26MAR201514573481
DIPLOMAT PHARMACY, INC.
2017 Annual Report
Letter From the CEO
Dear fellow shareholders:
Diplomat grew with purpose in 2017, bolstering our capabilities to thrive in the changing
healthcare market. Expanding our opportunity for 2018 and beyond, we made strategic
investments to address unmet market needs and deepen existing relationships. Weʼve built the
foundation to solve the biggest challenges facing patients and partners across the continuum of
care.
This year, we will capitalize on several advantages:
(cid:404) Drug developers choose Diplomat. Many of the most promising drugs in the pipeline
are expected to have limited-distribution panels. We expect to be among the few
pharmacies selected to dispense them.
(cid:404) Benefit management opens new doors. By focusing on the underserved middle-market,
we stand to capture significant growth opportunities. Working more closely with payers,
we can serve more patients. We can also cross-sell to new and existing partners between
complementary service areas.
(cid:404) Diplomat minimizes costs without sacrificing outcomes. With our industry partners,
we work to address rising healthcare costs and ensure patients get the treatment they
need. We combine technology, innovation, insight, optimal care settings, and more to
deliver great care and avoid excess spend.
(cid:404) New leadersʼ expertise supports our growth. Weʼve added team members who spent
years building careers in the areas above. Diplomat has the people in place to guide our
strategy and support front-line staff.
We appreciate the trust you place in us to achieve our goals. As I look forward, I am confident
that our strategy—aligning our services to deliver the best access and patient care—has set us
up to grow.
As always, everything we do at Diplomat is with patients in mind—not just to make the most of
the opportunities before us but also because it is the right thing to do.
Sincerely,
Jeff Park
Interim CEO
(This page has been left blank intentionally.)
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, 2017
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
Name of Each Exchange on Which Registered
Common Stock, no par value per share
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 (cid:2) No (cid:3)
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 (cid:3) No (cid:2)
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 (cid:2) No (cid:3)
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 (cid:2) No (cid:3)
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. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Emerging growth company (cid:3)(cid:4)
(cid:2)
Accelerated filer (cid:3)
(cid:4)
Non-accelerated filer(cid:4)(cid:3)
(cid:4)
Smaller reporting company (cid:3)
(cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:3) No (cid:2)
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $709 million as
of June 30, 2017 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 74,069,226 shares of Common Stock outstanding as of February 27, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions, as expressly described in this report, of the Registrant’s Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed
subsequently are incorporated by reference into Part III of this report.
DIPLOMAT PHARMACY, INC.
2017 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 ............................................................................................................................................
Exhibits
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22
41
42
42
43
44
46
48
61
62
102
102
103
104
104
104
104
104
105
109
110
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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:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
our ability to adapt to changes or trends within the specialty pharmacy industry;
significant and increasing pricing pressure from third-party payers, including any reductions in reimbursement
rates;
competition within the prescription benefit management marketplace, and an inability to effectively differentiate
our products and services from those of our competitors;
the amount of direct and indirect remuneration fees, as well as the timing of assessing such fees and the
methodology used to calculate such fees;
our relationships with key pharmaceutical manufacturers;
revenue concentration of the top specialty drugs we dispense;
bad publicity about, or market withdrawal of, specialty drugs we dispense;
a significant increase in competition from a variety of companies in the healthcare industry;
our ability to expand the number of specialty drugs we dispense and related services;
declining gross margins in the prescription benefit management industry;
client losses and/or the failure to win new business;
significant changes occurring within the pharmacy provider marketplace or arising with respect to our pharmacy
networks, including the loss of or adverse change in our relationship with one or more key pharmacy providers;
3
(cid:2)
our ability to effectively execute our acquisition strategy or successfully integrate acquired businesses, including
difficulty, cost and time spent integrating acquired companies or a failure to realize anticipated benefits;
(cid:2) CEO succession planning;
(cid:2)
fluctuations in operating results;
(cid:2) maintaining existing patients;
(cid:2)
increasing consolidation in the healthcare industry;
(cid:2) managing our growth effectively;
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
our ability to drive volume through a refreshed marketing strategy in traditional specialty pharmacy;
our capability to penetrate the fragmented infusion market;
the success of our strategy in the pharmacy benefit manager space;
the ability to advance our specialty footprint by deepening our relationship with manufacturers through critical
service solutions;
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;
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;
disruptions at our facilities related to failures in infrastructure or catastrophic events;
dependence on our senior management and key employees, and effective succession planning and managing
recent turnover among key employees;
loss of management personnel and other key employees due to uncertainties related to acquisitions;
primary reliance on a single shipping provider;
debt service obligations;
supply disruption of any of the 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.”
4
ITEM 1. BUSINESS
Overview
PART I
We are the largest independent provider of specialty pharmacy services in the United States of America (“U.S.”). We
are focused on improving the lives of patients with complex chronic diseases while delivering unique solutions for
manufacturers, hospitals, payers and providers. Our patient-centric approach positions us at the center of the healthcare
continuum for the treatment of complex chronic diseases. We offer a broad range of innovative solutions to address
the dispensing, delivery, dosing, and reimbursement of clinically intensive, high-cost specialty drugs, and a wide range
of applications and pharmacy benefit management (“PBM”) services designed to help our customers reduce the cost
and manage the complexity of their prescription drug programs. 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—always focused on improving patient care and clinical adherence.
Our revenues are derived from: (i) customized care management programs we deliver to our patients, including the
dispensing of their specialty medications and (ii) PBM services (as described more fully below, see, Item 1. Business—
PBM Business), that we provide to our customers. Our specialty pharmacy services focus on offering 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 offer a full array of payer-centric
PBM services that seek to deliver cost-containment strategies that help payers handle rising pharmacy cost.
Our comprehensive, patient-focused specialty pharmacy 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. Our PBM services provide a broad
range of pharmacy spend management solutions and information technology capabilities that enable our clients to
maximize quality of care and gain increased control of their pharmacy benefit dollars and cost control.
We have grown our business in recent years by strengthening our clinical expertise in key therapeutic categories, such
as oncology, immunology, specialty infusion therapy, hepatitis and multiple sclerosis, and by strengthening our
relationships with patients, payers, pharmaceutical manufacturers and physicians. In addition, our business has
continued to evolve. We have broadened the scope of our services provided to hospitals and health systems, managed
care organizations, self-insured employer groups, unions, and third-party healthcare plan administrators and worker’s
compensation payers, including by diversifying our service offerings to include PBM services. While we will continue
to focus on growing our business organically, we have completed several significant acquisitions in recent years and
we may further enhance our competitive position through complementary acquisitions to expand existing services and
provide additional services.
Our specialty pharmacy 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 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.
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
5
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-healthcare 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 Specialty Pharmacy 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, payers and
pharmaceutical manufacturers. 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, smaller owned or leased regional facilities, and centralized clinical call centers to provide such services
to all U.S. states and territories. 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 payers 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 healthcare 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 healthcare 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.
6
Our programs consist of the following business services:
(cid:2) Specialty Drug Dispensing – For the years ended December 31, 2017, 2016 and 2015, 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 specialty business offerings and the overall payer 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. 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. 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 50
percent medical benefit and 50 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 designed to accommodate 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. Our Clinical
Help Desk includes pharmacists, nurses and pharmacy technicians. A pharmacist is available to
counsel patients and consult with 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 180 licensed pharmacists as of December
31, 2017.
o Compliance and Persistency Programs: Our compliance and persistency programs support the
needs of patients based on their therapy regimen. In some cases, a dedicated nurse contacts patients
at specific intervals of therapy to discuss precautions, side-effect management, medication
7
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.
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. These programs result in increased access to specialty drug therapies for
patients and increased revenues for us.
o Specialty Pharmacy Training (Diplomat University): Diplomat University is our education and
training department that educates our employees 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 appropriate third
party to support reimbursement for the prescribed medication. If the required therapy is not listed
on the third-party payer’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
healthcare 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. Our patient care system has been designed to capture much of the
information the pharmaceutical manufacturer must report to the FDA.
(cid:2) 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
8
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.
(cid:2) 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, payers, 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.
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, payers, pharmaceutical manufacturers and physicians. Our
services provide value to constituents as described below.
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). We further believe 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
healthcare costs. We have achieved patient adherence rates higher than 90 percent in each fiscal quarter of 2015, 2016
and 2017. 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.
Diplomat provides patients with personalized medication programs and services for a variety of complex disease
states, including the following:
(cid:2) 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.
(cid:2) 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 with conditions including: 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 therapy is typically
delivered to the patient or caregiver for self-administration in the home or administration by a credentialed
home-healthcare nurse or trained caregiver at home or in another care site.
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(cid:2)
Immunology: Care of patients with autoimmune and/or inflammatory conditions generally involves 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.
(cid:2) 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 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.
(cid:2) 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.
(cid:2) 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.
Payers
We partner with regional and mid-sized payers and independent 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 payer’s needs and is designed to improve efficiency and lower costs.
We offer payers 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 healthcare costs, so our strong adherence
rates provides a benefit to payers. 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 payers with a comprehensive approach to meeting their pharmacy service needs. Our specialty pharmacy
services offer payers a cost effective solution for the distribution of specialty pharmaceuticals, generally directly to
patients for self-administration. We manage high-risk members in the payers’ 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 payers, as well as providing clinical and adherence data to evaluate therapy
effectiveness.
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Pharmaceutical Manufacturers
Through the coverage and clinical expertise of our Company-owned, main distribution facility and 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, encourage and track patient adherence, as well as drug trial assistance including product encapsulation and
packaging, which helps drive the clinical and commercial success of specialty drugs. In addition, in cases where
pharmaceutical companies have successful clinical trials but little commercialization experience, we will partner with
the pharmaceutical manufacturers, including biotechnology pharmaceutical companies early to help them develop
specialty pharmaceutical channel strategies as part of their commercial launch preparation, including strategies to
market to, educate and fulfill the needs of patients, prescribers and payers. We further provide pharmaceutical
manufacturers with a strong distribution channel for their existing pharmaceuticals and their new product launches. In
some cases, we believe that 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.
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
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.
As of December 31, 2017, we have a portfolio of more than 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 has become 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 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, specialty infusion therapy,
immunology, hepatitis 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
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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 payers 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.
Hospitals and Health Systems
We provide clinical and administrative support services for our 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 payers with respect to their specialty pharmacy
customers, except that we do not buy or dispense the specialty product or bill the payers. 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, 2017, 2016 and 2015.
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 healthcare 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.
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 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 without
cause and after giving notice (generally 90 days or less). Specialty drug purchases from AmerisourceBergen, a drug
wholesaler, Celgene Corporation (“Celgene”) and Pharmacyclics, Inc. (“Pharmacyclics”), pharmaceutical
manufacturers from whom we purchase several drugs, represented 41 percent, 17 percent and 14 percent, respectively,
of cost of products sold in 2017, 49 percent, 13 percent and 10 percent, respectively, of cost of products sold in 2016
and 50 percent, 12 percent and 9 percent, respectively, of cost of products sold in 2015. 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 Payers
We derive most of our revenue from contracts with third-party payers such as managed care organizations, insurance
companies, self-insured employers, PBMs, and Medicare and Medicaid programs. We contract directly with some
payers and PBMs or, in other cases, with third parties which in turn contract with payers and PBMs on our behalf. See
“Constituent Relationships-Payers” for additional information on payers.
We bill payers 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 payers. For the great
majority of our dispensing business, claims are submitted to payers 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
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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 payers 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, 2017, we had 190 sales
employees, consisting of 59 centralized, mostly telephonic team members, and 131 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 payer 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 recent years, we have in-sourced a substantial portion of our information technology
development. We also use an off-the-shelf pharmacy software system for purposes of transmitting claims to payers.
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. 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 provider of specialty pharmacy services 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 several
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 specialty pharmacy services. While such entities
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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.
PBM Industry
We believe the key market factors that influence spending on PBM solutions and services by participants in the
pharmaceutical supply chain are the amount spent on prescription drugs and the associated volume of prescription
drugs dispensed and insurance claims processed each year. We estimate that the current market opportunity for our
PBM solutions and services in this industry is significant, and is growing due to an aging population and increased
prescription drug spend. In particular, the U.S. population age 65 and older is expected to reach 92 million by 2060,
representing one in five U.S. residents, with a commensurate increase in prescription drug spend which is estimated
to be 19.3 percent of U.S. gross domestic product by 2023. We believe the increase in prescription spending, faster
projected economic growth and the aging of the population will drive demand for senior-focused clinical programs
and benefit plans, as well as information technology decision support tools to facilitate the on-line analytical
assessment of specific population trends, and address the PBM needs of an aging population. In addition, rising drug
prices and a growth in specialty drug spend should further amplify this trend, with specialty drug spending expected
to surpass traditional drug spending in 2018 and health spending projected to grow at an average rate of 5.7 percent
through 2023, driven primarily by price inflation and the introduction of new products. This, coupled with the trend
in the marketplace to shift coverage of these drugs from the medical benefit to the pharmacy benefit, is expected to
lead to an increase in demand for benefit design and clinical and reimbursement management strategies. In addition,
as demand for Medicare Part D programs continue to increase, the demand for pharmacy benefit management and
information technology should increase concomitantly, as our customers are required to update their systems, and will
continue to require support to maintain these systems.
PBM Business
In late 2017, we entered the PBM business through our December 2017 acquisition of LDI Holding Company, LLC,
doing business as LDI Integrated Pharmacy Services (“LDI”) and our November 2017 acquisition Pharmaceutical
Technologies, Inc., doing business as National Pharmaceutical Services (“NPS”). We are a business provider of PBM
services, which are marketed under the LDI and NPS brands and include electronic point-of-sale pharmacy claims
management, retail pharmacy network management, mail pharmacy claims management, specialty pharmacy claims
management, Medicare Part D services, benefit design consultation, preferred drug management programs, drug
review and analysis, consulting services, data access, and reporting and information analysis. Our PBM services
include owning and operating a network of mail order pharmacies. Our customers include managed care organizations,
self-insured employer groups, unions, and third-party healthcare plan administrators and worker’s compensation
payers.
PBM Products and Services Offered
Our PBM service offering consists of a broad suite of customizable services that provide a flexible and cost-effective
alternative to traditional PBM offerings typically employed by health plans, government agencies and employers. We
provide our customers with increased control of their pharmacy benefit dollars and maximized cost control and quality
of care through a full range of pharmacy spend management services, including:
(cid:2) Formulary Administration – Provide support for customers’ existing formularies and preferred drug lists or
collaborate to create best-in-class models supported by formulary predictive modeling and impact analysis.
Pharmacist, physician and member-focused intervention protocols provide quality controls to drive generics,
preferred drug products and appropriate use. Formularies are administered based on specific plan designs.
(cid:2) Benefit Plan Design and Management – Accommodate and support any benefit plan design option or
variation required. We specialize in applying data-driven insights to help customers understand the medical
risk drivers within their population and take a strategic approach to plan design. We provide benefit design
configuration and support to customers in accordance with mutually developed processes.
(cid:2) Drug Utilization Review (“DUR”) – Pre-dispensing DUR edit checks are performed on an online, real-time
basis between mail and retail pharmacies to encourage appropriate drug utilization, enhance member
outcomes, and reduce drug costs. All prescriptions are checked for member eligibility and plan design
features and are then compared against previous histories of prescriptions filled by the same pharmacy, by
other participating retail network pharmacies and by the mail service pharmacy.
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(cid:2) Clinical Services and Consulting – Clinical and technical expertise are used to develop, deploy and support
our clinical programs. Customers have the option of using selected or the full-suite of our clinical programs,
which incorporate complete prescription drug information to reduce prescription drug costs and increase the
quality of care and member safety. We offer comprehensive clinical management strategies which help
reduce undesirable events, increase medication compliance, decrease medication waste and promote plan
member well-being.
(cid:2) Mail Order Pharmacy Services – In addition to the specialty pharmacy services we provide, as previously
described (See Item 1 Business – Specialty Pharmacy Industry – Our Services), we offer mail order services
to our PBM members. Mail service gives members flexibility, privacy and easy access to their maintenance
medications while offering significant plan savings to the customer. To provide a higher standard of service
and to assert greater control over outcomes for clients, we offer members access to full-service mail service
pharmacies that provide high quality service, member support and convenient, easy-to-use mail service
delivery throughout the U.S. Projected savings for mail service are dependent on plan design features,
including co-payments and incentives and utilization patterns.
