26MAR201514573481
DIPLOMAT PHARMACY, INC.
2016 Annual Report
Dear Fellow Shareholders:
Over the course of 2016, we grew our revenue by 31 percent including acquisitions. And while Diplomat faced some
challenges, they presented a chance to take a more strategic approach as we realigned the structure of our organization.
As always, we remain focused on providing exceptional care and services to each of our patients and partners.
2016 results include:
! $4.4 billion revenue, an annual increase of 31%
! 981,000 total prescriptions dispensed, an increase of 8%
! 7.4% gross margin compared to last year’s 7.8%
! $107.4 million adjusted EBITDA, an increase of 13%
! $28.3 million net income attributable to Diplomat, an increase of 10%
As we build on these successes, we have made several exciting additions to our team.
! Benjamin Wolin, as independent lead director, a newly created position, expands our board governance,
ensuring Diplomat’s governance structure runs efficiently and upholds our shareholders’ interests.
! Former United States Surgeon General Dr. Regina Benjamin was appointed to the board, and her extraordinary
qualifications will make an important impact on Diplomat.
! Atul Kavthekar will join our team May 1 as chief financial officer. He has extensive experience in technology,
!
health care, and investment banking, and I look forward to having him on board.
Jeff Park has been nominated to join Diplomat’s board of directors and will stand for a vote at the annual
shareholder meeting. As a former executive vice president and chief operating officer at OptumRx, he brings
exceptional industry knowledge to the team.
I am confident these additions will further strengthen our expertise and position in the specialty pharmacy industry.
Diplomat has established a leading presence in the oncology and specialty infusion markets. In 2016, revenue from
these therapeutic categories grew by a weighted average of 44 percent combined including acquisitions and
represented approximately 60 percent of our revenue. We expanded into new geographical regions, deepened our
presence in others, and strengthened our relationships with leading oncologists and immunologists.
We achieved this growth despite several headwinds. The year 2016 brought fewer specialty drug approvals than
previous years because of fewer drug filings from manufacturers and more requests from the FDA for added
information on those filings. Meanwhile, the hepatitis C market declined faster than anticipated for Diplomat and the
industry. The emergence of unexpectedly high DIR fees challenged the entire specialty pharmacy industry. Despite
these difficulties, we believe our position, scale, and drug access provide the foundation for continued growth in our
key markets.
Oncology revenue grew 47 percent in 2016 including acquisitions and represented nearly half our total revenue. With
access to most key limited-distribution oncology drugs, Diplomat is the go-to specialty pharmacy for many
oncologists. The strength of our largest therapeutic category was driven by many factors, including:
As an independent specialty pharmacy, we are not owned by a payor or a pharmacy benefit manager. The resulting
flexibility, combined with our scale, puts us in a unique position to meet the needs of our teammates in care.
In 2017, we are looking to acquire and further grow our specialty infusion and specialty pharmacy drug management
services. Through a new comprehensive fee-for-service model, we can continue to grow our business, stay relevant to
our partners, and become a true one-stop shop for specialty pharmacy services.
Innovations arise in all areas of the industry. Diplomat constantly evaluates opportunities to partner with small,
emerging, and virtual biotech companies. With so much emphasis on centering programs around patients and partners,
we believe the limited-distribution model will continue to dominate. For existing limited-distribution drugs, we expect
expanded indications for some that will broaden the potential patient population. If the robust drug pipeline is any sign,
new treatments will keep coming to market, bringing hope and possibilities to patients nationwide.
This is a year for us to get back to the basics—keeping our patients and partners at the center of everything we do and
harnessing our entrepreneurial spirit. I am proud to be surrounded by a team that innovates, analyzes, and executes new
and exciting solutions to help our patients thrive.
As we make progress in each of the areas I have identified here, know we do so to support our patients. My dad has
long said, “Take good care of patients and the rest falls into place.” For us, being a good steward of your investment
means taking the best care of those who need us by growing in new ways and expanding our services.
It is an honor and privilege to spend 2017 doing just that.
In health,
Phil Hagerman
CEO and Chairman
! Growth from drugs launched since the start of 2015
! Key drugs receiving new indications, expanding the number of treatable patients
! Our continued leadership in winning access to limited-distribution drugs (medications dispensed only by select
specialty pharmacies)
! Our acquisitions and their continued growth
Considering these factors and the drug pipeline—dominated by oncology—we expect oncolytic therapies to continue
leading the specialty industry and drive substantial revenue growth for Diplomat. Barclays Capital has forecast that the
oncology market will increase by 87 percent over five years—from $46 billion in 2016 to $86 billion by 2021.1
Our strategy for specialty infusion—creating a nationwide platform and leveraging the broader Diplomat network—is
paying off. Revenues from our specialty infusion business increased 35 percent in 2016 including acquisitions, and we
maintained our position as a top provider in this market.
While infusion has grown more slowly than specialty pharmacy as a whole, our infusion business growth significantly
outpaced that of the industry. Our specialty infusion performance in 2016 was a testament to the strength of our industry
position and the length of the runway before us. Given this therapeutic category’s higher margins, we intend to continue
expanding our services, capabilities, and sales force in this space.
Diplomat’s growth opportunities come from more than organic sources. We can also leverage our brand and
relationships with prescribers across the nation through acquisitions. In 2016, we continued to realize synergies from
prior infusion acquisitions and combined their expertise and practices under one name, Diplomat Specialty Infusion
Group. All our acquisitions to date have enhanced our service offerings without sacrificing our commitment to
patients. I feel strongly that we can do the same with future acquisitions.
When we examine an acquisition opportunity, we target several key areas:
! Expansion into new therapeutic areas and/or geographic regions
! Strategies to enhance clinical capabilities
! Access to limited-distribution drugs
! Access to specialty prescribers
! Opportunities to accelerate higher-margin business
! New services and technologies
We believe the acquisitions we completed in 2016 achieve many of these goals. Purchasing a licensed facility in Texas
gave us a brick-and-mortar presence and provided an opportunity to serve the state’s 4.06 million Medicaid patients.2
We further bolstered our prescriber relationships in Texas when we acquired TNH Advanced Specialty Pharmacy in
June. TNH is a diverse specialty pharmacy that provides medication management programs for oncology, hepatitis,
and immunology patients. TNH’s prescriber relationships and market concentration in California helped strengthen our
presence on the West Coast.
We believe our strong balance sheet and highly selective approach to acquisitions will position us well for long-term
growth.
1 Barclays, “Specialty Market Model 2017 Update: A Focus on Biosimilar Opportunities,” U.S. Healthcare Distribution & Technology, January 2017.
2 Texas Health and Human Services Commission, Charles Smith et al., “Texas Medicaid and CHIP in Perspective,” February 2017.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission File Number: 001-36677
_____________________
Diplomat Pharmacy, Inc.
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of
incorporation or organization)
38-2063100
(I.R.S. Employer
Identification Number)
4100 S. Saginaw Street
Flint, Michigan 48507
(888) 720-4450
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Not Applicable
(former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, no par value per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No "
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes " No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No "
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes ⌧ No "
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. "
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer ⌧
Accelerated filer "
Non-accelerated filer "
Smaller reporting company "
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes " No ⌧
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $1.6 billion as
of June 30, 2016 based on the reported last sale price as reported on the New York Stock Exchange on that date. Shares of the
registrant’s Common Stock held by executive officers, directors and holders of 10 percent or more of the Common Stock outstanding
have been excluded from this calculation because such persons may be deemed affiliates of the registrant; such exclusion does not reflect
a determination that such persons are affiliates of the registrant for any other purpose.
The Registrant had 66,987,621 shares of Common Stock outstanding as of March 6, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions, as expressly described in this report, of the Registrant’s Proxy Statement for its 2017 Annual Meeting of Shareholders to be
filed subsequently are incorporated by reference into Part III of this report.
DIPLOMAT PHARMACY, INC.
2016 ANNUAL REPORT ON FORM 10-K
INDEX
Forward-Looking Statements...............................................................................................................
3
Page No.
PART I
Item 1 – Business .................................................................................................................................
Item 1A – Risk Factors ........................................................................................................................
Item 1B – Unresolved Staff Comments ...............................................................................................
Item 2 – Properties ...............................................................................................................................
Item 3 – Legal Proceedings..................................................................................................................
Item 4 – Mine Safety Disclosures ........................................................................................................
PART II
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ..............................................................................................
Item 6 – Selected Financial Data .........................................................................................................
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations .............................................................................................................................
Item 7A – Quantitative and Qualitative Disclosures About Market Risk ............................................
Item 8 – Financial Statements and Supplementary Data ......................................................................
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .............................................................................................................................
Item 9A – Controls and Procedures .....................................................................................................
Item 9B – Other Information ...............................................................................................................
PART III
Item 10 – Directors, Executive Officers and Corporate Governance ...................................................
Item 11 – Executive Compensation .....................................................................................................
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters ..........................................................................................................
Item 13 – Certain Relationships and Related Transactions, and Director Independence .....................
Item 14 – Principal Accountant Fees and Services ..............................................................................
PART IV
Item 15 – Exhibits and Financial Statement Schedules ......................................................................
Item 16 – Form 10-K Summary ...........................................................................................................
Signatures ............................................................................................................................................
5
23
37
38
38
39
40
42
44
56
57
95
95
96
97
97
97
97
97
98
98
99
Exhibit Index .......................................................................................................................................
100
Exhibits
FORWARD-LOOKING STATEMENTS
Unless the context suggests otherwise, references in this Annual Report on Form 10-K to “Diplomat,” the
“Company,” “we,” “us,” and “our” refer to Diplomat Pharmacy, Inc. and its consolidated subsidiaries.
Certain statements contained or incorporated in this Annual Report on Form 10-K which are not statements of
historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are included throughout this Annual Report on Form 10-K,
including under the headings entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and relate to matters such as our industry, business strategy, goals
and expectations concerning our market position, future operations, margins, profitability, capital expenditures,
liquidity and capital resources, and other financial and operating information. Words such as “anticipate,” “assume,”
“believe,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,”
“project,” “seek,” “should,” “will,” and similar terms and phrases, or the negative thereof, utilized in discussions of
future operating or financial performance signify forward-looking statements.
The forward-looking statements contained in this Annual Report on Form 10-K are based on management’s
good-faith belief and reasonable judgment based on current information, and these statements are qualified by
important factors, many of which are beyond our control, that could cause our actual results to differ materially from
those in the forward-looking statements, including changes in global, regional, or local economic, business,
competitive, market, regulatory, and other factors, including those described in “Risk Factors.” Any forward-looking
statement made by us speaks only as of the date of this report or the date specified in such forward-looking
statement. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new
information, future developments, or otherwise, except as may be required by any applicable laws or regulations.
The following risks related to our business, among others, could cause actual results to differ materially from those
described in the forward-looking statements:
•
•
•
•
•
•
•
•
•
our ability to adapt to changes or trends within the specialty pharmacy industry;
significant and increasing pricing pressure from third-party payors;
the amount of direct and indirect remuneration fees, as well as the timing of assessing such fees and the non-
transparent methodology used to calculate such fees;
our relationships with key pharmaceutical manufacturers;
bad publicity about, or market withdrawal of, specialty drugs we dispense;
a significant increase in competition from a variety of companies in the health care industry;
our ability to effectively execute our acquisition strategy or successfully integrate acquired businesses;
fluctuations in operating results;
our ability to expand the number of specialty drugs we dispense and related services;
• maintaining existing patients;
•
increasing consolidation in the health care industry;
• managing our growth effectively;
•
•
revenue concentration of the top specialty drugs we dispense;
our ability to maintain relationships with a specified wholesaler and two pharmaceutical manufacturers, or other
pharmaceutical manufacturers that become material to our business over time;
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3
•
•
•
•
•
•
•
•
•
•
•
•
security breaches or other failures or disruptions of our information technology and security systems, and
significant costs required to oversee, maintain, and improve such systems;
relationships with clinical experts and key thought leaders at physician groups and universities within the
United States of America;
dependence on our senior management and key employees, and managing recent turnover among key
employees;
potential disruption to our workforce and operations due to recent cost savings and restructuring initiatives;
reliance on a single shipping provider;
debt service obligations;
our inability to identify and remediate any present or future material weaknesses in our internal control over
financial reporting, which could impair our ability to produce accurate and timely financial statements;
supply disruption of any of the specialty drugs we dispense;
loss of orphan drug status for such specialty drugs we dispense;
reductions of research, development, and marketing of specialty drugs;
adverse impacts from environmental regulations, and health and safety laws and regulations, applicable to our
business; and
other factors set forth under “Risk Factors.”
ITEM 1. BUSINESS
Overview
PART I
We are the largest independent specialty pharmacy in the United States of America (“U.S.”), and are focused on
improving the lives of patients with complex chronic diseases. We define our independence as our singular focus on
specialty pharmacy services, independent of other operations such as pharmacy benefit management or managed
care. Our patient-centric approach positions us at the center of the healthcare continuum for the treatment of
complex chronic diseases through partnerships with patients, payors, pharmaceutical manufacturers, and physicians.
We offer a broad range of innovative solutions to address the dispensing, delivery, dosing, and reimbursement of
clinically intensive, high-cost specialty drugs. We were formed and incorporated in Michigan in 1975 by our Chief
Executive Officer, Philip Hagerman, and his father, Dale, both trained pharmacists who transformed our business
from a traditional pharmacy into a leading specialty pharmacy beginning in 2005. Diplomat opened its doors in 1975
as a neighborhood pharmacy with one essential tenet: “Take good care of patients and the rest falls into place.”
Today, that tradition continues and we are focused on creating a culture that is highly committed to increasing
adherence and improving therapy effectiveness.
Our core revenues are derived from the customized care management programs we deliver to our patients, including
the dispensing of their specialty medications. We focus on specialty drugs that are typically administered on a
recurring basis to treat patients with complex chronic diseases that require specialized handling and administration
as part of their distribution process. We have expertise across a broad range of high-growth specialty therapeutic
categories, including oncology, immunology, hepatitis, specialty infusion therapy, multiple sclerosis, and many
other serious or long-term conditions.
Our comprehensive, patient-focused services ensure that patients receive a superior standard of care, including
assistance with complicated medication therapies, refill processing, third-party funding support programs, side effect
management, and adherence monitoring. We customize solutions for each patient based on the patient’s overall
health, disease and family history, lifestyle, and financial means.
We have grown our business in recent years by strengthening our clinical expertise in key therapeutic categories,
such as oncology, immunology, hepatitis, specialty infusion therapy, and multiple sclerosis, strengthening our
relationships with patients, payors, pharmaceutical manufacturers, and physicians, and broadening the scope of our
services to hospitals and health systems. While we will continue to focus on growing our business organically, we
have completed several significant acquisitions in recent years and we may further opportunistically enhance our
competitive position through complementary acquisitions in both existing and new markets. In June 2014, we
acquired MedPro Rx, Inc. (“MedPro”), a specialty pharmacy focused on specialty infusion therapies including
hemophilia and immune globulin. In April 2015, we acquired BioRx, LLC (“BioRx”), a highly specialized
pharmacy and infusion services company that provides treatments for patients with ultra-orphan and rare, chronic
diseases. In June 2015, we acquired Burman’s Apothecary, LLC (“Burman’s”), a provider of individualized patient
care with a primary focus on hepatitis C. In June 2016, we acquired Valley Campus Pharmacy, Inc. doing business
as TNH Advanced Specialty Pharmacy (“TNH”), a specialty pharmacy with a primary focus on oncology, hepatitis,
and immunology.
Our services, together with our proactive engagement with pharmaceutical manufacturers early in the drug
development process, have contributed to our current and growing access to limited distribution drugs, which we
define as drugs that are only available for distribution by a select network of specialty pharmacies. Our inclusion in
limited-distribution networks provides critical sources of revenue growth and provides a catalyst for our future
growth.
As a part of our mission to improve patient care, we provide specialty pharmacy support services to a national
network of retailers, as well as hospitals and health systems. Through many of these partners, we earn revenue by
providing clinical and administrative support services on a fee-for-service basis to help them dispense specialty
medications.
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5
Specialty Pharmacy Industry
Specialty pharmacy services are a distinct form of pharmacy services that coordinate full-service patient care and
complex disease management. Specialty pharmacy services are designed to take advantage of economies of scale by
using standardized and efficient processes to deliver medications with customized handling, storage, and distribution
requirements. Specialty pharmacies are also designed to improve clinical, adherence, and economic outcomes for
patients with complex, often chronic, or rare conditions through a wide range of oral, injectable, inhalable, and
infusible specialty pharmaceuticals.
Less acute, chronic conditions are generally treated with self-administered, oral, injectable, or inhalable specialty
pharmaceuticals, but may also be administered by a physician or nurse. These pharmaceuticals can be distributed
directly to the patient for at-home administration or to the patient’s physician for in-office administration. Several
chronic, genetic conditions and orphan diseases are treated with infused pharmaceuticals via a more complex
intravenous form of administration. These pharmaceuticals are dispensed under the supervision of a registered
pharmacist, and the therapies are typically delivered to the patient for self-administration in the home or
administration by a credentialed home-health care nurse or trained caregiver at home or in another care site. Many of
the pharmaceuticals handled by specialty pharmacies require refrigeration during shipping, as well as special
handling to prevent potency degradation. Patients receiving treatment usually require personalized counseling and
education regarding their condition and treatment programs.
Specialty pharmacies primarily treat serious or chronic conditions such as cancer, hemophilia, hepatitis, immune
deficiency disorders, multiple sclerosis, and neurological conditions. Retail pharmacies and other traditional
distributors generally are designed to carry inventories of low-cost, high-volume products and therefore are not as
well equipped to handle the high-cost, low-volume specialty pharmaceuticals that have specialized handling and
administration requirements. In addition, those entities generally lack both the deep clinical expertise and the
administrative and call center support functions necessary to effectively deliver specialty pharmacy services. As a
result, specialty pharmaceuticals generally are provided by pharmacies that focus primarily on filling, labeling, and
delivering oral, injectable, infusible, or inhalable pharmaceuticals and related medication and support services.
Segment Information
Our chief operating decision maker reviews our financial results in total when evaluating financial performance and
for purposes of allocating resources. Therefore, we have determined that we operate in a single reportable segment –
specialty pharmacy services.
Our Services
We provide specialty pharmacy services dedicated to servicing the needs of patients, while also providing clinical
expertise, technology-driven innovation tools, and administrative efficiencies that support physicians, payors,
pharmaceutical manufacturers, and retail pharmacies. We purchase specialty pharmaceuticals from manufacturers
and wholesale distributors, fill prescriptions, and label, package, and deliver the pharmaceuticals to patients’ homes
or physicians’ offices through contract couriers. We utilize our main Company-owned distribution facility and
corporate headquarters, 19 smaller owned or leased regional facilities, and centralized clinical call centers to provide
such services to all 50 states in the U.S. The services provided to our patients and other constituents described below
are integral to securing the relationships that drive our revenue and prescription volumes, and are a central focus of
our specialty pharmacy business. To successfully compete, we must provide value to each constituent in the
specialty pharmacy industry.
Our value to constituents is based on our ability to provide broad specialty and limited-distribution product access,
utilization management, high patient adherence rates, patient funding assistance, data management, outstanding
patient and prescriber satisfaction rates, and direct and indirect cost savings. Further, we manage the high cost of
specialty drugs by pursuing cost savings through channel management, utilization management, formulary
management (i.e., the list of specialty drugs that will be reimbursed by a health plan or managed care organization),
and waste minimization (including our split-fill program). Channel management is a strategy that includes targeting
specialty medications covered under the medical benefit by payors and moving the coverage of these medications to
the pharmacy benefit to take advantage of deeper discounts, rebates or more detailed reporting when available.
Utilization management is the evaluation of the appropriateness, medical need, and efficiency of health care
services, procedures, drugs, and facilities according to established criteria or guidelines and under the provisions of
an applicable health benefits plan. Formulary management is an integrated patient care process which enables
physicians, pharmacists, and other health care professionals to work together to promote clinically sound,
cost-effective medication therapy, and positive therapeutic effectiveness. A drug formulary, or preferred drug list, is
a continually updated list of medications and related products supported by current evidence-based medicine,
judgment of physicians, pharmacists, and other experts in the diagnosis and treatment of disease and preservation of
health.
Our programs consist of the following business services:
• Specialty Drug Dispensing – For the years ended December 31, 2016, 2015, and 2014, we derived more
than 99 percent of our revenue from the dispensing of drugs and the reporting of data associated with those
dispenses to pharmaceutical manufacturers and other outside companies. The other services described
below are included in our core business offerings and the overall payor reimbursement for dispensed drugs,
rather than as separately reimbursable events. We are licensed to dispense prescriptions in all U.S. states
and territories. Our business processes and dispensing solutions are well established and can provide
specialty prescriptions to patients as required by the communicated “need by” date. All specialty
prescriptions are verified by registered pharmacists for accuracy and appropriateness at two separate points
in the dispensing process prior to shipping to the patient. Our specialty dispensing and distribution
capabilities include package-tracking through contracted couriers, temperature controls, and signature
confirmation upon delivery.
Our physical footprint has enabled us to develop a centralized infrastructure that we have successfully
scaled to dispense to all U.S. states and territories. We have an advanced distribution center that enables us
to ship medications nationwide as well as centralized clinical call centers that help us deliver localized
services on a national scale. In addition to our headquarters and main distribution facility in Flint,
Michigan, we operate 19 smaller regional facilities in Arizona, California, Connecticut, Florida, Illinois,
Iowa, Maryland, Massachusetts, Michigan, Minnesota, North Carolina, Ohio, Pennsylvania, and Texas. We
are fully accredited and licensed to conduct business in each state that requires such licensure. We
primarily utilize UPS in the delivery of the specialty pharmaceutical products we dispense.
Specialty drug dispensing includes our specialty infusion pharmacy services. Our April 2015, June 2014,
and December 2013 acquisitions of BioRx, MedPro, and AHF, respectively, expanded our specialty
infusion pharmacy services. We provide individualized, patient-centric specialty infusion services to
patients with bleeding disorders and other chronic conditions, while managing overall drug spend through
factor utilization using dose management, assay management (which means ensuring that the prescribed
amount is the dispensed amount), clinical and therapy education, intervention, and nursing support to
advance better clinical effectiveness for patients. Specialty infusion drugs are high-cost, with intravenous or
subcutaneous routes of administration, and can be managed at home or in a hospital or free-standing
ambulatory infusion clinic, in a physician office, or through our extensive outsourced network of
credentialed specialty nurses who administer medications in the patent’s home or at other sites of care. We
estimate our drug reimbursement for specialty infusion patients is approximately 60 percent medical benefit
and 40 percent pharmacy benefit.
Our specialty drug dispensing services include:
o Patient Care Coordination: Our proprietary patient care system coordinates and tracks patient
adherence and safety. It is built around specific drug therapies and disease states for greater
consistency of care using clinical algorithms. Each step of the patient’s treatment regimen is
extensively researched based on various disease guideline publications. Our system automatically
tracks all clinical interventions and activities and provides real-time access to patient information.
Using this system, our patient care coordinators, including pharmacists, work with patients and
prescribers to identify potential adherence failures and implement proactive plans to optimize
treatment effectiveness.
o Clinical Services: Our pharmacists and nurses, with the assistance of our pharmacy technicians,
provide clinically based drug therapy management programs for clients and patients. Pharmacists
provide counseling on adherence and side-effect management. Our Clinical Help Desk includes
6
7
pharmacists, nurses, and pharmacy technicians. A pharmacist is available to patients and
prescribers 24 hours per day, seven days per week, and nurses are available during regular
business hours. Clinical pharmacists are responsible for high-level clinical interaction with
patients and healthcare practitioners, including medication counseling and clinical advice. Our
clinicians work with patients’ prescribers to identify adherence failures and to implement a
proactive plan to achieve intended effectiveness. Our broader clinical and operations team has
deep clinical expertise and includes more than 140 licensed pharmacists as of December 31, 2016.
o Compliance and Persistency Programs: Our drug-specific compliance and persistency programs
support the needs of patients based on their therapy regimen. In some cases, a dedicated nurse
proactively contacts patients at specific intervals of therapy to discuss precautions, side-effect
management, medication administration, and refill procedures. Prior to every refill, we call
patients to: verify the dose, dosing regimen, and shipping address; discuss side effects; and
confirm that the patient is taking the medication appropriately. Aside from standard protocol, we
initiate calls at critical points during the therapy to improve adherence. We also address
non-compliance by offering enhanced patient education and communication through customized
programs specific to the medications we provide.
o Patient Financial Assistance: Our funding specialists help patients navigate their benefits and
find third-party financial assistance to address coverage deficiencies. We provide services to help
patients understand and receive reimbursement benefits and we work with available co-pay
assistance programs, including co-pay card enrollment and program management. We work with
substantially all major commercial co-pay card programs. Our team also coordinates with many
external charitable foundations and research grant organizations that help subsidize the cost of
medications for patients. We also help patients access manufacturer patient assistance (free drug)
programs when necessary and available. These programs result in increased access to specialty
drug therapies for patients and increased revenues for us.
o Specialty Pharmacy Training/Consulting (Diplomat University): Diplomat University is our
education and training department that educates both Diplomat employees and external
professionals (including pharmacists, payors, pharmaceutical partners, and physicians) on topics
unique to the specialty pharmacy industry. Our in-depth, ongoing training program promotes
clinical competence and builds new skills, enabling employees to provide high-level care for our
patients and improve overall business performance. Diplomat University also houses our quality
assurance department, which focuses on programs that promote quality and patient safety.
Diplomat University-produced materials have been used in trade conference materials, magazine
articles, and business meetings, to explain the specialty pharmacy industry generally and the broad
range of solutions we can provide.
o Benefits Investigation: Our standard procedures require that we conduct a benefits investigation
for each patient we work with. In addition to processing test claims, our benefit specialists contact
the appropriate pharmacy or medical benefit plan to verify coverage, deductibles, coinsurance, and
out-of-pocket maximums. Our specialists provide all necessary coding for the prescribed therapy
or service. Any prior authorization or predetermination requirements are defined at the time of the
benefits investigation. Our standard procedures require an initial test adjudication upon receipt of
the referral and require subsequent investigations under certain circumstances.
o Prior Authorization: Our prior authorization specialists, in coordination with the prescribing
physician and their staff, contact the patient’s insurance plan and collect all necessary patient
specific information, together with supporting documentation, to provide to the third-party payor
to support reimbursement for the prescribed medication. If the required therapy is not listed on the
third-party payor’s formulary, we compile the necessary information to file a formulary exception
on behalf of the patient.
o Risk Evaluation and Mitigation Strategy (“REMS”): Our employees administer REMS
protocols on all levels of risk mitigation, which is required by many pharmaceutical manufacturers
due to regulatory requirements. The U.S. Food and Drug Administration (“FDA”) requires REMS
from certain manufacturers to ensure that the benefits of a drug or biological product outweigh its
risks. Manufacturers are required to comply with specific FDA requirements that may include
medication use guides, black box warnings / patient package insert language, and a
communication plan to health care providers. As part of REMS protocols, manufacturers may also
be required to comply with Elements to Assure Safe Use (“ETASU”) to mitigate a specific serious
risk listed in the labeling of the drug, including specialized training and certifications, required
dispensing locations, patient monitoring, and associated reporting. We have standard operating
procedures in place to support all aspects of a REMS program, including REMS administration,
REMS drug fulfillment, disease management, medication guide dispensing, and the ETASU
specific to a pharmaceutical manufacturer’s program. We also partner with manufacturers to
report and track Adverse Drug Events where required. Our patient care system has been designed
to capture much of the information the pharmaceutical manufacturer must report to the FDA.
• Retail Specialty Services: Retail specialty services connect a retail pharmacy business to the specialty
arena. Based on our broad industry experience, infrastructure, and unique treatment-tracking software,
retail specialty services offer companies a strategic partner for clinical and administrative support services
that help their business and their specialty patients achieve their optimal therapeutic effectiveness. Large
retailers with pharmacies have access to many of the same specialty drugs we distribute, but lack the
expertise and the infrastructure necessary to manage patients, payors, and physicians regarding these
specialty drugs. Development of this infrastructure is very costly, time consuming, and requires trained
clinical experts. Our retail specialty services fill this gap with our breadth of service expertise, which
includes nearly every aspect of our specialty pharmacy business, other than purchasing the drugs, filling the
prescriptions, and billing payors.
• Hospital and Health System Services: We provide clinical and administrative support services to
hospitals and health systems that dispense specialty medications through their outpatient pharmacies. We
partner with hospitals and health systems to assist with strategies and service delivery that is designed to
maximize cost containment and improve efficiency and clinical effectiveness related to specialty
pharmaceuticals. Our program also supports hospitals that are 340B covered entities through a contracted
pharmacy strategy.
• Hub Services: We also offer hub services to capitalize on our expertise in providing the services described
above and to compete with other hub service providers. Hub services generally are centralized management
services for collaboration and efficiency among the key participants in the specialty pharmacy system
(including patients, physicians, payors, pharmaceutical manufacturers, retail pharmacies, and other
prescribers). To maintain client satisfaction and compliance, we keep certain information and software
systems, infrastructure, and employees “firewalled” from our specialty pharmacy business to avoid
commingling or favoring any specialty pharmacy (including ours) within the networks of the hub
customers.
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Constituent Relationships
Our patient-centric approach positions us at the center of the healthcare continuum for the treatment of complex
chronic diseases through partnerships with patients, payors, pharmaceutical manufacturers, and physicians.
Diplomat provides patients with personalized medication programs and services for a variety of complex disease
states, including the following:
• Oncology: Cancer therapy often involves the use of highly-toxic chemotherapy or oral oncolytic agents
with a high incidence of adverse events. Our goals for these patients include providing the most effective
therapy at the appropriate dose, adverse event management to ensure treatment can continue for as long as
it is effective, and improving quality of life. Our clinicians strive to provide optimal treatment for these
patients by providing high-touch proactive and reactive care, focusing on appropriate dosage and
administration, adverse event management, and adherence monitoring.
•
Immunology: Care of patients with autoimmune and/or inflammatory conditions generally involves the use
of therapies aimed at slowing disease progression, reducing the rate of disease relapse, and managing
disease symptoms. Goals for these patients include reducing the signs and symptoms of the disease,
minimizing short- and long-term side effects and complications of the disease and therapy, and improving
or normalizing quality of life. Our clinicians help these patients by providing clinical management,
providing adverse event management support, proactively monitoring for adherence issues, and following
up with prescribers in response to identified therapy issues.
• Hepatitis: Management of hepatitis C virus (“HCV”) infection involves appropriate therapy selection based
on HCV genotype, the presence or absence of cirrhosis, transplant status, previous response to therapy, and
whether or not the patient is co-infected with human immunodeficiency virus (“HIV”) or hepatitis B virus.
Goals for these patients include achieving a sustained virologic response, decreasing the disease and
therapy burden, and optimal adherence to therapy. Our clinicians ensure that HCV therapy regimens are
complete and appropriate, provide adverse event management support, and follow-up with prescribers to
ensure optimal therapy.
Our services provide value to our constituents in the following ways.
Patients
Our core focus is on patients. We help patients adhere to complex medication therapies, process refills, and manage
any side effects and insurance concerns to ensure they get the best standard of care. The clinical efficacy of drug
therapies, especially for chronic conditions, is typically enhanced when patients precisely follow the prescribed
treatment regimens (including dosing and frequency). On the other hand, we believe, though we do not internally
track, that medication non-adherence (i.e., patients not following the instructions for their medication or failing to
finish taking their medication) can contribute to a substantial worsening of disease and, in some cases, accelerated
mortality, which increases hospital and other health care costs. We have achieved patient adherence rates higher
than 90 percent in each fiscal quarter of 2014, 2015, and 2016. We believe our high adherence rates are due in part
to our patient training and education, adherence packaging, prophylactic starter kits, and nurse adherence calls. We
also help identify third-party funding support programs to help cover expensive out-of-pocket costs.
We help manage patients’ complex disease states through counseling and education regarding their treatment and by
providing ongoing monitoring and, in some cases, proactive follow-up contact to encourage patient adherence to
their prescribed therapy. The goal of Diplomat’s patient care programs is to provide clinical services in a caring and
supportive environment, optimize medication adherence, prevent disease progression, and improve therapeutic
effectiveness. To accomplish this, Diplomat focuses on each patient and provides solutions related to medication
access, tolerance, and adherence.
• Specialty Infusion Therapy: Several chronic, genetic conditions and orphan diseases are treated with
infused pharmaceuticals with a more complex intravenous form of administration. These pharmaceuticals
are prescribed for individuals including, but not limited to, the following conditions: alpha-1 antitrypsin
deficiency; hemophilia; immune globulin and auto-immune deficiencies; hereditary angioedema; and
lysosomal storage disorders. Patients are generally referred to specialty infusion pharmacy service
providers by physicians or case managers. The medications are dispensed under the supervision of a
registered pharmacist, and the
the patient or caregiver for
self-administration in the home or administration by a credentialed home-health care nurse or trained
caregiver at home or in another care site.
typically delivered
therapy
to
is
• Multiple Sclerosis: Care for patients diagnosed with multiple sclerosis involves life-long support. Our
goals for these patients include providing efficacious therapy to reduce the frequency of relapse and
improving quality of life. Our clinicians ensure that patients are receiving the appropriate dose of therapy,
provide adverse event counseling and management support, provide education on relapse mitigation
strategies, and are available to respond to patient questions about therapy effectiveness and adverse events.
• Other Disease States: We also treat patients who have received organ transplants or who have HIV.
Life-long therapy is essential for the prevention of organ rejection in transplant patients, and we seek to
optimize adherence to therapy to decrease the likelihood of organ rejection. The management of HIV is
complex and involves the use of highly active anti-retroviral therapy. Goals for our patients diagnosed with
HIV include: achieving long-term, maximal suppression of viral load; preserving and improving immune
system function (prevention of progression to acquired immunodeficiency syndrome); and prevention of
the spread of HIV to others.
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Payors
We partner with regional and mid-sized payors and independent pharmacy benefit managers (“PBM” or “PBMs”),
on an exclusive or semi-exclusive basis, to improve clinical effectiveness and lower costs by managing high-risk
members and implementing patient-focused specialty programs. Our electronic patient care platform, centered on
our disease-specific technology solution, is customized for each payor’s needs and is designed to improve efficiency
and lower costs.
We offer payors access to limited distribution drugs and unique cost containment programs including split-fill
programs, clinical management, and motivational interviewing techniques for improving adherence. We believe that
medication non-adherence is the largest avoidable cost in specialty pharmacy because it contributes to a substantial
worsening of disease resulting in significant increases to hospital and other health care costs, so our strong
adherence rates provides a benefit to payors. For example, through our split-fill program of dispensing prescriptions
with less than the typical 30-day supply, we promote more frequent direct intervention and tracking of patients and
their therapies by our highly trained clinical experts. Our split-fill program focuses on medications that have a high
discontinuation rate based on poor response, adverse effects, and non-compliance, to address potential waste as well
as improve adherence to a prescribed therapy. We dispense a two-week supply when prescribed, and it is our policy
to contact patients on the second and tenth days of therapy to verify patient tolerance. Once confirmed, we will
dispense the remainder of that month’s supply. If not tolerated, we contact the prescriber to seek an alternate
therapy.
