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SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-25769
ACCREDO HEALTH, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE | 62-1642871 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134
(Address of principal executive offices) (Zip Code)
(901) 385-3688
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
CLASS | OUTSTANDING AT April 29, 2005 | |||
COMMON STOCK, $0.01 PAR VALUE | 49,551,609 | |||
TOTAL COMMON STOCK | 49,551,609 | |||
ACCREDO HEALTH, INCORPORATED
INDEX
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO | ||||||||
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO | ||||||||
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO | ||||||||
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO |
Note: Items 1, 2, 3 and 4 of Part II are omitted because they are not applicable
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCREDO HEALTH, INCORPORATED
Nine Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net patient revenue | $ | 1,411,120 | $ | 1,103,197 | $ | 507,914 | $ | 398,919 | ||||||||
Other revenue | 27,815 | 28,604 | 8,574 | 9,667 | ||||||||||||
Equity in net income of joint ventures | 1,805 | 2,272 | 572 | 722 | ||||||||||||
Total revenues | 1,440,740 | 1,134,073 | 517,060 | 409,308 | ||||||||||||
Cost of sales | 1,189,843 | 894,338 | 432,994 | 325,517 | ||||||||||||
Gross profit | 250,897 | 239,735 | 84,066 | 83,791 | ||||||||||||
General & administrative | 114,420 | 103,166 | 36,370 | 34,178 | ||||||||||||
Bad debts | 18,997 | 23,731 | 6,593 | 9,303 | ||||||||||||
Depreciation and amortization | 11,850 | 9,333 | 4,017 | 3,277 | ||||||||||||
Income from operations | 105,630 | 103,505 | 37,086 | 37,033 | ||||||||||||
Interest expense, net | 14,681 | 6,365 | 3,819 | 1,964 | ||||||||||||
Minority interest in consolidated subsidiary | 510 | 1,741 | 133 | 688 | ||||||||||||
Income before income taxes | 90,439 | 95,399 | 33,134 | 34,381 | ||||||||||||
Provision for income taxes | 35,015 | 36,855 | 12,959 | 13,254 | ||||||||||||
Net income | $ | 55,424 | $ | 58,544 | $ | 20,175 | $ | 21,127 | ||||||||
Cash dividends declared on common stock | $ | — | $ | — | $ | — | $ | — | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 1.13 | $ | 1.22 | $ | 0.41 | $ | 0.44 | ||||||||
Diluted | $ | 1.12 | $ | 1.20 | $ | 0.40 | $ | 0.43 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 48,891,593 | 48,050,099 | 49,130,520 | 48,307,891 | ||||||||||||
Diluted | 49,488,066 | 48,869,037 | 50,186,424 | 49,277,358 |
See accompanying notes to condensed consolidated financial statements.
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ACCREDO HEALTH, INCORPORATED
(Unaudited) | ||||||||
March 31, | June 30, | |||||||
2005 | 2004 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 78,204 | $ | 42,743 | ||||
Patient accounts receivable, less allowance for doubtful accounts of $80,336 at March 31, 2005 and $81,051 at June 30, 2004 | 402,196 | 325,642 | ||||||
Due from affiliates | 2,399 | 4,191 | ||||||
Other accounts receivable | 34,841 | 28,584 | ||||||
Inventories | 153,107 | 128,323 | ||||||
Prepaids and other current assets | 5,111 | 5,084 | ||||||
Income taxes receivable | 5,300 | 382 | ||||||
Deferred income taxes | 13,397 | 14,129 | ||||||
Total current assets | 694,555 | 549,078 | ||||||
Property and equipment, net | 45,422 | 41,283 | ||||||
Other assets: | ||||||||
Joint venture investments | 7,692 | 7,713 | ||||||
Goodwill, net | 553,959 | 382,628 | ||||||
Other intangible assets, net | 18,361 | 17,480 | ||||||
Total assets | $ | 1,319,989 | $ | 998,182 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 227,338 | $ | 164,780 | ||||
Accrued expenses | 22,007 | 22,625 | ||||||
Due to affiliates | 1,761 | 654 | ||||||
Current portion of long-term debt | 4,583 | 4,445 | ||||||
Total current liabilities | 255,689 | 192,504 | ||||||
Long-term debt | 344,064 | 174,866 | ||||||
Deferred income taxes | 31,199 | 25,112 | ||||||
Minority interest in consolidated joint venture | 2,767 | 3,757 | ||||||
Stockholders’ equity: | ||||||||
Undesignated Preferred Stock, 5,000,000 shares authorized, no shares issued | — | — | ||||||
Common Stock, $.01 par value; 100,000,000 shares authorized; 49,536,775 and 48,603,341 shares issued and outstanding at March 31, 2005 and June 30, 2004, respectively | 495 | 486 | ||||||
Additional paid-in capital | 464,923 | 436,021 | ||||||
Accumulated other comprehensive income | — | 8 | ||||||
Retained earnings | 220,852 | 165,428 | ||||||
Total stockholders’ equity | 686,270 | 601,943 | ||||||
Total liabilities and stockholders’ equity | $ | 1,319,989 | $ | 998,182 | ||||
See accompanying notes to condensed consolidated financial statements.
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ACCREDO HEALTH, INCORPORATED
Nine Months Ended | ||||||||
March 31, | ||||||||
2005 | 2004 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 55,424 | $ | 58,544 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 14,132 | 12,018 | ||||||
Provision for losses on accounts receivable | 18,997 | 23,731 | ||||||
Deferred income tax expense | 6,836 | 14,094 | ||||||
Tax benefit of exercise of stock options | 7,950 | 1,808 | ||||||
Excess distributed (undistributed) earnings of joint ventures | 22 | (1,857 | ) | |||||
Minority interest in income of consolidated joint venture | 510 | 1,741 | ||||||
Write-off of unamortized debt issuance costs | 4,422 | — | ||||||
Loss on sale of property and equipment | 288 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Patient receivables and other | (86,211 | ) | (64,876 | ) | ||||
Due from affiliates | 2,899 | (1,068 | ) | |||||
Inventories | (15,115 | ) | (48,290 | ) | ||||
Prepaids and other current assets | 228 | 908 | ||||||
Income taxes receivable | (2,706 | ) | (160 | ) | ||||
Accounts payable and accrued expenses | 49,083 | 52,613 | ||||||
Net cash provided by operating activities | 56,759 | 49,206 | ||||||
INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment | (13,744 | ) | (10,260 | ) | ||||
Proceeds from sale of property and equipment | 62 | — | ||||||
Additions to other assets | (927 | ) | — | |||||
Business acquisitions, net of cash acquired | (190,506 | ) | (35,862 | ) | ||||
Net cash used in investing activities | (205,115 | ) | (46,122 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of long-term debt | 376,450 | 1,381 | ||||||
Principal payments on long-term debt | (207,114 | ) | (12,525 | ) | ||||
Payment of debt issuance costs | (4,980 | ) | — | |||||
Issuance of common stock | 20,961 | 6,089 | ||||||
Distributions to minority interest partners | (1,500 | ) | (1,400 | ) | ||||
Net cash provided by (used in) financing activities | 183,817 | (6,455 | ) | |||||
Increase (decrease) in cash and cash equivalents | 35,461 | (3,371 | ) | |||||
Cash and cash equivalents at beginning of period | 42,743 | 48,006 | ||||||
Cash and cash equivalents at end of period | $ | 78,204 | $ | 44,635 | ||||
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2005
1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of Accredo Health, Incorporated (the “Company” or “Accredo”) have been included. Operating results for the three and nine-month periods ended March 31, 2005, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2005.
The balance sheet at June 30, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.
2. | STOCKHOLDERS’ EQUITY |
During the quarter and nine months ended March 31, 2005, employees and directors exercised stock options to acquire 598,523 and 898,423 shares of Accredo common stock, respectively. The weighted average option exercise price was $28.26 per share for the quarter and $22.41 per share for the nine-month period.
Employees of the Company also acquired 35,011 shares of Accredo common stock pursuant to the provisions of the Company’s Employee Stock Purchase Plan at a price of approximately $23.56 per share. Shares acquired under the plan were purchased on December 31, 2004 from employee funds accumulated via payroll deductions from July through December 2004.
3. | PRO FORMA NET INCOME EFFECT OF COMPANY STOCK OPTION PLANS |
The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Pro forma information regarding net income is required by Statement of Financial Accounting Standards No. 123 (SFAS 123) and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. Significant assumptions used by the Company in the Black-Scholes option-pricing model computations are as follows for the three-month and nine-month periods ended March 31:
Nine Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Weighted average risk-free interest rate | 3.28 | 2.77 | % | 3.43 | 2.75 | % | ||||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Volatility factor | .60 | .70 | .60 | .70 | ||||||||||||
Weighted-avg. expected life | 4.0 yrs | 4.0 yrs | 4.0 yrs | 4.0 yrs | ||||||||||||
Estimated turnover | 8 | % | 8 | % | 8 | % | 8 | % |
The Black-Scholes option model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
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For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the three-month and nine-month periods ended March 31 is as follows (in thousands, except share data):
Nine Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income, as reported | $ | 55,424 | $ | 58,544 | $ | 20,175 | $ | 21,127 | ||||||||
Less stock-based employee compensation cost, net of related tax effects, applying the fair value method to all awards | (10,241 | ) | (8,718 | ) | (4,163 | ) | (3,063 | ) | ||||||||
Pro forma net income | $ | 45,183 | $ | 49,826 | $ | 16,012 | $ | 18,064 | ||||||||
Earnings per share: | ||||||||||||||||
Basic – as reported | $ | 1.13 | $ | 1.22 | $ | 0.41 | $ | 0.44 | ||||||||
Basic – pro forma | $ | 0.92 | $ | 1.04 | $ | 0.33 | $ | 0.37 | ||||||||
Diluted – as reported | $ | 1.12 | $ | 1.20 | $ | 0.40 | $ | 0.43 | ||||||||
Diluted – pro forma | $ | 0.92 | $ | 1.04 | $ | 0.32 | $ | 0.37 |
The Financial Accounting Standards Board issued Statement No. 123 (revised 2004), Share-Based Payment, on December 16, 2004. SFAS 123R requires all entities to recognize compensation expense in an amount equal to the fair value of share based payments. The standard is effective for awards granted, modified, or settled after the first reporting year beginning after June 15, 2005. The Company will adopt SFAS 123R using the modified prospective method in the fiscal year beginning July 1, 2005.
4. | COMPREHENSIVE INCOME |
Comprehensive income includes changes in the fair value of certain derivative financial instruments that qualify for hedge accounting. Comprehensive income for all periods presented is as follows:
Nine Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Reported net income | $ | 55,424 | $ | 58,544 | $ | 20,175 | $ | 21,127 | ||||||||
Unrealized gain (loss) on interest rate swap contracts, net of tax benefit | (8 | ) | 58 | — | (36 | ) | ||||||||||
Comprehensive income | $ | 55,416 | $ | 58,602 | $ | 20,175 | $ | 21,091 | ||||||||
The adjustments made in computing comprehensive income are reflected as a component of stockholders’ equity under the heading “accumulated other comprehensive income”.
