 213,000 members
enrolled to date. In addition, utilization has been lower than expected. As a
result, in December 2004 we recorded a $12.0 million reserve against this note
receivable from PCA, resulting in a net receivable of $2.6 million, which is
included in other long-term assets on our Consolidated Balance
Sheet.
3. Joint venture
We are
one of the founders of RxHub, an electronic exchange enabling physicians who use
electronic prescribing technology to link to pharmacies, PBM companies and
health plans. The company operates as conduit of information among all parties
engaging in electronic prescribing. We own one-third of the equity of RxHub (as
do each of the other two founders) and have committed to invest up to $20.0
million over the first five years of the joint venture with approximately $17.4
million invested through December 31, 2004. We have recorded our investment in
RxHub under the equity method of accounting, which requires our percentage
interest in RxHub’s results to be recorded in our Consolidated Statement of
Operations. Our percentage of RxHub’s loss for 2004, 2003 and 2002 is $4.5
million ($2.8 million net of tax), $5.8 million ($3.6 million net of tax), and
$4.5 million ($2.8 million net of tax), respectively, and has been recorded in
other income (expense), net, in our Consolidated Statement of Operations. The
cumulative, undistributed losses of RxHub through December 31, 2004 are
$16.6 million. Our investment in RxHub (approximately $0.8 million and $2.0
million at December 31, 2004 and 2003, respectively) is recorded in other assets
on our Consolidated Balance Sheet.
4. Contractual agreements
In March
2002, we renegotiated certain terms of our relationship with Manufacturer's Life
Insurance Company “Manulife” and entered into an amended agreement which, among
other things, extended the term of the agreement through March 2009. During
2001, Manulife earned 101,000 shares of our common stock to be issued in 2002.
In lieu of the issuance of the 101,000 shares, we made a cash payment to
Manulife. Therefore, the advance discount recorded in other intangible assets as
of December 31, 2001 was recorded against revenue during the first quarter of
2002. In addition, the amendment eliminated the ability for Manulife to receive
shares of our common stock or the warrants contemplated in the original
agreement.
5. Property and equipment
Property
and equipment, at cost, consists of the following:
| |
|
December
31, |
|
| |
(in thousands) |
2004 |
2003 |
| |
Land |
$ |
2,461 |
|
$ |
800 |
|
| |
Buildings |
|
3,259 |
|
|
1,900 |
|
| |
Furniture |
|
18,622 |
|
|
17,609 |
|
| |
Equipment |
|
134,418 |
|
|
118,279 |
|
| |
Computer
software |
|
128,016 |
|
|
107,328 |
|
| |
Leasehold
improvements |
|
35,685 |
|
|
26,347 |
|
| |
|
|
322,461 |
|
|
272,263 |
|
| |
Less
accumulated depreciation |
|
141,295 |
|
|
94,951 |
|
|
|
|
$ |
181,166 |
|
$ |
177,312 |
|
Depreciation
expense for 2004, 2003 and 2002 was $52.2 million, $40.3 million and $69.5
million, respectively. Internally developed software, net of accumulated
depreciation, was $47.3 million and $49.8 million at December 31, 2004 and 2003,
respectively.
In July
2004, we entered into a capital lease with the Camden County Joint Development
Authority in association with the development of our new Patient Care Contact
Center in St. Marys, Georgia. At December 31, 2004, our lease obligation is
$13.5 million. In accordance with FASB Interpretation Number 39, “Offsetting of
Amounts Related to Certain Contracts,” our lease obligation has been offset
against $13.5 million of industrial revenue bonds issued to us by the Camden
County Joint Development Authority.
Under
certain of our operating leases for facilities in which we operate mail order
pharmacies, we are required to remove improvements and equipment upon surrender
of the property to the landlord and convert the facilities back to office space.
Our asset retirement obligation was $3.6 million and $3.3 million at December
31, 2004 and 2003, respectively. We recorded accretion expense of $0.3 million
and $0.2 million during 2004 and 2003, respectively.
During
2003, we sold our East Hanover, New Jersey property and building for $6.5
million. The building included a mail order pharmacy and office space. A portion
of the office space was then leased back from the purchaser for a five year term
with a renewal option for an additional five years. The resulting lease is being
accounted for as an operating lease. The agreement included a provision for
additional proceeds upon the receipt of a no further action letter from the New
Jersey Department of Environmental Protection. The amount of additional proceeds
(which could be up to $1.25 million) is dependent upon the degree of remediation
efforts required to receive such letter. Remediation efforts are underway, and
any additional proceeds will be recorded as a deferred gain and amortized over
the five year lease term.
6. Goodwill
and Other Intangibles
The
following is a summary of our goodwill and other intangible assets (amounts in
thousands).
| |
December
31, 2004 |
|
|
December
31, 2003 |
|
| |
Gross
Carrying Amount |
|
Accumulated
Amortization |
|
|
Gross
Carrying Amount |
|
Accumulated
Amortization |
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
PBM
(1) |
$ |
1,793,830 |
|
$ |
107,031 |
|
|
$ |
1,506,242 |
|
$ |
106,885 |
|
|
Non-PBM |
|
22,136 |
|
|
- |
|
|
|
22,136 |
|
|
- |
|
| |
$ |
1,815,966 |
|
$ |
107,031 |
|
|
$ |
1,528,378 |
|
$ |
106,885 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PBM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts |
$ |
294,063 |
|
$ |
85,067 |
|
|
$ |
264,831 |
|
$ |
70,180 |
|
|
Other
(2) |
|
72,346 |
|
|
40,408 |
|
|
|
67,592 |
|
|
35,064 |
|
| |
|
366,409 |
|
|
125,475 |
|
|
|
332,423 |
|
|
105,244 |
|
|
Non-PBM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts |
|
4,000 |
|
|
1,416 |
|
|
|
4,000 |
|
|
917 |
|
|
Other |
|
1,880 |
|
|
128 |
|
|
|
1,880 |
|
|
83 |
|
| |
|
5,880 |
|
|
1,544 |
|
|
|
5,880 |
|
|
1,000 |
|
|
Total
other intangible assets |
$ |
372,289 |
|
$ |
125,019 |
|
|
$ |
338,303 |
|
$ |
106,244 |
|
(1) As a
result of our acquisition of the capital stock of CuraScript, we preliminarily
recorded PBM goodwill, customer contracts, trade names, and other intangible
assets of $286.0 million, $28.7 million, $1.3 million, and $2.7 million,
respectively (See Note 2). Changes in goodwill and accumulated amortization from
December 31, 2003 to December 31, 2004 are also a result of changes in foreign
currency exchange rates.
(2) Write-offs
of deferred financing fees due to the redemption of our Senior Notes and the
refinancing of our bank credit facility (see Note 7) also resulted in changes in
other intangible assets from December 31, 2003 to December 31,
2004.
The aggregate
amount of amortization expense of other intangible assets was $33.7 million,
$23.7 million and $15.6 million for the twelve months ended December 31, 2004,
2003 and 2002, respectively. The future aggregate amount of amortization expense
of other intangible assets is expected to be approximately $28.8 million for
2005, $24.1 million for 2006, $20.1 million for 2007, $17.2 million for 2008 and
$15.8 million for 2009. The weighted average amortization period of intangible
assets subject to amortization is 17 years in total, and by major intangible
class is 8 to 20 years for customer contracts and six years for other intangible
assets.
7. Financing
Long-term debt consists
of:
| |
December 31, |
|
(in
thousands) |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Term
A loans due February 13, 2009 with an average interest rate of 3.46% at
December 31, 2004 |
$ |
185,000 |
|
$ |
- |
|
|
Term
B loans due February 13, 2010 with an average interest rate of 3.70% at
December 31, 2004 and a deferred interest rate swap gain of $50 at
December 31, 2004 |
|
198,550 |
|
|
- |
|
|
Revolving
credit facility due February 13, 2009 with an average interest rate of
3.67% at December 31, 2004 |
|
50,000 |
|
|
- |
|
|
Promissory
note payable to Camden County Joint Development Authority due July 1,
2014, with a zero interest rate at December 31, 2004 |
|
563 |
|
|
- |
|
|
Term
B loans due March 31, 2008 with an interest rate of 3.13% at December 31,
2003 and a deferred interest rate swap gain of $249 at December 31,
2003 |
|
- |
|
|
250,249 |
|
|
9.625%
Senior Notes due June 15, 2009, net of an unamortized discount of $0 and
$639, and an unamortized interest rate lock of $0 and $953 at December 31,
2004 and 2003, respectively |
|
- |
|
|
204,769 |
|
|
Total
debt |
|
434,113 |
|
|
455,018 |
|
| |
|
|
|
|
|
|
|
Less
current maturities |
|
22,056 |
|
|
- |
|
|
Long-term
debt |
$ |
412,057 |
|
$ |
455,018 |
|
At
December 31, 2003, our credit facility with a commercial bank syndicate
consisted of $250.0 million of Term B loans and a $150.0 million revolving
credit facility (of which no debt was outstanding at December 31, 2003). In
January 2004, we added a $125.0 million Term C Loan to partially fund the
acquisition of CuraScript, in early February 2004 we borrowed $50.0 million on
the revolving credit facility under our then existing credit agreement, and on
February 13, 2004, we refinanced our entire credit facility. We negotiated an
$800.0 million credit facility with a bank syndicate which includes $200.0
million of Term A loans, $200.0 million of Term B loans and a $400.0
million revolving credit facility. The proceeds from the $800.0 million credit
facility were used to prepay borrowings on the revolver and Term B loans
outstanding under our previous credit facility. During 2004, we made scheduled
payments on our Term A and Term B loans totaling $15.0 million and
$1.5 million, respectively. As of December 31, 2004, we had net borrowings
of $50.0 million under our revolving credit facility.