We provide payors with a comprehensive approach to meeting their pharmacy service needs. Our specialty
pharmacy services offer payors a cost effective solution for the distribution of specialty pharmaceuticals, generally
directly to patients for self-administration. We manage high-risk members in the payors’ networks and assist with
adherence to such members’ health plans to minimize waste in the purchase of specialty drugs and to optimize
clinical effectiveness. We also provide access to a significant number of limited distribution drugs. Other services
include coordinating care with the members’ physicians and payors, and providing clinical and adherence data to
evaluate therapy effectiveness.
Pharmaceutical Manufacturers
Through the coverage and clinical expertise of our Company-owned, main distribution facility and 19 regional
locations, some with retail capabilities and some with limited-to-moderate distribution capabilities, we provide
pharmaceutical manufacturers with a strong distribution channel for their existing pharmaceutical products. In many
cases, our national presence is critical to becoming a selected partner in the launch of new products. When providing
new products to patients, we implement a monitoring program to encourage adherence to the prescribed therapy, and
we provide valuable clinical information to the manufacturer to aid in their evaluation of product efficacy. We
receive fees, which we record as revenue, from certain pharmaceutical manufacturers in return for providing them
with clinical data.
We offer specialized and highly customized prescription programs for pharmaceutical companies to help them
optimize and track patient adherence, which helps drive the clinical and commercial success of specialty drugs. In
addition, we partner with pharmaceutical manufacturers early by helping them develop specialty pharmaceutical
channel strategies as part of their commercial launch preparation.
We provide pharmaceutical manufacturers with a strong distribution channel for their existing pharmaceuticals and
their new product launches. We implement patient monitoring programs that encourage adherence. We also provide
drug trial assistance including product encapsulation and packaging.
The adherence rates that result from our patient-centered services described above directly benefit pharmaceutical
manufacturers through clinically appropriate continued dispensing of their products to patients who might otherwise
have failed to continue their prescribed therapies. In addition, the financial assistance and reimbursement
management we provide to patients further drives pharmaceutical sales.
Pharmaceutical manufacturers frequently seek patient data on the efficacy and utilization of their products, which
we currently provide in a de-identified format compliant with the Health Insurance Portability and Accountability
Act of 1996 (“HIPAA”). This data provides valuable clinical information in the form of effectiveness and adherence
data to manufacturers to aid in their evaluation of product efficacy. We continue to invest in new technologies that
will enable us to better provide such analytical services.
We have also assisted emerging biotechnology pharmaceutical companies in their commercialization of new drugs.
In cases where pharmaceutical companies have successful clinical trials but little commercialization experience, we
are engaged to formulate strategies to market to, educate, and fulfill the needs of patients, prescribers, and payors.
We refer to this tailored, multifaceted approach as “channel strategies.” We believe that, in some cases, these
engagements have led to exclusive rights to administer the products of these pharmaceutical companies or our
inclusion in a small panel of authorized specialty pharmacies for limited distribution of drugs.
As of December 31, 2016, we have a portfolio of approximately 100 limited-distribution drugs, all of which are
commercially available. We have historically earned access to many limited-distribution drugs, both at the time of
their launch and post-launch. We actively monitor the drug pipeline and maintain dialogue with many of the major
biotechnology and pharmaceutical manufacturers to identify opportunities in all pre-commercial stages of drug
development. We believe that limited distribution is becoming the delivery system of choice for many drug
manufacturers because it is conducive to smaller patient populations, facilitates high patient engagement, clinical
expertise, and elevated focus on service, and because it allows for real-time patient-specific (albeit de-identified)
data. We believe the trend toward limited distribution of specialty drugs will continue to expand, making strong
representation in this area essential.
Physicians and Other Prescribers
Our team works with physician offices to manage prior-authorization and other managed care organization
requirements, such as the denial and appeal process, to ensure that complicated administrative tasks do not impair
the delivery of quality patient care. Additionally, we provide risk evaluation services, implement risk mitigation
strategies, and collect patient adherence data to provide physicians and health systems with enhanced visibility.
Our singular focus on specialty pharmacy and complex chronic diseases has enabled us to develop strong
relationships with clinical experts and thought leaders in key therapeutic categories, such as oncology, immunology,
hepatitis, specialty infusion therapy, and multiple sclerosis. We leverage these relationships to gain greater visibility
into future drug launches and to stay current on the latest advances in patient care.
We assist prescribers with personalized and intensive patient support by providing care management related to their
patients’ pharmacy needs and improving patient adherence to therapy protocols. We eliminate the need for
physicians to carry inventories of high-cost prescriptions by distributing medications directly to patients’ homes or,
in rare cases, to physicians’ offices. We also assist physicians and their clinical and non-clinical staff members by
performing many of the administratively intensive tasks associated with benefits investigations, prior authorizations,
and other reimbursement-related matters. We bill payors directly, on the patient’s behalf, in nearly all cases. Further,
we assist physicians by helping their patients manage the side effects of their therapies and by monitoring
adherence. We also provide physicians with clinical updates and assist with managing the pipeline of potential new
therapies.
Retail Pharmacies, Hospitals, and Health Systems
We provide clinical and administrative support services for our retail and hospital partners on a fee-for-service basis.
Based on our broad industry experience, infrastructure, and treatment-tracking software, our specialty network
solution provides customized clinical and administrative support services that help these partners and their specialty
patients improve financial outcomes. These services are similar to those provided to payors with respect to their
specialty pharmacy customers, except that we do not buy or dispense the specialty product or bill the payors. The
services generally include patient engagement and adherence programs, reimbursement processing and patient
funding programs, and general disease-state management services. These services constituted less than 1 percent of
our revenues in each of the years ended December 31, 2016, 2015, and 2014.
We provide unique solutions to maximize cost containment, and improve efficiency and clinical effectiveness from
specialty pharmaceuticals. Our programs also support hospitals that are 340B covered entities, which are
organizations that provide access to reduced price prescription drugs to health care facilities in accordance with the
federal 340B Drug Pricing Program and that have been certified by the U.S. Department of Health and Human
Services (“HHS”), through a contracted pharmacy strategy.
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Our Suppliers
We obtain the pharmaceuticals and medical supplies and equipment that we provide to our patients through
pharmaceutical manufacturers, distributors, and group purchasing organizations. The majority of
the
pharmaceuticals that we purchase through distributors are available from multiple sources and are available in
sufficient quantities to meet our needs and the needs of our patients. However, some biotechnology drugs are only
available through the manufacturer and may be subject to limits on distribution. In such cases, it is important for us
to establish and maintain good working relationships with the manufacturer in order to ensure sufficient supply to
meet our patients’ needs.
Most of the manufacturers of the pharmaceuticals we sell have the right to cancel their supply contracts with us
less). Specialty drug purchases from
without cause and after giving notice (generally 90 days or
AmerisourceBergen, a drug wholesaler, Celgene Corporation
Inc.
(“Celgene”) and Pharmacyclics,
(“Pharmacyclics”), pharmaceutical manufacturers from whom we purchase several drugs, represented 49 percent, 13
percent, and 10 percent, respectively, of cost of products sold in 2016, represented 50 percent, 12 percent, and 9
percent, respectively, of cost of products sold in 2015, and 57 percent, 15 percent, and 7 percent, respectively, of
cost of products sold in 2014. We purchase large quantities from a single wholesaler to ease administration and
leverage favorable pricing. In the event of a termination of our relationship with AmerisourceBergen, we believe
there is typically at least one alternative drug wholesaler from whom we could source each non-limited-distribution
drug we dispense. We further believe that we could replace the inventories without a material disruption to our
operations. As for the specialty drugs we purchase from Celgene and Pharmacyclics, they are not available from any
other source.
Billing and Significant Payors
We derive most of our revenue from contracts with third-party payors such as managed care organizations,
insurance companies, self-insured employers, PBMs, and Medicare and Medicaid programs. We contract directly
with some payors and PBMs or, in other cases, with third parties which in turn contract with payors and PBMs on
our behalf. See “Constituent Relationships-Payors” for additional information on payors.
We bill payors and track our accounts receivable through computerized billing systems. These systems allow our
billing staff the flexibility to review and edit claims in the system before they are submitted to payors. For the great
majority of our dispensing business, claims are submitted to payors electronically. We have extensive experience
managing the coordination of benefits between commercial and government-sponsored plans. We participate with
Medicare as a Durable Medical Equipment, Prosthetics, Orthotics and Supplies (“DMEPOS”) pharmacy supplier,
and participate in Medicare Part D. A benefit coverage specialist reviews all Medicare coverage determinations to
ensure that the appropriate benefit is being billed. Upon completion of all benefit verifications, we follow each
plan’s guidelines to identify which plan is primary and secondary and submit the billing accordingly.
Our financial performance is highly dependent upon effective billing and collection practices. The process begins
with an accurate and complete patient onboarding process, in which all critical information about the patient, the
patient’s insurance, and the patient’s care needs is gathered. A critical part of this process is verification of insurance
coverage and authorization from insurance to provide the required care, which typically takes place before we
initiate services. An exception occurs when a patient referral is received outside of regular business hours, but we
have an existing contractual relationship with the patient’s insurance carrier. In such cases, we provide the patient
with sufficient drugs and services to last until the next business day, when the patient’s insurance coverage can be
verified.
Sales and Marketing
Our sales and marketing efforts focus on three primary objectives: (1) establishing, maintaining, and strengthening
relationships with pharmaceutical manufacturers to gain distribution access as they release new or improved
products; (2) establishing, maintaining, and strengthening relationships with prescribers and key opinion leaders to
obtain prescription referrals; and (3) building new relationships and expanding existing contracts with managed care
organizations and other payors or PBMs. Our national and regional sales directors focus on establishing and
expanding our contracts with managed care organizations, while our local account managers focus on maximizing
value from these contracts by developing and maintaining relationships with local and regional referral sources, such
as physicians, hospital discharge planners, other hospital personnel, health maintenance organizations, preferred
provider organizations or other managed care organizations, and insurance companies. We also have a dedicated
sales force, through a combination of internal (phone sales) and external (field sales) team members for scalability
and efficiency, focused on maintaining and expanding our relationships with biotechnology drug manufacturers to
establish our position as an exclusive, semi-exclusive, or participating provider. As of December 31, 2016, we had
202 sales employees, consisting of 85 centralized, mostly telephonic team members, and 117 team members
working in the field in various U.S. regions.
Information Technology
Our information technology centers around a custom-developed scalable patient care system that provides real-time
prescription and patient care status to us, prescribers, and contracted partners. Our technology allows us to track and
report industry standard metrics on call center performance, dispensing, adherence, length of therapy, and
persistency. We can also provide HIPAA-compliant reports that contain inventory data, prescription status,
persistency, compliance, discontinuation, and payor data. In addition to reporting on patient and prescriber
demographics, turnaround times, spend, and error reporting, we can also report on patient assessment data, clinical
status, and other monitoring parameters. In 2014, we decided to in-source a substantial portion of our information
technology development. We also use an off-the-shelf pharmacy software system for purposes of transmitting claims
to payors. We have invested significantly in information technology in recent years to position us to improve cost
efficiencies among us and our constituents and to provide additional services regarding the de-identified data we
accumulate to take greater advantage of our relationships with data-driven pharmaceutical manufacturers.
Competition
There are a significant number of competitors that distribute specialty pharmacy drugs and provide related services,
some of which have greater resources than we do. Many of the competitive segments in which we compete have
experienced significant consolidation over the past few years, including 2016. Our competitors include: captive
specialty pharmacies owned by PBMs; retail pharmacy chains and independent retail pharmacies; health plans;
national, regional and niche specialty pharmacies; specialty infusion therapy companies; physician practices and
hospital systems; and group purchasing organizations.
We are the largest independent specialty pharmacy in the U.S., with a market share of approximately 4 percent
(based on 2016 revenues from pharmacy-dispensed specialty drugs). The three largest specialty pharmacies are
divisions within CVS Caremark, Express Scripts, and Walgreens. We understand that a number of other traditionally
non-specialty pharmacies with significant resources are attempting to build, acquire, or partner with specialty
pharmacies due to the double-digit growth anticipated in spending on specialty prescription drugs compared to flat
to low single-digit growth in spending on traditional prescription drugs. There are also many smaller specialty
pharmacies and other entities in the healthcare industry that provide limited specialty pharmacy services that
compete with us to a lesser extent. Some of these smaller entities, however, may be able to invest significant
resources, through acquisition or otherwise, to compete with us on a larger scale.
Many of the retail pharmacies for whom we provide patient management services may acquire a competing
specialty pharmacy business or start their own specialty pharmacy business and thereby become competitors. In
addition, many of our PBM customers have their own specialty pharmacy businesses, and to the extent certain of our
products can be obtained internally, these customers could cease doing business with us.
Governmental Regulation
The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal, state,
and local level. The industry is also subject to frequent regulatory change. Laws and regulations in the healthcare
industry are extremely complex and, in many instances, the industry does not have the benefit of significant
regulatory or judicial interpretation. Moreover, our business is impacted not only by those laws and regulations that
are directly applicable to us, but also by certain laws and regulations that are applicable to our managed care and
other clients. If we fail to comply with the laws and regulations directly applicable to our business, we could suffer
civil and/or criminal penalties, and we could be excluded from participating in Medicare, Medicaid, and other
federal and state healthcare programs, which would have an adverse impact on our business.
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Professional Licensure
Pharmacists, nurses, and certain other healthcare professionals employed by us are required to be individually
licensed or certified under applicable state law. We perform criminal, government exclusion, and other background
checks on employees and take steps to ensure that our employees possess all necessary licenses and certifications,
and we believe that our employees comply, in all material respects, with applicable licensure laws.
Pharmacy Licensing and Registration
State laws require that each of our pharmacy locations be appropriately licensed and/or registered to dispense
pharmaceuticals in that state. We are licensed in all states that require such licensure and believe that we
substantially comply with all state licensing laws applicable to our business. Where required by law, we also have
pharmacists licensed in all states in which we dispense.
Laws enforced by the U.S. Drug Enforcement Administration (“DEA”), as well as some similar state agencies,
require our pharmacy locations to individually register to handle controlled substances, including prescription
pharmaceuticals. A separate registration is required at each principal place of business where we dispense controlled
substances. Federal and state laws also require that we follow specific labeling, reporting, and record-keeping
requirements for controlled substances. We maintain DEA registrations for each of our facilities that require such
registration and follow procedures intended to comply with all applicable federal and state requirements regarding
controlled substances.
Food, Drug, and Cosmetic Act
Certain provisions of the federal Food, Drug, and Cosmetic Act govern the handling and distribution of
pharmaceutical products. This law exempts many pharmaceuticals and medical devices from federal labeling and
packaging requirements as long as they are not adulterated or misbranded and are dispensed in accordance with and
pursuant to a valid prescription. We believe that we comply with all applicable requirements.
Fraud and Abuse Laws – Anti-Kickback Statute
The federal Anti-Kickback Statute prohibits individuals and entities from knowingly and willfully paying, offering,
receiving, or soliciting money or anything else of value in order to induce the referral of patients or to induce a
person to purchase, lease, order, arrange for, or recommend services or goods covered by Medicare, Medicaid, or
other government healthcare programs. The federal courts have held that an arrangement violates the Anti-Kickback
Statute if any one purpose of the remuneration is to induce the referral of patients covered by the Medicare or
Medicaid programs, even if another purpose of the payment is to compensate an individual for rendered services.
The Anti-Kickback Statute is broad and potentially covers many standard business arrangements. Violations can
lead to significant penalties, including criminal fines of up to $25,000 per violation and/or five years imprisonment,
civil monetary penalties of up to $50,000 per violation plus treble damages, and/or exclusion from participation in
Medicare, Medicaid, and other federal government healthcare programs. In an effort to clarify the conduct
prohibited by the Anti-Kickback Statute, the Office of the Inspector General of HHS (the “OIG”) publishes
regulations that identify a limited number of safe harbors. Business arrangements that satisfy all of the elements of a
safe harbor are immune from criminal enforcement or civil administrative actions. The Anti-Kickback Statute is an
intent-based statute and the failure of a business relationship to satisfy all of the elements of a safe harbor does not,
in and of itself, mean that the business relationship violates the Anti-Kickback Statute. The OIG, in its commentary
to the safe harbor regulations, has recognized that many business arrangements that do not satisfy a safe harbor
nonetheless operate without the type of abuses the Anti-Kickback Statute is designed to prevent. We attempt to
structure our business relationships to satisfy an applicable safe harbor. However, in those situations where a
business relationship does not fully satisfy the elements of a safe harbor, we attempt to satisfy as many elements of
an applicable safe harbor as possible. The OIG is authorized to issue advisory opinions regarding the interpretation
and applicability of the Anti-Kickback Statute, including whether an activity constitutes grounds for the imposition
of civil or criminal sanctions.
A number of states have statutes and regulations that prohibit the same general types of conduct as those prohibited
by the Anti-Kickback Statute described above. Some state anti-fraud and anti-kickback laws apply only to goods and
services covered by Medicaid. Other state anti-fraud and anti-kickback laws apply to all healthcare goods and
services, regardless of whether the source of payment is governmental or private. Where applicable, we attempt to
structure our business relationships to comply with these statutes and regulations.
Fraud and Abuse Laws – False Claims Act
We are subject to state and federal laws that govern the submission of claims for reimbursement. These laws
generally prohibit an individual or entity from knowingly and willfully presenting a claim or causing a claim to be
presented for payment from a federal healthcare program that is false or fraudulent. The standard for “knowing and
willful” may include conduct that amounts to a reckless disregard for the accuracy of information presented to
payors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare or
Medicaid programs and imprisonment. One of the most prominent of these laws is the federal False Claims Act,
which may be enforced by the federal government directly or by a private plaintiff by filing a qui tam lawsuit on the
government’s behalf. Under the False Claims Act, the government and private plaintiffs, if any, may recover
monetary penalties in the amount of $5,500 to $11,000 per false claim, as well as an amount equal to three times the
amount of damages sustained by the government as a result of the false claim. A number of states, including states
in which we operate, have adopted their own false claims statutes as well as statutes that allow individuals to bring
qui tam actions. In recent years, federal and state government authorities have launched several initiatives aimed at
uncovering practices that violate false claims or fraudulent billing laws, and they have conducted numerous
investigations of pharmaceutical manufacturers, PBMs, pharmacies, and health care providers with respect to false
claims, fraudulent billing, and related matters. We believe that we have procedures in place to ensure the accuracy of
our claims.
Ethics in Patient Referrals Law – Stark Law
The federal Stark Law generally prohibits a physician from making referrals for certain Designated Health Services,
reimbursable by Medicare, to an entity with which the physician or an immediate family member has a financial
relationship and prohibits the entity from presenting or causing to be presented claims to Medicare for those referred
services, unless an exception applies. A financial relationship is generally defined as an ownership, investment, or
compensation relationship. Designated Health Services include, but are not limited to, outpatient pharmaceuticals,
parenteral and enteral nutrition products, home health services, durable medical equipment, physical and
occupational therapy services, and inpatient and outpatient hospital services. Among other sanctions, a civil
monetary penalty of up to $15,000 may be imposed for each bill or claim for a service a person knows or should
know is for a service for which payment may not be made due to the Stark Law. Such persons or entities are also
subject to exclusion from the Medicare and Medicaid programs. Any person or entity participating in a
circumvention scheme to avoid the referral prohibitions is liable for a civil monetary penalty of up to $100,000. A
$10,000 fine may be imposed for failure to comply with reporting requirements regarding an entity’s ownership,
investment, and compensation arrangements for each day for which reporting is required to have been made under
the Stark Law.
The Stark Law is a broad prohibition on certain business relationships, with detailed exceptions. However, unlike
the Anti-Kickback Statute under which an activity may fall outside a safe harbor and still be lawful, a referral for
Designated Health Services that does not fall within an exception is strictly prohibited by the Stark Law. We attempt
to structure all of our relationships with physicians who make referrals to us in compliance with an applicable
exception to the Stark Law.
In addition to the Stark Law, many of the states in which we operate have comparable restrictions on the ability of
physicians to refer patients for certain services to entities with which they have a financial relationship. Certain of
these state statutes mirror the Stark Law while others may be more restrictive. We attempt to structure all of our
business relationships with physicians to comply with any applicable state self-referral laws.
HIPAA and Other Privacy and Confidentiality Legislation
Our activities involve the receipt, use, and disclosure of confidential health information, including disclosure of the
confidential information to a patient’s health benefit plan, as permitted in accordance with applicable federal and
state privacy laws. In addition, we use and disclose de-identified data for analytical and other purposes. Many state
laws restrict the use and disclosure of confidential medical information, and similar new legislative and regulatory
initiatives are underway at the state and federal levels.
HIPAA imposes extensive requirements on the way in which healthcare providers that engage in certain actions
covered by HIPAA, as well as healthcare clearinghouses (each known as “covered entities”) and the persons or
entities that create, receive, maintain, or transmit protected health information (“PHI”) on behalf of covered entities
(known as “business associates”) and their use, disclosure and safeguarding of PHI, including requirements to
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protect the integrity, availability, and confidentiality of electronic PHI. Many of these obligations were expanded
under the Health Information Technology for Economic and Clinical Health Act (“HITECH”), passed as part of the
American Recovery and Reinvestment Act of 2009. In January 2013, the Office for Civil Rights of HHS issued a
final rule under HITECH that makes significant changes to the privacy, security, breach notification, and
enforcement regulations promulgated under HIPAA (the “Final Omnibus Rule”), and which generally took effect in
September 2013. The Final Omnibus Rule enhances individual privacy protections, provides individuals new rights
to their health information, and strengthens the government’s ability to enforce HIPAA.
The privacy regulations (the “Privacy Rule”) issued by the Office of Civil Rights of HHS pursuant to HIPAA give
individuals the right to know how their PHI is used and disclosed, as well as the right to access, amend, and obtain
information concerning certain disclosures of PHI. Covered entities, such as pharmacies and health plans, are
required to provide a written Notice of Privacy Practices to individuals that describes how the entity uses and
discloses PHI, and how individuals may exercise their rights with respect to their PHI. For most uses and disclosures
of PHI other than for treatment, payment, healthcare operations, and certain public policy purposes, HIPAA
generally requires that covered entities obtain a valid written individual authorization. In most cases, use or
disclosure of PHI must be limited to the minimum necessary to achieve the purpose of the use or disclosure. The
Final Omnibus Rule modifies the content of Notice of Privacy Practices in significant ways, requiring, among other
things, statements informing individuals of their rights to receive notifications of any breaches of unsecured PHI and
to restrict disclosures of PHI to a health plan where the individual pays out of pocket.
We are a covered entity under HIPAA in connection with our operation of specialty service pharmacies. To the
extent that we provide services other than as a covered entity and we perform a function or activity, or provide a
service to, a covered entity that involves PHI, the covered entity may be required to enter into a business associate
agreement with us. Business associate agreements mandated by the Privacy Rule create a contractual obligation for
us, as a business associate, to perform our duties for the applicable covered entity in compliance with the Privacy
Rule. In addition, HITECH subjects us to certain aspects of the Privacy Rule and the HIPAA security regulations
when we act as a business associate, including imposing direct liability on business associates for impermissible
uses and disclosures of PHI and the failure to disclose PHI to the covered entity, the individual, or the individual’s
designee (as specified in the business associate agreement), as necessary to satisfy a covered entity’s obligations
with respect to an individual’s request for an electronic copy of PHI. The Final Omnibus Rule also extends the
business associate provisions of HIPAA to subcontractors where the function, activity, or service delegated by the
business associate to the subcontractor involves the creation, receipt, maintenance, or transmission of PHI. As such,
business associates are required to enter into business associate agreements with subcontractors for services
involving access to PHI and may be subject to civil monetary penalties for the acts and omissions of their
subcontractors.
Importantly, the Final Omnibus Rule greatly expands the types of product- and service-related communications to
patients or enrollees that will require individual authorizations by requiring individual authorization for all treatment
and health care operations communications where the covered entity receives payment in exchange for the
communication from or on behalf of a third-party whose product or service is being described. While the Office of
Civil Rights of HHS has established limited exceptions to this rule where individual authorization is not required,
the marketing provisions finalized in the Final Omnibus Rule could potentially have an adverse impact on our
business and revenues.
If we fail to comply with HIPAA or our policies and procedures are not sufficient to prevent the unauthorized
disclosure of PHI, we could be subject to liability, fines, and lawsuits under federal and state privacy laws, consumer
protection statutes, and other laws. Criminal penalties and civil sanctions may be imposed for failing to comply with
HIPAA standards either as a covered entity or business associate, and these penalties and sanctions have
significantly increased under HITECH. In addition to imposing potential monetary penalties, HITECH also requires
the Office of Civil Rights of HHS to conduct periodic compliance audits and empowers state attorneys general to
bring actions in federal court for violations of HIPAA on behalf of state residents harmed by such violations. Several
such actions have already been brought against both covered entities and at least one business associate, and
continued enforcement actions are likely to occur in the future.
The transactions and code sets regulation promulgated under HIPAA requires that all covered entities that engage in
certain electronic transactions, directly or through a third-party agent, use standardized formats and code sets. We, in
our role as a business associate of a covered entity, must conduct such transactions in accordance with such
transaction rule and related regulations that require the use of operating rules in connection with HIPAA
transactions. In our role as a specialty pharmacy operator, we must also conduct such transactions in accordance
with such regulations or engage a clearinghouse to process our covered transactions. HHS promulgated a National
Provider Identifiers (“NPI”) Final Rule that requires covered entities to utilize NPIs in all standard transactions.
NPIs replaced National Association of Boards of Pharmacy numbers for pharmacies, DEA numbers for physicians,
and similar identifiers for other health care providers for purposes of identifying providers in connection with
HIPAA standard transactions. Covered entities may be excluded from federal health care programs for violating
these regulations.
The security regulations issued pursuant to HIPAA mandate the use of administrative, physical, and technical
safeguards to protect the confidentiality of electronic PHI. Such security rules apply to covered entities and business
associates.
We must also comply with the “breach notification” regulations, which implement provisions of HITECH. In the
case of a breach of “unsecured PHI,” covered entities must promptly notify affected individuals and the HHS
Secretary, as well as the media in cases where a breach affects more than 500 individuals. Breaches affecting fewer
than 500 individuals must be reported to the HHS Secretary on an annual basis. The regulations also require
business associates of covered entities to notify the covered entity of such breaches by the business associate.
Final regulations governing the accounting of disclosures are forthcoming. The applicable proposed rule, if
finalized, would require covered entities to develop systems to monitor and record: (1) which of their employees and
business associates access an individual’s electronic PHI contained in a designated record set; (2) the time and date
access occurs; and (3) the action taken during the access session (e.g., modification, deletion, viewing). The final
regulations could impose significant burdens on covered entities and business associates.
The Health Reform Laws (as defined in “Health Reform Legislation” below) require the HHS Secretary to develop
new health information technology standards that could require changes to our existing software products. For
example, the statute requires the establishment of interoperable standards and protocols to facilitate electronic
enrollment of individuals in federal and state health and human services programs and provides the government with
authority to require incorporation of these standards and protocols in health information technology investments as a
condition of receiving federal funds for such investments.
HIPAA generally preempts state laws, except when state laws are more protective of PHI or are more restrictive
than HIPAA requirements. Therefore, to the extent states continue to enact more protective or restrictive legislation,
we could be required to make significant changes to our business operations. In addition, independent of any
statutory or regulatory restrictions, individual health plan clients could increase limitations on our use of medical
information, which could prevent us from offering certain services.
Medicare Part D
The Medicare Part D program, which makes prescription drug coverage available to eligible Medicare beneficiaries,
regulates various aspects of the provision of Medicare drug coverage, including enrollment, formularies, pharmacy
networks, marketing, and claims processing. The Centers for Medicare & Medicaid Services (“CMS”) imposed
restrictions and consent requirements for automatic prescription delivery programs, and further limited the
circumstances under which Medicare Part D plans may recoup payments to pharmacies for claims that are
subsequently determined not payable under Medicare Part D. CMS sanctions for non-compliance may include
suspension of enrollment and even termination from the program.
The Medicare Part D program has undergone significant legislative and regulatory changes since its inception.
Medicare Part D continues to attract a high degree of legislative and regulatory scrutiny, and applicable government
rules and regulations continue to evolve. For example, CMS may issue regulations that limit the ability of Medicare
Part D plans to establish preferred pharmacy networks. Accordingly, it is possible that legislative and regulatory
developments and regulatory oversight could materially affect our Medicare Part D business or profitability.
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to privacy, authentication, and security of prescription orders, adherence to a recognized quality assurance
policy, and provision of meaningful consultation between patients and pharmacists.
• Center for Pharmacy Practice Accreditation (“CPPA”): Effective January 4, 2016, we hold a CPPA
certification. The CPPA recognizes pharmacies that practice efficient, high-quality patient care while
promoting safe and effective medication management and distribution. With a focus on regulatory and
organizational quality, the program ensures a superior level of pharmacy service to patients, prescribers,
partners, and payors.
• Health Information Trust Alliance (“HITRUST”): Effective August 22, 2016, we hold a HITRUST
Common Security Framework (“CSF”) certification. CSF certification through HITRUST places us in an
limited group of organizations worldwide that have met industry-defined requirements and are
appropriately managing risk. Incorporating a risk-based approach, the HITRUST CSF helps healthcare
organizations comply with data privacy and security regulations through a comprehensive and flexible set
of prescriptive and scalable security controls. HITRUST CSF certification validates compliance with state
and federal regulations, standards, and frameworks.
Intellectual Property
We rely on copyright, trademark, and trade secret laws, in addition to contractual restrictions, to establish and
protect our proprietary rights. We have registered or applied to register a variety of our trademarks and service
marks used throughout our business. DIPLOMAT SPECIALTY PHARMACY® and DIPLOMAT®, among others,
are service marks registered with the U.S. Patent Trademark Office. In addition, we rely on unregistered common
law trademark rights and unregistered copyrights under applicable U.S. law to distinguish and/or protect our services
and branding. We believe that our trade names are becoming more recognized by many referral sources as
representing a reliable, cost-effective source of specialty pharmacy services. We are not aware of any facts that
could materially impact our continuing use of any of our intellectual property. We do not believe that the loss of
copyrights, trademarks, or service marks would have a material adverse effect on our business.
Employees
As of December 31, 2016, we employed 1,827 persons, including 1,737 on a full-time basis and 90 persons on a
part-time basis. Of our employees, 659 were corporate personnel and 1,168 were clinically focused. The majority of
our part-time employees are clinicians due to the nature and timing of the services we provide. None of our
employees are covered by collective bargaining agreements.
Health Reform Legislation
Congress passed major health reform legislation, including the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Reform Laws”). This
legislation affects virtually every aspect of health care in the U.S. In addition to establishing the framework for
every individual to have health coverage beginning in 2014, the Health Reform Laws enacted a number of
significant health care reforms. President Donald Trump has stated his intentions to support the repeal and possible
replacement of the Health Reform Laws during his term of office. While not all of these reforms, or their repeal or
replacement, affect our business directly, they could affect the coverage and plan designs that are or will be provided
by many of our health plan clients. As a result, these reforms, or their repeal or replacement, could impact many of
our services and business practices. There is considerable uncertainty as to the continuation of these reforms, their
repeal, or their replacement.
Managed Care Reform
In addition to health reforms enacted by the Health Reform Laws, legislation has been considered, proposed, and/or
enacted at the state level, aimed at providing additional rights and access to drugs to individuals enrolled in managed
care plans. This legislation may impact the design and implementation of prescription drug benefit plans sponsored
by our PBM health plan clients and/or the services we provide to them. Both the scope of the managed care reform
proposals considered by state legislatures and reforms enacted by states to date vary greatly, and the scope of future
legislation that may be enacted is uncertain.
21st Century Cures Act
The 21st Century Cures Act ("Cures Act"), enacted in December 2016, among other things implemented Average
Sales Price pricing for Part B DME infusion drugs in January of 2017 and delayed payment for the home infusion
services necessary to administer these drugs until January of 2021. Given our current understanding of the Cures
Act, we do not believe that it will have a significant impact on our business.
Accreditations
We have and maintain accreditations from the following organizations:
• Accreditation Commission for Health Care (“ACHC”): Effective July 21, 2014, we hold specialty
pharmacy and infusion pharmacy accreditations from the ACHC. Under such accreditation, the ACHC
reviews and assesses our activities. Areas of focus include infusion pharmacy business, infusion pharmacy
continuum of care, intravenous drug mixture preparation, administration, therapy monitoring, and
client/patient counseling and education.
• American Society of Health-System Pharmacists (“ASHP”): Effective September 26, 2013, we hold a
postgraduate year one pharmacy residency program accreditation from the ASHP. The ASHP reviews and
evaluates our residency training program against established criteria to ensure that pharmacy residents are
properly trained. The ASHP is a nationally recognized non-profit pharmacy association that has been
accrediting pharmacy residency programs for more than 50 years.
• URAC: Effective January 1, 2013, we hold a URAC specialty pharmacy accreditation, a nationally
recognized and rigorous accreditation that includes a thorough review of documentation, an on-site survey
for verifying compliance standards, and final review by the URAC accreditation and executive committees.
• National Association of Boards of Pharmacy (“NABP”): Effective May 13, 2013, we hold a
Verified-Accredited Wholesale Distributors® (“VAWD®”) accreditation from
the NABP. This
accreditation is designed for compliance with state and federal laws, for preventing counterfeit drugs from
entering the U.S., and to protect patients from below-quality drug distribution by employing security and
best practice standards for wholesale drug distribution. Effective July 23, 2012, we hold a DMEPOS
accreditation from the NABP.
We hold a Verified Internet Pharmacy Practice Sites® (“VIPPS®”) accreditation, effective January 7, 2015
through January 6, 2018, from the NABP. This accreditation certifies that we comply with the licensing and
inspection requirements of our state and each state to which we dispense pharmaceuticals. In addition,
displaying the VIPPS® seal demonstrates NABP compliance with VIPPS® criteria including patient rights
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Executive Officers of the Registrant
The following table sets forth information regarding our executive officers (ages as of December 31, 2016):
ITEM 1.A. RISK FACTORS
Name
Philip R. Hagerman
Paul N. Urick
Gary Rice
Age
64
45
59
Position
Chief Executive Officer, Chairman of the Board of Directors
President
Executive Vice President, Operations
Philip R. Hagerman, RPh, has served as our chief executive officer, a director, and the chairman of the board of
directors since 1991. Mr. Hagerman co-founded the Company with his father in 1975.
