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EXHIBIT 99.01
RISK FACTORS
CHANGES IN OUTSOURCING TRENDS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES
COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice has grown substantially in the 1990s, and we
have benefited from this trend. If this trend were to change and companies in
these industries reduced their tendency to outsource those projects, our
operations and financial condition could be materially and adversely affected.
In addition, numerous governments have undertaken efforts to control growing
healthcare costs through legislation, regulation and voluntary agreements with
medical care providers and pharmaceutical companies. If future regulatory cost
containment efforts limit the profits which can be derived on new drugs, our
customers may reduce their research and development spending which could reduce
the business they outsource to us. We cannot predict the likelihood of any of
these events or the effects they would have on our business, results of
operations or financial condition.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE PMSI AND ENVOY INTO OUR BUSINESS
We may not achieve the intended benefits of the mergers with PMSI and
ENVOY if we are unable to integrate these businesses with our own successfully.
We could encounter a number of difficulties as a result of the mergers, such as:
- retaining PMSI's and ENVOY's customers;
- maintaining and increasing PMSI's and ENVOY's competitive
presence in the healthcare industry;
- continuing to operate PMSI's and ENVOY's businesses
efficiently; or
- retaining key PMSI and ENVOY employees.
For example, if either acquired company's current customers are
uncertain about our commitment to support their existing products and services,
they could cancel or refuse to renew current contracts. In addition, the
combined company may be unsuccessful in expanding or retaining its competitive
position in the healthcare industry as a result of factors such as its
inability to properly market either acquired company's services and products.
Furthermore, the successful integration of PMSI and ENVOY depends on the
contribution of certain key PMSI
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and ENVOY employees. The loss of any key personnel could result in less
efficient business operations for the combined company and could seriously harm
its business.
IF COMPANIES WE ACQUIRE DO NOT PERFORM AS EXPECTED OR IF WE ARE UNABLE TO MAKE
STRATEGIC ACQUISITIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED
A key element of our growth strategy depends on our ability to complete
acquisitions that complement or expand our business and successfully integrate
the acquired companies into our operations. If we are unable to successfully
execute our acquisition strategy, there could be a material adverse effect on
our business, results of operations and financial condition. In the past, some
of our acquisitions performed below our expectations in the short term, but we
experienced no impact to our expectations for our overall results, due in part
to the size of such acquisitions and the performance of other areas of our
business. In the future, if we are unable to operate the business of an acquired
company so that our results meet our expectations, those results could have a
negative impact on our results as a whole. The risk that our results may be
affected if we are unable to successfully operate the businesses we acquire may
increase in proportion with (1) the size of the businesses we acquire, (2) the
lines of business we acquire and (3) the number of acquisitions we complete in
any given time period.
In 1998, we completed 11 acquisitions. As of March 31, 1999, we have
completed another four acquisitions, including PMSI and ENVOY. The PMSI and
ENVOY acquisitions have expanded our lines of business and thus involve new
risks. ENVOY is the largest acquisition we have completed to date, and PMSI is
one of the largest we have ever completed. If either of these acquisitions fails
to meet our performance expectations, our results of operation and financial
condition could be materially adversely affected. In addition, we are currently
reviewing many acquisition candidates and continually evaluating and competing
for new acquisition opportunities. Other risk factors we face as a result of our
aggressive acquisition strategy include the following:
- the ability to achieve anticipated synergies from combined
operations;
- integrating the operations and personnel of acquired
companies, especially those in lines of business that differ
from our current lines of business;
- the ability of acquired companies to meet anticipated revenue
and net income targets;
- potential loss of the acquired companies' key employees;
- the possibility that we may be adversely affected by risk
factors present at the acquired companies, including Year 2000
risks;
- potential losses resulting from undiscovered liabilities of
acquired companies that are not covered by the indemnification
we may obtain from the sellers;
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- the ability to expand the data analyses portion of ENVOY's
business;
- risks of assimilating differences in foreign business
practices and overcoming language barriers (for acquisitions
of foreign companies); and
- risks experienced by companies in general that are involved in
acquisitions.
Due to these risks, we may not be able to successfully execute our
acquisition strategy.
IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AND MARKET POTENTIAL NEW SERVICES, OUR
GROWTH COULD BE ADVERSELY AFFECTED
Another key element of our growth strategy is the successful
development and marketing of new services which complement or expand our
existing business. If we are unable to succeed in (1) developing new services
and (2) attracting a customer base for those newly developed services, we will
not be able to implement this element of our growth strategy, and our future
business, results of operations and financial condition could be adversely
affected.