Our new
credit facility requires us to pay interest periodically on the London Interbank
Offered Rates (“LIBOR”) or base rate options, plus a margin. The margin on the
Term A loans and on amounts outstanding under the revolving credit facility is
dependent on our credit rating and our ratio of debt to earnings before
interest, taxes, depreciation and amortization (“EBITDA”). The Term B loan
interest is based on the LIBOR or alternative base rate options plus a margin of
1.5% or 0.25% per annum, respectively. To alleviate interest rate volatility, we
have an interest rate swap arrangement (see Note 8). Under our new credit
facility we are required to pay commitment fees on the unused portion of the
$400.0 million revolving credit facility ($350.0 million at December
31, 2004). The commitment fee will range from 0.2% to 0.5% depending on our
credit rating and our consolidated leverage ratio. The commitment fee is
currently 0.25% per annum.
At
December 31, 2004, the weighted average interest rate on the new facility was
3.59%. Our new credit facility contains covenants that limit the indebtedness we
may incur, the common shares we may repurchase and dividends we may pay. The
covenants also include a minimum interest coverage ratio and a maximum leverage
ratio. At December 31, 2004, we are in compliance with all covenants associated
with our credit facility.
At
December 31, 2003, our credit facility with a commercial bank syndicate
consisted of $250 million of Term B loans and a $150 million revolving credit
facility (of which nothing was outstanding at December 31, 2003). The Term B
loans originated from a 2002 amendment to our credit facility to add the $325
million loans to fund the acquisition of NPA. During 2003, we utilized
internally generated cash to prepay $75 million of our Term B loans, resulting
in a charge to interest expense of $0.7 million ($0.4 million pre-tax).
During
2002, we utilized internally generated cash to prepay $105 million of our Term A
loans and as a result recorded charges of $1.7 million ($1.0 million net of tax)
from the write-off of deferred financing fees. These write-offs are included in
interest expense as a result of our adoption of FAS 145 during
2003.
In June
1999, we issued $250 million of 9.625% Senior Notes due 2009, of which $10.1
million and $35.4 million were repurchased on the open market during 2000 and
2003, respectively. Upon issuance of the Senior Notes, we received $2.1 million,
which was being amortized against interest expense over the term of the Senior
Notes. Interest expense was reduced by $0.2 million during 2003 and 2002. In
2003, we recorded in interest expense a premium of $3.9 million and a write-off
of deferred financing fees of $0.6 million as a result of our Senior Note
repurchase.
During
2004, we redeemed all of our outstanding Senior Notes ($204.4 million) at a
redemption price of 104.8125% by using internally generated cash and a portion
of our $400 million revolving credit facility. As a result of the redemption, we
recorded in interest expense charges of approximately $12.3 million ($7.6
million after-tax) representing a redemption premium of $9.8 million and the
write-off of unamortized deferred financing fees.
The
following represents the schedule of current maturities for our long-term debt
as of December 31, 2004, excluding the deferred gain ($50,000 at December 31,
2004) from the restructuring of an interest rate swap agreement in 2000 (amounts
in thousands):
|
Year
Ended December 31, |
|
|
|
2005 |
|
22,056 |
|
|
2006 |
|
29,556 |
|
|
2007 |
|
39,556 |
|
|
2008 |
|
79,556 |
|
|
2009 |
|
215,556 |
|
|
Thereafter |
|
47,783 |
|
| |
$ |
434,063 |
|
8. Derivative financial
instruments
We use an
interest rate swap agreement to manage our interest rate risk on future variable
interest payments. At December 31, 2004, our swap agreement fixes the variable
interest rate payments on approximately $20.0 million of debt under our
credit facility. Under our swap agreement, we agree to receive a variable rate
of interest on the notional principal amount of approximately $20.0 million
based upon a three month LIBOR rate in exchange for payment of a fixed rate of
6.25% per annum. The swap will mature in April 2005.
Our present interest rate swap agreement is a cash flow hedge which requires us
to pay fixed-rates of interest, and which hedge against changes in the amount of
future cash flows associated with variable interest obligations. Accordingly,
the fair value of our swap agreement is $0.4 million and $2.5 million at
December 31, 2004 and 2003, respectively. The balance as of December 31, 2004 is
reported on the balance sheet in current liabilities; and the balance as of
December 31, 2003 is reported on the balance sheet in other liabilities. The
related deferred loss on our swap agreements, $0.3 million and $1.5 million, net
of taxes, at December 31, 2004 and 2003, respectively, is deferred in
stockholders’ equity as a component of other comprehensive income. This deferred
loss is then recognized as an adjustment to interest expense over the same
period in which the related interest payments being hedged are recorded in
income. The loss associated with the ineffective portion of this agreement is
immediately recognized as an expense. For the years ended December 31, 2004 and
2003, the losses on the ineffective portion of our swap agreement were not
material to our Consolidated Financial Statements.
9. Income
taxes
The income tax
provision consists of the following:
| |
Year
Ended December 31, |
|
|
(in
thousands) |
2004 |
2003 |
2002 |
|
Current
provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
137,782 |
|
$ |
104,478 |
|
$ |
85,561 |
|
|
State |
|
14,193 |
|
|
14,324 |
|
|
11,136 |
|
|
Foreign |
|
1,312 |
|
|
1,434 |
|
|
(1,413 |
) |
|
Total
current provision |
|
153,287 |
|
|
120,236 |
|
|
95,284 |
|
|
Deferred
provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
13,694 |
|
|
31,349 |
|
|
27,443 |
|
|
State |
|
5,734 |
|
|
3,211 |
|
|
2,533 |
|
|
Foreign |
|
(279 |
) |
|
(122 |
) |
|
(93 |
) |
|
Total
deferred provision |
|
19,149 |
|
|
34,438 |
|
|
29,883 |
|
|
Total
current and deferred provision |
$ |
172,436 |
|
$ |
154,674 |
|
$ |
125,167 |
|
Income
taxes included in the Consolidated Statement of Operations are:
| |
Year
Ended December 31, |
|
|
(in
thousands) |
2004 |
2003 |
2002 |
|
Continuing
operations |
$ |
172,436 |
|
$ |
154,674 |
|
$ |
125,167 |
|
|
Cumulative
effect of accounting change |
|
- |
|
|
(635 |
) |
|
- |
|
| |
$ |
172,436 |
|
$ |
154,039 |
|
$ |
125,167 |
|
A
reconciliation of the statutory federal income tax rate and the effective tax
rate follows (the effect of foreign taxes on the effective tax rate for 2004,
2003 and 2002 is immaterial):
| |
Year
Ended December 31, |
| |
2004 |
2003 |
2002 |
|
Statutory
federal income tax rate |
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
|
State
taxes, net of federal benefit |
|
3.4 |
|
|
2.8 |
|
|
3.2 |
|
|
Non-deductible
amortization of |
|
|
|
|
|
|
|
|
|
|
customer
contracts |
|
0.2 |
|
|
0.2 |
|
|
0.3 |
|
|
Other,
net |
|
(0.3 |
) |
|
0.2 |
|
|
(0.3 |
) |
|
Effective
tax rate |
|
38.3 |
% |
|
38.2 |
% |
|
38.2 |
% |
The
deferred tax assets and deferred tax liabilities recorded in our
Consolidated Balance Sheet are as follows:
| |
December
31, |
|
(in
thousands) |
2004 |
2003 |
|
Deferred
tax assets: |
|
|
|
|
|
Allowance
for doubtful accounts |
$ |
13,337 |
|
$ |
8,226 |
|
|
Non-compete
agreements |
|
1,818 |
|
|
2,122 |
|
|
Deferred
compensation |
|
7,633 |
|
|
5,674 |
|
|
Restricted
stock |
|
7,046 |
|
|
4,687 |
|
|
Deferred
loss on interest rate swap |
|
154 |
|
|
952 |
|
|
Accrued
expenses |
|
10,426 |
|
|
- |
|
|
State
income taxes |
|
1,558 |
|
|
- |
|
|
Other |
|
2,011 |
|
|
2,292 |
|
|
Gross
deferred tax assets |
|
43,983 |
|
|
23,953 |
|
|
Deferred
tax liabilities: |
|
|
|
|
|
|
|
Depreciation
and property differences |
|
(30,276 |
) |
|
(28,606 |
) |
|
Goodwill
and customer contract amortization |
|
(132,480 |
) |
|
(84,734 |
) |
|
Accrued
expenses |
|
- |
|
|
(5,208 |
) |
|
Prepaids |
|
(3,002 |
) |
|
- |
|
|
Other |
|
(801 |
) |
|
(2,110 |
) |
|
Gross
deferred tax liabilities |
|
(166,559 |
) |
|
(120,658 |
) |
| |
|
|
|
|
|
|
|
Net
deferred tax liabilities |
$ |
(122,576 |
) |
|
(96,705 |
) |
At
December 31, 2004 and 2003, the net current deferred tax asset is $33.1 million
and $15.3 million, respectively, and the net long-term deferred tax liability,
included in other liabilities is $155.7 million and $112.1 million,
respectively.