(cid:2) Medicare Part D – As a full-service PBM, we support a variety of Medicare Part D Plan Sponsors. We
provide prescription benefit management support including implementation of specific Medicare Part D plan
designs, creation and maintenance of Medicare Part D formularies, CMS reporting requirements and
consultative, proactive account management.
PBM Competition
We compete with numerous companies that provide the same or similar PBM services. Our competitors range from
large publicly traded companies to several small and privately owned companies which compete for a significant part
of the market. The principal competitive factors are quality of service, scope of available services and price. The
ability to be competitive is influenced by our ability to negotiate prices with pharmacies, drug manufacturers and third-
party rebate administrators. Market share for PBM services in the U.S. is highly concentrated, with a few national
firms, such as Express Scripts, CVS Caremark. and OptumRx, a UnitedHealth Group Company, controlling a
significant share of prescription volume. Some of our competitors have been in existence longer and are better
established. Some of them also have broader public recognition and substantially greater financial and marketing
resources. In addition, some of our customers and potential customers may find it desirable to perform for themselves
those services now being rendered by us.
The payer and pharmaceutical supply chain markets require solutions which address the unique needs of each
constituent. Our customers require robust and scalable technology solutions, as well as the ability to ensure cost
efficiency for themselves and their customers. Others require extensive clinical solutions and member-centric services.
Our ability to attract and retain customers depends substantially on our capability to provide competitive pricing,
efficient and accurate claims management, utilization review services and related reporting and consulting services.
Governmental Regulation
The healthcare industry is subject to extensive regulation by several 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.
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
15
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 federal
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 healthcare programs. Certain types of payments are excluded from the statutory prohibition. Additionally, 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.
Several 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 payers. 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
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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. Several 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 healthcare 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 Physician Self-Referral Prohibition, commonly known as the Stark Law, generally prohibits a physician
from ordering Designated Health Services for Medicare and Medicaid patients from 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 or Medicaid 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 subcontractors, use, disclose and safeguard PHI, including requirements to 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
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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 healthcare 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, 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
healthcare providers for purposes of identifying providers in connection with HIPAA standard transactions. Covered
entities may be excluded from federal healthcare 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.
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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 implementing provision in HITECH are forthcoming, but
have been subject to significant delay. The initial 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.
Health Reform Legislation
Congress passed major health reform legislation, including the Patient Protection and Affordable Care Act, as
amended by the Healthcare and Education Reconciliation Act of 2010 (the “Health Reform Laws”), which enacted a
number of significant healthcare 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 Congress has not passed repeal
legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based
shared responsibility payment imposed by the Health Reform Laws on certain individuals who fail to maintain
qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Congress
may consider other legislation to repeal or replace elements of the Health Reform Laws. 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.
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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 2017 and delayed payment for the home infusion services
necessary to administer these drugs until January 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 maintain accreditations from the following organizations:
(cid:2) Accreditation Commission for Healthcare (“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.
(cid:2) 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.
(cid:2) 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.
(cid:2) 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.
Effective January 7, 2015, we hold a Verified Internet Pharmacy Practice Sites® (“VIPPS®”) accreditation
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 to privacy, authentication and
security of prescription orders, adherence to a recognized quality assurance policy and provision of
meaningful consultation between patients and pharmacists.
(cid:2) 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 payers.
(cid:2) 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 a
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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, 2017, we employed 2,419 persons, including 2,177 on a full-time basis and 242 on a part-time
basis. Of our employees, 1,042 were corporate personnel and 1,377 were clinically focused. Most of our part-time
employees are clinicians due to the nature and timing of the services we provide. We have 50 employees covered by
a collective bargaining agreement, which expires on December 31, 2018.
Executive Officers of the Registrant
The following table sets forth information regarding our executive officers (ages as of December 31, 2017):
Name
Jeff Park
Atul Kavthekar
Joel Saban
Gary Rice
Age
46
49
50
60
Position
Interim Chief Executive Officer, Member of the Board of Directors
Chief Financial Officer and Treasurer
President
Executive Vice President, Operations
Jeff Park has served as our interim chief executive officer since January 2018, and has served as a director of the
board of directors since June 2017. Prior to joining Diplomat, Mr. Park was the Chief Operating Officer of OptumRx,
a $75 billion entity resulting from the merger of Catamaran Corporation (NASDAQ: CTRX), a major PBM services
provider, and OptumRx, UnitedHealth Group’s (NYSE: UNH) free-standing pharmacy care services business from
July 2015 until July 2016. Immediately prior to the merger, Mr. Park served as Catamaran’s Executive Vice President,
Operations since March 2014 and previously served as its Chief Financial Officer beginning in 2006. Prior to serving
as Chief Financial Officer, Mr. Park was a member of Catamaran’s board of directors and was a Senior Vice President
of Covington Capital Corporation, a private equity venture capital firm he joined in 1998.
Atul Kavthekar has served as our chief financial officer and treasurer since May 2017. Mr. Kavthekar has over two
decades of financial experience, including most recently at Framebridge, Inc., an ecommerce retailer, where he served
as Chief Financial Officer immediately prior to joining the Company. Before joining Framebridge, Mr. Kavthekar
was at LivingSocial, Inc., an e-commerce retailer, where he served as Chief Financial Officer from June 2015 to
December 2016 and was responsible for overall financial and operational improvement of the business. Mr. Kavthekar
also spent time as Head of Corporate Development for Sears Holding Corporation’s health and wellness division
which included the Kmart Pharmacy business, from December 2013 to May 2015, and as Division CFO of e-
commerce for Walgreen Co. from December 2009 to December 2013. Prior to these positions, he held a number of
positions in the financial industry, focusing on investment banking and mergers and acquisitions.
Joel Saban has served as our president since August 2017. Prior to joining Diplomat, Mr. Saban served as the
Executive Vice President, Pharmacy Operations at Catamaran Corp. from June 2010 until January 2016 overseeing a
staff of approximately 3,200 employees of Catamaran Corp.’s retail, mail and specialty operations, as well as cost of
goods contracting and vendor relations. Prior to joining Catamaran Corp., Mr. Saban was the Senior Vice President
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of Industry Relations at CVS/Caremark Corporation from 1997 until 2010 where he was responsible for directing
brand pharmaceutical industry relations including contract negotiations and administration, financial analysis, and
strategic business development, as well as evaluating opportunities, analyzing contract profitability and ensuring that
contracts met company business objectives in the pharmaceutical and retail areas. Previously, Mr. Saban also served
as Director of Medical and Scientific Affairs for the Alzheimer’s Association. Mr. Saban is a member of the Academy
of Managed Care Pharmacy and the Pharmaceutical Care Management Association.
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 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 work 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 Information,” 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.
ITEM 1.A. RISK FACTORS
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 the Specialty Pharmacy 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, changes to the manner in which healthcare products or services are contracted
for, 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. Furthermore, changes in political, economic and regulatory influences, as well as industry-wide changes in
business practices, including with respect to the imposition of direct and indirect remuneration (“DIR”) fees by PBMs,
may significantly affect our business. Our failure to successfully anticipate and respond to, or appropriately adapt to,
evolving industry conditions or any of these changes or trends, none of which are within our control, in a timely and
effective manner could have a significant negative impact on our competitive position and materially adversely affect
our business, financial condition and results of operations.
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Significant and increasing pressure from third-party payers 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 payers to limit
pharmacy reimbursements may adversely impact our profitability. While manufacturers have increased the price of
drugs, payers have generally decreased reimbursement rates as a percentage of drug cost.
We expect pricing pressures from third-party payers to continue given the high and increasing costs of specialty drugs.
As a result of this industry-wide pressure, we also may see profit margins on our contracts compress, which may
adversely affect our profitability.
PBMs:
Reimbursements received from PBMs are determined pursuant to agreements. Should PBMs seek to
negotiate reduced reimbursement rates or to adjust reimbursement rates downward, this could negatively
impact our profitability. In addition, we may not be willing to accept or otherwise restrict our participation
in networks of pharmacy providers to comply with PBM demands. We also may elect not to continue or enter
into participation in a pharmacy provider network if reimbursements are too low. As a result, we may lose
sales, and if we are unable to replace any such lost sales, either through an increase in other sales or through
participation in other pharmacy provider networks, our operating results could be materially and adversely
affected.
Medicare and Medicaid:
Reimbursement from government programs is subject to a myriad of requirements, including but not limited
to statutory and regulatory, administrative rulings, interpretations, retroactive payment adjustments,
governmental funding restrictions, and changes to, or introduction of, legislation, all of which may materially
affect the amount and timing of reimbursement payments to us. These changes may reduce our revenue and
profitability on services provided to Medicare and Medicaid patients and increase our working capital
requirements.
Furthermore, the utilization of Medicare Part D by cash and state Medicaid customers has resulted in
increased utilization and decreased pharmacy gross margin rates. In addition, changes to Medicare Part D,
such as the elimination of the tax deductibility of the retiree drug subsidy payment received by sponsors of
retiree drug plans, could result in our PBM clients deciding 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 the growth of our
Medicare Part D business.
Given the significant competition in the industry, we have limited bargaining power to counter payer demands for
reduced reimbursement rates. If we are unable to negotiate for acceptable reimbursement rates or replace unfavorable
contracts with new business on acceptable terms, our revenues and business could be adversely affected. Should we
experience a loss of sales as a result of reduced reimbursement rates and are unable to appropriately adjust staffing
levels in a timely and efficient manner, this may negatively impact our financial condition or results of operations.
In response to rising specialty drug prices, payers 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 payers, 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 payer’s willingness to engage us, exclusively or at all, as a specialty pharmacy in the face of rising drug costs.
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The amount of DIR fees charged by payers, as well as the timing of assessing such fees and the 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 payers charge certain 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. Further, the
timing of assessments, changes in the manner in which DIR fees are assessed and 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. In addition, as reimbursement pressure increases
throughout the industry, the amount of DIR fees assessed may increase, which could have an adverse impact on our
revenues and results of operations.
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 has 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 several limited-distribution
drugs to which we do not have access. Access to limited-distribution drugs provides us with significant competitive
advantages in developing relationships with payers and physicians. If we cannot obtain access to new limited-
distribution pharmaceuticals or lose access to limited-distribution pharmaceuticals we currently distribute this could
have a material and adverse impact on our business, profitability and results of operations.
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:
(cid:2)
(cid:2)
(cid:2)
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.
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We generate a significant amount of revenue from certain specialty drugs we dispense.
Our three largest revenue producing specialty drugs we dispense represented 34 percent, 29 percent and 30 percent of
our revenues in 2017, 2016 and 2015, respectively. Our 10 largest revenue producing specialty drugs we dispense
represented 51 percent, 51 percent and 55 percent of our revenues in 2017, 2016 and 2015, respectively. If 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.
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 several healthcare organizations, and CVS Caremark
and Walgreens also benefit from their retail and urgent care locations. As we increase in scale and market share, or
provide additional healthcare services (including PBM services), we expect more direct competition for certain drugs,
payer 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, several 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 hospital pharmacies for 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 doing business with us. Our
failure to maintain and expand relationships with payers 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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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.
Risks related to the PBM Industry
The PBM marketplace is very competitive, which could compress our margins and impair our ability to attract and
retain clients. Our failure to effectively differentiate our products and services from those of our competitors could
magnify the impact of the competitive environment.
Significant competition in the PBM marketplace generates greater client demand for lower pricing, increased revenue
sharing and enhanced product and service offerings. These competitive factors apply pressure on operating margins
and cause many PBMs to reduce the prices charged for core products and services while sharing with clients a greater
portion of the rebates and related revenues received from pharmaceutical manufacturers.
In this regard, we maintain contractual relationships that provide for purchase discounts and/or rebates on drugs
dispensed by pharmacies in our retail network and by our specialty and mail order pharmacies (all or a portion of
which may be passed on to clients). Rebates from manufacturers often depend on a PBM’s ability to meet contractual
market share, formulary or other requirements, including in some cases the placement of a manufacturer’s products
on the PBM’s or client’s formularies. If the discounts or rebates provided by pharmaceutical manufacturers decline,
our business and financial results could be adversely affected. In addition, we also maintain contractual relationships
with participating pharmacies that provide for discounts on retail transactions for generic and brand name drugs
dispensed by pharmacies in our retail network. If we lose our relationship with one or more of the larger pharmacies
in our network, or if the retail discounts provided by network pharmacies decline, our business and financial results
could be adversely affected.
To succeed in the highly competitive PBM marketplace, we must differentiate our products and services by
demonstrating enhanced value to our clients. Unless we can attract new clients and demonstrate enhanced value
through innovative product and service offerings to retain and cross-sell additional products and services to our
existing clients, we may be unable to remain competitive.
If we fail to identify and implement new ways to mitigate pricing pressures or maintain positive trends, this could
negatively impact our ability to attract or retain clients or sell additional services, which could negatively impact our
margins and have a material adverse effect on our business and results of operations.
The possibility of client losses and/or the failure to win new business.
PBM businesses generate revenues primarily by contracting with clients to provide prescription drugs and related
healthcare services to plan members. PBM client contracts often have terms of approximately three years in duration.
In some cases, however, PBM clients may negotiate a shorter or longer contract term or may require early or periodic
renegotiation of pricing prior to expiration of a contract. Our PBM clients can easily move between our competitors
and often seek competing bids prior to expiration of their contracts. In addition, the reputational impact of a service-
related incident could negatively affect our business. These factors, either individually or in the aggregate, together
with the impact of competitive pressures, could make it difficult for us to attract new clients, retain existing clients
and cross-sell additional services, which could result in an adverse effect on our business and financial results.
Furthermore, the PBM industry has been impacted by consolidation activity that may continue in the future. In the
event one or more of our PBM clients is acquired by an entity that obtains PBM services from a competitor, we may
be unable to retain all or a portion of our clients' business. Because of this, we continually face challenges in competing
for new PBM business and retaining or renewing our existing PBM business.
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There can be no assurance that we will be able to win new business or secure renewal business on terms as favorable
to us as the present terms. The loss of business, or a material change in the terms, could adversely impact our business,
profitability or financial results.
Entry into disadvantageous contracts for our claims processing or clinical services could negatively impact our
business. We provide claims processing and clinical services to clients on either a fixed amount per transaction or
percentage of expenditure basis. When contracting for these services, we may not be able to contract at rates that
ensure such transactions will be profitable. In the event of errors in services provided, Diplomat may have exposure
in excess of the value to Diplomat of the claim processed. Should we enter into a significant number of unprofitable
contracts or experience sizeable errors in providing our services, this may have an adverse impact on our profitability
and results of operations.
If significant changes occur within the pharmacy provider marketplace, or if other issues arise with respect to our
pharmacy networks, including the loss of or adverse change in our relationship with one or more key pharmacy
providers, our business and financial results could be impaired.
The entry of one or more large pharmacy chains into the PBM business in addition to the current pharmacy chain
competitors, the consolidation of existing pharmacy chains or increased leverage or market share by the largest
pharmacy providers, could increase the likelihood of negative changes in our relationship with such pharmacies.
Changes in the overall composition of our pharmacy networks, or reduced pharmacy access under our networks, could
have a negative impact on our claims volume and/or our competitiveness in the marketplace, which could cause us to
fall short of certain guarantees in our contracts with clients or otherwise impair our business or results of operations.
Risks related to our Business
We may not be able to effectively execute our acquisition strategy or successfully integrate acquired businesses.
We have completed several significant acquisitions in recent years. The success of an acquisition, will depend, in part,
on our ability to successfully combine and integrate. It is possible that any integration process could result in any of
the following risks which, individually or in aggregate, may have a material adverse effect on our business, affect our
ability to achieve, or result in difficulties in realizing, the anticipated financial or strategic benefits and cost savings
of an acquisition: the loss of key employees; higher than expected costs; diversion of management attention or capital
from other uses; disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies;
impairment of existing relationships with our employees, distributors, suppliers, customers, or other constituents or
those of the acquired companies; difficulty in integrating acquired operations, including restructuring and realigning
activities, personnel, technologies, information and data security and products; and assumption of known and
unknown liabilities, some of which may be difficult or impossible to quantify. In addition, acquiring entities and the
integration in to our operations may require significant capital expenditures, increased indebtedness and non-cash
impairment charges relating to acquired assets. If we experience difficulties with the integration process, the
anticipated benefits of an acquisition may not be realized fully, or at all, or may take longer to realize than expected.
These integration matters could have an adverse effect during any transition period and on the combined company for
an undetermined period after completion of an acquisition.