5. | CONTINGENCIES |
The Company, David D. Stevens and Joel R. Kimbrough are named as defendants in a putative class action lawsuit filed in the United States District Court for the Western District of Tennessee, Memphis Division. A Consolidated Amended Complaint was filed on September 15, 2004. The lawsuit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)(5) promulgated thereunder, and Section 20 of the Securities Exchange Act of 1934. The putative class representatives seek to represent a class of individuals and entities that purchased Company stock during the period June 16, 2002 through April 7, 2003 and who supposedly suffered damages from the alleged violations of the securities laws. The Company believes that the claims asserted in the putative class action lawsuit are without merit. The Company maintains insurance for losses arising from the types of allegations made in this litigation. The Company has expended defense costs to date substantially equal to the amount of the Company’s retention under its insurance coverage. The Company believes that it is not reasonably possible that it will suffer any material out-of-pocket monetary loss in this lawsuit. Therefore, no loss provision has been accrued in the consolidated financial statements related to this matter as of March 31, 2005.
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In addition, two purported derivative lawsuits were filed in the Circuit Court of Shelby County, Tennessee for the Thirtieth Judicial District at Memphis. These actions were consolidated and a Consolidated Derivative Complaint was filed on July 28, 2003. The derivative action names certain current and former Company officers and directors (David D. Stevens, John R. Grow, Kyle J. Callahan, Kevin L. Roberg, Kenneth R. Masterson, Kenneth J. Melkus, Dick R. Gourley, Nancy-Ann DeParle, Joel R. Kimbrough, Thomas W. Bell, Jr., and Patrick J. Welsh) as defendants. The derivative lawsuit alleges that the defendants breached fiduciary duties owed to the Company by engaging in the same alleged conduct that is the basis of the putative class action lawsuit. On behalf of the Company, the derivative complaint seeks compensatory damages from the defendants and the disgorgement of profits, benefits and other compensation received by the defendants. The Company has filed a motion to dismiss the Consolidated Derivative Complaint and the parties are awaiting the Court’s ruling on this motion.
As a result of the pending acquisition of the Company by Medco Health Solutions, Inc. (Medco) (see below “Proposed Transaction with Medco”), on February 23, 2005, the derivative plaintiffs in the Consolidated Derivative Complaint filed a motion seeking leave to amend the Consolidated Derivative Complaint to add Medco and certain additional Accredo directors as defendants. The proposed amendment seeks injunctive relief to enjoin the Medco acquisition of Accredo on the grounds that the named Accredo directors and officers allegedly seek to use the acquisition to squeeze out Accredo’s current stockholders for an unfair price and to insulate themselves from liability for alleged wrongdoing associated with Accredo’s June 2002 acquisition of the SPS Division of Gentiva Health Services, Inc. The Company believes that the claims asserted in the derivative lawsuit are without merit. The Company maintains insurance for losses arising from the types of allegations made in this litigation. The Company has expended defense costs to date substantially equal to the amount of the Company’s retention under its insurance coverage. The Company believes that it is not reasonably possible that it will suffer any material out-of-pocket monetary loss in this lawsuit. Therefore, no loss provision has been accrued in the consolidated financial statements related to this matter as of March 31, 2005.
The Company and the Company’s 80% owned joint venture in California provided contract pharmacy and related billing services to a local California pharmacy that was recently audited by the California Department of Health Services (Department) concerning its MediCal billing for clotting factor supplied to the pharmacy by the Company or the Company’s joint venture. The audit is for the period January 2, 2001 to March 5, 2003 with dates of payment from March 26, 2001 to April 21, 2003. Although the joint venture is not currently involved with the audits, the contract pharmacy relationship is implicated and the pharmacy is seeking indemnification from the joint venture. Since the initiation of the audit, the state agency has temporarily withheld MediCal payments from the pharmacy and has alleged, among other things, overbilling and false claims. In December 2004, the Department notified the pharmacy that it had completed its audit and assessed the pharmacy approximately $13.5 million in alleged overbilling and overpayment received by the pharmacy from MediCal. Over 80% of the assessment was for claims allegedly submitted in excess of acquisition cost. The remaining portion of the assessment cited overpayments for lack of documentation and false claims. The Department stated in its letter that the pharmacy received reimbursement for services that were falsely represented as provided by the pharmacy. The pharmacy has appealed the assessment, and a trial date has been set for August 3, 2005. The Company believes the assessment is without merit and expects the pharmacy and the joint venture to vigorously defend against these allegations through judicial proceedings. Since false claim statutes are implicated, the pharmacy could also be assessed fines and penalties. Due to the uncertainty about the issues involved in this matter, based on the facts and circumstances known to date, the Company believes some amount of monetary loss is reasonably possible in the range of zero to $20 million.
The Company and the Company’s 80% owned joint venture in California also provided contract pharmacy and related billing services to a second local California pharmacy. The California Department of Health Services is also auditing this pharmacy. The Company has recently received a letter from the Department asking for information in connection with the audit. The Company anticipates that this audit will involve issues that are the same as or similar to those involved in the audit described in the preceding paragraph. The Company is in the process of gathering information responsive to the Department’s letter and cannot determine at this time whether it will incur any liability associated with this audit.
Also, from time to time, the Company is involved in lawsuits, claims, audits and investigations arising in the normal course of its business. In addition, the business that the Company acquired from Gentiva Health Services, Inc. is involved in several lawsuits and claims related to its historic operation by Gentiva, which are being controlled by Gentiva and for which Gentiva has agreed to indemnify the Company. The Company believes that it is not reasonably possible that it would suffer any material monetary loss in these lawsuits, claims, audits and investigations. Therefore, no loss provision has been accrued in the consolidated financial statements related to these matters as of March 31, 2005.
6. | ACQUISITIONS |
On October 17, 2003, the Company acquired certain assets, including inventory and accounts receivable, of Alpha Therapeutic Services, Inc. (ATS) from Baxter Healthcare Corporation. ATS, located in the City of Industry, California,
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provides pharmaceutical care for certain chronic, long-term patient populations including those requiring IVIG and blood related disorders such as hemophilia. As a result of the acquisition, we have increased our market share in these products. The aggregate purchase price paid was $35.7 million. Total assets acquired were $4.2 million. The excess of the total purchase price over the fair value of the assets acquired was allocated as follows: $30.8 million to goodwill and $0.7 million to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The results of the ATS operations have been included in the consolidated financial statements since October 18, 2003.
On July 21, 2004, the Company acquired all of the outstanding stock of HRA Holding Corporation and its wholly owned subsidiary, Hemophilia Resources of America, Inc. (HRA). HRA specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with hemophilia and related bleeding disorders. The acquisition of HRA increased the Company’s market leading position in the distribution of hemophilia related products. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $166.5 million and was funded by the Company’s increased credit facility. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $24.0 million and $6.9 million, respectively. The excess of the purchase price, including acquisition costs of approximately $0.3 million, over the fair value of the net assets acquired of $17.1 million was allocated as follows: $146.1 million to goodwill and $2.5 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. Final resolution of the working capital adjustment, as defined in the merger agreement, resulted in the payment of $0.7 million of additional consideration in April 2005. In addition, we recorded a $1.0 million deferred tax liability associated with the non-deductible future amortization of the acquired patient relationships. These amounts were accrued as of March 31, 2005, and are included as adjustments to the liabilities assumed amount described above. The Company also paid $0.8 million as consideration for an agreement with a selling shareholder not to compete with the Company for a period of ten years. The transition and integration of HRA business activities commenced during the September 2004 quarter and will continue throughout the remainder of fiscal 2005. The results of HRA have been included in the consolidated financial statements since July 21, 2004.
On July 1, 2004, the Company acquired all of the outstanding stock of Home Health Care Resources, Inc. (HHCR). HHCR specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with autoimmune disorders and hemophilia. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $29.8 million. This amount includes additional consideration paid in March 2005 amounting to $3 million related to an earn-out payment based on the achievement of certain financial results for the six months ended December 31, 2004. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $4.3 million and $0.8 million, respectively. The excess of the purchase price, including the earn-out payment, over the fair value of the net assets acquired of $3.5 million was allocated as follows: $25.7 million to goodwill and $0.3 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The Company also paid $0.3 million as consideration for an agreement with the selling shareholders not to compete with the Company for a period of ten years. The results of HHCR have been included in the consolidated financial statements since July 1, 2004.
7. | PROPOSED TRANSACTION WITH MEDCO |
On February 23, 2005, the Company and Medco announced the signing of a definitive agreement whereby Medco would acquire all of the outstanding stock of Accredo. Total consideration is approximately $2.2 billion in cash and Medco common stock. The transaction has been approved by the boards of directors of both companies and is subject to the approval of Accredo shareholders and other customary closing conditions. Medco intends to manage Accredo as an independent business. Under terms of the definitive agreement, each Accredo share outstanding will be exchanged for $22.00 in cash and 0.49107 shares of the Company’s common stock, subject to adjustment based on the value of Medco’s common stock in certain situations as provided in the agreement. Medco expects to fund the cash portion of the consideration through a combination of cash on hand, bank borrowings and its accounts receivable financing facility. The transaction is expected to close in mid-2005.
On February 23, 2005, the derivative plaintiffs in the derivative lawsuit filed in Shelby County, Tennessee against certain Accredo directors and officers filed a motion seeking leave to amend the Consolidated Derivative Complaint to add Medco and certain additional Accredo directors as defendants. The proposed amendment seeks injunctive relief to enjoin the Medco acquisition of Accredo on the grounds that the named Accredo directors and officers allegedly seek to use the acquisition to squeeze out Accredo’s current stockholders for an unfair price and to insulate themselves from liability for alleged wrongdoing associated with Accredo’s June 2002 acquisition of the SPS Division of Gentiva Health Services, Inc. See “Contingencies” footnote above.
8. | EARNINGS PER SHARE |
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The Company presents earnings per share in accordance with SFAS No. 128, Earnings Per Share. All per share amounts have been calculated using the weighted average number of shares outstanding during each period. Diluted earnings per share are adjusted for the impact of common stock equivalents using the treasury stock method when the effect is dilutive. Options to purchase approximately 198,000 and 26,000 shares of common stock were outstanding at March 31, 2005 and March 31, 2004, respectively, but were not included in the computation of diluted earnings per share for the three months ended March 31 because the options’ exercise prices were greater than the average market price of common shares and, therefore, the effect would be antidilutive. A reconciliation of the basic and diluted weighted average shares outstanding is as follows at March 31:
Nine Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Weighted average number of common shares outstanding used as the denominator in the basic earnings per share calculation | 48,891,593 | 48,050,099 | 49,130,520 | 48,307,891 | ||||||||||||
Additional shares assuming exercise of dilutive stock options | 596,473 | 818,938 | 1,055,904 | 969,467 | ||||||||||||
Weighted average number of common and equivalent shares used as the denominator in the diluted earnings per share calculation | 49,488,066 | 48,869,037 | 50,186,424 | 49,277,358 | ||||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Some of the information in this quarterly report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully for the following reasons:
• | the statements discuss our future expectations; | |||
• | the statements contain projections of our future earnings or of our financial condition; and | |||
• | the statements state other “forward-looking” information. | |||
Specifically, this report contains, among others, forward-looking statements about: | ||||
• | our expectations regarding our product mix for periods following March 31, 2005; | |||
• | our expectations regarding our payor mix for periods following March 31, 2005; | |||
• | our expectations regarding the movement of patients pursuant to our strategic alliance with Medco Health Solutions, Inc. (Medco) following March 31, 2005; | |||
• | our expectations regarding the proposed acquisition of the Company by Medco; | |||
• | our expectations regarding the scope and cost of our capital expenditures following March 31, 2005; | |||
• | our sources and availability of funds to satisfy our working capital needs; | |||
• | the implementation or interpretation of current or future regulations and legislation relating to the industry in which we operate; | |||
• | our critical accounting policies; and | |||
• | our expectations regarding the percentage of our revenues attributable to federal and state programs. |
The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause our actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in Part I, Item 2 of this report under the sub-heading “Risk Factors.”
