CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Corporation's current estimates, expectations and projections about the
Corporation's future results, performance, prospects and opportunities. Forward
looking statements include, among other things, the information concerning the
Corporation's possible future results of operations including revenue, costs of
goods sold, and gross margin, business and growth strategies, financing plans,
the Corporation's competitive position and the effects of competition, the
projected growth of the industries in which we operate, and the Corporation's
ability to consummate strategic acquisitions. Forward-looking statements include
statements that are not historical facts and can be identified by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "plan," "may," "should," "will," "would," "project," and
similar expressions. These forward-looking statements are based upon information
currently available to the Corporation and are subject to a number of risks,
uncertainties and other factors that could cause the Corporation's actual
results, performance, prospects or opportunities to differ materially from those
expressed in, or implied by, these forward-looking statements. Important factors
that could cause the Corporation's actual results to differ materially from the
results referred to in the forward-looking statements the Corporation makes in
this report include:
• the Corporation's access to capital, credit ratings, indebtedness, and
ability to raise additional financings and operate under the terms of the
Corporation's debt obligations;
• anti-takeover provisions of the Delaware General Corporation Law, which in
concert with our certificate of incorporation and our by-laws could delay
or deter a change in control;
• the effects of adverse economic trends or intense competition in the
markets in which we operate;
• the demand for the Corporation's products and services;
• the risk of retaining existing customers and service contracts and the
Corporation's ability to attract new customers for growth of the
Corporation's business;
• the effects of renegotiating contract pricing relating to significant
customers and suppliers, including the hospital pharmacy segment which is
substantially dependent on service provided to one customer;
• the Corporation's ability to successfully transition information technology services being provided by its current vendor to another vendor
effectively;
• the effects of an increase in credit risk, loss or bankruptcy of or default by any significant customer, supplier, or other entity relevant to
the Corporation's operations;
• the Corporation's ability to successfully pursue the Corporation's
development and acquisition activities and successfully integrate new
operations and systems, including the realization of anticipated revenues,
economies of scale, cost savings, and productivity gains associated with
such operations;
• the Corporation's ability to control costs, particularly labor and employee benefit costs, rising pharmaceutical costs, and regulatory
compliance costs;
• the effects of healthcare reform and government regulations, including,
interpretation of regulations and changes in the nature and enforcement of
regulations governing the healthcare and institutional pharmacy services
industries;
• changes in the reimbursement rates or methods of payment from Medicare and
Medicaid and other third party payers to both us and our customers;
• the potential impact of state government budget shortfalls and their ability to pay the Corporation and its customers for services provided;
• the Corporation's ability, and the ability of the Corporation's customers,
to comply with Medicare or Medicaid reimbursement regulations or other
applicable laws;
• the effects of changes in the interest rate on the Corporation's outstanding floating rate debt instrument and the increases in interest
expense, including increases in interest rate terms on any new debt
financing;
• the Corporation's ability to implement the short cycle dispensing
requirements of the 2010 Health Care Legislation without incurring
significant additional operating costs;
• further consolidation of managed care organizations and other third party
payers;
• political and economic conditions nationally, regionally, and in the
markets in which the Corporation operates;
• natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes,
earthquakes, hurricanes, epidemic, pandemic, catastrophic event or other
matters beyond the Corporation's control;
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• increases in energy costs, including state and federal taxes, and the
impact on the costs of delivery expenses and utility expenses;
• elimination of, changes in, or the Corporation's failure to satisfy pharmaceutical manufacturers' rebate programs;
• the Corporation's ability to attract and retain key executives,
pharmacists, and other healthcare personnel;
• the Corporation's risk of loss not covered by insurance;
• the outcome of litigation to which the Corporation is a party from time to
time, including adverse results in material litigation or governmental
inquiries;
• changes in accounting rules and standards, audits, compliance with the Sarbanes-Oxley Act, and regulatory investigations;
• changes in market conditions that would result in the impairment of
goodwill or other assets of the Corporation;
• changes in market conditions in which we operate that would influence the
value of the Corporation's stock;
• changes in volatility of the Corporation's stock price and the risk of litigation following a decline in the price of the Corporation's stock
price;
• the Corporation's ability to anticipate a shift in demand for generic drug
equivalents and the impact on the financial results including the negative
impact on brand drug rebates;
• prescription volumes may decline, and our net revenues and profitability
may be negatively impacted, if the safety risk profiles of drugs increase
or if drugs are withdrawn from the market, including as a result of
manufacturing issues, or if prescription drugs transition to
over-the-counter products;
• the effects on the Corporation's results of operations related to interpretations of accounting principles by the SEC staff that may differ
from those of management;
• changes in tax laws and regulations;
• the effects of changes to critical accounting estimates; and
• other factors, risks and uncertainties referenced in the Corporation's
filings with the Commission, including the "Risk Factors" set forth in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
2011.
YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS,
ALL OF WHICH SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY REPORT. EXCEPT AS
REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR RELEASE ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS QUARTERLY REPORT OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON ACTING ON THE
CORPORATION'S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION AND IN OUR RISK FACTORS SET
FORTH IN PART I, ITEM 1A OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2011 AND IN OTHER REPORTS FILED WITH THE SEC BY THE
CORPORATION.
General
The condensed consolidated financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in this
quarterly report on Form 10-Q as of and for the three months and six months
ended June 30, 2012, reflect the financial position, results of operations, and
cash flows of the Corporation.
Unless the context otherwise requires, all references to "we," "us," "our," and
"Corporation" refer to PharMerica Corporation and its subsidiaries.
The Corporation's Business and Industry Trends
Unsolicited Takeover by Omnicare
On August 23, 2011, Omnicare, Inc. ("Omnicare") made public an unsolicited
proposal to acquire all of the outstanding shares of the Corporation's common
stock for $15.00 per share in cash. On January 27, 2012, the Federal Trade
Commission ("FTC") issued an administrative complaint to block Omnicare's
proposed acquisition of the Corporation. The complaint alleges that the proposed
acquisition would be illegal and in violation of Section 15 of the FTC Act and
Section 7 of the Clayton Act because it would harm competition and enable
Omnicare to raise the price of drugs for Medicare Part D consumers and others.
On February 21, 2012 the unsolicited tender offer expired and Omnicare did not
extend the offer.
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In connection with these matters, in the six months ended June 30, 2012, we
expensed $1.9 million of legal and advisory fees, which are included in merger,
acquisition, integration costs and other charges in the condensed consolidated
financial statements. The Corporation does not expect to incur significant
additional costs in the future in connection with Omnicare's unsolicited tender
offer.
Institutional Pharmacy Business
The Corporation is the second largest institutional pharmacy services company in
the United States based on revenues. We service healthcare facilities and also
provide management pharmacy services to hospitals. The Corporation operates 95
institutional pharmacies in 44 states. The Corporation's customers are typically
institutional healthcare providers, such as skilled nursing facilities, nursing
centers, assisted living facilities, hospitals, and other long-term alternative
care settings. The Corporation is generally the primary source of supply of
pharmaceuticals to its customers. The Corporation also provides pharmacy
management services to 91 hospitals in the United States.
Our core business provides pharmacy products and services to residents and
patients in skilled nursing facilities, nursing centers, assisted living
facilities, hospitals, and other long-term alternative care settings. We
purchase, repackage, and dispense prescription and non-prescription
pharmaceuticals in accordance with physician orders and deliver such medication
to healthcare facilities for administration to individual patients and
residents. Depending on the specific location, we service healthcare facilities
typically within a radius of 120 miles or less of our pharmacy locations at
least once each day. We provide 24-hour, seven-day per week on-call pharmacist
services for emergency dispensing, delivery, and/or consultation with the
facility's staff or the resident's attending physician. We also provide various
supplemental healthcare services that complement our institutional pharmacy
services.
We offer prescription and non-prescription pharmaceuticals to our customers
through unit dose or modified unit dose packaging, dispensing, and delivery
systems, typically in a 15 to 30 day supply. Unit dose medications are packaged
for dispensing in individual doses as compared to bulk packaging used by most
retail pharmacies. The customers we serve prefer the unit dose delivery system
over the bulk delivery system employed by retail pharmacies because it improves
control over the storage and ordering of drugs and reduces errors in drug
administration in healthcare facilities. Nursing staff in our customers'
facilities administer the pharmaceuticals to individual patients and residents.
Our computerized dispensing and delivery systems are designed to improve
efficiency and control over distribution of medications to patients and
residents. We provide computerized physician orders and medication
administration records for patients or residents on a monthly basis as
requested. Data from these records are formulated into monthly management
reports on patient and resident care and quality assurance. This system improves
efficiencies in nursing time, reduces drug waste, and helps to improve patient
outcomes.
Consultant Pharmacist Services
Federal and state regulations mandate that long-term care facilities, in
addition to providing a source of pharmaceuticals, retain consultant pharmacist
services to monitor and report on prescription drug therapy in order to maintain
and improve the quality of resident care. On September 30, 2008, the United
States Department of Health and Human Services Office of Inspector General
("OIG") published OIG Supplemental Compliance Program Guidance for Nursing
Homes. With quality of care being the first risk area identified, the
supplemental guidance is part of a series of recent government efforts focused
on improving quality of care at skilled nursing and long-term care facilities.
The guidance contains compliance recommendations and an expanded discussion of
risk areas. The guidance stressed that facilities must provide pharmaceutical
services to meet the needs of each resident and should be mindful of potential
quality of care problems when implementing policies and procedures on proper
medication management. It further stated that facilities can reduce risk by
educating staff on medication management and improper pharmacy kickbacks for
consultant pharmacists and that facilities should review the total compensation
paid to consultant pharmacists to ensure it is not structured in a way that
reflects the volume or value of particular drugs prescribed or administered to
residents.
In October 2011, Centers for Medicare and Medicaid Services ("CMS") issued a
proposed rule entitled "Medicare Program; Proposed Changes to the Medicare
Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year
2013 and Other Proposed Changes; Considering Changes to the Conditions of
Participation for Long Term Care Facilities" (the "Proposed Rule"). In the
Proposed Rule, CMS outlined its concerns, and requested comments, regarding
certain contractual arrangements between Long Term Care ("LTC") facilities, LTC
pharmacies, consultant pharmacies, and pharmaceutical manufacturers. After
reviewing the comments, CMS declined to finalize the portion of the Proposed
Rule requiring the independence of consultant pharmacists from LTC pharmacies.
CMS further noted that "the independent consultant pharmacist requirement would
be highly
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disruptive to both LTC facilities and consultant pharmacists," and without
additional regulation of facility staff and providers, any benefits would not
"outweigh the costs of industry disruption." However, CMS solicited additional
comments and acknowledged the possibility of future regulations if there fails
to be improvement in inappropriate utilization throughout the industry. The
Corporation believes that a future rule, which could require the independence of
consultant pharmacists, may increase overall costs for payers and customers and
reduce the quality of care and service to long-term care patients and residents.
However, until CMS provides additional guidance, the Corporation is unable to
fully evaluate the impact of future regulations in consultant pharmacist
services.
We provide consultant pharmacist services that help our customers comply with
the federal and state regulations applicable to nursing homes. Currently, we
provide consultant services to approximately 70.1% of our patients serviced. The
services offered by our consultant pharmacists include:
• Monthly reviews of each resident's drug regimen to assess the
appropriateness and efficacy of drug therapies, including the review of
medical records, monitoring drug interactions with other drugs or food,
monitoring laboratory test results, and recommending alternative
therapies;
• Participation on quality assurance and other committees of our customers,
as required or requested by such customers;
• Monitoring and reporting on facility-wide drug utilization;
• Development and maintenance of pharmaceutical policy and procedure
manuals; and
• Assistance with federal and state regulatory compliance pertaining to
resident care.