We will continue to review strategic acquisition opportunities that will enhance our market position, expand our
services, 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.
Sales of shares of our common stock after the expiration of the LDI acquisition lock-up period may cause the
market price of our common stock to fall.
In connection with the acquisition of LDI, we issued 4,113,188 shares of our common stock upon the closing of the
transaction. We are required to file a registration statement with the Securities and Exchange Commission for the
benefit of the sellers with respect to the resale of such common stock. The sellers entered into a subscription agreement
which restricts them from selling or otherwise transferring (subject to limited exceptions) our common stock acquired
pursuant to the LDI acquisition as follows: no sales or transfers prior to March 20, 2018; sales or transfers of up to 50
27
percent of such holder’s common stock between March 20, 2018 and June 20, 2018; and no restrictions after June 20,
2018. A significant number of shares of our common stock may be sold following the end of the foregoing restrictions.
Such sales of our common stock could have the effect of depressing the market price for our common stock. The
market price of our common stock could decline significantly as a result of sales of a large number of shares of our
common stock in the market. These sales, or the perception that these sales might occur, could cause the market price
of our common stock to decline. These sales, or the possibility that these sales may occur, also might make it more
difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
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:
(cid:2)
(cid:2)
(cid:2)
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;
(cid:2) whether our expected distribution share of drugs that come to market is properly estimated;
(cid:2) whether revenues and margins on sales of drugs that come to market are properly estimated;
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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 payers.
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.
We have significant outstanding debt following the acquisition of LDI, which could adversely affect us, including
by decreasing our business flexibility and increasing our interest expense. Our 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. Failure to meet our debt service
obligations could have a material adverse effect on our business, financial condition and results of operations.
We had outstanding indebtedness of $738.3 million under our credit facility at December 31, 2017. As of such date,
we could incur up to an additional $61.7 million in indebtedness under our credit facility and we may be permitted to
incur additional indebtedness under specified conditions. We have substantially increased the amount of our
outstanding indebtedness compared to our recent historical indebtedness amounts, which could have the effect, among
other things, of reducing our flexibility to respond to changing business and economic conditions and increasing our
interest expense.
Our increased debt service obligations may require us to dedicate significant cash flow from operations to the payment
of principal, interest and other amounts payable on our debt, which would reduce the funds available for other business
purposes, and may create competitive disadvantages for us relative to other companies with lower debt levels. Our
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ability to meet our cash requirements, including our debt service obligations, is dependent upon our ability to maintain
our operating performance, which will be subject to general economic and competitive conditions and to financial,
business and other factors, many of which are beyond our control.
We cannot provide assurance that our business will generate sufficient cash flow from operations to fund our cash
requirements and debt service obligations. Our failure to generate sufficient operating cash flow to pay our debts could
have a material adverse effect on us.
If our operating results, cash flow or capital resources prove inadequate, or if interest rates rise significantly, we could
face liquidity constraints. If we are unable to service our debt or experience a significant reduction in our liquidity, we
could be forced to reduce or delay planned capital expenditures and other initiatives (including acquisitions), sell
assets, restructure or refinance our debt or seek additional equity capital, and such transactions may not be available
on terms acceptable to us or at all. We may in the future need to raise substantial additional financing to fund working
capital, capital expenditures, debt service requirements, debt refinancing, acquisitions or other general corporate
requirements. This may make us more vulnerable in the event of a downturn in our business. Our ability to arrange
additional financing or refinancing will depend on, among other factors, our financial position and performance, as
well as prevailing market conditions and other factors beyond our control. Furthermore, any of these actions may not
be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. There can be
no assurance that we will be able to obtain additional financing or refinancing and failure to obtain such additional
financing or refinancing could have a material adverse impact on our operations.
In addition, we will have additional exposure to interest rate risk because our debt obligations are at variable interest
rates. We currently do not maintain hedging contracts that would limit our exposure to variable rates of interest.
However, in the future we may use derivatives, such as interest rate swaps, to fix the effective rate paid on all or a
portion of our debt obligations. The use of derivatives, including interest rate swaps, is a highly specialized activity
that involves certain risks, including counterparty risk. If a counterparty defaults, we would not be able to use the
anticipated net receipts under the derivative contract to offset our interest payments. In addition, the impact of the use
of derivatives will fluctuate dependent upon movements in market interest rates.
We may incur or assume significantly more debt in the future. If we incur more debt in the future and do not retire
existing debt, the risks described above could increase.
Our existing debt agreements limit our ability to take certain actions, which may impact our ability to obtain
additional financing or refinancing on terms acceptable to us, or at all, or access the credit markets when needed.
Our credit facility contains covenants requiring us to, among other things, provide financial and other information
reporting, and provide notice upon certain events. These covenants also place restrictions on our ability to incur
additional indebtedness, pay dividends or make other 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 inability to refinance existing indebtedness or otherwise access the
credit markets for any reason, whether due to market conditions or otherwise, could have a material adverse effect on
our business and results of operations and your investment in our common stock.
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
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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.
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 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 41 percent, 17 percent and 14 percent, respectively, of cost of products sold in 2017, 49
percent, 13 percent and 10 percent, respectively, of cost of products sold in 2016 and 50 percent, 12 percent and 9
percent, respectively, of cost of products sold in 2015. 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 agreement 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, the amended contract also commits us to a minimum purchase obligation per contract year
of approximately $2.0 billion to maintain these current negotiated discounts. Failure to meet this minimum purchase
obligation would result in significant additional expense without corresponding revenues. Furthermore,
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, 2019, 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. In the event of a contractual dispute, we could become involved in litigation, the outcome of which
may be uncertain or difficult to predict and could result in our incurrence of substantial costs regardless of the outcome.
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
30
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, specialty infusion therapy, hepatitis 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.
The success of our hub services depends on the willingness of participants in the specialty pharmacy system to
continue outsourcing work and on our reputation for independent, high-quality service.
Our success in providing hub services depends on the ability and willingness of participants in the specialty pharmacy
system to outsource the services we provide. Accordingly, a general downturn in the specialty pharmacy industry, or
healthcare industry more generally, could materially harm our hub services offerings. In addition, demand for our hub
services may be affected by our customers’ perceptions regarding outsourcing as a whole. For example, other hub
services companies could engage in conduct or fail to detect malfeasance that could render our customers less willing
to do business with us or any hub services company. If any such event causing industry-wide reputational harm were
to occur, even though outside our control, confidence in the industry generally could be impaired and the willingness
of our customers to outsource services to organizations that provide hub services like ours could diminish.
Moreover, demand for our hub services depends to a significant extent on the trust our customers place in us and our
reputation for independent, high-quality service. To maintain client satisfaction and compliance, we keep certain
information and software systems, infrastructure, and employees “firewalled” from our specialty pharmacy and
pharmacy benefit management activities. In the event that our protocols or procedures are not followed, or contain
31
undetected errors or defects that are subsequently discovered by us, our customers or a third party, our reputation with
current and potential customers could be harmed. If one or more of the foregoing events were to occur, it could have
a material adverse effect on our business, financial condition and results of operations.
Significant disruptions to infrastructure or any of our facilities due to failure of technology or some other
catastrophic event could adversely impact our business.
Our distribution centers, call centers, data centers and corporate facilities depend on the local infrastructure and the
uninterrupted operation of our computerized dispensing systems and our electronic data processing systems.
Significant disruptions at any of these facilities or due to failure of technology or any other failure or disruption to
these systems or to the infrastructure due to natural disasters, severe weather conditions, fire, electrical outage, acts of
terrorism or malice, war, health epidemics or pandemics, global political and economic developments, or some other
catastrophic event or the prospect of these events, 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 clients
and members.
Many of the prescriptions we distribute are distributed from a single facility or stored at a single storage site. Loss or
damage to a distribution facility or storage site due to a natural disaster or other catastrophic event could cause
interruptions or delays in our business and loss of inventory and adversely affect our ability to deliver products to
meet patient demands or contractual requirements, which may result in a loss of revenue and other adverse business
consequences. Because of the time required to approve and license a distribution facility a third-party manufacturer
may not be available on a timely basis to replace distribution capabilities in the event we lose distribution capabilities
due to natural disaster, regulatory action or otherwise. Such natural disasters or catastrophic events could materially
and adversely affect the U.S. economy in general and the healthcare industry specifically. For example, in the event
of a natural disaster, bioterrorism attack, pandemic or other extreme events, we could face, among other things,
significant medical costs and increased use of healthcare services. Any such disaster or similar event could have a
material adverse effect on our results of operations, financial position and cash flows.
Our disaster recovery plan is currently limited and has yet to be tested by a real-world catastrophic event. As a result,
we do not know how our disaster recovery plan will function, if at all, should such an event occur. In addition, we
have made significant acquisitions in recent years that remain to be integrated, and may not be able to fully implement
our disaster recovery plan, or at all, in the event of a natural disaster or other catastrophic event. Even though we
believe we carry commercially reasonable business interruption and liability insurance, that protects us in certain
events for a limited period of time, we might suffer losses because of business interruptions that exceed the coverage
available under our insurance policies or for which we do not have coverage and our business interruption insurance
may not adequately compensate us for losses that may occur. If a significant portion of our facilities was destroyed or
our operations were interrupted for any extended period, our business, financial condition, and operating results would
be harmed.
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 centers,
or corporate facilities, 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 or effectively plan for succession.
Our success largely depends on the skills, experience and continued efforts of our management. We have recently
appointed new key executives, including our interim chief executive officer, president and chief financial officer, and
we may expect to hire or promote additional key management team members. Furthermore, 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
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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 fail to provide sufficient incentives
to motivate and retain our key executives, our business and prospects may suffer. 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.
In January 2018, we appointed an interim chief executive officer, Jeff Park, replacing our co-founder, chief executive
officer and chairman of the board of directors, Philip Hagerman, who had led our company throughout its history of
more than 40 years. Our ability to implement effective succession planning is a key factor for our long-term success.
Failure to effectively transfer knowledge and facilitate smooth transitions for key employees could adversely affect
our long-term strategic planning and execution, and the morale and productivity of the workforce could be disrupted,
all of which may adversely affect our business, financial condition, operating results and prospects.
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:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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.
The specialty pharmacy and PBM industries are 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, services rendered in connection with our disease management activity and our
pharmacy benefits management services. 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 and a shareholder
derivative suit. If one or more of these proceedings or any future proceeding has an unfavorable outcome, we cannot
provide any assurance it would not have a material adverse effect on our business and results of operations, including
our ability to attract and retain clients as a result of any negative reputational impact of such an outcome.
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.
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We are self-insured for medical benefits, creating significant exposure to fluctuations in the number and severity
of claims, which may lead to volatility in our expenditures and could materially and adversely affect our financial
condition and results of operations.
The Company has recently implemented a self-insured medical plan. Because we are self-insured for a significant
portion of our claims exposure and related expenses, our insurance and claims expense may be volatile. Although we
have established liabilities based on our claims expectations, we have minimal experience establishing such liabilities.
As a result, actual claims, costs and expenses may exceed our estimates. If the frequency and/or severity of claims
increase, our expenditures could increase and the results of operations could be adversely affected. The timing of the
incurrence of these costs could significantly and adversely impact our operating results. Significant increases in
healthcare costs related to medical inflation, claims experience, current and future federal and state laws and
regulations, and other cost components that are beyond our control could significantly increase the costs of our self-
insured medical plan or require us to adjust the level of benefits offered to our employees. In the future, changes to
healthcare eligibility, design, and cost structure may significantly increase our healthcare coverage costs, which could
have an adverse impact on our business and operating costs, and could materially adversely affect our financial
condition and results of operations.
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.
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, 2017, 2016 and 2015, our involvement with hospitals that
34
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 payer agreements and other contracts with third party payers
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 payers, 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 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 payers such as Medicare and Medicaid. 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
35
excluded from participating in Medicare, Medicaid and other federal and state healthcare programs, which could have
an adverse impact on our business.
Some of the healthcare laws and regulations that apply to our activities include:
(cid:2) 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 federal 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.
(cid:2) The Stark Law prohibits physicians from ordering Designated Health Services for Medicare and Medicaid
patients from any entity with which the physicians or their immediate family members have a “financial
relationship” (i.e., an ownership, investment, or compensation relationship), and prohibits the entity from
presenting or causing to be presented claims to Medicare or Medicaid 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.
(cid:2) Legislation regulating PBM activities in a comprehensive manner has been and continues to be considered
in a number of states. In the past, certain organizations, such as the National Association of Insurance
Commissioners (“NAIC”), an organization of state insurance regulators, have considered proposals to
regulate PBMs and/or certain PBM activities, such as formulary development and utilization management.
While the actions of the NAIC would not have the force of law, it may influence states to adopt model
legislation that such organizations promulgate. Certain states have adopted PBM registration and/or
disclosure laws that require complying with applicable disclosure requirements mandating disclosure of
various aspects of financial practices, including those concerning pharmaceutical company revenue, as well
as prescribing processes for prescription switching programs and client and provider audit terms. As more
states consider similar legislation, it will be difficult to manage the distinct requirements of each.
(cid:2) Changes in existing federal or state laws or regulations or the adoption of new laws or regulations relating to
patent term extensions, purchase discount and rebate arrangements with pharmaceutical manufacturers, or
other PBM services could also reduce the discounts or rebates we receive. Additionally, changes in, or the
adoption of, new laws or regulations relating to claims processing and billing, including our ability to collect
network administration, technology and transmission fees, could adversely impact our profitability.
(cid:2) 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.
(cid:2) 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.
(cid:2) Pharmacy benefits managers must obtain state licenses and comply with various insurance regulations to
operate. If we are unable to maintain our licenses or if states place burdensome regulations on pharmacy
benefits managers, this could limit or affect our ability to operate in some states.
36
(cid:2) ERISA and related regulations regulate many aspects of a pharmacy benefit mangers contractual relationships
with their clients. The failure of our PBMs to comply with ERISA requirements could result in fines and loss
of reputation. In addition, some states attempt to enact laws which impose fiduciary status on PBMs under
certain circumstances which could have a negative effect on the PBMs margins.
(cid:2) Many states impose “any willing provider”, “MAC” and “due process” laws on pharmacy benefit managers
which can affect a PBM’s ability to manage certain aspects of the PBMs pharmacy network, including
reimbursement to pharmacies.
(cid:2) Pharmacy benefits managers that participate in the Medicare Part D Prescription Drug Program are subject
to increasing federal regulations, including certain pricing restrictions and additional compliance
requirements. Such participation can result in increased costs to the PBM as well as increased risk of running
afoul of the related regulations.
(cid:2) Federal and state investigations and enforcement actions continue to focus on the healthcare industry,
scrutinizing a wide range of items such as joint venture arrangements, referral and billing practices, product
discount arrangements, home healthcare services, dissemination of confidential patient information, clinical
drug research trials and gifts for patients.
(cid:2) Various governmental agencies have conducted investigations and audits in to PBM business practices, and
many of these investigations and audits have resulted in those PBMs agreeing to civil penalties, including
the payment of money and corporate integrity agreements. We cannot predict what effect, if any, such
governmental investigations and audits may ultimately have on us or on the PBM industry in general. We
may experience additional government scrutiny and audit activity which may result in the payment or offset
of prior reimbursement from the government.
We are subject to the provisions of Medicare and Medicaid and we may be subject to civil penalties for knowingly
making or causing to be made false claims or false records or statements to obtain reimbursement or for failure to
return overpayments.
The federal False Claims Act (the “False Claims Act”) imposes civil penalties for knowingly making or causing to be
made false claims or false records or statements with respect to governmental programs, such as Medicare and
Medicaid, to obtain reimbursement or for failure to return overpayments. If we are subject to a civil penalty in regard
to our Medicare and Medicaid billing or reimbursement practices, this could result in the possibility of substantial
financial liabilities, which may adversely impact our results of operations. Furthermore, criminal statutes similar to
the False Claims Act provide that if a corporation is convicted of presenting a claim or making a statement it knows
to be false, fictitious or fraudulent to any federal agency, the corporation may be fined. Conviction under these statutes
may also result in exclusion from participation in federal and state healthcare programs. Many states have also enacted
laws similar to the False Claims Act, some of which may include criminal penalties, substantial fines and treble
damages, all of which could negatively impact our business and results of operations.
Regulatory changes relating to Medicare Part D and our failure to comply with CMS regulatory requirements
could adversely impact our business and our results of operations.