You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we currently expect or anticipate. You should be aware that the occurrence of any of the events described in the risk factors discussed elsewhere in this quarterly report and other events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition and business. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
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OVERVIEW
For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Form 10-K for the fiscal year ended June 30, 2004.
We provide specialty retail pharmacy services for the treatment of patients with costly, chronic diseases. We derive revenues primarily from the retail sale of drugs to patients. We focus almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. The following table presents the percentage of our total revenues generated from sales with respect to the diseases that we primarily serve:
Three Months | Nine Months Ended | |||||||||||||||
Ended March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Hemophilia, Autoimmune Disorders, Primary Immunodeficiency Disease (PID) and Alpha- 1 Antitrypsin Deficiency | 35 | % | 33 | % | 36 | % | 35 | % | ||||||||
Multiple Sclerosis | 13 | % | 13 | % | 15 | % | 14 | % | ||||||||
Pulmonary Arterial Hypertension (PAH) | 15 | % | 15 | % | 15 | % | 16 | % | ||||||||
Gaucher Disease | 5 | % | 7 | % | 6 | % | 9 | % | ||||||||
Growth Hormone-Related Disorders | 9 | % | 7 | % | 9 | % | 8 | % | ||||||||
Respiratory Syncytial Virus (RSV) | 13 | % | 14 | % | 8 | % | 9 | % | ||||||||
Other Diseases and Services | 10 | % | 11 | % | 11 | % | 9 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
In the June 2005 quarter, we anticipate that revenues for the treatment of RSV will represent a much smaller percentage of our overall revenues with an offsetting increase in the percentage of our revenues from the other diseases listed above. Synagis®, for the treatment of RSV, is primarily dispensed in the December and March quarters.
Reimbursement for the products we sell comes from governmental payors, Medicare and Medicaid, and from non-governmental payors. The following table presents the percentage of our total revenues reimbursed by these payors:
Year Ended | Year Ended | Nine Months Ended | ||||||||||
June 30, 2003 | June 30, 2004 | March 31, 2005 | ||||||||||
Non-governmental | 73 | % | 72 | % | 72 | % | ||||||
Governmental: | ||||||||||||
Medicaid | 20 | % | 21 | % | 21 | % | ||||||
Medicare | 7 | % | 7 | % | 7 | % |
Blood clotting factor for the treatment of hemophilia and the PAH products, Flolan® and Remodulin®, are the primary products we distributed in fiscal years 2003, 2004, and year to date March 31, 2005, for which we were reimbursed directly by Medicare. We anticipate that our payor mix for the remainder of our fiscal year 2005 will be similar to the payor mix achieved in fiscal 2004 and the nine months ended March 31, 2005.
STRATEGIC ALLIANCE
On February 9, 2004, we signed a long-term agreement with Medco to become the preferred retail and home delivery pharmacy provider to Medco members for our specialty product lines that we currently dispense to treat patients with long-term, chronic diseases. The agreement includes drugs to treat hemophilia, pulmonary arterial hypertension, RSV, immune deficiency disorders, multiple sclerosis, growth hormone deficiency and Gaucher’s disease. We have historically provided our drugs to some Medco members; however, this agreement has significantly increased the number of prescriptions dispensed for Medco members.
On February 23, 2005, the Company and Medco announced the signing of a definitive agreement whereby Medco would acquire all of the outstanding stock of Accredo. See discussion in “Proposed Transaction with Medco” section below.
ACQUISITIONS
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On October 17, 2003, the Company acquired certain assets, including inventory and accounts receivable, of Alpha Therapeutic Services, Inc. (ATS) from Baxter Healthcare Corporation. ATS, located in the City of Industry, California, provides pharmaceutical care for certain chronic, long-term patient populations including those requiring IVIG and blood related disorders such as hemophilia. As a result of the acquisition, we have increased our market share in these products. The aggregate purchase price paid was $35.7 million. Total assets acquired were $4.2 million. The excess of the total purchase price over the fair value of the assets acquired was allocated as follows: $30.8 million to goodwill and $0.7 million to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The results of the ATS operations have been included in the consolidated financial statements since October 18, 2003.
On July 21, 2004, the Company acquired all of the outstanding stock of HRA Holding Corporation and its wholly owned subsidiary, Hemophilia Resources of America, Inc. (HRA). HRA specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with hemophilia and related bleeding disorders. The acquisition of HRA increased the Company’s market leading position in the distribution of hemophilia related products. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $166.5 million and was funded by the Company’s increased credit facility. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $24.0 million and $6.9 million, respectively. The excess of the purchase price, including acquisition costs of approximately $0.3 million, over the fair value of the net assets acquired of $17.1 million was allocated as follows: $146.1 million to goodwill and $2.5 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. Final resolution of the working capital adjustment, as defined in the merger agreement, resulted in the payment of $0.7 million of additional consideration in April 2005. In addition, we recorded a $1.0 million deferred tax liability associated with the non-deductible future amortization of the acquired patient relationships. These amounts were accrued as of March 31, 2005, and are included as adjustments to the liabilities assumed amount described above. The Company also paid $0.8 million as consideration for an agreement with a selling shareholder not to compete with the Company for a period of ten years. The transition and integration of HRA business activities commenced during the September 2004 quarter and will continue throughout the remainder of fiscal 2005. The results of HRA have been included in the consolidated financial statements since July 21, 2004.
On July 1, 2004, the Company acquired all of the outstanding stock of Home Health Care Resources, Inc. (HHCR). HHCR specializes in providing pharmaceuticals, therapeutic supplies and disease management services for people with autoimmune disorders and hemophilia. The aggregate purchase price paid for this acquisition, inclusive of transaction costs and related expenses, was approximately $29.8 million. This amount includes additional consideration paid in March 2005 amounting to $3 million related to an earn-out payment based on the achievement of certain financial results for the six months ended December 31, 2004. This transaction was accounted for using the purchase method of accounting. Total assets acquired and liabilities assumed were $4.3 million and $0.8 million, respectively. The excess of the purchase price, including the earn-out payment, over the fair value of the net assets acquired of $3.5 million was allocated as follows: $25.7 million to goodwill and $0.3 million related to acquired patient relationships. The acquired patient relationship intangible is being amortized over five years. The Company also paid $0.3 million as consideration for an agreement with the selling shareholders not to compete with the Company for a period of ten years. The results of HHCR have been included in the consolidated financial statements since July 1, 2004.
PROPOSED TRANSACTION WITH MEDCO
On February 23, 2005, the Company and Medco announced the signing of a definitive agreement whereby Medco would acquire all of the outstanding stock of Accredo. Total consideration is approximately $2.2 billion in cash and Medco common stock. The transaction has been approved by the boards of directors of both companies and is subject to the approval of Accredo shareholders and other customary closing conditions. Medco intends to manage Accredo as an independent business. Under terms of the definitive agreement, each Accredo share outstanding will be exchanged for $22.00 in cash and 0.49107 shares of the Company’s common stock, subject to adjustment based on the value of Medco’s common stock in certain situations as provided in the agreement. Medco expects to fund the cash portion of the consideration through a combination of cash on hand, bank borrowings and its accounts receivable financing facility. The transaction is expected to close in mid-2005.
On February 23, 2005, the derivative plaintiffs in the derivative lawsuit filed in Shelby County, Tennessee against certain Accredo directors and officers filed a motion seeking leave to amend the Consolidated Derivative Complaint to add Medco and certain additional Accredo directors as defendants. The proposed amendment seeks injunctive relief to enjoin the Medco acquisition of Accredo on the grounds that the named Accredo directors and officers allegedly seek to use the acquisition to squeeze out Accredo’s current stockholders for an unfair price and to insulate themselves from liability for alleged wrongdoing associated with Accredo’s June 2002 acquisition of the SPS Division of Gentiva Health Services, Inc. The Company believes the claims asserted in the derivative lawsuit are without merit.
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RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Revenues.Total revenues increased 26% from $409.3 million to $517.1 million from the three months ended March 31, 2004 to the three months ended March 31, 2005. Net patient revenue increased 27% from $398.9 million to $507.9 million from the three months ended March 31, 2004 to the three months ended March 31, 2005. The increase is primarily due to volume growth in our products for the treatments of hemophilia, growth hormone disorders, multiple sclerosis, immune deficiency disorders and RSV as a result of the addition of new patients and additional sales of product to existing patients. Sales volume increases in growth hormone and our product for the treatment of multiple sclerosis are primarily driven by our expanded relationship with Medco. Since the strategic alliance with Medco did not begin until May 2004, we did not have any revenue in the March 2004 quarter associated with the expanded relationship. We also benefited from the addition of new and expanded contracts with other managed care organizations, and from market share gains in certain product lines. The increase in the hemophilia and immune deficiency product lines is driven in part by the acquisitions of HRA and HHCR, which were purchased in July 2004. In addition, revenues from our seven new products launched since January 1, 2003, increased approximately $17.3 million in the current quarter as compared to the same period last year.
Cost of Sales.Cost of sales increased 33% from $325.5 million to $433 million from the three months ended March 31, 2004 to the three months ended March 31, 2005. The 33% growth in costs of sales exceeded the 26% revenue growth discussed above. As a percentage of revenues, cost of sales increased from 79.5% to 83.7% from the three months ended March 31, 2004 to the three months ended March 31, 2005, resulting in gross margins of 20.5% and 16.3% for the three months ended March 31, 2004 and 2005, respectively. The decline is primarily a result of reductions in reimbursement levels from government and commercial payors in the three months ended March 31, 2005 as compared to the same period last year. These reductions principally relate to our hemophilia (specifically products reimbursed by MediCal beginning June 1, 2004, and Medicare beginning January 1, 2005), PAH (specifically products reimbursed by Medicare), and IVIG product lines. Furthermore, the decrease is a result of product mix changes. We derived a larger percentage of our revenues from lower margin products in the 2005 period when compared to the same period last year, including changes resulting from our expanded relationship with Medco and the increasing volume of our seven new products launched since 2003.
General and Administrative.General and administrative expense increased from $34.2 million to $36.4 million, or 6%, from the three months ended March 31, 2004 to the three months ended March 31, 2005. As a percentage of revenues, general and administrative expense decreased from 8.4% to 7.0% from the three months ended March 31, 2004 to the three months ended March 31, 2005. The decrease as a percentage of revenue is primarily due to the significant revenue growth in the current period as compared to the same period last year and changes in product mix, both driven in part from our expanded relationship with Medco. The increase on an absolute dollar basis is primarily due to approximately $1.4 million in transaction costs associated with the proposed acquisition by Medco in the current quarter that were not present in the same quarter last year. These transaction costs primarily consisted of legal, investment banking, and other professional fees. Non-transaction related professional fees also increased as a result of Sarbanes-Oxley compliance costs and costs associated with various legal matters. Information technology expenses associated with certain hardware and software maintenance contracts and licenses also increased as a result of revenue growth in the current quarter as compared to the same quarter last year.