Medical Records
The Corporation provides medical records services, which includes the completion
and maintenance of medical record information for patients in the Corporation's
customer's facilities. The medical records services include:
• Real-time access to medication and treatment administration records,
physician order sheets and psychotropic drug monitoring sheets;
• Online ordering to save time and resources;
• A customized database with the medication profiles of each resident's
medication safety, efficiency and regulatory compliance;
• Web-based individual patient records detailing each prescribed medicine; and
• Electronic medical records to improve information to make it more legible
and instantaneous.
Ancillary Services
The Corporation provides intravenous ("IV") drug therapy products and services
to its customers. We provide IV products and services to client facilities as
well as hospice and home care patients.
We prepare the product to be administered using proper equipment in an aseptic
environment and then deliver the product to the facilities for administration by
the nursing staff. Proper administration of IV drug therapy requires a highly
trained nursing staff. Upon request, we arrange for consultants to provide an
education and certification program on IV therapy to assure proper staff
training and compliance with regulatory requirements in client facilities
offering an IV therapy program.
Hospital Pharmacy Management Services
We also provide hospital pharmacy management services. These services generally
entail the overall management of the hospital pharmacy operations, including the
ordering, receipt, storage, and dispensing of pharmaceuticals to the hospital's
patients pursuant to the clinical guidelines established by the hospital. We
offer the hospitals a wide range of regulatory and financial management
services, including inventory control, budgetary analysis, staffing
optimization, and assistance with obtaining and maintaining applicable
regulatory licenses, certifications, and accreditations. We work with the
hospitals to develop and implement pharmacy policies and procedures, including
drug formulary development and utilization management. We also offer clinical
pharmacy programs that encompass a wide range of drug therapy and disease
management protocols, including protocols for anemia treatment, infectious
diseases, wound care, nutritional support, renal dosing, and therapeutic
substitution. The hospital pharmacy management services segment is comprised of
a few customers, of which, our largest service is to the majority of the Kindred
Healthcare, Inc. ("Kindred") hospitals.
Additional business segment information is set forth in Part I, Item 1
"Financial Statements" and Note 12-"Business Segment Data" to the Condensed
Consolidated Financial Statements of this quarterly report on Form 10-Q.
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Customers
Institutional Care Settings. Our customers are typically institutional
healthcare providers, such as skilled nursing facilities, nursing centers,
assisted living facilities, hospitals and other long-term alternative care
settings. We are generally the primary source of supply of pharmaceuticals for
our customers.
Our customers depend on institutional pharmacies like us to provide the
necessary pharmacy products and services and to play an integral role in
monitoring patient medication regimens and safety. We dispense pharmaceuticals
in patient specific packaging in accordance with physician instructions.
At June 30, 2012, we had contracts to provide pharmacy services to 326,148
licensed beds for patients in healthcare facilities throughout the country. We
also have significant customer concentrations with facilities operated by
Kindred. For the six months ended June 30, 2012, Kindred institutional pharmacy
contracts represented approximately 11.5% of the Corporation's total revenues.
Hospital Pharmacy Management Services. At June 30, 2012, the Corporation
provided hospital pharmacy management services to Kindred and other customers at
91 locations. For the six months ended June 30, 2012, revenues under the Kindred
hospital pharmacy management service contracts represented approximately 3.1% of
the Corporation's total revenues.
Suppliers/Inventory
On January 4, 2011, the Corporation entered into an Amended and Restated Prime
Vendor Agreement for Long-Term Care Pharmacies by and between AmerisourceBergen
Drug Corporation ("ABDC"), a wholly owned subsidiary of AmerisourceBergen
Corporation, the Corporation, Pharmacy Corporation of America and Chem Rx
Pharmacy Services, LLC ("Chem Rx") (the "Amended Prime Vendor Agreement"). The
Amended Prime Vendor Agreement became effective on January 1, 2011 and, upon its
effectiveness, superseded in its entirety the Prime Vendor Agreement for
Long-Term Care Pharmacies entered into as of August 1, 2007 between the
Corporation and ABDC.
The Amended Prime Vendor Agreement incorporates Chem Rx and is otherwise
substantially the same in scope except for modifications to select sourcing and
rebate terms. The term of the Amended Prime Vendor Agreement was extended until
September 30, 2013, with one-year automatic renewal periods unless either party
provides prior notice of its intent not to renew.
We also obtain pharmaceutical and other products from contracts negotiated
directly with pharmaceutical manufacturers for discounted prices. While the loss
of a supplier could adversely affect our business if alternate sources of supply
are unavailable, numerous sources of supply are generally available to us.
We seek to maintain an on-site inventory of pharmaceuticals and supplies to
ensure prompt delivery to our customers. ABDC maintains local distribution
facilities in most major geographic markets in which we operate.
Brand versus Generic
The pharmaceutical industry has been experiencing a higher level of
brand-to-generic drug conversions. We believe the generic dispensing rate will
continue to increase over time as the result of a large number of patent
expirations in the near future.
The following table summarizes the generic drug dispensing rate:
2011 2012
March 31 77.1 % 78.8 %
June 30 77.9 79.1
September 30 78.3 N/A
December 31 78.4 N/A
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The following table summarizes the material brand-to-generic conversions
expected to occur in 2012 through 2016:
2012 2013 2014 2015 2016
Seroquel (1Q) Lidoderm Patch
(1Q) Cymbalta (1Q) Namenda (1Q) Crestor (3Q)
Lexapro (1Q) Humalog (2Q) Nexium (2Q) Abilify (2Q)
Plavix (2Q) Celebrex (2Q) Aggrenox (3Q)
Provigil (2Q) Copaxone (2Q)
Singulair (3Q) Renvela (3Q)
Actos (3Q)
Diovan (3Q)
Diovan HCT (3Q)
Xopenex (3Q)
(Number in parentheses equals the quarter of conversion)
N/A - Currently no material brand to generic conversion in 2016.
When a branded drug shifts to a generic, initial pricing of the generic drug in
the market will vary depending on the number of manufacturers launching their
generic version of the drug. Historically a shift from brand-to-generic
decreased our revenue and improved our gross margin from sales of these classes
of drugs during the initial time period a brand drug has a generic alternative.
However, recent experience has indicated that the third-party payers may reduce
their reimbursements to the Corporation faster than previously experienced. This
acceleration in the reimbursement reduction has resulted in margin compression
much earlier than we have historically experienced. Due to the unique nature of
the brand-to-generic conversion, management cannot estimate the future financial
impact of the brand-to-generic conversions on its results of operations.
Supplier and Manufacturer Rebates
We currently receive rebates from certain manufacturers and distributors of
pharmaceutical products for achieving targets of market share or purchase
volumes. Rebates are designed to prefer, protect, or maintain a manufacturer's
products that are dispensed by the pharmacy under its formulary. Rebates for
brand name products are generally based upon achieving a defined market share
tier within a therapeutic class and can be based on either purchasing volumes or
actual prescriptions dispensed. Rebates for generic products are more likely to
be based on achieving purchasing volume requirements.
Information Technology
Computerized medical records and documentation are an integral part of our
distribution system. We primarily utilize a proprietary information technology
infrastructure that automates order entry of medications, dispensing of
medications, invoicing, and payment processing. These systems provide consulting
drug review, electronic medication management, medical records, and regulatory
compliance information to help ensure patient safety. These systems also support
verification of eligibility and electronic billing capabilities for the
Corporation's pharmacies. They also provide order entry, shipment, billing,
reimbursement and collection of service fees for medications, specialty services
and other services rendered.
Based upon our electronic records, we are able to provide reports to our
customers and management on patient care and quality assurance. These reports
help to improve efficiency in patient care, reduce drug waste, and improve
patient outcomes. We expect to continue to invest in technologies that help
critical information access and system availability.
Sources of Pharmacy Revenues
We receive payment for our services from third party payers, including Medicare
Part D Plans, government reimbursement programs under Medicare and Medicaid, and
non-government sources such as institutional healthcare providers, commercial
insurance companies, health maintenance organizations, preferred provider
organizations, and contracted providers. The sources and amounts of our revenues
will be determined by a number of factors, including the mix of our customers'
patients, brand to generic conversions and the rates and charges of
reimbursement among payers. Changes in our customers' censuses, the case mix of
the patients, brand and generic dispensing rates, and the payer mix among
private pay, Medicare Part D and Medicaid, will affect our profitability.
In December 2003, Congress enacted the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 ("MMA") which included a major expansion of the
Medicare program through the introduction of a prescription drug benefit (titled
Medicare Part D) which is administered by commercial market insurers contracted
with CMS. Under Medicare Part D, Medicare beneficiaries
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who are also entitled to benefits under a state Medicaid program (so called
"dual eligibles") now have their outpatient prescription drug costs covered by
Medicare Part D, subject to certain limitations. Since January 1, 2006, most of
the nursing center residents we serve whose drug costs were previously covered
by state Medicaid programs are dual eligibles who qualify for Medicare Part D.
Accordingly, Medicaid is no longer a primary payer for the pharmacy services
provided to these residents. See "Overview of Reimbursement."
A summary of revenue by payer type for the three months and six months ended
June 30, 2011 and 2012 is as follows (dollars in millions):
Three Months Ended June 30, Six Months Ended June 30,
2011 2012 2011 2012
% of % of % of % of
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Medicare Part D $ 252.3 47.5 % $ 220.3 48.1 % $ 507.0 47.5 % $ 460.6 48.1 %
Institutional healthcare providers 158.2 29.8 138.7 30.2 322.8 30.3 288.5 30.1
Medicaid 56.7 10.7 42.4 9.2 112.6 10.6 90.0 9.4
Private and other 24.5 4.6 21.6 4.7 46.0 4.3 45.1 4.7
Insured 23.1 4.2 18.4 4.1 44.8 4.2 39.1 4.1
Medicare 1.2 0.2 0.9 0.2 2.4 0.2 1.8 0.2
Hospital management fees 15.7 3.0 16.2 3.5 31.2 2.9 32.3 3.4
Total $ 531.7 100.0 % $ 458.5 100.0 % $ 1,066.8 100.0 % $ 957.4 100.0 %
Competition
We face a highly competitive environment in the institutional pharmacy market.
In each geographic market there are national, regional and local institutional
pharmacies that provide services comparable to those offered by our pharmacies
which may have greater financial and other resources than we do and may be more
established in the markets they serve than we are. In addition, owners of
skilled nursing facilities are also entering the institutional pharmacy market,
particularly in areas of their geographic concentration. On a nationwide basis,
there is one large competitor in the institutional pharmacy industry, Omnicare.
We believe that the competitive factors most important to our business are
pricing, quality and the range of services offered, clinical expertise, ease of
doing business with the provider and the ability to develop and maintain
relationships with customers. Because relatively few barriers to entry exist in
the local markets we serve, we have encountered and will continue to encounter
substantial competition from local market entrants.
2010 Health Care Legislation
On March 23, 2010, President Obama signed into law the Patient Protection and
Affordable Care Act and on March 30, 2010, President Obama signed into law the
reconciliation law known as Health Care and Education Affordability
Reconciliation Act (the "Reconciliation Act"), combined both Acts will
hereinafter be referred to as "2010 Health Care Legislation." Four key
provisions of the 2010 Health Care Legislation that are relevant to the
Corporation are: (i) the gradual modification to the calculation of the Federal
Upper Limit ("FUL") for drug prices and the definition of Average Manufacturer's
Price ("AMP"), (ii) the closure, over time, of the Medicare Part D coverage gap,
which is otherwise known as the "Donut Hole," (iii) short cycle dispensing
requirements, and (iv) Biosimilar Biological Products. The constitutionality of
the 2010 Health Care Legislation was confirmed on June 28, 2012 by the Supreme
Court of the United States (the "Supreme Court"). Specifically, the Supreme
Court upheld the individual mandate and the expansion of Medicaid; however, the
Supreme Court limited the expansion by making state participation in the
expansion voluntary. Pending the promulgation of regulations thereunder, the
Corporation is unable to fully evaluate the impact of the 2010 Health Care
Legislation.