For example, as a result of our acquisition of ENVOY, we are
considering expanding our pharmaceutical and healthcare information and market
research services. Providers of these services manipulate healthcare information
to analyze aspects of current healthcare products and procedures for use in
producing new products and services or in analyzing sales and marketing of
existing products. These types of services are also known as data mining. We
believe that the healthcare information ENVOY processes in its current business
could be utilized to create new data mining services. In addition to the other
difficulties associated with the development of any new service, our ability to
develop this line of service may be limited further by contractual provisions
limiting our use of the healthcare information or the legal rights of others
that may prevent or impair our use of the healthcare information. Due to these
and other limitations, we cannot assure you that we will be able to develop this
type of service successfully. Our inability to develop new products or services
or any delay in the development of them may adversely affect our ability to
realize some of the synergies we anticipate from the acquisition of ENVOY.
OUR RESULTS COULD BE ADVERSELY AFFECTED BY THE POTENTIAL LOSS OR DELAY OF OUR
LARGE CONTRACTS
Most of our customers can terminate our contracts upon 15-90 days
notice. In the event of termination, our contracts often provide for fees for
winding down the project. Still, the loss or delay of a large contract or the
loss or delay of multiple contracts could adversely affect our future net
revenue and profitability.
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OUR BACKLOG MAY NOT BE INDICATIVE OF FUTURE RESULTS
We report backlog based on anticipated net revenue from uncompleted
projects that a customer has authorized. We cannot assure you that the backlog
we have reported will be indicative of our future results. A number of factors
may affect our backlog, including:
- the variable size and duration of projects (some are performed
over several years);
- the loss or delay of projects; and
- a change in the scope of work during the course of a project.
WE FACE RISKS CONCERNING THE YEAR 2000 ISSUE
If We or Our Vendors Do Not Adequately Prepare for the Year 2000 Issue,
Our Operations Could Be Disrupted
We have established a Year 2000 Program to address the Year 2000
issue, which results from computer processors and software failing to process
date values correctly, potentially causing system failures or data corruption.
The Year 2000 issue could cause disruptions of our operations, including, among
other things, a temporary inability to process information; receive information,
services or products from third parties; interface with customers in the
performance of contracts; or operate or communicate in some or all of the
regions in which we do business. Our computing infrastructure is based on
industry standard systems. We do not depend on large legacy systems and do not
use mainframes. Rather, the scope of our Year 2000 Program includes unique
software systems and tools in each of our service groups, especially our Product
Development Group, embedded systems in our laboratory and manufacturing
operations, facilities such as elevators and fire alarms in over 70 offices
(which also involve embedded technology) and numerous supplier and other
business relationships. We have identified critical systems within each service
group and are devoting our resources to address these items first.
Our Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of our Chief Information Officer and representatives
from regional business units, together with legal, quality assurance and
information technology personnel. We have established a Year 2000 Program
Management Office, staffed by consultants, which develops procedures and
instructions at a centralized level and oversees performance of the projects
that make up the program. Project teams organized by service group and
geographic region are responsible for implementation of the individual projects.
The framework for our Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
We are in the process of assessing those systems, facilities and business
relationships which we believe may be vulnerable to the Year 2000 issue and
which we believe could impact our operations. Although we cannot control
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whether and how third parties will address the Year 2000 issue, our assessment
also will include a limited evaluation of certain services on which we are
substantially dependent, and we plan to develop contingency plans for possible
deficiencies in those services. For example, we believe that among our most
significant third party service providers are physician investigators who
participate in clinical studies conducted through our contract research
services; consequently, we are developing a specialized process to assess and
address Year 2000 issues arising from these relationships. We do not plan to
assess how our customers, such as pharmaceutical and large biotechnology
companies, are dealing with the Year 2000 issue.