Paul N. Urick, RPh, became our president in November 2016. Mr. Urick works closely with Diplomat’s operations,
clinical services, and sales teams, as well as industry partners. He has spent more than two decades building in-depth
knowledge and key relationships in specialty pharmacy, managed markets, and integrated health systems. Mr. Urick
served as vice president of Industry Relations, Pharmaceutical Account Management, and Payor Strategies upon our
acquisition of Burman’s in June 2015. He was promoted to senior vice president in February 2016. In that role, he
provided overall strategy and execution for all pharmaceutical and payor partners. Mr. Urick was president of
managed markets and industry relations for Burman’s from September 2014 until its acquisition by us. Before that
role, beginning May 2011, he served as senior vice president of pharmacy operations for Cigna Corporation, a
healthcare company serving more than 15 million customers. He led Cigna’s internal PBM and home delivery
operations. From 2004 to 2011, Mr. Urick was senior vice president of pharmacy services at Independence Blue
Cross. During his tenure, he served as president for FutureScripts and FutureScripts Secure, two PBM companies he
incorporated. In addition, Mr. Urick spent 10 years at Geisinger Health System, a leading integrated health services
organization. There, he transformed and insourced PBM operations for Geisinger Health Plan. Mr. Urick is a
member of the Academy of Managed Care Pharmacy, the National Association of Specialty Pharmacy, and other
national associations.
Gary Rice became our executive vice president of operations in 2016 and is responsible for Diplomat’s core
operational management. This position builds on his previous role as senior vice president of clinical, education, and
human resources, in which he was responsible for Diplomat’s industry-leading clinical support services; education
for patients and clients; and human resources department. Before joining Diplomat in June 2011, Mr. Rice was vice
president of operations at ITSRx, where he provided operational and clinical leadership for the development of
specialty and retail pharmacies. Mr. Rice also served as director of specialty clinical management for MedImpact
Healthcare Systems Inc. Mr. Rice directed oncology strategy, specialty pharmacy sales management, the clinical
guidance of specialty medication providers, and the clinical protocol development of 15 specialty therapy categories.
Before his time at MedImpact, he was vice president of retail and ancillary services and director of pharmaceutical
services at the Kelsey-Seybold Clinic in Houston, Texas.
Available information
Our Internet address is diplomat.is and our investor relations website is located at ir.diplomat.is. We make available
free of charge on our investor relations website under the heading “Financial and Filings” our Annual Reports on
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as
reasonably practicable after such materials are electronically filed with (or furnished to) the Securities and Exchange
Commission (“SEC”). Information contained on our websites is not incorporated by reference into this Annual
Report on Form 10-K. In addition, the SEC maintains an Internet site, sec.gov, that includes filings of and
information about issuers that file electronically with the SEC.
Our business, prospects, financial condition, or operating results could be materially adversely affected by any of
the risks and uncertainties set forth below, as well as in any amendments or updates reflected in subsequent filings
with the SEC. In assessing these risks, you should also refer to the other information contained in this Annual
Report on Form 10-K, including our consolidated financial statements and related notes.
Risks Related to Our Business and Industry
Our failure to anticipate or appropriately adapt to changes or trends within the specialty pharmacy industry could
have a significant negative impact on our ability to compete successfully.
The specialty pharmacy industry is growing and evolving rapidly. Any significant shifts in the structure of the
specialty pharmacy industry or the healthcare products and services industry in general could alter the industry
dynamics and adversely affect our ability to attract or retain customers. These changes or trends could result from,
among other things, a large intra- or inter-industry merger, a new entrant in the specialty pharmacy business,
changes in the pricing or distribution model for specialty drugs, a slowdown in the biotechnology pharmaceutical
pipeline in our areas of expertise, consolidation of shipping carriers, or the necessary changes or unintended
consequences of the Health Reform Laws or future regulatory changes. Our failure to anticipate or appropriately
adapt to any of these changes or trends, none of which are within our control, could have a significant negative
impact on our competitive position and materially adversely affect our business.
Significant and increasing pressure from third-party payors to limit reimbursements and the impact of high-cost
specialty drugs could materially adversely impact our profitability, results of operations, and financial condition.
The continued efforts of health maintenance organizations, managed care organizations, PBMs, government
programs (such as Medicare, Medicaid and other federal and state funded programs), and other third-party payors to
limit pharmacy reimbursements may adversely impact our profitability. While manufacturers have increased the
price of drugs, payors have generally decreased reimbursement rates as a percentage of drug cost.
We expect pricing pressures from third-party payors to continue given the high and increasing costs of specialty
drugs. In particular, we have recently declined to renew certain contracts with PBMs and other payors due to such
pricing pressures. Given the significant competition in the industry, we have limited bargaining power to counter
payor demands for reduced reimbursement rates. If we are unable negotiate for acceptable reimbursement rates or
replace unfavorable contracts with new business on acceptable terms, our revenues and business could be adversely
affected.
In response to rising specialty drug prices, payors may also demand that we provide additional services, enhanced
service levels, and other cost savings to help mitigate the increase in drug costs. Additional services with minimal or
no service fees would adversely impact our profitability. Since data-management technology and software make it
challenging for us to prove specific cost savings to payors, we may be unable to demand additional service fees to
offset the cost of additional services. Our inability or failure to demonstrate cost efficiencies could adversely impact
a payor’s willingness to engage us, exclusively or at all, as a specialty pharmacy in the face of rising drug costs.
The amount of direct and indirect remuneration fees charged by payors, as well as the timing of assessing such
fees and the non-transparent methodology in calculating such fees, may have a material adverse impact on our
financial performance and, to the extent such fees are material, may limit our ability to provide accurate
financial guidance for future periods.
Some payors charge certain direct and indirect remuneration fees (“DIR fees”), often calculated and charged several
months after adjudication of a claim, which adversely impacts our profitability. DIR fees is a term used by CMS to
address price concessions that ultimately impact the prescription drug costs of Medicare Part D plans, but are not
captured at the point of sale; however, this term is used to capture a number of different type of fees assessed after
adjudication of a claim. In particular, the methodology and transparency around how PBMs are applying these DIR
fees changed materially in 2016 and the resulting significant DIR fees assessed in 2016 adversely impacted our
financial performance and may continue to do so in the future. Further, the timing of assessments and non-
transparent methodology in computing DIR fees may materially impact our ability to provide accurate financial
guidance to investors and analysts, and may result in a future change in the estimated DIR fees we have recognized.
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Changes in reimbursement rates from Medicare and Medicaid for the services we provide may cause our revenue
and profitability to decline.
Reimbursement from government programs are subject to statutory and regulatory requirements, administrative
rulings, interpretations of policy, implementation of reimbursement procedures, retroactive payment adjustments,
governmental funding restrictions, changes to existing legislation, and the enactment of new legislation, all of which
may materially affect the amount and timing of reimbursement payments to us. Changes to the way Medicare and
Medicaid pay for our services may reduce our revenue and profitability on services provided to Medicare and
Medicaid patients and increase our working capital requirements.
Since its inception in 2006, Medicare Part D has resulted in increased utilization and decreased pharmacy gross
margin rates as higher margin business, such as cash and state Medicaid customers, migrated to Medicare Part D
coverage. Further, as a result of the Health Reform Laws and changes to Medicare Part D, such as the elimination in
2013 of the tax deductibility of the retiree drug subsidy payment received by sponsors of retiree drug plans, our
PBM clients could decide to discontinue providing prescription drug benefits to their Medicare-eligible members.
To the extent this occurs, the adverse effects of increasing customer migration into Medicare Part D may outweigh
the benefits we realize from growth of our Medicare Part D business.
If our relationship with any of our key pharmaceutical manufacturers deteriorates, or if we are unable to create
new significant relationships with other pharmaceutical manufacturers, we could lose all or a significant portion
of our access to existing and future specialty drugs.
In recent years, an increasing number of pharmaceutical manufacturers have attempted to significantly limit the
number of pharmacies that may dispense their drugs. Out of a total of approximately 60,000 traditional and specialty
pharmacies, these manufacturers increasingly limit access to their drugs to anywhere from one to 20 specialty
pharmacies, to ensure they can manage a drug’s rollout, obtain real time data, and confirm the unique patient
population’s receipt of the necessary services and support to remain adherent. There are a number of limited-
distribution drugs to which we do not have access. In addition to directly providing significant revenues, access to
limited-distribution drugs provides us with significant competitive advantages in developing relationships with
payors and physicians, and our failure to continue obtaining access to new limited-distribution pharmaceuticals or
losing our current access could have a material and adverse impact on our business.
We obtain access to limited-distribution drugs primarily from small to mid-size biotechnology companies, many of
whom are bringing their first or second drug to market. We incur significant expense, time, and opportunity cost to
educate and assist emerging small and mid-size biotechnology manufacturers in bringing these products to the
marketplace without any guarantee of a successful drug launch or future sales. The failure to monetize these
relationships could adversely impact our profitability and our prospects.
We also provide a significant amount of direct and indirect services for the benefit of our pharmaceutical
manufacturer customers and our patients to gain access to specialty drugs, and our failure to provide services at
optimal quality could result in losing access to existing and future drugs. In addition, we incur significant costs in
providing these services and receive minimal service fees in return. If pharmaceutical manufacturers require
significant additional services and products to obtain access to their drugs without a corresponding increase in
service fees paid to us, our profitability could be adversely impacted.
We have limited contractual protections with pharmaceutical manufacturers and wholesalers that supply us with
most of the pharmaceuticals that we distribute.
We dispense specialty pharmaceuticals that are supplied to us by a variety of manufacturers and wholesalers, many
of which are our only source of that specific pharmaceutical. Our contracts with pharmaceutical manufacturers and
wholesalers often provide us with, among other things:
•
•
•
discounts on drugs we purchase to be dispensed from our specialty pharmacies;
rebates and service fees; and
access to limited-distribution specialty pharmaceuticals.
Our contracts with pharmaceutical manufacturers and wholesalers are generally for three years and are terminable
on reasonably short notice by either party before or after the contract term. In addition, our contracts with
wholesalers provide for purchase money security interests in products sold. If several of these contractual
relationships are terminated or materially altered by the pharmaceutical manufacturers or wholesalers or if we are
otherwise unable to renew these contracts or enter into similar contracts on favorable terms, we could lose a major
source of the pharmaceuticals we dispense.
Our revenues, profitability, and cash flows may be negatively impacted if safety risks of a specialty drug are
publicized or if a specialty drug is withdrawn from the market due to manufacturing or other issues.
Physicians may significantly reduce the numbers of prescriptions for a specialty drug with safety concerns or
manufacturing issues. Additionally, negative press regarding a drug with a higher safety risk profile may result in
reduced global consumer demand for such drug. Decreased utilization and demand of a specialty drug we distribute
could materially and adversely impact our volumes, net revenues, profitability, and cash flows.
Many healthcare companies have a presence in the specialty pharmacy market, and we expect a significant
increase in competition due to high growth anticipated in specialty drug spending, which could have a material
and adverse impact on our business.
There are a significant number of competitors that provide one or more comprehensive services, including
distribution, with respect to specialty pharmacy drugs, some of whom have greater resources than we do, including:
PBMs; retail pharmacy chains and independent retail pharmacies; health plans; national, regional and niche specialty
pharmacies; home and specialty infusion therapy companies; physician practices and hospital systems; and group
purchasing organizations.
The three leading specialty pharmacies, which operate as divisions within each of Express Scripts, CVS Caremark
and Walgreens, have significantly greater market share, resources, and purchasing power than we do. Express
Scripts and CVS Caremark also benefit from their services as PBMs to a number of healthcare organizations, and
CVS Caremark and Walgreens also benefit from their retail and urgent care locations. As we increase in scale and
market share, we expect more direct competition for certain drugs, payor and patient access, and services from these
three companies. Many of our constituents are well informed and can easily move between us and our competitors.
These factors together with the impact of the competitive marketplace or other significant differentiating factors
between us and our competitors may make it difficult for us to retain existing business.
Further, a number of other traditional pharmacies with significant resources are attempting to build, acquire, or
partner with specialty pharmacies due to the double-digit growth anticipated in spending on specialty prescription
drugs compared to flat to low-single digit growth in spending on traditional prescription drugs. There are also many
smaller specialty pharmacies and other entities in the healthcare industry that provide limited specialty pharmacy
services; while such entities presently compete with us to a lesser extent, they may be able to invest significant
resources, through acquisition or otherwise, to compete with us on a larger scale.
Moreover, many of the retail and hospital pharmacies to which we provide patient management services may
acquire a competing specialty pharmacy business or start their own specialty pharmacy business and thereby become
competitors. In addition, many of our PBM customers have their own specialty pharmacy businesses, and to the
extent certain of our products can be obtained internally, these customers could reduce or cease to do business with
us. Our failure to maintain and expand relationships with payors and PBM companies, who can effectively
determine the pharmacy source for their members, could materially and adversely affect our competitive position
and prospects.
Any increase in competition noted above could significantly increase the competition for limited-distribution drugs,
reduce gross profit, and otherwise materially adversely affect our business, results of operations, financial condition,
and prospects.
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the risks related to increased indebtedness;
• whether revenues and margins on sales of drugs that come to market are properly estimated;
We may not be able to effectively execute our acquisition strategy or successfully integrate acquired businesses.
Organic growth has been paramount since we were founded, but we have completed five important acquisitions in
recent years: American Homecare Federation, Inc. (December 2013); MedPro (June 2014); BioRx (April 2015);
Burman’s (June 2015); and TNH (June 2016).
Any of the following risks associated with our recent or future acquisitions, individually or in aggregate, may have a
material adverse effect on our business:
difficulties in realizing anticipated financial or strategic benefits of such acquisition;
diversion of capital from other uses;
potential dilution of shareholder ownership if stock is used as consideration for the acquisition or if an
equity offering is completed in connection with the financing of the acquisition;
significant capital expenditures may be required to integrate acquisition into our operations;
disruption of our ongoing business or the ongoing acquired business, including impairment of existing
relationships with our employees, distributors, suppliers, customers, or other constituents or those of the
acquired companies;
diversion of management’s attention and other resources from current operations, including potential strain
on financial and managerial controls and reporting systems and procedures;
difficulty in integrating acquired operations, including restructuring and realigning activities, personnel,
technologies, and products, including the loss of key employees, distributors, suppliers, customers, or other
constituents of the acquired businesses;
difficulties in the assimilation of different cultures and practices, as well as in the assimilation of broad and
geographically dispersed personnel and operations;
inability to realize cost savings, sales increases, or other benefits that we anticipate from such acquisitions,
either as to amount or in the expected time frame;
assumption of known and unknown liabilities, some of which may be difficult or impossible to quantify;
and
non-cash impairment charges or other accounting charges relating to the acquired assets.
We will continue to review strategic acquisition opportunities that will enhance our market position, expand our
expertise and drug access, add value to our constituents, and/or provide sufficient synergies. Strategic transactions,
including the pursuit of such transactions, often require significant up-front costs and require significant resources
and management attention. These significant up-front costs relate to the assessment, due diligence, negotiation, and
execution of the transaction. We may also incur additional costs to retain key employees as well as transaction fees
and costs related to executing our integration plans.
•
•
•
•
•
•
•
•
•
•
•
•
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict
and could cause our operating results to fall below expectations or our guidance.
Our quarterly and annual operating results, and in particular our revenues, have fluctuated in the past and may
fluctuate significantly in the future. These fluctuations make it difficult for us to predict our future operating results.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control and are
difficult to predict, including the following:
•
•
•
the launch timing for specialty drugs;
the effect of the expiration of drug patents and the introduction of generic drugs;
the demand for the specialty drugs to which we have access;
• whether our expected distribution share of drugs that come to market is properly estimated;
•
•
•
•
expenditures that we will or may incur to acquire or develop additional capabilities;
the timing of increases in drug costs by manufacturers;
the amount of DIR fees and the timing for assessing us for such fees; and
changes in the reimbursement policies of payors.
These factors, individually or in the aggregate, could result in large fluctuations and unpredictability in our quarterly
and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be
meaningful. Investors should not rely on our past results as an indication of our future performance. This variability
and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or
investors for any period.
Our ability to grow our specialty pharmacy business could be limited if we do not expand the number of drugs
and treatments we offer or if we lose even a small percentage of our existing patients.
Our specialty pharmacy business focuses on complex and high cost medications that serve a relatively small patient
population. Due to the limited patient populations utilizing the medications that our specialty pharmacy business
handles, our future growth relies, in part, on expanding our base of drugs or penetration in certain treatment
categories. Further, given our relatively high net sales and gross profit per prescription dispensed, a small percentage
decrease in our patient base or reduction in demand for any reason for the medications we dispense could have a
material adverse effect on our business.
Consolidation in the healthcare industry could materially adversely affect our business, financial condition, and
results of operations.
Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with
significant market power and we expect such trend to continue. As provider networks and managed care
organizations consolidate, thereby decreasing the number of market participants, competition to provide products
and services like ours will become more intense, and the importance of establishing relationships with key industry
participants will become greater. In addition, industry participants may try to use their increased market power to
negotiate price reductions for our products and services. We expect that market demand, government regulation,
third party reimbursement policies, and societal pressures will continue to cause the healthcare industry to evolve,
potentially resulting in further business consolidations and alliances among the industry participants with whom we
engage. If we are forced to reduce prices as a result of either an imbalance of market power or decreased demand for
our products, revenue would be reduced, and we could become significantly less profitable.
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Our future success depends upon our ability to maintain and manage our continued growth. If we are unable to
manage our growth effectively, we may incur unexpected expenses and be unable to meet the demands of our
customers and other constituents.
Over the past several years our business has grown significantly, and we aim to continue to expand the scope of our
operations, both organically and through strategic acquisitions. Growth in our operations will place significant
demands on our management, financial, and other resources. We cannot be certain that our current systems,
procedures, controls, and space will adequately support expansion of our operations, and we may be unable to
expand or upgrade our systems or infrastructure to accommodate future growth. Our future operating results will
depend on the ability of our management and key employees to successfully maintain our independence and
corporate culture, preserve the effectiveness of our high-touch patient care model, manage changing business
conditions, and implement and improve our technical, administrative, financial control, and reporting systems. Our
inability to finance future growth, manage future expansion, or hire and retain the personnel needed to manage our
business successfully could have a material adverse effect on our business and prospects.
We generate a significant amount of revenue from certain specialty drugs we dispense.
Our three largest revenue producing specialty drugs we dispense represented 29 percent, 30 percent, and 28 percent
of our revenues in 2016, 2015, and 2014, respectively, and our 10 largest revenue producing specialty drugs we
dispense represented 51 percent, 55 percent, and 54 percent of our revenues in 2016, 2015, and 2014, respectively.
In the event that the use of these specialty drugs were to decline due to clinical ineffectiveness or as a result of the
introduction of more effective alternatives, and we are unable to obtain access to high growth alternative specialty
drugs, our revenues would be adversely affected. Loss of revenues from our three largest revenue producing
specialty drugs without access to alternative high growth specialty drugs could have a material adverse effect on our
revenues in the short term.
We receive a significant amount of prescription drugs from one wholesaler and two manufacturers. The loss of
any of these relationships could disrupt our business and adversely impact our revenues for one or more fiscal
quarters.
Specialty drug purchases from AmerisourceBergen, a drug wholesaler, Celgene and Pharmacyclics, pharmaceutical
manufacturers, represented 49 percent, 13 percent, and 10 percent, respectively, of cost of products sold in 2016, 50
percent, 12 percent, and 9 percent, respectively, of cost of products sold in 2015, and 57 percent, 15 percent, and 7
percent, respectively, of cost of products sold in 2014. Our amended contract with AmerisourceBergen expires
September 30, 2018, and can be terminated by, among other things, either party’s material breach that continues for
30 days. The amended contract also commits us to a minimum purchase obligation per contract year of
approximately $2.0 billion. Failure to meet this minimum purchase obligation would result in significant additional
expense without corresponding revenues. The agreement also provides for negotiated discounts that differ by drug
classification, and any permitted reclassification of products by AmerisourceBergen to a lower discount category
could have an adverse impact on our gross profit. In addition, AmerisourceBergen has a long term relationship with
one of the largest specialty pharmacy companies in the country, which could adversely impact our relationship with
AmerisourceBergen. Our significant competitors may obtain better discounts from AmerisourceBergen or other
wholesalers, which could impair our competitiveness.
Our amended agreement with Celgene expires June 30, 2017, and can be terminated by either party without cause
upon 90 days prior written notice, or earlier in the event of a material breach. Unlike the specialty drugs we purchase
from AmerisourceBergen, the specialty drugs we purchase from Celgene are not available from any other source.
Our agreement with Pharmacyclics automatically renews annually, and can be terminated by either party without
cause upon 90 days prior written notice, or earlier in the event of a material breach. Unlike the specialty drugs we
purchase from AmerisourceBergen, the specialty drugs we purchase from Pharmacyclics are not available from any
other source.
The loss of any of these relationships, the failure by the suppliers to fulfill our purchase orders on a timely basis or at
all, or a contractual dispute could significantly disrupt our business and adversely impact our revenues for one or
more fiscal quarters. These agreements also limit our ability to distribute competing drugs, while allowing the
supplier to distribute through other channels.
Security breaches or other failures or disruptions of our information technology systems, our information
security systems, and our infrastructure to support our business and to protect the privacy and security of
sensitive customer and business information could materially adversely affect our business.
Many aspects of our operations are dependent on our communications and information systems and the information
collected, processed, stored, and handled by these systems. Throughout our operations, we receive, retain, and
transmit certain highly confidential information, including personal health information, personally identifiable
information, and other data that our customers and other constituents provide to purchase products or services, enroll
in programs or services, register on our websites, interact with our personnel, or otherwise communicate with us. In
addition, for these operations, we depend, in part, on the secure transmission of confidential information over public
networks. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks
by hackers or breached due to employee error, malfeasance, or other disruptions. Although we have not historically
experienced a major systems failure or security breach, our information systems are subject to damage or
interruption from power outages, computer and telecommunications failures, computer viruses, and security
breaches including credit card information breaches, vandalism, catastrophic events, and human error. Like most
companies that conduct business in part over the internet, we rely on the availability and connectivity of the internet,
which is out of our control.
A compromise of our information security controls or those of the businesses with whom we interact, which results
in confidential information being accessed, obtained, damaged, or used by unauthorized or improper persons, could
harm our reputation and expose us to regulatory actions and claims from patients, physicians, and other persons, any
of which could adversely affect our business, brands, financial position, and results of operations. Moreover, a data
security breach could require that we expend significant resources related to our information systems and
infrastructure, subject us to investigations by various state or federal authorities, and distract management and other
key personnel from performing their primary operational duties. Additionally, while certain data security breaches
might not result in a material adverse effect on our business operations, breaches involving the exfiltration or
unauthorized access to personally identifiable information of patients or other individuals can significantly impact
such individuals, resulting in a loss of confidence in, or goodwill of, the Company. If our information systems are
damaged, fail to work properly, or otherwise become unavailable, we may incur substantial costs to remediate,
repair, or replace them, and we may experience a loss of critical information, customer disruptions, and interruptions
or delays in our ability to perform essential functions and implement new and innovative services. In addition,
compliance with changes in privacy and information security laws and standards may result in considerable expense
due to increased investment in technology and the development of new operational processes. See also “Risks
Related to Federal and State Laws and Regulations – Our business operations involve the substantial receipt and use
of confidential health information concerning individuals. A failure to adequately protect such information may
harm our reputation and subject us to significant liabilities, each of which could have a material adverse effect on
our business.”
Our failure to maintain significant relationships or build new relationships with clinical experts and key thought
leaders at U.S. physician groups and universities could result in a loss of existing patients, future referrals on
existing and future drugs and pharmaceutical industry data, and could materially adversely impact our business
and prospects.
We have developed significant relationships with clinical experts and key opinion leaders at physician groups and
universities throughout the U.S. who are focused on oncology, immunology, hepatitis, specialty infusion therapy,
and multiple sclerosis, involved in significant research projects related to specialty drugs, and who are high-volume
prescribers of specialty drugs. Our failure to provide quality and timely services to such persons and their patients
could impair our relationship, which could result in a loss of existing patients, future referrals on existing and future
drugs and pharmaceutical industry data (including the anticipated drug pipeline), and therefore materially adversely
impact our business and prospects.
A disruption in our operations could hurt our relations with our constituents and significantly impact our results
of operations.
Our business is dependent on a number of different operations, products, and processes, many of which involve third
parties. A disruption in our business operations could result from, among other things, contamination of drugs or a
failure to maintain appropriate shipment and storage conditions, including maintenance of our coolers for products
that require refrigeration, an error in order processing, the unavailability of services provided by our suppliers,
vendors or shipping carriers, labor strikes, or unanticipated disruptions at our dispensing facilities, call centers, data
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centers, or corporate facilities. Such disruptions or our failure to implement adequate business continuity and
disaster recovery strategies could, temporarily or indefinitely, significantly reduce, or partially or totally eliminate
our ability to process and dispense prescriptions and provide products and services to our partners, which could have
a material adverse effect on our business and results of operations.
We are highly dependent on our senior management and key employees. Competition for our employees is
intense, and we may not be able to attract and retain the highly skilled employees that we need to support our
business and our anticipated future growth.
Our success largely depends on the skills, experience, and continued efforts of our management. In particular, our
co-founder, chief executive officer and chairman of the board of directors, Philip Hagerman, has led our company
throughout its history of more than 40 years. Further, we intend to grow the business significantly, which will
depend on our ability to continue to attract, motivate, and retain highly qualified individuals in key management,
pharmacist, nursing, and similar roles. Competition for senior management and other key personnel is intense, and
the pool of suitable candidates is limited. In addition, the realization of the expected benefits from our recent, and
potentially future, acquisitions will depend to some extent on our ability to retain key employees from the entities
we have acquired or may acquire in the future. If we lose the services of one or more of our key employees, we may
not be able to find a suitable replacement and our business could be materially adversely affected.
The integration of new key executives into our management team may interfere with our operations.
We have recently appointed new key executives, including our president and our vice president of operations, and
we may expect to hire or promote additional key management team members, including a chief financial officer.
These executives will be required to spend a significant amount of time on certain integration and transition efforts
in addition to performing their regular duties and responsibilities. If we fail to complete these integrations and
transitions in an efficient manner, or if we fail to provide sufficient incentives to motivate and retain our key
executives, our business and prospects may suffer.
Our cost savings and restructuring initiatives may be disruptive to our workforce and operations and adversely
affect our financial results.
In response to the business environment and to accomplish our strategic objectives, we have recently undertaken
certain cost savings and restructuring initiatives across all sectors of our business. To the extent such initiatives
involve workforce changes, such changes may temporarily reduce workforce productivity, which could be disruptive
to our business and adversely affect our results of operations. In addition, we may not achieve or sustain the
expected cost savings or other benefits of our restructuring plans, or do so within the expected time frame.
We rely heavily on a single shipping provider, and our business could be harmed if our shipping rates increase,
our provider is unavailable, or our provider performs poorly and we are unable to successfully replace our
shipping provider.
A substantial majority of the specialty drugs we dispense are shipped through UPS. We depend heavily on these
shipping services for efficient and cost-effective delivery of our products.
The risks associated with our dependence on UPS include:
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any significant increase in shipping rates, including rate increases resulting from higher fuel prices;
strikes or other service interruptions by UPS or by another carrier that could affect UPS;
spoilage of high cost drugs during shipment, since our drugs often require special handling, such as
refrigeration; and
increased delivery errors by UPS, resulting in lost or stolen product.
In the event any of the foregoing occurs and we are unable to transition efficiently and effectively to a new provider,
we could incur increased costs or experience a material disruption in our operations.
Our industry is highly litigious and future litigation or other proceedings could subject us to significant monetary
damages or penalties or require us to change our business practices, which could impair our reputation and
result in a material adverse effect on our business.
We are subject to risks relating to litigation, enforcement actions, regulatory proceedings, government inquiries and
investigations, and other similar actions in connection with our business operations, including the dispensing of
pharmaceutical products by our specialty and home delivery pharmacies, claims, and complaints related to the
various regulations to which we are subject and services rendered in connection with our disease management
activity. While we are currently not subject to any material litigation of this nature, such litigation is not unusual in
our industry. Further, while certain costs are covered by insurance, we may incur uninsured costs related to the
defense of such proceedings that could be material to our financial performance. In addition, as a public company,
any material decline in the market price of our common stock may expose us to purported class action lawsuits that,
even if unsuccessful, could be costly to defend or indemnify (to the extent not covered by insurance) and a
distraction to management. See Item 3, “Legal Proceedings” for information regarding a purported class action
against the Company and certain current and former executive officers.
Furthermore, unexpected volatility in insurance premiums or retention requirements or claims in excess of our
insurance coverage could have a material adverse effect on our business and results of operations.
We have identified a material weakness in our internal control over financial reporting. If we fail to remediate
this material weakness, our ability to produce accurate and timely financial statements could be impaired, which
could adversely affect investor views of us and the value of our common stock.
As a public company, we are required to comply with the standards adopted by the Public Company Accounting
Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as
amended, regarding internal control over financial reporting. In connection with our evaluation of compliance, we
identified a material weakness in our internal control over financial reporting as of December 31, 2016. A “material
weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. During the fourth quarter of 2016, we have identified a material weakness in
the operating effectiveness of our evaluation and review of recorded inventory balances. Specifically, at certain
locations the initial costs used to value ending inventories were not correct and we did not initially identify all items
necessary to accurately complete our inventory reconciliation. The remediation actions we are taking, and expect to
take, include: additional testing of the pricing file utilized to cost physical inventory; and strengthening the depth
and breadth of review of the inventory reconciliation by senior accounting and finance personnel. However, these
steps will take time to fully integrate and confirm, and until the remediation steps are fully implemented and tested,
the material weakness will continue to exist.
If we fail to remediate the identified material weakness or identify further material weaknesses, we may not be able
to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may
cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
In addition, our failure to timely file our periodic reports could eventually result in the delisting of our common
stock from the New York Stock Exchange, regulatory sanctions from the SEC, and/or the breach of covenants in our
credit facilities or of any preferred equity or debt securities we may issue in the future, any of which could have a
material adverse impact on our operations and your investment in our common stock.
Any debt service obligations will reduce the funds available for other business purposes, and the terms and
covenants relating to our current and future indebtedness could adversely impact our financial performance and
liquidity.
As of December 31, 2016, we had $111.0 million and $39.3 million in debt outstanding under our term loan and line
of credit, respectively. As of such date, we could incur up to an additional $129.9 million in indebtedness under our
line of credit. To the extent we incur significant debt in the future for acquisitions, capital expenditures, working
capital, or otherwise, we will be subject to risks typically associated with debt financing, such as insufficient cash
flow to meet required debt service payment obligations and the inability to refinance existing indebtedness.
In addition, our credit facility contains covenants requiring us to, among other things, provide financial and other
information reporting, provide notice upon certain events, and maintain cash management arrangements. These
covenants also place restrictions on our ability to incur additional indebtedness, pay dividends or make other
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distributions, redeem or repurchase capital stock, make investments and loans, and enter into certain transactions,
including selling assets, engaging in mergers or acquisitions, or engaging in transactions with affiliates. If we fail to
satisfy one or more of the covenants under our credit facility, we would be in default thereunder, and may be
required to repay such debt with capital from other sources or otherwise not be able to draw down against our line of
credit. Under such circumstances, other sources of capital may not be available to us on reasonable terms or at all.
Our business could be harmed if the supply of any of the specialty drugs we distribute becomes scarce or is
disrupted.
Many specialty drugs are manufactured with ingredients that are susceptible to supply shortages. In particular,
specialty drugs used to treat disease states such as hemophilia and autoimmune conditions can depend on supplies of
donated blood, which may fluctuate. A supply shortage, or in rare cases, a complete cessation of manufacturing, of a
specialty drug we distribute could materially and adversely impact our volumes, net revenues, profitability, and cash
flows.
If some of the drugs that we provide lose their orphan drug status, we could face increased competition.
In order to encourage the development of drugs that might not otherwise be profitable for pharmaceutical
companies, the FDA will occasionally grant certain drugs orphan status. When the FDA grants orphan status to a
drug, it will not approve a second drug for the same treatment for a period of seven years unless the new drug is
chemically different or clinically superior. Additionally, it is easier to gain marketing approval for an orphan drug,
and there may be other financial incentives associated with the manufacturing and distribution of orphan drugs, such
as extended exclusivity periods. Our business could be adversely affected by any challenges to or the expiration of a
drug’s orphan status. The loss of such status, the approval of new drugs notwithstanding a drug’s orphan status, or
the development of drugs that are superior to the orphan drugs we dispense could result in additional competition
and adversely impact our business and results of operations.
Our business would be harmed if the pharmaceutical industry reduces research, development, and marketing of
specialty drugs that are compatible with the services we provide.
Our business is highly dependent on continued research, development, and marketing expenditures of
pharmaceutical companies, and the ability of those companies to develop, supply, and generate demand for specialty
drugs that are compatible with the services we provide. Our business could be materially adversely affected if
manufacturers fail to market and support existing drugs, research potential new treatments, or develop new drugs.
Our business could also be harmed by any governmental or private initiative that would alter how drug
manufacturers promote or sell products and services.
We support hospitals that participate in the 340B Drug Pricing Program (“340B Program”). In recent years, the
340B Program has faced
increased scrutiny from Congress, federal agencies, and pharmaceutical
manufacturers. In light of the publication or proposed regulatory guidance and future changes to the 340B
Program, the revenues we derive from hospital services could be adversely impacted.
Our hospital program supports hospitals that are 340B covered entities pursuant to which such hospitals are able to
purchase certain specialty drugs from pharmaceutical manufacturers at a discount for dispensing to eligible patients.
In cases where the covered entity treats an insured patient with a discounted specialty drug, the federal government
or the patient’s private insurance routinely reimburses the entity for the full price of the medication, and the entity is
able to retain the difference between the reduced price it pays for the drug and the full amount for which it is
reimbursed. In recent years, this practice and other aspects of the 340B Program have come under increased
scrutiny. In August 2015, HHS published proposed 340B program guidance (the “Proposed Guidance”). The
Proposed Guidance relates to program eligibility and registration, eligibility of drugs for purchase under 340B,
patient eligibility to receive 340B drugs, requirements for covered entities, arrangements for contract pharmacies,
manufacturer responsibilities, rebate options for HIV drug assistance programs, and program integrity. To address
regulatory concerns with the risk of double discounting in the contract pharmacy setting, the Proposed Guidance
provides that contract pharmacies will not dispense 340B drugs to certain Medicaid patients without a written
agreement that describes a system to prevent duplicate discounts. In addition, the Proposed Guidance provides that
(1) each covered entity is expected to conduct quarterly reviews and annual independent audits of each contract
pharmacy location, and (2) any 340B Program violation detected through quarterly reviews or annual audits of a
contract pharmacy should be disclosed to HHS.
Although we are not direct participants in the 340B Program and related services accounted for less than 0.1 percent
of our revenues in each of the years ended December 31, 2016, 2015, and 2014, our involvement with hospitals that
are covered entities could cause reputational harm as a result of increased controversy regarding the 340B Program.
In addition, if hospitals decrease their utilization of the 340B Program, whether due to regulatory changes or
increased scrutiny, such decrease would impact revenue from this business.
We may be unable to obtain or retain the right to use or successfully integrate third-party licenses in our
technology-based products, which could limit the number and type of products we are able to offer our
customers.