Bad Debts.Bad debts decreased from $9.3 million to $6.6 million from the three months ended March 31, 2004 to the three months ended March 31, 2005. As a percentage of revenues, bad debt expense decreased from 2.3% to 1.3% from the three months ended March 31, 2004 to the three months ended March 31, 2005. This decrease is primarily due to a decrease in the percentage of our revenues that were reimbursed by major medical benefit plans versus prescription card benefits, and the impact of changes in product mix, including the incremental Medco revenues in the three months ended March 31, 2005, that did not exist in the same period last year. The change in revenue mix discussed above directly impacts the percentage of revenue reimbursed by prescription card benefits versus major medical benefit plans. The majority of the reimbursement provided by major medical benefit plans are subject to much higher co-payment and deductible amounts versus the typical $20 to $30 co-pay generally required by prescription card benefit plans. The revenue stream associated with the expanded Medco business is pre-adjudicated by Medco and has virtually no bad debt costs associated with it.
Depreciation and Amortization.Depreciation expense increased from $2.1 million to $2.8 million from the three months ended March 31, 2004 to the three months ended March 31, 2005, as a result of purchases of property and equipment associated with our revenue growth including additional computer hardware and enhancements to our fully integrated pharmacy and reimbursement software system, and build-outs of additional space. Amortization expense was $1.2 million for the three months ended March 31, 2004 and the three months ended March 31, 2005. These amounts primarily relate to the amortization of certain other identifiable intangible assets (principally patient relationships and non-compete agreements) associated with the companies we acquired.
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Interest Income/Expense, Net.Interest expense, net increased from $2.0 million to $3.8 million from the three months ended March 31, 2004 to the three months ended March 31, 2005 due to increased borrowings and higher interest rates. Upon the closing of our expanded credit facility in July 2004 (now at $550 million capacity), we initially increased our borrowings to $375.0 million. The borrowings were primarily used to fund the acquisition of HRA that also occurred in July 2004. Amounts borrowed under the previous Senior Credit facility were approximately $182.5 million at March 31, 2004, with a weighted average interest rate of 3.38%. Amounts borrowed under the expanded Senior Credit facility were $347.2 million at March 31, 2005, with a weighted average interest rate of 4.60%.
Income Tax Expense.Our effective tax rate increased from 38.6% to 39.1% from the three months ended March 31, 2004 to the three months ended March 31, 2005. The increase in the effective tax rate for the period is primarily due to a larger percentage of our profits being derived from income that is taxable at higher rates in certain states. The difference between the recognized effective tax rate and the statutory rate is primarily attributed to state income taxes.
Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004
Revenues.Total revenues increased 27% from $1.134 billion to $1.441 billion from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. Net patient revenue increased 28% from $1.103 billion to $1.411 billion from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. The increase is primarily due to volume growth in our products for the treatments of hemophilia, multiple sclerosis, growth hormone disorders, PAH, RSV and immune deficiency disorders as a result of the addition of new patients and additional sales of product to existing patients. In addition, the increase in revenues from hemophilia products and our products for the treatment of immune deficiency disorders is driven in part by of the acquisitions of HRA and HHCR, which were purchased in July 2004. We also benefited from the addition of new and expanded contracts with managed care organizations and pharmacy benefit management companies (PBMs), including our expanded relationship with Medco. We also achieved market share gains in certain product lines. Since the strategic alliance with Medco did not begin until May 2004, we did not have any revenue in the nine-months ended March 31, 2004, associated with the expanded relationship. We experienced improved collection rates in fiscal 2005 on certain product lines that resulted in the reduction of contractual adjustments in the amount of $4.8 million for the nine months ended March 31, 2005. In addition, revenues from our seven new products launched since January 1, 2003, increased approximately $53.3 million in the current period as compared to the same period last year.
Cost of Sales.Cost of sales increased 33% from $894.3 million to $1.19 billion from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. The 33% growth in costs of sales exceeded the 27% revenue growth discussed above. As a percentage of revenues, cost of sales increased from 78.9% to 82.6% from the nine months ended March 31, 2004 to the nine months ended March 31, 2005, resulting in gross margins of 21.1% and 17.4% for the nine months ended March 31, 2004 and 2005, respectively. The decline is primarily a result of reductions in reimbursement levels from government and commercial payors in the nine months ended March 31, 2005, as compared to the same period last year. These reductions principally relate to our hemophilia (specifically products reimbursed by MediCal beginning June 1, 2004, and Medicare beginning January 1, 2005), PAH (specifically products reimbursed by Medicare), and IVIG product lines. Furthermore, the decrease is a result of product mix changes. We derived a larger percentage of our revenues from lower margin products in the 2004 period when compared to the same period last year, including changes resulting from our expanded relationship with Medco. The primary change in product mix was an increase in the percentage of total revenues from products for the treatment of multiple sclerosis and growth hormone deficiency.
General and Administrative.General and administrative expense increased from $103.2 million to $114.4 million, or 11%, from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. As a percentage of revenues, general and administrative expense decreased from 9.1% to 7.9% from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. The decrease as a percentage of revenue is primarily due to the significant revenue growth in the current period as compared to the same period last year and changes in product mix, both driven in part from our expanded relationship with Medco. The increase on an absolute dollar basis is primarily due to increased salaries and fringe benefits associated with the expansion of our staff to support our revenue growth, including increases in group health insurance costs. Rent and information technology expenses increased with the expansion of our office space. We also incurred approximately $1.4 million in transaction related costs associated with the proposed acquisition by Medco. These transaction costs primarily consisted of legal, investment banking, and other professional fees. Finally, these increases were partially offset by reductions in directors and officers insurance costs for the nine months ended March 31, 2005, as compared to the same period last year.
Bad Debts.Bad debts decreased from $23.7 million to $19.0 million from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. As a percentage of revenues, bad debt expense decreased from 2.1% to 1.3% from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. This decrease is primarily due to a decrease in the percentage of our revenues that were reimbursed by major medical benefit plans versus prescription card
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benefits, and the impact of changes in product mix, including the incremental Medco revenues in the nine months ended March 31, 2005, that did not exist in the same period last year. The change in revenue mix discussed above directly impacts the percentage of revenue reimbursed by prescription card benefits versus major medical benefit plans. The majority of the reimbursement provided by major medical benefit plans are subject to much higher co-payment and deductible amounts versus the typical $20 to $30 co-pay generally required by prescription card benefit plans. The revenue stream associated with the expanded Medco business is pre-adjudicated by Medco and has virtually no bad debt costs associated with it.
Depreciation and Amortization.Depreciation expense increased from $5.8 million to $8.1 million from the nine months ended March 31, 2004 to the nine months ended March 31, 2005, as a result of purchases of property and equipment associated with our revenue growth including additional computer hardware and enhancements to our fully integrated pharmacy and reimbursement software system, and build-outs of additional space. Amortization expense increased from $3.5 million to $3.8 million from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. This increase is due to amortization of certain other identifiable intangible assets (principally patient relationships and non-compete agreements) associated with the acquisitions of HRA and HHCR that were completed in July 2004.
Interest Income/Expense, Net.Interest expense, net increased from $6.4 million to $14.7 million from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. Interest expense (net) in the current period includes the write-off of approximately $4.4 million in unamortized debt issuance costs associated with the replacement and expansion of our Senior Credit facility. The write-off was recorded in the September 2004 quarter. Upon the closing of the expanded credit facility (now at $550 million capacity), we initially increased our borrowings to $375.0 million. The borrowings were primarily used to refinance the existing facility and to fund the acquisition of HRA that also occurred during the September 2004 quarter. Excluding the write-off of unamortized debt issuance costs, interest expense (net) would have been $10.3 million for the nine months ended March 31, 2005, as compared to $6.4 million for the nine months ended March 31, 2004. This increase is attributable to increased borrowings under the expanded facility and higher interest rates during the current period as compared to the same period last year. Amounts borrowed under the previous Senior Credit facility were approximately $182.5 million at March 31, 2004, with a weighted average interest rate of 3.38%. Amounts borrowed under the expanded Senior Credit facility were $347.2 million at March 31, 2005, with a weighted average interest rate of 4.60%.
Income Tax Expense.Our effective tax rate increased from 38.6% to 38.7% from the nine months ended March 31, 2004 to the nine months ended March 31, 2005. The increase in the effective tax rate for the period is primarily due to a larger percentage of our profits being derived from income that is taxable at higher rates in certain states. The difference between the recognized effective tax rate and the statutory rate is primarily attributed to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, working capital was $438.9 million, cash and cash equivalents were $78.2 million and the current ratio was 2.7 to 1.0.
Net cash provided by operating activities was $56.8 million for the nine months ended March 31, 2005. During the nine months ended March 31, 2005, accounts receivable increased $86.2 million, inventories increased $ 15.1 million and accounts payable, accrued expenses and income taxes receivable increased $ 46.4 million. These changes are due primarily to our revenue growth and the timing of the collection of receivables, inventory purchases and payments of accounts payable. The growth in accounts receivable from June 30, 2004, to March 31, 2005, was lower than the sequential revenue growth, as evidenced by an eleven day reduction in day’s sales outstanding. This is driven in part by the effect of our expanded PBM relationships, as well as improved billing and collection processes. The rise in inventory is driven primarily by management’s intent to increase quantities on hand of certain IVIG products in anticipation of potential product shortages. The increase is also due to certain inventory purchasing commitments.
Net cash used in investing activities was $205.1 million for the nine months ended March 31, 2005. Cash used in investing activities consisted primarily of $190.5 million for the purchase of HRA and HHCR and $13.7 million for purchase of property and equipment. Cash used for the addition of other assets was approximately $0.9 million. Proceeds from the sale of property and equipment were approximately $0.1 million.
Net cash provided by financing activities was $183.8 million for the nine months ended March 31, 2005. This amount consisted of $376.5 million of proceeds from the issuance of long-term debt and $21.0 million from the issuance of common stock, less $207.1 million in debt repayments, $5.0 million for the payment of debt issuance costs, and $1.5 million of distributions to our minority interest partners.
Historically, we have funded our operations and continued internal growth through cash provided by operations. Capital expenditures amounted to $19.7 million in fiscal year 2004 and $16.0 million in fiscal year 2003. We anticipate that
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our capital expenditures for the fiscal year ending June 30, 2005 will consist primarily of additional computer hardware, including installation of a second data center, enhancements to our fully integrated pharmacy and reimbursement software system and costs to build out and furnish additional space needed to meet our anticipated growth. We expect the cost of our capital expenditures in fiscal year 2005 to be approximately $20.0 million, exclusive of any acquisitions of businesses. We expect to fund these expenditures through cash provided by operating activities and/or borrowings under the revolving credit facility with our bank.