The administration of Medicare Part D is complex and any failure to effectively execute the provisions of Medicare
Part D may have an adverse effect on our business and our results of operations. In addition, there are many
uncertainties about the financial and regulatory risks of participating in Medicare Part D, and we can give no assurance
these risks will not materially adversely impact our business and results of operations.
The receipt of federal funds made available through Medicare Part D by our affiliates, our clients or us is subject to
compliance with, among other things, the Medicare regulations and established laws and regulations governing the
federal government’s payment for healthcare goods and services, including the anti-kickback laws and the federal
False Claims Act. If we do not comply with material contractual or regulatory obligations, including, for example,
during CMS audits or client audits in cases where we provide PBM services to Medicare Part D sponsors, recoupment,
monetary penalties and/or applicable sanctions, including suspension of enrollment and marketing or debarment from
participation in Medicare programs, could be imposed.
37
Furthermore, the adoption or promulgation of new or more complex regulatory requirements or changes in the
interpretation of existing regulatory requirements, in each case, associated with Medicare may require us to incur
significant compliance-related costs, including requiring substantial investments in the personnel and technology
necessary to administer our Medicare Part D operations, which could adversely impact our business and our results of
operations.
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. that 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 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, payers, 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 healthcare
delivery, including physicians, hospitals, insurers and other payers. 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 healthcare benefit programs and, in addition to Medicare and Medicaid, to other federal
healthcare 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
38
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.
With respect to our PBM business the Health Reform Laws impose certain transparency requirements related to the
healthcare insurance exchanges and healthcare coverage for Americans in general. The Health Reform Laws impact
our business in a variety of ways and long-term impacts remain unclear with respect to the implementation of certain
components of the Health Reform Laws and related regulatory guidance. Known impacts include an increase in
utilization of the pharmacy benefit by a newly enrolled population with an unknown risk profile, compliance
obligations stemming from increased state and federal government involvement in the healthcare marketplace, shifting
claims liability from plan sponsors to third-party administrators for certain women’s preventive benefits, data
reporting obligations to support health plan issuers and insurers operating in the healthcare exchanges and general
market reforms prohibiting the use of many factors traditionally used to establish premiums and adjustments
implemented by health plan sponsors and health insurance providers.
Tax matters, including the changes in corporate tax rates, disagreements with taxing authorities and imposition of
new taxes could impact our results of operations and financial condition.
We are subject to income and other taxes in the U.S. and our operations, plans and results are affected by tax and other
initiatives. On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law by
President Trump. The Tax Act contains significant changes to corporate taxation, including reduction of the corporate
tax rate from 35 percent to 21 percent, limitation of the tax deduction for interest expense to 30 percent of earnings
(except for certain small businesses), limitation of the deduction for net operating losses to 80 percent of current year
taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced
rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain
important exceptions), immediate deductions for certain new investments instead of deductions for depreciation
expense over time, and modifying or repealing many business deductions and credits. For existing deferred tax
balances for which we were able to determine an impact and those which we were able to determine a reasonable
estimate, we recognized an income tax benefit of $7.8 million, which is included as a component of income tax benefit
for the year ended December 31, 2017. We re-measured these deferred tax assets and liabilities based on the rates at
which they are expected to reverse in the future. As we have not yet completed our accounting for the effect of the
changes in the Tax Act, such completion could result in a material impact on our income tax expense and deferred tax
balances during 2018.
We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing
authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority
disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties.
There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not
have a material impact on our results of operations and financial position.
We also need to comply with new, evolving or revised tax laws and regulations. Changes in the application or
interpretation of the Tax Act may have an adverse effect on our business or on our results of operations.
39
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:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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;
limit 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, a director and our former chairman and chief executive officer, has
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.
40
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, a director and our former 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 26.9 percent of our common stock as of February 28, 2018. 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.
41
ITEM 2. PROPERTIES
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.
The following table lists information regarding each of our major properties as of December 31, 2017:
Location
Flint, MI ......................
Omaha, NE ..................
Creve Coeur, MO ........
Bellevue, NE ...............
Chantilly, VA ..............
Bannockburn, IL .........
Cincinnati, OH ............
Woburn, MA ...............
Boothwyn, PA .............
Flint, MI ......................
Ronkonkoma, NY .......
Cincinnati, OH ............
Cincinnati, OH ............
Ontario, CA .................
Urbandale, IA ..............
Flint, MI ......................
Greensboro, NC...........
Raleigh, NC .................
Raleigh, NC .................
Carlsbad, CA ...............
Scottsdale, AZ .............
Van Nuys, CA .............
Cincinnati, OH ............
Beltsville, MD .............
Enfield, CT ..................
Richardson, TX ...........
Sunrise, FL ..................
Buffalo Grove, IL ........
Square
Footage
599,383
Facility Description
Headquarters and main distribution
Owned
Owned/Leased
facility
Specialty pharmacy
Specialty pharmacy
Specialty and retail pharmacy
Specialty and wholesale pharmacy
Specialty pharmacy
50,594 Office space
34,156 Office space
30,200 Office space
18,018 Office space
15,364 Office space
15,147
11,641
11,400
10,366
8,400
8,205 Office space
8,100 Office space
7,280
7,050
7,000
7,000
6,032 Office space
5,872
5,825
5,792
5,747
5,710 Office space
5,625
4,664
4,147
3,640
3,408
Owned
Leased (expires Aug. 31, 2022)
Owned
Leased (expires Dec. 31, 2020)
Leased (expires Mar. 31, 2023)
Leased (expires Jun. 30, 2025)
Leased (expires Dec. 31, 2027)
Leased (expires Oct. 31, 2026)
Owned
Leased (expires Jul. 31, 2021)
Leased (expires May 31, 2025)
Leased (expires Dec. 31, 2018)
Leased (expires Mar. 14, 2020)
Leased (expires Apr. 30, 2021)
Owned
Leased (expires Apr. 30, 2024)
Leased (expires Jun. 30, 2019)
Specialty pharmacy and office space Leased (expires Nov. 30, 2018)
Leased (expires Dec. 31, 2024)
Specialty pharmacy
Specialty pharmacy
Leased (expires Jun. 9, 2021)
Specialty pharmacy and office space Leased (expires Nov. 30, 2018)
Leased (expires Sep. 30, 2019)
Leased (expires Mar. 31, 2022)
Leased (expires Dec. 17, 2018)
Leased (expires Jul. 31, 2021)
Leased (expires Apr. 30, 2023)
Leased (expires May 31, 2021)
Specialty pharmacy
Specialty pharmacy
Specialty and retail pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty pharmacy
Specialty pharmacy
The Company leases multiple facilities (ranging from 400 to 2,000 square feet) in the mid-Atlantic and southeast
regions of the U.S. for use as specialty infusion suites. Most 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. Following appointment of lead
plaintiffs and lead counsel, an amended complaint was filed on April 11, 2017. The amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with public filings made
between February 29, 2016 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
42
damages and other relief. The Company filed a motion to dismiss the amended complaint on May 24, 2017. The court
issued an order denying the Company’s motion to dismiss on January 19, 2018. The Company filed a motion for
reconsideration of its motion to dismiss on February 2, 2018. The Company believes the complaint and allegations to
be without merit and intends to vigorously defend itself against the action. 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.
On February 10, 2017, the Company’s Board of Directors (the “Board”) received a demand letter from a purported
shareholder containing allegations similar to those contained in the putative class action complaint described above.
The letter demanded that the Board take action to remedy the alleged violations. In response, the Board established a
Special Independent Committee of its disinterested and independent members to investigate the claims. Subsequently,
on June 2, 2017, the shareholder filed a putative shareholder’s derivative lawsuit in the Michigan Circuit Court for the
County of Genesee regarding the same matters alleged in the demand letter. The complaint names the Company as a
nominal defendant and names a number of the Company’s current and former officers and directors as defendants.
The complaint seeks unspecified monetary damages and other relief. In connection with the ongoing Special
Independent Committee investigation, on July 20, 2017, by agreement between the Company and the shareholder, the
court ordered a stay of legal proceedings for 90 days, after which time by further agreement of the Company and the
shareholder, the court has extended the stay until April 3, 2018. 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.
The results of legal proceedings are often uncertain and difficult to predict, and the Company could from time to time
incur judgments, enter into settlements, materially change its business practices or technologies or revise its
expectations regarding the outcome of certain matters. In addition, the costs incurred in litigation can be substantial,
regardless of the outcome.
The Company’s business of providing specialized pharmacy services and other related services may subject it to
litigation and liability for damages in the ordinary course of business. Nevertheless, the Company believes there are
no other legal proceedings, the outcome of which, if determined adversely to the Company, would individually or in
the aggregate be reasonably expected to have a material adverse effect on its business, financial position, cash flows,
or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
43
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:
Quarter
2017
2016
High Low High Low
First ......................................... $ 15.95 $ 12.50 $ 35.62 $ 25.21
Second ..................................... $ 18.84 $ 14.06 $ 35.00 $ 28.14
Third ........................................ $ 21.78 $ 14.43 $ 37.76 $ 27.00
Fourth ...................................... $ 21.57 $ 14.63 $ 29.06 $ 12.50
On February 27, 2018, we had 74,069,226 shares of common stock, no par value, outstanding and 80 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, 2017.
44
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, 2017. 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.
45
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” (“Item 8”) of this Annual Report on Form
10-K. Results of operations and the fair values of assets and liabilities from acquired businesses are included from
their respective acquisition dates forward. See Note 3 of Item 8 for further business acquisition details.
2017
Year Ended December 31,
2015
(Dollars in thousands, except per share amounts)
2014
2016
2013
Consolidated Statements of Operations Data
$ 1,515,139
Net sales .............................................................. $ 4,485,230
Cost of products sold .......................................... (4,136,552) (4,085,560) (3,103,392) (2,074,817) (1,426,112)
89,027
(77,944)
11,083
Gross profit ...............................................
Selling, general and administrative expenses ......
Income from operations ............................
348,678
(330,113)
18,565
263,239
(217,302)
45,937
324,828
(277,751)
47,077
140,139
(127,556)
$ 3,366,631
$ 4,410,388
$ 2,214,956
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 (loss) before income taxes ............
Income tax benefit (expense) ..............................
Net income (loss) ......................................
Less net loss attributable to noncontrolling
(10,716)
(6,573)
(5,239)
(2,528)
(1,996)
—
—
(4,659)
—
—
—
—
213
(10,503)
8,062
7,126
15,188
—
370
(10,862)
36,215
(11,195)
25,020
—
308
(4,931)
41,006
(16,234)
24,772
(6,208)
(1,055)
9,073
(34,348)
(4,842)
1,128
(3,377)
9,206
(4,655)
4,551
—
196
(37,203)
(26,120)
—
(26,120)
interest ..............................................................
(322)
(3,253)
(1,004)
(225)
—
Net income (loss) attributable to Diplomat
Pharmacy, Inc. ..................................................
15,510
28,273
25,776
4,776
(26,120)
Net income allocable to preferred
shareholders ......................................................
—
—
—
458
—
Net income (loss) allocable to common
shareholders ......................................................
$
15,510
$
28,273
$
25,776
$
4,318
$
(26,120)
Net income (loss) per common share:
Basic ...............................................................
Diluted ............................................................
$
$
0.23
0.23
$
$
0.43
0.42
$
$
0.42
0.41
$
$
0.12
0.11
$
$
(0.79)
(0.79)
Weighted average common shares outstanding:
Basic ...............................................................
Diluted ............................................................
68,130,322
68,780,053
65,970,396
68,047,723
60,730,133
63,096,951
36,012,592
38,553,995
33,141,500
33,141,500
2017
2016
As of December 31,
2015
(Dollars in thousands)
2014
2013
Consolidated Balance Sheet Data
Total assets .....................................................
Total debt ........................................................
Total shareholders' equity (deficit) .................
$ 1,940,423
738,250
749,501
$ 1,099,254
150,255
613,724
$ 1,001,579
117,000
515,546
$
390,086
—
168,727
$
211,777
88,164
(77,782)
46
2017
Year Ended December 31,
2016
2014
2015
(Per prescription information in dollars)
2013
Other Data (unaudited)
Prescriptions dispensed .......................................
910,000
981,000
911,000
797,000
722,000
Net sales per prescription dispensed ................... $
Gross profit per prescription dispensed............... $
4,917
367
$
$
4,487
325
$
$
3,683
280
$
$
2,770
167
$
$
2,090
116
47
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except per share, per patient and per prescription data)
Overview
We are the largest independent provider of specialty pharmacy services in the U.S. We are focused on improving the
lives of patients with complex chronic diseases while also delivering unique solutions for manufacturers, hospitals,
payers and providers. Our patient-centric approach positions us at the center of the healthcare continuum for treatment
of complex chronic diseases. 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) and a wide range of applications and PBM services designed to help our customers reduce the cost
and manage the complexity of their prescription drug programs. We have expertise across a broad range of
high-growth specialty therapeutic categories, including oncology, immunology, specialty infusion therapy, hepatitis,
multiple sclerosis and many other serious or long-term conditions. We dispense to patients in all U.S. states and
territories through our advanced distribution centers and manage centralized clinical call centers to deliver localized
services on a national scale. 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—always focused on
improving patient care and clinical adherence.
Our revenues are derived from: (i) customized care management programs we deliver to our patients, including the
dispensing of their specialty medications and (ii) PBM services that we provide to our customers. Because the
therapeutic disease states primarily addressed by our specialty pharmacy services generally require multiyear or
lifelong therapy, our focus on complex chronic diseases helps drive recurring revenues and sustainable growth. Our
specialty pharmacy services revenue growth is primarily driven by manufacturer price inflation, 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, 2017, 2016 and 2015, 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. Going forward, we expect an aging population and attendant increase in prescription
spending to drive demand for our PBM services.
Our recent and historical revenue growth has largely been driven by our position as a leader in the oncology,
immunology, specialty infusion, hepatitis and multiple sclerosis therapeutic categories. For the years ended
December 31, 2017, 2016 and 2015, we generated approximately 94 percent, 93 percent and 92 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 more than 100 limited-distribution drugs, all of which are
commercially available, is important to our revenue growth. For our PBM services, we expect our revenue to be
propelled by rising drug prices and a growth in specialty drug spend, as well a shift in the marketplace of drug coverage
from a medical benefit to a pharmacy benefit, and the increasing complexity and required support for Medicare Part
D programs.
We also provide specialty pharmacy support services to 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 2017, 2016 and 2015 was derived from these services provided
to hospital pharmacy partners.
48
Recent Developments
LDI Holding Company, LLC
On December 20, 2017, we acquired LDI Holding Company, LLC, doing business as LDI Integrated Pharmacy
Services (“LDI”) for a total acquisition price of $600,388, excluding related acquisition costs. Included in the total
acquisition price is $521,300 in cash and 4,113,188 restricted shares of our common stock, fair valued at $79,088 as
of the acquisition date. LDI is a full-service pharmacy benefit manager (“PBM”) based in St. Louis, Missouri. LDI’s
service offerings include URAC-accredited mail-order and specialty pharmacies, a national network of retail
pharmacies, and comprehensive clinical programs.
Debt Financing
On December 20, 2017, in conjunction with the LDI acquisition, we fully syndicated an $800,000 debt financing led
by JPMorgan Chase Bank, N.A. and Capital One, comprised of a $250,000 line of credit and a $150,000 Term Loan
A, each with a December 20, 2022 maturity date, and a $400,000 Term Loan B with a December 20, 2024 maturity
date. The proceeds of this credit facility were used to finance the LDI acquisition, pay related transaction fees and
expenses, and repay the former credit facility, as well as provide sufficient liquidity for our future needs. We incurred
debt issuance costs of $21,507 associated with the credit facility.
Pharmaceutical Technologies, Inc.
On November 27, 2017, we acquired Pharmaceutical Technologies, Inc., doing business as National Pharmaceutical
Services (“NPS”), for a total acquisition price of $47,190, excluding related acquisition costs. Included in the total
acquisition price is $34,437 in cash and 835,017 restricted shares of our common stock, fair valued at $12,753 as of
the acquisition date. NPS is a fully-integrated, nationwide pharmacy benefit manager based in Omaha, Nebraska.
Focus Rx Pharmacy Services Inc. and Focus Rx Inc.