We rely on third-party licenses for some of the technology used in our products, and intend to continue licensing
technologies from third parties. Most of these licenses can be renewed only by mutual consent and may be
terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. We may
not be able to continue to obtain these licenses on commercially reasonable terms, or at all. Our inability to obtain or
renew these licenses or find suitable alternatives could delay development of new products or prevent us from
selling our existing products until suitable substitute technology can be identified, licensed, integrated, or developed
by us. We cannot assure you as to when we would be able to do so, if at all.
Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the
technology covered by these licenses and use the technology to attempt to compete more effectively with us. In
addition, our use of third-party technologies exposes us to risks associated with the integration of components from
various sources into our products, such as unknown software errors or defects or unanticipated incompatibility with
our systems and technologies, or unintended infringement resulting from the combination of intellectual property
rights. Further, we are dependent on our vendors’ continued support of the technology we use. If a vendor chooses
to discontinue or is unable to support a licensed technology, we may not be able to modify or adapt our products to
fit other available technologies in a timely manner, if at all.
We outsource certain operations of our business to third-party vendors, which could leave us vulnerable to data
security failures of third parties.
From time to time, like many similarly situated companies, we outsource certain operations to third-party vendors to
achieve efficiencies. Such outsourced functions include payment processing, data center hosting and management,
facilities management, etc. Although we expect our business partners to maintain the same vigilance as we do with
respect to data security, we cannot control the operations of these third parties. While we engage in certain actions to
reduce the exposure resulting from outsourcing, vulnerabilities in the information security infrastructure of our
business partners could make us vulnerable to attacks or disruptions in service.
Possible changes in industry pricing benchmarks.
It is possible that the pharmaceutical industry or regulators may evaluate and/or develop an alternative pricing
reference to replace average wholesale price (“AWP”), which is the pricing reference used for many pharmaceutical
purchase agreements, retail network contracts, specialty payor agreements, and other contracts with third party
payors in connection with the reimbursement of specialty drug payments. Future changes to the use of AWP or to
other published pricing benchmarks used to establish pharmaceutical pricing, including changes in the basis for
calculating reimbursement by federal and state health programs and/or other payors, could impact our pricing
arrangements. The effect of these possible changes on our business cannot be predicted at this time.
Risks Related to Federal and State Laws and Regulations
We operate in a highly regulated industry and must comply with a significant number of complex and evolving
requirements. Changes in state and federal government regulations could restrict our ability to conduct our
business and cause us to incur significant costs.
The marketing, sale, and purchase of pharmaceuticals and medical supplies and provision of healthcare services
generally are extensively regulated by federal and state governments. In addition, other aspects of our business are
also subject to government regulation. The applicable regulatory framework is complex, and the laws are very broad
in scope. Many of these laws remain open to interpretation and have not been addressed by substantive court
decisions. Accordingly, we cannot assure you that our interpretation would prevail or that one or more government
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agencies will not interpret the applicable laws and regulations differently. Changes in the law or new interpretations
of existing law can have a dramatic effect on our operations, our cost of doing business, and the amount of
reimbursement we receive from governmental third-party payors such as Medicare and Medicaid.
Some of the healthcare laws and regulations that apply to our activities include:
• The federal Anti-Kickback Statute prohibits individuals and entities from knowingly and willfully paying,
offering, receiving or soliciting money or anything else of value in order to induce the referral of patients,
or to induce a person to purchase, lease, order, arrange for, or recommend services or goods covered in
whole or in part by Medicare, Medicaid, or other government healthcare programs. The Anti-Kickback
Statute is an intent-based statute and the failure of a business arrangement to satisfy all elements of a safe
harbor will not necessarily render the arrangement illegal, but it may subject that arrangement to increased
scrutiny by enforcement authorities. Any violation of the Anti-Kickback Statute can lead to significant
penalties, including criminal penalties, civil fines, and exclusion from participation in Medicare and
Medicaid.
• The Stark Law prohibits physicians from making referrals to any entity with which the physicians or their
immediate family members have a “financial relationship” (i.e., an ownership, investment, or compensation
relationship) for the furnishing of certain Designated Health Services that are reimbursable under Medicare,
and prohibits the entity from presenting or causing to be presented claims to Medicare for those referred
services, unless an exception applies. The Stark Law is a broad prohibition on certain business
relationships, with detailed exceptions. However, unlike the Anti-Kickback Statute under which an activity
may fall outside a safe harbor and still be lawful, a referral for Designated Health Services that does not fall
within an exception is strictly prohibited by the Stark Law. A violation of the Stark Law is punishable by
civil sanctions, including significant fines and exclusion from participation in Medicare and Medicaid.
• HIPAA and HITECH provide federal privacy protections for individually identifiable health information.
See “Our business operations involve the substantial receipt and use of confidential health information
concerning individuals. A failure to adequately protect any of this information could result in severe harm
to our reputation and subject us to significant liabilities, each of which could have a material adverse effect
on our business.” below.
• Pharmacies and pharmacists must obtain state licenses to operate and dispense pharmaceuticals. If we are
unable to maintain our licenses or if states place burdensome restrictions or limitations on non-resident
pharmacies, this could limit or affect our ability to operate in some states.
• Federal and state investigations and enforcement actions continue to focus on the health care industry,
scrutinizing a wide range of items such as joint venture arrangements, referral and billing practices, product
discount arrangements, home health care services, dissemination of confidential patient information,
clinical drug research trials, and gifts for patients.
Legislative or regulatory policies in the U.S. designed to manage healthcare costs or alter healthcare financing
practices or changes to government policies in general may adversely impact our business and results of
operations.
From time to time, legislative and/or regulatory proposals are made in the U.S. which seek to manage the cost of
healthcare, including prescription drug cost. Such proposals include changes in reimbursement rates, restrictions on
rebates and discounts, restrictions on access or therapeutic substitution, limits on more efficient delivery channels,
taxes on goods and services, price controls on prescription drugs, and other significant healthcare reform proposals,
including their repeal or replacement. Further, more exacting regulatory policies and requirements specific to the
specialty pharmacy sector may cause a rise in costs, labor, and time to meet all such requirements. We are unable to
predict whether any such policies or proposals will be enacted, or the specific terms thereof. Certain of these policies
or proposals, if enacted, could have a material adverse impact on our business.
Our business operations involve the substantial receipt and use of confidential health information concerning
individuals. A failure to adequately protect any of this information could result in severe harm to our reputation
and subject us to significant liabilities, each of which could have a material adverse effect on our business.
Most of our activities involve the receipt or use of PHI concerning individuals. We also use aggregated and
de-identified data for research and analysis purposes, and in some cases, provide access to such de-identified data to
pharmaceutical manufacturers, payors, and third-party data aggregators and analysts. We believe our de-identified
data is proprietary and we expect our future operations will include additional services regarding the de-identified
data we accumulate to take greater advantage of our relationships with data-driven pharmaceutical manufacturers.
There is substantial regulation at the federal and state levels addressing the use, disclosure, and security of patient
identifiable health information. At the federal level, HIPAA and the regulations issued thereunder impose extensive
requirements governing the transmission, use, and disclosure of health information by all participants in health care
delivery, including physicians, hospitals, insurers, and other payors. Many of these obligations were expanded under
HITECH, passed as part of the American Recovery and Reinvestment Act of 2009. Failure to comply with standards
issued pursuant to federal or state statutes or regulations may result in criminal penalties and civil sanctions. In
addition to regulating privacy of individual health information, HIPAA includes several anti-fraud and abuse laws,
extends criminal penalties to private health care benefit programs and, in addition to Medicare and Medicaid, to
other federal health care programs, and expands the Office of Inspector General’s authority to exclude persons and
entities from participating in the Medicare and Medicaid programs. Further, future regulations and legislation that
severely restrict or prohibit our use of patient identifiable or other information could limit our ability to use
information critical to the operation of our business. If we violate a patient’s privacy or are found to have violated
any federal or state statute or regulation with regard to confidentiality or dissemination or use of PHI, we could be
liable for significant damages, fines, or penalties and suffer severe reputational harm, each of which could have a
material adverse effect on our business, results of operations, and prospects. These risks may become more
prominent as we provide additional services related to our de-identified data.
Our business operations involve communication with patients, for which certain federal and state laws exist.
Violations of these laws could result in substantial statutory penalties and other sanctions.
Certain federal and state laws, such as the Telephone Consumer Protection Act, give the Federal Trade
Communication, Federal Communications Commission, and state attorneys general the ability to regulate, and bring
enforcement actions relating to, telemarketing practices and certain automated outbound contacts such as phone
calls, texts, or emails. Under certain circumstances, these laws may provide consumers with a private right of action.
Violations of these laws could result in substantial statutory penalties and other sanctions.
Our business, financial position, and operations could be adversely affected by environmental regulations, and
health and safety laws and regulations applicable to our business.
Certain federal, state, and local environmental regulations and health and safety laws and regulations are applicable
to our business, including the management of hazardous substances, storage, and transportation of possible
hazardous materials, and various other disclosure and procedure requirements that may be promulgated by the
Occupational Safety and Health Administration or the Environmental Protection Agency that may apply to our
operations. Violations of these laws and regulations could result in substantial statutory penalties, sanctions, and, in
certain circumstances, a private right of action by consumers, employees, or the general public.
There remains considerable uncertainty as to the full impact of the Health Reform Laws on our business.
Many of the structural changes enacted by the Health Reform Laws were implemented in 2014; however, much of
the applicable regulations and sub-regulatory guidance are subject to being repealed or replaced. There is
considerable uncertainty as to the impact of Health Reform Laws (and their potential repeal or replacement) on our
business.
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We could also become subject to certain anti-takeover provisions under Michigan law which may discourage, delay
or prevent someone from acquiring us or merging with us, whether or not an acquisition or merger is desired by or
beneficial to our shareholders. If a corporation's board of directors chooses to "opt-in" to certain provisions of
Michigan Law, such corporation may not, in general, engage in a business combination with any beneficial owner,
directly or indirectly, of 10 percent of the corporation's outstanding voting shares unless the holder has held the
shares for five years or more or, among other things, the board of directors has approved the business combination.
Our Board of Directors has not elected to be subject to this provision, but could do so in the future. Any provision of
our amended and restated articles of incorporation or bylaws or Michigan law that has the effect of delaying or
deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares,
and could also affect the price that some investors are willing to pay for our common stock otherwise.
Philip Hagerman, our chairman and chief executive officer, has significant influence on the outcome of matters
submitted for shareholder approval and he may have interests that differ from those of our other shareholders.
Philip Hagerman and various trusts affiliated with or for the benefit of Philip Hagerman or his wife (the "Hagerman
family") beneficially own approximately 29.8 percent of our common stock as of March 6, 2017. Therefore, the
Hagerman family will continue to have significant influence over the outcome of votes on all matters requiring
approval by shareholders, including the election of directors, the adoption of amendments to our articles of
incorporation and bylaws, and approval of a sale of the Company and other significant corporate transactions.
Furthermore, the interests of the Hagerman family may be different than the interests of other shareholders. This
concentration of voting power could also have the effect of delaying, deterring, or preventing a change in control or
other business combination that might otherwise be beneficial to our shareholders.
ITEM 1.B. UNRESOLVED STAFF COMMENTS
Not applicable.
Risks Related to Governance Matters
Certain provisions of our corporate governance documents and Michigan law could discourage, delay, or prevent
a merger or acquisition at a premium price.
Our amended and restated articles of incorporation and bylaws contain provisions that may make the acquisition of
our Company more difficult without the approval of our Board of Directors. These include provisions that, among
other things:
•
•
•
•
•
•
•
•
•
•
•
permit the Board to issue up to 10,000,000 shares of preferred stock, with any rights, preferences, and
privileges as they may determine (including the right to approve an acquisition or other change in control);
provide that the authorized number of directors may be fixed only by the Board in accordance with our
amended and restated bylaws;
do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares
entitled to vote in any election of directors to elect all of the directors standing for election);
divide our Board into three staggered classes;
provide that all vacancies and newly created directorships may be filled by the affirmative vote of a
majority of directors then in office, even if less than a quorum;
prohibit removal of directors without cause;
prohibit shareholders from calling special meetings of shareholders;
requires unanimous consent for shareholders to take action by written consent without approval of the
action by our Board;
provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate
candidates for election as directors at a meeting of shareholders must provide advance notice in writing and
also comply with specified requirements related to the form and content of a shareholder's notice;
require at least 80 percent supermajority shareholder approval to alter, amend, or repeal certain provisions
of our amended and restated articles of incorporation; and
require at least 80 percent supermajority shareholder approval in order for shareholders to adopt, amend, or
repeal our amended and restated bylaws.
These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current
management by making it more difficult for shareholders to replace members of the Board of Directors, which is
responsible for appointing members of our management. Any matters requiring the approval of our shareholders will
be significantly impacted by the Hagerman family (as defined below), which may have interests that differ from
those of our other shareholders. See "Philip Hagerman, our chairman and chief executive officer, and his immediate
family have significant influence on the outcome of matters submitted for shareholder approval and they may have
interests that differ from those of our other shareholders."
In addition, the award agreements for outstanding stock options under our 2007 Option Plan generally provide that
all unvested options will immediately vest upon a change in control. The 2014 Omnibus Plan permits the Board of
Directors or a committee thereof to accelerate, vest, or cause the restrictions to lapse with respect to outstanding
equity awards in the event of, or immediately prior to, a change in control. Although our more recent form of option
awards contain “double trigger” vesting, such vesting or acceleration of earlier awards could discourage the
acquisition of our Company.
36
37
ITEM 2. PROPERTIES
would individually or in the aggregate be reasonably expected to have a material adverse effect on our business,
financial position, cash flows, or results of operations.
We own a 599,383 square foot distribution facility in Flint, Michigan, which also contains our corporate
headquarters. We believe that our headquarters and the other facilities described below are suitable and adequate for
our current business needs.
ITEM 4. MINE SAFETY DISCLOSURES
The following table lists information regarding each of our major properties as of December 31, 2016:
Not applicable.
Location
Flint, MI ......................
Cincinnati, OH ............
Boothwyn, PA .............
Flint, MI ......................
Cincinnati, OH ............
Cincinnati, OH ............
Ontario, CA.................
Urbandale, IA ..............
Flint, MI ......................
Greensboro, NC ..........
Carlsbad, CA ...............
Raleigh, NC ................
Raleigh, NC ................
Scottsdale, AZ .............
Van Nuys, CA .............
Cincinnati, OH ............
Beltsville, MD .............
Woburn, MA ...............
Enfield, CT .................
Richardson, TX ...........
Buffalo Grove, IL ........
Ft. Lauderdale, FL .......
Square
Footage
599,383
Facility Description
Owned/Leased
Headquarters and main distribution
Owned
facility
Specialty pharmacy
Specialty and retail pharmacy
Specialty and wholesale pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty and retail pharmacy
Specialty pharmacy
Specialty pharmacy
15,147
11,400
10,366
8,205 Office space
8,100 Office space
7,280
7,050
7,000
7,000
6,589
6,032 Office space
5,872
5,792
5,747
5,710 Office space
5,625
4,734
4,664
4,147
3,408
2,665
Leased (expires Jun. 30, 2025)
Leased (expires Oct. 31, 2026)
Owned
Leased (expires May 31, 2025)
Leased (expires Mar. 31, 2017)
Leased (expires Mar. 14, 2020)
Leased (expires Apr. 30, 2021)
Owned
Leased (expires Apr. 30, 2024)
Leased (expires Nov. 20, 2017)
Leased (expires Jun. 30, 2019)
Specialty pharmacy and office space Leased (expires Nov. 30, 2018)
Specialty pharmacy
Specialty pharmacy and office space Leased (expires Nov. 30, 2018)
Leased (expires Sep. 30, 2019)
Leased (expires Mar. 31, 2022)
Leased (expires Nov. 30, 2017)
Leased (expires Dec. 17, 2018)
Leased (expires Jul. 31, 2021)
Leased (expires May 31, 2021)
Leased (expires Mar. 31, 2018)
Specialty pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty and retail pharmacy
Leased (expires Jun. 9, 2021)
The Company leases an additional 22 facilities (ranging from 400 square feet to 2,000 square feet) in the mid-
Atlantic and southeast regions of the U.S. for use as specialty infusion suites. The majority of these specialty
infusion suite leases have one-year terms and automatically renew for additional one-year terms unless either party
gives written notice of termination.
ITEM 3. LEGAL PROCEEDINGS
On November 10, 2016, a putative class action complaint was filed in the U.S. District Court for the Eastern District
of Michigan against Diplomat Pharmacy, Inc. and certain officers of the Company. The complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with public filings made between
October 9, 2014 and November 2, 2016 (the “potential class period”). The plaintiff seeks to represent a class of
shareholders who purchased stock in the potential class period. The complaint seeks unspecified monetary damages
and other relief. The Company believes the complaint and allegations to be without merit and intends to vigorously
defend itself against these actions. The Company is unable at this time to determine whether the outcome of the
litigation would have a material impact on our results of operations, financial condition, or cash flows.
In addition, our business of providing specialized pharmacy services and other related services may subject us to
litigation and liability for damages in the ordinary course of business. Although the results of litigation and claims
cannot be predicted, we believe there are no legal proceedings, the outcome of which, if determined adversely to us,
38
39
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The following table sets forth for the periods indicated the high and low closing sale prices per share of our common
stock as reported on the New York Stock Exchange:
Performance Graph
The following graph compares the total cumulative stockholder return on our common stock with the total
cumulative return of the S&P 500 Index and the S&P Small Cap 600 Index during the period commencing on
October 10, 2014, the initial trading day of our common stock, and ending on December 31, 2016. The graph
assumes that $100 was invested at the beginning of the period in our common stock and in each of the comparative
indices, and the reinvestment of any dividends. Historical stock price performance should not be relied upon as an
indication of future stock price performance.
Quarter
2016
2015
High Low High Low
First ........................................ $ 35.62 $ 25.21 $ 34.63 $ 22.41
Second ................................... $ 35.00 $ 28.14 $ 47.04 $ 32.87
Third ...................................... $ 37.76 $ 27.00 $ 51.31 $ 27.06
Fourth..................................... $ 29.06 $ 12.50 $ 36.19 $ 24.39
On March 6, 2017, we had 66,987,621 shares of common stock, no par value, outstanding and 43 holders of record
of our common stock. A substantially greater number of holders are beneficial owners whose shares are held of
record by banks, brokers and other nominees. The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
Dividends
We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business. Any
determination to declare and pay cash dividends on our common stock in the future will be made at the discretion of
our Board of Directors and will depend on our results of operations, financial performance and condition, capital
requirements, contractual restrictions under our credit facility, restrictions imposed by applicable law, and other
factors that our Board of Directors may deem relevant. We do not anticipate paying cash dividends on our common
stock for the foreseeable future.
Issuer Purchases of Equity Securities
There have been no repurchases of our common stock either on the open market or by private transaction during the
quarter ended December 31, 2016.
40
41
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the information under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated
financial statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this Annual
Report on Form 10-K.
Year Ended December 31,
2016
2015
2014
(Dollars in thousands, except per share amounts)
2013
2012
Consolidated Statements of Operations Data
$ 1,126,943
Net sales ........................................................... $ 4,410,388
Cost of products sold......................................... (4,085,560) (3,103,392) (2,074,817) (1,426,112) (1,057,608)
69,335
(64,392)
4,943
Gross profit .............................................
Selling, general, and administrative expenses .....
Income from operations ...........................
140,139
(127,556)
12,583
89,027
(77,944)
11,083
324,828
(277,751)
47,077
263,239
(217,302)
45,937
$ 1,515,139
$ 3,366,631
$ 2,214,956
2016
Year Ended December 31,
2015
2013
2014
(Per prescription information in dollars)
Other Data (unaudited)
981,000
Prescriptions dispensed .....................................
Prescriptions serviced (not dispensed)................
177,000
Total prescriptions ............................................ 1,158,000
911,000
282,000
1,193,000
797,000
212,000
1,009,000
722,000
208,000
930,000
2012
680,000
118,000
798,000
Net sales per prescription dispensed ................... $
Gross profit per prescription dispensed .............. $
Net sales per prescription serviced (not
dispensed) .......................................................
$
Gross profit per prescription serviced (not
4,487
325
$
$
3,683
280
$
$
2,770
167
$
$
2,090
116
$
$
1,652
97
36
$
29
$
27
$
27
$
dispensed) .......................................................
$
36
$
29
$
27
$
27
$
29
29
Other (expense) income:
Interest expense ............................................
Equity loss and impairment of non-
consolidated entities ....................................
Change in fair value of redeemable
common shares............................................
Termination of existing stock redemption
agreement ...................................................
Other ............................................................
Total other expense ...........................................
Income (loss) before income taxes............
Income tax expense ...........................................
Net income (loss) ....................................
Less net loss attributable to noncontrolling
(6,573)
(4,659)
—
(5,239)
(2,528)
(1,996)
(1,086)
—
—
(6,208)
(1,055)
(267)
9,073
(34,348)
(6,566)
—
370
(10,862)
36,215
(11,195)
25,020
—
308
(4,931)
41,006
(16,234)
24,772
(4,842)
1,128
(3,377)
9,206
(4,655)
4,551
—
196
(37,203)
(26,120)
—
(26,120)
—
337
(7,582)
(2,639)
—
(2,639)
interest ............................................................
(3,253)
(1,004)
(225)
—
—
Net income (loss) attributable to Diplomat
Pharmacy, Inc. ................................................
28,273
25,776
4,776
(26,120)
(2,639)
Net income allocable to preferred
shareholders ....................................................
Net income (loss) allocable to common
shareholders ....................................................
$
Net income (loss) per common share:
Basic ................................................................ $
Diluted ............................................................. $
—
—
458
—
—
28,273
$
25,776
$
4,318
$
(26,120)
$
(2,639)
0.43
0.42
$
$
0.42
0.41
$
$
0.12
0.11
$
$
(0.79)
(0.79)
$
$
(0.08)
(0.08)
Weighted average common shares outstanding:
Basic ................................................................ 65,970,396
Diluted ............................................................. 68,047,723
60,730,133
63,096,951
36,012,592
38,553,995
33,141,500
33,141,500
33,141,500
33,141,500
2016
2015
As of December 31,
2014
(Dollars in thousands)
2013
2012
Consolidated Balance Sheet Data
Total assets ....................................................... $ 1,107,947
150,255
Total debt .........................................................
613,724
Total shareholders' equity (deficit) .....................
$ 1,001,579
117,000
515,546
$ 390,086
—
168,727
$ 211,777
88,164
(77,782)
$ 139,595
63,102
(51,562)
42
43
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Recent Development
RESULTS OF OPERATIONS
(Dollars in thousands, except per share, per patient, and per prescription data)
TNH Acquisition
Overview
We are the largest independent specialty pharmacy in the U.S., and are focused on improving the lives of patients
with complex chronic diseases. Our patient-centric approach positions us at the center of the healthcare continuum
for treatment of complex chronic diseases through partnerships with patients, payors, pharmaceutical manufacturers,
and physicians. We offer a broad range of innovative solutions to address the dispensing, delivery, dosing, and
reimbursement of clinically intensive, high-cost specialty drugs (many of which can cost more than $100,000 per
patient, per year). We have expertise across a broad range of high-growth specialty therapeutic categories, including
oncology, immunology, hepatitis, specialty infusion therapy, multiple sclerosis, and many other serious or long-term
conditions. We dispense to patients in all 50 states and U.S. territories through our advanced distribution centers and
manage centralized clinical call centers to deliver localized services on a national scale. We were founded in 1975
by our chief executive officer, Philip Hagerman, and his father, Dale, both trained pharmacists who transformed our
business from a traditional pharmacy into a leading specialty pharmacy beginning in 2005.
Our core revenues are derived from the customized care management programs we deliver to our patients, including
the dispensing of their specialty medications. Because our core therapeutic disease states generally require multiyear
or lifelong therapy, our singular focus on complex chronic diseases helps drive recurring revenues and sustainable
growth. Our revenue growth is primarily driven by new drugs coming to market, new indications for existing drugs,
volume growth with current clients, and the addition of new clients. For the years ended December 31, 2016, 2015
and 2014, we derived more than 99 percent of our revenue from the dispensing of drugs and the reporting of data
associated with those dispenses to pharmaceutical manufacturers and other outside companies.
Our recent and historical revenue growth has largely been driven by our position as a leader in the oncology,
immunology, hepatitis, specialty infusion, and multiple sclerosis therapeutic categories. For the years ended
December 31, 2016, 2015, and 2014, we generated approximately 93 percent, 92 percent, and 90 percent,
respectively, of our revenues in these categories.
We expect our revenue growth to continue to be driven by a highly visible and recurring base of prescription volume
and revenues, favorable demographic trends, advanced clinical developments, expanding drug pipelines, earlier
detection of chronic diseases, improved access to medical care, mix shift toward higher-cost specialty drugs, and
manufacturer price increases. In addition, we believe our expanding breadth of services, our growing penetration
with new customers, and our access to limited-distribution drugs will help us achieve sustainable revenue growth in
the future. Further, we believe that limited distribution is becoming the delivery system of choice for many specialty
drug manufacturers because it is conducive to smaller patient populations, facilitates high patient engagement,
clinical expertise, and elevated focus on service, and because it allows for real-time patient-specific (albeit de-
identified) data. Accordingly, we believe our current portfolio of approximately 100 limited-distribution drugs, all of
which are commercially available, is important to our revenue growth.
We also provide specialty pharmacy support services to a national network of retailers and independent hospital
groups, as well as hospitals and health systems. Through many of these partners, we earn revenue by providing
clinical and administrative support services on a fee-for-service basis to help them dispense specialty medications.
Our other revenue in 2016, 2015, and 2014 was derived from these services provided to retail and hospital pharmacy
partners.
As a result of our clinical expertise and our ability to expand scope of services, demand for our services has grown,
which, along with acquisition activity, has driven growth in revenue. Net sales for the years ended December 31,
2016, 2015, and 2014, were $4,410,388, $3,366,631, and $2,214,956, respectively. Our net income attributable to
Diplomat for the years ended December 31, 2016, 2015, and 2014 was $28,273, $25,776, and $4,776, respectively.
On June 1, 2016, we acquired all of the outstanding equity interests of TNH for a total acquisition price of $78,422,
excluding related acquisition costs. Included in the total acquisition price is $68,915 in cash and 324,244 restricted
shares of our common stock, fair valued at $9,507 as of the acquisition date. TNH, a specialty pharmacy based in
Van Nuys, California, provides medication management programs for individuals with complex chronic diseases,
including oncology, hepatitis, and immunology. We acquired TNH to expand our existing business, enhance our
proprietary technology, and increase our geographic presence, particularly in California and Texas.
Key Performance Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our
performance, identify trends, formulate financial projections, and make strategic decisions:
Year Ended December 31,
2015
2014
2016
Prescriptions dispensed ................................................................................ 981,000 911,000 797,000
Prescriptions serviced (not dispensed) .......................................................... 177,000 282,000 212,000
Total prescriptions ....................................................................................... 1,158,000 1,193,000 1,009,000
Net sales per prescription dispensed ............................................................. $
Gross profit per prescription dispensed ........................................................ $
Net sales per prescription serviced (not dispensed) ....................................... $
Gross profit per prescription serviced (not dispensed) .................................. $
4,487 $
325 $
36 $
36 $
3,683 $
280 $
29 $
29 $
2,770
167
27
27
Prescription Data (rounded to the nearest thousand)
Prescriptions dispensed represent prescriptions filled and dispensed by Diplomat to patients or, in rare cases, to
physicians. Prescriptions serviced (not dispensed) represent prescriptions filled and dispensed by a third-party
(non-Diplomat) pharmacy, including unaffiliated retailers and health systems, as well as those for which we provide
support services required to assist these patients and pharmacies through the complexity of filling specialty
medications and those for which we earn a fee.
Our volume for the year ended December 31, 2016 was 1,158,000 prescriptions dispensed or serviced, a 3 percent
decrease compared to 1,193,000 prescriptions dispensed or serviced for the year ended December 31, 2015. The
volume decrease was due to a decrease in prescriptions serviced for retailers, the loss of non-specialty dispenses
resulting from the sale of our compounding business in September 2015, and a business decision to exit dispensing
certain high-volume, but low-profit, drugs. These volume decreases were partially offset by the contribution of our
BioRx, Burman’s, and TNH acquisitions, new drugs to the market or newly dispensed by us, growth in patients from
current payors and physician practices, and the addition of patients from new payors and physician practices.
Our volume for the year ended December 31, 2015 was 1,193,000 prescriptions dispensed or serviced, an 18 percent
increase compared to 1,009,000 prescriptions dispensed or serviced for the year ended December 31, 2014. The
volume increase was due to new drugs to the market or newly dispensed by us, growth in patients from current
payors and physician practices, growth in prescriptions serviced for retailers, the addition of patients from new
payors and physician practices, as well as the contribution of our BioRx, Burman’s, and MedPro acquisitions. These
volume increases were partially offset by the loss of non-specialty dispenses resulting from the decision to close our
Grand Rapids facility in November 2014 and the impact of the sale of our compounding business in September
2015.
44
45
Other Metrics
Other Expense
Other key metrics used in analyzing our business are net sales per prescription dispensed, gross profit per
prescription dispensed, net sales per prescription serviced (not dispensed), and gross profit per prescription serviced
(not dispensed).
Net sales per prescription dispensed represent total prescription revenue from prescriptions dispensed by Diplomat
divided by the number of prescriptions dispensed by Diplomat. Gross profit per prescription dispensed represents
gross profit from prescriptions dispensed by Diplomat divided by the number of prescriptions dispensed by
Diplomat. Total prescription revenue from prescriptions dispensed includes all revenue collected from patients,
third-party payors, and various patient assistance programs, as well as revenue collected from pharmaceutical
manufacturers for data and other services directly tied to the actual dispensing of their drug(s). Gross profit
represents total prescription revenue from prescriptions dispensed less the cost of the drugs purchased, including
performance-related rebates paid by manufacturers to us, which are recorded as a reduction to cost of products sold.
Net sales per prescription serviced (not dispensed) represent total prescription revenue from prescriptions serviced
divided by the number of prescriptions serviced for the non-Diplomat pharmacies. Gross profit per prescription
serviced (not dispensed) is equal to net sales per prescription serviced because there is no cost of drug associated
with such transactions. Total prescription revenue from prescriptions serviced includes revenue collected from
partner pharmacies, including retailers and health systems, for support services rendered to their patients.
Components of Results of Operations
Net Sales
Revenue for a dispensed prescription is recognized at the time of shipment for home delivery and at prescription
adjudication (which approximates the fill date) for patient pick-up at open-door or retail pharmacy locations. We can
earn revenue from multiple sources for any one claim, including the primary insurance plan, the secondary insurance
plan, the tertiary insurance plan, the patient copay, and patient assistance programs. Prescription revenue also
includes revenue from pharmaceutical manufacturers and other outside companies for data reporting or additional
services rendered for dispensed prescriptions. Service revenue is primarily derived from fees earned by us from
retail and hospital pharmacies for patient support that is provided by us to those non-Diplomat pharmacies to
dispense specialty drugs to patients. The retail and hospital pharmacies dispense the drug and pay us a service fee
for clinically and administratively servicing their patients.
Cost of Products Sold
Cost of products sold represents the purchase price of the drugs that we ultimately dispense. These drugs are
purchased directly from the manufacturer or from an authorized wholesaler and the purchase price is negotiated with
the selling entity. In general, period-over-period percentage changes in cost of products sold will move directionally
with period-over-period percentage changes in net sales for prescription dispensing transactions. This is due to the
mathematical relationship between AWP and wholesale acquisition cost (“WAC”), where most commonly AWP
equals WAC multiplied by 1.20, and our contractual relationships to purchase at a discount off WAC and receive
reimbursement at a discount off AWP. The discounts off AWP and WAC that we receive vary significantly by drug
and by contract. Rebates we receive from manufacturers are reflected as reductions to cost of products sold when
they are earned.
Selling, General, and Administrative Expenses (“SG&A”)
Our operating expenses primarily consist of employee and employee-related costs, outbound prescription drug
transportation and logistics costs, and amortization expense from definite-lived intangible assets associated with our
acquired entities. Our employee and employee-related costs relate to both our patient-facing personnel and our
non-patient-facing support and administrative personnel. Other operating expenses consist of occupancy and other
indirect costs, insurance costs, professional fees, and other general overhead expenses. We expect that general and
administrative expenses will continue to increase as we incur additional expenses related to our growth.
Other expense primarily consists of interest expense associated with our debt, equity losses and impairments of non-
consolidated entities, and tax credits.
Income Tax Expense
On January 23, 2014, we converted from an S corporation to a C corporation. Prior to this date, our historical
financial statements reflect our results as an S corporation.
RESULTS OF OPERATIONS
The following table provides consolidated statements of operations data for each of the years presented:
Net sales ..................................................................................... $ 4,410,388
Cost of products sold .................................................................. (4,085,560)
324,828
(277,751)
47,077
Gross profit .........................................................................
SG&A ........................................................................................
Income from operations .......................................................
2016
Year Ended December 31,
2015
$ 3,366,631
(3,103,392)
263,239
(217,302)
45,937
2014
$ 2,214,956
(2,074,817)
140,139
(127,556)
12,583
Other (expense) income:
Interest expense ......................................................................
Equity loss and impairment of non-consolidated entities ..........
Change in fair value of redeemable common shares .................
Termination of existing stock redemption agreement ...............
Other ......................................................................................
Total other expense.....................................................................
Income before income taxes .................................................
Income tax expense ....................................................................
Net income ..........................................................................
Less net loss attributable to noncontrolling interest ......................
Net income attributable to Diplomat Pharmacy, Inc. ....................
Net income allocable to preferred shareholders ...........................
Net income allocable to common shareholders ............................ $
(6,573)
(4,659)
—
—
370
(10,862)
36,215
(11,195)
25,020
(3,253)
28,273
—
28,273
$
(5,239)
—
—
—
308
(4,931)
41,006
(16,234)
24,772
(1,004)
25,776
—
25,776
$
(2,528)
(6,208)
9,073
(4,842)
1,128
(3,377)
9,206
(4,655)
4,551
(225)
4,776
458
4,318
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Net Sales
Net sales for the year ended December 31, 2016 were $4,410,388, a $1,043,757 or 31 percent increase, compared to
$3,366,631 for the year ended December 31, 2015. The increase was primarily the result of organic growth,
including approximately $256,000 of additional revenue from drugs that were new to the market in 2016 and
approximately $241,000 from the impact of price increases. The remaining organic growth was primarily the result
of a more favorable mix of those drugs that existed a year ago, partially offset by a shift in hepatitis C drug mix from
those drugs that existed a year ago to new drugs and increased DIR fees. BioRx, Burman’s, and TNH, combined,
contributed approximately $476,000 to the increase.