As of June 30, 2004, our $325 million revolving credit facility with Bank of America, N.A. and other participating banks (collectively the “Lenders”) consisted of a $125 million revolving commitment expiring June 2007, a $75 million term loan (Tranche A Term Loan) due in periodic principal payments through March 2007, and a $125 million term loan (Prior Tranche B Term Loan) due in periodic principal payments through March 2009. On November 18, 2003, we amended our credit facility to lower the margin on the Prior Tranche B Term Loan to 2.25% for London Inter-Bank Offered Rate (LIBOR) based loans and 0.75% for prime rate based loans effectively reducing the margin by 50 basis points through May 2004 and 25 basis points for the remaining term of the loan. We paid Bank of America, N.A. $175,000 in administrative fees related to this amendment. During the quarter ended September 30, 2004, we replaced our credit facility to increase the size of the credit facility to $550 million, consisting of a $175 million revolving commitment expiring July 2009 and a $375 million term loan (Tranche B Term Loan) due in periodic principal payments through June 2011.
Amounts outstanding under the credit facility bear interest at varying rates based upon a LIBOR or prime rate of interest (as selected by us), plus a variable margin rate based upon our leverage ratio as defined by the credit agreement. The combination of a variable rate margin and LIBOR base rate resulted in an effective borrowing rate of 3.39% and 4.60% at June 30, 2004, and March 31, 2005, respectively. Our obligations under the credit facility are secured by a lien on substantially all of our assets, including a pledge of all of the common stock or partnership interest of each of our domestic subsidiaries. The Lenders’ security interest in a portion of our inventory is subordinate to the liens on that inventory under the terms of a security agreement between one of our vendors and us. The same vendor has a security interest in certain accounts receivable, which is subordinate to the rights of the Lenders.
The credit facility documentation contains financial covenants, including requirements to maintain certain ratios with respect to leverage, fixed charge coverage, net worth and asset coverage, each as defined in the credit agreement. The credit facility documentation also includes customary affirmative and negative covenants, including covenants relating to transactions with affiliates, uses of proceeds, restrictions on subsidiaries, limitations on indebtedness, limitations on mergers, acquisitions and asset dispositions, limitations on investments, limitations on payment of dividends and stock repurchases, and other distributions. The credit facility documentation also contains customary events of default, including events relating to changes in control of the Company.
On June 4, 2003, we entered into an interest rate swap agreement effectively converting for a period of one year beginning July 21, 2003, $120 million of floating-rate borrowings to fixed-rate borrowings with a fixed rate of 1.14%, plus the applicable margin rate as determined by the credit agreement. The interest rate swap agreement expired on July 21, 2004.
On February 6, 2003, the Securities and Exchange Commission (SEC) declared effective our shelf registration statement on Form S-3 providing for the offer, from time to time, of various securities, up to an aggregate of $500 million. The shelf registration statement may enable us to more efficiently raise funds from the offering of securities covered by the shelf registration statement, subject to market conditions and our capital needs.
Our liquidity needs currently arise primarily from working capital requirements, capital expenditures, commitments related to financing obtained through the issuance of long-term debt and inventory purchase obligations. We believe that our cash from operations, cash available under the increased revolving credit facility and the proceeds from any offering of debt or equity securities allowed by the shelf registration statement will be sufficient to meet our internal operating and working capital requirements and growth plans for at least the next 12 months.
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Commitments and Contractual Obligations
The following table sets forth a summary of our contractual cash obligations as of March 31, 2005. With the exception of long-term debt, this table does not reflect amounts already recorded on our balance sheet.
Payments Due Under Contractual Obligations by Fiscal Year | ||||||||||||||||||||||||||||
2005 (1) | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Long-Term Debt | $ | 1,114 | $ | 4,407 | $ | 4,248 | $ | 3,878 | $ | 3,750 | $ | 331,250 | $ | 348,647 | ||||||||||||||
Interest on Long-Term Debt | 4,008 | 15,898 | 15,704 | 15,518 | 15,345 | 16,136 | 82,609 | |||||||||||||||||||||
Operating Leases | 1,916 | 5,967 | 4,472 | 2,915 | 2,149 | 1,142 | 18,561 | |||||||||||||||||||||
Purchase Obligations | 95,696 | 170,922 | 28,500 | — | — | — | 295,118 | |||||||||||||||||||||
Capital Leases | — | — | — | — | — | — | — | |||||||||||||||||||||
Other Long-Term Liabilities | — | — | — | — | — | — | — | |||||||||||||||||||||
$ | 102,734 | $ | 197,194 | $ | 52,924 | $ | 22,311 | $ | 21,244 | $ | 348,528 | $ | 744,935 | |||||||||||||||
(1) | Cash obligations for the remainder of fiscal 2005. |
The long-term debt obligations in the table reflect the maturities pursuant to revised and expanded credit facility amendments that occurred during the quarter ended September 30, 2004. Interest on long-term debt was calculated based on the quarterly repayment terms defined in the credit agreement and at the interest rate in effect as of March 31, 2005 (4.60%). Actual interest costs could vary significantly from these estimates based on interest rate fluctuations, voluntary accelerated principal payments, and other factors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates.
Information regarding our “Critical Accounting Policies and Estimates” can be found in our Annual Report on Form 10-K for our most recent fiscal year ended June 30, 2004. The four critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to revenue recognition, allowance for doubtful accounts, allowance for contractual discounts and medical claims reserve. In addition, Note 1 to the financial statements in our Annual Report contains a summary of our significant accounting policies.
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RISK FACTORS
You should carefully consider the risks and uncertainties we describe below before investing in Accredo Health, Incorporated. The risks and uncertainties described below arenotthe only risks and uncertainties that could develop. Other risks and uncertainties that we have not predicted or evaluated could also affect our company.
If any of the following risks occur, our earnings, financial condition or business could be materially harmed, and the trading price of our common stock could decline, resulting in the loss of all or part of your investment. As described below, on February 23, 2005, the Company and Medco announced the signing of an agreement whereby Medco would acquire all of the outstanding stock of Accredo. If this transaction is consummated (which is expected to occur in mid-2005), not all of the Risk Factors described below will continue to apply to Accredo.
The pending transaction with Medco, if not consummated, could result in a significant drop in our stock price. In addition, our future specialty pharmacy offering may not be competitive in the marketplace and our net revenues and profitability may be negatively impacted.
On February 23, 2005, the Company and Medco announced the signing of a definitive agreement whereby Medco would acquire all of the outstanding stock of Accredo. The closing of the acquisition is subject to customary conditions, including (i) approval of the holders of Accredo common stock, (ii) absence of any law or order prohibiting the closing, and (iii) expiration or termination of the Hart-Scott-Rodino waiting period (which expired on April 7, 2005) and certain other regulatory approvals. In addition, each party’s obligation to consummate the acquisition is subject to certain other conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) material compliance of the other party with its covenants and (iii) the delivery of customary opinions from counsel to us and counsel to Medco that the acquisition will qualify as a tax-free reorganization for federal income tax purposes.
Our stock price rose dramatically following the announcement of the signing of the definitive agreement with Medco, and based on the exchange ratio set out in the merger agreement, our stock price has tracked the price of Medco stock. If our agreement with Medco is not consummated, it could result in a significant drop in our stock price. In addition, our future ability to provide a competitive specialty pharmacy offering to our clients would be harmed and our net revenues and profitability may be negatively impacted.
We are highly dependent on our relationships with a limited number of biopharmaceutical suppliers and the loss of any of these relationships could significantly impact our ability to sustain or grow our revenues.
Approximately 36% of our revenue for the nine months ended March 31, 2005 was derived from the sale of IVIG, Alpha-1 antitrypsin deficiency and blood clotting factor product. The majority of our IVIG and blood clotting factor products were purchased from Baxter Healthcare Corporation. We also derive a substantial percentage of our revenue and profitability from our relationships with Biogen Idec, Inc., Genzyme Corporation, GlaxoSmithKline, Inc. and MedImmune, Inc. Our revenue derived from these relationships represented approximately 35% of our revenue during the nine months ended March 31, 2005.
Our agreements with these suppliers are short-term and cancelable by either party without cause on 60 to 365 days prior notice. These agreements also generally limit our ability to handle competing drugs during and, in some cases, after the term of the agreement, but allow the supplier to distribute through channels other than us. Further, these agreements provide that pricing and other terms of these relationships be periodically adjusted for changing market conditions or required service levels. Any termination or modification to any of these relationships could have a material adverse effect on a significant portion of our business, financial condition and results of operations.
Our ability to grow could be limited if we do not expand our existing base of drugs or if we lose patients.
We primarily sell 22 product lines. We focus almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. The drugs that we sell with respect to the following core disease markets accounted for approximately 89% of our revenues for the nine months ended March 31, 2005, with the drugs for hemophilia, autoimmune disorders and PID constituting approximately 36% of our revenue for the same period:
§ | Hemophilia, Autoimmune Disorders and PID; | |||
§ | Pulmonary Arterial Hypertension; | |||
§ | Multiple Sclerosis; |
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§ | Gaucher Disease; | |||
§ | Growth Hormone-Related Disorders; and | |||
§ | Respiratory Syncytial Virus, or RSV. |
Due to the small patient populations that use the drugs we handle, our future growth is highly dependent on expanding our base of drugs. Further, a loss of patient base or reduction in demand for any reason of the drugs we currently handle could have a material adverse effect on a significant portion of our business, financial condition and results of operations.
Our business would be harmed if demand for our products and services is reduced.
Reduced demand for our products and services could be caused by a number of circumstances, including:
§ | patient shifts to treatment regimens other than those we offer; | |||
§ | new treatments or methods of delivery of existing drugs that do not require our specialty products and services; | |||
§ | a recall of a drug; | |||
§ | adverse reactions caused by a drug; | |||
§ | the expiration or challenge of a drug patent; | |||
§ | competing treatment from a new drug or a new use of an existing drug; | |||
§ | the loss of a managed care or other payor relationship; | |||
§ | the expansion of product-only service models; | |||
§ | changes in sites of service; | |||
§ | the cure of a disease we service; or | |||
§ | the death of a high-revenue patient. |
There is substantial competition in our industry, and we may not be able to compete successfully.
The specialty pharmacy industry is highly competitive and is continuing to become more competitive. Most of the drugs, supplies and services that we provide are also available from our competitors. Our current and potential competitors include:
§ | other specialty pharmacy distributors; | |||
§ | specialty pharmacy divisions of wholesale drug distributors; | |||
§ | payors or pharmacy benefit management companies (PBMs); | |||
§ | hospital-based pharmacies; | |||
§ | retail pharmacies; | |||
§ | home infusion therapy companies; | |||
§ | manufacturers that sell their products both to distributors and directly to users; | |||
§ | comprehensive hemophilia treatment centers; | |||
§ | patient support groups and payors entering the specialty pharmacy distribution business; and |
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§ | other alternative site health care providers. |
Many of our competitors have substantially greater resources and more established operations and infrastructure than we have. We are particularly at risk from any of our suppliers or payors deciding to pursue their own distribution and services instead of outsourcing these needs to companies like us. A significant factor in effective competition will be our ability to maintain and expand relationships with managed care companies, PBMs and other payors who can effectively determine the pharmacy source for their enrollees.
Entry by PBMs into the specialty pharmacy market, our strategic alliance with Medco Health Solutions, changes in Medco’s business and consolidation in the industry could affect our ability to serve patients.