On September 1, 2017, we acquired Focus Rx Pharmacy Services Inc. and Focus Rx Inc. (collectively, “Focus”) for
a total acquisition price of $24,975, excluding related acquisition costs. Included in the total acquisition price is
$17,252 in cash, 374,297 restricted shares of our common stock, fair valued at $5,643 as of the acquisition date, and
contingent consideration of up to $1,500 in cash per performance period to the former holders of Focus’ equity
interests based upon the achievement of certain gross margin targets in each of the 12-month periods ending
September 30, 2018 and 2019, which was fair valued at $2,080 as of the acquisition date. Focus is a specialty
pharmacy focusing on infusion services located in Ronkonkoma, New York.
Accurate Rx Pharmacy Consulting, LLC
On July 5, 2017, we acquired Accurate Rx Pharmacy Consulting, LLC (“Accurate”) for a total acquisition price of
$13,164, excluding related acquisition costs. Included in the total acquisition price is $9,408 in cash, 131,108
restricted shares of our common stock, fair valued at $1,776 as of the acquisition date, and contingent consideration
of up to $3,600 in cash per performance period to the former holders of Accurate’s equity interests based upon the
achievement of certain gross margin targets in each of the 12-month periods ending July 31, 2018 and 2019, which
was fair valued at $1,980 as of the acquisition date. Accurate is a specialty pharmacy focusing on infusion services
located in Columbia, Missouri.
WRB Communications, LLC Acquisition
On May 8, 2017, we acquired WRB Communications, LLC (“WRB”) for a total acquisition price of $31,625,
excluding related acquisition costs. Included in the total acquisition price is $26,804 in cash, 299,325 restricted shares
of our common stock, fair valued at $4,291 as of the acquisition date, and contingent consideration of up to $500 in
cash per performance period to the former holders of WRB’s equity interests based upon the achievement of certain
earnings before interest, taxes, depreciation and amortization targets in each of the 12-month periods ending May 31,
2018 and 2019, which was fair valued at $530 as of the acquisition date. WRB is a communications and contact center
49
company based in Chantilly, Virginia that specializes in relationship-management programs for leading
pharmaceutical manufacturers and service organizations.
Comfort Infusion, Inc. Acquisition
On March 22, 2017, we acquired Comfort Infusion, Inc. (“Comfort”) for a total acquisition price of $14,413, excluding
related acquisition costs. Included in the total acquisition price is $10,613 in cash, and contingent consideration of up
to $2,000 in cash per performance period to the former holders of Comfort’s equity interests based upon the
achievement of certain gross profit targets in each of the 12-month periods ending March 31, 2018, 2019 and 2020,
which was fair valued at $3,800 as of the acquisition date. Comfort is a specialty pharmacy and infusion services
company based in Birmingham, Alabama that specializes in intravenous immune globulin therapy to support patients’
immune systems.
Affinity Biotech, Inc. Acquisition
On February 1, 2017, we acquired Affinity Biotech, Inc. (“Affinity”) for a total acquisition price of $17,412, excluding
related acquisition costs. Included in the total acquisition price is $17,377 in cash, and contingent consideration of up
to $4,000 in cash to the former holders of Affinity’s equity interests based upon the achievement of a certain earnings
before interest, taxes, depreciation and amortization target in the 12-month period ending February 28, 2018, which
was fair valued at $35 as of the acquisition date. Affinity is a specialty pharmacy and infusion services company based
in Houston, Texas that provides treatments and nursing services for patients with hemophilia.
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:
Prescriptions dispensed ..............................................................................
Year Ended December 31,
2016
910,000 981,000 911,000
2015
2017
Net sales per prescription dispensed ..........................................................
Gross profit per prescription dispensed .....................................................
$
$
4,917 $
367 $
4,487 $
325 $
3,683
280
Prescription Data (rounded to the nearest thousand)
Prescriptions dispensed represent prescriptions filled and dispensed by Diplomat to patients or, in rare cases, to
physicians. Our volume for the year ended December 31, 2017 was 910,000 prescriptions dispensed, a 7 percent
decrease compared to 981,000 prescriptions dispensed for the year ended December 31, 2016. These volume decreases
were due to contracts that were not renewed, a business decision to exit dispensing certain high-volume, but low-
profit, drugs and a decrease in hepatitis C volume, partially offset by the contributions of our recent acquisitions, new
drugs to the market or newly dispensed by us, growth in patients from current payers and physician practices, and the
addition of patients from new payers and physician practices.
Our volume for the year ended December 31, 2016 was 981,000 prescriptions dispensed, an 8 percent increase
compared to 911,000 prescriptions dispensed for the year ended December 31, 2015. The volume increase was due to
the contribution of our acquisitions, new drugs to the market or newly dispensed by us, growth in patients from current
payers and physician practices, and the addition of patients from new payers and physician practices. These volume
increases were partially offset by 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.
50
Other Metrics
Other key metrics used in analyzing our business are net sales per prescription dispensed and gross profit per
prescription 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 payers 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.
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 hospital
pharmacies for patient support that is provided by us to those non-Diplomat pharmacies to dispense specialty drugs to
patients. The 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
Other expense primarily consists of interest expense associated with our debt, and equity losses and impairments of
non-consolidated entities.
51
RESULTS OF OPERATIONS
The following table provides consolidated statements of operations data for each of the years presented:
Net sales ......................................................................................... $ 4,485,230
Cost of products sold ..................................................................... (4,136,552)
348,678
(330,113)
18,565
Gross profit .............................................................................
SG&A ............................................................................................
Income from operations ..........................................................
2017
Year Ended December 31,
2016
$ 4,410,388
(4,085,560)
324,828
(277,751)
47,077
2015
$ 3,366,631
(3,103,392)
263,239
(217,302)
45,937
Other (expense) income:
Interest expense ..........................................................................
Equity loss and impairment of non-consolidated entities ...........
Other ..........................................................................................
Total other expense ........................................................................
Income before income taxes ...................................................
Income tax benefit (expense) .........................................................
Net income .............................................................................
Less net loss attributable to noncontrolling interest .......................
Net income attributable to Diplomat Pharmacy, Inc. ..................... $
(10,716)
—
213
(10,503)
8,062
7,126
15,188
(322)
15,510
$
(6,573)
(4,659)
370
(10,862)
36,215
(11,195)
25,020
(3,253)
28,273
$
(5,239)
—
308
(4,931)
41,006
(16,234)
24,772
(1,004)
25,776
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
Net Sales
Net sales for the year ended December 31, 2017 were $4,485,230, a $74,842 or 1.7 percent increase, compared to
$4,410,388 for the year ended December 31, 2016. This increase was the result of approximately $294,000 from the
impact of manufacturer price increases, approximately $272,000 of net sales from our recent acquisitions,
approximately $127,000 from drugs that were new in the past 12 months and approximately $70,000 of net sales from
increased volume and mix associated with existing payer contracts. These increases were partially offset by a decrease
of approximately $460,000 due to contracts that were not renewed in 2017, as well as a decrease of approximately
$229,000 in hepatitis C drug sales versus the prior year period.
Cost of Products Sold
Cost of products sold for the year ended December 31, 2017 was $4,136,552, a $50,992 or 1.2 percent increase,
compared to $4,085,560 for the year ended December 31, 2016. This increase was primarily the result of the same
factors that drove the increase in our net sales over the same period. Cost of goods sold was 92.2 percent and 92.6
percent of net sales for the years ended December 31, 2017 and 2016, respectively. The increase in gross margin from
7.4 percent to 7.8 percent for the years ended December 31, 2016 and 2017, respectively, was primarily attributable
to the continued growth of our specialty infusion therapeutic category and the impact of our LDI, NPS and WRB
acquisitions, all of which have higher margins than our legacy operations.
SG&A
SG&A for the year ended December 31, 2017 were $330,113, a $52,362 increase, compared to $277,751 for the year
ended December 31, 2016. Total employee cost increased by $26,947, inclusive of $18,783 of employee expense for
our recently acquired entities. The remaining increase in employee cost was primarily attributable to the increased
clinical and administrative complexity associated with our mix of both acquired and organic business. Changes in fair
values of contingent consideration were $3,675 and $(8,922) for the years ended December 31, 2017 and 2016,
respectively, leading to a period-over-period increase of $12,597. Amortization expense from definite-lived intangible
assets associated with our acquired entities increased $9,990. The remaining increase was in various other SG&A
including insurance, legal fees and other miscellaneous expenses. These increases were partially offset by the
nonrecurrence of a $4,804 impairment expense recognized during the third quarter of 2016 to fully impair the definite-
52
lived intangible assets associated with Primrose Healthcare, LLC (“Primrose”). As a percent of net sales, SG&A,
excluding the changes in fair values of contingent consideration and the Primrose impairment, accounted for 7.3
percent for the year ended December 31, 2017 compared to 6.4 percent for the year ended December 31, 2016. This
increase is primarily attributable to the increase in acquisition-related amortization, the increased operating complexity
associated with both of our PBM acquisitions and new drugs and our expansion into more service based offerings,
partially offset by operating efficiencies.
Other Expense
Other expense for the years ended December 31, 2017 and 2016 was $10,503 and $10,862, respectively. Interest
expense increased by $4,143 as we fully drew down our $25,000 deferred draw term loan at the end of the first quarter
of 2017 and entered into a new financing arrangement during the fourth quarter of 2017, which increased our
outstanding debt and caused us to expense $1,380 of debt issuance costs in accordance with debt modification
accounting standards. 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.
Income Tax Benefit (Expense)
Income tax benefit (expense) for the years ended December 31, 2017 and 2016 was $7,126 and $(11,195), respectively.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, which reduces the U.S. federal
corporate tax rate from 35 percent to 21 percent. We recognized a $7,828 income tax benefit during the fourth quarter
of 2017 due to the Tax Act’s impact of reducing our net deferred tax liability. In the absence of the Tax Act, our
effective tax rates for the years ended December 31, 2017 and 2016 would have been 9 percent and 31 percent,
respectively. Income taxes for the years ended December 31, 2017 and 2016 included the recognition of excess tax
benefits related to share-based awards, which favorably impacted the effective tax rates by 37 percent and 11 percent,
respectively.
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. Acquisitions 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
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; 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
53
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, 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 changes 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 our term loan
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 related to share-based awards, which favorably impacted the 2016
effective tax rate by 11 percent.
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, 2017 and 2016, we had $84,251 and $7,953,
respectively, of cash and cash equivalents. We had $188,250 and $39,255 outstanding on our line of credit at
December 31, 2017 and 2016, respectively. Our available liquidity under our line of credit was $61,750 and $129,908
at December 31, 2017 and 2016, 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.
The following table provides cash flow data for each of the years presented:
Net cash provided by operating activities ........................................... $ 135,254
(633,319)
Net cash used in investing activities ...................................................
574,363
Net cash provided by financing activities ...........................................
76,298
Net increase (decrease) in cash and cash equivalents ......................... $
2017
$
Year Ended December 31,
2016
31,326
(85,967)
34,994
(19,647)
$
$
$
2015
29,447
(311,573)
291,769
9,643
54
Cash Flows from Operating Activities
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 $103,928 increase in cash provided by operating activities for the year ended December 31, 2017 compared to
the year ended December 31, 2016 was due to a $106,269 change in net working capital inflows and a $7,491 increase
in noncash adjustments to net income, partially offset by a $9,832 decrease in net income.
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.
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 $547,352 increase in cash used in investing activities during the year ended December 31, 2017 compared to the
year ended December 31, 2016 was primarily related to a $555,911 increase in cash used to acquire businesses,
partially offset by a $9,090 decrease in spending on capitalized software.
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.
Cash Flows from Financing Activities
Our primary financing activities have consisted of debt borrowings and repayments, payment of debt issuance costs,
proceeds from stock option exercises, proceeds from capital stock offerings and payments made to repurchase capital
stock and stock options.
The $539,369 increase in cash provided by financing activities during the year ended December 31, 2017 compared
to the year ended December 31, 2016 was primarily due to increased borrowings associated with our LDI acquisition.
We received $575,000 in long-term debt proceeds during 2017, partially offset by long-term debt repayments of
$136,000 and debt issuance payments of $21,507 during 2017. We also had a $109,740 increase in year-over-year net
proceeds from our line of credit.
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 fully drawn term loan
from our former credit facility (described below), partially offset by $36,298 in payments made to repurchase stock
options.
Excess Tax Benefits Related to Share-Based Awards
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”), 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
55
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 year ended December 31, 2015, we
recorded excess tax benefits related to share-based awards of $20,805 as an increase 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 of excess tax benefits related to share-based awards as a decrease to cash flows from
operating activities and as an increase to cash flows from financing activities for the year ended December 31, 2015.
Debt
On December 20, 2017, in conjunction with the LDI acquisition, we fully syndicated an $800,000 debt financing led
by JPMorgan Chase Bank, N.A. and Capital One, National Association (“Capital One”), comprised of a $250,000 line
of credit and a $150,000 Term Loan A, each with a December 20, 2022 maturity date, and a $400,000 Term Loan B
with a December 20, 2024 maturity date (“credit facility”). The credit facility is secured by substantially all of our
assets. The proceeds of the credit facility were used to finance the LDI acquisition, pay related transaction fees and
expenses, and repay the former credit facility (as defined below), as well as provide sufficient liquidity for our future
needs. We incurred debt issuance costs of $21,507 associated with the credit facility, of which all but $744 were
capitalized. These costs, along with $2,715 in previously incurred unamortized debt issuance costs, are being
amortized to interest expense over the term of the credit facility. We also expensed $636 in previously incurred
unamortized debt issuance costs to interest expense upon entering into the credit facility.
On April 1, 2015, in conjunction with the BioRx, LLC 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 thereto, which provided for an increase in our line of credit from $120,000 to $175,000, a fully drawn term
loan for $120,000 and a delayed draw term loan (“DDTL”) for an additional $25,000 (“former credit facility”). We
fully drew upon the $25,000 DDTL during the first quarter of 2017. The former credit facility was subsequently
extinguished with the proceeds of the credit facility.
At December 31, 2017 and 2016, we had $550,000 and $111,000, respectively, in outstanding term loans. Term loan-
related unamortized debt issuance costs of $17,402 and $3,316 as of December 31, 2017 and 2016, respectively, are
presented in the consolidated balance sheets as direct deductions to the outstanding debt balances. We had $188,250
and $39,255 outstanding on our line of credit at December 31, 2017 and 2016, respectively. We had $61,750 and
$129,908 available to borrow on our line of credit at December 31, 2017 and 2016, respectively. We had weighted
average borrowings on our line of credit of $28,238 and $11,986 and maximum borrowings on our line of credit of
$188,250 and $82,683 during the years ended December 31, 2017 and 2016, respectively. Line of credit-related
unamortized debt issuance costs of $4,861 and $550 as of December 31, 2017 and 2016, respectively, are classified
within “Other noncurrent assets” in the consolidated balance sheets.
The interest rates we pay under the credit facility are a function of a defined margin above LIBOR. Our Term Loan A
and Term Loan B interest rates were 4.04 percent and 6.04 percent, respectively, at December 31, 2017. Our term loan
interest rate was 3.13 percent at December 31, 2016. Our line of credit interest rate was 4.04 percent and 4.75 percent
at December 31, 2017 and 2016, respectively. We are charged a monthly unused commitment fee ranging from 0.3
percent to 0.4 percent on the average unused daily balance on our $250,000 line of credit.
The credit facility contains, and former credit facility contained, certain financial and non-financial covenants. We
were in compliance with all such covenants as of December 31, 2017 and 2016.
56
Contractual Obligations
Our contractual obligations, including estimated payments due by year, as of December 31, 2017 are as follows:
2018
2019
2020
2021
2022
Thereafter Total
Long-term debt ...................... $ 11,500 $ 11,500 $ 11,500 $ 11,500 $124,000 $ 380,000
—
Line of credit ......................... 188,250
—
Interest payments(1) ............... 31,016 30,471 29,927 29,382 28,837
45,481
2,348
1,677
2,761
Operating leases ....................
Total ...................................... $233,506 $ 44,732 $ 43,903 $ 43,024 $154,514 $ 427,829
2,740
2,142
2,476
—
—
—
$ 550,000
188,250
195,114
14,144
$ 947,508
(1) Interest rates utilized were the rates in effect as of December 31, 2017.
We purchase a large portion of our prescription drug inventory from AmerisourceBergen. Our amended contract with
AmerisourceBergen expires on September 30, 2018. The amended contract commits us to a minimum purchase
obligation of approximately $2,000,000 per contract year to maintain our current negotiated discounts and rates.
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.
Critical Accounting Policies
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 dispensing prescription drugs 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 payer contracts and do not
experience a significant level of returns or reshipments. Revenues from dispensing prescription drugs that are picked
up by customers at an open door or retail pharmacy location are recorded at prescription adjudication, which
approximates fill date.