As we complete the assessment of our systems, we are developing plans
to renovate, replace or retire them, as appropriate, if they are affected by the
Year 2000 issue. Such plans generally include testing of new or renovated
systems upon completion of the remedial actions. We will utilize both internal
and external resources to implement these plans. Our strategic healthcare
communications services are less dependent on information technology than our
other services. With the exception of recent acquisitions, our Year 2000 Program
with respect to those services is substantially complete, with validation
expected to be completed in the first quarter of 1999. We addressed most systems
relating to our healthcare consulting services in 1998, with completion expected
in the first half of 1999. We also addressed most of our contract sales systems
in 1998, and expect to have substantially completed this program during
mid-1999. Our contract research services utilize numerous systems, which we must
address individually on disparate schedules, depending on the magnitude and
complexity of the particular system. We anticipate that remediation or
replacement of these systems will be substantially complete by mid-1999, with
migration occurring primarily in the second half of the year. We are in the
process of evaluating the state of readiness of our recent acquisitions,
particularly ENVOY and PMSI, and plan to integrate these acquisitions into our
Year 2000 Program during the second quarter of 1999. We expect to complete the
core components of our Year 2000 Program before there is a significant risk that
internal Year 2000 problems will have a material impact on our operations.
If Our Costs of Addressing the Year 2000 Issue Exceed Our Estimates,
Our Net Income Could Be Adversely Affected
We estimate that the aggregate costs of our Year 2000 Program,
excluding recent acquisitions, will be approximately $14 million, including
costs already incurred. A significant portion of these costs, approximately $6
million, are not likely to be incremental costs, but rather will represent the
redeployment of existing resources. This reallocation of resources is not
expected to have a significant impact on our day-to-day operations. We incurred
total Year 2000 Program costs of $3.5 million through December 31, 1998, of
which approximately $2.6 million represented incremental expense. ENVOY
previously estimated its Year 2000 costs to be between $3.0 and $4.0 million,
and PMSI previously estimated that its Year 2000 costs would not be material. We
are in the process of assessing these valuations as part of the integration of
these acquisitions into our Year 2000 Program. Our estimates regarding the cost,
timing and impact of addressing the Year 2000 issue are based on numerous
assumptions of future events, including the continued availability of certain
resources, our ability to meet deadlines and the cooperation of third parties.
We cannot guarantee that our assumptions will be correct and that
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these estimates will be achieved. Actual results could differ materially from
our expectations as a result of numerous factors, including the availability and
cost of personnel trained in this area, unforeseen circumstances that would
cause us to allocate our resources elsewhere and similar uncertainties.
Our Business Could Be Adversely Affected if Year 2000 Issues Are Not
Adequately Addressed In Other Parts of the World or by Companies With Which We
Do Business
We face both internal and external risks from the Year 2000 issue. If
realized, these risks could have a material adverse effect on our business,
results of operations or financial condition. Our primary internal risk is that
our systems will not be Year 2000 compliant on time. The magnitude of this risk
depends on our ability to achieve compliance of both internally and externally
developed systems or to migrate to alternate systems in a timely fashion. The
decentralized nature of our business may compound this risk if we are unable to
coordinate efforts across our global operations on a timely basis. We believe
that our Year 2000 Program will successfully address these risks; however, we
cannot assure you that this program will be completed in a timely manner.
Notwithstanding our Year 2000 Program, we also face external risks that may be
beyond our control. Our international operations and our relationships with
foreign third parties create additional risks for us, as many countries outside
the United States have been less attuned to the Year 2000 issue. These risks
include the possibility that infrastructural systems, such as electricity,
water, natural gas or telephone, will fail in some or all of the regions in
which we operate, as well as the danger that the internal systems of our foreign
suppliers, service providers and customers will fail. Our business also requires
considerable travel, and our ability to perform services under our customer
contracts could be negatively affected if air travel is disrupted by the Year
2000 issue.
In addition, our business depends heavily on the healthcare industry,
particularly on third party physician investigators. The healthcare industry,
and physicians' groups in particular, to date may not have focused on the Year
2000 issue to the same degree as some other industries, especially outside of
major metropolitan centers. As a result, we face increased risk that our
physician investigators will be unable to provide us with the data that we need
to perform under our contracts on time, if at all. Thus, the clinical study
involved could be slowed or brought to a halt. Also, the failure of our
customers to address the Year 2000 issue could negatively impact their ability
to utilize our services. While we intend to develop contingency plans to address
certain of these risks, we cannot assure you that any developed plans will
sufficiently insulate us from the effects of these risks. Any disruptions
resulting from the realization of these risks would affect our ability to
perform our services. If we are unable to receive or process information, or if
third parties are unable to provide information or services to us, we may not be
able to meet milestones or obligations under our customer contracts, which could
have a material adverse effect on our business, results of operations and
financial condition.