10. Commitments
and contingencies
We have
entered into noncancellable agreements to lease certain office and distribution
facilities with remaining terms from one to ten years. The majority of our lease
agreements include renewal options which would extend the agreements from one to
five years. We have entered into noncancellable agreements to sublet two
facilities with remaining terms of two and three years. Rental expense under the
office and distribution facilities leases in 2004, 2003 and 2002 was $22.1
million, $18.3 million and $16.3 million, respectively. The future minimum lease
payments due under noncancellable operating leases (in thousands):
| |
Year
Ended December 31, |
|
Minimum
lease payments |
| |
2005 |
|
$ |
22,845 |
|
| |
2006 |
|
|
20,229 |
|
| |
2007 |
|
|
18,800 |
|
| |
2008 |
|
|
14,666 |
|
| |
2009 |
|
|
5,497 |
|
| |
Thereafter |
|
|
25,079 |
|
| |
|
$ |
107,116 |
|
In July
2004, we entered into a capital lease with the Camden County Joint Development
Authority in association with the development of our new Patient Care Contact
Center in St. Marys, Georgia, as discussed in Note 5, “Property and equipment”.
For the
year ended December 31, 2004, approximately 81.2% of our pharmaceutical
purchases were through one wholesaler. We believe other alternative sources are
readily available. Our top five clients represented 22.8%, 17.8%, and 19.6% of
revenues during 2004, 2003 and 2002 respectively. None of our clients accounted
for 10% or more of our consolidated revenues in fiscal years 2004, 2003 or 2002.
We believe no other concentration risks exist at December 31, 2004.
We accrue
self-insurance reserves based upon estimates of the aggregate liability of claim
costs in excess of our insurance coverage. Reserves are estimated using certain
actuarial assumptions followed in the insurance industry and our historical
experience (see Note 1, “Self-insurance reserves”) . The majority of these
claims are legal claims and our liability esimate is primarily related to the
cost to defend these claims. We do not accrue for settlements, judgments,
monetary fines or penalties until such amounts are probable and estimable, in
compliance with FAS 5, “Accounting for Contingencies.” Under FAS 5, if the range
of possible loss is broad, the liability accrual should be based on the lower
end of the range. Based on current year developments (see—“Legal Proceedings”),
we recorded a $25.0 million increase in legal reserves during the third quarter
period.
While we
believe that our services and business practices are in compliance with all
applicable laws, rules and regulations in all material respects, we cannot
predict the outcome of these matters at this time. An unfavorable outcome in one
or more of these matters could result in the imposition of judgments, monetary
fines or penalties, or injunctive or administrative remedies. We can give no
assurance that such judgments, fines and remedies, and future costs associated
with these matters would not have a material adverse effect on our financial
condition, our consolidated results of operations or our consolidated cash
flows.
11. Common
stock
Treasury
shares are carried at first in, first out cost. We have a stock repurchase
program, announced on October 25, 1996, under which our Board of Directors has
approved the repurchase of a total of 10.0 million shares. During 2004, our
Board of Directors authorized a 4.0 million share increase to the existing
10.0 million share repurchase program. Subsequently, in 2005, our Board of
Directors authorized an additional 5.0 million share increase, which increased
the total shares available for repurchase under the program to 6.1 million.
There is no limit on the duration of the program. During 2004, we used
internally generated cash to repurchase 4.8 million shares for $336.4
million. Through December 31, 2004, approximately 12.9 million of the 19.0
million total shares have been repurchased under the program and 7.0 million
shares have been reissued in connection with employee compensation plans.
Additional share purchases, if any, will be made in such amounts and at such
times as we deem appropriate based upon prevailing market and business
conditions, subject to restrictions on the amount of stock repurchases contained
in our bank credit facility.
As of
December 31, 2004, approximately 5.4 million shares of our Common Stock have
been reserved for employee benefit plans (see Note 12).
Preferred
Share Purchase Rights. In July
2001 our Board of Directors adopted a stockholder rights plan which declared a
dividend of one right for each outstanding share of our common stock. The rights
plan will expire on July 25, 2011. The rights are currently represented by our
common stock certificates. When the rights become exercisable, they will entitle
each holder to purchase 1/1,000th of a share of our Series A Junior
Participating Preferred Stock for an exercise price of $300 (subject to
adjustment). The rights will become exercisable and will trade separately from
the common stock only upon the tenth day after a public announcement that a
person, entity or group ("Person") has acquired 15% or more of our outstanding
common stock ("Acquiring Person") or ten days after the commencement or public
announcement of a tender or exchange offer which would result in any Person
becoming an Acquiring Person; provided that any Person who beneficially owned
15% or more of our common stock as of the date of the rights plan will not
become an Acquiring Person so long as such Person does not become the beneficial
owner of additional shares representing 2% or more of our outstanding shares of
common stock. In the event that any Person becomes an Acquiring Person, the
rights will be exercisable for our common stock with a market value (as
determined under the rights plan) equal to twice the exercise price. In the
event that, after any Person becomes an Acquiring Person, we engage in certain
mergers, consolidations, or sales of assets representing 50% or more of our
assets or earning power with an Acquiring Person (or Persons acting on behalf of
or in concert with an Acquiring Person), the rights will be exercisable for
common stock of the acquiring or surviving company with a market value (as
determined under the rights plan) equal to twice the exercise price. The rights
will not be exercisable by any Acquiring Person. The rights are redeemable at a
price of $0.01 per right prior to any Person becoming an Acquiring
Person.
12. Employee
benefit plans and stock-based compensation plans
Retirement
savings plan. We
sponsor retirement savings plans under Section 401(k) of the Internal Revenue
Code for all of our full time employees. Employees may elect to enter a written
salary deferral agreement under which a maximum of 15% to 25% of their salary,
subject to aggregate limits required under the Internal Revenue Code, may be
contributed to the plan. For substantially all employees, we match 100% of the
first 4% of the employees’ compensation contributed to the Plan. For the years
ended December 31, 2004, 2003 and 2002, we had contribution expense of
approximately $8.7 million, $7.8 million and $6.4 million,
respectively.
Employee
stock purchase plan. We offer
an employee stock purchase plan that qualifies under Section 423 of the Internal
Revenue Code and permits all employees, excluding certain management level
employees, to purchase shares of our Common Stock. Participating employees may
elect to contribute up to 10% of their salary to purchase common stock at the
end of each monthly participation period at a purchase price equal to 85% of the
fair market value of our Common Stock as of either the beginning or the end of
the participation period, whichever is lower. During 2004, 2003 and 2002,
approximately 75,000, 68,000 and 63,000 shares of our Common Stock were issued
under the plan, respectively. Our Common Stock reserved for future employee
purchases under the plan is 176,305 at December 31, 2004.
Deferred
compensation plan. We
maintain a non-qualified deferred compensation plan (the “Executive Deferred
Compensation Plan”) that provides benefits payable to eligible key employees at
retirement, termination or death. Benefit payments are funded by a combination
of contributions from participants and us. Participants may elect to defer up to
50% of their base earnings and 100% of specific bonus awards. Participants
become fully vested in our contributions on the third anniversary of the end of
the plan year for which the contribution is credited to their account. For 2004,
our contribution was equal to 6% of each qualified participant’s total annual
compensation, with 25% being allocated as a hypothetical investment in our
Common Stock and the remaining being allocated to a variety of investment
options. We have chosen to fund our liability for this plan through investments
in trading securities, which primarily consists of mutual funds (see Note 1). We
incurred approximately $3.5 million in 2004 and $3.8 million of
compensation expense in 2003 and 2002. At December 31, 2004, 741,532 shares
of our Common Stock have been reserved for future issuance under the
plan.
Stock-based
compensation plans. In August
2000, the Board of Directors adopted the Express Scripts, Inc. 2000 Long-Term
Incentive Plan which was subsequently amended in February 2001 and again in
December 2001 (as amended, the “2000 LTIP”), which provides for the grant of
various equity awards with various terms to our officers, Board of Directors and
key employees selected by the Compensation Committee of the Board of Directors.