57
We accrue an estimate of fees, including DIR fees, which are assessed or expected to be assessed by payers 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.
We recognize revenue from the sale of prescription drugs by our retail pharmacy network when the claim is
adjudicated. When we act as principal in the arrangement, exercise pricing latitude and independently have a
contractual obligation to pay our network pharmacy providers for benefits provided to our clients’ members, we
include the total prescription price (ingredient cost plus dispensing fee) we have contracted with these clients as
revenue, including member co-payments to pharmacies. When we merely administer a client’s network pharmacy
contracts and do not assume credit risk, we earn an administrative fee for collecting payments from the client and
remit the corresponding amount to the pharmacies in the client’s network, drug ingredient cost is not included in our
revenues or cost of products sold.
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).
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.
Goodwill
Goodwill is reviewed for impairment annually during the fourth quarter, or more frequently if indicators of impairment
exist. 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 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.
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
58
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.
In a quantitative assessment, the fair value of a reporting unit is determined and then compared 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
value, a goodwill impairment charge is recognized for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting
unit.
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.
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 certain revenue
and/or Adjusted EBITDA targets prior to vesting. We use the Black-Scholes-Merton option pricing model to
determine the grant date fair value of options.
59
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. Expected volatility is
based on a weighted average of the Company’s historic volatility and 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). Forfeitures are
accounted for when they occur.
We also grant restricted stock units (“RSU” or “RSUs”) to key employees, which are accounted for as equity awards.
Some granted RSUs cliff vest after three years, whereas others vest one-third per year. The grant date fair value of a
RSU is determined by the closing market price of our common stock as of the date of grant. We expense the grant
date fair value of the RSU over the three-year vesting period on a straight-line basis.
We grant restricted stock awards (“RSA” or “RSAs”) to non-employee directors, which are accounted for as equity
awards. Generally, such RSAs fully vest on the first anniversary of the grant date. The grant date fair value of a RSA
is determined by the closing market price of our common stock as of the date of grant. We expense the grant date fair
value of the RSA over the 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.
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 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, 2017 and 2016, 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.
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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. We currently are not using any interest rate
swaps, but may in the future. A 100 basis-point increase in 2017 interest rates would have decreased our 2017 pre-tax
income by approximately $1.8 million.
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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, 2017.
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 the entities that were
acquired by the Company during 2017 (the “2017 Acquisitions”), which are included in the consolidated balance sheet
of Diplomat Pharmacy, Inc. as of December 31, 2017, and the related consolidated statements of operations, cash
flows and changes in shareholders’ equity for the year then ended. The 2017 Acquisitions’ net sales represented
approximately 2 percent of consolidated net sales for the year ended December 31, 2017. As of December 31, 2017,
the 2017 Acquisitions’ total assets and net tangible assets represented approximately 45 percent of consolidated total
assets and approximately 18 percent of consolidated net tangible 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 effective as
of December 31, 2017.
BDO USA, LLP, the Company’s independent registered public accounting firm, audited the Company’s consolidated
financial statements included in this Annual Report on Form 10-K and 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).
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Diplomat Pharmacy, Inc.
Flint, Michigan
Opinion on Internal Control over Financial Reporting
We have audited Diplomat Pharmacy, Inc.’s (the “Company’s”) internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related
consolidated statements of operations, cash flows and changes in shareholders’ equity for each of the three years in
the period ended December 31, 2017, and the related notes and our report dated March 1, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.
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.
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 the entities that were acquired by the Company during 2017 (the “2017 Acquisitions”),
which are included in the consolidated balance sheet of the Company as of December 31, 2017, and the related
consolidated statements of operations, cash flows and changes in shareholders’ equity for the year then ended. The
2017 Acquisitions’ net sales represented approximately 2 percent of consolidated net sales for the year ended
December 31, 2017. As of December 31, 2017, the 2017 Acquisitions’ total assets and net tangible assets represented
approximately 45 percent of consolidated total assets and approximately 18 percent of consolidated net tangible assets.
Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal
control over financial reporting of the 2017 Acquisitions.
Definition and Limitations of Internal Control over Financial Reporting
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
63
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.
/s/ BDO USA, LLP
Troy, Michigan
March 1, 2018
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Diplomat Pharmacy, Inc.
Flint, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Diplomat Pharmacy, Inc. (the “Company”) as
of December 31, 2017 and 2016, the related consolidated statements of income, cash flows and changes in
shareholders’ equity for each of the three years in the period ended December 31, 2017 and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December
31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2017, 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) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, 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 1, 2018 expressed an unqualified
opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2008.
/s/ BDO USA, LLP
Troy, Michigan
March 1, 2018
65
DIPLOMAT PHARMACY, INC.
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
2017
December 31,
2016
Current assets:
ASSETS
Cash and equivalents ............................................................................................. $
Accounts receivable, net ........................................................................................
Inventories .............................................................................................................
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 ...........................................................................
Deferred income taxes ...............................................................................................
Other noncurrent assets .............................................................................................
$
84,251
332,091
206,603
11,125
634,070
38,990
36,520
832,624
392,011
—
6,208
7,953
275,568
215,351
6,235
505,107
20,372
50,247
316,616
199,862
6,010
1,040
Total assets ................................................................................................... $ 1,940,423
$ 1,099,254
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 .................................................................................
413,463
188,250
11,500
9,584
8,100
20,560
651,457
$
Long-term debt, less current portion .........................................................................
Deferred income taxes ...............................................................................................
Contingent consideration ...........................................................................................
Total liabilities .............................................................................................
521,098
14,367
4,000
1,190,922
320,684
39,255
7,500
5,674
—
12,233
385,346
100,184
—
—
485,530
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; 73,871,424 and
66,764,999 shares issued and outstanding at December 31, 2017 and 2016,
respectively) .......................................................................................................
Additional paid-in capital ......................................................................................
Retained earnings ..................................................................................................
Total Diplomat Pharmacy shareholders’ equity ....................................................
Noncontrolling interests ............................................................................................
Total shareholders’ equity ............................................................................
—
—
619,235
38,450
91,816
749,501
—
749,501
503,828
33,268
76,306
613,402
322
613,724
Total liabilities and shareholders’ equity ..................................................... $ 1,940,423
$ 1,099,254
See accompanying notes to consolidated financial statements.
66
DIPLOMAT PHARMACY, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Net sales ......................................................................................... $ 4,485,230
Cost of products sold ..................................................................... (4,136,552)
348,678
(330,113)
18,565
Gross profit .............................................................................
Selling, general and administrative expenses ................................
Income from operations ..........................................................
2017
Year Ended December 31,
2016
$ 4,410,388
(4,085,560)
324,828
(277,751)
47,077
2015
$ 3,366,631
(3,103,392)
263,239
(217,302)
45,937
Other (expense) income:
Interest expense ..........................................................................
Equity loss and impairment of non-consolidated entities ...........
Other ..........................................................................................
Total other expense ........................................................................
Income before income taxes ...................................................
Income tax benefit (expense) .........................................................
Net income .............................................................................
Less net loss attributable to noncontrolling interest .......................
Net income allocable to Diplomat Pharmacy, Inc. ........................ $
(10,716)
—
213
(10,503)
8,062
7,126
15,188
(322)
15,510
$
(6,573)
(4,659)
370
(10,862)
36,215
(11,195)
25,020
(3,253)
28,273
$
(5,239)
—
308
(4,931)
41,006
(16,234)
24,772
(1,004)
25,776
Net income per common share:
Basic .............................................................................................. $
Diluted ........................................................................................... $
0.23
0.23
$
$
0.43
0.42
$
$
0.42
0.41
Weighted average common shares outstanding:
Basic .............................................................................................. 68,130,322
Diluted ........................................................................................... 68,780,053
65,970,396
68,047,723
60,730,133
63,096,951
See accompanying notes to consolidated financial statements.
67
DIPLOMAT PHARMACY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net income ....................................................................................................... $ 15,188
Adjustments to reconcile net income to net cash provided by
$ 25,020
$ 24,772
Year Ended December 31,
2016
2017
2015
operating activities:
Depreciation and amortization ...................................................................
Net provision for doubtful accounts ...........................................................
Share-based compensation expense ...........................................................
Changes in fair values of contingent consideration ....................................
Contingent consideration payments ...........................................................
Deferred income tax (benefit) expense ......................................................
Amortization of debt issuance costs ...........................................................
Impairment expense ...................................................................................
Equity loss and impairment of non-consolidated entities ...........................
Excess tax benefits related to share-based awards (Note 10) .....................
Other ..........................................................................................................
Changes in operating assets and liabilities, net of business acquisitions:
66,566
9,424
7,281
3,675
—
(10,795)
2,655
—
—
—
1
Accounts receivable .............................................................................
Inventories ...........................................................................................
Accounts payable .................................................................................
Other assets and liabilities ....................................................................
Net cash provided by operating activities ........................................
7,735
13,813
24,327
(4,615)
135,254
Cash flows from investing activities:
Payments to acquire businesses, net of cash acquired ......................................
Expenditures for property and equipment ........................................................
Expenditures for capitalized software for internal use .....................................
Capital investments in and loans to non-consolidated entities .........................
Other ................................................................................................................
Net cash used in investing activities .................................................
(623,067)
(6,652)
(3,505)
(100)
5
(633,319)
Cash flows from financing activities:
Net proceeds from line of credit ......................................................................
Proceeds from long-term debt ..........................................................................
Payments on long-term debt ............................................................................
Payments of debt issuance costs ......................................................................
Proceeds from issuance of stock upon stock option exercises .........................
Contingent consideration payments .................................................................
Proceeds from public offering, net of transaction costs ...................................
Payments made to repurchase stock options ....................................................
Excess tax benefits related to share-based awards (Note 10) ...........................
Net cash provided by financing activities ........................................
148,995
575,000
(136,000)
(21,507)
7,875
—
—
—
—
574,363
50,045
9,534
5,412
(8,922)
(4,174)
8,779
1,176
4,804
4,659
—
2
(15,128)
(44,342)
(5,906)
367
31,326
(67,156)
(6,217)
(12,595)
—
1
(85,967)
39,255
—
(6,000)
(28)
4,448
(2,681)
—
—
—
34,994
30,841
5,990
3,936
6,724
(3,738)
(4,615)
963
150
—
(20,805)
85
(50,771)
(41,657)
43,202
34,370
29,447
(293,496)
(4,624)
(12,021)
(1,459)
27
(311,573)
—
120,000
(3,000)
(5,055)
10,341
(3,012)
187,988
(36,298)
20,805
291,769
Net increase (decrease) in cash and equivalents ...............................
76,298
(19,647)
9,643
Cash and equivalents at beginning of year .............................................................
7,953
27,600
17,957
Cash and equivalents at end of year ....................................................................... $ 84,251
$ 7,953
$ 27,600
Supplemental disclosures of cash flow information:
Cash paid for interest ....................................................................................... $ 7,327
5,876
Cash paid for income taxes ..............................................................................
$ 5,273
728
$ 3,949
351
See accompanying notes to consolidated financial statements.
68
DIPLOMAT PHARMACY, INC.
Consolidated Statement of Changes in Shareholders’ Equity
(Dollars in thousands)
Total
Common Stock
Shares
Amount
Paid-In
Capital
Retained
Earnings
Additional
$
148,901
—
$
$
9,893
—
5,354
25,776
Diplomat
Pharmacy, Inc.
Shareholders’
Equity
164,148
25,776
$
$
Balance at January 1, 2015 ..................................... 51,457,023
Net income (loss) ......................................................
—
Proceeds from follow-on public offering, net of
issuance costs .......................................................
Repurchase of stock options ......................................
Issuance of stock as partial consideration of BioRx,
6,821,125
—
187,988
(34,194)
—
(2,104)
LLC acquisition ...................................................
4,038,853
125,697
—
Issuance of stock as partial consideration of
Burman’s Apothecary, LLC acquisition ...............
253,036
Stock issued upon stock option exercises .................. 1,943,022
—
Excess tax benefits related to share-based awards .....
—
Share-based compensation expense ..........................
Restricted stock awards .............................................
10,805
Balance at December 31, 2015 ................................ 64,523,864
—
Adoption of ASU 2016-09 (Note 10) ........................
Net income (loss) ......................................................
—
Issuance of stock upon full contingent consideration
payout ..................................................................
1,346,282
Issuance of stock as partial consideration of Valley
324,244
Campus Pharmacy, Inc. acquisition .....................
564,844
Stock issued upon stock option exercises ..................
—
Share-based compensation expense ..........................
Restricted stock awards .............................................
5,765
Balance at December 31, 2016 ................................ 66,764,999
Net income (loss) ......................................................
—
Issuance of stock as partial consideration in several
acquisitions ..........................................................
5,852,291
Stock issued upon stock option exercises .................. 1,217,320
—
Share-based compensation expense ..........................
Restricted stock awards .............................................
36,814
Balance at December 31, 2017 ................................ 73,871,424
$
9,578
13,650
—
—
—
451,620
—
—
36,888
9,507
5,813
—
—
503,828
—
105,433
9,974
—
—
619,235
Noncontrolling Shareholders’
Total
Interest
$
4,579
(1,004)
—
—
—
—
—
—
—
—
3,575
—
(3,253)
$
Equity
168,727
24,772
187,988
(36,298)
125,697
9,578
10,341
20,805
3,936
—
515,546
16,903
25,020
—
—
—
—
—
—
—
—
31,130
16,903
28,273
187,988
(36,298)
125,697
9,578
10,341
20,805
3,936
—
511,971
16,903
28,273
$
—
(3,309)
20,805
3,936
—
29,221
—
—
—
—
36,888
—
36,888
—
(1,365)
5,412
—
33,268
—
—
(2,099)
7,281
—
38,450
$
—
—
—
—
76,306
15,510
—
—
—
—
91,816
$
9,507
4,448
5,412
—
613,402
15,510
105,433
7,875
7,281
—
749,501
$
—
—
—
—
322
(322)
—
—
—
—
—
$
9,507
4,448
5,412
—
613,724
15,188
105,433
7,875
7,281
—
749,501
$
See accompanying notes to consolidated financial statements.
69
DIPLOMAT PHARMACY, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. DESCRIPTION OF BUSINESS
Diplomat Pharmacy, Inc. and its consolidated subsidiaries (the “Company”) is the largest independent provider of
specialty pharmacy services in the United States of America (“U.S.”). The Company is focused on improving the lives
of patients with complex chronic diseases while also delivering unique solutions for manufacturers, hospitals, payers
and providers. The Company’s patient-centric approach positions it at the center of the healthcare continuum for
treatment of complex chronic disease states, including oncology, specialty infusion therapy, immunology, hepatitis,
multiple sclerosis and many other serious or long-term conditions. The Company offers a broad range of innovative
solutions to address the dispensing, delivery, dosing and reimbursement of clinically intensive, high-cost specialty
drugs and a wide range of applications and prescription benefit management (“PBM”) services designed to help the
Company’s customers reduce the cost and manage the complexity of their prescription drug programs. The Company
dispenses to patients in all U.S. states and territories through its advanced distribution centers and manages centralized
clinical call centers to deliver localized services on a national scale.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
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”).
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 controlled and which was dissolved
during the fourth quarter of 2017. The Company also owns a 22 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 8). 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 8). In addition, the Company paid $100
to acquire an 11.1 percent interest in a non-consolidated entity during 2017, which is accounted for under the cost
method, as the Company owns less than 20 percent and does not have the ability to exercise significant influence over
the entity.
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.
70
Concentrations of Risk
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 often 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 payers and multiple geographic areas.
No single payer customer accounted for more than 10 percent of net sales for any period presented or trade accounts
receivable at December 31, 2017 and 2016.
The Company purchases a significant portion of its prescription drug inventory from AmerisourceBergen, a
prescription drug wholesaler. These purchases accounted for approximately 41 percent, 49 percent and 50 percent of
cost of products sold for the years ended December 31, 2017, 2016 and 2015, respectively. The Company has
alternative vendors available if necessary. See Note 13 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 17
percent and 14 percent, 13 percent and 10 percent, and 12 percent and 9 percent of cost of products sold for the years
ended December 31, 2017, 2016 and 2015, 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 payer, 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:
Year Ended December 31,
2015
2016
2017
Beginning balance ................................................................... $ (15,257) $ (8,123) $ (3,043)
(9,534) (5,990)
910
2,400
Ending balance ........................................................................ $ (22,050) $ (15,257) $ (8,123)
Charged to expense ..........................................................
