Business Combinations | 9 Months Ended |
Sep. 30, 2013 |
Business Combinations [Abstract] | ' |
Business Combinations | ' |
Business Combinations |
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Catalyst Health Solutions, Inc. Merger |
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On July 2, 2012, the Company completed its merger (the “Merger”) with Catalyst Health Solutions, Inc. ( "Catalyst"), a full-service PBM. Each share of Catalyst common stock outstanding immediately prior to the effective time of the Merger (other than shares owned by the Company or Catalyst or any of their respective wholly-owned subsidiaries) was converted in the Merger into the right to receive 1.3212 (0.6606 prior to the October 2012 two-for-one stock split) of a Company common share and $28.00 in cash. This resulted in the Company issuing approximately 66.8 million common shares, issuing 0.5 million warrants, and paying $1.4 billion in cash to Catalyst stockholders to complete the Merger. The results of Catalyst have been included in the Company's results since July 2, 2012. The consolidated statement of operations include total revenues from the Catalyst book of business of $1.9 billion and $5.3 billion, for the three and nine month periods ended September 30, 2013, respectively, and $1.5 billion for the three and nine month periods ended September 30, 2012. |
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The Merger was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of their maturities. The fair values for acquired customer relationships intangible asset was valued using an excess earnings model based on expected future revenues derived from the customers acquired. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. |
All of the assets and liabilities recorded for the Merger are included within the Company's PBM segment. Goodwill is non-amortizing for financial statement purposes. Goodwill of $525 million related to the Catalyst Merger is tax deductible. The goodwill recognized by the Company represents many of the synergies and business growth opportunities that may be realized from this Merger. The synergies include improved pricing from the Company's suppliers due to the increased volume of prescription drug purchases, pull through opportunities of the combined companies' mail and specialty service offerings, and a more efficient leveraging of resources to achieve operating profits. |
The purchase price of the acquired Catalyst operations was comprised of the following (in thousands): |
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Cash paid to Catalyst shareholders | | | | $ | 1,415,276 | | | | | | | | | | |
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Fair value of common shares issued (a) | | | | 3,238,141 | | | | | | | | | | |
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Fair value of warrants and stock options issued (b) | | | | 19,824 | | | | | | | | | | |
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Total purchase price | | | | $ | 4,673,241 | | | | | | | | | | |
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(a) | Valued based on the number of outstanding shares immediately prior to the Merger multiplied by the exchange ratio of 1.3212 (0.6606 prior to the October 2012 two-for-one stock split), multiplied by the closing market price of Catamaran shares on July 2, 2012. | | | | | | | | | | | | | | |
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(b) | The Black-Scholes pricing model was used to calculate the fair value of the replacement warrants and stock options issued. | | | | | | | | | | | | | | |
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The following summarizes the fair values assigned to the assets acquired and liabilities assumed at the acquisition date (in thousands): |
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| Initial Amounts Recognized at Acquisition Date (a) | | Prior Measurement Period Adjustments (b) | | Current Measurement Period Adjustments (c) | | Current Amounts Recognized at Acquisition Date |
Cash and cash equivalents | $ | 93,775 | | | $ | (315 | ) | | $ | — | | | $ | 93,460 | |
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Other current assets | 695,888 | | | 5,202 | | | 2,411 | | | 703,501 | |
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Total current assets | 789,663 | | | 4,887 | | | 2,411 | | | 796,961 | |
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Goodwill | 4,010,235 | | | 8,492 | | | 16,141 | | | 4,034,868 | |
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Customer relationships intangible | 1,184,800 | | | — | | | — | | | 1,184,800 | |
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Other long-term assets | 87,174 | | | 1,547 | | | 8 | | | 88,729 | |
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Total assets acquired | 6,071,872 | | | 14,926 | | | 18,560 | | | 6,105,358 | |
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Accounts Payable | 338,819 | | | — | | | 5 | | | 338,824 | |
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Pharmacy benefit management rebates payable | 176,202 | | | 2,935 | | | (1,522 | ) | | 177,615 | |
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Accrued expenses and other current liabilities | 187,851 | | | 1,348 | | | 5,473 | | | 194,672 | |
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Long-term debt | 311,994 | | | — | | | — | | | 311,994 | |
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Other long-term liabilities | 385,375 | | | 10,643 | | | 14,604 | | | 410,622 | |
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Total liabilities assumed | 1,400,241 | | | 14,926 | | | 18,560 | | | 1,433,727 | |
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Non-controlling interest | (1,610 | ) | | — | | | — | | | (1,610 | ) |
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Net assets acquired | $ | 4,673,241 | | | $ | — | | | $ | — | | | $ | 4,673,241 | |
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(a) As previously reported in the Company's Form 10-Q for the period ended September 30, 2012. |
(b) These represent measurement period adjustments from the acquisition date through December 31, 2012 and were recorded to reflect changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing as of the acquisition date. |
(c) These represent measurement period adjustments during 2013 through the end of the measurement period and were recorded to reflect changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing as of the acquisition date. |
During the three and nine month periods ended September 30, 2013, the Company recognized $40.0 million and $126.0 million, respectively, of amortization expense from intangible assets acquired in the Catalyst Merger. Amortization associated with the Catalyst Merger for the remainder of 2013 is expected to be $40.0 million. The estimated fair value of the customer relationship intangible asset on the acquisition date was $1.2 billion with a useful life of 9 years. The intangible asset acquired will not have any residual value at the end of the amortization period. There were no in-process research and development assets acquired. |