Caremark Rx, Inc. and AdvancePCS combined to form the nation’s second largest pharmacy benefit manager, processing drug claims for about 95 million individuals with about 600 million prescriptions filled per year. Express Scripts, Inc., which provides PBM services to over 50 million members, acquired Curascripts on January 30, 2004. All of these firms are our customers and competitors. On February 9, 2004, we entered into a 10-year strategic alliance with Medco where we became the preferred retail and home delivery pharmacy provider to Medco’s members for our specialty pharmacy products. Because of the amount of revenue that we generate from our relationship with Medco, we could be adversely impacted if Medco is not able to retain the customer base that we service or is not able to attract new customers and expand their customer base. On February 23, 2005, the Company and Medco announced the signing of a definitive agreement whereby Medco would acquire all of the outstanding stock of Accredo (see separate Risk Factor above describing risks associated with the proposed transaction).
As a result of our relationship with Medco, other PBMs may be reluctant to do business with us. As PBMs acquire specialty pharmacy capability, it is likely that they will attempt to cancel their relationships with entities, including us, that compete with the PBM specialty pharmacy operations, and to cause the PBM patients to obtain their drugs from the PBM’s own specialty pharmacy. We also expect there will be further consolidation among specialty pharmacy providers, such as the recent merger of Chronimed and MIM Corporation. Such events could materially and adversely affect our financial condition and results of operations.
Our business could be harmed by changes in Medicare or Medicaid.
Changes in Medicare, Medicaid or similar government health benefit programs or the amounts paid by those programs for our services may adversely affect our earnings. Such programs are highly regulated and subject to substantial changes and cost containment measures. In recent years, changes in these programs have modified payments to providers both positively and negatively. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, is having a significant impact on the U.S. drug delivery system and, correspondingly, on our business. The MMA expands drug benefits for Medicare beneficiaries. The MMA changes drug pricing methodologies resulting in both increases and decreases in drug payments. The MMA changes Medicare’s payment methodology over the next three years from a system based on average wholesale price, or AWP, to one based on average sales price, or ASP, and provided for Medicare rate reductions that were effective January 1, 2004. In November 2004, the reimbursement levels for Remodulin® were retroactively increased from the rates initially established under the MMA. The amount of Medicare reimbursement that we receive for blood clotting factor was changed effective January 1, 2005 to an ASP methodology. We expect that the effect of the MMA will be to reduce prices and margins on some of the drugs that we distribute. Future changes and clarifications to MMA may also impact our business.
At least one Medicaid program has adopted, and we expect other Medicaid programs, some states and some commercial payors, to adopt those aspects of the MMA that either result in or appear to result in price reductions for drugs covered by such programs. Adoption of ASP as the measure for determining reimbursement by state Medicaid programs for the drugs we sell could materially reduce our revenue and gross margins.
In order to deal with budget shortfalls, some states are attempting to create state administered prescription drug discount plans, to limit the number of prescriptions per person that are covered, to raise Medicaid co-pays and deductibles, and are proposing more restrictive formularies and reductions in pharmacy reimbursement rates. For example, California’s Medicaid program, MediCal, recently adopted a plan that shifted away from use of acquisition cost plus 1% and instead uses ASP plus 20% for blood clotting factor products. This reduction and any further reductions in the reimbursement from MediCal could adversely impact revenues and profitability from the sale of drugs by us or by our two partnerships in California to patients covered by MediCal. Any reductions in amounts reimbursable by other government programs for our services or changes in regulations governing such reimbursements could materially and adversely affect our business, financial condition and results of operations.
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Changes in average wholesale prices could reduce our pricing and margins.
Many government payors, including Medicare and Medicaid, have paid, or continue to pay, us directly or indirectly at a percentage off a drug’s AWP. We have also contracted with a number of private payors to sell drugs at AWP or at a percentage off AWP. AWP for most drugs is compiled and published by several private companies, including First DataBank, Inc. Several states have filed lawsuits against pharmaceutical manufacturers for allegedly inflating reported AWP for prescription drugs. In addition, class action lawsuits have been brought by consumers against pharmaceutical manufacturers alleging overstatement of AWP. We are not responsible for such calculations, reports or payments; however, there can be no assurance that our ability to negotiate discounts from drug manufacturers will not be materially adversely affected by such investigations or lawsuits, in the future.
The Federal Government has also entered into settlement agreements with several drug manufacturers relating to the calculation and reporting of AWP pursuant to which the drug manufacturers, among other things, have agreed to report new pricing information, the “average sales price”, to government healthcare programs. The average sales price is calculated differently than AWP.
The recently enacted MMA changes the way the federal government pays for certain Part B drugs. While the majority of our revenue is reimbursed by private payors, as CMS implements the ASP methodology of reimbursement, it may affect our current AWP based reimbursement structure with our private payors. If private payors adopt the ASP methodology, it could have a material effect on reimbursement rates that we are able to negotiate with these payors.
While we cannot predict the eventual results of these law changes, government proposals, investigations, or lawsuits, the effect of the MMA has been and will be to reduce prices and margins on some of the drugs that we distribute. If government payors or private payors revise their pricing based on new methods of calculating the AWP for drugs we handle or implement reimbursement methodology based on some value other than AWP, this could have a material adverse effect on our business, financial condition and results of operation, including reducing the pricing and margins on certain of our products.
Our business will suffer if we lose relationships with payors.
We are highly dependent on reimbursement from non-governmental payors. For the fiscal years ended June 30, 2002, 2003 and 2004, and the nine months ended March 31, 2005, we derived approximately 79%, 73%, 72% and 72% respectively of our gross patient revenue from non-governmental payors (including self-pay), which included 3%, 1%, 1% and 1%, respectively for those periods, from sales to private physician practices whose ultimate payor is typically Medicare.
Many payors seek to limit the number of providers that supply drugs to their enrollees. For example, we were selected by Aetna, Inc. as one of three providers of injectable medications. We received approximately 10% of our total revenues from Aetna in the fiscal year ended June 30, 2004, and approximately 10% in the nine months ended March 31, 2005. As previously announced by Aetna, they have begun to transfer patients and therapies from us to a new joint venture between Aetna and one of our competitors. Our relationship with Medco was responsible for approximately 15% of our total revenue in the nine months ended March 31, 2005. This revenue was generated from patients that we serviced on a retail basis prior to our expanded relationship with Medco that commenced in February 2004 and also from patients that were referred to us through the expanded relationship. From time to time, payors with whom we have relationships require that we and our competitors bid to keep their business, and there can be no assurance that we will be retained or that our margins will not be adversely affected when that happens. Further, significant consolidation has occurred among non-government payors, and we expect there will be further consolidation in the future. If payors with whom we have relationships are part of this consolidation, our relationships with those payors could be terminated. The loss of a payor relationship, such as the loss of our relationship with Aetna, Inc. and affiliates, or an adverse change in the financial condition of a payor, could result in the loss of a significant number of patients and have a material adverse effect on our business, financial condition and results of operations.
Our business could be harmed if payors decrease or delay their payments to us or seek to recoup payments already made.
Our profitability depends on payment from governmental and non-governmental payors, and we could be materially and adversely affected by cost containment trends in the health care industry or by financial difficulties suffered by non-governmental payors. Cost containment measures affect pricing, purchasing and usage patterns in health care. Payors also influence decisions regarding the use of a particular drug treatment and focus on product cost in light of how the product may impact the overall cost of treatment. Recently, a number of payors have contracted with specialty drug management services or network managers that focus on controlling the cost of specialty drugs. These entities, similar to PBMs, are retained by payors to help control the drugs that are provided to patients and to minimize the cost of these drugs where appropriate. Certain employers and other private payors have also joined group purchasing arrangements in an effort to control costs.
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Some payors, including large managed care organizations and some private physician practices, have recently experienced financial trouble. The timing of payments and our ability to collect from payors also affects our revenue and profitability. Payors also have contractual rights to audit our books and records to determine if they have overpaid us. We had a contractual relationship through a joint venture with two pharmacies currently involved in ongoing reimbursement audits by the California agency that administers MediCal. If the audits find that the pharmacies received overpayments from MediCal, we could be required, under the terms of our prior contractual relationship, to reimburse the pharmacies for all or a portion of any amounts recouped by the State of California. Subject to the outcome of the audits, we could be required to make a significant payment in order to satisfy our alleged contractual obligations. If we are unable to collect from payors or if payors fail to pay us in a timely manner, or if payors seek to recoup payments already made to us, it could have a material adverse effect on our business and financial condition.
If any of our relationships with medical centers are disrupted or canceled, our business could be harmed.
We have joint venture relationships with four medical centers that provide services primarily related to hemophilia, growth hormone-related disorders and RSV. For the fiscal years ended June 30, 2002, 2003 and 2004, we derived approximately 4%, 4% and 2%, respectively, of our income before income taxes from equity in the net income of unconsolidated joint ventures. We derived approximately 2% of our income before income taxes from equity in the net income of unconsolidated joint ventures during the nine months ended March 31, 2005.
We own 80% of one of our joint ventures with Children’s Home Care, Inc. and the financial results of this joint venture are included in our consolidated financial results. This consolidated joint venture represented approximately 10% of our income before income taxes for the fiscal year ended June 30, 2002, 17% of our income before income taxes for the fiscal year ended June 30, 2003, 7% of our income before income taxes in the fiscal year ended June 30, 2004, and 2% of our income before income taxes for the nine months ended March 31, 2005.
During 2003, the OIG issued a Special Advisory Bulletin focused on complex contractual joint ventures that could potentially violate the anti-kickback statute. In this bulletin, the OIG discussed the characteristics that potentially indicate a prohibited arrangement. Some of these characteristics are present in our existing joint ventures. As a result, our joint venture relationships have been modified or are in the process of being restructured.
Further, the Department of Health and Human Services, or DHHS, published a set of “safe harbor” regulations and continues to publish clarifications to the safe harbors under the federal anti-kickback statute. Arrangements that fully comply with a safe harbor are deemed not to violate the anti-kickback statute. We have several business arrangements (for example, our joint venture and management arrangements with medical centers, service arrangements with physicians and product pricing arrangements with suppliers) that do not satisfy all of the requirements necessary to fall within the safe harbors. Failure to satisfy a safe harbor does not mean that an arrangement is necessarily illegal. We believe our business arrangements comply with the anti-kickback statute, the Health Insurance Portability and Accountability Act, or HIPPA, the federal Stark Law and similar state laws. However, if we are found to violate any of these laws, we could suffer penalties, fines or possible exclusion, which could adversely affect our revenues and earnings.
In addition to joint venture relationships, we also provide pharmacy management services to several medical centers. Our agreements with medical centers have terms of between one and five years, and may be cancelled by either party without cause upon notice of between one and twelve months. Adverse changes in our relationships with those medical centers could be caused, for example, by:
§ | changes caused by consolidation within the hospital industry; | |||
§ | changes caused by regulatory uncertainties inherent in the structure of the relationships; or | |||
§ | restrictive changes to regulatory requirements. |
Any termination or adverse change of these relationships could have a material adverse effect on our business, financial condition and results of operations.
If additional providers obtain access to favorable pricing from the Health Resources and Services Administration, Office of Pharmacy Affairs drug discount program (the “PHS program”) for drugs we handle, our business could be harmed.