Write-offs, net of recoveries .............................................
(9,424)
2,631
71
Inventories
Inventories consist of prescription and over-the-counter medications and are stated at the lower of cost or net realizable
value. 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 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 the majority of customer, 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
72
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, a reporting unit’s fair value is compared 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
impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.
Debt Issuance Costs
Costs incurred related to the issuance of the Company’s credit facility were deferred and are being amortized to interest
expense using the effective interest method over the term of the agreement.
Revenue Recognition
The Company recognizes revenue from dispensing prescription drugs 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 payer
contracts and does not experience a significant level of returns or reshipments. Revenues from dispensing prescription
drugs that are picked up by patients at an open-door or retail pharmacy location are recorded at prescription
adjudication, which approximates the fill date. Revenue generated from dispensing prescription drugs was $4,444,486,
$4,386,643 and $3,346,652 for the years ended December 31, 2017, 2016 and 2015, 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 payers 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 the sale of prescription drugs by its retail pharmacy network when the claim
is adjudicated. When the Company acts as principal in the arrangement, exercises pricing latitude and independently
has a contractual obligation to pay its network pharmacy providers for benefits provided to its clients’ members, the
Company includes the total prescription price (ingredient cost plus dispensing fee) it has contracted with these clients
as revenue, including member co-payments to pharmacies. Revenue generated from the sale of prescription drugs by
retail pharmacies was $6,531 for the year ended December 31, 2017. When the Company merely administers a client’s
network pharmacy contracts and does not assume credit risk, the Company earns an administrative fee for collecting
payments from the client and remits the corresponding amount to the pharmacies in the client’s network, drug
ingredient cost is not included in the Company’s revenues or cost of products sold. Administrative fee revenue was
$1,724 for the year ended December 31, 2017.
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
$32,489, $23,745 and $19,979 for the years ended December 31, 2017, 2016 and 2015, respectively.
Sales taxes are presented on a net basis (excluded from revenues and costs).
73
The Company derived its revenue from the following therapeutic classes:
Year Ended December 31,
2017
Oncology ................................................................. $ 2,545,708
617,904
Specialty Infusion ....................................................
Immunology(1) .........................................................
561,730
Hepatitis ...................................................................
<10%
759,888
Other (none greater than 10% in the period) ...........
Total revenue ........................................................... $ 4,485,230
2016
$ 2,102,130
505,240
644,173
583,751
575,094
$ 4,410,388
2015
$ 1,432,091
374,884
510,708
520,771
528,177
$ 3,366,631
(1) Includes drugs dispensed to treat arthritis, Crohn’s disease and psoriasis.
Shipping and Handling Costs
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 $15,689, $15,144 and $13,899 for the years ended December 31, 2017, 2016 and 2015,
respectively.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred as a component of “Selling, general and administrative
expenses” and were $2,251, $3,868 and $3,553 for the years ended December 31, 2017, 2016 and 2015, 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 are recognized as a component of “Selling, general
and administrative expenses” and were $2,908, $2,665 and $1,877 for the years ended December 31, 2017, 2016 and
2015, 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 certain revenue and/or Adjusted
EBITDA targets 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 also grants restricted stock units (“RSU” or “RSUs”) to key employees, which are accounted for as
equity awards. Some granted RSUs cliff vest after three years, whereas others vest one-third per year. The grant date
fair value of a RSU is determined by the closing market price of our common stock as of the date of grant. The
Company expenses the grant date fair value of the RSU over the three-year vesting period on a straight-line basis.
The Company grants restricted stock awards (“RSA” or “RSAs”) to non-employee directors, which are accounted for
as equity awards. Generally, such RSAs fully vest on the first anniversary of the grant date. The grant date fair value
of a RSA 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 the RSU is expensed over the vesting period on a straight-line basis.
74
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.
Segment Information
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.
Accounting Standards Update (“ASU”) Adoption – Balance Sheet Classification of Deferred Taxes
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17, Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), eliminating the requirement for companies
to present deferred tax assets and liabilities as current and noncurrent. Instead, companies are required to classify all
deferred tax assets and liabilities as noncurrent.
Effective January 1, 2017, the Company retrospectively adopted the accounting guidance contained within ASU 2015-
17. The following December 31, 2016 consolidated balance sheet line items were adjusted due to this adoption:
As
Previously
Reported
14,703
Deferred income taxes (current asset) .................. $
519,810
Total current assets ...............................................
Deferred income taxes (noncurrent asset) ............
—
Total assets ........................................................... 1,107,947
Deferred income taxes (noncurrent liability) ........
8,693
494,223
Total liabilities ......................................................
Total liabilities and shareholders’ equity .............. 1,107,947
Adjustment As Adjusted
—
$
505,107
6,010
1,099,254
—
485,530
1,099,254
(14,703) $
(14,703)
6,010
(8,693)
(8,693)
(8,693)
(8,693)
ASU Adoption – Simplifying the Test for Goodwill Impairment
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”), eliminating Step 2 from the quantitative goodwill impairment test.
Instead, an entity will perform its annual, or interim, quantitative goodwill impairment test by comparing the fair value
of a reporting unit with its carrying amount (Step 1). An entity will recognize an impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot 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, though early adoption is permitted.
Effective January 1, 2017, the Company adopted the accounting guidance contained within ASU 2017-04. This
adoption had no impact on the Company’s consolidated financial statements.
75
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, including interim periods within that reporting period, for public entities,
though early adoption was permitted. Topic 606 permits two methods of adoption: retrospective approach reflecting
the application of the standard in each prior reporting period presented (full retrospective method), or retrospective
approach with the cumulative effect of initially applying the guidance recognized at the date of initial application
(cumulative catch-up transition method). The new standard also includes a cohesive set of disclosure requirements
intended to provide users of financial statements with comprehensive information about the nature, amount, timing
and uncertainty of revenue and cash flows arising from a company’s contracts with customers. The Company is
finalizing the impact of Topic 606 on the disclosures for its consolidated financial statement footnotes and expects the
disclosures to be enhanced.
On January 1, 2018, the Company adopted Topic 606 using the cumulative catch-up transition method and will record
an immaterial after-tax adjustment to reduce retained earnings. This cumulative adjustment relates to a shift in the
recognition of dispensing prescription drugs for home delivery from the date the drugs are shipped under the
Company’s existing accounting policy to the date the drugs are physically delivered (when control transfers) under
the new standard. The effect of this change will not be significant as there is a very short timeframe from shipment to
physical delivery of the prescription medication.
For the Company’s PBM businesses acquired late in the fourth quarter of 2017, the Company has gathered most of its
data from customer contracts, is finalizing its evaluation of the potential impact of the new standard and is in the
process of completing its applicable accounting policy memorandums. A portion of the Company’s PBM businesses
includes dispensing prescription drugs for home delivery, the impact of which will be included in the cumulative
adjustment previously discussed. For the remainder of its PBM businesses, the Company is finalizing the evaluation
of reporting revenues on a gross or net basis under its payer contracts, however, based on the preliminary analysis to
date, it is not expected that other aspects of the new standard will have a significant impact on the Company’s
consolidated financial statements.
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 lease commencement date. This
ASU is effective for annual periods beginning on or after December 15, 2018, including interim periods within those
annual periods, though early adoption is permitted. The Company is in the early stages of evaluating the impact that
the adoption of this guidance will have on its consolidated financial statements and/or notes thereto.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of
Modification Accounting, providing guidance about which changes to the terms or conditions of a share-based
payment award require an entity to apply modification accounting in Topic 718. This ASU is effective for annual
periods beginning on or after December 15, 2017, including interim periods within those annual periods. This ASU is
to be applied prospectively to an award modified on or after the adoption date. The adoption of this guidance is not
expected to have any immediate impact on the Company’s consolidated financial statements.
3. 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 portions of BioRx, LLC (“BioRx”) and LDI (defined below), were treated as asset purchases for income tax
76
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. For the entities acquired by the Company during 2017, 2016 and 2015, their
net sales following their acquisition dates and solely in the year acquired represented approximately 2 percent, 6
percent and 12 percent, respectively, of the Company’s consolidated net sales.
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. These
estimates are preliminary and subject to change up to one year following each acquired entity’s respective acquisition
date.
LDI Holding Company LLC
On December 20, 2017, the Company acquired LDI Holding Company LLC, doing business as LDI Integrated
Pharmacy Services (“LDI”). LDI is a full-service PBM based in St. Louis, Missouri. LDI’s service offerings include
URAC-accredited mail-order and specialty pharmacies, a national network of retail pharmacies and comprehensive
clinical programs. The following table summarizes the consideration transferred to acquire LDI:
Cash ..................................................................................
4,113,188 restricted common shares .................................
$ 521,300
79,088
$ 600,388
The above share consideration at closing is based on 4,113,188 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of December 19, 2017 ($20.24)
and multiplied by 95 percent to account for the restricted nature of the shares.
Approximately $7,500 of the purchase consideration was deposited into an escrow account to be held for 12 months
after the closing date to satisfy any indemnification claims that may be made by the Company.
The Company incurred acquisition-related costs of $948 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2017.
77
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 .........................................
Accounts payable ..............................................................
Accrued expenses – compensation and benefits ...............
Accrued expenses – other .................................................
Deferred income taxes ......................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
965
38,273
2,979
837
2,659
791
201,523
(35,472)
(2,137)
(4,862)
(31,173)
174,383
426,005
$ 600,388
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Customer relationships ............................................ 10 years
4 years
Trade names and trademarks ...................................
Useful
Life
Amount
$ 184,973
16,550
$ 201,523
Pharmaceutical Technologies, Inc.
On November 27, 2017, the Company acquired Pharmaceuticals Technologies, Inc., doing business as National
Pharmaceutical Services (“NPS”). NPS is a full-service PBM based in Omaha, Nebraska. The following table
summarizes the consideration transferred to acquire NPS:
Cash ..................................................................................
835,017 restricted common shares ....................................
$
$
34,437
12,753
47,190
The above share consideration at closing is based on 835,017 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of November 24, 2017 ($16.97)
and multiplied by 90 percent to account for the restricted nature of the shares.
Approximately $9,005 of the purchase consideration was deposited into an escrow account to be held for 12 months
after the closing date to satisfy any indemnification claims that may be made by the Company.
The Company incurred acquisition-related costs of $804 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2017.
78
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 .........................................
Accounts payable ..............................................................
Accrued expenses – other .................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$ 10,151
21,286
100
650
13,713
1,800
6,720
(23,084)
(4,881)
26,455
20,735
$ 47,190
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Customer relationships ............................................ 10 years
2 years
Trade names and trademarks ...................................
Useful
Life
Amount
5,900
$
820
6,720
$
Focus Rx Pharmacy Services Inc. and Focus Rx Inc.
On September 1, 2017, the Company acquired Focus Rx Pharmacy Services Inc. and Focus Rx Inc. (collectively,
“Focus”), a specialty pharmacy focusing on infusion services located in Ronkonkoma, New York. The following table
summarizes the consideration transferred to acquire Focus:
Cash ..................................................................................
374,297 restricted common shares ....................................
Contingent consideration at fair value ..............................
$
$
17,252
5,643
2,080
24,975
The above share consideration at closing is based on 374,297 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of August 31, 2017 ($16.75) and
multiplied by 90 percent to account for the restricted nature of the shares.
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former
owners additional cash payouts of up to $1,500 per performance period based upon the achievement of certain gross
profit targets in each of the 12-month periods ending September 30, 2018 and 2019. The maximum additional cash
payout is $3,000.
Approximately $1,200 of the purchase consideration was deposited into an escrow account to be held for 12 months
after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $329 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2017.
79
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at
the acquisition date:
Cash ..................................................................................
Accounts receivable ..........................................................
Inventories ........................................................................
Prepaid expenses and other current assets.........................
Definite-lived intangible assets .........................................
Other noncurrent assets .....................................................
Accounts payable ..............................................................
Accrued expenses – compensation and benefits ...............
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
1,809
4,936
1,177
20
7,100
21
(5,169)
(156)
9,738
15,237
$ 24,975
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Patient relationships...................................................
Non-compete employment agreements .....................
Trade names and trademarks .....................................
7 years
3 years
3 years
Useful
Life
Amount
3,700
$
2,200
1,200
7,100
$
Accurate Rx Pharmacy Consulting, LLC
On July 5, 2017, the Company acquired Accurate Rx Pharmacy Consulting, LLC (“Accurate”), a specialty pharmacy
focusing on infusion services located in Columbia, Missouri. The following table summarizes the consideration
transferred to acquire Accurate:
Cash ..................................................................................
131,108 restricted common shares ....................................
Contingent consideration at fair value ..............................
$
$
9,408
1,776
1,980
13,164
The above share consideration at closing is based on 131,108 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of July 3, 2017 ($15.05) and
multiplied by 90 percent to account for the restricted nature of the shares.
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former
owners additional cash payouts of up to $3,600 per performance period based upon the achievement of certain gross
profit targets in each of the 12-month periods ending July 31, 2018 and 2019. The maximum additional cash payout
is $7,200.
Approximately $1,000 of the purchase consideration was deposited into an escrow account to be held for 15 months
after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $218 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2017.
80
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at
the acquisition date:
Cash ..................................................................................
Accounts receivable ..........................................................
Inventory ...........................................................................
Prepaid expenses and other current assets.........................
Definite-lived intangible assets .........................................
Other noncurrent assets .....................................................
Accounts payable ..............................................................
Accrued expenses – compensation and benefits ...............
Accrued expenses – other .................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
1,295
2,196
936
34
3,420
3
(3,303)
(152)
(6)
4,423
8,741
$ 13,164
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Patient relationships...................................................
Non-compete employment agreements .....................
Trade names and trademarks .....................................
7 years
5 years
4 years
Useful
Life
Amount
2,100
$
670
650
3,420
$
WRB Communications, LLC
On May 8, 2017, the Company acquired WRB Communications, LLC (“WRB”), a communications and contact center
company based in Chantilly, Virginia that specializes in relationship management programs for leading
pharmaceutical manufacturers and service organizations. The following table summarizes the consideration
transferred to acquire WRB:
Cash ..................................................................................
299,325 restricted common shares ....................................
Contingent consideration at fair value ..............................
$
$
26,804
4,291
530
31,625
The above share consideration at closing is based on 299,325 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of May 5, 2017 ($15.93) and
multiplied by 90 percent to account for the restricted nature of the shares.
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former
owners additional cash payouts of up to $500 per performance period based upon the achievement of certain earnings
before interest, taxes, depreciation and amortization targets in each of the 12-month periods ending May 31, 2018 and
2019. During the fourth quarter of 2017, the Company guaranteed a full payout to allow for the acceleration of certain
integration. The formers owners received $1,000 in cash in January 2018.
Approximately $1,950 of the purchase consideration was deposited into an escrow account to be held for 18 months
after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $259 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2017.
81
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at
the acquisition date:
Cash ..................................................................................
Accounts receivable ..........................................................
Prepaid expenses and other current assets.........................
Property and equipment ....................................................
Definite-lived intangible assets .........................................
Other noncurrent assets .....................................................
Accounts payable ..............................................................
Accrued expenses – other .................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
1,018
2,593
179
498
7,730
24
(100)
(498)
11,444
20,181
$ 31,625
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Customer relationships ..............................................
Non-compete employment agreements .....................
Trade names and trademarks .....................................
7 years
4 years
2 years
Useful
Life
Amount
5,200
$
1,530
1,000
7,730
$
Comfort Infusion, Inc.
On March 22, 2017, the Company acquired Comfort Infusion, Inc. (“Comfort”), a specialty pharmacy and infusion
services company based in Birmingham, Alabama that specializes in intravenous immune globulin therapy to support
patients’ immune systems. The following table summarizes the consideration transferred to acquire Comfort:
Cash ..................................................................................
Contingent consideration at fair value ..............................
$
$
10,613
3,800
14,413
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former
owners additional cash payouts of up to $2,000 per performance period based upon the achievement of certain gross
profit targets in each of the 12-month periods ending March 31, 2018, 2019 and 2020. The maximum payout of
contingent consideration is $6,000.
Approximately $1,050 of the purchase consideration was deposited into an escrow account to be held for 18 months
after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $204 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2017.
82
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at
the acquisition date:
Cash ..................................................................................
Accounts receivable ..........................................................
Inventories ........................................................................
Prepaid expenses and other current assets.........................