FUL and AMP Changes
The 2010 Health Care Legislation amended the Deficit Reduction Act of 2005 (the
"DRA") to change the definition of the Federal Upper Limit or FUL by requiring
the calculation of the FUL as no less than 175% of the weighted average, based
on utilization, of the most recently reported monthly Average Manufacturer's
Price or AMP for pharmaceutically and therapeutically equivalent multi-source
drugs available through retail community pharmacies nationally.
In addition, the definition of AMP changed to reflect net sales only to drug
wholesalers that distribute to retail community pharmacies and to retail
community pharmacies that directly purchase from drug manufacturers. Further,
the 2010 Health Care Legislation continues the current statutory exclusion of
prompt pay discounts offered to wholesalers and adds three other exclusions to
the AMP definition: i) bona fide services fees; ii) reimbursement for unsalable
returned goods (recalled, expired, damaged, etc.); and
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iii) payments from and rebates/discounts to certain entities not conducting
business as a wholesaler or retail community pharmacy. In addition to reporting
monthly, the manufacturers are required to report the total number of units used
to calculate each monthly AMP. CMS will use this information when it establishes
FULs as a result of the new volume-weighted requirements pursuant to the 2010
Health Care Legislation.
In September 2011, CMS issued the first draft FUL reimbursement files for
multiple source drugs, including the draft methodology used to calculate the
FULs in accordance with the Health Care Legislation. These draft FUL prices are
based on the manufacturer reported and certified July 2011 monthly AMP and AMP
unit data. CMS continues to release this data monthly and is expected to do so
going forward. CMS has not posted monthly AMPs for individual drugs, but only
posted the weighted average of monthly AMPs in a FUL group and the calculation
methodology.
On February 2, 2012, CMS issued proposed regulations further clarifying the AMP
and FUL changes described above and indicated that the final rule would be
issued sometime in 2013.
Until CMS provides final guidance and the industry adapts to this now public
available pricing information, the Corporation is unable to fully evaluate the
impact of the changes in FUL and AMP to its business.
Part D Coverage Gap
Starting on January 1, 2011, the Medicare Coverage Gap Discount Program (the
"Program") requires drug manufacturers to provide a 50% discount on the
negotiated ingredient cost to certain Medicare Part D beneficiaries for certain
drugs and biologics purchased during the coverage gap (this is exclusive of the
pharmacy dispensing fee). In addition, the 2010 Health Care Legislation includes
a requirement that closes or eliminates the coverage gap entirely by fiscal year
2020. The coverage gap will be eliminated by gradually reducing the coinsurance
percentage for both drugs covered and not covered by the Program for each
applicable beneficiary.
At this time, the Corporation is unable to fully evaluate the impact of the
changes to the coverage gap to its business.
Short Cycle Dispensing
Pursuant to the 2010 Health Care Legislation, Prescription Drug Plans ("PDPs")
will be required, under Medicare Part D and Medicare Advantage prescription drug
plans ("Medicare Advantage" or "MAPDs") to utilize specific, uniform dispensing
techniques, such as weekly, daily, or automated dose dispensing, when dispensing
covered Medicare Part D drugs to beneficiaries who reside in a long-term care
facility to reduce waste associated with 30 to 90 day prescriptions for such
beneficiaries. This short cycle dispensing provision will take effect on
January 1, 2013. On April 15, 2011, CMS issued final regulations pursuant to the
2010 Health Care Legislation requiring, beginning January 1, 2013, pharmacies
dispensing to long-term care facilities to dispense no more than 14-day supplies
of brand-name medications covered by Medicare Part D except in limited
circumstances (i.e. solid oral doses of antibiotics and solid oral doses
dispensed in original containers as indicated by the FDA or otherwise
customarily dispensed in their original packaging to assist patients with
compliance). The final regulations also provided clarity around what pharmacy
costs should be included in the determination of the dispensing fee.
The Corporation is unable to fully evaluate the impact of the short cycle
dispensing requirements on the Corporation's operating costs.
Biosimilar Biological Products
The 2010 Health Care Legislation creates a regulatory approval pathway for
biosimilars (alternatively known as generics) for biological products. An
innovator biological product will be granted 12 years of exclusivity. At this
time, the Corporation is unable to fully evaluate the impact of the changes to
biosimilars to its business.
Overview of Reimbursement
Medicare is a federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over and to certain disabled persons.
Medicaid is a medical assistance program administered by each state that
provides healthcare benefits to certain indigent patients. Within the Medicare
and Medicaid statutory framework, there are substantial areas subject to
administrative rulings, interpretations, and discretion that may affect payments
made under Medicare and Medicaid.
We receive payment for our services from institutional healthcare providers,
commercial Medicare Part D Plans, third party payer government reimbursement
programs such as Medicare and Medicaid, and other non-government sources such as
commercial insurance companies, health maintenance organizations, preferred
provider organizations, and contracted providers. With respect to our skilled
nursing facilities customers, their residents are covered by Medicare Part A,
Part B and Part D Plans, Medicaid, insurance, and other private payers
(including managed care).
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Medicare
The Medicare program consists of four parts: (i) Medicare Part A, which covers,
among other things, in-patient hospital, skilled nursing facilities, home
healthcare, and certain other types of healthcare services; (ii) Medicare Part
B, which covers physicians' services, outpatient services, and certain items and
services provided by medical suppliers such as intravenous therapy; (iii) a
managed care option for beneficiaries who are entitled to Medicare Part A and
enrolled in Medicare Part B, known as Medicare Part C or Medicare Advantage; and
(iv) Medicare Part D, which provides coverage for prescription drugs that are
not otherwise covered under Medicare Part A or Part B for those beneficiaries
that enroll.
Part A
The Balanced Budget Act of 1997 (the "BBA") mandated the Prospective Payment
System ("PPS") for Medicare-eligible enrolled residents in skilled nursing
facilities. Under PPS, Medicare pays skilled nursing facilities a fixed fee per
patient per day for extended care services to patients, covering substantially
all items and services furnished during such enrollee's stay. Such services and
items include pharmacy services and prescription drugs. We bill skilled nursing
facilities based upon a negotiated fee schedule and are paid based on those
contractual relationships. We do not receive direct payment from Medicare for
patients covered under the Medicare Part A benefit. We classify the revenues
recognized from these payers as Institutional Healthcare Providers.
Federal legislation continues to focus on reducing Medicare and Medicaid program
expenditures. Such decreases may directly impact the Corporation's customers and
their Medicare reimbursement. Given the changing nature of these rules, we are
unable at this time to fully evaluate the impact on our business. Any evaluation
of budgeting, cost-cutting, and financing of health care must also consider the
new federal administration and the impact its proposed health care policies
could have on any future cost considerations.
Part B
The MMA also changed the Medicare payment methodology and conditions for
coverage of certain items of durable medical equipment, prosthetics, orthotics,
and supplies ("DMEPOS") under Medicare Part B. The Corporation provides some of
these products to its customers. The changes include, among other things, a new
competitive bidding program. Beginning on January 1, 2011 in selected areas and
for selected supplies, only suppliers that were winning bidders are eligible to
provide services, at prices established as a result of the competitive bids, to
Medicare beneficiaries. Enteral nutrients, equipment and supplies, oxygen
equipment, hospital beds, walkers, negative pressure wound therapy pumps and
supplies are among the 10 categories of DMEPOS included in the first round of
the competitive bidding process. The Corporation submitted bids in all
geographic areas for the enteral nutrient category prior to the March 3, 2012
deadline set by CMS. Once the bidding and selection process is completed,
proposed implementation of the contracts and pricing is July 2013. Medicare Part
B is not material to the Corporation, representing less than 0.5% of revenues.
Part D
Medicare Part D provides coverage for prescription drugs that are not otherwise
covered under Medicare Part A or Part B for those beneficiaries that enroll.
Under Medicare Part D, beneficiaries may enroll in prescription drug plans
offered by private commercial insurers who contract with CMS (or in a "fallback"
plan offered on behalf of the government through a contractor, to the extent
private entities fail to offer a plan in a given area), which provide coverage
of outpatient prescription drugs (collectively, "Part D Plans"). Part D Plans
include both plans providing the drug benefit on a standalone basis and Medicare
Advantage plans providing drug coverage as a supplement to an existing medical
benefit under that Medicare Advantage plan. Medicare beneficiaries generally
have to pay a premium to enroll in a Part D Plan, with the premium amount
varying from one Part D Plan to another, although CMS provides various federal
subsidies to Part D Plans to reduce the cost to beneficiaries.
Part D Plans are required to make available certain drugs on their formularies.
Dually-eligible residents in nursing centers generally are entitled to have
their prescription drug costs covered by a Part D Plan, provided that the
prescription drugs which they are taking are either on the Part D Plan's
formulary or an exception to the Part D Plan's formulary is granted. CMS reviews
the formularies of Part D Plans and requires these formularies to include the
types of drugs most commonly used by Medicare beneficiaries. CMS also reviews
the formulary exceptions criteria of the Part D Plans that provide for coverage
of drugs determined by the Part D Plan to be medically appropriate for the
enrollee; however there currently is not a separate formulary for long-term care
residents.
We obtain reimbursement for drugs we provide to enrollees of the given Part D
Plan in accordance with the terms of agreements negotiated between us and the
Part D Plan. The Medicare Part D final rule prohibits Part D plans from paying
for drugs and services not specifically called for by the BBA.
In addition, beginning January 2010, MIPPA required that all PDPs are required
to provide prompt payment to pharmacies. PDP and MAPDs must pay clean claims to
retail pharmacies within 14 days if submitted electronically or within 30 days
otherwise.
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Medicare Part D does not alter federal reimbursement for residents of nursing
centers whose stay at the nursing center is covered under Medicare Part A.
Accordingly, Medicare's fixed per diem payments to nursing centers under PPS
will continue to include a portion attributable to the expected cost of drugs
provided to such residents. We will, therefore, continue to receive
reimbursement for drugs provided to such residents from the nursing center in
accordance with the terms of our agreements with each nursing center.
In June 2009, CMS released a report indicating that approximately $41.0 million
in Medicare Part D payments for prescription drugs, some dispensed by LTC
pharmacies, were likely made incorrectly. CMS concluded many of the drugs, which
were dispensed during Part A skilled nursing facility stays, should have been
included in per diem payments under Medicare Part A. CMS stated it will focus on
ensuring such improper payments do not occur in the future. We are unable to
fully evaluate the impact of current and future federal initiatives aimed at
eliminating these discrepancies.
In addition, we receive rebates from pharmaceutical manufacturers for
undertaking certain activities that the manufacturers believe may increase the
likelihood that we will dispense their products. CMS continues to question
whether institutional pharmacies should be permitted to receive these
access/performance rebates from manufacturers with respect to prescriptions
covered under Medicare Part D, but has not prohibited the receipt of such
rebates. CMS defines these as rebates a manufacturer provides to long-term care
pharmacies that are designed to "prefer, protect, or maintain" that
manufacturer's product selection by the long-term care pharmacy or to increase
the volume of that manufacturer's products that are dispensed by the pharmacy
under its formulary. CMS, in 2007, required PDPs to have policies and systems in
place as part of their drug utilization management programs to protect
beneficiaries and reduce costs when long-term care pharmacies receive incentives
to move market share through access/performance rebates. The elimination or
substantial reduction of manufacturer rebates, if not offset by other
reimbursement, would have an adverse effect on our business.