The 2000 LTIP, as then amended, was approved by our stockholders in May 2001. As
of December 31, 2004, 4,496,323 shares of our Common Stock are available for
issuance under this plan. The maximum term of options granted under the 2000
LTIP is 10 years. During 2004, we granted approximately 134,817 restricted
shares of Common Stock with a weighted average fair market value of $67.33, to
certain of our officers and employees. These shares are subject to various
cliff-vesting periods from five to ten years with provisions allowing for
accelerated vesting based upon specific performance criteria. Prior to vesting,
these restricted shares are subject to forfeiture to us without consideration
upon termination of employment under certain circumstances. As of December 31,
2004, a total of 1,259,817 restricted shares of Common Stock have been issued
under the 2000 LTIP of which, 1,033,817 shares were issued from shares held in
treasury and approximately 194,294 shares have been forfeited. Unearned
compensation relating to the restricted shares is recorded as a separate
component of stockholders’ equity and is amortized to non-cash compensation
expense over the estimated vesting periods. As of December 31, 2004, 2003 and
2002, unearned compensation was $17.1 million, $22.1 million and $5.7 million.
We recorded compensation expense related to restricted stock grants for 2004,
2003 and 2002 of $10.6 million, $7.2 million and $8.3 million,
respectively.
The
provisions of the 2000 LTIP allow employees to use shares to cover tax
withholding on stock awards. Upon vesting of restricted stock, employees have
taxable income subject to statutory withholding requirements. The number of
shares issued to employees may be reduced by the number of shares having a
market value equal to our minimum statutory withholding for federal, state and
local tax purposes.
As a
result of the Board’s adoption and stockholder approval of the 2000 LTIP, no
additional awards will be granted under either of our 1992 amended and restated
stock option plans (discussed below) or under our 1994 amended and restated
Stock Option Plan (discussed below). However, these plans are still in existence
as there are outstanding grants under these plans.
In April
1992, we adopted a stock option plan that we amended and restated in 1995 and
amended in 1999, which provided for the grant of nonqualified stock options and
incentive stock options to our officers and key employees selected by the
Compensation Committee of the Board of Directors. In June 1994, the Board
of Directors adopted the Express Scripts, Inc. 1994 Stock Option Plan, also
amended and restated in 1995 and amended in 1997, 1998 and 1999. Under either
plan, the exercise price of the options was not less than the fair market value
of the shares at the time of grant, and the options typically vested over a
five-year period from the date of grant.
In April
1992, we also adopted a stock option plan that was amended and restated in 1995
and amended in 1996 and 1999 that provided for the grant of nonqualified stock
options to purchase 48,000 shares to each director who is not an employee of
ours or our affiliates. In addition, the second amendment to the plan gave each
non-employee director who was serving in such capacity as of the date of the
second amendment the option to purchase 2,500 additional shares. The second
amendment options vested over three years. The plan provides that the options
vest over a two-, three- or five-year period from the date of grant depending
upon the circumstances of the grant.
We apply
APB 25 and related interpretations in accounting for our plans. Accordingly,
compensation cost has been recorded based upon the intrinsic value method of
accounting for restricted stock and no compensation cost has been recognized for
stock options granted. Had compensation cost for stock option grants been
determined based on the fair value at the grant dates consistent with the method
prescribed by FAS 123, our net income (loss) would have been reduced by $8.6
million, $11.9 million and $11.4 million for the years ended December 31, 2004,
2003 and 2002, respectively (see also Note 1).
The fair
value of options granted (which is amortized to expense over the option vesting
period in determining the pro forma impact), is estimated on the date of grant
using the Black-Scholes multiple option-pricing model with the following
weighted average assumptions:
| |
2004 |
2003 |
2002 |
|
Expected
life of option |
3-7
years |
3-10
years |
3-5
years |
|
Risk-free
interest rate |
2.0%-4.2% |
1.6%-3.7% |
1.4%-5.0% |
|
Expected
volatility of stock |
41%-47% |
52%-53% |
54% |
|
Expected
dividend yield |
None |
None |
None |
A summary
of the status of our fixed stock option plans as of December 31, 2004, 2002 and
2001, and changes during the years ending on those dates is presented below.
| |
2004 |
|
2003 |
|
2002 |
|
|
(share
data in thousands) |
Shares |
Weighted-Average
Exercise
Price |
Shares |
Weighted-Average
Exercise
Price |
Shares |
Weighted-Average
Exercise
Price |
|
Outstanding
at beginning of year |
|
4,016
|
|
$ |
35.96 |
|
|
5,594 |
|
$ |
31.50 |
|
|
5,992 |
|
$ |
26.26 |
|
|
Granted |
|
755 |
|
|
72.64 |
|
|
142 |
|
|
64.14 |
|
|
948 |
|
|
49.63 |
|
|
Exercised |
|
(911 |
) |
|
31.19 |
|
|
(1,644 |
) |
|
22.85 |
|
|
(1,226 |
) |
|
19.50 |
|
|
Forfeited/Cancelled |
|
(275 |
) |
|
51.47 |
|
|
(76 |
) |
|
44.06 |
|
|
(120 |
) |
|
35.66 |
|
|
Outstanding
at end of year |
|
3,585 |
|
|
43.71 |
|
|
4,016 |
|
|
35.96 |
|
|
5,594 |
|
|
31.50 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year end |
|
2,502
|
|
|
|
|
|
2,688 |
|
|
|
|
|
2,889 |
|
|
|
|
|
Weighted-average
fair value of
options
granted during the year |
$ |
28.49 |
|
|
|
|
$ |
29.75 |
|
|
|
|
$ |
21.61 |
|
|
|
|
The
following table summarizes information about fixed stock options outstanding at
December 31, 2004:
| |
Options
Outstanding |
|
|
Options
Exercisable |
|
|
Range
of
Exercise
Prices
(share
data in thousands) |
Number
Outstanding
at
12/31/04 |
Weighted-
Average
Remaining Contractual Life |
Weighted-Average
Exercise Price |
|
Number
Exercisable
at
12/31/04 |
Weighted-
Average
Exercise
Price |
|
$ 7.44
- 21.20 |
|
415 |
|
|
3.8 |
|
$ |
16.98 |
|
|
|
405 |
|
$ |
16.92 |
|
|
25.81 -
33.69 |
|
836 |
|
|
4.5 |
|
|
28.30 |
|
|
|
809 |
|
|
28.30 |
|
|
35.08 -
46.62 |
|
846 |
|
|
4.2 |
|
|
40.12 |
|
|
|
829 |
|
|
40.03 |
|
|
47.55 -
64.01 |
|
744 |
|
|
5.0 |
|
|
50.77 |
|
|
|
424 |
|
|
49.09 |
|
|
64.36 -
79.36 |
|
744 |
|
|
6.1 |
|
|
72.98 |
|
|
|
35 |
|
|
66.31 |
|
|
7.44 -
79.36 |
|
3,585 |
|
|
4.8 |
|
$ |
43.71 |
|
|
|
2,502 |
|
$ |
34.40 |
|
13. Segment
information
We report
segments on the basis of services offered and have determined that we have two
reportable segments: PBM services and non-PBM services. Our PBM operating
results include those of CuraScript from January 30, 2004, the date of
acquisition. Our domestic and Canadian PBM operating segments have similar
characteristics and as such have been aggregated into a single PBM reporting
segment. In 2002 the remaining operating service lines (Specialty Distribution
Services, Specialty self-injectibles and Phoenix Marketing Group) were
aggregated into a non-PBM reporting segment. Effective in December 2003, our
self-injectibles business unit became part of our domestic PBM operating segment
and our remaining service lines (Specialty Distribution Services and Phoenix
Marketing Group) merged into a single Non-PBM operating segment. Our 2002 data
has been recast to reflect the change in our operations and reporting
segments.