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HealthTran LLC Acquisition |
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In January 2012, the Company completed the acquisition of all of the outstanding equity interests of HealthTran LLC (“HealthTran”), a full-service PBM, in exchange for $250 million in cash, subject to certain customary post-closing adjustments, in each case upon the terms and subject to the conditions contained in the HealthTran purchase agreement. HealthTran was an existing HCIT client and utilizes a Company platform for its claims adjudication services. The acquisition provides the opportunity to create new revenues from HealthTran's customer base and generate cost savings through purchasing and SG&A synergies. The results of HealthTran have been included in the Company's results since January 1, 2012. |
The HealthTran acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. |
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The following summarizes the fair values assigned to the assets acquired and liabilities assumed at the acquisition date (in thousands): |
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| Initial Amounts Recognized at Acquisition Date (a) | | Measurement Period Adjustments (b) | | Current Amounts Recognized at Acquisition Date | | | | |
Current assets | $ | 30,654 | | | $ | 245 | | | $ | 30,899 | | | | | |
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Property and equipment | 2,787 | | | — | | | 2,787 | | | | | |
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Goodwill | 173,642 | | | 833 | | | 174,475 | | | | | |
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Intangible assets | 77,130 | | | (2,600 | ) | | 74,530 | | | | | |
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Total assets acquired | 284,213 | | | (1,522 | ) | | 282,691 | | | | | |
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Current liabilities | 36,784 | | | (496 | ) | | 36,288 | | | | | |
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Total liabilities assumed | 36,784 | | | (496 | ) | | 36,288 | | | | | |
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Net assets acquired | $ | 247,429 | | | $ | (1,026 | ) | | $ | 246,403 | | | | | |
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(a) As previously reported in the Company's Form 10-Q for the period ended March 31, 2012. |
(b) These measurement period adjustments were recorded to reflect an additional $1.0 million paid to the former HealthTran owners for the working capital reconciliation and changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing as of the acquisition date. |
During the three and nine month periods ended September 30, 2013, the Company recognized $3.6 million and $10.9 million, respectively, of amortization expense from intangible assets acquired in the HealthTran acquisition. Amortization associated with the HealthTran acquisition for the remainder of 2013 is expected to be $3.6 million. |
The estimated fair values and useful lives of intangible assets acquired are as follows (dollars in thousands): |
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| Fair Value | | Useful Life | | | | | | | | | | |
Trademarks/Trade names | $ | 1,750 | | | 6 months | | | | | | | | | | |
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Customer relationships | 69,800 | | | 4-9 years | | | | | | | | | | |
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Non-compete agreements | 2,600 | | | 5 years | | | | | | | | | | |
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License | 380 | | | 3 years | | | | | | | | | | |
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Total | $ | 74,530 | | | | | | | | | | | | | |
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None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired. |
Unaudited Pro Forma Financial Information |
The following unaudited pro forma financial information presents the combined historical results of operations of the Company and Catalyst as if the Merger had occurred on January 1, 2012. The unaudited pro forma financial information includes certain adjustments related to the acquisitions, such as increased amortization from the fair value of intangible assets acquired, income tax effects related to the acquisition and the elimination of transactions between the Company and Catalyst. Unaudited pro forma results of operations are as follows (in thousands, except share and per share amounts): |
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| Nine Months Ended September 30, 2012 | | | | | | | | | | | | |
Revenue | $ | 9,609,135 | | | | | | | | | | | | | |
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Gross profit | $ | 654,852 | | | | | | | | | | | | | |
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Net income | $ | 79,424 | | | | | | | | | | | | | |
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Earnings per share: | | | | | | | | | | | | | |
Basic | $ | 0.39 | | | | | | | | | | | | | |
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Diluted | $ | 0.39 | | | | | | | | | | | | | |
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Weighted average shares outstanding: | | | | | | | | | | | | | |
Basic | 204,350,003 | | | | | | | | | | | | | |
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Diluted | 205,477,142 | | | | | | | | | | | | | |
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This unaudited pro forma financial information is not intended to represent or be indicative of what would have occurred if these transactions had taken place on the date presented and is not indicative of what the Company's actual results of operations would have been had the acquisitions been completed at the beginning of the period indicated above. Further, the pro forma combined results do not reflect one-time costs to fully integrate and operate the combined organization more efficiently or anticipated synergies expected to result from the combinations and should not be relied upon as being indicative of the future results that the Company will experience. |
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Restat, LLC Acquisition |
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On October 1, 2013, the Company completed the previously announced acquisition of Restat, LLC, a privately held pharmacy benefit manager based in Milwaukee, Wisconsin, for a purchase price of $409.5 million in cash subject to certain customary post-closing adjustments. The purchase price was funded from Catamaran’s existing cash balance and $350 million in borrowings under its Revolving Facility. |
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The acquisition provides the Company the opportunity to bring Catamaran's full suite of technology and clinical services to Restat's clients, including mail order and specialty pharmacy services. The initial accounting for this acquisition was incomplete at the time these financial statements were available for issuance. The Company expects to finalize the accounting for the acquisition as soon as practicable, but no later than one year from the acquisition closing date. |