Medicaid
The reimbursement rate for pharmacy services under Medicaid is determined on a
state-by-state basis subject to review by CMS and applicable federal law.
Although Medicaid programs vary from state to state, they generally provide for
the payment of certain pharmacy services, up to established limits, at rates
determined in accordance with each state's regulations. The federal Medicaid
statute specifies a variety of requirements that a state plan must meet,
including the requirements related to eligibility, coverage for services,
payment, and admissions. For residents that are eligible for Medicaid only, and
are not dual eligibles covered under Medicare Part D, we bill the individual
state Medicaid program or in certain circumstances the state's designated
managed care or other similar organizations. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement of
certain prescription drugs under Medicaid. In most states, pharmacy services are
priced at the lower of "usual and customary" charges or cost, which generally is
defined as a function of average wholesale price and may include a profit
percentage plus a dispensing fee. Most states establish a fixed dispensing fee
per prescription that is adjusted to reflect associated cost. Over the last
several years, state Medicaid programs have lowered reimbursement through a
variety of mechanisms, principally higher discounts off average wholesale price
levels, expansion of the number of medications subject to federal upper limit
pricing, and general reductions in contract payment methodology to pharmacies.
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Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. requires us to make estimates and assumptions
that affect reported amounts and related disclosures. Management considers an
accounting estimate to be critical if:
• It requires assumptions to be made that were uncertain at the time the
estimate was made; and
• Changes in the estimate or different estimates could have a material impact on our consolidated results of operations or financial condition.
The critical accounting estimates discussed below are not intended to be a
comprehensive list of all of the Corporation's accounting policies that require
estimates. Management believes that of the significant accounting policies, as
discussed in Note 1 of the condensed consolidated financial statements included
elsewhere in this report, the estimates discussed below involve a higher degree
of judgment and complexity. Management believes the current assumptions and
other considerations used to estimate amounts reflected in the condensed
consolidated financial statements are appropriate. However, if actual experience
differs from the assumptions and other considerations used in estimating amounts
reflected in the condensed consolidated financial statements, the resulting
changes could have a material adverse effect on the consolidated results of
operations and financial condition of the Corporation.
Allowance for doubtful accounts and provision for doubtful accounts
Accounts receivable primarily consist of amounts due from PDP's under Medicaid
Part D, long-term care institutions, the respective state Medicaid programs,
private payers and third party insurance companies. Our ability to collect
outstanding receivables is critical to our results of operations and cash flows.
We establish an allowance for doubtful accounts to reduce the carrying value of
our receivables to their estimated net realizable value. In addition, certain
drugs dispensed are subject to being returned and the responsible paying party
is due a credit for such returns.
Our allowance for doubtful accounts, included in our condensed consolidated
balance sheets at December 31, 2011 and June 30, 2012, were $48.6 million and
$52.8 million, respectively
Our quarterly provision for doubtful accounts included in our condensed
consolidated income statements was as follows (dollars in millions):
% of % of
Amount Revenues Amount Revenues
2011 2012
March 31 $ 5.4 1.0 % March 31 6.2 1.2 %
June 30 5.8 1.1 June 30 6.2 1.4
September 30 6.4 1.2 September 30 N/A N/A
December 31 7.2 1.5 December 31 N/A N/A
Please refer to Note 1 to our condensed consolidated financial statements
included elsewhere in this report for a rollforward of our allowance for
doubtful accounts.
The largest components of bad debts in our accounts receivable relate to the
accounts for which private payers are responsible (which we refer to as private
and other), accounts which our customers from long-term care institutions are
responsible under Medicare Part A and owe us for the drug component of their
patients' stay at their respective institution and third party, Medicare Part D,
and Medicaid accounts that have been denied.
We attempt to collect the private and other accounts through various efforts. We
attempt to collect payments due from long-term care institutions through billing
and collecting in accordance with the terms of the contracts. We attempt to
collect from third party, Medicare Part D and Medicaid accounts by obtaining the
appropriate documentation and direct discussions with the payers. In all cases,
the drugs have been dispensed.
In general, we perform the following steps in collecting accounts receivable:
• if possible, perform up front adjudication prior to dispensing the product;
• billing and follow-up with third party payers;
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• billing and follow-up with long-term care institutions;
• utilization of collection agencies; and
• other legal processes.
The Corporation has an established process to determine the adequacy of the
allowance for doubtful accounts, which relies on analytical tools, specific
identification, and benchmarks to arrive at a reasonable allowance. No single
statistic or measurement alone determines the allowance for doubtful accounts.
We monitor and review trends by payer classification along with the composition
of our aging accounts receivable. This review is focused primarily on trends in
private and other payers, PDP's, dual eligible co-payments, historic payment
patterns of long-term care institutions, and monitoring respective credit risks.
In addition, we analyze other factors such as revenue days in accounts
receivables, denial trends by payer types, payment patterns by payer types,
subsequent cash collections, and current events that may impact payment patterns
of our long-term care institution customers.
The following table shows our institutional pharmacy revenue days outstanding
reflected in our institutional pharmacy net accounts receivable as of the dates
indicated:
2011 2012
First Quarter 39.0 42.8
Second Quarter 41.6 45.3
Third Quarter 42.5 N/A
Fourth Quarter 42.8 N/A
The following table shows our summarized aging categories by quarter:
2011 2012
First Second Third Fourth First Second Third Fourth
0 to 60 days 63.4 % 63.9 % 63.1 % 61.2 % 61.5 % 58.0 % N/A % N/A %
61 to 120 days 19.3 18.0 18.9 19.5 17.3 17.7 N/A N/A
Over 120 Days 17.3 18.1 18.0 19.3 21.2 24.3 N/A N/A
The following table shows our allowance for doubtful accounts as a percent of
gross accounts receivable:
2011 2012
% of Gross % of Gross
Gross Accounts Accounts Gross Accounts Accounts
Allowance Receivable Receivable Allowance Receivable Receivable
March 31 $ 38.1 $ 273.9 13.9 % $ 52.1 $ 296.4 17.6 %
June 30 39.6 282.4 14.0 52.8 272.1 19.4
September 30 42.9 282.8 15.2 N/A N/A N/A
December 31 48.6 280.8 17.3 N/A N/A N/A
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Revenue recognition/Allowance for contractual discounts
The following table shows our sources of revenues for the quarters:
Three Months Ended Three Months Ended
March 31, June 30,
2011 2012 2011 2012
Medicare Part D 47.7 % 48.2 % 47.5 % 48.1 %
Institutional healthcare providers 30.7 30.0 29.8 30.2
Medicaid 10.4 9.6 10.7 9.2
Private payer and other 4.0 4.7 4.6 4.7
Insured 4.1 4.1 4.2 4.1
Medicare 0.2 0.2 0.2 0.2
Hospital management fees 2.9 3.2 3.0 3.5
Total 100.0 % 100.0 % 100.0 % 100.0 %
Three Months Ended Three Months Ended
September 30, December 31,
2011 2012 2011 2012
Medicare Part D 48.3 % N/A % 48.3 % N/A %
Institutional healthcare providers 29.7 N/A 28.5 N/A
Medicaid 10.4 N/A 10.2 N/A
Private payer and other 4.6 N/A 4.6 N/A
Insured 3.8 N/A 5.1 N/A
Medicare 0.2 N/A 0.2 N/A
Hospital management fees 3.0 N/A 3.1 N/A
Total 100.0 % - % 100.0 % - %
We recognize revenues at the time services are provided or products are
delivered. A significant portion of our revenues are billed to PDPs under
Medicare Part D, the state Medicaid programs, long-term care institutions, third
party insurance companies, and private payers. Some claims are electronically
adjudicated through online processing at the point the prescription is dispensed
such that our operating system is automatically updated with the actual amount
to be reimbursed. As a result, our revenues and the associated receivables are
based upon the actual reimbursement to be received. For claims that are
adjudicated on-line and are rejected or otherwise denied upon submission, the
Corporation provides contractual allowances based upon historical trends,
contractual reimbursement terms and other factors which may impact ultimate
reimbursement. Amounts are adjusted to actual reimbursed amounts based upon cash
receipts.
Co-payments for our services can be applicable under Medicare Part D, the state
Medicaid programs, and certain third party payers and are typically not
collected at the time products are delivered or services are provided.
Co-payments under the Medicaid programs and third party plans are generally
billed to the responsible party as part of our normal billing procedures which
are subject to normal collection procedures.
Under Medicare Part D, institutional residents who are dual eligible have
co-payments due from the responsible party for up to the first thirty days of a
beneficiary's stay in a skilled nursing facility subsequent to which the PDP's
are responsible for reimbursement.
Under certain circumstances, including state-mandated return policies under
various Medicaid programs, we accept returns of medications and issue credit
memorandums to the applicable payer. Product returns are processed in the period
returned. We estimate an amount for expected returns based on historical trends.
Our hospital pharmacy management revenues represent contractually defined
management fees and the reimbursement of costs associated with the direct
operations of hospital pharmacies, and are primarily comprised of personnel
costs.
Please refer to Note 7 to our accompanying condensed consolidated financial
statements and footnotes included elsewhere in this quarterly report for a
further discussion of our revenue recognition policies.
Inventory and cost of drugs dispensed
We have inventory located at each of our institutional pharmacy locations. Our
inventory is maintained on a first-in, first-out lower of cost or market basis.
The inventory consists of prescription drugs, over the counter products and
intravenous solutions. Our
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inventory relating to controlled substances is maintained on a manually prepared
perpetual system to the extent required by the Drug Enforcement Agency and state
board of pharmacies. All other inventory is maintained on a periodic system,
through the performance of quarterly physical inventories at the end of each
quarter. All inventory counts are reconciled to the balance sheet account and
differences are adjusted through cost of goods sold. In addition, we record an
amount of potential returns of prescription drugs based on historical rates of
returns.
As of December 31, 2011 and June 30, 2012, our inventories on our accompanying
condensed consolidated balance sheets were $130.6 million and $109.1 million,
respectively.
Our inventory turns were as follows for the periods presented:
2011 2012
First Quarter 15.0 11.0
Second Quarter 12.0 10.6
Third Quarter 11.0 N/A
Fourth Quarter 10.3 N/A
Goodwill, other intangible assets and accounting for business combinations
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies. Our intangible assets are comprised primarily
of trade names, customer relationship assets, and non-compete agreements.
Our goodwill included in our accompanying condensed consolidated balance sheets
as of December 31, 2011 and June 30, 2012 was $214.9 million.
Our net intangible assets included in our accompanying condensed consolidated
balance sheets as of December 31, 2011 and June 30, 2012, were $100.2 million
and $95.7 million, respectively. The amount of accumulated amortization of
intangible assets as of December 31, 2011 and June 30, 2012 was $34.2 million
and $40.0 million, respectively.
The Corporation performs an annual, and more frequent if necessary, qualitative
assessment of its Institutional Pharmacy reporting unit to determine if it is
necessary to proceed to the first step of the two-step impairment test. The
Corporation is not required to do so unless, based on the qualitative
assessment, it is determined that it is more likely than not that the fair value
of the reporting unit is less than its carrying amount. If the Corporation must
continue to step one, then we determine fair value using widely accepted
valuation techniques, including discounted cash flow and market multiple
analyses. These types of analyses require us to make assumptions and estimates
regarding future cash flows, industry economic factors and the profitability of
future business strategies.
The purchase prices of acquisitions are allocated to the assets acquired and
liabilities assumed based upon their respective fair values. Such valuations
require us to make significant estimates and assumptions, including projections
of future events and operating performance.
Fair value estimates are determined by management based upon and derived from
appraisals, established market values of comparable assets, or internal
calculations of estimated future net cash flows. Our estimate of future cash
flows is based on assumptions and projections we believe to be currently
reasonable and supportable. The ultimate decision of allocation is that of
management.