Until we have completed our remediation, testing and deployment plans,
we believe it is premature to develop contingency plans to address what would
happen if our execution of these plans were to fail to address the Year 2000
issue.
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IF WE LOSE THE SERVICES OF DENNIS GILLINGS OR OTHER KEY PERSONNEL, OUR BUSINESS
COULD BE ADVERSELY AFFECTED
Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Chairman of the Board of Directors and Chief Executive Officer. We maintain key
man life insurance on Dr. Gillings in the amount of $3 million. Our performance
also depends on our ability to attract and retain qualified management and
professional, scientific and technical operating staff, as well as our ability
to recruit qualified representatives for our contract sales services. The
departure of Dr. Gillings, or any key executive, or our inability to continue to
attract and retain qualified personnel could have a material adverse effect on
our business, results of operations or financial condition.
OUR CONTRACT RESEARCH SERVICES CREATE A RISK OF LIABILITY FROM CLINICAL TRIAL
PARTICIPANTS
We contract with physicians to serve as investigators in conducting
clinical trials to test new drugs on human volunteers. Such testing creates risk
of liability for personal injury to or death of volunteers, particularly to
volunteers with life-threatening illnesses, resulting from adverse reactions to
the drugs administered during testing. It is possible third parties could claim
that we should be held liable for losses arising from any professional
malpractice of the investigators with whom we contract or in the event of
personal injury to or death of persons participating in clinical trials. We do
not believe we are legally accountable for the medical care rendered by third
party investigators, and we would vigorously defend any such claims.
Nonetheless, it is possible we could be found liable for those types of losses.
In addition to supervising such tests, we also own a number of labs
where Phase I clinical trials are conducted. Phase I clinical trials involve
testing a new drug on a limited number of healthy individuals, typically 20 to
80 persons, to determine the drug's basic safety. We also could be liable for
the general risks associated with ownership of such a facility. These risks
include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers.
RELAXATION OF GOVERNMENT REGULATION COULD DECREASE THE NEED FOR THE SERVICES WE
PROVIDE
Governmental agencies throughout the world, but particularly in the
United States, highly regulate the drug development/approval process. A large
part of our business involves helping pharmaceutical and biotechnology companies
through the regulatory drug approval process. Any relaxation in regulatory
approval standards could eliminate or substantially reduce the need for our
services, and, as a result our business, results of operations and financial
condition could be materially adversely affected. Potential regulatory changes
under consideration in the United States and elsewhere include mandatory
substitution of generic drugs for patented drugs, relaxation in the scope of
regulatory requirements or the introduction of simplified drug approval
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procedures. These and other changes in regulation could have an impact on the
business opportunities available to us.
FAILURE TO COMPLY WITH EXISTING REGULATIONS COULD RESULT IN A LOSS OF REVENUE
Any failure on our part to comply with applicable regulations could
result in the termination of ongoing clinical research or sales and marketing
projects or the disqualification of data for submission to regulatory
authorities, either of which could have a material adverse effect on us. For
example, if we were to fail to verify that informed consent is obtained from
patient participants in connection with a particular clinical trial, the data
collected from that trial could be disqualified, and we could be required to
redo the trial under the terms of our contract at no further cost to our
customer, but at substantial cost to us.
PROPOSED REGULATIONS MAY INCREASE THE COST OF OUR BUSINESS OR LIMIT OUR SERVICE
OFFERINGS
Certain of our current services relate to the diagnosis and treatment
of disease. The confidentiality of patient-specific information and the
circumstances under which such patient-specific records may be released for
inclusion in our databases or used in other aspects of our business, are subject
to substantial government regulation. Additional legislation governing the
possession, use and dissemination of medical record information has been
proposed at both the state and federal levels. This legislation may (1) require
us to implement security measures that may require substantial expenditures or
(2) limit our ability to offer some of our products and services. These and
other changes in regulation could limit our ability to offer some of our
products or have an impact on the business opportunities available to us.
EXCHANGE RATE FLUCTUATIONS MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
We derive a large portion of our net revenue from international
operations; for example, we derived approximately 51.0% of our 1998 net revenue
from outside the United States. Our financial statements are denominated in U.S.
dollars; thus, factors associated with international operations, including
changes in foreign currency exchange rates could significantly affect our
results of operations and financial condition. Exchange rate fluctuations
between local currencies and the U.S. dollar create risk in several ways,
including:
- Foreign Currency Translation Risk. The revenue and expenses of
our foreign operations are generally denominated in local
currencies.
