| BUSINESS ACQUISITIONS | 4. BUSINESS ACQUISITIONS
The Company accounts for its business acquisitions using the acquisition method as required by FASB Accounting Standards Codification Topic 805, Business Combinations . The Company ascribes significant value to the synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value of these components is included within goodwill. The Company’s business acquisitions described below were treated as asset purchases for income tax purposes and the related goodwill resulting from these business acquisitions is deductible for income tax purposes. The results of operations for acquired businesses are included in the Company’s consolidated financial statements from their respective acquisition dates.
The assets acquired and liabilities assumed in the business combinations described below, including identifiable intangible assets, were based on their estimated fair values as of the acquisition date. The excess of purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The allocation of the purchase price required management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values were based on information obtained from management of the acquired companies and historical experience and, with respect to the long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm. These estimates included, but were not limited to, the cash flows that an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset, discounted at rates commensurate with the risks and uncertainties involved. For acquisitions that involved contingent consideration, the Company recognized a liability equal to the fair value of the contingent consideration obligation as of the acquisition date. The estimate of fair value of a contingent consideration obligation required subjective assumptions regarding future business results, discount rates, and probabilities assigned to various potential business result scenarios.
Focus Rx Pharmacy Services Inc. and Focus Rx Inc.
On September 1, 2017, the Company acquired Focus Rx Pharmacy Services Inc. and Focus Rx Inc. (collectively, “Focus”), a specialty pharmacy focusing on infusion services located in Ronkonkoma, New York. The following table summarizes the consideration transferred to acquire Focus:
Cash
$
374,297 restricted common shares
Contingent consideration at fair value
$
The above share consideration at closing is based on 374,297 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of August 31, 2017 ($16.75) and multiplied by 90 percent to account for the restricted nature of the shares.
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $1,500 per performance period based upon the achievement of certain gross profit targets in the 12-month periods ending September 30, 2018 and 2019. The maximum additional cash payout is $3,000.
Approximately $1,200 of the purchase consideration was deposited into an escrow account to be held for 12 months after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $234 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash
$
Accounts receivable
Inventory
Prepaid expenses and other current assets
Definite-lived intangible assets
Other noncurrent assets
Accounts payable
)
Accrued expenses — other
)
Total identifiable net assets
Goodwill
$
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Useful
Amount
Patient relationships
7 years
$
Non-compete employment agreements
3 years
Trade names and trademarks
3 years
$
Accurate Rx Pharmacy Consulting, LLC
On July 5, 2017, the Company acquired Accurate Rx Pharmacy Consulting, LLC (“Accurate”), a specialty pharmacy focusing on infusion services located in Columbia, Missouri. The following table summarizes the consideration transferred to acquire Accurate:
Cash
$
131,108 restricted common shares
Contingent consideration at fair value
$
The above share consideration at closing is based on 131,108 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of July 3, 2017 ($15.05) and multiplied by 90 percent to account for the restricted nature of the shares.
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $3,600 per performance period based upon the achievement of certain gross profit targets in the 12-month periods ending July 31, 2018 and 2019. The maximum additional cash payout is $7,200.
Approximately $1,000 of the purchase consideration was deposited into an escrow account to be held for 15 months after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $134 and $217 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017, respectively.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash
$
Accounts receivable
Inventory
Prepaid expenses and other current assets
Definite-lived intangible assets
Other noncurrent assets
Accounts payable
)
Accrued expenses — other
)
Total identifiable net assets
Goodwill
$
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Useful
Amount
Patient relationships
7 years
$
Non-compete employment agreements
5 years
Trade names and trademarks
4 years
$
WRB Communications, LLC
On May 8, 2017, the Company acquired WRB Communications, LLC (“WRB”), a communications and contact center company based in Chantilly, Virginia that specializes in relationship management programs for leading pharmaceutical manufacturers and service organizations. The following table summarizes the consideration transferred to acquire WRB:
Cash
$
299,325 restricted common shares
Contingent consideration at fair value
$
The above share consideration at closing is based on 299,325 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of May 5, 2017 ($15.93) and multiplied by 90 percent to account for the restricted nature of the shares.
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $500 per performance period based upon the achievement of certain earnings before interest, taxes, depreciation and amortization targets in the 12-month periods ending May 31, 2018 and 2019. The maximum additional cash payout is $1,000.