We assess for the potential impairment of intangible assets and finite-lived
assets recorded on the Corporation's balance sheet whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Accounting for income taxes
The provision for income taxes is based upon the Corporation's annual taxable
income or loss for each respective accounting period. The Corporation recognizes
an asset or liability for the deferred tax consequences of temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. Deferred tax assets generally represent items that
will result in a tax deduction in future years for which we have already
recorded the tax benefit in the accompanying condensed consolidated income
statements. The Corporation also recognizes as deferred tax assets the future
tax benefits from net operating and capital loss carryforwards.
We assess the likelihood that deferred tax assets will be recovered from future
taxable income. A valuation allowance is provided for deferred tax assets if it
is more-likely-than-not that some portion or all of the net deferred tax assets
will not be realized. Our deferred tax asset balances in our condensed
consolidated balance sheets as of December 31, 2011 and June 30, 2012, were
$37.1 million and $31.1 million, respectively, including the impact of valuation
allowances. Our valuation allowances for deferred tax assets in our condensed
consolidated balance sheets as of December 31, 2011 and June 30, 2012, were $1.0
million.
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Please refer to Note 10 to our condensed consolidated financial statements
included elsewhere in this report for further discussion of our accounting for
income taxes.
Key Financial Statement Components
Consolidated Income Statements
Our revenues are comprised primarily of product revenues and are derived from
the sale of prescription drugs through our institutional pharmacies. The
majority of our product revenues are derived on a fee-for-service basis. Our
revenues are recorded net of certain discounts and estimates for returns.
Hospital pharmacy revenues represent management fees and pass through costs
associated with managing the clients' hospital pharmacy.
Cost of goods sold is comprised primarily of the cost of product and is
principally attributable to the dispensing of prescription drugs. Our cost of
product relating to drugs dispensed by our institutional pharmacies consists
primarily of the cost of inventory dispensed and our costs incurred to process
and dispense the prescriptions. Cost of goods also includes direct labor,
delivery costs, rent, utilities, depreciation, travel costs, professional fees
and other costs attributable to the dispensing of medications. In addition, cost
of product includes a credit for rebates earned from pharmaceutical
manufacturers whose drugs are included in our formularies. These rebates
generally take the form of formulary rebates, which are earned based on the
volume of a specific drug dispensed, or market share rebates, which are earned
based on the achievement of contractually specified market share levels. The
Corporation receives rebates on brand and generic drugs dispensed and other
administrative rebates.
Selling, general and administrative expenses reflect the costs of operations
dedicated to executive management, the generation of new sales, maintenance of
existing client relationships, management of clinical programs, enhancement of
technology capabilities, direction of pharmacy operations, human resources and
performance of reimbursement and collection activities, in addition to finance,
legal and other staff activities.
Merger, acquisition, integration costs and other charges represent the costs
associated with integrating our operations, as well as costs related to
acquisitions. Also included in this category are costs related to the
unsolicited tender offer by Omnicare.
Interest expense, net, primarily includes interest expense relating to our
senior secured credit facility, partially offset by interest income generated by
cash and cash equivalents.
Consolidated Balance Sheets
Our assets include cash and cash equivalent investments, accounts receivable,
inventory, fixed assets, deferred tax assets, goodwill and intangibles.
Cash reflects the accumulation of positive cash flows from our operations and
financing activities, and primarily includes deposits with banks or other
financial institutions. Our cash balances are at the highest on Thursday nights
and at the lowest on Friday nights. Friday is usually our largest cash
disbursement day as a result of payments for our drug costs and our payrolls.
Accounts receivable primarily consist of amounts due from PDPs under Medicare
Part D, the respective state Medicaid programs, long-term care institutions,
third party insurance companies, and private payers, net of allowances for
doubtful accounts, as well as contractual allowances.
Inventory reflects the cost of prescription products held for dispensing by our
institutional pharmacies, net of allocated rebates, and is recorded on a
first-in, first-out basis. We perform quarterly inventory counts and record our
inventory and cost of goods sold based on such quarterly inventories. We also
include an estimate for returns on inventory.
Deferred tax assets primarily represent temporary differences between the
financial statement basis and the tax basis of certain accrued expenses,
goodwill, accounts receivable allowance, net operating loss carryforwards, and
stock-based compensation.
Fixed assets include investments in our institutional pharmacies and information
technology, including capitalized software development. Goodwill and intangible
assets are comprised primarily of goodwill and intangibles related to our
previous acquisitions.
Our primary liabilities include accounts payable, accrued salaries and wages,
other current liabilities, debt, and deferred tax liabilities. Accounts payable
primarily consist of amounts payable for prescription inventory purchases under
our Amended Prime Vendor Agreement and other purchases made in the normal course
of business. The balances in accounts payable and accrued salaries
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and wages are at the highest on Thursday nights and at the lowest on Friday
nights, as a result of payments for drug costs and payroll being funded on
Friday. Accrued expenses and other current liabilities primarily consist of
employee and facility-related cost accruals incurred in the normal course of
business, as well as income taxes payable. Our debt is primarily comprised of
loans under our senior secured credit facility as well as our revolver. We do
not have any off-balance sheet arrangements, other than purchase commitments and
lease obligations.
Consolidated Statements of Cash Flows
An important element of our operating cash flows is the timing of billing
cycles, subsequent cash collections and payments for drug costs and labor. Due
to the nature of the Corporation's cash cycle, cash flows from operations can
fluctuate significantly depending on the day of the week of the respective close
process. We pay for our prescription drug inventory in accordance with payment
terms offered under our Amended Prime Vendor Agreement. The Corporation receives
rebates from its prime vendor and suppliers each period. Rebates are allocated
as reduction in inventory and also recorded as a reduction to cost of goods sold
in the period earned. Outgoing cash flows include inventory purchases, employee
payroll and benefits, facility operating expenses, capital expenditures
including technology investments, interest and principal payments on our
outstanding debt, and income taxes. The cost of acquisitions will also result in
cash outflows.
Definitions
Listed below are definitions of terms used by the Corporation in managing the
business. The definitions are necessary to the understanding of the Management's
Discussion and Analysis section of this document.
Assisted Living Facilities (ALF): Represents assisted living facility. Its units
or beds will represent the number of apartment type units within the facility.
Bps: Represents basis points. Basis points are based on percentages. For
example, 100 bps represents a change of 1.0%.
Gross profit per prescription dispensed: Represents the gross profit from the
institutional pharmacy segment divided by the total prescriptions dispensed.
Gross profit percentage: Represents the gross profit per prescription dispensed
divided by the revenue per prescription dispensed.
NM: Represents not meaningful.
Prescriptions dispensed: Represents a prescription filled for an individual
patient. A prescription will usually be for a 15 or 30 day period and will
include only one drug type.
Revenues per prescription dispensed: Represents the revenues from the
institutional pharmacy segment divided by the total prescriptions dispensed.
Skilled Nursing Facilities (SNF): Represents skilled nursing facilities. Its
licensed beds will represent the customer licensed beds and this may not be
indicative of its census.
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Results of Operations
The following table presents selected consolidated comparative results of
operations and statistical information for the periods presented (dollars in
millions, except per prescription amounts and where indicated):
Three Months Ended June 30, Six Months Ended June 30,
2011 Increase (Decrease) 2012 2011 Increase (Decrease) 2012
Amount Amount Amount Amount
Net revenues
Institutional Pharmacy $ 516.0 $ (73.7) (14.3) % $ 442.3 $ 1,035.6 $ (110.5) (10.7) % $ 925.1
Hospital Management 15.7 0.5 3.2 16.2 31.2 1.1 3.5 32.3
Total net revenues 531.7 (73.2) (13.8) 458.5 1,066.8 (109.4) (10.3) 957.4
Cost of goods sold
Institutional Pharmacy 441.0 (73.0) (16.6) 368.0 896.5 (116.6) (13.0) 779.9
Hospital Management 13.7 0.7 5.1 14.4 27.2 1.6 5.9 28.8
Total cost of goods sold 454.7 (72.3) (15.9) 382.4 923.7 (115.0) (12.4) 808.7
Gross profit
Institutional Pharmacy 75.0 (0.7) (0.9) 74.3 139.1 6.1 4.4 145.2
Hospital Management 2.0 (0.2) (10.0) 1.8 4.0 (0.5) (12.5) 3.5
Total gross profit $ 77.0 $ (0.9) (1.2) % $ 76.1 $ 143.1 $ 5.6 3.9 % $ 148.7
Institutional Pharmacy (in whole numbers
except where indicated)
Volume information
Prescriptions dispensed (in thousands) 10,607 (728) (6.9) % 9,879 21,376 (1,412) (6.6) % 19,964
Revenue per prescription dispensed $ 48.65 $ (3.88) (8.0) % $ 44.77$ 48.45$ (2.11) (4.4) % $ 46.34
Gross profit per prescription dispensed $ 7.07$ 0.45
6.4 % $ 7.52$ 6.51$ (0.76) (11.7) % $ 7.27
Institutional gross margin
14.5 % 2.3 % 15.9 % 16.8 % 13.4 % 2.3 % 17.2 % 15.7 %
Generic dispensing rate 77.9 % 1.2 % 1.5 % 79.1 % 77.5 % 1.4 %
1.8 % 78.9 %
Customer licensed beds under contract
Beginning of period 357,669 (24,495)
(6.8) % 333,174 362,901 (23,403) (6.4) % 339,498
Additions - PharMerica Corporation
6,160 (1,706) (27.7) 4,454 10,641 (1,641) (15.4) 9,000
Additions - Chem Rx 392 290 74.0 682 1,390 (246) (17.7) 1,144
Losses - PharMerica Corporation (9,553) (1,226)
(12.8) (10,779) (16,726) (3,570) (21.3) (20,296)
Losses - Chem Rx
(1,644) 261 15.9 (1,383) (5,182) 1,984
38.3 (3,198)
End of period 353,024 (26,876)
(7.6) % 326,148 353,024 (26,876) (7.6) % 326,148
Hospital Management (in whole numbers
except where indicated)
Volume information
Hospital management contracts serviced 90 1.0 1.1 % 91 90 1.0 1.1 % 91
Revenues
Institutional pharmacy revenues decreased $73.7 million for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011, due
primarily to the continued wave of drugs converting from brand to generic, and a
net decline in customer licensed beds of 26,876, both of which contributed to
the decline in revenues. The decrease of $73.7 million is comprised of an
unfavorable volume variance of approximately $35.4 million or 728,000 less
prescriptions dispensed and an unfavorable rate variance of approximately $38.3
million or $3.88 decrease per prescription dispensed. The rate variance was
comprised of approximately $15.6 million due to reduced reimbursement rates on
generics and certain pricing concessions combined with $22.7 million due to the
increase in the generic dispensing rate from 77.9% to 79.1%.
The increase in hospital management revenues of $0.5 million for the three
months ended June 30, 2012 compared to the three months ended June 30, 2011 was
due to an increase in the number of hospital contracts serviced in the period.
Institutional pharmacy revenues decreased $110.5 million for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011, due
primarily to the net decline in customer licensed beds of 26,876 as well as
other factors including the continued wave of drugs converting from brand to
generic which results in lower revenues. The decrease of $110.5 million is
comprised of an unfavorable volume variance of approximately $68.4 million or
1,412,000 less prescriptions dispensed and an unfavorable rate variance of
approximately $42.1 million or a $2.11 decrease per prescription dispensed. The
rate variance was comprised of approximately $3.3 million due to inflation on
brand name drugs dispensed between periods offset by reduced reimbursement rates
on generics and certain pricing concessions combined with $45.4 million due to
the increase in the generic dispensing rate from 77.5% to 78.9%.