- Foreign Currency Transaction Risk. Our service contracts may
be denominated in a currency other than the currency in which
we incur expenses related to such contracts.
We try to limit these risks through exchange rate fluctuation
provisions stated in our service contracts, or we may hedge our transaction risk
with foreign currency exchange contracts
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or options. Despite these efforts, we may still experience fluctuations in
financial results from our operations outside the United States, and we cannot
assure you that we will be able to favorably reduce our currency transaction
risk associated with our service contracts.
On January 1, 1999, a new currency, the euro, became the legal currency
for 11 of the 15 member countries of the European Economic Community. Between
January 1, 1999 and January 1, 2002, governments, companies and individuals may
conduct business in these countries in both the euro and existing national
currencies. On January 1, 2002, the euro will become the sole currency in these
countries. We are evaluating the impact conversion to the euro will have on our
business. In particular we are reviewing (1) whether we may have to change the
prices of our services in the different countries because they will now be
denominated in the same currency in each country and (2) whether we will have to
change the terms of any financial instruments in connection with our hedging
activities described above. Based on current information and our initial
evaluation, we do not expect the cost of any necessary corrective action to
seriously harm our business. However, we will continue to evaluate the impact of
these and other possible effects of the conversion to the euro on our business.
We cannot assure you that the costs associated with the conversion to the euro
will not in the future seriously harm our business, results of operations or
financial condition.
INDUSTRY REGULATION MAY RESTRICT OUR ABILITY TO DISSEMINATE
PHARMACEUTICAL DATA
As described above, the pharmaceutical industry is subject to extensive
regulations, including limitations on the prices drug companies may charge. Such
regulations may cause our pharmaceutical company clients to revise or reduce
their marketing programs. In addition, we are directly subject to certain
restrictions on the collection and use of data. While we do not believe that any
such current legislation will have a material adverse effect on our operations,
we cannot assure you that future legislation or regulations will not directly or
indirectly restrict the dissemination of the type of information we gather and
therefore materially adversely affect our operations.
ENVOY MAY BE ADVERSELY AFFECTED BY CUSTOMER CONCENTRATION
ENVOY has one customer, Aetna U.S. Healthcare, Inc. ("AUSHC"), that
accounted for 17% of its 1998 revenues and 12% of its 1997 revenues. ENVOY and
AUSHC entered into a ten-year services agreement that requires AUSHC to use
ENVOY as its single source clearinghouse and EDI network for all of AUSHC's
electronic healthcare transactions. The fees under the AUSHC services agreement
have been negotiated for the first three years. The AUSHC services agreement
also requires ENVOY to maintain minimum transaction volumes and services levels
and to perform marketing services that are designed to encourage AUSHC providers
to use ENVOY's services. If either ENVOY or AUSHC fail to comply with a material
term of the services agreement, the other party can terminate the services
agreement upon 180 days' notice. ENVOY believes that it is currently complying
with all material terms of the AUSHC services agreement.
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ENVOY receives medical EDI transactions from practice management system
vendors and other claims clearinghouses. These vendors and claims clearinghouses
collect transactions from healthcare providers and send ENVOY these transactions
to complete the processing of the transactions with the payors. ENVOY receives
revenue from the payors for processing these transactions and, in turn, pays
rebates to exclusive and preferred vendors based on the volume of transactions
delivered to ENVOY. If consolidation in the healthcare industry results in fewer
vendors and clearinghouses that gather medical EDI transactions from healthcare
providers, then ENVOY's medical EDI business will be more dependent on a smaller
number of vendors and clearinghouses.
To illustrate the foregoing risk, ENVOY currently processes batch
transactions for Medic Computer Systems, a practice management system vendor.
ENVOY and Medic have an exclusive relationship for processing these transactions
through June 1999. ENVOY's revenues for such processing represented 3.5% of
ENVOY's revenues for the year ended December 31, 1998. Medic recently announced
that it has entered into a processing and development agreement with one of
ENVOY's competitors. Subsequently, both ENVOY and Medic have alleged that the
other party has breached the parties' current agreement, and a lawsuit is
pending to resolve the parties' allegations. If ENVOY is not able to resolve the
parties' allegations and maintain a relationship with Medic, or other companies
like Medic, its business may be adversely affected.