Operating
income is the measure used by our chief operating decision maker to assess the
performance of each of our operating segments. The following table presents
information about our reportable segments, including a reconciliation of
operating income to income before income taxes, as of and for the years ended
December 31:
|
(in
thousands) |
PBM |
Non-PBM |
Total |
|
2004 |
|
|
|
|
|
|
|
Product
revenue: |
|
|
|
|
|
|
|
Network
revenues |
$ |
9,387,269 |
|
$ |
- |
|
$ |
9,387,269 |
|
|
Mail
revenues |
|
5,390,541 |
|
|
- |
|
|
5,390,541 |
|
|
Other
revenues |
|
- |
|
|
114,856 |
|
|
114,856 |
|
|
Service
revenues |
|
100,729 |
|
|
121,333 |
|
|
222,062 |
|
|
Total
revenues |
|
14,878,539 |
|
|
236,189 |
|
|
15,114,728 |
|
|
Depreciation
and amortization expense |
|
65,423 |
|
|
4,617 |
|
|
70,040 |
|
|
Operating
income |
|
454,627 |
|
|
38,365 |
|
|
492,992 |
|
|
Undistributed
loss from joint venture |
|
|
|
|
|
|
|
(4,514 |
) |
|
Interest
income |
|
|
|
|
|
|
|
3,837 |
|
|
Interest
expense |
|
|
|
|
|
|
|
(41,672 |
) |
|
Income
before income taxes |
|
|
|
|
|
|
|
450,643 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
assets (as of December 31) |
|
3,460,426 |
|
|
139,660 |
|
|
3,600,086 |
|
|
Investment
in equity method investees |
|
808 |
|
|
- |
|
|
808 |
|
|
Capital
expenditures |
|
42,275 |
|
|
9,241 |
|
|
51,516 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
Product
revenue: |
|
|
|
|
|
|
|
|
|
|
Network
revenues |
$ |
9,037,246 |
|
$ |
- |
|
$ |
9,037,246 |
|
|
Mail
revenues |
|
3,988,141 |
|
|
- |
|
|
3,988,141 |
|
|
Other
revenues |
|
- |
|
|
86,799 |
|
|
86,799 |
|
|
Service
revenues |
|
72,878 |
|
|
109,453 |
|
|
182,331 |
|
|
Total
revenues |
|
13,098,265 |
|
|
196,252 |
|
|
13,294,517 |
|
|
Depreciation
and amortization expense |
|
50,973 |
|
|
3,057 |
|
|
54,030 |
|
|
Operating
income |
|
413,295 |
|
|
35,830 |
|
|
449,125 |
|
|
Undistributed
loss from joint venture |
|
|
|
|
|
|
|
(5,796 |
) |
|
Interest
income |
|
|
|
|
|
|
|
3,390 |
|
|
Interest
expense |
|
|
|
|
|
|
|
(41,417 |
) |
|
Income
before income taxes |
|
|
|
|
|
|
|
405,302 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
assets (as of December 31) |
|
3,286,700 |
|
|
122,474 |
|
|
3,409,174 |
|
|
Investment
in equity method investees |
|
1,971 |
|
|
- |
|
|
1,971 |
|
|
Capital
expenditures |
|
49,009 |
|
|
4,096 |
|
|
53,105 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
Product
revenue: |
|
|
|
|
|
|
|
|
|
|
Network
revenues |
$ |
8,423,861 |
|
$ |
- |
|
$ |
8,423,861 |
|
|
Mail
revenues |
|
3,612,485 |
|
|
- |
|
|
3,612,485 |
|
|
Other
revenues |
|
- |
|
|
55,806 |
|
|
55,806 |
|
|
Service
revenues |
|
86,094 |
|
|
92,267 |
|
|
178,361 |
|
|
Total
revenues |
|
12,122,440 |
|
|
148,073 |
|
|
12,270,513 |
|
|
Depreciation
and amortization expense |
|
80,038 |
|
|
2,000 |
|
|
82,038 |
|
|
Operating
income |
|
340,333 |
|
|
31,393 |
|
|
371,726 |
|
|
Undistributed
loss from joint venture |
|
|
|
|
|
|
|
(4,549 |
) |
|
Interest
income |
|
|
|
|
|
|
|
4,716 |
|
|
Interest
expense |
|
|
|
|
|
|
|
(43,890 |
) |
|
Income
before income taxes |
|
|
|
|
|
|
|
328,003 |
|
|
Total
assets (as of December 31) |
|
3,102,285 |
|
|
104,707 |
|
|
3,206,992 |
|
|
Investment
in equity method investees |
|
3,117 |
|
|
- |
|
|
3,117 |
|
|
Capital
expenditures |
|
55,388 |
|
|
5,915 |
|
|
61,303 |
|
PBM
product revenue consists of revenues from the dispensing of prescription drugs
from our mail pharmacies and revenues from the sale of prescription drugs by
retail pharmacies in our retail pharmacy networks. Non-PBM product revenues
consist of revenues from certain specialty distribution activities. PBM service
revenue includes administrative fees associated with the administration of
retail pharmacy networks contracted by certain clients, market research programs
and informed decision counseling services. Non-PBM service revenue includes
revenues from certain specialty distribution services, and sample distribution
and accountability services.
Revenues
earned by our Canadian PBM totaled $26.1 million, $22.3 million and $12.4
million for the years ended December 31, 2004, 2003 and 2002, respectively. All
other revenues are earned in the United States. Long-lived assets of our
Canadian PBM (consisting primarily of fixed assets and goodwill) totaled $36.1
million, $33.9 million and $26.2 million as of December 31, 2004, 2003 and
2002, respectively. All other long-lived assets are domiciled in the United
States.
14. Quarterly financial data
(unaudited)
| |
Quarters |
|
|
(in
thousands, except per share data) |
First |
Second |
Third |
Fourth |
|
Fiscal
2004 |
|
|
|
|
|
|
|
|
|
Total
revenues (1) |
$ |
3,627,815 |
|
$ |
3,779,505 |
|
$ |
3,767,690 |
|
$ |
3,939,718 |
|
|
Cost
of revenues (1) |
|
3,406,028 |
|
|
3,555,983 |
|
|
3,532,280 |
|
|
3,676,247 |
|
|
Gross
profit |
|
221,787 |
|
|
223,522 |
|
|
235,410 |
|
|
263,471 |
|
|
Selling,
general and administrative |
|
95,244 |
|
|
96,723 |
|
|
130,806 |
|
|
128,425 |
|
|
Operating
income |
|
126,543 |
|
|
126,799 |
|
|
104,604 |
|
|
135,046 |
|
|
Net
income |
$ |
69,963 |
|
$ |
65,420 |
|
$ |
61,917 |
|
|
80,907 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share |
$ |
0.90 |
|
$ |
0.85 |
|
$ |
0.81 |
|
$ |
1.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share |
$ |
0.89 |
|
$ |
0.83 |
|
$ |
0.80 |
|
$ |
1.07 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Quarters |
|
|
(in
thousands, except per share data) |
First |
|
Second |
|
Third |
|
Fourth |
|
|
Fiscal
2003 |
|
|
|
|
|
|
|
|
|
Total
revenues (1) |
$ |
3,223,981 |
|
$ |
3,334,197 |
|
$ |
3,248,602 |
|
$ |
3,487,737 |
|
|
Cost
of revenues (1) |
|
3,014,368 |
|
|
3,116,962 |
|
|
3,041,825 |
|
|
3,255,024 |
|
|
Gross
profit |
|
209,613 |
|
|
217,235 |
|
|
206,777 |
|
|
232,713 |
|
|
Selling,
general and administrative |
|
101,786 |
|
|
106,955 |
|
|
93,286 |
|
|
115,186 |
|
|
Operating
income |
|
107,827 |
|
|
110,280 |
|
|
113,491 |
|
|
117,527 |
|
|
Income
before cumulative effect of |
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
change |
|
59,649 |
|
|
59,006 |
|
|
64,542 |
|
|
67,431 |
|
|
Cumulative
effect of accounting change(1) |
|
(1,028 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Net
income |
$ |
58,621 |
|
$ |
59,006 |
|
$ |
64,542 |
|
|
67,431 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
cumulative effect of |
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
change |
$ |
0.77 |
|
$ |
0.75 |
|
$ |
0.82 |
|
$ |
0.87 |
|
|
Cumulative
effect of accounting change |
|
(0.01 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Net
income |
$ |
0.76 |
|
$ |
0.75 |
|
$ |
0.82 |
|
$ |
0.87 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
cumulative effect of |
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
change |
$ |
0.75 |
|
$ |
0.74 |
|
$ |
0.81 |
|
$ |
0.86 |
|
|
Cumulative
effect of accounting change |
|
(0.01 |
) |
|
- |
|
|
- |
|
|
- |
|
|
Net
income |
$ |
0.74 |
|
$ |
0.74 |
|
$ |
0.81 |
|
$ |
0.86 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1) |
Excludes
estimated retail pharmacy co-payments of $1,397,111 and $1,333,683 for the
three months ended March 31, 2004 and 2003, respectively, $1,387,488 and
$1,338,804 for the three months ended June 30, 2004 and 2003,
respectively, $1,363,991 and $1,326,022 for the three months ended
September 30, 2004 and 2003, respectively, and $1,397,299 and $1,280,568
for the three months ended December 31, 2004 and 2003, respectively. These
are amounts we instructed retail pharmacies to collect from members. We
have no information regarding actual co-payments collected.
|
Item
9 — Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A — Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and under the Securities Exchange Act
of 1934 Exchange Act) as of December 31, 2004. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of
December 31, 2004, our disclosure controls and procedures were (1) designated to
ensure that material information relating to us, including our consolidated
subsidiaries, is made known to our chief executive officer and chief financial
officer by others within those entities, particularly during the period in which
this report was being prepared, and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act are recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms.