The federal pricing program of the Public Health Service, commonly known as PHS, allows qualified hospitals and hemophilia treatment centers to obtain discounts on blood clotting factor products. While we are able to access PHS pricing
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through our contracts to provide contract pharmacy services to hemophilia treatment centers, we are not eligible to participate directly in these programs. Increased competition from hospitals and hemophilia treatment centers that have the right to participate directly in these discount programs may reduce our profit margins.
Our acquisition and joint venture strategy may not be successful, which could cause our business and future growth prospects to suffer.
As part of our growth strategy, we continue to evaluate acquisition and joint venture opportunities, but we cannot predict or provide assurance that we will complete any future acquisitions or joint ventures. Acquisitions and joint ventures involve many risks, including:
§ | difficulty in identifying suitable candidates and negotiating and consummating acquisitions on attractive terms; | |||
§ | difficulty in assimilating the new operations; | |||
§ | increased transaction costs; | |||
§ | diversion of our management’s attention from existing operations; | |||
§ | dilutive issuances of equity securities that may negatively impact the market price of our stock; | |||
§ | increased debt; and | |||
§ | increased amortization expense related to intangible assets that would decrease our earnings. |
We could also be exposed to unknown or contingent liabilities resulting from the pre-acquisition operations of the entities we acquire, such as liability for failure to comply with health care or reimbursement laws, including an obligation to recoup reimbursement payments previously received by the companies we acquire. We also face exposure if any seller of an entity which we acquire, is not able to fulfill its indemnification obligations under the terms of the purchase agreement. We may suffer impairment of assets or have to bear a liability for which we are entitled to indemnification but are unable to collect.
Our debt incurred from recent acquisitions may limit our future financial flexibility.
The current level of our debt will have several important effects on our future operations, including, among others:
§ | A portion of our cash flow will be dedicated to the payment of principal and interest on the debt and will not be available for other purposes; | |||
§ | Our debt covenants will require us to meet financial tests, and may impose other limitations that may limit our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities; | |||
§ | Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited; | |||
§ | Failure to meet our debt covenants could result in foreclosure by our lenders or an increase in the interest rate or administrative fees associated with our debt; | |||
§ | We may be at a competitive disadvantage to similar companies that have less debt; and | |||
§ | Our vulnerability to adverse economic and industry conditions may increase, including, but not limited to, rising interest rates. |
Fluctuations in our quarterly financial results may cause our stock price to decline.
Our results of operations may fluctuate on a quarterly basis, which could adversely affect the market price of our common stock. Our results may fluctuate as a result of:
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§ | lower prices paid by Medicare or Medicaid for the drugs that we sell, including lower prices resulting from the MMA and other state and federal legislation and revisions in pricing methods, or the method of establishing AWP or ASP; | |||
§ | below-expected sales or delayed launch of a new drug; | |||
§ | price and term adjustments with our drug suppliers; | |||
§ | increases in our operating expenses in anticipation of the launch of a new drug; | |||
§ | product shortages or an oversupply of product; | |||
§ | inaccuracies in our estimates of the costs of ongoing programs; | |||
§ | the timing and integration of our acquisitions; | |||
§ | making an acquisition that is dilutive to earnings; | |||
§ | changes in our estimates used to prepare our financial statements; | |||
§ | effectiveness of our sales force; | |||
§ | changes in governmental regulations; | |||
§ | the annual renewal of deductibles and co-payment requirements that affect patient ordering patterns; | |||
§ | our provision of drugs to treat seasonal illnesses, such as RSV; | |||
§ | physician prescribing patterns; | |||
§ | general political and economic conditions; | |||
§ | interest rate fluctuations; and | |||
§ | adverse experience in collection of accounts receivable. |
Our business would be harmed if the biopharmaceutical industry reduces research, development and production of the types of drugs that are compatible with the services we provide.
Our business is highly dependent on continued research, development, manufacturing and marketing expenditures of biopharmaceutical companies, and the ability of those companies to develop, supply and generate demand for drugs that are compatible with the services we provide. Our business would be materially and adversely affected if those companies stopped outsourcing the services we provide or failed to support existing drugs or develop new drugs. Our business could also be harmed if the biopharmaceutical industry undergoes any of the following developments:
§ | supply shortages; | |||
§ | adverse drug reactions; | |||
§ | drug recalls; | |||
§ | increased competition among biopharmaceutical companies; | |||
§ | an inability of drug companies to finance product development because of capital shortages; | |||
§ | a decline in product research, development or marketing; | |||
§ | a reduction in the retail price of drugs from governmental or private market initiatives; | |||
§ | changes in the FDA approval process; or |
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§ | governmental or private initiatives that would alter how drug manufacturers, health care providers or pharmacies promote or sell products and services. |
Our business could be harmed if the supply of any of the products that we distribute becomes scarce.
The biopharmaceutical industry is susceptible to product shortages. Some of the products that we distribute, such as some of our hemophilia products, IVIG and products for the treatment of Alpha-1 antitrypsin deficiency, are collected and processed from human donors. Accordingly, the supply of these products is highly dependent on human donors and their availability has been constrained from time to time. Our suppliers of IVIG have announced initiatives that could result in decreases in the future supply of IVIG, which, in addition to other factors, may cause the pricing of IVIG to rise. There was also an industry wide recombinant factor VIII product shortage that existed for some time, as a result of the manufacturers being unable to increase production to meet rising global demand. Supply of this drug has only recently returned to normal levels. If these products, or any of the other drugs that we distribute, are in short supply for long periods of time and we are unable to acquire an amount of the drug sufficient to service our patients, our business could be harmed.
Our industry is subject to extensive government regulation and noncompliance by us, physicians who prescribe our products and services or our suppliers could harm our business.
The marketing, sale and purchase of drugs and medical supplies is extensively regulated by federal and state governments, and if we fail or are accused of failing to comply with laws and regulations, we could suffer a material adverse effect on our business, financial condition and results of operations. Our business could also be materially and adversely affected if the suppliers or others we work with are accused of violating laws or regulations. The applicable regulatory framework is complex, and the laws are very broad in scope. Many of these laws remain open to interpretation, and have not been addressed by substantive court decisions.
The health care laws and regulations that especially apply to our activities include:
§ | The federal “Anti-Kickback Law” prohibits the offer or solicitation of compensation in return for the referral of patients covered by almost all governmental programs and billing for services rendered pursuant to such referrals, or the arrangement or recommendation of the purchase of any item, facility or service covered by those programs. The Health Insurance Portability and Accountability Act (HIPAA) created new violations for fraudulent activity applicable to both public and private health care benefit programs and prohibits inducements to Medicare or Medicaid eligible patients. The potential sanctions for violations of these laws range from significant fines, to exclusion from participation in the Medicare and Medicaid programs, to criminal sanctions. Although some “safe harbor” regulations attempt to clarify when an arrangement will not violate the Anti-Kickback Law, our business arrangements and the services we provide may not fit within these safe harbors. Failure to satisfy a safe harbor requires analysis of whether the parties intended to violate the Anti-Kickback Law. Allegations, investigations, or findings of a violation of the Anti-Kickback Law or similar state laws could have a material adverse effect on our business. | |||
§ | The Department of Health and Human Services (DHHS) has issued regulations implementing the Administrative Simplification provisions of HIPAA concerning the maintenance of privacy and security of individually identifiable health information. These new regulations require the development and implementation of measures to maintain the privacy and security of health information and require that certain health claims transactions be conducted in accordance with uniform standards. These regulations govern health care providers, health plans and health clearinghouses. Failure to comply with these regulations, or wrongful disclosure of confidential patient information could result in the imposition of administrative or criminal sanctions, including exclusion from the Medicare and state Medicaid programs. In addition, if we choose to distribute drugs through new distribution channels such as the Internet, we will have to comply with government regulations that apply to those distribution channels, which could have a material adverse effect on our business. | |||
§ | The Ethics in Patient Referrals Act of 1989, as amended, commonly referred to as the “Stark Law,” prohibits physician referrals to entities with which the physician or their immediate family members have a “financial relationship.” Many states have adopted laws similar to the Stark law. A violation of the Stark Law or similar state laws is punishable by civil sanctions, including significant fines and exclusion from participation in Medicare and Medicaid. | |||
§ | State laws prohibit the practice of medicine, pharmacy and nursing without a license. To the extent that we assist patients and providers with prescribed treatment programs, a state could consider our activities to constitute the |
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practice of medicine. If we are found to have violated those laws, we could face civil and criminal penalties and be required to reduce, restructure, or even cease our business in that state. | ||||
§ | Pharmacies and pharmacists must obtain state licenses to operate and dispense drugs. Pharmacies must also obtain licenses in some states to operate and provide goods and services to residents of those states. Our entities that provide nursing for our patients and our nurses must obtain licenses in certain states to conduct our business. If we are unable to maintain our licenses or if states place burdensome restrictions or limitations on non-resident pharmacies or nurses, this could limit or affect our ability to operate in some states which could adversely impact our business and results of operations. | |||
§ | Federal and state investigations and enforcement actions continue to focus on the health care industry, scrutinizing a wide range of items such as joint venture arrangements, referral and billing practices, product discount arrangements, home health care services, dissemination of confidential patient information, clinical drug research trials and gifts for patients. Recently, the OIG issued a Special Advisory Bulletin focused on complex contractual joint ventures that could potentially violate the anti- kickback statute. In this bulletin, the OIG discussed the characteristics that potentially indicate a prohibited arrangement. Some of these characteristics are present in our existing joint ventures. Accordingly, some of our existing joint ventures have been restructured and others may be restructured in the future. | |||
§ | The False Claims Act encourages private individuals to file suits on behalf of the government against health care providers such as us. Such suits could result in significant financial sanctions or exclusion from participation in the Medicare and Medicaid programs. |
If some of the drugs that we provide lose their “orphan drug” status, we could face more competition.
Our business could be adversely affected by the expiration or challenge to the orphan drug status that has been granted by the FDA to some of the drugs that we handle. When the FDA grants orphan drug status, it will not approve a second drug for the same treatment for a period of seven years unless the new drug is chemically different or clinically superior. Not all of the drugs that we sell which are related to our core disease states have orphan drug status. The loss of orphan drug status, the approval of new drugs notwithstanding orphan drug status or the development of drugs that are superior to the drugs we sell could result in additional competitive drugs entering the market, which could harm our business.
We rely heavily on a single shipping provider, and our business would be harmed if our rates are increased or our provider is unavailable.
A significant portion of our revenues result from the sale of drugs we deliver to our patients and a single carrier, FedEx, ships principally all of our products. We depend heavily on these outsourced shipping services for efficient, cost effective delivery of our product. The risks associated with this dependence include:
§ | any significant increase in shipping rates, including rate increases resulting from higher fuel prices; | |||
§ | strikes or other service interruptions by our primary carrier, FedEx, or by another carrier that could affect FedEx; or | |||
§ | spoilage of high cost drugs during shipment, since our drugs often require special handling, such as refrigeration. |
Disruptions in commercial activities such as those following the September 2001 terrorist attacks on the U.S. or as a result of a natural disaster may adversely impact our results of operations, our ability to raise capital or our future growth.