Approximately $1,950 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $28 and $255 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017, respectively.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash
$
Accounts receivable
Prepaid expenses and other current assets
Property and equipment
Definite-lived intangible assets
Other noncurrent assets
Accounts payable
)
Accrued expenses — other
)
Total identifiable net assets
Goodwill
$
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Useful
Amount
Customer relationships
7 years
$
Non-compete employment agreements
4 years
Trade names and trademarks
2 years
$
Comfort Infusion, Inc.
On March 22, 2017, the Company acquired Comfort Infusion, Inc. (“Comfort”), a specialty pharmacy and infusion services company based in Birmingham, Alabama that specializes in intravenous immune globulin therapy to support patients’ immune systems. The following table summarizes the consideration transferred to acquire Comfort:
Cash
$
Contingent consideration at fair value
$
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $2,000 per performance period based upon the achievement of certain gross profit targets in each of the 12-month periods ending March 31, 2018, 2019 and 2020. The maximum payout of contingent consideration is $6,000.
Approximately $1,050 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $11 and $232 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2017, respectively.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash
$
Accounts receivable
Inventories
Prepaid expenses and other current assets
Definite-lived intangible assets
Other noncurrent assets
Accounts payable
)
Accrued expenses — other
)
Total identifiable net assets
Goodwill
$
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Useful
Amount
Physician relationships
7 years
$
Non-compete employment agreements
5 years
$
Affinity Biotech, Inc.
On February 1, 2017, the Company acquired Affinity Biotech, Inc. (“Affinity”), a specialty pharmacy and infusion services company based in Houston, Texas that provides treatments and nursing services for patients with hemophilia. The following table summarizes the consideration transferred to acquire Affinity:
Cash
$
Contingent consideration at fair value
$
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners an additional cash payout based upon the achievement of a certain earnings before interest, taxes, depreciation and amortization target in the 12-month period ending January 31, 2018. The maximum payout of contingent consideration is $4,000.
Approximately $2,000 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $204 which were charged to “Selling, general and administrative expenses” during the nine months ended September 30, 2017.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash
$
Accounts receivable
Inventories
Prepaid expenses and other current assets
Definite-lived intangible assets
Other noncurrent assets
Accounts payable
)
Accrued expenses — compensation and benefits
)
Accrued expenses — other
)
Total identifiable net assets
Goodwill
$
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Useful
Amount
Patient relationships
7 years
$
Non-compete employment agreements
5 years
$
Valley Campus Pharmacy, Inc.
On June 1, 2016, the Company acquired Valley Campus Pharmacy, Inc., doing business as TNH Advanced Specialty Pharmacy (“TNH”). TNH, a specialty pharmacy based in Van Nuys, California, provides medication management programs for individuals with complex chronic diseases, including oncology, hepatitis and immunology. The following table summarizes the consideration transferred to acquire TNH:
Cash
$
324,244 restricted common shares
$
The above share consideration at closing is based on 324,244 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of May 31, 2016 ($32.58) and multiplied by 90 percent to account for the restricted nature of the shares.
Approximately $3,800 of the purchase consideration was deposited into an escrow account to be held for 12 months after the closing date to satisfy any indemnification claims that may be made by the Company. These funds remain in escrow as of September 30, 2017.
The Company incurred acquisition-related costs of $40 and $399 which were charged to “Selling, general and administrative expenses” during the three and nine months ended September 30, 2016, respectively.
The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash
$
Accounts receivable
Inventories
Prepaid expenses and other current assets
Property and equipment
Capitalized software for internal use
Definite-lived intangible assets
Other noncurrent assets
Accounts payable
)
Accrued expenses — compensation and benefits
)
Accrued expenses — other
)
Total identifiable net assets
Goodwill
$
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Useful
Amount
Physician relationships
10 years
$
Non-compete employment agreements
5 years
Trade names and trademarks
1 year
$
Pro Forma Operating Results
The following 2017 unaudited pro forma summary presents condensed consolidated financial information as if the Accurate, Affinity, Comfort, Focus and WRB acquisitions had occurred on January 1, 2016. The following 2016 unaudited pro forma summary presents condensed consolidated financial information as if the Accurate, Affinity, Comfort, Focus and WRB acquisitions had occurred on January 1, 2016 and the TNH acquisition had occurred on January 1, 2015. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as amortization expense resulting from intangible assets acquired and adjustments to reflect the Company’s borrowings and tax rates. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of the as if dates or of results that may occur in the future.
Three Months Ended
Nine Months Ended
2017
2016
2017
2016
Net sales
$
$
$
$
Net income attributable to Diplomat Pharmacy, Inc.
$
$
$
$
Net income per common share — basic
$
$
$
$
Net income per common share — diluted
$
$
$
$ |