Management’s
Report on Internal Control Over Financial Reporting
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of our management, including
our Chairman and Chief Executive Officer, and our Senior Vice President and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control—Intergrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal
Control—Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2004. Our management’s assessment of the
effectiveness of our internal control over financial reporting as of December
31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
Management
has excluded CuraScript from its assessment of internal control over financial
reporting as of December 31, 2004 because they were acquired by the Company in a
purchase business combination effective during 2004. CuraScript is a wholly
owned subsidiary whose total assets and total revenues represent 11.6% and 4.2%,
respectively, of the related consolidated financial statement amounts as of and
for the year ended December 31, 2004.
Changes
in Internal Control Over Financial Reporting
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the quarter ended December
31, 2004 that has materially affected, or is reasonable likely to materially
affect, our internal control over financial reporting.
PART
III
Item
10 — Directors and Executive Officers of the Registrant
The
information required by this item will be incorporated by reference from our
definitive Proxy Statement for our 2005 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A (the “Proxy Statement”) under the heading “I.
Election of Directors”; provided that the Report of the Compensation Committee
on Executive Compensation, the Report of the Audit Committee and the performance
graph contained in the Proxy Statement shall not be deemed to be incorporated
herein; and further provided that some of the information regarding our
executive officers required by Item 401 of Regulation S-K has been included in
Part I of this report.
We have
adopted a code of ethics that applies to our directors, officers and employees,
including our principal executive officers, principal financial officer,
principal accounting officer, controller, or persons performing similar
functions (the "senior financial officers"). A copy of this code of business
conduct and ethics is posted on the investor relations portion of our website at
www.express-scripts.com/other/investor. In the
event the code of ethics is revised, or any waiver is granted under the code of
ethics with respect to any director, executive officer or senior financial
officer, notice of such revision or waiver will be posted on our
website.
Item
11 — Executive Compensation
The
information required by this item will be incorporated by reference from the
Proxy Statement under the headings “Directors’ Compensation,” “Compensation
Committee Interlocks and Insider Participation” and “Executive Compensation.”
Item
12 — Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this item will be incorporated by reference from the
Proxy Statement under the headings “Security Ownership of Certain Beneficial
Owners and Management.”
Item
13 — Certain Relationships and Related Transactions
The
information required by this item will be incorporated by reference from the
Proxy Statement under the heading “Certain Relationships and Related Party
Transactions.”
Item
14 - Principal Accountant Fees and Services
The
information required by this item will be incorporated by reference from the
Proxy Statement under the heading “Principal Accountant Fees”
PART
IV
Item
15 — Exhibits, Financial Statement Schedules and Reports on Form
8-K
(a)
Documents filed as part of this Report:
(1)
Financial Statements
The
following report of independent accountants and our consolidated financial
statements are contained in this Report
Report of Independent Accountant
Consolidated
Balance Sheet as of December 31, 2004 and 2003
Consolidated
Statement of Operations for the years ended December 31, 2004, 2003 and
2002
Consolidated
Statement of Changes in Stockholders’ Equity for the years ended December 31,
2004, 2003 and 2002
Consolidated
Statement of Cash Flows for the years ended December 31, 2004, 2003 and
2002
Notes to
Consolidated Financial Statements
(2)
The following financial statement schedule is contained in
this Report.
Financial Statement
Schedule:
VIII. Valuation
and Qualifying Accounts and Reserves
for the
years ended December 31, 2004, 2003 and 2002
All other
schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
(3)
List of Exhibits
|
|
See
Index to Exhibits on the pages below. The Company agrees to furnish to the
Securities and Exchange Commission, upon request, copies of any long-term
debt instruments that authorize an amount of securities constituting 10%
or less of the total assets of Express Scripts, Inc. and its subsidiaries
on a consolidated basis. |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
| |
EXPRESS
SCRIPTS, INC. |
|
March 2, 2005 |
By:
/s/ Barrett A.
Toan
|
| |
Barrett
A. Toan |
| |
Chairman
of the Board of Directors and |
| |
Chief
Executive
Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature |
|
Title |
|
Date |
|
/s/
Barrett A.
Toan
|
|
|
|
|
|
Barrett
A. Toan |
|
Chairman
of the Board of Directors and Chief Executive Officer (Principal Executive
Officer) |
|
March
2, 2005 |
|
/s/
George
Paz
|
|
|
|
|
|
George
Paz |
|
President,
Director |
|
March
2, 2005 |
|
/s/
Edward
Stiften
|
|
|
|
|
|
Edward
Stiften |
|
Senior
Vice President and Chief Financial Officer (Principal Financial
Officer) |
|
March
2, 2005 |
|
/s/
Darryl E.
Weinrich
|
|
|
|
|
|
Darryl
E. Weinrich |
|
Vice
President, Chief Accounting Officer and Corporate Controller
(Principal Accounting Officer) |
|
March
2, 2005 |
|
/s/
Gary G.
Benanav
|
|
|
|
|
|
Gary
G. Benanav |
|
Director |
|
March
2, 2005 |
|
/s/
Frank J.
Borelli
|
|
|
|
|
|
Frank
J. Borelli |
|
Director |
|
March
2, 2005 |
|
/s/
Maura C.
Breen
|
|
|
|
|
|
Maura
C. Breen |
|
Director |
|
March
2, 2005 |
|
/s/
Nicholas J.
LaHowchic |
|
|
|
|
|
Nicholas
J. LaHowchic |
|
Director |
|
March
2, 2005 |
|
/s/
Thomas P. Mac
Mahon
|
|
|
|
|
|
Thomas
P. Mac Mahon |
|
Director |
|
March
2, 2005 |
|
/s/
John O.
Parker |
|
|
|
|
|
John
O. Parker |
|
Director |
|
March
2, 2005 |
|
/s/
Samuel
Skinner
|
|
|
|
|
|
Samuel
Skinner |
|
Director |
|
March
2, 2005 |
|
/s/
Seymour
Sternberg
|
|
|
|
|
|
Seymour
Sternberg |
|
Director |
|
March
2, 2005 |
|
/s/
Howard L.
Waltman
|
|
|
|
|
|
Howard
L. Waltman |
|
Director |
|
March
2, 2005 |
| |
|
|
|
|
EXPRESS
SCRIPTS, INC.
Schedule
VIII — Valuation and Qualifying Accounts and Reserves
Years
Ended December 31, 2004, 2003, and 2002
|
Col.
A |
Col.
B |
|
Col.
C |
|
Col.
D |
|
Col.
E |
|
| |
|
|
Additions |
|
|
|
|
|
|
Description |
Balance
At
Beginning
Of
Period |
|
Charges
to
Costs
and
Expenses |
|
Charges
to
Other
Accounts |
|
(Deductions) |
|
Balance
at
End
of
Period |
|
Allowance
for Doubtful Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended 12/31/02 |
$ |
24,157,378 |
|
$ |
17,865,386 |
|
$ |
1,933,359 |
(1) |
$ |
8,134,207 |
|
$ |
35,821,916 |
|
|
Year
Ended 12/31/03 |
|
35,821,916 |
|
|
(2,572,786 |
|
|
|
|
|
4,642,298 |
|
|
28,606,832 |
|
|
Year
Ended 12/31/04 |
|
28,606,832 |
|
|
6,208,469 |
|
|
4,450,603 |
(3) |
|
7,912,062 |
|
|
31,353,842 |
|
|
(1) |
Represents
the opening balance sheet for our February 25, 2002 acquisition of Phoenix
Marketing Group and our April 12, 2002 acquisition of National
Prescription Administrators and related
entities. |
|
(2) |
Amount
includes the reversal of a reserve recorded in 2002 for a client then in
bankruptcy. In 2003, we received payment on this client’s obligations to
us and determined such reserve was no longer necessary.
|
|
(3) |
Represents
the opening balance sheet for our January 30, 2004 acquisition of
CuraScript. |
INDEX TO
EXHIBITS
(Express
Scripts, Inc. - Commission File Number 0-20199)
|
Exhibit
Number |
|
Exhibit |
|
2.11 |
|
Stock
Purchase Agreement, dated December 19, 2003, by and among the Company, CPS
Holdings, LLC, CuraScript Pharmacy, Inc. and CuraScript PBM Services, Inc,
incorporated by reference to Exhibit No. 2.1 to the Company’s Current
Report on Form 8-K filed December 24, 2003.