Cost of Products Sold
Cost of products sold for the year ended December 31, 2016 was $4,085,560, a $982,168 or 32 percent increase,
compared to $3,103,392 for the year ended December 31, 2015. The increase was primarily the result of the same
factors that drove the increase in our net sales over the same period. Cost of products sold was 92.6 percent and 92.2
percent of net sales for the years ended December 31, 2016 and 2015, respectively. The reduction in gross margin
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from 7.8 percent to 7.4 percent for the years ended December 31, 2015 and 2016, respectively, was primarily due to:
a continued shift in mix towards higher priced but lower percent margin drugs, including the impact of TNH; lower
growth and lower margins in our specialty infusion therapeutic category; increased DIR fees; the September 2015
sale of our low profit, but high margin, compounding business; and the recognition of a $2,407 inventory loss due to
a cooler failure at one of our pharmacy locations during the fourth quarter of 2016.
SG&A
SG&A for the year ended December 31, 2016 were $277,751, a $60,449 increase, compared to $217,302 for the
year ended December 31, 2015. Total employee cost increased by $35,974 and includes the employee expense for
our acquired entities. The increased employee expense was primarily attributable to the 8 percent increase in
dispensed prescription volume, combined with the increased clinical and administrative complexity associated with
our mix of business. We also experienced a $13,925 increase in amortization expense from definite-lived intangible
assets associated with our acquired entities, a $4,804 impairment expense to fully impair the definite-lived intangible
assets associated with Primrose Healthcare, LLC (“Primrose”), a $3,544 increase in bad debt expense, and a $1,250
early termination fee associated with a software licensing agreement. The remaining increase was in all other SG&A
to support our growth including software licenses, travel, freight, and other miscellaneous expenses. These increases
were partially offset by a $15,590 decrease in the change in fair value of contingent consideration related to our
acquisitions. As a percent of net sales, SG&A, excluding the change in fair value of contingent consideration and the
Primrose impairment, accounted for 6.4 percent of net sales for the year ended December 31, 2016 compared to 6.3
percent for the year ended December 31, 2015.
Other Expense
Other expense for the years ended December 31, 2016 and 2015 was $10,862 and $4,931, respectively. We
recognized a $4,659 impairment during the year ended December 31, 2016 to write down our cost method
investment in Physician Resource Management, Inc. (“PRM”) to net realizable value. Interest expense increased by
$1,334 as Term Loan A was outstanding for all of 2016 versus only nine months of 2015.
Income Tax Expense
Income tax expense for the years ended December 31, 2016 and 2015 was $11,195 and $16,234, respectively,
resulting in effective tax rates of 31 percent and 40 percent, respectively. Income tax expense for the year ended
December 31, 2016 included the recognition of excess tax benefits, which favorably impacted the 2016 effective tax
rate by 11 percent (see Note 3 to our consolidated financial statements, included in Item 8 of this report).
Year Ended December 31, 2015 vs. Year Ended December 31, 2014
Net Sales
Net sales for the year ended December 31, 2015 were $3,366,631, a $1,151,675 or 52 percent increase, compared to
$2,214,956 for the year ended December 31, 2014. The increase was primarily the result of organic growth,
including approximately $453,000 from increased volume and a more favorable mix of those drugs that existed a
year ago, approximately $136,000 from the impact of price increases, and approximately $103,000 of additional
revenue from drugs that were new to the market in 2015. BioRx, Burman’s and MedPro, combined, contributed
approximately $460,000 to the increase.
Cost of Products Sold
Cost of products sold for the year ended December 31, 2015 was $3,103,392, a $1,028,575 or 50 percent increase,
compared to $2,074,817 for the year ended December 31, 2014. The increase was primarily the result of the same
factors that drove the increase in our net sales over the same period. Cost of products sold was 92.2 percent and 93.7
percent of net sales for the years ended December 31, 2015 and 2014, respectively. The gross margin improvement
from 6.3 percent to 7.8 percent for the years ended December 31, 2014 and 2015, respectively, was primarily due to
drug mix changes, including the impact of BioRx, Burman’s and MedPro, as well as the impact of increased pharma
dollars, and, to a lesser extent, manufacturer price increases.
SG&A
SG&A for the year ended December 31, 2015 were $217,302, an $89,746 increase, compared to $127,556 for the
year ended December 31, 2014. Total employee cost increased by $44,104 and includes the employee expense for
our acquired entities. The increased employee expense was primarily attributable to the 18 percent increase in
dispensed and serviced prescription volume, combined with the increased clinical and administrative complexity
associated with our mix of business. Amortization expense from definite-lived intangible assets associated with our
acquired entities increased $22,045. The remaining increase was in all other SG&A to support our growth including
public company requirements, consulting fees, software licenses, travel, freight, and other miscellaneous expenses.
As a percent of net sales, SG&A, excluding acquisition-related amortization and the change in fair value of
contingent consideration, accounted for 5.5 percent of net sales for the year ended December 31, 2015 compared to
5.3 percent for the year ended December 31, 2014. This increase was primarily attributable to the more clinically
intensive businesses we have acquired and the additional operating expense associated with servicing those patients,
partially offset by operating efficiencies.
Other Expense
Other expense for the year ended December 31, 2015 was $4,931, compared to $3,377 for the year ended December
31, 2014. Interest expense increased by $2,711 due to increased borrowings during 2015. This increase was partially
offset by the net impact of 2014 non-operating activities that were not applicable in 2015 (change in fair value of
redeemable shares, termination of existing stock redemption agreement, and equity loss and impairment of non-
consolidated entity).
Income Tax Expense
On January 23, 2014, we converted our income tax status from an S corporation to a C corporation. Since such
conversion date, we bear income taxes which had previously been borne by our shareholders. Accordingly, on that
date, we recorded a net deferred income tax liability of $2,965 and a charge to income tax expense for the same
amount. Income tax expense for the years ended December 31, 2015 and 2014 was $16,234 and $4,655,
respectively, resulting in effective tax rates of 40 percent and 51 percent, respectively.
Liquidity and Capital Resources
Our primary uses of cash include funding our ongoing working capital needs, business acquisitions, acquiring and
maintaining property and equipment and internal use software, and debt service. Our primary source of liquidity for
our working capital is cash flows generated from operations. At various times during the course of the year, we may
be in an operating cash usage position, which may require us to use our short-term borrowings. We continuously
monitor our working capital position and associated cash requirements and explore opportunities to more effectively
manage our inventory and capital spending. As of December 31, 2016 and 2015, we had $7,953 and $27,600,
respectively, of cash and cash equivalents. Our cash balances fluctuate based on working capital needs and the
timing of sweeping available cash each day to pay down any outstanding balance on our line of credit, which was
$39,255 and $0 at December 31, 2016 and 2015, respectively. Our available liquidity under our line of credit was
$129,908 and $166,691 at December 31, 2016 and 2015, respectively.
We believe that funds generated from operations, cash and cash equivalents on hand, and available borrowing
capacity under our credit facility will be sufficient to meet our working capital and capital expenditure requirements
for at least the next 12 months. We may enhance our competitive position through additional complementary
acquisitions in both existing and new markets. Therefore, from time to time, we may access the equity or debt
markets to raise additional funds to finance acquisitions or otherwise on a strategic basis.
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The following table provides cash flow data for each of the years presented:
Excess Tax Benefits Related to Share-Based Awards
Net cash provided by (used in) operating activities ........................... $
Net cash used in investing activities .................................................
Net cash provided by financing activities .........................................
Net (decrease) increase in cash and cash equivalents ........................ $
Cash Flows from Operating Activities
Year Ended December 31,
2015
29,447
(311,573)
291,769
9,643
2016
31,326
(85,967)
34,994
(19,647)
$
$
$
$
2014
(9,568)
(66,084)
84,500
8,848
Cash flows from operating activities consists of net income, adjusted for noncash items, and changes in various
working capital items, including accounts receivable, inventories, accounts payable, and other assets/liabilities.
The $1,879 increase in cash provided by operating activities for the year ended December 31, 2016 compared to the
year ended December 31, 2015 was due to a $248 increase in net income and a $51,784 increase in noncash
adjustments to net income, partially offset by a $50,153 increase in net working capital outflows.
The $39,015 increase in cash flow associated with operating activities for the year ended December 31, 2015
compared to the year ended December 31, 2014 was due to a $20,221 increase in net income, a $17,930 decrease in
net working capital outflows, and an $864 increase in noncash adjustments to net income.
Cash Flows from Investing Activities
Our primary investing activities have consisted of business acquisitions, labor expenditures associated with
capitalized software for internal use, investments in non-consolidated entities, capital expenditures to purchase
computer equipment, software, furniture and fixtures, as well as building improvements to support the expansion of
our infrastructure and workforce. As our business grows, our capital expenditures and our investment activity may
continue to increase.
The $225,606 decrease in cash used in investing activities during the year ended December 31, 2016 compared to
the year ended December 31, 2015 was primarily related to a $226,340 decrease in cash used to acquire businesses.
The $245,489 increase in cash used in investing activities during the year ended December 31, 2015 compared to the
year ended December 31, 2014 was primarily related to a $241,897 increase in cash used to acquire businesses.
Cash Flows from Financing Activities
Our primary financing activities have consisted of proceeds from capital stock offerings, payments made to
repurchase capital stock and stock options, debt borrowings and repayments, payment of debt issuance costs, and
proceeds from stock option exercises.
The $256,775 decrease in cash provided by financing activities during the year ended December 31, 2016 compared
to the year ended December 31, 2015 was primarily related to the non-recurrence of the following 2015 activities:
$187,988 in net proceeds from our follow-on public offering and $120,000 in proceeds from the Term Loan A
component of our credit facility (described below), partially offset by $36,298 in payments made to repurchase stock
options.
The $207,269 increase in cash provided by financing activities during the year ended December 31, 2015 compared
to the year ended December 31, 2014 was primarily related to $120,000 in proceeds from entering into our Term
Loan A on April 1, 2015, $10,341 in 2015 proceeds from issuance of stock upon stock option exercises, $62,622 of
net payments on the line of credit in 2014, and the following changes in year-over-year activities: $26,502 decrease
in the repurchase of stock and stock options; and $22,542 decrease in payments on long-term debt; partially offset
by a $44,267 decrease in net proceeds from capital stock offerings.
For accounting principles generally accepted in the U.S. (“U.S. GAAP”) purposes, share-based compensation
expense associated with stock options is based upon recognition of the grant date fair value over the vesting period
of the option. For income tax purposes, share-based compensation tax deductions associated with nonqualified stock
option exercises and repurchases are based upon the difference between the stock price and the exercise price at time
of exercise or repurchase. Prior to our January 1, 2016 adoption of Financial Accounting Standards Board’s
Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting (“ASU 2016-09”) (see Note 3 to our consolidated financial statements,
included in Item 8 of this report), in instances where share-based compensation expense for income tax purposes
was in excess of share-based compensation expense for U.S. GAAP purposes, which had predominately been the
case for us, U.S. GAAP required that the tax benefit associated with this excess expense be recorded to
shareholders’ equity to the extent that it reduced cash taxes payable. During the years ended December 31, 2015 and
2014, we recorded excess tax benefits related to share-based awards of $20,805 and $3,689, respectively, as
increases to shareholders’ equity.
Prior to our adoption of ASU 2016-09, U.S. GAAP also required that excess tax benefits related to share-based
awards be reported as a decrease to cash flows from operating activities and as an increase to cash flows from
financing activities. We reported $20,805 and $3,689 of excess tax benefits related to share-based awards as
decreases to cash flows from operating activities and as increases to cash flows from financing activities for the
years ended December 31, 2015 and 2014, respectively.
Debt
On July 20, 2012, we entered into a credit facility (“facility”) with Capital One that provided for borrowings under a
line of credit of up to $60,000. In 2013, the facility was amended to increase the commitment under the line of credit
to $85,000. In June 2014, the facility was further amended to increase the commitment under the line of credit to
$120,000. On April 1, 2015, in connection with the BioRx acquisition, we entered into a Second Amended and
Restated Credit Agreement with Capital One, as agent and as a lender, the other lenders party thereto, and the other
credit parties party thereto, providing for an increase in our line of credit to $175,000, a fully drawn Term Loan A
for $120,000, and a deferred draw term loan for an additional $25,000 (“credit facility”). The credit facility also
extended the maturity date to April 1, 2020. The credit facility provides for the issuance of letters of credit up to
$10,000 and swingline loans up to $15,000, the issuance and incurrence of which will reduce the availability of the
line of credit. The credit facility is guaranteed by substantially all of our subsidiaries and is collateralized by
substantially all of our and our subsidiaries’ respective assets, with certain exceptions. In addition, we have pledged
the equity of substantially all of our subsidiaries as security for the obligations under the credit facility. We add
newly acquired subsidiaries promptly for purposes of, among other things, the guarantor, collateralization, and
pledge provisions of the credit facility. We are required to maintain a depository bank account where money is
collected and swept directly to the line of credit. We had $111,000 and $117,000 outstanding on Term Loan A at
December 31, 2016 and 2015, respectively. Under our line of credit, we had weighted average borrowings of
$11,986 and $12,022 and maximum borrowings of $82,683 and $78,866 during the years ended December 31, 2016
and 2015, respectively. We had $39,255 and $0 outstanding on our line of credit as of December 31, 2016 and 2015,
respectively. We had $129,908 and $166,691 available to borrow on our line of credit at December 31, 2016 and
2015, respectively.
At December 31, 2016, our Term Loan A interest rate options were (i) LIBOR (as defined) plus 2.50 percent or (ii)
Base Rate (as defined) plus 1.50 percent, and our line of credit and swingline loan interest rate options were (i)
LIBOR (as defined) plus 2.00 percent or (ii) Base Rate (as defined) plus 1.00 percent. Our Term Loan A interest rate
was 3.13 percent and 2.74 percent at December 31, 2016 and 2015, respectively. Our line of credit interest rate was
4.50 percent at December 31, 2016. In addition, we are charged a monthly unused commitment fee ranging from
0.25 percent to 0.50 percent on our average unused daily balance on our $175,000 line of credit and from 0.50
percent to 0.75 percent on our $25,000 deferred draw term loan.
During 2015, we incurred deferred financing costs of $5,055 associated with the credit facility, which were
capitalized. These costs, along with previously unamortized deferred debt issuance costs are being amortized to
interest expense over the term of the credit facility.
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The credit facility contains certain financial and non-financial covenants. We were in compliance with all such
covenants as of December 31, 2016 and 2015.
Contractual Obligations
Our contractual obligations, including estimated payments due by year, as of December 31, 2016 are as follows:
2017
2018
Long-term debt ..................... $ 7,500 $ 9,000 $ 10,500 $ 84,000 $ — $
—
Line of credit ........................ 39,255
842
4,265
Interest payments ..................
704
1,761
Operating leases ....................
Total ..................................... $ 52,781 $ 14,622 $ 15,101 $ 85,546 $
—
—
572
572 $
—
3,643
958
—
3,943
1,679
Thereafter Total
—
—
—
1,559
1,559
$ 111,000
39,255
12,693
7,233
$ 170,181
2020
2019
2021
We purchase a large portion of our prescription drug inventory from AmerisourceBergen. In October 2016, we
amended our contract with AmerisourceBergen, which now expires on September 30, 2018. The amended contract
commits us to a minimum purchase obligation of approximately $2,000,000 per contract year. We fully expect to
meet this requirement.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
customers at an open door or retail pharmacy location are recorded at prescription adjudication, which approximates
fill date. We recognize revenue from service, data, and consulting services when the services have been performed
and the earnings process is therefore complete. Sales taxes are presented on a net basis (excluded from revenues and
costs).
We accrue an estimate of fees, including DIR fees, which are assessed or expected to be assessed by payors at some
point after adjudication of a claim, as a reduction at the time revenue is recognized. Changes in our estimate of such
fees are recorded when the change becomes known.
Business Combinations
The assets acquired and liabilities assumed in a business combination, including identifiable intangible assets, are
based on their estimated fair values as of the acquisition date. The excess of purchase price over the estimated fair
value of the net tangible and identifiable intangible assets acquired is recorded as goodwill. The allocation of the
purchase price requires management to make significant estimates in determining the fair values of assets acquired
and liabilities assumed, especially with respect to intangible assets. These estimates are based on information
obtained from management of the acquired companies and historical experience and are generally made with the
assistance of an independent valuation firm. These estimates can include, but are not limited to, the cash flows that
an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset.
When an acquisition involves contingent consideration, we recognize a liability equal to the fair value of the
contingent consideration obligation as of the acquisition date. The estimate of fair value of a contingent
consideration obligation requires subjective assumptions to be made regarding future business results, discount rates,
and probabilities assigned to various potential business result scenarios.
These estimates are inherently uncertain and unpredictable, and, if different estimates were used, the purchase price
for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we
have made. In addition, unanticipated events and circumstances may occur which affect the accuracy or validity of
such estimates, and, if such events occur, we may be required to record a charge against the value ascribed to an
acquired asset or an increase in the amounts recorded for assumed liabilities.
Critical Accounting Policies
Goodwill
The accompanying consolidated financial statements, included under Item 8 of this report, have been prepared in
conformity with U.S. GAAP and, accordingly, our significant accounting policies have been disclosed in Note 3 to
the consolidated financial statements. Certain of our accounting policies require the application of significant
judgment by our management in selecting the appropriate assumptions for calculating financial estimates. These
policies require the most difficult, subjective, or complex judgments that our management makes in the preparation
of the consolidated financial statements. We consider an accounting estimate to be critical if: (i) the estimates
involve matters that are highly uncertain at the time the accounting estimate is made; and (ii) different estimates or
changes to estimates could have a material impact on the reported financial position, changes in financial position,
or results of operations.
When more than one accounting principle, or the method of its application, is generally accepted, our management
selects the principle or method that it considers to be the most appropriate given the specific circumstances.
Application of these accounting principles requires our management to make estimates about future resolution of
existing uncertainties. Estimates are typically based upon historical experience, current trends, contractual
documentation, and other information, as appropriate. Due to the inherent uncertainty involving estimates, actual
results reported in the future may differ from those estimates. In preparing these financial statements, our
management has made its best estimate and judgments of the amounts and disclosures included in the financial
statements, giving due regard to materiality. Such critical accounting estimates are discussed below.
Revenue Recognition
We recognize revenue from prescription drug sales for home delivery at the time the drugs are shipped. At the time
of shipment, we have performed substantially all of our obligations under our payor contracts and do not experience
a significant level of returns or reshipments. Revenues from dispensing specialty prescriptions that are picked up by
Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if indicators of
impairment exist. Goodwill impairment testing involves a comparison of the estimated fair value of a reporting unit
to its respective carrying amount, which may be performed utilizing either a qualitative or quantitative assessment.
A reporting unit is defined as an operating segment or one level below an operating segment. The qualitative
assessment evaluates various events and circumstances, such as macro-economic conditions, industry and market
conditions, cost factors, relevant events, and financial trends that may impact a reporting unit’s fair value. If it is
determined that the estimated fair value of the reporting unit is more likely than not less than the carrying amount,
including goodwill, a quantitative assessment is required. Otherwise, no further analysis is necessary.
If a quantitative assessment is performed, step one is to determine the fair value of a reporting unit and then compare
its fair value to its carrying value. A reporting unit’s fair value is determined based upon consideration of various
valuation methodologies, including the income approach which utilizes projected future cash flows discounted at
rates commensurate with the risks involved, and multiples of current and future earnings. If the fair value of a
reporting unit is less than its carrying amount, an indication of goodwill impairment exists and step two of the
quantitative assessment is required. Under step two, a goodwill impairment loss is recognized for any excess of the
carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of a reporting unit in a manner similar to a purchase price
allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred.
Such indicators may include, among others: a significant decline in expected future cash flows; a significant adverse
change in legal factors or in the business climate; unanticipated competition; and the testing for recoverability of a
significant asset group within a reporting unit. Our goodwill impairment analysis also includes a comparison of the
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aggregate estimated fair value of all reporting units to our total market capitalization. Therefore, our stock may trade
below our book value and a significant and sustained decline in our stock price and market capitalization could
result in goodwill impairment charges. Any adverse change in these factors could have a significant impact on the
recoverability of these assets and could have a material impact on our consolidated financial statements.
The income approach used to test our reporting units includes the projection of estimated operating results and cash
flows, discounted using a weighted-average cost of capital (“WACC”) that reflects current market conditions
appropriate to each reporting unit. Such projections contain management’s best estimates of economic and market
conditions over the projected period, including growth rates in revenues and costs and best estimates of future
expected changes in operating margins and cash expenditures. Other significant assumptions and estimates used in
the income approach include terminal value growth rates, future estimates of capital expenditures, and changes in
future working capital requirements. In addition, the WACC utilized to discount estimated future cash flows is
sensitive to changes in interest rates and other market rates in place at the time the assessment is performed. Future
changes in our estimates or assumptions or in interest rates could have a significant impact on the estimated fair
value of reporting units and result in a goodwill impairment charge that could be material to our consolidated
financial statements.
We performed a quantitative assessment during the fourth quarter of 2016. The following table contains our step one
results:
Fair Value
Exceeds
Carrying
Value
30%
11%
Reporting unit 1 ................
Reporting unit 2 ................
Goodwill
$ 216,385
100,231
$ 316,616
The market price of our common stock experienced significant fluctuations during 2016. Our market capitalization
significantly exceeded our total book value for most of 2016 and as of our annual impairment test date. However,
continued fluctuations could result in our market capitalization dropping below book value. A significant and
sustained decline in our common stock price and market capitalization could result in a goodwill impairment charge
that could be material to our consolidated financial statements. See the New Accounting Pronouncements section of
Note 3 to our consolidated financial statements, included in Item 8 of this report, regarding the simplification of the
goodwill impairment test that we intend to early adopt on January 1, 2017.
Long-Lived Assets
Long-lived assets, such as capitalized software for internal use, property and equipment, and definite-lived
intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. In assessing long-lived assets for impairment, assets are grouped with
other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash
flows of other assets and liabilities. If circumstances require a long-lived asset or asset group to be tested for
possible impairment, we compare the undiscounted cash flows expected to be generated by that asset or asset group
to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an
undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds its
fair value. Fair values of long-lived assets are determined through various techniques, such as applying probability
weighted, expected present value calculations to the estimated future cash flows using assumptions a market
participant would utilize, or through the use of a third-party independent appraiser or valuation specialist.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts that reduces receivables to amounts that we expect to be collected.
In estimating this allowance, we consider overall economic conditions, historical and anticipated customer
performance, historical experience with write-offs, and the level of past due accounts. Our general policy for
uncollectible accounts, if not reserved through specific examination procedures, is to reserve based upon the aging
categories of accounts receivable. Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote.
Share-Based Compensation
We grant stock options to key employees, which are accounted for as equity awards. The exercise price of a granted
stock option is equal to the closing market stock price of the underlying common share as of the date the option is
granted. Options generally become exercisable in installments of 25 percent per year, beginning on the first
anniversary of the grant date and each of the three anniversaries thereafter, and have a maximum term of 10 years.
Certain stock option grants have performance-based conditions, which require the satisfaction of one-year revenue
and Adjusted EBITDA goals prior to vesting. We use the Black-Scholes-Merton option pricing model to determine
the grant date fair value of options.
We expense the grant date fair values of our employee stock options over their respective vesting periods on a
straight-line basis. Estimating grant date fair values for employee stock options requires management to make
assumptions regarding expected volatility of the underlying shares, the risk-free rate over the expected life of the
stock options, and the length of time in years that the granted options are expected to be outstanding. Due to our
limited history as a public company, expected volatility is based on an implied volatility for a group of
industry-relevant healthcare companies as of the measurement date. Risk-free rate is determined based upon U.S.
Treasury rates over the estimated expected option lives. Expected dividend yield is zero as we do not anticipate
declaring a dividend during the expected term of the options. Expected option life is calculated using the simplified
method (the midpoint between the end of the vesting period and the end of the maximum term) because we do not
have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to
the limited period of time such awards have been outstanding. If actual results differ significantly from these
estimates and assumptions, particularly in relation to management’s estimation of volatility which requires the most
judgment due to our limited history as a public entity, share-based compensation expense, primarily with respect to
future share-based awards, could be materially impacted.
We grant restricted stock awards to non-employee directors. Such restricted stock fully vests on the first anniversary
of the grant date. The grant date fair value of a restricted stock award is determined by the closing market price of
our common stock as of the date of grant. We expense the grant date fair values of restricted stock over the one year
vesting period on a straight-line basis.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We provide
a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than
not that the deferred tax assets will be realized.
Prior to January 23, 2014, we had elected to be taxed under the provisions of Subchapter S of the Internal Revenue
Code. Under these provisions, we did not pay federal corporate income taxes on our taxable income. Instead, the
shareholders were liable for individual federal income taxes on their respective shares of our taxable income.
Distributions were made periodically to our shareholders to the extent needed to cover their income tax liability
based on our taxable income.
We prepare and file tax returns based on interpretations of tax laws and regulations. In the normal course of
business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in
future tax and interest assessments by these taxing authorities. In determining our tax provision for financial
reporting purposes, we establish a reserve for examination, based on their technical merits. That is, for reporting
purposes, we only recognize tax benefits taken on the tax return if we believe it is more likely than not that such tax
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positions would be sustained. There is considerable judgment involved in determining whether it is more likely than
not that such tax positions would be sustained. As of both December 31, 2016 and 2015, we had unrecognized tax
benefits of $268; all of which, if recognized, would reduce both tax expense and the effective tax rate.
We adjust our tax reserve estimates periodically because of ongoing examinations by, and settlements with, varying
taxing authorities, as well as changes in tax laws, regulations, and interpretations. The consolidated tax provision of
any given year includes adjustments to prior year income tax accruals and related estimated interest charges that are
considered appropriate. Our policy is to recognize, when applicable, interest and penalties on uncertain income tax
positions as part of income tax expense.
Recently Issued Accounting Standards to be Implemented
See Note 3 to our consolidated financial statements, included in Item 8 of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operations are solely in the U.S. and U.S. territories and are exposed to market risks in the ordinary course of
our business. These risks primarily include interest rate and certain exposure, as well as risks relating to changes in
the general economic conditions in the U.S. We are exposed to interest rate fluctuations with regard to future
issuances of fixed-rate debt, and existing and future issuances of floating-rate debt. Primary exposures include the
U.S. Prime Rate and LIBOR related to debt outstanding under our credit facility. In the past, we used interest rate
swaps to reduce the volatility of our financing costs and to achieve a desired proportion of fixed and floating-rate
debt. We did not use these interest rate swaps for trading or other speculative purposes. We currently are not using
any interest rate swaps, but may in the future. A 100 basis-point increase in 2016 interest rates would have decreased
our 2016 pre-tax income by approximately $1.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our
Company’s internal control over financial reporting includes those policies and procedures that pertain to the
Company’s ability to record, process, summarize, and report a system of internal accounting controls and procedures
to provide reasonable assurance, at an appropriate cost/benefit relationship, that the unauthorized acquisition, use, or
disposition of assets are prevented or timely detected and that transactions are authorized, recorded, and reported
properly to permit the preparation of financial statements in accordance with generally accepted accounting
principles in the United States of America and receipt and expenditures are duly authorized. Management of the
Company is required to assess the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016.
As allowed pursuant to guidance from the Securities and Exchange Commission (which states that management may
omit an assessment of an acquired business’ internal control over financial reporting from its assessment of internal
control over financial reporting for a period not to exceed one year), our assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the internal controls of Valley Campus
Pharmacy, Inc., doing business as TNH Advanced Specialty Pharmacy (“TNH”), which was acquired on June 1,
2016, and which is included in the consolidated balance sheet of Diplomat Pharmacy, Inc. as of December 31, 2016,
and the related consolidated statements of operations, cash flows, and changes in shareholders’ equity for the year
then ended. From June 1, 2016 through December 31, 2016, TNH’s net sales represented approximately 6 percent of
consolidated net sales for the year ended December 31, 2016. As of December 31, 2016, TNH’s total assets
represented approximately 10 percent of consolidated total assets.
We conducted an assessment of the effectiveness of our internal controls over financial reporting based on the
criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 Framework). This evaluation included review of the documentation, evaluation of
the design effectiveness, and testing of the operating effectiveness of controls. Our system of internal control over
financial reporting is enhanced by written policies and procedures and a written Code of Conduct adopted by our
Company’s Board of Directors, applicable to all employees of our Company. In addition, we have an internal
Disclosure Committee, which performs a separate review of our disclosure controls and procedures. There are
inherent limitations in the effectiveness of any system of internal controls over financial reporting.
Based on our assessment, we concluded that the Company’s internal control over financial reporting was not
effective as of December 31, 2016.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis. During the fourth quarter of 2016, we have identified
a material weakness in the operating effectiveness of our evaluation and review of recorded inventory balances.
Specifically, at certain locations the initial costs used to value ending inventories were not correct and we did not
initially identify all items necessary to accurately complete our inventory reconciliation.
Management is actively implementing a remediation plan to ensure that deficiencies contributing to the material
weakness are remediated such that these controls will operate effectively, which includes steps to strengthen our
inventory costing and reconciliation controls. The remediation actions we are taking, and expect to take, include:
additional testing of the pricing file utilized to cost physical inventories; and strengthening the depth and breadth of
review of the inventory reconciliation by senior accounting and finance personnel.
The Company has concluded that these remediation efforts will represent significant improvements to our internal
control over financial reporting. The Company has started to implement these steps, however, some of these steps
will take time to fully integrate and confirm the effectiveness and sustainability of such procedures. Additional
56
57
controls may also be required over time. Until the remediation steps set forth above are fully implemented and
tested, the material weakness described above will continue to exist.
BDO USA, LLP, the Company’s independent registered public accounting firm, that audited the Company’s
consolidated financial statements included in this annual report on Form 10-K also audited the Company’s system of
internal control over financial reporting. The accompanying reports of BDO USA, LLP are based upon audits
conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Diplomat Pharmacy, Inc.
Flint, Michigan
We have audited Diplomat Pharmacy, Inc.’s internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Diplomat Pharmacy, Inc.’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying “Item 8,
Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following material weakness has been identified
and described in management's assessment. The Company identified a material weakness in the operating
effectiveness of its evaluation and review of recorded inventory balances. Specifically, at certain locations the initial
costs used to value the Company’s ending inventories were not correct and the Company did not initially identify all
items necessary to accurately complete its inventory reconciliation. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit of the 2016 financial statements, and
this report does not affect our report dated March 8, 2017 on those financial statements.
As indicated in the accompanying “Item 8, Management’s Report on Internal Control Over Financial Reporting”,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of Valley Campus Pharmacy, Inc., doing business as TNH Advanced Specialty
Pharmacy (“TNH”), and which is included in the consolidated balance sheet of Diplomat Pharmacy, Inc. as of
December 31, 2016, and the related consolidated statements of operations, cash flows, and changes in shareholders’
equity for the year then ended. From June 1, 2016 through December 31, 2016, TNH’s combined net sales
represented approximately 6 percent of consolidated net sales for the year ended December 31, 2016. As of
58
59
December 31, 2016, TNH’s total assets represented approximately 10 percent of consolidated total assets.
Management did not assess the effectiveness of internal control over financial reporting of TNH because of the
timing of this acquisition, which was completed on June 1, 2016. Our audit of internal control over financial
reporting of Diplomat Pharmacy, Inc. also did not include an evaluation of the internal control over financial
reporting of TNH.
In our opinion, Diplomat Pharmacy, Inc. did not maintain, in all material respects, effective internal control over
financial reporting as of December 31, 2016, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any
corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Diplomat Pharmacy, Inc. as of December 31, 2016 and 2015 and the
related consolidated statements of operations, cash flows, and changes in shareholders’ equity (deficit) for each of
the three years in the period ended December 31, 2016 and our report dated March 8, 2017 expressed an unqualified
opinion thereon.
/s/ BDO USA, LLP
Troy, Michigan
March 8, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Diplomat Pharmacy, Inc.
Flint, Michigan
We have audited the accompanying consolidated balance sheets of Diplomat Pharmacy, Inc. as of December 31,
2016 and 2015 and the related consolidated statements of operations, cash flows, and changes in shareholders’
equity (deficit) for each of the three years in the period ended December 31, 2016. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used, and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Diplomat Pharmacy, Inc. at December 31, 2016 and 2015, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Diplomat Pharmacy, Inc.’s internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 8, 2017 expressed an adverse
opinion thereon.
/s/ BDO USA, LLP
Troy, Michigan
March 8, 2017
60
61
DIPLOMAT PHARMACY, INC.
Consolidated Balance Sheets
(Dollars in thousands)
DIPLOMAT PHARMACY, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
December 31,
2016
December 31,
2015
Current assets:
ASSETS
Cash and equivalents ............................................................................................. $
Accounts receivable, net ........................................................................................
Inventories .............................................................................................................
Deferred income taxes ...........................................................................................
Prepaid expenses and other current assets .............................................................
Total current assets .......................................................................................
Property and equipment, net ......................................................................................
Capitalized software for internal use, net ..................................................................
Goodwill ....................................................................................................................
Definite-lived intangible assets, net ...........................................................................
Investment in non-consolidated entity .......................................................................
Other noncurrent assets .............................................................................................
$
7,953
275,568
215,351
14,703
6,235
519,810
20,372
50,247
316,616
199,862
300
740
27,600
254,682
165,950
5,311
7,427
460,970
16,538
37,250
256,318
224,644
4,959
900
Total assets ................................................................................................... $ 1,107,947
$ 1,001,579
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable ................................................................................................... $
Borrowings on line of credit ..................................................................................
Short-term debt, including current portion of long-term debt ................................
Accrued expenses:
Compensation and benefits ................................................................................
Contingent consideration ...................................................................................
Other ..................................................................................................................
Total current liabilities .................................................................................
Long-term debt, less current portion .........................................................................
Deferred income taxes ...............................................................................................
Total liabilities .............................................................................................
$
320,684
39,255
7,500
5,674
—
12,233
385,346
100,184
8,693
494,223
296,587
—
6,000
5,563
52,665
11,087
371,902
106,706
7,425
486,033
Commitments and contingencies
Shareholders’ equity:
Preferred stock (10,000,000 shares authorized; none issued and outstanding) ......
Common stock (no par value; 590,000,000 shares authorized; 66,764,999 and
64,523,864 shares issued and outstanding at December 31, 2016 and 2015,
respectively) .......................................................................................................
Additional paid-in capital ......................................................................................
Retained earnings ..................................................................................................
Total Diplomat Pharmacy shareholders’ equity.....................................................
Noncontrolling interests ............................................................................................
Total shareholders’ equity ............................................................................
—
—
503,828
33,268
76,306
613,402
322
613,724
451,620
29,221
31,130
511,971
3,575
515,546
Total liabilities and shareholders’ equity ..................................................... $ 1,107,947
$ 1,001,579
See accompanying notes to consolidated financial statements.
Net sales ..................................................................................... $ 4,410,388
Cost of products sold .................................................................. (4,085,560)
324,828
(277,751)
47,077
Gross profit .........................................................................
Selling, general, and administrative expenses ..............................
Income from operations .......................................................
2016
Year Ended December 31,
2015
$ 3,366,631
(3,103,392)
263,239
(217,302)
45,937
2014
$ 2,214,956
(2,074,817)
140,139
(127,556)
12,583
Other (expense) income:
Interest expense ......................................................................
Equity loss and impairment of non-consolidated entities ..........