As another illustration, before NEIC was acquired by ENVOY, it
generated most of our revenues from five insurance companies who were
shareholders of NEIC. These insurance companies have continued to use NEIC's
services following ENVOY's acquisition of NEIC, but they are not required to
continue to use NEIC's services in the future. If one or more of the insurance
companies decreases or ceases its use of NEIC's services, then ENVOY's business
could be adversely affected.
ENVOY RELIES ON SPECIFIC DATA CENTERS
ENVOY relies on its host computer system to perform real-time EDI
transaction processing. This host computer system is contained in a single data
facility. The host computer system does not have a remote backup data center.
Although the host computer system is insured, if there is a fire or other
disaster at the data facility, ENVOY's business could be materially adversely
affected.
ENVOY also relies on a data center operated by a third party to perform
many of its other healthcare EDI transaction processing services. The facility
is located in Tampa, Florida and is operated by GTE Data Services Incorporated,
with whom ENVOY has contracted for such processing services. ENVOY relies
primarily on this facility to process its batch claims and other medical EDI
transaction sets. ENVOY's contract with GTE requires GTE to maintain continuous
processing capability and a "hot site" disaster recovery system. This contract
expires in December 2003. If the GTE facility's services are disrupted or
delayed, ENVOY's business could be materially adversely affected.
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ENVOY CANNOT PREDICT THE NEED FOR INDEPENDENT HEALTHCARE EDI PROCESSING
ENVOY's business strategy anticipates that providers of healthcare
services and payors will increase their use of electronic processing of
healthcare transactions in the future. The development of the business of
electronically transmitting healthcare transactions is affected, and somewhat
hindered, by the complex nature and types of transactions that must be
processed. Furthermore, while the wide variety of processing forms used by
different payors has fostered the need for healthcare EDI and transaction
processing clearinghouses such as ENVOY to date, if such forms become
standardized, through consolidation of payors or otherwise, then the need for
independent third party healthcare EDI processing could become less prevalent.
We cannot assure you that the electronic processing of healthcare transactions
will increase or that ENVOY's business will grow.
ENVOY FACES A VARIETY OF COMPETITORS
ENVOY faces different types of competition in the healthcare EDI and
transaction processing business. Some of its competitors are similarly
specialized, such as former regional partners of ENVOY that have direct provider
relationships, and others are involved in more highly developed areas of the
business. In addition, some vendors of provider information management systems
include or may include, in their offered products, their own electronic
transaction processing systems. If electronic transaction processing becomes the
standard method of processing healthcare claims and information, other companies
with significant capital resources could enter the industry. Competition from
any or all of these sources could force ENVOY to reduce, or even eliminate, per
transaction fees, which could adversely affect its business.
DIRECT LINKS MAY BYPASS NEED FOR ENVOY'S SERVICES
Some third party payors provide electronic data transmission systems to
healthcare providers, thereby directly linking the payor to the provider. Such
direct links bypass third party processors such as ENVOY. An increase in the use
of direct links between payors and providers would materially adversely affect
ENVOY's business.
ENVOY FACES AN UNCERTAIN REGULATORY ENVIRONMENT
The operations of companies in the healthcare industry are affected by
changes in political, economic and regulatory influences. Federal and state
legislatures periodically consider legislation that would change the federal and
state healthcare programs. Such legislation may include increased government
involvement in healthcare, lower reimbursement rates, or other changes. The
uncertainty surrounding these proposed or actual changes could cause companies
in the healthcare industry to curtail or defer investments in ENVOY's services
and products.
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CONSOLIDATION IN THE HEALTHCARE INDUSTRY MAY ADVERSELY AFFECT ENVOY'S BUSINESS
Many healthcare providers and payors are consolidating to create larger
healthcare organizations. This consolidation reduces the number of potential
customers for ENVOY's services, and the increased bargaining power of these
organizations could lead to reductions in the amounts paid for ENVOY's services.
Industry developments are increasing the amount of capitation-based care and
reducing the need for providers to make claims or reimbursements for products or
services. Payors and other healthcare information companies, such as billing
services and practice management vendors, which currently utilize ENVOY's
services, have developed or acquired transaction processing and networking
capabilities and may cease utilizing ENVOY's services in the future. The impact
of these developments in the healthcare EDI and transaction processing industry
is difficult to predict and could materially adversely affect ENVOY's business.