Our operations have been and could again be harmed by terrorist attacks on the U.S. For example, transportation systems and couriers that we rely upon to deliver our drugs have been and could again be disrupted, thereby causing a decrease in our revenues. In addition, we may experience a rise in operating costs, such as costs for transportation, courier services, insurance and security. We also may experience delays in payments from payors, which would harm our cash flow. The U.S. economy in general may be adversely affected by terrorist attacks or by any related outbreak of hostilities. Any such economic downturn could adversely impact our results of operations, impair our cost of or ability to raise debt or equity capital or impede our ability to continue growing our business.
We have a centralized data center located in Memphis, Tennessee and we are in the process of building a second data center in another city that we expect to be fully operational in mid-2005. Until the second data center is fully operational, acts by terrorists or a natural disaster that causes damage to the data center could cause us to be unable to operate our business for a period of time.
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If we are unable to manage our growth effectively, our business will be harmed.
Our rapid growth over the past several years has placed a strain on our resources, and if we cannot effectively manage our growth, our business, financial condition and results of operations could be materially and adversely affected. We have experienced a large increase in the number of our employees, the size of our programs and the scope of our operations. Our ability to manage this growth and be successful in the future will depend partly on our ability to retain skilled employees, which has become more difficult due to the national health care professional shortage. Our ability to manage our growth is also dependent upon our ability to enhance our management team and improve our management information and financial control systems.
We could be adversely affected by an impairment of the significant amount of goodwill and other intangibles on our financial statements.
Our formation and our acquisitions have resulted in the recording of a significant amount of goodwill on our financial statements. The goodwill was recorded because the fair value of the tangible net assets acquired was less than the purchase price. There can be no assurance that we will realize the full value of this goodwill. We evaluate on an on-going basis whether events and circumstances indicate that all or some of the carrying value of goodwill is no longer recoverable, in which case we would write off the unrecoverable goodwill as a charge to our earnings. As of March 31, 2005, we had goodwill, net of accumulated amortization, of approximately $554 million, or 42% of total assets and 81% of stockholders’ equity.
Since our growth strategy may involve the acquisition of other companies, we may record additional goodwill in the future. The possible write-off of this goodwill could negatively impact our future earnings. We will also be required to allocate a portion of the purchase price of any acquisition to the value of non-competition agreements, patient base and contracts that are acquired. The amount allocated to these items could be amortized over a fairly short period. As a result, our earnings and the market price of our common stock could be negatively impacted.
We rely on a few key employees whose absence or loss could adversely affect our business.
We depend on a few key executives, and the loss of their services could cause a material adverse effect to our company. We do not maintain “key person” life insurance policies on any of those executives. As a result, we are not insured against the losses resulting from the death of our key executives. Further, we must be able to attract and retain other qualified, essential employees for our technical operating and professional staff, such as pharmacists and nurses. If we are unable to attract and retain these essential employees, our business could be harmed.
We have been named in a consolidated shareholder class action lawsuit and a shareholders’ derivative lawsuit asserting claims under the securities laws.
The uncertainty associated with these unresolved lawsuits could harm our business and financial condition. The defense of these lawsuits also could result in litigation fees and costs, as well as the diversion of resources. Negative developments with respect to the lawsuits could cause our stock price to decline significantly. The indemnification provisions contained in our Certificate of Incorporation and Bylaws require us to indemnify our current and former officers and directors who are named as defendants against the allegations contained in these suits. Even though we maintain directors and officers insurance applicable to the lawsuits, there can be no guarantee that the proceeds of such insurance will be available for defense fees and costs, or payment of any settlement or judgment in the lawsuits or, if available, will be sufficient to cover the fees and costs and any settlement or judgment imposed against us.
The ultimate cost and effect of these lawsuits on our financial condition, results of operations, customer relations and management is unknown at this time.
In addition to the securities litigation currently pending against us and our officers and directors, we may also in the future be the target of similar litigation. Additional securities litigation could result in substantial costs and divert our attention and resources.
The derivative plaintiffs in the stockholders’ derivative lawsuit asserting claims under the securities laws have filed a motion to add Medco as a defendant and enjoin consummation of the merger. Accredo believes that the claims asserted in the derivative lawsuit are without merit and intends to continue to vigorously contest the action, and Medco believes that the allegations sought to be asserted against it are without merit and intends to vigorously contest the action in the event the leave to amend is granted.
We may need additional capital to finance our growth and capital requirements, which could prevent us from fully pursuing our growth strategy.
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In order to implement our growth strategy, we will need substantial capital resources and will incur, from time to time, short- and long-term indebtedness, the terms of which will depend on market and other conditions. We cannot be certain that existing or additional financing will be available to us on acceptable terms, if at all. As a result, we could be unable to fully pursue our growth strategy. Further, additional financing may involve the issuance of equity or debt securities that would reduce the percentage ownership of our then current stockholders.
The market price of our common stock may experience substantial fluctuations for reasons over which we have little control.
Our common stock is traded on the Nasdaq National Market System. The market price of our common stock could fluctuate substantially based on a variety of factors, including the following:
§ | future announcements concerning us, our competitors, the drug manufacturers with whom we have relationships or the health care market; | |||
§ | changes in government regulations; | |||
§ | overall volatility of the stock market; | |||
§ | changes in the financial estimates we provide to the market; | |||
§ | changes in estimates by analysts; | |||
§ | changes in operating results from quarter to quarter; and | |||
§ | loss of key executives. |
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.
Some provisions of our charter documents and the Stockholder Protection Rights Plan may have anti-takeover effects that could discourage a change in control, even if an acquisition would be beneficial to our stockholders.
Our certificate of incorporation, our bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, our Board of Directors has adopted a Stockholder Protection Rights Plan, sometimes referred to as a poison pill, which would substantially dilute the interest sought by an acquirer.
In the event we are unable to satisfy regulatory requirements relating to internal controls, or if these internal controls over financial reporting are not effective, our business and our stock price could suffer.
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive and costly evaluation of their internal controls. As a result, during our fiscal year ending June 30, 2005, we will be required to perform an evaluation of our internal controls over financial reporting and have our auditor publicly attest to such evaluation. We have prepared an internal plan of action for compliance, which includes a timeline and scheduled activities with respect to preparation of such evaluation. Our efforts to comply with Section 404 and related regulations regarding our management’s required assessment of internal control over financial reporting and our independent auditors’ attestation of that assessment has required, and continues to require, the commitment of significant financial and managerial resources. If we fail to timely complete this evaluation, or if our auditors cannot timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our business and our stock price.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to the impact of financial market risk is significant. Our primary financial market risk exposure consists of interest rate risk related to interest that we are obligated to pay on our variable-rate debt.
We sometimes use derivative financial instruments to manage our exposure to rising interest rates on our variable-rate debt, primarily by entering into variable-to-fixed interest rate swaps. We had fixed the interest rate through July 21, 2004 on $120 million of our variable-rate debt through the use of a variable-to-fixed interest rate swap. As a result, we did not benefit from any decrease in interest rates nor were we subjected to any detriment from rising interest rates on this portion of our debt during the period of the swap agreement.
We have not yet hedged against our interest rate risk exposure after July 21, 2004. As a result, we will benefit from decreasing interest rates, but rising interest rates on our debt will also harm us. Accordingly, if we maintain our current level of total debt, a 100 basis point decrease in interest rates along the entire yield curve would result in an increase in pre-tax income of approximately $3.47 million over the next twelve months. However, a 100 basis point increase in interest rates would result in a decrease in pre-tax income of $3.47 million for the same period.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report the Company maintains disclosure controls and procedures that provide reasonable assurance that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On February 23, 2005, the Company and Medco announced the signing of a definitive agreement whereby Medco would acquire all of the outstanding stock of Accredo. Total consideration is approximately $2.2 billion in cash and Medco common stock. The transaction has been approved by the boards of directors of both companies and is subject to the approval of Accredo shareholders and other customary closing conditions. Medco intends to manage Accredo as an independent business. Under terms of the definitive agreement, each Accredo share outstanding will be exchanged for $22.00 in cash and 0.49107 shares of the Company’s common stock, subject to adjustment based on the value of Medco’s common stock in certain situations as provided in the agreement. Medco expects to fund the cash portion of the consideration through a combination of cash on hand, bank borrowings and its accounts receivable financing facility. The transaction is expected to close in mid-2005.
On February 23, 2005, the derivative plaintiffs in the derivative lawsuit filed in Shelby County, Tennessee against certain Accredo directors and officers filed a motion seeking leave to amend the Consolidated Derivative Complaint to add Medco and certain additional Accredo directors as defendants. The proposed amendment seeks injunctive relief to enjoin the Medco acquisition of Accredo on the grounds that the named Accredo directors and officers allegedly seek to use the acquisition to squeeze out Accredo’s current stockholders for an unfair price and to insulate themselves from liability for alleged wrongdoing associated with Accredo’s June 2002 acquisition of the SPS Division of Gentiva Health Services, Inc. The Company believes the claims asserted in the derivative lawsuit are without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) | Exhibits |
Exhibit 31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
*Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
*Exhibit 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | In accordance with Release No. 34-47986, this exhibit is hereby furnished to the SEC as an accompanying document and is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933. |
(b) | Reports on Form 8-K |
We filed a report on Form 8-K on January 31, 2005 to furnish as an exhibit, the press release reporting our financial results for the quarter ended December 31, 2004.
We filed a report on Form 8-K on February 23, 2005 to furnish as an exhibit, the joint press release issued on February 23, 2005, by Accredo Health, Incorporated (“Accredo”) and Medco Health Solutions, Inc. (“Medco”) announcing the execution of an Agreement and Plan of Merger among Accredo, Medco and Raptor Merger Sub, Inc.
We filed a report on Form 8-K on February 24, 2005 to provide details of entry into a material definitive agreement and to furnish as an exhibit the agreement dated February 22, 2005 whereby Accredo Health, Incorporated, a Delaware corporation (“Accredo”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Medco Health Solutions, Inc., a Delaware corporation (“Medco”), and Raptor Merger Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of Medco (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Accredo will merge with and into Merger Sub, with Merger Sub continuing as the surviving corporation and a wholly-owned subsidiary of Medco.
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We filed a report on Form 8-K on February 28, 2005 to provide details of entry into material definitive agreements with certain executive officers of the company. On February 22, 2005, Accredo Health, Incorporated, a Delaware corporation (the “Company”), entered into definitive employment agreements with certain executive officers of the Company, the effectiveness of which are conditioned upon the closing of the merger (the “Merger”) contemplated by the Agreement and Plan of Merger among the Company, Medco Health Solutions, Inc. (“Medco”) and Raptor Merger Sub, Inc. This Form 8-K also reported the motion to amend the Consolidated Derivative Complaint in the derivative lawsuit filed in Shelby County, Tennessee. See also Part II Item 5 and the “Contingencies” footnote in the condensed consolidated financial statements.
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Signatures
Pursuant to the requirements 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.
Accredo Health, Incorporated | ||||
May 6, 2005 | /s/ David D. Stevens | |||
David D. Stevens | ||||
Chairman of the Board and Chief Executive Officer | ||||
May 6, 2005 | /s/ Joel R. Kimbrough | |||
Joel R. Kimbrough | ||||
Senior Vice President, Chief Financial Officer and Treasurer | ||||
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Exhibit Index
Exhibit | ||
Number | Description of Exhibits | |
31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
*32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
*32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | In accordance with Release No. 34-47986, this exhibit is hereby furnished to the SEC as an accompanying document and is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933. |
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