Change in fair value of redeemable common shares .................
Termination of existing stock redemption agreement ...............
Other ......................................................................................
Total other expense.....................................................................
Income before income taxes .................................................
Income tax expense ....................................................................
Net income ..........................................................................
Less net loss attributable to noncontrolling interest ......................
Net income attributable to Diplomat Pharmacy, Inc. ....................
Net income allocable to preferred shareholders ...........................
Net income allocable to common shareholders ............................ $
(6,573)
(4,659)
—
—
370
(10,862)
36,215
(11,195)
25,020
(3,253)
28,273
—
28,273
$
(5,239)
—
—
—
308
(4,931)
41,006
(16,234)
24,772
(1,004)
25,776
—
25,776
$
(2,528)
(6,208)
9,073
(4,842)
1,128
(3,377)
9,206
(4,655)
4,551
(225)
4,776
458
4,318
Net income per common share:
Basic .......................................................................................... $
Diluted ....................................................................................... $
0.43
0.42
$
$
0.42
0.41
$
$
0.12
0.11
Weighted average common shares outstanding:
Basic .......................................................................................... 65,970,396
Diluted ....................................................................................... 68,047,723
60,730,133
63,096,951
36,012,592
38,553,995
See accompanying notes to consolidated financial statements.
62
63
DIPLOMAT PHARMACY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
DIPLOMAT PHARMACY, INC.
Cons olidated S tatement of Changes in Shareholders ' Equity (Deficit)
(Dollars in thousands )
Common Stock
Class A
Clas s B
No Par
Shares
Amount
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
(Accumulated
Deficit)
Total
Diplomat
Pharmacy, Inc.
Shareholders '
Equity (Deficit)
Total
Noncontrolling
Interes t
Shareholders'
Equity (Deficit)
$
4,186
$
(81,972)
$
(77,782)
$
-
$
(77,782)
Balance at January 1, 2014
Net income (los s)
Reclassification of S Corporation accumulated deficit
Repurchas e of shares of common stock
Removal of common stock redemption features
Repurchas e of stock options
Issuance of shares of Class B common stock as partial
1,657,500
$
-
31,492,500
$
4
—
—
—
—
—
—
—
—
—
—
—
—
(2,850,407)
425,000
—
—
—
—
—
—
cons ideration of MedPro Rx, Inc. aquis ition
—
—
716,695
—
Issuance of shares of Class B common stock in
connection with termination of existing stock
redemption agreement
Capital investment in s ubs idiary
by noncontrolling s hareholders
Share-based compensation expense
Excess tax benefits related to s hare-bas ed awards
Proceeds from initial public offering, net of is suance costs
Conversion of capital stock into new shares :
Redeemable common stock
Series A Preferred Stock
Class A and B common s tock
Reclass ification of capital
Restricted stock awards
Balance at December 31, 2014
Net income (los s)
Proceeds from follow-on public offering, net of iss uance cos ts
Repurchas e of stock options
Issuance of shares of no par common s tock as partial
—
—
372,486
—
—
—
—
—
—
—
(1,657,500)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(30,156,274)
—
—
—
—
—
—
—
—
—
—
—
—
(4)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,000,000
2,423,616
6,211,356
31,813,774
—
8,277
—
—
—
—
—
—
—
—
—
—
31,507
101,815
4
15,575
—
51,457,023
148,901
—
6,821,125
—
—
187,988
(34,194)
—
12,000
—
4,842
cons ideration of BioRx, LLC aquisition
—
—
—
—
4,038,853
125,697
—
Issuance of shares of no par common s tock as partial
cons ideration of Burman's Apothecary, LLC aquisition
Stock is sued upon s tock option exercis es
Excess tax benefits related to s hare-bas ed awards
Share-based compensation expense
Restricted stock awards
Balance at December 31, 2015
Adoption of ASU 2016-09 (Note 3)
Net income (los s)
Issuance of shares of no par common s tock upon full
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
253,036
1,943,022
—
—
10,805
9,578
13,650
—
—
—
—
(3,309)
20,805
3,936
—
64,523,864
451,620
29,221
—
—
—
—
contingent cons ideration payout
—
—
—
—
1,346,282
36,888
Issuance of shares of no par common s tock as partial
cons ideration of Valley Campus Pharmacy, Inc. aquisition
Stock is sued upon s tock option exercis es
Share-based compensation expense
Restricted stock awards
Balance at December 31, 2016
—
—
—
—
—
—
—
—
—
$
-
—
—
—
—
—
—
—
—
—
324,244
564,844
—
5,765
9,507
5,813
—
—
—
(82,550)
(47,726)
7,116
(9,400)
—
2,871
3,689
130,440
—
—
—
(15,575)
—
9,893
—
—
(2,104)
—
—
—
—
(1,365)
5,412
—
4,776
82,550
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,354
25,776
—
—
—
—
—
—
—
—
31,130
16,903
28,273
—
—
—
—
—
4,776
—
(47,726)
7,116
(9,400)
(225)
—
—
—
—
4,551
—
(47,726)
7,116
(9,400)
12,000
—
12,000
4,842
—
2,871
3,689
130,440
31,507
101,815
—
—
—
164,148
25,776
187,988
(36,298)
—
4,804
—
—
—
—
—
—
—
—
4,579
(1,004)
—
—
4,842
4,804
2,871
3,689
130,440
31,507
101,815
—
—
—
168,727
24,772
187,988
(36,298)
125,697
—
125,697
9,578
10,341
20,805
3,936
—
511,971
16,903
28,273
36,888
9,507
4,448
5,412
—
—
—
—
—
—
9,578
10,341
20,805
3,936
—
3,575
515,546
(3,253)
—
—
—
—
—
16,903
25,020
36,888
9,507
4,448
5,412
—
$
-
66,764,999
$
503,828
$
33,268
$
76,306
$
613,402
$
322
$
613,724
See accompanying notes to cons olidated financial statements.
Cash flows from operating activities:
Net income .............................................................................................................. $ 25,020
Adjustments to reconcile net income to net cash provided by (used in)
$ 24,772
$
4,551
Year Ended December 31,
2015
2016
2014
operating activities:
Depreciation and amortization ..........................................................................
Net provision for doubtful accounts..................................................................
Changes in fair value of contingent consideration ............................................
Contingent consideration payments ..................................................................
Deferred income tax expense (benefit) .............................................................
Share-based compensation expense ..................................................................
Impairment expense ..........................................................................................
Equity loss and impairment of non-consolidated entities..................................
Amortization of debt issuance costs..................................................................
Excess tax benefits related to share-based awards ............................................
Change in fair value of redeemable common shares .........................................
Termination of existing stock redemption agreement .......................................
Other .................................................................................................................
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable ...................................................................................
Inventories ..................................................................................................
Accounts payable .......................................................................................
Other assets and liabilities ..........................................................................
Net cash provided by (used in) operating activities ................................
Cash flows from investing activities:
Payments to acquire businesses, net of cash acquired .............................................
Expenditures for capitalized software for internal use ............................................
Expenditures for property and equipment ...............................................................
Capital investments in and loans to non-consolidated entities ................................
Other .......................................................................................................................
Net cash used in investing activities .......................................................
Cash flows from financing activities:
Net proceeds from (payments on) line of credit ......................................................
Payments on long-term debt....................................................................................
Proceeds from issuance of stock upon stock option exercises .................................
Contingent consideration payments ........................................................................
Payments of debt issuance costs..............................................................................
Proceeds from public offering, net of transaction costs...........................................
Proceeds from long-term debt .................................................................................
Payments made to repurchase stock options ...........................................................
Excess tax benefits related to share-based awards ..................................................
Proceeds from sale of preferred stock, net of transaction costs ...............................
Payments made to repurchase common stock .........................................................
Net cash provided by financing activities ...............................................
50,045
9,534
(8,922)
(4,174)
8,779
5,412
4,804
4,659
1,176
—
—
—
2
(15,128)
(44,342)
(5,906)
367
31,326
(67,156)
(12,595)
(6,217)
—
1
(85,967)
39,255
(6,000)
4,448
(2,681)
(28)
—
—
—
—
—
—
34,994
Net (decrease) increase in cash and equivalents .....................................
(19,647)
Cash and equivalents at beginning of year .....................................................................
27,600
30,841
5,990
6,724
(3,738)
(4,615)
3,936
150
—
963
(20,805)
—
—
85
(50,771)
(41,657)
43,202
34,370
29,447
(293,496)
(12,021)
(4,624)
(1,459)
27
(311,573)
—
(3,000)
10,341
(3,012)
(5,055)
187,988
120,000
(36,298)
20,805
—
—
291,769
9,643
17,957
8,139
4,045
6,121
—
(1,295)
2,871
—
6,208
366
(3,689)
(9,073)
4,842
132
(43,130)
(50,334)
56,505
4,173
(9,568)
(51,599)
(9,470)
(1,487)
(4,000)
472
(66,084)
(62,622)
(25,542)
—
—
(480)
130,440
—
(9,400)
3,689
101,815
(53,400)
84,500
8,848
9,109
Cash and equivalents at end of year ............................................................................... $
7,953
$ 27,600
$ 17,957
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................................................................... $
Cash paid for income taxes ......................................................................................
5,273
728
$
3,949
351
$
2,248
5,924
See accompanying notes to condensed consolidated financial statements.
64
65
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
1. DESCRIPTION OF BUSINESS
Diplomat Pharmacy, Inc. and its consolidated subsidiaries (the “Company”) operate a specialty pharmacy business
that stocks, dispenses, and distributes prescriptions for various biotechnology and specialty pharmaceutical
manufacturers. Its primary focus is on medication management programs for individuals with complex chronic
diseases. Disease states covered include oncology, immunology, hepatitis, specialty infusion therapy, multiple
sclerosis, and many other serious or long-term conditions. The Company has its corporate headquarters and main
distribution facility in Flint, Michigan, and operates 19 other pharmacy locations in Arizona, California,
Connecticut, Florida, Illinois, Iowa, Maryland, Massachusetts, Michigan, Minnesota, North Carolina, Ohio,
Pennsylvania, and Texas. The Company also has centralized call centers to effectively deliver services to customers
located in all 50 states in the United States of America (“U.S.”) and U.S. territories.
common shareholders of record. Accordingly, all share and per share amounts in these consolidated financial
statements and notes thereto, were adjusted, where applicable, to reflect the stock split on a retroactive basis.
Effect of Conversion from S Corporation to C Corporation
On January 23, 2014, the Company converted its income tax status from an S corporation to a C corporation.
Accordingly, on that date, the Company recorded a net deferred income tax liability of $2,965 and a charge to
income tax expense for the same amount. The Company reclassified its accumulated deficit, inclusive of the net
deferred tax liability adjustment, into additional paid-in capital on the date of conversion.
Reclassifications
Initial Public Offering
Certain items in the prior periods’ financial statements have been reclassified to conform to the current presentation.
In October 2014, the Company completed its initial public offering (“IPO”), in which 15,333,333 shares of common
stock were sold at a public offering price of $13.00 per share. The Company sold 11,000,000 shares of common
stock, and certain existing shareholders sold 4,333,333 shares of common stock. The Company did not receive any
proceeds from the sale of common stock by the existing shareholders. The Company received net proceeds of
$130,440 after deducting underwriting discounts and commissions of $9,652, and other offering expenses of $2,908.
Proceeds of $80,458 were used to repay existing indebtedness to certain current or former shareholders and
employees ($19,824), and borrowings under the line of credit ($60,634). The remaining proceeds were used for
working capital and other general corporate purposes.
Immediately prior to the closing of the IPO, each share of the Company’s then-outstanding capital stock converted
into one share of its newly-authorized shares of no par value common stock. Refer to notes 15, 16, and 17.
Follow-On Public Offering
In March 2015, the Company completed a public equity offering, in which 9,821,125 shares of common stock were
sold at $29.00 per share. The Company sold 6,821,125 shares of common stock, and certain existing shareholders
sold 3,000,000 shares of common stock. The Company did not receive any proceeds from the sale of common stock
by the existing shareholders. The Company received net proceeds of $187,988 after deducting underwriting
discounts and commissions of $9,141, and other offering expenses of $685. The Company used $36,298 of the net
proceeds to repurchase options to purchase common stock held by a number of current and former employees,
including certain executive officers, with the remainder of the proceeds used to pay a portion of the cash
consideration for the BioRx, LLC (“BioRx”) acquisition (Note 4). The purchase price for each stock option
repurchased was based on the public offering price per share, net of the underwriting discount and each individual’s
exercise price.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Diplomat Pharmacy, Inc., its wholly owned
subsidiaries, and a 51 percent owned subsidiary, formed in August 2014, which the Company controls. The
Company also owns a 25 percent interest in a non-consolidated entity which is accounted for under the equity
method of accounting since the Company does not control the entity but has the ability to exercise significant
influence over its operating and financial policies. This equity method investment was fully impaired during the
fourth quarter of 2014 (Note 9). An investment in an entity in which the Company owns less than 20 percent and
does not have the ability to exercise significant influence is accounted for under the cost method. This cost method
investment was impaired during the fourth quarter of 2016 (Note 9).
Noncontrolling interest in a consolidated subsidiary in the consolidated balance sheets represents the minority
shareholders’ proportionate share of the equity in such subsidiary. Consolidated net income (loss) is allocated to the
Company and noncontrolling interests (i.e., minority shareholders) in proportion to their percentage ownership.
All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be based upon amounts that differ from these estimates.
2. BASIS OF PRESENTATION
Concentrations of Risk
The accompanying consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the U.S. (“U.S. GAAP”) and the applicable rules and regulations of the Securities and
Exchange Commission (“SEC”).
Stock Split
In October 2014, immediately prior to the completion of the IPO, the Board of Directors declared and approved a
8,500-for-one stock split, effected in the form of a stock dividend, on each share of common stock outstanding to the
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of
cash on deposit with banks or other financial institutions and trade accounts receivable.
A federal program provides non-interest bearing cash balances insurance coverage up to $250 per depositor at each
financial institution. The Company’s cash balances may exceed federally insured limits.
Concentration of credit risk with respect to trade accounts receivable is limited by the large number of patients
comprising the Company’s customer base and their dispersion across multiple payors and multiple geographic areas.
No single payor customer accounted for more than 10 percent of net sales for any period presented or trade accounts
receivable at December 31, 2016 and 2015.
66
67
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
The Company purchases a significant portion of its prescription drug inventory from AmerisourceBergen, a
prescription drug wholesaler. These purchases accounted for approximately 49 percent, 50 percent, and 57 percent
of cost of products sold for the years ended December 31, 2016, 2015, and 2014, respectively. The Company has
alternative vendors available if necessary. See Note 14 for discussion of the Company’s minimum purchase
obligation with AmerisourceBergen.
The Company purchases certain prescription drugs from Celgene Corporation (“Celgene”) and Pharmacyclics, Inc.
(“Pharmacyclics”), drug manufacturers. Purchases from Celgene and Pharmacyclics accounted for approximately 13
percent and 10 percent, 12 percent and 9 percent, and 15 percent and 7 percent of cost of products sold for the years
ended December 31, 2016, 2015, and 2014, respectively, with no minimum purchase obligation. The specialty drugs
that the Company purchases from Celgene and Pharmacyclics are not available from any other source.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less from the date of
purchase to be cash equivalents.
Accounts Receivable, net
Trade accounts receivable are stated at the invoiced amount. Trade accounts receivable primarily include amounts
from third-party pharmacy benefit managers and insurance providers and are based on contracted prices. Trade
accounts receivable are unsecured and require no collateral. Trade accounts receivable terms vary by payor, but
generally are due within 30 days after the sale of the product or performance of the service.
The Company maintains an allowance for doubtful accounts that reduces receivables to amounts that are expected to
be collected. In estimating the allowance, management considers factors such as current overall economic
conditions, historical and anticipated customer performance, historical experience with write-offs, and the level of
past due accounts. The Company’s general policy for uncollectible accounts, if not reserved through specific
examination procedures, is to reserve based upon the aging categories of accounts receivable. Account balances are
charged off against the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote.
Activity in the allowance for doubtful accounts was as follows:
Beginning balance ................................................................ $ (8,123) $ (3,043)
(9,534) (5,990)
910
2,400
Ending balance ..................................................................... $ (15,257) $ (8,123)
Charged to expense ........................................................
Write-offs, net of recoveries ...........................................
Year Ended December 31,
2014
2015
2016
$
(849)
(4,045)
1,851
$ (3,043)
Inventories
Inventories consist of prescription and over-the-counter medications and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method. Prescription medications are returnable to the Company’s
vendors and fully refundable before six months of expiration, and any remaining expired medication is relieved from
inventory on a quarterly basis.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed on a
straight-line basis over the estimated useful lives of the assets. The costs of leasehold improvements are depreciated
either over the life of the improvement or the lease term, whichever is shorter. For income tax purposes, accelerated
methods of depreciation are generally used. Significant improvements are capitalized, and disposed or replaced
property is written off. Maintenance and repairs are charged to expense in the period they are incurred. When items
of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the
accounts, and any gain or loss is included in earnings.
Capitalized Software for Internal Use, net
The Company capitalizes certain development costs primarily related to a custom-developed, proprietary, scalable
patient care system. The Company expenses the costs incurred during the preliminary project stage, and capitalizes
the direct development costs, including the associated payroll and related costs for employees and outside
contractors working on development, during the application development stage. The Company monitors
development on an ongoing basis and capitalizes the costs of any major improvements or that result in significant
additional functionality.
Capitalized internal use software costs are amortized on a straight-line basis over the estimated useful lives of the
assets, generally three to five years. For income tax purposes, accelerated methods of amortization are generally
used. Management evaluates the useful lives of these assets on an annual basis.
Definite-Lived Intangible Assets, net
Definite-lived intangible assets consist of assets related to acquisitions and are amortized over their estimated useful
lives using an accelerated method for patient and physician relationships, and the straight line method for the
remaining intangible assets.
Long-Lived Assets
Long-lived assets, such as property and equipment, capitalized software for internal use, and definite-lived
intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be
tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated by that
asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not
recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying
amount exceeds fair value. Fair values of long-lived assets are determined through various techniques, such as
applying probability weighted, expected present value calculations to the estimated future cash flows using
assumptions a market participant would utilize, or through the use of a third-party independent appraiser or
valuation specialist.
Goodwill
Goodwill represents the excess acquisition cost of an acquired entity over the estimated fair values of the net
tangible assets and the identifiable intangible assets acquired. Goodwill is not amortized, but rather is reviewed for
impairment annually during the fourth quarter, or more frequently if facts or circumstances indicate that the carrying
value may not be recoverable.
An entity has the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the
fair value of the reporting unit is less than its carrying amount prior to performing a quantitative impairment test.
The qualitative assessment evaluates various events and circumstances, such as macro-economic conditions,
industry and market conditions, cost factors, relevant events and financial trends that may impact a reporting unit’s
fair value. If it is determined that the estimated fair value of the reporting unit is more-likely-than-not less than its
carrying amount, including goodwill, a quantitative assessment is required. Otherwise, no further analysis is
necessary.
If a quantitative assessment is performed, step one is to compare a reporting unit’s fair value to its carrying value. A
reporting unit’s fair value is determined based upon consideration of various valuation methodologies, including the
68
69
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
income approach which utilizes projected future cash flows discounted at rates commensurate with the risks
involved, and multiples of current and future earnings. If the fair value of a reporting unit is less than its carrying
amount, an indication of goodwill impairment exists and the Company must perform step two of the quantitative
assessment. Under step two, a goodwill impairment loss is recognized for any excess of the carrying amount of a
reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of a reporting unit in a manner similar to a purchase price allocation and the
residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
See the New Accounting Pronouncements section of this Note regarding the simplification of the goodwill
impairment test that the Company intends to early adopt on January 1, 2017.
Debt Issuance Costs
Costs incurred related to the issuance of the Company’s credit facility were deferred and are being amortized to
interest expense over the term of the agreement.
Revenue Recognition
The Company recognizes revenue from prescription drug sales for home delivery at the time the drugs are shipped.
At the time of shipment, the Company has performed substantially all of its obligations under its payor contracts and
does not experience a significant level of returns or reshipments. Revenues from dispensing specialty prescriptions
that are picked up by patients at an open-door or retail pharmacy location are recorded at prescription adjudication,
which approximates the fill date. Sales taxes are presented on a net basis (excluded from revenues and costs).
Revenues generated from prescription drug sales were $4,386,643, $3,346,652, and $2,202,299 for the years ended
December 31, 2016, 2015, and 2014, respectively.
The Company accrues an estimate of fees, including direct and indirect remuneration fees (“DIR fees”), which are
assessed or expected to be assessed by payors at some point after adjudication of a claim, as a reduction at the time
revenue is recognized. Changes in the Company’s estimate of such fees are recorded when the change becomes
known.
The Company recognizes revenue from service, data, and consulting services when the services have been
performed and the earnings process is therefore complete. Revenues generated from service, data, and consulting
services were $23,745, $19,979, and $12,657 for the years ended December 31, 2016, 2015, and 2014, respectively.
The Company derived its revenue from the following therapeutic classes:
Year Ended December 31,
2016
Oncology .............................................................. $ 2,102,130
Immunology(1) .......................................................
644,173
583,751
Hepatitis ................................................................
505,240
Specialty Infusion ..................................................
Multiple Sclerosis ..................................................
<10%
Other (none greater than 10% in the period) ...........
575,094
Total revenue ........................................................ $ 4,410,388
2015
$ 1,432,091
510,708
520,771
374,884
<10%
528,177
$ 3,366,631
2014
$ 1,068,751
438,145
<10%
<10%
226,805
481,255
$ 2,214,956
(1) Includes drugs dispensed to treat arthritis, Crohn’s disease and psoriasis.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and were $3,868, $3,553, and $1,174 for the years ended
December 31, 2016, 2015, and 2014, respectively.
Defined Contribution Savings Plans
The Company maintains certain defined contribution savings plans for eligible employees. The total expenses
attributable to the Company’s defined contribution savings plans were $2,665, $1,877, and $1,179 for the years
ended December 31, 2016, 2015, and 2014, respectively.
Share-Based Compensation
The Company grants stock options to key employees, which are accounted for as equity awards. The exercise price
of a granted stock option is equal to the closing market stock price of the underlying common share on the date the
option is granted. The grant date fair value of these awards is measured using the Black-Scholes-Merton option
pricing model. Stock options generally become exercisable in installments of 25 percent per year, beginning on the
first anniversary of the grant date and each of the three anniversaries thereafter, and have a maximum term of ten
years. Certain stock option grants have performance-based conditions, which require the satisfaction of one-year
revenue and Adjusted EBITDA goals prior to vesting. The Company expenses the grant date fair value of its stock
options over their respective vesting periods on a straight-line basis.
The Company grants restricted stock awards to non-employee directors, which are accounted for as equity awards.
Such restricted stock fully vests on the first anniversary of the grant date. The grant date fair value of a restricted
stock award is determined by the closing market price of the Company’s common stock as of the date of grant. The
grant date fair value of restricted stock is expensed over the vesting period on a straight-line basis.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. The Company provides a valuation allowance against net deferred tax assets unless, based upon the
available evidence, it is more likely than not that the deferred tax assets will be realized.
The Company records interest and penalties related to tax uncertainties as income tax expense. Based on
management’s evaluation, the Company concluded there were no significant uncertain tax positions requiring
recognition in its consolidated financial statements.
Prior to January 23, 2014, the Company had elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Under these provisions, the Company did not pay federal corporate income taxes on its taxable
income. Instead, the shareholders were liable for individual federal income taxes on their respective shares of the
Company’s taxable income. Distributions were made periodically to the Company’s shareholders to the extent
needed to cover their income tax liability based on the Company’s taxable income.
Shipping and Handling Costs
Segment Information
Shipping and handling costs are not billed to patients; therefore, there are no shipping and handling revenues. The
Company recognizes shipping and handling costs as incurred as a component of “Selling, general and administrative
expenses” and were $15,144, $13,899, and $12,269 for the years ended December 31, 2016, 2015, and 2014,
respectively.
The Company’s chief operating decision maker reviews the financial results of the Company in total when
evaluating financial performance and for purposes of allocating resources. The Company has thus determined that it
operates in a single reportable segment – specialty pharmacy services.
70
71
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
Accounting Standards Update (“ASU”) Adoption – Debt Issuance Cost Presentation
ASU Adoption – Transition to the Equity Method of Accounting
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest – Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), and, in August
2015, the FASB issued ASU No. 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation and
Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to
SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (“ASU 2015-15”). ASU 2015-03
required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-15 then clarified
that the SEC staff would not object to debt issuance costs related to a line-of-credit arrangement being presented as
an asset on the balance sheet, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. These ASUs were effective for annual periods beginning after December 15, 2015, and for interim
periods within those annual periods. Upon adoption, these ASUs were to be applied on a retrospective basis and
disclosed as a change in an accounting principle.
Effective January 1, 2016, the Company adopted the accounting guidance contained within ASU 2015-03 and 2015-
15. The following December 31, 2015 consolidated balance sheet line items were adjusted due to this adoption:
As
Previously
Reported
Other noncurrent assets....................................... $
5,194
Total assets ........................................................ 1,005,873
Long-term debt, less current portion ...................
111,000
490,327
Total liabilities ...................................................
Total liabilities and shareholders’ equity ............. 1,005,873
Adjustment As Adjusted
900
$
1,001,579
106,706
486,033
1,001,579
(4,294) $
(4,294)
(4,294)
(4,294)
(4,294)
Debt issuance costs of $550 and $719 related to the Company’s line of credit arrangement remained classified
within “Other noncurrent assets” as of December 31, 2016 and 2015, respectively.
ASU Adoption – Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The intent of ASU 2016-09 is to
simplify several aspects of the accounting for employee share-based payment award transactions, including:
recognition of excess tax benefits irrespective of whether the benefit reduces taxes payable in the current period;
recognition of excess tax benefits as a reduction to income taxes on the statement of operations; changes to the
determination of award classification as being either an equity or liability award; and the cessation of classifying
excess tax benefits as a decrease to operating cash flows and as an increase to financing cash flows on the statement
of cash flows. ASU 2016-09 is effective for annual periods beginning on or after December 15, 2016, including
interim periods within those annual periods. Early adoption is permitted.
Effective January 1, 2016, the Company adopted the accounting guidance contained within ASU 2016-09. As a
result, the Company recorded a $16,903 current deferred tax asset and a $16,903 increase to retained earnings on
January 1, 2016 to recognize the Company’s excess tax benefits that existed as of December 31, 2015 (modified
retrospective application). Beginning January 1, 2016, the Company recognizes all newly arising excess tax benefits
as a reduction to income tax expense in its consolidated statement of operations, which resulted in the Company’s
recognition of $4,148 in benefits to income tax expense during the year ended December 31, 2016. Also beginning
January 1, 2016, the Company elected the prospective transition method such that excess tax benefits will no longer
be reflected as a decrease to cash flows from operating activities and as an increase to cash flows from financing
activities on the consolidated statement of cash flows. Finally, effective January 1, 2016, the Company elected to
account for share-based compensation forfeitures when they occur. There was no impact of this election because
prior to the adoption the Company did not have adequate historical information to estimate forfeitures. No prior
period amounts have been adjusted as a result of the adoption of ASU 2016-09.
In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”), eliminating the requirement that
when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest
or degree of influence, an investor must adjust the investment, results of operations, and retained earnings
retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the
investment had been held. Instead, ASU 2016-07 requires that the equity method investor add the cost of acquiring
the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the
equity method of accounting as of the date the investment qualifies for equity method accounting. Therefore, upon
qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. ASU 2016-
07 is effective for annual periods beginning on or after December 15, 2016, including interim periods within those
annual periods. Early adoption is permitted.
Effective January 1, 2016, the Company adopted the accounting guidance contained within ASU 2016-07. There
was no impact to the Company’s consolidated financial statements as a result of this adoption.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09”), which will supersede the existing revenue recognition guidance under U.S. GAAP. The new standard
focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all
industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised
goods or services to its customers at an amount that represents what the company expects to be entitled to in
exchange for those goods or services. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts
with Customers (Topic 606) Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by
one year to annual reporting periods beginning after December 15, 2017 for public entities, though early adoption is
permitted. ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented
(full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance
recognized at the date of initial application (cumulative catch-up transition method). The Company currently
anticipates adopting ASU 2014-09 using the cumulative catch-up transition method. The Company continues to
assess the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements and/or notes
thereto, although the Company does not expect the impact to be significant.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory,
requiring that inventory be measured at the lower of cost and net realizable value. Net realizable value is defined as
estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. This ASU is effective for annual periods beginning on or after December 15, 2016, including
interim periods within those annual periods. The Company does not expect the adoption of this guidance to have a
significant impact on its consolidated financial statements and/or notes thereto.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes, eliminating the current requirement for companies to present deferred tax assets and liabilities as
current and noncurrent. Instead, companies will be required to classify all deferred tax assets and liabilities as
noncurrent. This ASU is effective for annual periods beginning on or after December 15, 2016, including interim
periods within those annual periods, and can be adopted either prospectively or retrospectively. The adoption of this
guidance will result in a balance sheet reclassification and require related disclosure revisions in the Company’s
consolidated financial statements and notes thereto.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), requiring lessees to recognize a right-of-
use asset and a lease liability for all leases (with the exception of short-term leases) at the lease commencement date.
This ASU is effective for annual periods beginning on or after December 15, 2018, including interim periods within
those annual periods. Early adoption is permitted. The Company is currently evaluating the impact that the adoption
of this guidance will have on its consolidated financial statements and/or notes thereto.
72
73
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step two from the goodwill impairment test.
Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a
reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. This ASU is effective for an entity’s annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The
Company intends to adopt the accounting guidance contained within ASU 2017-04 effective January 1, 2017. The
Company anticipates no immediate impact on its consolidated financial statements as a result of this adoption.
4. BUSINESS ACQUISITIONS
The Company accounts for its business acquisitions using the acquisition method as required by FASB Accounting
Standards Codification Topic 805, Business Combinations. The Company ascribes significant value to the synergies
and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly,
the value of these components is included within goodwill. The Company’s business acquisitions described below,
except for one subsidiary of BioRx, were treated as asset purchases for income tax purposes and the related goodwill
resulting from these business acquisitions is deductible for income tax purposes. The results of operations for
acquired businesses are included in the Company’s consolidated financial statements from their respective
acquisition dates.
The assets acquired and liabilities assumed in the business combinations described below, including identifiable
intangible assets, were based on their estimated fair values as of the acquisition date. The excess of purchase price
over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill.
The allocation of the purchase price required management to make significant estimates in determining the fair
values of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These
estimated fair values were based on information obtained from management of the acquired companies and
historical experience and, with respect to the long-lived tangible and intangible assets, were made with the
assistance of an independent valuation firm. These estimates included, but were not limited to, the cash flows that an
asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset,
discounted at rates commensurate with the risks and uncertainties involved. For acquisitions that involved
contingent consideration, the Company recognized a liability equal to the fair value of the contingent consideration
obligation as of the acquisition date. The estimate of fair value of a contingent consideration obligation required
subjective assumptions regarding future business results, discount rates, and probabilities assigned to various
potential business result scenarios.
Valley Campus Pharmacy, Inc.
On June 1, 2016, the Company acquired Valley Campus Pharmacy, Inc., doing business as TNH Advanced
Specialty Pharmacy (“TNH”). TNH, a specialty pharmacy based in Van Nuys, California, provides medication
management programs for individuals with complex chronic diseases, including oncology, hepatitis, and
immunology. The Company acquired TNH to expand its existing business, enhance its proprietary technology, and
increase its geographic presence, particularly in California and Texas. The following table summarizes the
consideration transferred to acquire TNH:
Cash.................................................................................. $
324,244 restricted common shares .....................................
$
68,915
9,507
78,422
The above share consideration at closing is based on 324,244 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of May 31, 2016 ($32.58), and
multiplied by 90 percent to account for the restricted nature of the shares.
Approximately $3,800 of the purchase consideration was deposited into an escrow account to be held for two years
after the closing date to satisfy any indemnification claims that may be made by the Company.
The Company incurred acquisition-related costs of $410 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2016.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at
the acquisition date:
Cash................................................................................
Accounts receivable ........................................................
Inventories ......................................................................
Prepaid expenses and other current assets ........................
Property and equipment ...................................................
Capitalized software for internal use ................................
Definite-lived intangible assets ........................................
Other noncurrent assets ...................................................
Accounts payable ............................................................
Accrued expenses – compensation and benefits ...............
Accrued expenses – other ................................................
Total identifiable net assets .......................................
Goodwill .........................................................................
$
2,114
16,271
4,740
46
200
14,000
13,890
21
(29,773)
(400)
(1,962)
19,147
59,275
$ 78,422
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Physician relationships .......................................... 10 years
5 years
Noncompete employment agreements ....................
1 year
Trade names and trademarks ..................................
Useful
Life
Amount
7,700
$
4,490
1,700
13,890
$
Burman’s Apothecary, LLC
On June 19, 2015, the Company acquired all of the outstanding equity interests of Burman’s Apothecary, LLC
(“Burman’s”). Burman’s, located in the greater Philadelphia area of Pennsylvania, is a provider of individualized
patient care with a primary focus on those infected with the hepatitis C virus. The Company acquired Burman’s to
expand its existing hepatitis business, enhance its proprietary technology, and increase its national presence. The
following table summarizes the consideration transferred to acquire Burman’s:
Cash.................................................................................. $
253,036 restricted common shares .....................................
$
77,416
9,578
86,994
The above share consideration is based on 253,036 shares, as computed in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of June 18, 2015 ($42.06), and
multiplied by 90 percent to account for the restricted nature of the shares.
Approximately $5,000 of the purchase consideration was deposited into an escrow account to be held for two years
after the closing date to satisfy any indemnification claims that may be made by the Company.
74
75
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
The Company incurred acquisition-related costs of $860 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2015.
Company issued 1,346,282 shares of its common stock, with a fair value of $36,888, along with $104 in cash, in full
payout of the contingent consideration arrangement in April 2016.
The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the
acquisition date:
Approximately $10,000 of the purchase consideration was deposited into an escrow account to be held for two years
after the closing date to satisfy any indemnification claims made by the Company.
Accounts receivable .......................................................... $ 17,109
8,064
Inventories ........................................................................
7,513
Prepaid expenses and other current assets ..........................
Property and equipment .....................................................
88
17,000
Capitalized software for internal use ..................................
22,200
Definite-lived intangible assets ..........................................
(25,761)
Accounts payable ..............................................................
(169)
Accrued expenses – compensation and benefits .................
Accrued expenses – other ..................................................
(6)
46,038
Total identifiable net assets .........................................
40,956
Goodwill ...........................................................................
$ 86,994
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Physician relationships ............................................ 10 years
5 years
Noncompete employment agreements ......................
1 year
Favorable supply agreement.....................................