The increase in hospital management revenues of $1.1 million for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011 was due to an
increase in the number of hospital contracts serviced in the period.
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Cost of Goods Sold
Institutional pharmacy cost of goods sold decreased $73.0 million for the three
months ended June 30, 2012 compared to the three months ended June 30, 2011
primarily due to a decrease in overall total drug costs associated with fewer
prescriptions dispensed and certain brand-name drugs that recently went generic.
The drug costs as a percentage of revenue decreased 375 bps as a result of
rebates and the brand to generic conversions. Other costs included in cost of
goods sold increased as a percentage of revenues 145 bps, of which the increase
primarily related to salaries and wages expense increasing as a percentage of
revenue by 106 bps and delivery fees as a percentage of revenues increasing by
13 bps, along with other smaller increases in various items.
The increase in hospital management cost of goods sold of $0.7 million for the
three months ended June 30, 2012 compared to the three months ended June 30,
2011 was due primarily to the overall increase in direct operating costs as a
result of an increase in the number of hospital contracts serviced in the
period.
Institutional pharmacy cost of goods sold decreased $116.6 million for the six
months ended June 30, 2012 compared to the six months ended June 30, 2011
primarily due to a decrease in overall total drug costs associated with fewer
prescriptions dispensed and certain brand-name drugs that recently went generic.
The drug costs as a percentage of revenue decreased 304 bps as a result of
rebates and the brand to generic conversions. Other costs included in cost of
goods sold increased as a percentage of revenues 74 bps, of which the increase
primarily related to salaries and wages expense as a percentage of revenues
increasing 62 bps along with other smaller increases in various items.
The increase in hospital management cost of goods sold of $1.6 million for the
six months ended June 30, 2012 compared to the six months ended June 30, 2011
was due primarily to the overall increase in direct operating costs as a result
of an increase in the number of hospital contracts serviced in the period.
Gross Profit and Operating Expenses (Dollars in millions)
Three Months Ended June 30, Six Months Ended June 30,
2011 Increase (Decrease) 2012 2011 Increase (Decrease) 2012
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
Gross profit and operating expenses:
Total gross profit $ 77.0 14.5 % $ (0.9 ) (1.2 )% $ 76.1 16.6 % $ 143.1
13.4 % $ 5.6 3.9 % $ 148.7 15.5 %
Selling, general and administrative expenses 55.7 10.5 (0.6 ) (1.1 ) 55.1 12.0 107.7 10.1 (0.2 ) (0.2 ) 107.5 11.2
Amortization expense 2.7 0.5 0.3 11.1 3.0 0.7 5.4 0.5 0.4 7.4 5.8 0.6
Merger, acquisition, integration costs and other charges 5.1 1.0
(2.3 ) (45.1 ) 2.8 0.6 9.8 0.9 (1.6 ) (16.3 ) 8.2 0.9
Interest expense, net 2.6 0.4 (0.1 ) (3.8 ) 2.5 0.5 3.7 0.3 1.5 40.5 5.2 0.5
Income before income taxes 10.9 2.1 1.8 16.5 12.7 2.8 16.5 1.6 5.5 33.3 22.0 2.3
Provision for income taxes 3.5 0.7 1.6 45.7 5.1 1.1 5.8 0.6 3.0 51.7 8.8 0.9
Net income $ 7.4 1.4 % $ 0.2 2.7 % $ 7.6 1.7 % $ 10.7 1.0 % $ 2.5 23.4 % $ 13.2 1.4 %
Institutional pharmacy gross profit for the three months ended June 30, 2012 was
$74.3 million or $7.52 per prescription dispensed compared to $75.0 million or
$7.07 per prescription dispensed for the three months ended June 30, 2011.
Institutional pharmacy gross profit margin for the three months ended June 30,
2012 was 16.8% compared to 14.5% for the three months ended June 30, 2011.
Institutional pharmacy gross profit margin was positively impacted by higher
margins on certain brand-name drugs that recently went generic and decreases in
overall drug costs, as a result of such drugs going generic, and higher rebates.
Institutional pharmacy gross profit for the six months ended June 30, 2012 was
$145.2 million or $7.27 per prescription dispensed compared to $139.1 million or
$6.51 per prescription dispensed for the six months ended June 30, 2011.
Institutional pharmacy gross profit margin for the six months ended June 30,
2012 was 15.7% compared to 13.4% for the six months ended June 30, 2011.
Institutional pharmacy gross profit margin was positively impacted by higher
margins on certain brand-name drugs that recently went generic, decreases in
overall drug costs, as a result of such drugs going generic, and higher rebates.
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Selling, General and Administrative Expenses (Dollars in millions)
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2011 (Decrease) 2012 2011 (Decrease) 2012
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
Selling, general and administrative
expenses
Total wages, benefits and contract
labor $ 29.0 5.5 % $ (1.2 ) (4.1 )% $ 27.8 6.1 % $ 56.4 5.3 % $ (1.5 ) (2.7 )% $ 54.9 5.7 %
Contracted services 3.9 0.7 - - 3.9 0.8 7.5 0.7 0.1 1.3 7.6 0.8
Provision for doubtful accounts 5.8 1.1 0.4 6.9 6.2 1.4 11.2 1.0 1.2 10.7 12.4 1.3
Supplies 1.8 0.3 (0.2 ) (11.1 ) 1.6 0.3 3.7 0.4 (0.4 ) (10.8 ) 3.3 0.3
Travel expenses 1.4 0.3 - - 1.4 0.3 2.5 0.2 0.1 4.0 2.6 0.3
Professional fees 2.8 0.5 1.5 53.6 4.3 0.9 5.3 0.5 1.5 28.3 6.8 0.7
Adjudication expense 1.0 0.2 (0.3 ) (30.0 ) 0.7 0.2 1.9 0.2 (0.4 ) (21.1 ) 1.5 0.2
Stock-based compensation 1.8 0.3 (0.5 ) (27.8 ) 1.3 0.3 3.2 0.3 (0.3 ) (9.4 ) 2.9 0.3
Depreciation 2.5 0.4 (0.2 ) (8.0 ) 2.3 0.5 4.9 0.4 (0.1 ) (2.0 ) 4.8 0.5
Rent 1.2 0.2 0.1 8.3 1.3 0.3 2.5 0.2 (0.2 ) (8.0 ) 2.3 0.2
Maintenance 0.7 0.2 0.1 14.3 0.8 0.2 1.6 0.2 (0.1 ) (6.3 ) 1.5 0.2
Other costs 3.8 0.8 (0.3 ) (7.9 ) 3.5 0.7 7.0 0.7 (0.1 ) (1.4 ) 6.9 0.7
Total selling, general and
administrative expenses $ 55.7 10.5 % $ (0.6 ) (1.1 )% $ 55.1 12.0 % $ 107.7 10.1 % $ (0.2 ) (0.2 )% $ 107.5 11.2 %
Selling, general and administrative expenses decreased $0.6 million for the
three months ended June 30, 2012, compared to the three months ended June 30,
2011. The decrease of $0.6 million is due primarily to a $1.2 million decrease
in labor costs and $0.5 million decrease in stock based compensation, offset by
increases in professional fees of $1.5 million and bad debt expense of $0.4
million. All other costs included in selling, general and administrative
expenses decreased approximately $0.8 million.
Selling, general and administrative expenses decreased $0.2 million for the six
months ended June 30, 2012, compared to the six months ended June 30, 2011. The
decrease of $0.2 million is due primarily to decreases of $1.5 million in labor
costs and $0.4 million in both adjudication expense and supply costs, partially
offset by increases in professional fees of $1.5 million and bad debt expense of
$1.2 million. All other costs included in selling, general and administrative
expenses decreased approximately $0.6 million.
Depreciation and Amortization
Depreciation expense for the periods presented is as follows (dollars in
millions):
Three Months Ended June 30, Six Months Ended June 30,
2011 2012 2011 2012
% of % of % of % of
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Leasehold improvements $ 0.5 0.1 % $ 0.3 0.1 % $ 1.0 0.1 % $ 0.7 0.1 %
Equipment and software 4.3 0.8 4.2 0.9 8.7 0.8 8.3 0.9
Leased equipment 0.2 NM - - 0.4 NM 0.3 NM
Total depreciation expense $ 5.0 0.9 % $ 4.5 1.0 % $ 10.1 0.9 % $ 9.3 1.0 %
Depreciation expense recorded
in cost of goods sold $ 2.5 0.5 $ 2.2 0.5 $ 5.2 0.5 $ 4.5 0.5
Depreciation expense recorded
in selling, general &
administrative expenses 2.5 0.4 2.3 0.5 4.9 0.4 4.8 0.5
Total depreciation expense $ 5.0 0.9 % $ 4.5 1.0 % $ 10.1 0.9 % $ 9.3 1.0 %
Total capital expenditures $ 3.8 0.7 % $ 4.4 1.0 % $ 6.2 0.6 % $ 6.9 0.7 %
Depreciation expense decreased $0.5 million for the three months ended June 30,
2012, compared to the three months ended June 30, 2011 as a result of certain
equipment and leasehold improvements becoming fully depreciated or written off
in 2011 and having no expense recognized in the current year.
Depreciation expense decreased $0.8 million for the six months ended June 30,
2012, compared to the six months ended June 30, 2011 as a result of certain
equipment and leasehold improvements becoming fully depreciated or written off
in 2011 and having no expense recognized in the current year.
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Amortization expense related to certain identifiable intangibles for the periods
presented is as follows (dollars in millions):
Three Months Ended June 30, Six Months Ended June 30,
2011 2012 2011 2012
% of % of % of % of
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Amortization of intangibles:
Trade names $ 0.4 0.1 % $ 0.5 0.1 % $ 0.8 0.1 % $ 0.9 0.1 %
Non-compete agreements 0.4 0.1 0.5 0.1 0.9 0.1 0.8 0.1
Customer relationships 1.9 0.3 2.0 0.5 3.7 0.3 4.1 0.4
Total amortization expense $ 2.7 0.5 % $ 3.0 0.7 % $ 5.4 0.5 % $ 5.8 0.6 %
Amortization expense increased $0.3 million for the three months ended June 30,
2012, compared to the three months ended June 30, 2011 as a result of increased
amortization expense recognized on short-term non-compete agreements, along with
expense on trade names and customer relationships acquired through the 2011
acquisitions.
Amortization expense increased $0.4 million for the six months ended June 30,
2012, compared to the six months ended June 30, 2011 as a result of amortization
expense recognized primarily on customer relationships acquired through the 2011
acquisitions.
Merger, Acquisition, Integration Costs and Other Charges (Dollars in millions)
Three Months Ended June 30, Six Months Ended June 30,
2011 2012 2011 2012
Integration costs:
Tender offer costs $ - $ (0.3) $ - $ 1.9
Professional and advisory
fees 0.3 0.7 0.4 1.0
General and administrative - - 0.1 -
Employee costs 0.2 - 0.2 -
Severance costs 0.2 - 0.2 -
Facility costs - - (0.1) 0.4
Other (0.1) 0.1 (0.1) 0.1
0.6 0.5 0.7 3.4
Acquisition costs:
Professional and advisory
fees 1.9 1.3 3.2 2.6
General and administrative 0.3 0.1 0.6 0.1
Employee costs 0.9 0.5 2.0 1.5
Severance costs 1.0 0.3 1.4 0.3
Facility costs 0.4 0.1 1.2 0.4
Other costs - - 0.7 (0.1)
4.5 2.3 9.1 4.8
Total merger, acquisition,
integration costs and other
charges $ 5.1 $ 2.8 $ 9.8 $ 8.2
Negative effect on diluted
earnings per share $ (0.12) $ (0.06) $ (0.22) $ (0.17)
The Corporation incurred integration costs and other charges during the six
months ended June 30, 2012 related to costs incurred as a result of Omnicare's
unsolicited tender offer including legal, investment banking and other fees
along with other costs related to costs to convert data and integrate systems.