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on
Form 10-K for the year ending December 31, 2001.
|
|
3.2 |
|
Certificate
of Amendment to the Certificate of Incorporation of the Company dated June
2, 2004, incorporated by reference to Exhibit No. 3.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ending June 30,
2004.
|
|
3.2
|
|
Third
Amended and Restated Bylaws, incorporated by reference to Exhibit No. 3.3
to the Company’s Quarterly Report on Form 10-Q for the quarter ending June
30, 2004.
|
|
4.1
|
|
Form
of Certificate for Class A Common Stock, incorporated by reference to
Exhibit No. 4.1 to the Company’s Registration Statement on Form S-1 filed
June 9, 1992 (Registration Number 33-46974).
|
|
4.2
|
|
Stockholder
and Registration Rights Agreement, dated as of October 6, 2000, between
the Company and New York Life Insurance Company, incorporated by reference
to Exhibit No. 4.2 to the Company’s Amendment No. 1 to Registration
Statement on Form S-3 filed October 17, 2000 (Registration Number
333-47572).
|
|
4.3
|
|
Asset
Acquisition Agreement, dated October 17, 2000, between NYLIFE Healthcare
Management, Inc., the Company, NYLIFE LLC and New York Life Insurance
Company, incorporated by reference to Exhibit No. 4.3 to the Company’s
amendment No. 1 to the Registration Statement on Form S-3 filed October
17, 2000 (Registration Number 333-47572).
|
|
4.4
|
|
Rights
Agreement, dated as of July 25, 2001, between the Corporation and American
Stock Transfer &
Trust
Company, as Rights Agent, which includes the Certificate of Designations
for the Series A Junior Participating Preferred Stock as Exhibit A, the
Form of Right Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Shares as Exhibit C, incorporated by reference to
Exhibit No. 4.1 to the Company’s Current Report on Form 8-K filed July 31,
2001.
|
|
4.5 |
|
Amendment
dated April 25, 2003 to the Stockholder and Registration Rights Agreement
dated as of October 6, 2000 between the Company and New York Life
Insurance Company, incorporated by reference to Exhibit No. 4.8 to the
Company’s Quarterly Report on Form 10-Q for the quarter ending March 31,
2003.
|
|
10.1
|
|
Lease
Agreement dated March 3, 1992, between Riverport, Inc. and Douglas
Development Company--Irvine Partnership in commendam and the Company,
incorporated by reference to Exhibit No. 10.21 to the Registration
Statement on Form S-1 filed June 9, 1992 (Registration Number
33-46974).
|
|
10.2
|
|
First
Amendment to Lease dated as of December 29, 1992, between Sverdrup/MDRC
Joint Venture and the Company, incorporated by reference to Exhibit No.
10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter
ending June 30, 1993 (File No. 0-20199).
|
|
10.3
|
|
Second
Amendment to Lease dated as of May 28, 1993, between Sverdrup/MDRC Joint
Venture and the Company, incorporated by reference to Exhibit No. 10.14 to
the Company’s Quarterly Report on Form 10-Q for the quarter ending June
30, 1993 (File No. 0-20199).
|
|
10.4
|
|
Third
Amendment to Lease entered into as of October 15, 1993, by and between
Sverdrup/MDRC Joint Venture and the Company, incorporated by reference to
Exhibit No. 10.69 to the Company’s Annual Report on Form 10-K for the year
ending 1993 (File No. 0-20199).
|
|
10.5
|
|
Fourth
Amendment to Lease dated as of March 24, 1994, by and between
Sverdrup/MDRC Joint Venture and the Company, incorporated by reference to
Exhibit No. 10.70 to the Company’s Annual Report on Form 10-K for the year
ending 1993 (File No. 0-20199).
|
|
10.6
|
|
Fifth
Amendment to Lease made and entered into June 30, 1994, between
Sverdrup/MDRC Joint Venture and the Company, incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ending June 30, 1994 (File No. 0-20199).
|
|
10.7
|
|
Sixth
Amendment to Lease made and entered into January 31, 1995, between
Sverdrup/MDRC Joint Venture and the Company, incorporated by reference to
Exhibit No. 10.70 to the Company’s Annual Report on Form 10-K for the year
ending 1994 (File No. 0-20199).
|
|
10.8
|
|
Seventh
Amendment to Lease dated as of August 14, 1998, by and between Duke Realty
Limited Partnership, by and through its general partner, Duke Realty
Investments, Inc., and the Company, incorporated by reference to Exhibit
No. 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter
ending September 30, 1998.
|
|
10.9
|
|
Eighth
Amendment to Lease dated as of August 14, 1998, by and between Duke Realty
Limited Partnership, by and through its general partner, Duke Realty
Investments, Inc., and the Company, incorporated by reference to Exhibit
No. 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter
ending September 30, 1998.
|
|
10.10
|
|
Ninth
Amendment to Lease dated as of February 19, 1999, by and between Duke
Realty Limited Partnership, by and through its general partner, Duke
Realty Investments, Inc., and the Company, incorporated by reference
to Exhibit No. 10.29 to the Company’s Annual Report on Form 10-K/A
for the year ending 1998.
|
|
10.113 |
|
Amended
and Restated Express Scripts, Inc. 1992 Employee Stock Option Plan,
incorporated by reference to Exhibit No. 10.78 to the Company’s Annual
Report on Form 10-K for the year ending 1994 (File No.
0-20199).
|
|
10.123 |
|
First
Amendment to Express Scripts, Inc. Amended and Restated 1992 Stock Option
Plan incorporated by reference to Exhibit D to the Company’s Proxy
Statement dated April 22, 1999 (File No. 0-20199).
|
|
10.133 |
|
Second
Amendment to Express Scripts, Inc. Amended and Restated 1992 Stock Option
Plan incorporated by reference to Exhibit F to the Company’s Proxy
Statement dated April 22, 1999 (File No. 0-20199).
|
|
10.143 |
|
Amended
and Restated Express Scripts, Inc. Stock Option Plan for Outside
Directors, incorporated by reference to Exhibit No. 10.79 to the Company’s
Annual Report on Form 10-K for the year ending 1994 (File No.
0-20199).
|
|
10.153 |
|
First
Amendment to Express Scripts, Inc. Amended and Restated 1992 Stock Option
Plan for Outside Directors incorporated by reference to Exhibit A to the
Company’s Proxy Statement dated April 9, 1996 (File No.
0-20199).
|
|
10.163 |
|
Second
Amendment to Express Scripts, Inc. Amended and Restated 1992 Stock Option
Plan for Outside Directors incorporated by reference to Exhibit G to the
Company’s Proxy Statement dated April 22, 1999 (File No.
0-20199).
|
|
10.173 |
|
Amended
and Restated Express Scripts, Inc. 1994 Stock Option Plan incorporated by
reference to Exhibit No. 10.80 to the Company’s Annual Report on Form 10-K
for the year ending 1994 (File No. 0-20199).
|
|
10.183 |
|
First
Amendment to Express Scripts, Inc. Amended and Restated 1994 Stock Option
Plan incorporated by reference to Exhibit A to the Company’s Proxy
Statement dated April 16, 1997 (File No. 0-20199).
|
|
10.193 |
|
Second
Amendment to Express Scripts, Inc. Amended and Restated 1994 Stock Option
Plan incorporated by reference to Exhibit A to the Company’s Proxy
Statement dated April 21, 1998.
|
|
10.203 |
|
Third
Amendment to Express Scripts, Inc. Amended and Restated 1994 Stock Option
Plan, incorporated by reference to Exhibit C to the Company’s Proxy
Statement dated April 22, 1999.
|
|
10.213 |
|
Fourth
Amendment to Express Scripts, Inc. Amended and Restated 1994 Stock Option
Plan, incorporated by reference to Exhibit E to the Company’s Proxy
Statement dated April 22, 1999.
|
|
10.223 |
|
Amended
and restated Express Scripts, Inc. 2000 Long-Term Incentive Plan,
incorporated by reference to Exhibit No. 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ending June 30, 2001.
|
|
10.233 |
|
Second
Amendment to the Express Scripts, Inc. 2000 Long-Term Incentive Plan,
incorporated by reference to Exhibit No. 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
|
|
10.243 |
|
Express
Scripts, Inc. Employee Stock Purchase Plan incorporated by reference to
Exhibit No. 4.1 to the Company’s Registration Statement on Form S-8 filed
December 29, 1998 (Registration Number 333-69855).
|
|
10.253 |
|
Amended
and restated Express Scripts, Inc. Employee Stock Purchase Plan,
incorporated by reference to Exhibit No. 10.25 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
|
|
10.263 |
|
Express
Scripts, Inc. Executive Deferred Compensation Plan, as amended,
incorporated by reference to Exhibit No 10.1 to the Company’s Quarterly
Report on From 10-Q for the quarter ending June 30, 2000.
|
|
10.273 |
|
Express
Scripts, Inc. Executive Deferred Compensation Plan, as amended and
restated, incorporated by reference to Exhibit B to the Company’s Proxy
Statement dated April 28, 2003.
|
|
10.283 |
|
Employment
Agreement effective as of April 1, 1999, between Barrett A. Toan and the
Company, incorporated by reference to Exhibit No. 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ending March 31,
1999.
|
|
10.293 |
|
Amendment
to the Employment Agreement between the Company and Barrett A. Toan,
incorporated by reference to Exhibit No. 10.1 to the Company’s Current
Report on Form 8-K dated October 17, 2000 and filed October 18,
2000.
|
|
10.303 |
|
Executive
Employment Agreement, dated as of April 1, 2004, between the Company and
Edward J. Stiften, incorporated by reference to Exhibit No. 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ending June 30,
2004.
|
|
10.313 |
|
Executive
Employment Agreement, dated as of April 15, 2004, between the Company and
George Paz, incorporated by reference to Exhibit No. 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ending June 30,
2004.