Useful
Life
Amount
14,000
$
5,500
2,700
22,200
$
BioRx
On April 1, 2015, the Company acquired BioRx, a highly specialized pharmacy and infusion services company
based in Cincinnati, Ohio. BioRx provides treatments for patients with ultra-orphan and rare, chronic diseases –
predominately administered in the home and often via intravenous infusion. The Company acquired BioRx to
expand its existing specialty infusion business and increase its national presence. The following table summarizes
the consideration transferred to acquire BioRx:
Cash.................................................................................. $ 217,024
125,697
4,038,853 restricted common shares ..................................
41,000
Contingent consideration at fair value ................................
$ 383,721
The above share consideration at closing is based on 4,038,853 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of March 31, 2015 ($34.58),
and multiplied by 90 percent to account for the restricted nature of the shares.
The purchase price included a contingent consideration arrangement that required the Company to issue up to
1,350,309 shares of its restricted common stock, as computed in accordance with the purchase agreement, to the
former holders of BioRx’s equity interests based upon the achievement of a certain earnings before interest, taxes,
depreciation, and amortization target in the 12-month period ending March 31, 2016. An independent valuation firm
assisted with the Company’s determination of the fair value of the contingent consideration utilizing a Monte Carlo
simulation. The fair value of the contingent consideration liability was $46,208 as of December 31, 2015. The
The Company incurred acquisition-related costs of $1,398 which were charged to “Selling, general and
administrative expenses” during the year ended December 31, 2015.
The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the
acquisition date:
1,786
Cash and cash equivalents ................................................. $
37,716
Accounts receivable ..........................................................
5,546
Inventories ........................................................................
715
Deferred income taxes .......................................................
287
Prepaid expenses and other current assets ..........................
Property and equipment .....................................................
494
Definite-lived intangible assets .......................................... 181,700
163
Other noncurrent assets .....................................................
(25,088)
Accounts payable ..............................................................
(1,653)
Accrued expenses – compensation and benefits .................
(852)
Accrued expenses – other ..................................................
(8,495)
Deferred income taxes .......................................................
Total identifiable net assets ......................................... 192,319
Goodwill ........................................................................... 191,402
$ 383,721
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Patient relationships ................................................. 10 years
5 years
Noncompete employment agreements ......................
8 years
Trade names and trademarks ....................................
Useful
Life
Amount
$ 130,000
39,700
12,000
$ 181,700
MedPro Rx, Inc.
On June 27, 2014, the Company acquired all of the authorized, issued, and outstanding shares of capital stock of
MedPro Rx, Inc. (“MedPro”). MedPro, based in Raleigh, North Carolina, is a specialty pharmacy focused on
specialty infusion therapies including hemophilia and immune globulin. The Company acquired MedPro to expand
its existing specialty infusion business and increase its presence in the mid-Atlantic and Southern regions of the U.S.
The Company did not acquire MedPro’s affiliate from which MedPro leased certain operating and other facilities.
Instead, the Company, commensurate with the acquisition, entered into a five-year external lease agreement for the
facilities on similar terms. As the Company does not direct the significant activities of the lessor, it is not
consolidated into the Company’s financial statements.
76
77
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
The following table summarizes the consideration transferred to acquire MedPro:
Pro Forma Operating Results
Cash.................................................................................. $
716,695 restricted common shares .....................................
Contingent consideration at fair value ................................
$
52,267
12,000
4,270
68,537
The purchase price includes a contingent consideration arrangement that required the Company to pay the former
owners an additional payout based upon the achievement of certain revenue and gross profit targets in each of the
12-month periods ending June 30, 2015 and 2016. The maximum payout of contingent consideration was $11,500.
Based upon MedPro’s actual results for the 12-month periods ended June 30, 2015 and 2016, the Company paid the
maximum payout of $5,750 during both the third quarter of 2015 and 2016.
Approximately $3,500 of the purchase consideration was deposited into an escrow account to be held for two years
after the closing date to satisfy any of the Company’s indemnification claims. The full amount was released to the
seller from escrow during the third quarter of 2016.
The Company incurred acquisition-related costs of $825 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2014.
The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the
acquisition date:
Cash and cash equivalents ................................................. $
Accounts receivable ..........................................................
Inventories ........................................................................
Prepaid expenses and other current assets ..........................
Property and equipment .....................................................
Capitalized software for internal use ..................................
Definite-lived intangible assets ..........................................
Accounts payable ..............................................................
Accrued expenses – compensation and benefits .................
Accrued expenses – other ..................................................
Total identifiable net assets .........................................
Goodwill ...........................................................................
$
668
9,050
3,819
204
697
25
37,099
(3,638)
(157)
(865)
46,902
21,635
68,537
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Patient relationships .................................................
7 years
Trade names and trademarks .................................... 10 years
5 years
Noncompete employment agreements ......................
Useful
Life
Amount
24,000
$
8,700
4,399
37,099
$
The following 2016 unaudited pro forma summary presents consolidated financial information as if the TNH
acquisition had occurred on January 1, 2015. The following 2015 unaudited pro forma summary presents
consolidated financial information as if the TNH acquisition had occurred on January 1, 2015 and the BioRx and
Burman’s acquisitions had occurred on January 1, 2014. The unaudited pro forma results reflect certain adjustments
related to the acquisitions, such as amortization expense resulting from intangible assets acquired and adjustments to
reflect the Company’s borrowings and tax rates. Accordingly, such pro forma operating results were prepared for
comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions
been made as of the as if dates or of results that may occur in the future.
Net sales ................................................................................. $ 4,613,181
28,990
Net income attributable to Diplomat Pharmacy, Inc. ................ $
0.44
Net income per common share – basic .................................... $
0.43
Net income per common share – diluted ................................. $
2016
2015
$ 4,047,540
34,168
$
0.54
$
0.52
$
Year Ended December 31,
5. FAIR VALUE MEASUREMENTS
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible. Fair value is defined as the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such,
fair value is a market-based measurement that should be determined based upon assumptions that market
participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair
value hierarchy was established, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly;
and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own assumptions.
An asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of
observable inputs and minimize the use of unobservable inputs.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
A. Market approach: Prices and other relevant information generated by market transactions involving
identical or comparable assets or liabilities.
B. Cost approach: Amount that would be required to replace the service capacity of an asset (replacement
cost).
C. Income approach: Techniques to convert future amounts to a single present amount based upon market
expectations (including present value techniques, option-pricing and excess earnings models).
78
79
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
The following table presents the placement in the fair value hierarchy of assets and liabilities that were measured
and disclosed at fair value on a recurring basis at December 31, 2015:
7. CAPITALIZED SOFTWARE FOR INTERNAL USE
Capitalized software, consisting of software acquired and developed internally, was comprised as follows:
Contingent consideration ............. $ (52,665) $ (52,665)
C
Asset /
Valuation
(Liability) Level 3 Technique
The following table sets forth a roll forward of the Level 3 measurements:
Contingent
Consideration
Balance at January 1, 2014 ................................................ $
MedPro acquisition .....................................................
Change in fair value – American Homecare
Federation, Inc. (“AHF”) and MedPro ....................
Balance at December 31, 2014...........................................
BioRx acquisition .......................................................
Change in fair value – AHF, BioRx, and MedPro ........
Payments – AHF and MedPro .....................................
Balance at December 31, 2015...........................................
Change in fair value – BioRx and MedPro...................
Payments – AHF, BioRx, and MedPro ........................
Balance at December 31, 2016........................................... $
(1,300)
(4,270)
(6,121)
(11,691)
(41,000)
(6,724)
6,750
(52,665)
8,922
43,743
—
The carrying amounts of the Company’s financial instruments – consisting primarily of cash and cash equivalents,
accounts receivable, accounts payable, and other liabilities – approximate their estimated fair values due to the
relative short-term nature of the amounts. The carrying amount of debt approximates fair value due to variable
interest rates at customary terms and rates the Company could obtain in current financing.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
Land ..............................................................
Buildings .......................................................
Leasehold improvements ............................... 5 - 15 years*
Equipment and fixtures ..................................
Computer equipment .....................................
Construction in progress ................................
3 - 5 years
Useful Life
2016
2015
$
— $
332
40 years 10,007
1,644
5 - 10 years 12,178
6,657
485
31,303
(10,931)
$ 20,372
332
9,331
1,142
9,369
3,912
519
24,605
(8,067)
$ 16,538
Accumulated depreciation ..............................
* Unless applicable lease term is shorter.
Depreciation expense for the years ended December 31, 2016, 2015, and 2014 was $3,075, $2,071, and $1,474,
respectively.
Useful Life
Capitalized software for internal use .............. 3 - 5 years
Construction in progress ................................
Accumulated amortization .............................
December 31,
2015
2016
$ 33,213
$ 74,471
17,409
1,994
76,465
50,622
(26,218) (13,372)
$ 37,250
$ 50,247
Amortization expense for the years ended December 31, 2016, 2015, and 2014 was $13,102, $4,541, and $2,635,
respectively. Estimated future amortization expense is as follows:
2017 ................................................................. $ 21,440
21,273
2018 .................................................................
7,202
2019 .................................................................
332
2020 .................................................................
$ 50,247
8. GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
The following table sets forth a roll forward of goodwill:
Balance at January 1, 2014 ................................................ $
MedPro acquisition .....................................................
Miscellaneous .............................................................
Balance at December 31, 2014...........................................
BioRx acquisition .......................................................
Burman’s acquisition ..................................................
Miscellaneous .............................................................
Balance at December 31, 2015...........................................
TNH acquisition .........................................................
Miscellaneous .............................................................
Balance at December 31, 2016........................................... $
1,537
21,635
(24)
23,148
191,402
40,956
812
256,318
59,275
1,023
316,616
Definite-lived intangible assets consisted of the following:
Gross
Carrying
Amount
Patient relationships ................................ $ 159,100
54,689
Noncompete employment agreements ......
21,700
Physician relationships ............................
23,800
Trade names and trademarks ...................
2,647
Software licensing agreement ..................
2,157
Intellectual property ................................
2,700
Favorable supply agreement ....................
$ 266,793
Net
Carrying
Amount
December 31, 2016
Accumulated
Amortization
/Impairment
$ (31,445) $ 127,655
36,015
18,869
17,323
—
—
—
$ (66,931) $ 199,862
(18,674)
(2,831)
(6,477)
(2,647)
(2,157)
(2,700)
December 31, 2015
Gross
Carrying
Amount
$ 159,100
50,199
14,000
22,100
2,647
2,157
2,700
$ 252,903
Net
Accumulated
Carrying
Amortization
Amount
$ (15,217) $ 143,883
42,088
13,242
19,390
2,647
2,157
1,237
$ (28,259) $ 224,644
(8,111)
(758)
(2,710)
—
—
(1,463)
80
81
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
Amortization expense for the years ended December 31, 2016, 2015, and 2014 was $33,868, $24,229, and $4,030,
respectively. As of December 31, 2016, the weighted average remaining useful lives for the net carrying amounts of
patient relationships, noncompete employment agreements, physician relationships, and trade names and trademarks
are 7.8 years, 3.4 years, 6.6 years, and 2.8 years, respectively. Estimated future amortization expense is as follows:
2017 ................................................................. $ 37,690
36,465
2018 .................................................................
35,253
2019 .................................................................
24,459
2020 .................................................................
20,251
2021 .................................................................
45,744
Thereafter .........................................................
$ 199,862
On August 28, 2014, the Company and two unrelated third party entities entered into a contribution agreement to
form a new company, Primrose Healthcare, LLC (“Primrose”). Primrose functions as a management company,
managing a network of physicians and medical professionals providing continuum care for patients infected with the
hepatitis C virus. The Company contributed $5,000 for its 51 percent ownership interest, of which $2,000 and
$3,000 were contributed during the years ended December 31, 2015 and 2014, respectively. The unrelated third
party entities contributed a software licensing agreement valued at $2,647 and intellectual property valued at $2,157.
During the third quarter of 2016, primarily due to updated projections of continuing losses into the foreseeable
future, the Company fully impaired Primrose’s intangible assets. The $4,804 impairment is contained within
“Selling, general and administrative expenses” for the year ended December 31, 2016. Primrose’s post-impairment
balance sheet consists primarily of cash and cash equivalents as of December 31, 2016.
9. INVESTMENTS IN NON-CONSOLIDATED ENTITIES
Ageology
In October 2011, the Company purchased a 25 percent minority interest in WorkSmart MD, LLC, also known as
Ageology, for $5,000 of cash consideration, which was paid in installments during 2011, 2012, and 2013. No further
payments or other commitments are required as of December 31, 2016. Because the Company does not direct the
activities that most significantly impact the economic performance of Ageology, management has determined that
the Company is not its primary beneficiary.
Ageology is an anti-aging physician network dedicated to nutrition, fitness, and hormones, and has created a
commercial software product for anti-aging physician practices that became a saleable product during the latter half
of 2014. The Company accounted for Ageology under the equity method, as it has significant influence over its
operations. The Company’s portion of Ageology’s net loss for the year ended December 31, 2014 was $1,339.
During January 2014, the Company entered into a $500, 8 percent per annum interest bearing secured promissory
note receivable from Ageology. During November and December 2013, the Company entered into two $1,000 6
percent per annum interest-bearing promissory notes receivable from Ageology. The notes are secured by all
personal property and fixtures owned by Ageology. These notes are due on demand. In addition, in transactions
unrelated to the Company, an affiliated entity of the Company’s chief executive officer has personally invested
$15,250 in Ageology as of December 31, 2016.
During the fourth quarter of 2014, the Company reassessed the recoverability of its investment in Ageology. Based
upon this assessment, it was determined that a full impairment was warranted, primarily due to updated projections
of continuing losses into the foreseeable future. The $4,869 impairment is contained within “Equity loss and
impairment of non-consolidated entities” for the year ended December 31, 2014.
Physician Resource Management, Inc.
In December 2014, the Company invested $3,500 in Physician Resource Management, Inc. (“PRM”) in exchange
for a 15.0 percent equity position. In October 2015, the Company invested an additional $1,459, which increased its
equity position in PRM to 19.9 percent. The Company accounted for this investment under the cost method, as the
Company does not have significant influence over its operations. In transactions unrelated to the Company, the
Company’s chief executive officer has personally invested $250 in PRM through December 31, 2016.
During January 2017, PRM completed the planned sale of its primary asset. Based upon the terms of the sales
agreement, the Company anticipates that it will receive approximately $300 in proceeds from this sale. The
Company recognized a $4,659 impairment, which is contained within “Equity loss and impairment of non-
consolidated entities,” for the year ended December 31, 2016 to write its cost method investment in PRM to net
realizable value.
10. DEBT
On July 20, 2012, the Company entered into a credit facility (“facility”) with Capital One, as agent and lender, along
with other lenders and credit parties, that provided for borrowings under a line of credit of up to $60,000. In 2013,
the facility was amended to increase the commitment under the line of credit to $85,000. In June 2014, the facility
was further amended to increase the commitment under the line of credit to $120,000. On April 1, 2015, in
connection with the BioRx acquisition, the Company entered into a Second Amended and Restated Credit
Agreement with Capital One, as agent and as a lender, the other lenders party thereto, and the other credit parties
party thereto, providing for an increase in the Company’s line of credit to $175,000, a fully drawn Term Loan A for
$120,000, and a deferred draw term loan for an additional $25,000 (“credit facility”). The credit facility also
extended the maturity date to April 1, 2020. The credit facility provides for the issuance of letters of credit up to
$10,000 and swingline loans up to $15,000, the issuance and incurrence of which will reduce the availability of the
line of credit. The credit facility is guaranteed by substantially all of the Company’s subsidiaries and is collateralized
by substantially all of the Company’s and its subsidiaries’ respective assets, with certain exceptions. In addition, the
Company has pledged the equity of substantially all of its subsidiaries as security for the obligations under the credit
facility. The Company adds newly acquired subsidiaries promptly for purposes of, among other things, the
guarantor, collateralization, and pledge provisions of the credit facility. The Company is required to maintain a
depository bank account where money is collected and swept directly to the line of credit. Under its line of credit,
the Company had weighted average borrowings of $11,986 and $12,022, and maximum borrowings of $82,683 and
$78,866 during the years ended December 31, 2016 and 2015, respectively. The Company had $111,000 and
$117,000 outstanding on Term Loan A as of December 31, 2016 and 2015, respectively. Unamortized debt issuance
costs of $3,316 and $4,294 as of December 31, 2016 and 2015, respectively, are presented in the consolidated
balance sheets as direct deductions from the outstanding debt balances (Note 3). The Company had $39,255 and $0
outstanding on its line of credit as of December 31, 2016 and 2015, respectively. The Company had $129,908 and
$166,691 available to borrow on its line of credit at December 31, 2016 and 2015, respectively.
At December 31, 2016, the Company’s Term Loan A interest rate options were (i) LIBOR (as defined) plus 2.50
percent or (ii) Base Rate (as defined) plus 1.50 percent, and the Company’s line of credit and swingline loan interest
rate options were (i) LIBOR (as defined) plus 2.00 percent or (ii) Base Rate (as defined) plus 1.00 percent. The
Company’s Term Loan A interest rate was 3.13 percent and 2.74 percent at December 31, 2016 and 2015,
respectively. The Company’s line of credit interest rate was 4.50 percent at December 31, 2016. In addition, the
Company is charged a monthly unused commitment fee ranging from 0.25 percent to 0.50 percent on its average
unused daily balance on its $175,000 line of credit and from 0.50 percent to 0.75 percent on its $25,000 deferred
draw term loan.
During 2015, the Company incurred deferred financing costs of $5,055 associated with the credit facility, which
were capitalized. These costs, along with previously unamortized deferred debt issuance costs, are being amortized
to interest expense over the term of the credit facility.
82
83
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
The credit facility contains certain financial and non-financial covenants. The Company was in compliance with all
such covenants as of December 31, 2016 and 2015.
A summary of the Company’s stock option activity for the years ended December 31, 2014, 2015, and 2016 is as
follows:
The Company has the following contractual debt obligations outstanding associated with Term Loan A at December
31, 2016:
2017 ................................................................. $
2018 .................................................................
2019 .................................................................
2020 .................................................................
7,500
9,000
10,500
84,000
$ 111,000
The Company recognized related party interest expense of $781 for the year ended December 31, 2014. In October
2014, the Company repaid all of its outstanding borrowings, including related party note payables, with proceeds
received from its IPO.
11. SHARE-BASED COMPENSATION
Stock Options
Effective October 2014, the Company established the 2014 Omnibus Incentive Plan (“2014 Plan”), which permits
the granting of stock options, stock appreciation rights, restricted stock awards, and other stock-based awards. The
2014 Plan initially authorized up to 4,000,000 shares of common stock for awards to be issued to employees,
directors, or consultants of the Company, and each fiscal year, the number of shares reserved for issuance under the
plan automatically increases by an amount equal to 2 percent of the total number of outstanding shares of common
stock as of the beginning of such fiscal year. The stock-based awards will be issued at no less than the market price
on the date the awards are granted. Under the 2014 Plan, the Company granted service-based awards of 1,165,000,
893,896, and 982,000 options to purchase common stock to key employees during the years ended December 31,
2016 and 2015 and the fourth quarter of 2014, respectively. The options become exercisable in installments of 25
percent per year, beginning on the first anniversary of the grant date and each of the three anniversaries thereafter,
and have a maximum term of 10 years. The Company also granted performance-based awards of 381,532 and
391,043 options to purchase common stock to key employees under the 2014 Plan during the years ended December
31, 2016 and 2015, respectively, that are earned based upon the Company’s performance relative to specified
revenue and adjusted earnings before interest, taxes, depreciation, and amortization goals corresponding to the year
in which granted. None of the performance-based awards granted during 2016 were earned and, therefore, no share-
based compensation expense was recorded for these awards in 2016. All but 2,084 of the performance-based awards
granted during 2015 were earned. The earned options vest in four installments of 25%, with the first installment
vesting upon Audit Committee confirmation of the satisfaction of the applicable performance goals, and the
remaining installments vesting annually thereafter. These options also have a maximum term of 10 years.
The Company’s 2007 Stock Option Plan, as amended (“2007 Plan”), authorized the granting of stock options to
employees, directors, or consultants at no less than the market price on the date the option was granted. Options
generally become exercisable in installments of 25 percent per year, beginning on the first anniversary of the grant
date and each of the three anniversaries thereafter, and have a maximum term of 10 years. No further awards will be
granted under the 2007 Plan. All outstanding awards previously granted under the 2007 Plan, including those
granted in 2014, will continue to be governed by their existing terms.
The Company recorded share-based compensation expense associated with stock options of $5,073, $3,748, and
$2,846 for the years ended December 31, 2016, 2015, and 2014, respectively.
At December 31, 2016, the total compensation cost related to non-vested options not yet recognized was $13,042,
which will be recognized over a weighted average period of 1.5 years, assuming all employees complete their
respective service periods for vesting of the options.
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Price
Life
Value
Number
of Options
Outstanding at January 1, 2014 .................. 6,657,504
Granted ................................................... 1,867,588
Repurchased ............................................ (1,307,761)
Outstanding at December 31, 2014............. 7,217,331
Granted ................................................... 1,284,939
Repurchased ............................................ (1,641,387)
Exercised ................................................ (1,943,022)
(803,176)
Expired/cancelled ....................................
Outstanding at December 31, 2015............. 4,114,685
Granted ................................................... 1,546,532
Exercised ................................................
Expired/cancelled ....................................
(564,844)
(683,032)
Outstanding at December 31, 2016............. 4,413,341
$
4.30
14.77
9.39
7.54
39.11
5.44
5.32
16.59
17.53
22.64
7.87
27.41
$ 19.02
(In years)
7.0
$ 69,732
6.9
142,262
7.7
76,567
7.0
$ 11,558
Exercisable at December 31, 2016 ............. 2,005,925
$ 11.56
4.6
$ 10,385
The total intrinsic value of options exercised/repurchased during the years ended December 31, 2016, 2015, and
2014 was $13,048, $103,317, and $9,400, respectively.
The weighted average grant-date fair value of options granted during the years ended December 31, 2016, 2015, and
2014 was $6.34, $11.84, and $3.37, respectively. The grant-date fair value of each option award was estimated using
the Black-Scholes-Merton option-pricing model using the assumptions set forth in the following table:
Year Ended December 31,
2015
2016
Exercise price ............................................ $14.40 - $36.60 $27.80 - $48.72
Expected volatility..................................... 23.90% - 24.76% 25.12% - 26.70%
Expected dividend yield ............................
Risk-free rate for expected term ................. 1.23% - 2.06%
Expected term (in years) ............................
0%
1.53% - 2.01%
6.25
6.25
0%
2014
$13.00 - $16.74
23.2% - 24.3%
0%
1.82% - 1.85%
6.25
Estimating grant date fair values for employee stock options requires management to make assumptions regarding
the current value of the Company’s common shares (prior to IPO closing), expected volatility of value of those
underlying shares, the risk-free rate over the expected life of the stock options, and the length of time in years that
the granted options are expected to be outstanding. Prior to the closing of the IPO, the Company estimated its
common share fair value using the income approach and market approach using the market comparable method. Due
to the Company’s limited history as a public company, expected volatility is based on an implied volatility for a
group of industry-relevant healthcare companies as of the measurement date. Risk-free rate is determined based
upon U.S. Treasury rates over the estimated expected option lives. Expected dividend yield is zero, as the Company
does not anticipate that any dividends will be declared during the expected term of the options. The expected term of
options granted is calculated using the simplified method (the midpoint between the end of the vesting period and
the end of the maximum term) because the Company does not have sufficient historical exercise data to provide a
reasonable basis upon which to estimate the expected term due to the limited period of time its awards have been
84
85
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
outstanding. If actual results differ significantly from these estimates and assumptions, share-based compensation
expense, primarily with respect to future share-based awards, could be materially impacted.
A summary of the Company’s restricted stock award activity for the years ended December 31, 2014, 2015, and
2016 is as follows:
In March 2015, the Company repurchased vested stock options to buy 1,641,387 shares of common stock from
certain current employees, including certain executive officers, for cash consideration totaling $36,298. All
repurchased stock options were granted under the Company’s 2007 Stock Option Plan. No incremental
compensation expense was recognized as a result of these repurchases.
In May 2014, the Company entered into a Stock Option Redemption Agreement with a former executive whereby
the Company repurchased vested stock options to buy 884,000 shares of common stock for the cash purchase price
of $4,000. No incremental compensation expense was recognized as a result of this repurchase.
In April 2014, the Company repurchased vested stock options to buy 183,993 shares of common stock from certain
current employees for cash consideration, totaling $2,300. No incremental compensation expense was recognized as
a result of these repurchases.
In January 2014, the Company repurchased vested stock options to buy 239,768 shares of common stock from
certain current employees for cash consideration, totaling $3,100. No incremental compensation expense was
recognized as a result of these repurchases.
For U.S. GAAP purposes, share-based compensation expense associated with stock options is based upon
recognition of the grant date fair value over the vesting period of the option. For income tax purposes, share-based
compensation tax deductions associated with nonqualified stock option exercises and repurchases are based upon the
difference between the stock price and the exercise price at time of exercise or repurchase. Prior to the Company’s
adoption of ASU 2016-09 (Note 3), in instances where share-based compensation expense for income tax purposes
was in excess of share-based compensation expense for U.S. GAAP purposes, which has predominately been the
case for the Company, U.S. GAAP required that the tax benefit associated with this excess expense be recorded to
shareholders’ equity to the extent that it reduced cash taxes payable. During the years ended December 31, 2015 and
2014, the Company recorded excess tax benefits related to share-based awards of $20,805 and $3,689, respectively,
as increases to shareholders’ equity.
Prior to the Company’s adoption of ASU 2016-09 (Note 3), U.S. GAAP also required that excess tax benefits related
to share-based awards be reported as a decrease to cash flows from operating activities and as an increase to cash
flows from financing activities. The Company reported $20,805 and $3,689 of excess tax benefits related to share-
based awards as decreases to cash flows from operating activities and as increases to cash flows from financing
activities for the years ended December 31, 2015 and 2014, respectively.
Restricted Stock Awards
Under the 2014 Plan, the Company issued restricted stock awards to non-employee directors. The value of the
restricted stock awards was determined by the market value of the Company’s common stock at the date of grant.
The value of the restricted stock awards is recorded as compensation expense on a straight-line basis over the
vesting period, which is one year.
The Company recorded share-based compensation expense associated with restricted stock awards of $339, $188,
and $25 for the years ended December 31, 2016, 2015, and 2014, respectively. At December 31, 2016, the total
compensation cost related to non-vested restricted stock awards not yet recognized was $79, which will be
recognized during 2017, assuming the non-employee directors complete their service period for vesting of the
restricted stock awards.
Nonvested at January 1, 2014............................
Granted ..........................................................
Nonvested at December 31, 2014 ......................
Granted ..........................................................
Vested ............................................................
Nonvested at December 31, 2015 ......................
Granted ..........................................................
Vested ............................................................
Nonvested at December 31, 2016 ......................
$
Weighted
Average
Number
of Shares
Subject to Grant Date
Restriction Fair Value
—
18.12
18.12
26.60
18.12
26.60
32.97
26.60
32.97
—
8,277
8,277
10,805
(8,277)
10,805
5,765
(10,805)
5,765
$
$
12. INCOME TAXES
As disclosed in Note 2, the Company converted its income tax status from an S corporation to a C corporation on
January 23, 2014. Accordingly, on that date, the Company recorded a net deferred income tax liability of $2,965 and
a corresponding charge to deferred income tax expense.
Significant components of the expense for income taxes for the years ended December 31, 2016 and 2015 and for
the period from January 23, 2014 to December 31, 2014 are as follows:
2016
2015
2014
Current:
Federal .................................................................. $
State and local .......................................................
Total current ...................................................
(703) $ (17,592) $ (4,752)
(1,198)
(1,713)
(3,257)
(5,950)
(2,416) (20,849)
Deferred:
Federal ..................................................................
State and local .......................................................
Total deferred .................................................
(7,989)
(790)
(8,779)
4,061
554
4,615
1,087
208
1,295
$ (11,195) $ (16,234) $ (4,655)
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense is as
follows:
Income tax expense at U.S. statutory rate .......................................... $ (12,675) $ (14,352) $ (3,222)
Tax effect from:
Year Ended December 31,
2014
2015
2016
Excess tax benefits (Note 3) .......................................................
State income taxes, net of federal benefit ....................................
Loss on noncontrolling interest ..................................................
Change in fair value of redeemable common shares ....................
Adoption of C corporation status ................................................
Termination of existing stock redemption agreement ..................
Earnings while a S corporation ...................................................
Other .........................................................................................
—
(351)
(79)
3,176
(2,965)
(1,695)
499
(18)
Income tax expense .......................................................................... $ (11,195) $ (16,234) $ (4,655)
—
(1,563)
(351)
—
—
—
—
32
4,148
(1,904)
(1,138)
—
—
—
—
374
86
87
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
Significant components of deferred tax assets and liabilities are as follows:
13. INCOME PER COMMON SHARE
December 31,
2016
2015
Deferred tax assets:
Allowance for doubtful accounts .............................. $
Net operating loss and credit carryforwards ..............
Compensation and benefits ......................................
Investments .............................................................
Other temporary differences .....................................
Total deferred tax assets ....................................
8,861 $
6,383
3,598
1,101
1,014
20,957
3,728
—
3,638
—
429
7,795
Deferred tax liabilities:
Property and intangible assets ..................................
Prepaid expenses and other current assets .................
Other temporary differences .....................................
Total deferred tax liabilities ...............................
(13,825)
(1,122)
—
(14,947)
(8,550)
(870)
(489)
(9,909)
Net deferred tax assets (liabilities) ................ $
6,010 $
(2,114)
At December 31, 2016, the Company had $11,779 of federal and $45,769 of state and local gross net operating loss
carry-forwards. The federal gross net operating loss carry-forwards expire in 2036. The state and local gross net
operating loss carry-forwards expire at various times through 2036. At December 31, 2016, the Company has
alternative minimum tax credit carry-forwards of $676, which have no expiration.
The Company prepares and files tax returns based on interpretations of tax laws and regulations. In the normal
course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such
examinations may result in future tax and interest assessments by these taxing authorities. In determining the
Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain income
tax positions unless it is determined to be more likely than not that such tax positions would be sustained upon
examination, based on their technical merits. That is, for financial reporting purposes, the Company only recognizes
a tax benefit taken on its tax return if it believes it is more likely than not that such tax position would be sustained.
There is considerable judgment involved in determining whether it is more likely than not that such tax positions
would be sustained.
As of both December 31, 2016 and 2015, the Company had unrecognized tax benefits of $268; all of which, if
recognized, would reduce both tax expense and the effective tax rate. The following table sets forth a roll forward of
the Company’s unrecognized tax benefits:
Balance at January 1 ......................................................................... $
Additions for tax positions of prior years ....................................
Balance at December 31 ................................................................... $
268 $
—
268 $
—
268
268
Year Ended
December 31,
2016
2015
The Company would adjust its tax reserve estimates periodically because of ongoing examinations by, and
settlements with, varying taxing authorities, as well as changes in tax laws, regulations, and interpretations. The
consolidated tax provision of any given year includes adjustments to prior year income tax accruals and related
estimated interest charges that are considered appropriate. The Company’s 2015 and 2014 C corporation tax returns
are open to examination by U.S. federal, state, and local taxing authorities.
For the period January 23, 2014 through October 9, 2014, the Company computed net income per common share
using the two-class method as its Redeemable Series A Preferred Stock met the definition of a participating security
and thereby shared in the net income or loss of the Company on a ratable basis with the common shareholders. The
preferred stock’s portion of net income for the year ended December 31, 2014 was 10 percent. Concurrent with the
closing of the Company’s IPO, all outstanding Redeemable Series A Preferred Stock converted into Class C Voting
Common Stock, which then immediately converted into no par common stock.
Basic income per common share is computed by dividing net income allocable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted income per common share
further includes any common shares available to be issued upon: exercise of outstanding service-based stock
options; exercise of outstanding performance-based stock options for which all performance conditions were
satisfied; and satisfaction of all contingent consideration performance conditions; and conversion of preferred stock,
along with the vesting of restricted stock, if such inclusions would be dilutive.
The following table sets forth the computation of basic and diluted income per common share:
Year Ended December 31,
2016
2015
2014
Numerator:
Net income attributable to Diplomat Pharmacy, Inc................. $
Less: income attributable to preferred shareholders .................
Net income attributable to common shareholders ...............
28,273
—
28,273
$
$
25,776
—
25,776
4,776
458
4,318
Denominator:
Weighted average common shares outstanding, basic .............. 65,970,396
Weighted average dilutive effect of stock options and
60,730,133
36,012,592
restricted stock awards ........................................................
Weighted average dilutive effect of contingent consideration ..
1,739,750
337,577
Weighted average common shares outstanding, diluted ...... 68,047,723
2,029,241
337,577
63,096,951
2,541,403
—
38,553,995
Net income per share attributable to common shareholders:
Basic ...................................................................................... $
Diluted ................................................................................... $
0.43
0.42
$
$
0.42
0.41
$
$
0.12
0.11
Stock options to purchase a weighted average of 1,542,064, 649,564, and 485,122 common shares were excluded
from the computation of diluted weighted average common shares outstanding for the years ended December 31,
2016, 2015, and 2014, respectively, as inclusion of such options would be anti-dilutive. Performance-based stock
options to purchase up to a weighted average of 291,277, 410,452, and 799,067 common shares were excluded from
the computation of diluted weighted average common shares outstanding for the years ended December 31, 2016,
2015, and 2014, respectively, as all performance conditions were not satisfied at some/all quarter-end periods within
the respective years. Contingent consideration to issue a weighted average of 1,012,732 common shares was
excluded in the computation of diluted weighted average common shares outstanding for the year ended December
31, 2015, as all performance conditions were not satisfied until the quarter ended December 31, 2015.
All outstanding restricted stock awards were dilutive for the years ended December 31, 2016, 2015, and 2014.
The effect of all Redeemable Series A Preferred Stock were excluded from the computation of diluted weighted
average common shares outstanding for the year ended December 31, 2014 as inclusion would be anti-dilutive.
88
89
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. In addition, on
November 10, 2016, a putative class action complaint was filed in the U.S. District Court for the Eastern District of
Michigan against Diplomat Pharmacy, Inc. and certain officers of the Company. The complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with public filings made between
October 9, 2014 and November 2, 2016 (the “potential class period”). The plaintiff seeks to represent a class of
shareholders who purchased stock in the potential class period. The complaint seeks unspecified monetary damages
and other relief. The Company believes the complaint and allegations to be without merit and intends to vigorously
defend itself against these actions. The Company is unable at this time to determine whether the outcome of the
litigation would have a material impact on its results of operations, financial condition, or cash flows. In the opinion
of management, the disposition or ultimate resolution of all other currently known claims and lawsuits will not have
a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
No Par, Common Stock
In October 2014, the Company issued and sold 11,000,000 shares of its no par common stock and certain existing
shareholders sold 4,333,333 shares in its IPO at an offering price of $13.00 per share. The Company received net
proceeds of $130,440 after deducting underwriting discounts and commissions of $9,652, and other offering
expenses of $2,908. The Company did not receive any proceeds from the sale of common stock by the existing
shareholders. Immediately prior to the closing of the IPO, each share of the then outstanding shares of capital stock
totaling 40,448,744 shares converted into one share of no par common stock. Accordingly, $15,575 of previously
contributed capital was reclassified into common stock leaving only accumulated stock-based compensation and
related excess tax benefits in the additional paid-in capital account.