NEW HEALTHCARE LEGISLATION COULD RESTRICT ENVOY'S BUSINESS
The Health Insurance Portability and Accountability Act of 1996
requires the use of standard transactions, standard identifiers, security and
other administrative simplification provisions and instructs the Secretary of
Health and Human Services to promulgate regulations regarding these standards.
The Act also requires the Secretary of Health and Human Services to develop
recommendations regarding the privacy of individually identifiable health
information. On September 11, 1997, the Secretary presented her recommendations,
which, among other things, advise that patient information should not be
disclosed except when authorized by the patient. This Act further establishes an
August 1999 deadline for Congress to enact privacy legislation. If Congress does
not meet this deadline, the Secretary is directed to issue regulations setting
privacy standards to protect health information that is transmitted
electronically. Such changes could occur as early as the year 2000, and their
impact cannot be predicted. Such legislation or regulations could materially
affect ENVOY's business. This Act also specifically names clearinghouses as the
compliance facilitators for providers and payors, and permits clearinghouses to
convert non-standard transactions to standard transactions on behalf of their
clients. ENVOY is preparing to comply with the mandated standards within three
to six months after they are published. Whether ENVOY is successful in complying
with these standards may depend on whether providers, payors and others are also
successful in complying with the standards.
In addition, broad-based health information privacy legislation
restricting third party processors from using, transmitting or disclosing
certain patient data without specific patient consent has recently been
introduced in the United States Congress. If this legislation is adopted, it
could prevent third party processors from using, transmitting or disclosing
certain treatment and clinical data. It is difficult to predict the impact of
the legislation described above, but such legislation could materially adversely
affect ENVOY's business.
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ENVOY FACES EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES
The market for ENVOY's business is characterized by rapidly changing
technology, evolving industry standards and frequent introduction of new and
enhanced products and services. To succeed, ENVOY must continue to:
- enhance its existing products and services;
- introduce new products and services on a timely and
cost-effective basis to meet evolving customer requirements;
- achieve market acceptance for new products and services; and
- respond to emerging industry standards and other technological
changes.
PROTECTING ENVOY'S TECHNOLOGY IS IMPORTANT TO ITS SUCCESS
ENVOY believes that its technology is important to its success and
competitive position. Accordingly, ENVOY has devoted substantial resources to
the establishment and protection of the intellectual property rights associated
with its technology. These actions, however, may be inadequate to prevent a
third party from imitating or using ENVOY's technology or asserting certain
rights in ENVOY's technology and intellectual property rights. Additionally,
ENVOY's competitors may independently develop technologies that are
substantially equivalent or superior to ENVOY's technology. Although ENVOY is
currently not aware of any pending or threatened infringement claims, a third
party also may claim that ENVOY's products and services are infringing on its
intellectual property rights. Such claims could require ENVOY to enter into
license arrangements in order to use such products and services. ENVOY may not
be able to obtain such licenses.
Furthermore, litigation may be necessary to enforce or defend ENVOY's
intellectual property rights or defend against any infringement claims. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on ENVOY's business and financial results.
ENVOY INCREASINGLY DEPENDS ON MEDICAL EDI AND PATIENT STATEMENT TRANSACTION
REVENUES
ENVOY's medical EDI and patient statement transaction revenues
constituted approximately 75% of ENVOY's total revenues in 1998. Although
pharmacy EDI transactions currently represent a majority of ENVOY's total
transactions, pharmacy EDI revenue constituted less than 15% of ENVOY's total
revenues in 1998 as a result of lower per transaction prices on pharmacy
transactions. In 1998, the number of transactions processed in ENVOY's pharmacy
EDI business grew at approximately half the rate experienced in ENVOY's other
businesses. Because of the significant penetration and lower per transaction
prices already existing in the
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more mature pharmacy EDI sector, ENVOY believes that the percentage of total
revenue contributed by its pharmacy EDI business as presently conducted will
continue to decrease. Accordingly, ENVOY will have an increasing dependence on
medical EDI and patient statement transaction revenues. Any decline in growth
rates associated with these businesses could have a material adverse effect on
ENVOY's business and financial results.
ENVOY FACES RISKS CONCERNING UNAUTHORIZED ACCESS TO DATA CENTERS
Unauthorized access to ENVOY's data centers and misappropriation of
ENVOY's proprietary information could have a material adverse effect on ENVOY's
business and financial results. While ENVOY believes its current security
measures and the security measures used by third parties for whom ENVOY
processes or transmits healthcare information are adequate, such unauthorized
access or misappropriation could occur.
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