|
|
10.323 |
|
Executive
Employment Agreement, dated as of August 31, 2004, between the Company and
David Lowenberg, incorporated by reference to Exhibit No. 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ending September
30, 2004.
|
|
10.333 |
|
Executive
Employment Agreement, dated as of August 31, 2004, and effective as of
April 1, 2004, between the Company and C.K. Casteel, incorporated by
reference to Exhibit No. 10.2 to the Company’s Quarterly Report on Form
10-Q for the quarter ending September 30, 2004.
|
|
10.343 |
|
Executive
Employment Agreement, dated as of August 31, 2004, and effective as of
April 1, 2004, between the Company and Douglas Porter, incorporated by
reference to Exhibit No. 10.3 to the Company’s Quarterly Report on Form
10-Q for the quarter ending September 30, 2004.
|
|
10.353 |
|
Executive
Employment Agreement, dated as of August 31, 2004, and effective as of
April 1, 2004, between the Company and Agnes Rey-Giraud, incorporated by
reference to Exhibit No. 10.4 to the Company’s Quarterly Report on Form
10-Q for the quarter ending September 30, 2004.
|
|
10.363 |
|
Executive
Employment Agreement, dated as of October 29, 2004, between the Company
and Thomas Boudreau, incorporated by reference to Exhibit No. 10.5 to the
Company’s Quarterly Report on Form 10-Q for the quarter ending September
30, 2004.
|
|
10.373 |
|
Executive
Employment Agreement, dated as of October 29, 2004, and effective as of
April 1, 2004 between the Company and Edward Ignaczak, incorporated by
reference to Exhibit No. 10.6 to the Company’s Quarterly Report on Form
10-Q for the quarter ending September 30, 2004.
|
|
10.383 |
|
Form
of Restricted Stock Agreement used with respect to grants of restricted
stock by the Company, incorporated by reference to Exhibit No. 10.7 to the
Company’s Quarterly Report on Form 10-Q for the quarter ending September
30, 2004.
|
| 10.392,3 |
|
Form
of Stock Option Grant Notice and Agreement used with respect to grants of
stock options by the Company.
|
|
10.40 |
|
Credit
Agreement dated as of February 13, 2004 (Credit Agreement) among the
Company, the Lenders listed therein, Credit Suisse First Boston (CSFB)and
Citigroup Global Markets, Inc. (CGMI) as Joint Lead Arrangers and Joint
Bookmaking Runners, CSFB as Administrative Agent and Collateral Agent,
CGMI as Syndication Agent, and Bank of America, Bank One, N.A. and U.S.
Bank National Association as Co-Documentation Agents, incorporated by
reference to Exhibit No. 10.34 to the Company’s Annual Report on Form 10-K
for the year ending December 1, 2003.
|
|
10.41
|
|
Subsidiary
Guaranty dated as of February 13, 2004, in favor of Credit Suisse First
Boston as Collateral Agent and the Lenders listed in the Credit Agreement,
by the Subsidiary Guarantors (as defined in the Credit Agreement) of the
Company, incorporated by reference to Exhibit No. 10.35 to the Company’s
Annual Report on Form 10-K for the year ending December 1,
2003..
|
|
10.42 |
|
Company
Pledge Agreement dated as of February 13, 2004, by the Company in favor of
Credit Suisse First Boston as Collateral Agent and the Lenders listed in
the Credit Agreement, incorporated by reference to Exhibit No. 10.36 to
the Company’s Annual Report on Form 10-K for the year ending December 1,
2003.
|
|
10.43
|
|
Subsidiary
Pledge Agreement dated as of February 13, 2004, in favor of Credit Suisse
First Boston as Collateral Agent and the Lenders listed in the Credit
Agreement, by the Subsidiary Guarantors (as defined in the Credit
Agreement) of the Company, incorporated by reference to Exhibit No. 10.37
to the Company’s Annual Report on Form 10-K for the year ending December
1, 2003.
|
|
10.44
|
|
International
Swap Dealers Association, Inc. Master Agreement dated as of April 3, 1998,
between the Company and The First National Bank of Chicago, incorporated
by reference to Exhibit No. 10.6 to the Company’s Quarterly Report on Form
10-Q for the quarter ending June 30, 1998.
|
|
10.45
|
|
Swap
Transaction Confirmation Agreement between the Company and Bankers Trust
Company dated June 17, 1999, incorporated by reference to Exhibit No. 10.5
to the Company’s Quarterly Report on Form 10-Q for the quarter ending
September 30, 1999.
|
|
21.12 |
|
List
of Subsidiaries.
|
|
23.12 |
|
Consent
of PricewaterhouseCoopers LLP.
|
|
31.12 |
|
Certification
by Barrett A. Toan, as Chairman and Chief Executive Officer of Express
Scripts, Inc., pursuant to Exchange Act Rule 13a-14(a).
|
|
31.22 |
|
Certification
by Edward Stiften, as Senior Vice President and Chief Financial Officer of
Express Scripts, Inc., pursuant to Exchange Act Rule
13a-14(a).
|
|
32.12 |
|
Certification
by Barrett A. Toan, as Chairman and Chief Executive Officer of Express
Scripts, Inc., pursuant to 18 U.S.C.ss.1350 and Exchange Act Rule
13a-14(b).
|
|
32.22 |
|
Certification
by Edward Stiften, as Senior Vice President and Chief Financial Officer of
Express Scripts, Inc., pursuant to 18 U.S.C.ss. 1350 and Exchange Act Rule
13a-14(b). |
|
1 |
The
Company agrees to furnish supplementally a copy of any omitted schedule to
this agreement to the Commission upon
request. |
|
3 |
Management
contract or compensatory plan or
arrangement. |
EXHIBIT
21.1
The
following is a list of all of the Company’s subsidiaries, regardless of the
materiality of their operations. Each of these subsidiaries is included in the
Company’s Consolidated Financial Statements for the period ending December 31,
2004.
|
Subsidiary |
State
of Organization |
D/B/A |
|
Airport Holdings, LLC |
Pennsylvania |
None |
|
Central
Fill, Inc. |
Pennsylvania |
None |
|
CFI
New Jersey, Inc. |
New
Jersey |
None |
|
CuraScript
PBM Services, Inc. |
Delaware |
CuraScript |
|
CuraScript
Pharmacy, Inc. |
Delaware |
CuraScript |
|
Diversified
NY IPA, Inc. |
New
York |
None |
|
Diversified
Pharmaceutical Services
(Puerto
Rico), Inc. |
Puerto
Rico |
None |
|
Diversified
Pharmaceutical Services, Inc. |
Minnesota |
None |
|
ESI
Canada |
Ontario,
Canada |
None |
|
ESI
Claims, Inc. |
Delaware |
None |
|
ESI
Enterprises, LLC |
Delaware |
None |
|
ESI-GP
Canada, ULC |
Nova
Scotia, Canada |
None |
|
ESI-GP
Holdings, Inc. |
Delaware |
None |
|
ESI
Mail Pharmacy Service, Inc. |
Delaware |
None |
|
ESI
Partnership |
Delaware |
None |
|
ESI
Realty, LLC |
New
Jersey |
None |
|
ESI
Resources, Inc. |
Minnesota |
None |
|
Express
Access Pharmacy, Inc. |
Delaware |
None |
|
Express
Scripts Canada Co. |
Nova
Scotia, Canada |
None |
|
Express
Scripts Canada Holding, Co. |
Delaware |
None |
|
Express
Scripts Sales Development Co. |
Delaware |
None |
|
Express
Scripts Specialty Distribution
Services,
Inc. |
Delaware |
None |
|
Express
Scripts Utilization Management Co. |
Delaware |
None |
|
iBIOLogic,
Inc. |
Delaware |
None |
|
Intecare
Pharmacies, Ltd. |
Ontario,
Canada |
None |
|
IVTx,
Inc. |
Delaware |
None |
|
Great
Plains Reinsurance Company |
Arizona |
None |
|
National
Prescription Administrators, Inc. |
New
Jersey |
NPA |
|
NPA
of New York IPA, Inc. |
New
York |
None |
|
Phoenix
Marketing Group, LLC |
Delaware |
Phoenix |
|
Value
Health, Inc. |
Delaware |
None |
|
ValueRx
of Michigan, Inc. |
Michigan |
None |
|
YourPharmacy.com,
Inc. |
Delaware |
None |
EXHIBIT
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby
consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-110573, 333-43336, 333-80255, 333-72441, 333-69855,
333-48779, 333-48767, 333-48765, 333-27983, 333-04291, 33-64094, 33-64278,
33-93106) of Express Scripts, Inc. of our report dated March 2, 2005, relating
to the consolidated financial statements, management’s assessment of the
effectiveness of internal control over financial reporting and the effectiveness
of internal control over financial reporting, which appear in this Form 10-K.
PricewaterhouseCoopers
LLP
St.
Louis, Missouri
March 2,
2005