During the six months ended June 30, 2012, $1.9 million of tender offer costs
were incurred. The Corporation does not anticipate that significant additional
tender offer costs will continue to be incurred as the tender offer expired on
February 21, 2012.
Integration costs decreased $0.2 million for the three months ended June 30,
2012 compared to the three months ended June 30, 2011. Integration costs
increased $2.6 million for the six months ended June 30, 2012 compared to the
six months ended June 30, 2011 due primarily to costs associated with the
Omnicare tender offer.
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Acquisition costs decreased $2.2 million for the three months ended June 30,
2012 compared to the three months ended June 30, 2011. Acquisition costs
decreased $4.3 million for the six months ended June 30, 2012 compared to the
six months ended June 30, 2011 due to costs associated with the Chem Rx and Lone
Star acquisitions included in the prior year amount.
Interest Expense (Dollars in millions)
Three Months Ended June 30, Six Months Ended June 30,
2011 2012 2011 2012
Interest Expense:
Term Debt $ 1.4 $ 1.9 $ 2.2 $ 3.8
Revolving Credit Facility 0.9 0.4 1.0 1.0
Subtotal (including
commitment fees and letters
of credit fees) 2.3 2.3 3.2 4.8
Other:
Amortization of deferred
financing fees 0.3 0.2 0.5 0.4
Total Interest Expense $ 2.6 $ 2.5 $ 3.7 $ 5.2
Interest Rate (excluding
applicable margin):
Average interest rate on
variable term debt 0.82 % 0.32 % 0.64 % 0.44 %
LIBOR - 1month, at
beginning of period 0.24 % 0.24 % 0.26 % 0.30 %
LIBOR - 1month, at end of
period 0.19 % 0.25 % 0.19 % 0.25 %
LIBOR - 3 months, at
beginning of period 0.30 % 0.47 % 0.30 % 0.58 %
LIBOR - 3 months, at end of
period 0.25 % 0.46 % 0.25 % 0.46 %
Interest expense decreased $0.1 million for the three months ended June 30,
2012, compared to the three months ended June 30, 2011, due primarily to the
decrease in the revolving credit facility, along with lower interest rates
during the period. Interest expense increased $1.5 million for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011, due to
higher interest rates. The Corporation's interest rate on its borrowings
increased from London Interbank Offered Rate ("LIBOR") LIBOR plus 1.0% to LIBOR
plus 2.75% on May 2, 2011 due to the Corporation's refinancing activities in the
second quarter 2011, which paid off the 2007 credit agreement and replaced it
with the Credit Agreement dated May 2, 2011. Long-term debt, including the
current portion, was $274.0 million and $250.0 million as of June 30, 2011 and
June 30, 2012, respectively.
Tax Provision (Dollars in millions)
Three Months Ended June 30, Six Months Ended June 30,
2011 2012 2011 2012
Provision for income
taxes $ 3.5 $ 5.1 $ 5.8 $ 8.8
Total provision as a
percentage of income 31.5 % 40.1 % 35.1 % 40.1 %
The increase in our provision for income taxes as a percentage of taxable income
for the three months and six months ended June 30, 2012 compared to the
comparable 2011 periods was due to the release of a $1.2 million tax liability
in 2011 upon completion of an Internal Revenue Service audit for calendar years
2007 and 2008. The effective tax rates in 2012 are higher than the federal
statutory rate largely as a result of the combined impact of state and local
taxes and various non-deductible expenses. Excluding the release of the reserve
and certain other discrete items, the Corporation's effective tax rate for the
three months and six months ended June 30, 2011 would have been 40.8%.
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Liquidity and Capital Resources
The primary sources of liquidity for the Corporation are cash flows from
operations and the availability under the Credit Agreement. Based upon our
existing cash levels, expected operating cash flows, capital spending, potential
future acquisitions, and the availability of funds under our revolving credit
facility, we believe that we have the necessary financial resources to satisfy
our expected short-term and long-term liquidity needs.
Cash Flows - The following table presents selected data from our condensed
consolidated statements of cash flows for the periods presented (dollars in
millions):
Three Months Ended June 30, Six Months Ended June 30,
2011 2012 2011 2012
Net cash (used in) provided by
operating activities $ (5.1 ) $ 31.9 $ 0.3 $ 51.8
Net cash used in investing
activities (12.3 ) (4.6 ) (14.7 ) (7.0 )
Net cash provided by (used in)
financing activities 19.7 (22.0 ) 18.2 (50.2 )
Net change in cash and cash
equivalents 2.3 5.3 3.8 (5.4 )
Cash and cash equivalents at
beginning of period 12.3 6.7 10.8 17.4
Cash and cash equivalents at
end of period $ 14.6 $ 12.0 $ 14.6 $ 12.0
Operating Activities - Cash provided by operating activities aggregated $31.9
million and $51.8 million for the three months and six months ended June 30,
2012, respectively, compared to cash used in and provided by operating
activities of $5.1 million and $0.3 million for the three months and six months
ended June 30, 2011, respectively. The increase in cash provided by operating
activities compared to prior periods is primarily a result of lower inventory
levels and increased cash receipts on accounts receivable during the six months
ended June 30, 2012 partially offset by cash used in payments of accounts
payable and accrued salaries and wages.
Investing Activities - Cash used in investing activities aggregated $4.6 million
and $7.0 million for the three months and six months ended June 30, 2012,
respectively compared to $12.3 million and $14.7 million for the three months
and six months ended June 30, 2011, respectively. The decrease in cash used in
investing activities over the prior periods is due to cash used in the prior
year for acquisition activity surrounding the 2011 acquisitions, partially
offset by higher capital expenditures in the 2012 periods.
Financing Activities - Cash used in financing activities aggregated $22.0
million and $50.2 million for the three months and six months ended June 30,
2012, respectively, compared to cash provided by financing activities of $19.7
million and $18.2 million for the three months and six months ended June 30,
2011, respectively. The change is primarily due to additional payments made to
reduce the revolver borrowings related to the 2011 acquisitions. There are no
amounts outstanding on the revolver as of June 30, 2012.
Credit Agreement
On May 2, 2011, the Corporation entered into a long-term credit agreement (the
"Credit Agreement") among the Corporation, the Lenders named therein, and
Citibank, N.A. ("Citibank"), as Administrative Agent. The Credit Agreement
consists of a $250.0 million term loan facility and a $200.0 million revolving
credit facility. The terms and conditions of the Credit Agreement are customary
to facilities of this nature. Indebtedness under the Credit Agreement matures on
June 30, 2016, at which time the commitments of the Lenders to make revolving
loans also expire.
The Credit Agreement requires term loan principal payments by the Corporation in
an amount of $3.1 million on the last business day of each quarter beginning
September 2012 through June 2015 and $53.1 million on the last business day of
each quarter beginning September 2015 through June 2016. The final principal
repayment installment of term loans shall be repaid on the term maturity date,
June 30, 2016. In addition, the term loan is subject to certain prepayment
obligations relating to certain asset sales, certain casualty losses and the
incurrence by the Corporation of certain indebtedness.
Borrowings under the Credit Agreement bear interest at a floating rate equal to,
at the Corporation's option, a base rate plus a margin between 1.25% and
2.00% per annum, or an adjusted LIBO Rate plus a margin between 2.25% and
3.00% per annum, in each case depending on the leverage ratio of the Corporation
as defined by the Credit Agreement. The base rate is the greater of the prime
lending rate in effect on such day, the federal funds effective rate published
by the Federal Reserve Bank of New York on such day plus 0.5%, or the adjusted
LIBO Rate for deposits for a period equal to one month plus 1.0%. Any changes in
the base rate, federal funds rate or adjusted LIBO Rate shall be effective from
and including the effective date of such change in the rate, as applicable. The
Credit Agreement also provides for letter of credit fees between 2.25% and 3.00%
and a commitment fee payable on the unused portion of the revolving credit
facility, which shall accrue at a rate per annum ranging from 0.375% to 0.500%,
in each case depending on the leverage ratio of the Corporation.
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The Corporation's obligations under the Credit Agreement are secured by
substantially all of the Corporation's assets. Those obligations are guaranteed
by many of the Corporation's wholly-owned subsidiaries and the obligations of
the guarantors are secured by substantially all of their assets. The foregoing
includes a pledge of all of the equity interests of substantially all of the
Corporation's direct and indirect domestic subsidiaries and a portion of the
equity interests of any future foreign subsidiaries.
The Corporation had a total of $250.0 million outstanding of term debt under the
Credit Agreement and no outstanding balance under the revolving portion of the
Credit Agreement as of June 30, 2012. The Credit Agreement provides for the
issuance of letters of credit which, when issued, constitute usage and reduce
availability on the revolving portion of the Credit Agreement. The amount of
letters of credit outstanding as of June 30, 2012 was $2.0 million. After giving
effect to the letters of credit and amounts outstanding under the revolving
credit agreement, total availability under the revolving credit facility was
$198.0 million as of June 30, 2012.
Covenants
The Credit Agreement requires the Corporation to satisfy an interest coverage
ratio and a leverage ratio. The interest coverage ratio, which is tested as of
the last day of any fiscal quarter on a trailing four quarter basis, can be no
less than: 3.00:1.00. The leverage ratio, which also is tested quarterly, cannot
exceed 4.00:1.00 from the end of the first full fiscal quarter ending after the
effective date, through the quarter ending December 31, 2012; cannot exceed
3.75:1.00 for each of the four quarters in the year ending December 31, 2013;
and cannot exceed 3.50:1.00 for all remaining quarters through the expiration of
the Credit Agreement. In addition, capital expenditures (other than those funded
with proceeds of asset sales or insurance proceeds) are restricted in any fiscal
year to 3.0% of revenues.
In addition, the Credit Agreement contains customary affirmative and negative
covenants, which among other things, limit the Corporation's ability to incur
additional debt, create liens, pay dividends, effect transactions with the
Corporation's affiliates, sell assets, pay subordinated debt, merge,
consolidate, enter into acquisitions, and effect sale leaseback transactions.
The financial covenant requirements as defined by the Corporation's Credit
Agreements are as follows:
Interest Coverage Ratio Leverage Ratio Capital Expenditures
Requirement > = 3.00 to 1.00 < = 4.00 to 1.00 < = 3.00 %
June 30, 2012 10.45 2.01 * *
** Not applicable as the capital expenditures covenant is an annual requirement
under the terms of the Credit Agreement
Deferred Financing Fees
The Corporation capitalized a total of $9.8 million in deferred financing fees
associated with the Credit Agreement and recorded them as other assets in the
accompanying condensed consolidated balance sheets. As of June 30, 2012, the
Corporation had $8.8 million of unamortized deferred financing fees.
Prime Vendor Agreement
On January 4, 2011, the Corporation entered into an Amended and Restated Prime
Vendor Agreement for Long-Term Care Pharmacies by and between AmerisourceBergen
Drug Corporation ("ABDC"), a wholly owned subsidiary of AmerisourceBergen
Corporation, the Corporation, Pharmacy Corporation of America and Chem Rx
Pharmacy Services, LLC (the "Amended Prime Vendor Agreement"). The Amended Prime
Vendor Agreement became effective on January 1, 2011 and, upon its
effectiveness, superseded in its entirety the Prime Vendor Agreement for
Long-Term Care Pharmacies entered into as of August 1, 2007 between the
Corporation and ABDC.
The Amended Prime Vendor Agreement incorporates Chem Rx and is otherwise
substantially the same in scope excepting modifications to select sourcing and
rebate terms. The term of the Amended Prime Vendor Agreement was extended until
September 30, 2013, with one-year automatic renewal periods unless either party
provides prior notice of its intent not to renew.