Holders of common stock are entitled to one vote per share and to receive dividends. The holders have no
preemptive, conversion, or subscription rights, and there are no redemption or sinking fund provisions with respect
to such shares. Common stock is subordinate to the preferred stock as described below with respect to dividend
rights or rights upon liquidation, winding up, and dissolution of the Company.
Purchase Commitments
In October 2016, the Company amended its contract with AmerisourceBergen. This amended contract commits the
Company to a minimum purchase obligation of approximately $2,000,000 per contract year and extended the
contract expiration date to September 30, 2018. The Company fully expects to meet this requirement.
Class A, B, and C Common Stock
Prior to the closing of the IPO, each class of common stock had equal and identical rights, preferences, and
limitations, other than voting. The Class B common stock did not have any voting rights, but Class A and Class C
had 20 votes per share and one vote per share, respectively.
Lease Commitments
The Company leases multiple pharmacy and distribution facilities and office equipment under various operating
lease agreements expiring through September 2026. Total rental expense under operating leases for the years ended
December 31, 2016, 2015, and 2014 was $4,179, $3,295, and $2,241, respectively, exclusive of property taxes,
insurance, and other occupancy costs generally payable by the Company.
In August 2014, the Company issued 372,486 shares of Class B Nonvoting Common Stock to a non-employee
relative (and associated trusts) of the Company’s chief executive officer, in connection with the termination of an
existing Stock Redemption Agreement. The Company recorded a charge of $4,842 during the year ended December
31, 2014 to “Termination of existing stock redemption agreement” in the consolidated statement of operations upon
issuance of the shares. The value of the issued shares was based on the Company’s IPO price of $13.00 per share.
Future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one
year as of December 31, 2016 are as follows:
In June 2014, the Company issued 716,695 shares of Class B Nonvoting Common Stock, valued at $12,000, in
connection with its acquisition of MedPro. Refer to Note 4.
2017 ................................................................. $
2018 .................................................................
2019 .................................................................
2020 .................................................................
2021 .................................................................
Thereafter .........................................................
$
1,761
1,679
958
704
572
1,559
7,233
15. SHAREHOLDERS’ EQUITY (DEFICIT) AND NONCONTROLLING INTERESTS
Capital Stock
Effective September 2014, the Company amended its Certificate of Incorporation to change its authorized capital
stock to consist of (i) 590 million shares of common stock, no par value, of which 66,764,999 shares were issued
and outstanding as of December 31, 2016, and (ii) 10 million authorized shares of preferred stock.
In January 2014, the Company’s authorized capital stock consisted of (i) 42,500,000 shares of Class A Voting
Common Stock, (ii) 807,500,000 shares of Class B Nonvoting Common Stock, (iii) 2,992,000 shares of Class C
Voting Stock, and (iv) 2,992,000 of Series A Preferred Stock. On March 31, 2014, pursuant to the Second Amended
and Restated Articles of Incorporation, the Company’s authorized capital stock was amended further to provide for a
total of 6,222,000 shares of Redeemable Series A Preferred Stock and 6,222,000 shares of Class C Voting Stock.
Prior to January 2014, the Company’s authorized capital stock consisted of 42,500,000 shares of Class A Voting
Common Stock and 807,500,000 of Class B Nonvoting Common Stock.
Upon the closing of the IPO, the Class A, Class B, and Class C common shares were converted into shares of the
Company’s no par value common stock on a one-for-one basis.
Preferred Stock
The Company’s authorized capital stock includes 10 million shares of preferred stock. The shares of preferred stock
may be divided into and issued in one or more series. The Board of Directors is authorized to issue preferred stock
from time to time in one or more series, with such designations and such relative voting, dividend, liquidation, and
other rights, preferences, and limitations as may be adopted by the Board of Directors. No shares of preferred stock
were issued or outstanding as of December 31, 2016.
Noncontrolling Interest
Noncontrolling interest in a consolidated subsidiary in the consolidated balance sheets represents minority
stockholders' proportionate share of the equity in Primrose.
16. MANDATORILY REDEEMABLE COMMON SHARES
Upon the closing of the Company’s IPO, 2,423,616 shares of redeemable common stock outstanding were converted
into shares of no par value common stock on a one-for-one basis.
Several years prior to its IPO, the Company issued 11,050,000 shares of common stock to two shareholders that had
certain redemption features which provided that upon the death of the shareholder or termination of his employment
from the Company, all such outstanding shares owned by such shareholder would immediately be deemed to be
offered for sale to the Company at an agreed-upon price meant to represent the then-current fair value of such
shares. Due to this repurchase feature, the Company would be required to purchase the shares. Pursuant to this
90
91
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
Redeemable Series A Preferred Stock at a purchase price of $16.74 per share. The Company used $25,200 of this
$54,000 investment for general corporate purposes, inclusive of fees associated with this transaction, and the
remaining $28,800 was distributed to holders of common stock including 195,545 redeemable shares ($26,500) and
holders of options to acquire common stock ($2,300) (Note 11).
18. SUBSEQUENT EVENT
On February 1, 2017, the Company acquired Affinity Biotech, Inc., a specialty pharmacy and infusion services
company based in Houston, TX that provides treatments and nursing services for patients with hemophilia. Under
the terms of the agreement, Diplomat transferred cash consideration of approximately $16,000, with an additional
payout of up to $4,000 based upon the achievement of a certain earnings before interest, taxes, depreciation, and
amortization target in the 12-month period ending January 31, 2018.
provision, the common shares were deemed to be mandatorily redeemable and, as such, were required to be
reflected as a liability at their period-end estimated fair value. Changes in fair value were reflected as “Changes in
fair value of redeemable common shares” on the consolidated statement of operations. Fair value was determined
based on good faith estimates of the Company’s Board of Directors, in some cases with the assistance of
independent third party valuations of the Company. At January 1, 2014, 3,187,500 shares of these mandatorily
redeemable common stock were outstanding.
The Company redeemed 143,339 common shares in exchange for cash of $2,400 pursuant to a Stock Redemption
Agreement, dated January 2014.
The Company redeemed 195,545 common shares in exchange for cash of $3,274 pursuant to a Stock Redemption
Agreement, dated April 2014.
In June 2014, the holder of 425,000 redeemable common shares transferred them into a separate trust. On such date,
the redemption provisions on the transferred shares were terminated and the fair value of the common shares of
$7,116 was reclassified from liabilities to shareholders’ equity.
17. REDEEMABLE SERIES A PREFERRED STOCK
Upon the closing of the Company’s IPO, the shares of Redeemable Series A Preferred Stock outstanding were
converted into shares of Class C Voting Common Stock on a one-for-one basis. The shares of Class C Voting
Common Stock were then immediately converted into shares of no par value common stock on a one-for-one basis.
Prior to the Company’s IPO, the Redeemable Series A Preferred Stock had a zero coupon rate, optional redemption
rights, and liquidation preferences. The Redeemable Series A Preferred Stock was also convertible into Class C
Voting Common Stock at any time at the option of the holder on a one-for-one basis, subject to certain adjustments.
The initial conversion price per share for Redeemable Series A Preferred Stock was the original issue price, subject
to adjustment, as defined. The Redeemable Series A Preferred Stock was entitled to vote as if converted into Class C
Voting Common Stock. The Redeemable Series A Preferred Stock automatically converted into Class C Voting
Common Stock upon either (i) a qualified common stock public offering, as defined, or (ii) an affirmative vote of
the majority of the Redeemable Series A Preferred Stock.
The holders of the Redeemable Series A Preferred Stock, upon an affirmative vote of the majority, could have
demanded redemption of all outstanding shares of Redeemable Series A Preferred Stock anytime on or after the
earlier of (i) January 23, 2021, (ii) such time as the Company’s aggregate market price, as defined, was equal to or
greater than $5,000,000, and (iii) such time as certain changes were made to the Company’s Board of Directors,
certain executive officers, and/or certain controlling shareholders. The redemption price was payable in cash and
would be the greater of the original issuance price plus all declared but unpaid dividends and fair market value, as
defined. Due to these redemption features, the Redeemable Series A Preferred Stock was reflected outside of
permanent equity on the consolidated balance sheet. Upon a liquidation event, as defined, the Redeemable Series A
Preferred stockholders were entitled to receive the greater of (i) the sum of the original issuance price plus a 15
percent return compounded annually and (ii) the amount they would receive upon the liquidation had the
Redeemable Series A Preferred Stock converted into Class C Voting Common Stock on the liquidation date.
In January 2014, the Company entered into a Redeemable Series A Preferred Stock Purchase Agreement with
certain funds of T. Rowe Price Associates, Inc. (“T. Rowe”) under which the Company issued to T. Rowe 2,986,229
shares of Redeemable Series A Preferred Stock at a purchase price of $16.74 per share. The Company used $20,000
of this $50,000 investment for general corporate purposes, inclusive of fees associated with this transaction, and the
remaining $30,000 was distributed to holders of common stock including 143,339 redeemable shares ($26,900) and
holders of options to acquire common stock ($3,100) (Note 11).
In April 2014, the Company entered into a Redeemable Series A Preferred Stock Purchase Agreement with certain
funds of Janus Capital Management LLC (“Janus”) under which the Company issued to Janus 3,225,127 shares of
92
93
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except per share amounts)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for each of the quarters in the years ended December
31, 2016 and 2015:
Net sales ..................................................................... $ 995,870
79,238
Gross profit .................................................................
23,717
Income (loss) before income taxes ...............................
15,183
Net income (loss) ........................................................
15,429
Net income (loss) attributable to Diplomat...................
0.24
Basic income (loss) per common share ........................
0.23
Diluted income (loss) per common share .....................
For the 2016 Quarter Ended
March 31 June 30 September 30 December 31
1,144,838
$
83,808
468
(1,284)
(1,098)
(0.02)
(0.02)
$1,088,506
83,270
12,438
8,293
8,534
0.13
0.13
(408)
2,828
5,408
0.08
0.08
1,181,173
78,512
$
Net sales ..................................................................... $ 624,883
41,142
Gross profit .................................................................
4,622
Income before income taxes ........................................
2,672
Net income .................................................................
2,858
Net income attributable to Diplomat ............................
0.06
Basic income per common share .................................
0.05
Diluted income per common share ..............................
For the 2015 Quarter Ended
March 31 June 30 September 30 December 31
986,823
$
76,665
5,564
3,304
3,566
0.06
0.05
$ 808,011
69,669
5,367
3,113
3,390
0.05
0.05
946,913
75,763
25,451
15,683
15,961
0.25
0.24
$
The Company’s results were impacted by the following:
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Limitations on Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the Company have been detected.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required
to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized, and reported within the specified time periods in the
rules and forms of the Securities and Exchange Commission, and that such information is accumulated and
communicated to our management, including our chief executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of the chief executive officer and the principal financial officer, evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15(d)-15(e) promulgated
under the Exchange Act) as of December 31, 2016. Based on these evaluations, the chief executive officer and the
principal financial officer concluded that our disclosure controls and procedures required by paragraph (b) of Rule
13a-15 or 15d-15 were not effective as of December 31, 2016 as a result of the material weakness discussed below.
- Quarter ended December 31, 2016: The Company recognized a $4,659 impairment of its cost method
investment in PRM (Note 9).
Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered
Public Accounting Firm
- Quarter ended September 30, 2016: The Company was assessed and recorded approximately $8,000 in
additional DIR fees, of which approximately $4,000 were retroactive DIR fees that increased its previous
estimates by approximately $1,700 and $2,300 for the first and second quarters of 2016, respectively. The
Company recognized a $4,804 impairment of its Primrose intangible assets (Note 8), partially offset by
$2,354 which was the noncontrolling interests’ allocation of the recognized impairment. The Company
recognized $3,076 in excess tax benefits (Note 3).
- Quarter ended March 31, 2016: The Company recognized a $9,071 change in the fair value of contingent
consideration, primarily due to a reduction in its BioRx contingent consideration liability caused by a
decrease in the Company’s stock price.
- Quarter ended December 31, 2015: The Company recognized a $(8,384) change in the fair value of
contingent consideration, primarily due to an increase in its BioRx contingent consideration liability caused
by an increase in the Company’s stock price.
- Quarter ended September 30, 2015: The Company recognized a $6,829 change in the fair value of contingent
consideration, primarily due to a reduction in its BioRx contingent consideration liability caused by a
decrease in the Company’s stock price.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis. During the fourth quarter of 2016, we identified a
material weakness in the operating effectiveness of our evaluation and review of recorded inventory balances.
Specifically, at certain locations the initial costs used to value ending inventories were not correct and we did not
initially identify all items necessary to accurately complete our inventory reconciliation.
As a result of the material weakness noted above, we completed additional substantive procedures prior to filing this
Annual Report on Form 10-K for the year ended December 31, 2016. Based on these procedures, management
believes that our consolidated financial statements included in this Annual Report on Form 10-K have been prepared
in accordance with generally accepted accounting principles. Our chief executive officer and principal financial
officer have certified that, based on each such officer’s knowledge, the financial statements, and other financial
information included in this Annual Report on Form 10-K, fairly present in all material respects our financial
condition, results of operations, and cash flows as of, and for, the periods presented in this Annual Report on Form
10-K. There was no adjustment required as a result of this material weakness. In addition, we have developed a
remediation plan for this material weakness, which is described below.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included within this Form 10-K Management’s
Report on Internal Control over Financial Reporting as of December 31, 2016. Our independent registered public
accounting firm also attested to, and reported on, the Company’s Internal Control over Financial Reporting, which
report expressed an adverse opinion on the effectiveness of our internal controls over financial reporting as of
94
95
December 31, 2016. Management’s report and the independent registered public accounting firm’s report are
included in Item 8 of this Form 10-K.
PART III
Changes in Internal Control over Financial Reporting
Except for the control deficiencies discussed above that have been assessed as a material weakness as of December
31, 2016, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) that occurred during the fourth quarter of 2016 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Remediation Plan
Management is actively implementing a remediation plan to ensure that deficiencies contributing to the material
weakness are remediated such that these controls will operate effectively, which includes steps to strengthen our
inventory costing and reconciliation controls. The remediation actions we are taking, and expect to take, include:
additional testing of the pricing file utilized to cost physical inventory; and strengthening the depth and breadth of
review of the inventory reconciliation by senior accounting and finance personnel.
We believe that these actions, and the improvements we expect to achieve as a result, will effectively remediate the
material weakness. However, until the remediated controls operate for a sufficient period of time and management
has concluded, through testing, that these controls are operating effectively, the material weakness in our internal
controls over financial reporting will not be considered remediated. We expect that the remediation of this material
weakness will be completed in fiscal 2017.
ITEM 9B. OTHER INFORMATION
None
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
The information required by this item is set forth under the following captions in our proxy statement to be filed
with respect to the 2017 annual meeting of shareholders (the “Proxy Statement”), all of which is incorporated herein
by reference: “Proposal No. 1 – Election of Directors,” “Board Matters – The Board of Directors,” “Board Matters –
Committees of the Board,” “Board Matters – Corporate Governance,” “Certain Relationships and Related Person
Transactions,” “Additional Information – Section 16(a) Beneficial Ownership Reporting Compliance,” and
“Additional Information – Requirements for Submission of Shareholder Proposals and Nominations for 2018
Annual Meeting.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the following captions in our Proxy Statement, all of which
is incorporated herein by reference: “Compensation Discussion and Analysis,” “Named Executive Officer
Compensation Tables,” “Board Matters – Director Compensation,” “Compensation Committee Interlocks and
Insider Participation,” and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is set forth under the following captions in our Proxy Statement, all of which
is incorporated herein by reference: “Additional Information – Equity Compensation Plans” and “Security
Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS
INDEPENDENCE
The information required by this item is set forth under the following captions in our Proxy Statement, all of which
is incorporated herein by reference: “Certain Relationships and Related Person Transactions” and “Proposal No. 1 –
Election of Directors – Director Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth under the following captions in our Proxy Statement, which is
incorporated herein by reference: “Audit Committee Matters.”
96
97
PART IV
SIGNATURES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The financial statements of the Company filed in this Annual Report on Form 10-K are listed in Part II,
Item 8.
2. Financial Statement Schedules
All financial statement schedules have been omitted because they are not required or applicable under
instructions contained in Regulation S-X or because the information called for is shown in the financial
statements and notes thereto.
3. Exhibits
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DIPLOMAT PHARMACY, INC.
(Registrant)
By: /s/ ROBIN JOHNSON
Robin Johnson
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the attached
Exhibit Index.
Date: March 8, 2017
ITEM 16. FORM 10-K SUMMARY
None
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of March
8, 2017 by the following persons on behalf of the registrant and in the capacities indicated.
/s/ PHILIP R. HAGERMAN
Philip R. Hagerman
Chief Executive Officer, Chairman of the Board
Of Directors (Principal Executive Officer)
/s/ ROBIN JOHNSON
Robin Johnson
/s/ GARY W. KADLEC
Gary W. Kadlec
/s/ DAVID DREYER
David Dreyer
/s/ KENNETH O. KLEPPER
Kenneth O. Klepper
/s/ SHAWN CLINE TOMASELLO
Shawn Cline Tomasello
/s/ BENJAMIN WOLIN
Benjamin Wolin
Vice President, Finance
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Director
Director
Director
98
99
Exhibit Index
Exhibit
number
Exhibit description
Filed/Furnished
herewith
2.1** Membership Interest Purchase Agreement, dated
June 19, 2015, by and among Diplomat,
Burman’s Apothecary, L.L.C., and the other
parties named therein
3.1
Third Amended and Restated Articles of
Incorporation
3.2
Amended and Restated Bylaws
4.1
Form of Common Stock Certificate
4.2
4.3
Diplomat Pharmacy, Inc. First Amended and
Restated Investors’ Rights Agreement, dated
March 31, 2014, by and among Diplomat and
various funds of T. Rowe Price Associates, Inc.
and Janus Capital Management, LLC
Registration Rights Agreement, dated April 1,
2015, by and among Diplomat and each
shareholder named therein
10.1*
Diplomat Pharmacy, Inc. 2007 Option Plan
10.2*
Form of Amended and Restated 2007 Option
Plan Grant Agreement
10.3*
Form of 2007 Option Plan Grant (Performance-
Based) Agreement
10.4*
Diplomat Pharmacy, Inc. 2014 Omnibus
Incentive Plan
10.5*
Form of Stock Option Award Agreement (Time-
Based) (2014 Omnibus Incentive Plan)
10.6*
Form of Restricted Stock Award Agreement
(2014 Omnibus Incentive Plan)
10.7*
10.8*
Form of Stock Option Award Agreement
(Performance-Based) (2014 Omnibus Incentive
Plan)
Form of Restricted Stock Award Agreement
(Non-Employee Directors) (2014 Omnibus
Incentive Plan)
Incorporated by reference
Period
ending
Exhibit
number
Filing
date
2.1
06/22/15
Form
8-K
S-1/A
3.1
09/17/14
S-1/A
S-1/A
3.2
09/17/14
4.1
09/11/14
Exhibit
number
10.9*
Exhibit description
Form of Stock Option Award Agreement (Time-
Based) (2014 Omnibus Incentive Plan)
Filed/Furnished
herewith
Incorporated by reference
Period
ending
Exhibit
number
Filing
date
10.1
12/09/16
Form
8-K
10.10.1† Pharmacy Distribution and Services Agreement,
S-1/A
10.8.1
08/19/14
dated July 1, 2013, by and between Celgene
Corporation and Diplomat
10.10.2† First Amendment to Pharmacy Distribution and
Services Agreement, dated July 8, 2013, by and
between Celgene Corporation and Diplomat
S-1/A
10.8.2
08/19/14
10.10.3† Adoption and Amendment of Pharmacy
S-1/A
10.8.3
08/19/14
Distribution and Services Agreement, dated
March 21, 2014, by and between Celgene
Corporation and Diplomat
S-1
4.2
07/03/14
10.10.4† Amendment to Pharmacy Distribution and
10-K
12/31/15
10.18
02/29/16
Services Agreement, executed October 19, 2015
and effective as of June 1, 2016, by and between
Diplomat and Celgene Corporation
10.11.1† Prime Vendor Agreement, dated January 1,
S-1/A
10.9.1
08/19/14
8-K
4
04/06/15
S-1
S-1
10.4
07/03/14
10.5
07/03/14
2012, by and among AmerisourceBergen Drug
Corporation, Diplomat and its subsidiaries
named therein
10.11.2
First Amendment to Prime Vendor Agreement,
dated July 20, 2012, by and among
AmerisourceBergen Drug Corporation,
Diplomat and its subsidiaries named therein
S-1/A
10.9.2
08/19/14
S-1/A
10.6
09/11/14
10.11.3† Second Amendment to Prime Vendor
8-K
10.1
09/15/15
S-1/A
10.7
09/29/14
Agreement, effective August 1, 2015, by and
among Diplomat, AmerisourceBergen Drug
Corporation, and each Company subsidiary
named therein
S-1/A
10.11
10/03/14
10.11.4† Third Amendment to Prime Vendor Agreement,
8-K
10.1
10/06/16
S-1/A
10.12
10/03/14
8-K
10.1
06/09/15
10-Q
09/30/15
10.3
11/04/15
effective October 1, 2016, by and among
AmerisourceBergen Drug Corporation and the
Company subsidiaries named therein
10.12
Joinder Agreement, dated November 1, 2015, by
and among AmerisourceBergen Drug
Corporation, Diplomat and the Diplomat
subsidiaries named therein
10-K
12/31/15
10.20
02/29/16
100
101
Exhibit
number
10.13
10.14
10.15
10.16
10.17
Exhibit description
Second Amended and Restated Credit
Agreement, dated April 1, 2015, by and among
Diplomat, each party thereto designated as a
credit party, General Electric Capital
Corporation, as agent and as lender, and the
lenders from time to time party thereto
Second Amended and Restated Guaranty and
Security Agreement, dated April 1, 2015, by
Diplomat and each other grantor party thereto in
favor of General Electric Capital Corporation, as
agent
Consent to Acquisition, dated June 19, 2015, by
and among Diplomat, the other credit parties
party thereto, General Electric Capital
Corporation, as agent and as lender, and the
other lenders party thereto
Joinder Agreement to Guaranty and Security
Agreement and Credit Agreement, dated June
19, 2015, by and among Burman’s Apothecary,
L.L.C. and its wholly owned subsidiaries and
accepted and agreed by Diplomat and General
Electric Capital Corporation, as agent
Consent to Loan and Agency Transfer, dated as
of September 22, 2015, by and among Diplomat,
General Electric Capital Corporation, in its
capacity as Agent, and the other Credit Parties
thereto
10.18
Letter Agreement dated as of October 29, 2015,
by and among Diplomat, BioRx, LLC and
Healthcare Financial Solutions, LLC, as Agent
10.19*
Diplomat Pharmacy, Inc. Annual Performance
Bonus Plan
10.20
Consent to Sale of Compounding Business,
dated August 27, 2015, by and among Diplomat,
General Electric Capital Corporation, and the
other lender parties thereto
Filed/Furnished
herewith
Incorporated by reference
Period
ending
Exhibit
number
Filing
date
10.1
04/06/15
Form
8-K
8-K
10.2
04/06/15
8-K
10.1
06/22/15
8-K
10.2
06/22/15
Exhibit
number
10.23*
10.24†
10.25†
21
23
Exhibit description
Employment Agreement, dated October 25,
2016, by and between the Company and Paul
Urick
Distribution and Services Agreement dated
August 7, 2013 by and between Pharmacyclics,
Inc. and Diplomat
Amendment No. 1 to Distribution and Services
Agreement by and between Pharmacyclics, Inc.
and Diplomat, dated March 3, 2014
List of subsidiaries of Diplomat
Consent of BDO USA, LLP
31.1
Section 302 Certification—CEO
31.2
Section 302 Certification—PFO
32.1
Section 906 Certification—CEO
32.2
Section 906 Certification—PFO
101.INS XBRL Instance Document
10-K
12/31/15
10.17
02/29/16
101.SCH XBRL Taxonomy Extension Schema Document
10-K
12/31/15
10.19
02/29/16
8-K
10.2
06/09/15
10-Q
9/30/16
10.2
11/04/15
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document
101.DEF XBRL Taxonomy Extension Definition
Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase
Document
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document
Filed/Furnished
herewith
Incorporated by reference
Period
ending
Exhibit
number
Filing
date
10.1
10/26/16
Form
8-K
X
X
X
X
X
X
X
X
X
X
X
X
X
X
*
**
†
Indicates a management contract or compensatory plan or arrangement.
Exhibits and schedules have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of omitted
exhibits and schedules will be furnished to the Commission upon request.
Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from these
exhibits to this Annual Report on Form 10-K and submitted separately to the Securities and Exchange Commission.
10.21*
Diplomat Non-Employee Director
Compensation Program (February 2016)
X
10.22*
Permanent Release and Settlement Agreement,
dated October 25, 2016, by and between the
Company and Sean Whelan
8-K
10.2
10/26/16
102
103
DIPLOMAT PHARMACY, INC. SUBSIDIARIES
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 21
Exhibit 23
The direct and indirect operating subsidiaries of the Company and their respective States of incorporation as of
December 31, 2016 are as follows:
Name of Subsidiaries
State of Incorporation
Percentage of Voting
Stock Owned Directly and
Indirectly by Diplomat
Pharmacy, Inc.
Diplomat Specialty Pharmacy Great Lakes Distribution Center, LLC .......
Diplomat Specialty Pharmacy of Flint, LLC ..............................................
Diplomat Specialty Pharmacy of Grand Rapids, LLC ................................
Diplomat Specialty Pharmacy of Chicago, LLC ........................................
Diplomat Specialty Pharmacy of Ft. Lauderdale, LLC ..............................
Diplomat Specialty Pharmacy of Southern California, LLC ......................
Diplomat Corporate Properties, LLC .........................................................
DSP-Building C, LLC ................................................................................
DSP Flint Real Estate, LLC .......................................................................
Envoy Health Management, LLC...............................................................
Navigator Health Services, LLC ................................................................
American Homecare Federation, Inc. .........................................................
BioRx, LLC................................................................................................
Diplomat Blocker, Inc. ...............................................................................
Primrose Healthcare, LLC..........................................................................
At-Home IV Infusion Professional, Inc. .....................................................
PharmTrack, LLC ......................................................................................
MedPro Rx, Inc. .........................................................................................
Diplomat Specialty Pharmacy of Philadelphia, LLC ..................................
Diplomat Specialty Pharmacy of Boothwyn, LLC .....................................
Valley Campus Pharmacy, Inc. ..................................................................
XAS Infusion Suites, Inc. ...........................................................................
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Connecticut
Delaware
Delaware
Delaware
Maryland
Nevada
North Carolina
Pennsylvania
Pennsylvania
California
Texas
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
51.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Diplomat Pharmacy, Inc.
Flint, Michigan
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-199244) of
Diplomat Pharmacy, Inc. (the “Company”) of our reports dated March 8, 2017, relating to the consolidated financial
statements and the effectiveness of internal control over financial reporting of the Company, which appear in this
Form 10-K. Our report on the effectiveness of internal control over financial reporting expresses an adverse opinion
on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.
/s/ BDO USA, LLP
Troy, Michigan
March 8, 2017
Exhibit 31.1
Exhibit 31.2
CHIEF EXECUTIVE OFFICER’S 302 CERTIFICATION
PRINCIPAL FINANCIAL OFFICERS’ 302 CERTIFICATION
I, Philip R. Hagerman, certify that:
I, Robin Johnson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Diplomat Pharmacy, Inc. (the “Company”) for the year
ended December 31, 2016;
1.
I have reviewed this Annual Report on Form 10-K of Diplomat Pharmacy, Inc. (the “Company”) for the year
ended December 31, 2016;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Company as
of, and for, the periods presented in this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Company as
of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred
during the Company’s most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting; and
d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred
during the Company’s most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of
directors (or persons performing the equivalent functions):
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process,
summarize and report financial information; and
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the Company’s internal control over financial reporting.
role in the Company’s internal control over financial reporting.
Date: March 8, 2017
Date: March 8, 2017
By: /s/ PHILIP R. HAGERMAN
Philip R. Hagerman
Chief Executive Officer
(Principal Executive Officer)
By: /s/ ROBIN JOHNSON
Robin Johnson
Vice President, Finance
(Principal Financial Officer)
Exhibit 32.1
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Diplomat Pharmacy, Inc. on Form 10-K for the year ended December 31,
2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip R.
Hagerman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 8, 2017
By: /s/ PHILIP R. HAGERMAN
Philip R. Hagerman
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Diplomat Pharmacy, Inc. on Form 10-K for the year ended December 31,
2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robin Johnson,
Vice President – Finance of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 8, 2017
By: /s/ ROBIN JOHNSON
Robin Johnson
Vice President, Finance
(Principal Financial Officer)
NOTES REGARDING FORWARD-LOOKING STATEMENTS AND USE OF NON-GAAP MEASURES
OFFICERS AND DIRECTORS
This report contains forward-looking statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of
future events or our future financial or operating performance, and include Diplomat’s expectations regarding
revenues, market share, the performance of acquisitions and growth strategies. The forward-looking statements
contained in this report are based on management’s good-faith belief and reasonable judgment based on current
information, and these statements are qualified by important risks and uncertainties, many of which are beyond our
control, that could cause our actual results to differ materially from those forecasted or indicated by such forward-
looking statements. These risks and uncertainties include: our ability to adapt to changes or trends within the
specialty pharmacy industry; significant and increasing pricing pressure from third-party payors; the amount of
direct and indirect remuneration fees, as well as the timing of assessing such fees and the non-transparent
methodology used to calculate such fees; our relationships with key pharmaceutical manufacturers; bad publicity
about, or market withdrawal of, specialty drugs we dispense; a significant increase in competition from a variety of
companies in the health care industry; our ability to expand the number of specialty drugs we dispense and related
services; maintaining existing patients; revenue concentration of the top specialty drugs we dispense; our ability to
maintain relationships with a specified wholesaler and two pharmaceutical manufacturers; increasing consolidation
in the healthcare industry; managing our growth effectively; limited experience with acquisitions and our ability to
recognize the expected benefits therefrom on a timely basis or at all; managing recent turnover among key
employees; potential disruption to our workforce and operations due to recent cost savings and restructuring
initiatives; and the additional factors set forth in “Risk Factors” in Diplomat’s Annual Report on Form 10-K for the
year ended December 31, 2016 and in subsequent reports filed with or furnished to the Securities and Exchange
Commission. Except as may be required by any applicable laws, Diplomat assumes no obligation to publicly update
such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether
as a result of new information, future developments or otherwise.
This report includes non-GAAP financial measures as defined by SEC Regulation G. Definitions, discussion and
reconciliations of non-GAAP financial measures to the comparable GAAP financial measure are disclosed
Diplomat’s Current Report on Form 8-K furnished to the SEC on February 28, 2017.
KENNETH O. KLEPPER (1,2,3)
Co-Founder, Chairman, and Chief Executive
Officer of ReactiveCore, LLC
SHAWN C. TOMASELLO (2)
Chief Commercial Officer
Kite Pharma, Inc.
BENJAMIN WOLIN (1,3,4)
Former Chief Executive Officer
Everyday Health, Inc.
BOARD OF DIRECTORS
REGINA BENJAMIN
Physician, NOLA.com/Times Picayune
Endowed Chair in Public Health Sciences at
Xavier University of Louisiana
DAVID DREYER (1,2,3)
Former Chief Financial Officer
BIOLASE, Inc.
PHILIP R. HAGERMAN
Chairman of the Board
Chief Executive Officer
Diplomat Pharmacy, Inc.
GARY W. KADLEC
Former President
Diplomat Pharmacy, Inc.
EXECUTIVE OFFICERS
PHILIP R. HAGERMAN
Chairman of the Board
Chief Executive Officer
Diplomat Pharmacy, Inc.
ATUL KAVTHEKAR (5)
Chief Financial Officer
Diplomat Pharmacy, Inc.
GARY RICE
Executive Vice President of Operations
Diplomat Pharmacy, Inc.
PAUL URICK
President
Diplomat Pharmacy, Inc.
________________________________________________________________________________________________________________________________________________
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating and Corporate Governance
Committee Member
(4) Lead Director
(5) Effective May 1, 2017
ANNUAL MEETING
The 2017 Diplomat Pharmacy, Inc. Annual
Meeting will be held on Thursday, June 8, at
our headquarters at 4100 S. Saginaw Street in
Flint, Michigan. The meeting will begin at
1:00 p.m. Eastern Time.
TRANSFER AGENT AND REGISTRAR
Shareholder correspondence can be
mailed to:
Computershare
480 Washington Blvd.
29th Floor
Jersey City, NJ 07310
www-us.computershare.com/investor/
contact
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Diplomat Pharmacy, Inc.
4100 S. Saginaw Street
Flint, MI 48507
888.720.4450
USE OF DIPLOMAT
For ease of use, references in this report to
“Diplomat,” “company,” or “we” means
Diplomat Pharmacy, Inc. and/or one or more
of a number of separate, affiliated entities.
Business is sometimes conducted by an
affiliated entity rather than Diplomat
Pharmacy, Inc. itself.
QUARTERLY SHARE PRICE AND
DIVIDEND INFORMATION
The common stock of Diplomat Pharmacy,
Inc. is listed and traded on the New York
Stock Exchange (Symbol DPLO). The
following table represents the range of closing
share prices for 2016.
MARKET QUOTATIONS
2016 QUARTER HIGH LOW
First
Second
Third
Fourth
$35.62 $25.21
$35.00 $28.14
$37.76 $27.00
$29.06 $12.50
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
BDO USA LLP
Chicago, Illinois
SHAREHOLDER INQUIRIES
Asher S. Dewhurst
Westwicke Partners, LLC
2800 Quarry Lake Drive, Suite 380
Baltimore, MD 21209
443.213.0503
Asher.Dewhurst@westwicke.com
OUR WEBSITE:
www.diplomat.is
Investor information on our website
includes press releases, supplemental
investor information, corporate governance
information, our Code of Business Conduct
and Ethics, SEC filings, and webcasts of
quarterly earnings conference calls.
CONFIDENTIAL HOTLINE:
866.494.3161
Access Code: 4200
Our independently operated, confidential
hotline can be used to report concerns
regarding possible accounting, internal
accounting control or auditing matters, or
fraudulent acts and/or illegal activities
involving our company which may
compromise our ethical standards. Other
means of reporting concerns are identified
in our Code of Business Conduct and
Ethics located in the Investor
Relations/Corporate Governance section of
our company’s website.
PUBLICATIONS
Diplomat’s annual report on Form 10-K
and quarterly reports on Form 10-Q are
available free of charge from our Legal
Department or can be viewed and
downloaded online at www.diplomat.is. A
Notice of 2017 Annual Meeting of
Shareholders and Proxy Statement is
furnished in advance of the annual meeting
to all shareholders entitled to vote at the
annual meeting.