We also obtain pharmaceutical and other products from contracts negotiated
directly with pharmaceutical manufacturers for discounted prices. While the loss
of a supplier could adversely affect our business if alternate sources of supply
are unavailable, numerous sources of supply are generally available to us and we
have not experienced any difficulty in obtaining pharmaceuticals or other
products and supplies to conduct our business.
We seek to maintain an on-site inventory of pharmaceuticals and supplies to
ensure prompt delivery to our customers. ABDC maintains local distribution
facilities in most major geographic markets in which we operate.
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Treasury Stock
In August 2010, the Board of Directors authorized a share repurchase of up to
$25.0 million of the Corporation's common stock, of which $10.5 million was
used. On July 2, 2012 the Board of Directors authorized an increase to the
remaining portion of the existing stock repurchase program that will allow the
Corporation to again purchase back up to a maximum of $25.0 million of the
Corporation's common stock. Share repurchases under this authorization may be
made in the open market through unsolicited or solicited privately negotiated
transactions, or in such other appropriate manner, and will be funded from
available cash. The amount and timing of the repurchases, if any, will be
determined by the Corporation's management and will depend on a variety of
factors including price, corporate and regulatory requirements, capital
availability and other market conditions. Common stock acquired through the
share repurchase program will be held as treasury shares and may be used for
general corporate purposes, including reissuances in connection with
acquisitions, employee stock option exercises or other employee stock plans. The
share repurchase program does not have an expiration date and may be limited,
terminated or extended at any time without prior notice.
The Corporation did not repurchase shares under the program during the six
months June 30, 2012. The Corporation may redeem shares from employees upon the
vesting of the Corporation's stock awards for minimum statutory tax withholding
purposes. The Corporation redeemed 15,987 shares of certain vested awards for an
aggregate price of approximately $0.2 million during the six months ended
June 30, 2012. These shares have also been designated by the Corporation as
treasury stock.
As of June 30, 2012, the Corporation had a total of 1,366,115 shares held as
treasury stock.
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Supplemental Quarterly Information
The following tables represent the results of the Corporation's quarterly
operations for the year ended December 31, 2011 and for the first and second
quarters of 2012 (in millions, except where indicated):
2011 Quarters 2012 Quarters
First Second Third Fourth First Second
Net revenues:
Institutional pharmacy revenues $ 519.6 $ 516.0 $ 503.0 $ 480.0 $ 482.8 $ 442.3
Hospital management revenues 15.5 15.7 15.7 15.6 16.1 16.2
Total revenues 535.1 531.7 518.7 495.6 498.9 458.5
Cost of goods sold:
Institutional pharmacy 455.5 441.0 429.2 405.5 411.9 368.0
Hospital management 13.5 13.7 13.8 13.8 14.4 14.4
Total cost of goods sold 469.0 454.7 443.0 419.3 426.3 382.4
Gross profit:
Institutional pharmacy 64.1 75.0 73.8 74.5 70.9 74.3
Hospital management 2.0 2.0 1.9 1.8 1.7 1.8
Total gross profit 66.1 77.0 75.7 76.3 72.6 76.1
Selling, general and
administrative 52.0 55.7 55.1 53.9 52.4 55.1
Amortization expense 2.7 2.7 3.0 2.6 2.8 3.0
Impairment of intangible assets - - 5.1 - - -
Merger, acquisition, integration
costs and other charges 4.7 5.1 1.8 3.7 5.4 2.8
Operating income 6.7 13.5 10.7 16.1 12.0 15.2
Interest expense, net 1.1 2.6 2.6 2.5 2.7 2.5
Income before income taxes 5.6 10.9 8.1 13.6 9.3 12.7
Provision for income taxes 2.3 3.5 3.3 5.7 3.7 5.1
Net income $ 3.3 $ 7.4 $ 4.8 $ 7.9 $ 5.6 $ 7.6
Earnings per share (1):
Basic $ 0.11 $ 0.25 $ 0.16 $ 0.27 $ 0.19 $ 0.26
Diluted $ 0.11 $ 0.25 $ 0.16 $ 0.27 $ 0.19 $ 0.26
Adjusted diluted earnings per
diluted share (1)(2): $ 0.20 $ 0.33 $ 0.31 $ 0.35 $ 0.30 $ 0.32
Shares used in computing earnings
per share:
Basic 29.3 29.3 29.4 29.4 29.4 29.5
Diluted 29.4 29.4 29.5 29.6 29.7 29.7
Balance sheet data:
Cash and cash equivalents $ 12.3 $ 14.6 $ 10.3 $ 17.4 $ 6.7 $ 12.0
Working capital (3) $ 295.5 $ 334.6 $ 336.7 $ 348.4 $ 330.0 $ 316.6
Goodwill (3) $ 193.9 $ 186.8 $ 183.4 $ 214.9 $ 214.9 $ 214.9
Intangible assets, net $ 100.3 $ 100.8 $ 93.1 $ 100.2 $ 97.8 $ 95.7
Total assets (3) $ 784.7 $ 823.4 $ 787.6 $ 834.0 $ 800.7 $ 782.3
Long-term debt $ 244.3 $ 274.0 $ 257.9 $ 300.0 $ 272.1 $ 250.0
Total stockholders' equity $ 389.2 $ 398.3 $ 404.5 $ 413.8$ 420.8$ 429.7
Supplemental information:
Adjusted EBITDA (2) $ 19.2 $ 26.3 $ 25.4 $ 27.6 $ 25.0 $ 25.5
Adjusted EBITDA Margin (2) 3.6 % 4.9 % 4.9 % 5.6 % 5.0 % 5.6 %
Adjusted EBITDA per prescription
dispensed (2) $ 1.78 $ 2.48 $ 2.45 $ 2.78 $ 2.48 $ 2.58
Net cash provided by (used in)
operating activities $ 5.4 $ (5.1 ) $ 12.0 $ 14.5 $ 19.9 $ 31.9
Net cash used in investing
activities $ (2.4 ) $ (12.3 ) $ (3.1 ) $ (46.2 ) $ (2.4 ) $ (4.6 )
Net cash provided by (used in)
financing activities $ (1.5 ) $ 19.7 $ (13.2
) $ 38.8 $ (28.2 ) $ (22.0 )
Statistical information (in whole
numbers except where indicated)
Institutional Pharmacy
Volume information
Prescriptions dispensed (in
thousands) 10,769 10,607 10,357 9,944 10,085 9,879
Revenue per prescription
dispensed $ 48.25 $ 48.65 $ 48.57 $ 48.27 $ 47.87 $ 44.77
Gross profit per prescription
dispensed $ 5.95 $ 7.07 $ 7.12 $ 7.49 $ 7.03 $ 7.52
Gross profit percentage 12.3 % 14.5 % 14.7 % 15.5 % 14.7 % 16.8 %
Generic drug dispensing rate 77.1 % 77.9 % 78.3
% 78.4 % 78.8 % 79.1 %
Customer licensed beds under
contract
Beginning of period 362,901 357,669 353,024 342,099 339,498 333,174
Additions - PharMerica
Corporation 4,481 6,160 3,229 13,348 4,546 4,454
Additions - Chem Rx 998 392 905 947 462 682
Losses - PharMerica Corporation (7,173 ) (9,553 ) (13,561 ) (14,617 ) (9,517 ) (10,779 )
Losses - Chem Rx (3,538 ) (1,644 ) (1,498 ) (2,279 ) (1,815 ) (1,383 )
End of period 357,669 353,024 342,099 339,498 333,174 326,148
Hospital management contracts
serviced 90 90 90 91 90 91
(1) The Corporation has never declared a cash dividend. Earnings per share in
actual cents.
(2) See "Use of Non-GAAP Measures For Measuring Quarterly Results" for a
definition and reconciliation.
(3) As adjusted, see Note 2 - Acquisitions in the Condensed Consolidated
Financial Statements.
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Use of Non-GAAP Measures for Measuring Quarterly Results
The Corporation calculates Adjusted EBITDA as provided in the reconciliation
below and calculates Adjusted EBITDA Margin by taking Adjusted EBITDA and
dividing it by revenues. The Corporation calculates and uses Adjusted EBITDA as
an indicator of its ability to generate cash from reported operating results.
The measurement is used in concert with net income and cash flows from operating
activities, which measure actual cash generated in the period. In addition, the
Corporation believes that Adjusted EBITDA and Adjusted EBITDA Margin are
supplemental measurement tools used by analysts and investors to help evaluate
overall operating performance and the ability to incur and service debt and make
capital expenditures. In addition, Adjusted EBITDA, as defined in the Credit
Agreement, is used in conjunction with the Corporation's debt leverage ratio and
this calculation sets the applicable margin for the quarterly interest charge.
Adjusted EBITDA, as defined in the Credit Agreement, is not the same calculation
as this Adjusted EBITDA table. Adjusted EBITDA does not represent funds
available for the Corporation's discretionary use and is not intended to
represent or to be used as a substitute for net income or cash flows from
operating activities data as measured under U.S. generally accepted accounting
principles ("GAAP"). The items excluded from Adjusted EBITDA but included in the
calculation of the Corporation's reported net income and cash flows from
operating activities are significant components of the accompanying condensed
consolidated income statements and cash flows, and must be considered in
performing a comprehensive assessment of overall financial performance. The
Corporation's calculation of Adjusted EBITDA may not be consistent with
calculations of EBITDA used by other companies. The following are
reconciliations of Adjusted EBITDA to the Corporation's net income and net
operating cash flows for the periods presented.
The Corporation calculates and uses adjusted diluted earnings per share, which
is exclusive of the impact of merger, acquisition, integration costs and other
charges, impairment of intangible assets, and tax accounting matters as an
indicator of its core operating results. The measurement is used in concert with
net income and diluted earnings per share, which measure actual earnings per
share generated in the period. The Corporation believes the exclusion of these
charges in expressing earnings per share provides management with a useful
measure to assess period to period comparability and is useful to investors in
evaluating the Corporation's operating results from period to period. Adjusted
diluted earnings per share, which is exclusive of the impact of merger,
acquisition, integration costs and other charges, impairment of intangible
assets, and tax accounting matters does not represent the amount that
effectively accrues directly to stockholders (i.e., such costs are a reduction
in earnings and stockholders' equity) and is not intended to represent or to be
used as a substitute for earnings per diluted common share as measured under
GAAP. The impact of merger, acquisition, integration costs and other charges,
impairment of intangible assets, and tax accounting matters excluded from the
earnings per diluted share are significant components of the accompanying
condensed consolidated income statements, and must be considered in performing a
comprehensive assessment of overall financial performance. The following is a
reconciliation of adjusted diluted earnings per share to the Corporation's GAAP
earnings per diluted common share for the periods presented.
Unaudited Reconciliation of Net Income to Adjusted EBITDA
2011 Quarters 2012 Quarters
First Second Third Fourth First Second
Net income $ 3.3 $ 7.4 $ 4.8 $ 7.9 $ 5.6 $ 7.6
Add:
Interest expense, net 1.1 2.6 2.6 2.5 2.7 2.5
Merger, acquisition, integration costs and
other charges 4.7 5.1 1.8 3.7 5.4 2.8
Provision for income taxes 2.3 3.5 3.3 5.7 3.7 5.1
Impairment of intangible assets - - 5.1 - - -
Depreciation and amortization expense 7.8 7.7 7.8 7.8 7.6 7.5
Adjusted EBITDA $ 19.2 $ 26.3 $ 25.4 $ 27.6 $ 25.0 $ 25.5
Adjusted EBITDA Margin 3.6 % 4.9 % 4.9 % 5.6 % 5.0 % 5.6 %
58
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