Definite-lived intangible assets .........................................
Other noncurrent assets .....................................................
Accounts payable ..............................................................
Accrued expenses – other .................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
104
575
118
15
2,400
5
(372)
(101)
2,744
11,669
$ 14,413
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Physician relationships ..............................................
Non-compete employment agreements .....................
7 years
5 years
Useful
Life
Amount
1,200
$
1,200
2,400
$
Affinity Biotech, Inc.
On February 1, 2017, the Company acquired Affinity Biotech, Inc. (“Affinity”), a specialty pharmacy and infusion
services company based in Houston, Texas that provides treatments and nursing services for patients with hemophilia.
The following table summarizes the consideration transferred to acquire Affinity:
Cash ..................................................................................
Contingent consideration at fair value ..............................
$
$
17,377
35
17,412
The purchase price includes a contingent consideration arrangement that requires the Company to pay the former
owners an additional cash payout based upon the achievement of a certain earnings before interest, taxes, depreciation
and amortization target in the 12-month period ending February 28, 2018. The maximum payout of contingent
consideration is $4,000.
Approximately $2,000 of the purchase consideration was deposited into an escrow account to be held for 18 months
after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $204 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2017.
83
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at
the acquisition date:
Cash ..................................................................................
Accounts receivable ..........................................................
Inventories ........................................................................
Prepaid expenses and other current assets.........................
Definite-lived intangible assets .........................................
Other noncurrent assets .....................................................
Accounts payable ..............................................................
Accrued expenses – compensation and benefits ...............
Accrued expenses – other .................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
1,043
3,583
79
74
5,100
5
(1,075)
(144)
(25)
8,640
8,772
$ 17,412
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Patient relationships...................................................
Non-compete employment agreements .....................
7 years
5 years
Useful
Life
Amount
4,000
$
1,100
5,100
$
Valley Campus Pharmacy, Inc.
On June 1, 2016, the Company acquired Valley Campus Pharmacy, Inc., doing business as TNH Advanced Specialty
Pharmacy (“TNH”). TNH, a specialty pharmacy based in Van Nuys, California, provides medication management
programs for individuals with complex chronic diseases, including oncology, hepatitis and immunology. The
following table summarizes the consideration transferred to acquire TNH:
Cash ..................................................................................
324,244 restricted common shares ....................................
$
$
70,267
9,507
79,774
The above share consideration at closing is based on 324,244 shares, in accordance with the purchase agreement,
multiplied by the per share closing market price of the Company’s common stock as of May 31, 2016 ($32.58) and
multiplied by 90 percent to account for the restricted nature of the shares.
Approximately $3,800 of the purchase consideration was deposited into an escrow account to be held for 12 months
after the closing date to satisfy any indemnification claims that may be made by the Company. All but $150 was
released to the sellers from escrow in January 2018.
The Company incurred acquisition-related costs of $410 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2016.
84
The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition
date:
Cash ..................................................................................
Accounts receivable ..........................................................
Inventories ........................................................................
Prepaid expenses and other current assets.........................
Property and equipment ....................................................
Capitalized software for internal use .................................
Definite-lived intangible assets .........................................
Other noncurrent assets .....................................................
Accounts payable ..............................................................
Accrued expenses – compensation and benefits ...............
Accrued expenses – other .................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
2,114
16,271
4,740
46
200
14,000
13,890
21
(29,773)
(400)
(1,962)
19,147
60,627
$ 79,774
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
Physician relationships ............................................ 10 years
5 years
Non-compete 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. The full amount was
released to the sellers from escrow in the third quarter of 2017.
The Company incurred acquisition-related costs of $860 which were charged to “Selling, general and administrative
expenses” during the year ended December 31, 2015.
85
The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition
date:
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 ...........................................................................
$ 17,109
8,064
7,513
88
17,000
22,200
(25,761)
(169)
(6)
46,038
40,956
$ 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 ..................................................................................
4,038,853 restricted common shares .................................
Contingent consideration at fair value ..............................
$ 217,024
125,697
41,000
$ 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
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.
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. The full amount was released to
the sellers from escrow in the second quarter of 2017.
86
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:
Cash and cash equivalents .................................................
Accounts receivable ..........................................................
Inventories ........................................................................
Prepaid expenses and other current assets.........................
Property and equipment ....................................................
Definite-lived intangible assets .........................................
Other noncurrent assets .....................................................
Accounts payable ..............................................................
Accrued expenses – compensation and benefits ...............
Accrued expenses – other .................................................
Deferred income taxes ......................................................
Total identifiable net assets ........................................
Goodwill ...........................................................................
$
1,786
37,716
5,546
287
494
181,700
163
(25,088)
(1,653)
(852)
(7,780)
192,319
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
Pro Forma Operating Results
The following 2017 unaudited pro forma summary presents consolidated financial information as if the Accurate,
Affinity, Comfort, Focus, LDI, NPS and WRB acquisitions had occurred on January 1, 2016. The following 2016
unaudited pro forma summary presents consolidated financial information as if the Accurate, Affinity, Comfort,
Focus, LDI, NPS and WRB acquisitions had occurred on January 1, 2016 and the TNH acquisition had occurred on
January 1, 2015. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as
amortization expense resulting from intangible assets acquired and adjustments to reflect the Company’s borrowings
and tax rates. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been made as of the as if dates or of results
that may occur in the future.
Net sales ..................................................................................... $ 4,954,494
6,733
Net income attributable to Diplomat Pharmacy, Inc. ................. $
0.09
Net income per common share – basic ...................................... $
0.09
Net income per common share – diluted ................................... $
2017
2016
$ 5,117,678
8,498
$
0.12
$
0.11
$
Year Ended December 31,
87
4. 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).
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, 2017:
Contingent consideration ............. $ (12,100) $ (12,100)
C
Valuation
Asset /
(Liability) Level 3 Technique
88
The following table sets forth a roll forward of the Level 3 measurements:
Balance at January 1, 2015 ...............................................
BioRx acquisition .......................................................
Change in fair value ...................................................
Payments ....................................................................
Balance at December 31, 2015..........................................
Change in fair value ...................................................
Payments ....................................................................
Balance at December 31, 2016..........................................
Affinity acquisition ....................................................
Comfort acquisition ....................................................
WRB acquisition ........................................................
Accurate acquisition ...................................................
Focus acquisition ........................................................
Changes in fair values ................................................
Balance at December 31, 2017..........................................
Contingent
Consideration
$
(11,691)
(41,000)
(6,724)
6,750
(52,665)
8,922
43,743
—
(35)
(3,800)
(530)
(1,980)
(2,080)
(3,675)
(12,100)
$
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.
5. 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 .................................
Useful Life
2016
2017
332
$
— $ 5,232
10,007
40 years 18,818
1,644
5,247
12,178
5 - 10 years 14,116
6,657
8,527
485
2,425
54,365
31,303
(15,375) (10,931)
$ 20,372
$ 38,990
3 - 5 years
Accumulated depreciation ..............................
* Unless applicable lease term is shorter.
Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was $4,941, $3,075 and $2,071,
respectively.
89
6. CAPITALIZED SOFTWARE FOR INTERNAL USE
Capitalized software, consisting of software acquired and developed internally, was comprised as follows:
Capitalized software for internal use ..............
Construction in progress .................................
Accumulated amortization ..............................
Useful Life
3 years
December 31,
2016
2017
$ 74,471
$ 82,017
1,994
502
76,465
82,519
(45,999) (26,218)
$ 50,247
$ 36,520
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $19,781, $13,102 and $4,541,
respectively. Estimated future amortization expense is as follows:
2018 .................................................................... $ 22,198
13,599
2019 ....................................................................
640
2020 ....................................................................
83
2021 ....................................................................
$ 36,520
7. GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
The following table sets forth a roll forward of goodwill:
Balance at January 1, 2015 ...............................................
BioRx acquisition .......................................................
Burman’s acquisition .................................................
Miscellaneous .............................................................
Balance at December 31, 2015..........................................
TNH acquisition .........................................................
Miscellaneous .............................................................
Balance at December 31, 2016..........................................
Affinity acquisition ....................................................
Comfort acquisition ....................................................
WRB acquisition ........................................................
TNH purchase price adjustment .................................
Accurate acquisition ...................................................
Focus acquisition ........................................................
NPS acquisition ..........................................................
LDI acquisition...........................................................
Miscellaneous .............................................................
Balance at December 31, 2017..........................................
$
$
23,148
191,402
40,956
812
256,318
59,275
1,023
316,616
8,772
11,669
20,181
1,351
8,741
15,237
20,735
426,005
3,317
832,624
90
Definite-lived intangible assets consisted of the following:
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
Customer relationships ............................. $ 196,073
170,100
Patient relationships ..................................
61,389
Non-compete employment agreements .....
44,020
Trade names and trademarks ....................
21,700
Physician relationships .............................
$ 493,282
Net
Carrying
Amount
Accumulated
Amortization
$
(1,141) $ 194,932
120,457
(49,643)
30,829
(30,560)
30,396
(13,624)
15,397
(6,303)
$(101,271) $ 392,011
$
Gross
Carrying
Amount
—
159,100
54,689
23,800
21,700
$ 259,289
—
$
Accumulated
Amortization
$
Net
Carrying
Amount
—
127,655
36,015
17,323
18,869
$ (59,427) $ 199,862
(31,445)
(18,674)
(6,477)
(2,831)
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $41,844, $33,868 and $24,229,
respectively. As of December 31, 2017, the weighted average remaining useful lives for the net carrying amounts of
customer relationships, patient relationships, non-compete employment agreements, trade names and trademarks, and
physician relationships are 9.9 years, 6.8 years, 2.6 years, 3.1 years and 5.7 years, respectively. Estimated future
amortization expense is as follows:
2018 .................................................................... $ 67,630
66,420
2019 ....................................................................
54,184
2020 ....................................................................
44,130
2021 ....................................................................
2022 ....................................................................
37,233
122,414
Thereafter ...........................................................
$ 392,011
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 functioned 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 was dissolved during the fourth quarter
of 2017.
8. INVESTMENTS IN NON-CONSOLIDATED ENTITIES
Ageology
From October 2011 through January 2017, the Company maintained a 25 percent minority interest in Worksmart MD,
LLC, also known as Ageology, though it fully impaired its investment during the fourth quarter of 2014. In transactions
unrelated to the Company, SkyPoint Ventures LLC (“SkyPoint”), an affiliated entity of the Company’s former chief
executive officer, loaned $16,000 to Ageology through January 2017. In February 2017, SkyPoint elected to convert
its $16,000 in outstanding loans into equity in Ageology, which equated to an approximate ownership of 43 percent.
Concurrently, the Company converted its $2,500 in outstanding loans (which the Company had written off during the
fourth quarter of 2014) into equity in Ageology, which resulted in the Company having an approximate 22 percent
minority interest following the recapitalization. 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
nor ever has been Ageology’s primary beneficiary.
91
Subsequent to the February 2017 concurrent conversion transactions, SkyPoint loaned Ageology $3,970 during the
remainder of the year ended December 31, 2017.
Physician Resource Management, Inc.
In December 2014, the Company invested $3,500 in Physician Resource Management, Inc. (“PRM”) in exchange for
a 15 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
former chief executive officer 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 future 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.
9. DEBT
On December 20, 2017, in conjunction with the LDI acquisition, the Company fully syndicated an $800,000 debt
financing led by JPMorgan Chase Bank, N.A. and Capital One, National Association (“Capital One”), comprised of
a $250,000 line of credit and a $150,000 Term Loan A, each with a December 20, 2022 maturity date, and
a $400,000 Term Loan B with a December 20, 2024 maturity date (“credit facility”). The credit facility is secured by
substantially all of the Company’s assets. The proceeds of this credit facility were used to finance the LDI acquisition,
pay related transaction fees and expenses, and repay the Company’s former credit facility (as defined below), as well
as provide sufficient liquidity for the Company's future needs. The Company incurred debt issuance costs of $21,507
associated with the credit facility, of which all but $744 were capitalized. These capitalized costs, along with $2,079
in previously incurred unamortized debt issuance costs, are being amortized to interest expense over the term of the
credit facility. The Company also expensed $636 in previously incurred unamortized debt issuance costs to interest
expense upon entering into the credit facility.
On April 1, 2015, in conjunction 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 thereto, which provided for an increase in the Company’s line of credit from $120,000 to $175,000, a
fully drawn term loan for $120,000 and a delayed draw term loan (“DDTL”) for an additional $25,000 (“former credit
facility”). The Company fully drew upon the $25,000 DDTL during the first quarter of 2017. The former credit facility
was subsequently extinguished with the proceeds of the credit facility.
At December 31, 2017 and 2016, the Company had $550,000 and $111,000, respectively, in outstanding term loans.
Term loan-related unamortized debt issuance costs of $17,402 and $3,316 as of December 31, 2017 and 2016,
respectively, are presented in the consolidated balance sheets as direct deductions to the outstanding debt balances.
The Company had $188,250 and $39,255 outstanding on its line of credit at December 31, 2017 and 2016, respectively.
The Company had $61,750 and $129,908 available to borrow on its line of credit at December 31, 2017 and 2016,
respectively. The Company had weighted average borrowings on its line of credit of $28,238 and $11,986 and
maximum borrowings on its line of credit of $188,250 and $82,683 during the years ended December 31, 2017 and
2016, respectively. Line of credit-related unamortized debt issuance costs of $5,316 and $550 as of December 31,
2017 and 2016, respectively, are classified within “Other noncurrent assets” in the consolidated balance sheets.
The interest rates the Company pays under the credit facility are a function of a defined margin above LIBOR. The
Company’s Term Loan A and Term Loan B interest rates were 4.04 percent and 6.04 percent, respectively, at
December 31, 2017. The Company’s term loan interest rate was 3.13 percent at December 31, 2016. The Company’s
line of credit interest rate was 4.04 percent and 4.75 percent at December 31, 2017 and 2016, respectively. The
Company is charged a monthly unused commitment fee ranging from 0.3 percent to 0.4 percent on the average unused
daily balance on its $250,000 line of credit.
92
The credit facility contains, and former credit facility contained, certain financial and non-financial covenants. The
Company was in compliance with all such covenants as of December 31, 2017 and 2016.
The Company has the following contractual debt obligations outstanding associated with its term loans at December
31, 2017:
2018 .................................................................... $ 11,500
11,500
2019 ....................................................................
11,500
2020 ....................................................................
2021 ....................................................................
11,500
124,000
2022 ....................................................................
380,000
Thereafter ...........................................................
$ 550,000
10. SHARE-BASED COMPENSATION
Effective October 2014, the Company established the 2014 Omnibus Incentive Plan (the “2014 Plan”), which permits
the granting of stock options, stock appreciation rights, RSAs, RSUs 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 Company’s 2007 Stock Option Plan, as amended (the “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.
Prior Year Adoption of ASU 2016-09
Effective January 1, 2016, the Company early adopted the accounting guidance contained within ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). The Company recorded a $16,903 deferred tax asset and a $16,903 increase to retained earnings
on January 1, 2016 to recognize the Company’s excess tax benefits related to share-based awards that existed as of
December 31, 2015 (modified retrospective application). Beginning January 1, 2016, the Company recognizes all
newly arising excess tax benefits related to share-based awards as a reduction to income taxes in its consolidated
statement of operations, which resulted in the Company’s recognition of $3,003 and $4,148 in benefits to income
taxes during the years ended December 31, 2017 and 2016, respectively. Also beginning January 1, 2016, the
Company elected the prospective transition method such that excess tax benefits related to share-based awards 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 were adjusted as a result of the adoption of ASU 2016-09.
93
Stock Options
A summary of the Company’s stock option activity for the years ended December 31, 2015, 2016 and 2017 is as
follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Price
Life
Value
Number
of Options
Outstanding at January 1, 2015 ................... 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
Granted ...................................................... 4,066,735
Exercised ................................................... (1,217,320)
Expired/cancelled ...................................... (1,154,464)
Outstanding at December 31, 2017 ............. 6,108,292
$
7.54
39.11
5.44
5.32
16.59
17.53
22.64
7.87
27.41
19.02
16.43
6.47
25.25
$ 18.62
(In years)
6.9
$ 142,262
7.7
76,567
7.0
11,558
8.5
$ 16,205
Exercisable at December 31, 2017 .............. 1,459,459
$ 19.09
6.0
$
8,058
The Company recorded share-based compensation expense associated with stock options of $6,628, $5,073 and $3,748
for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company granted service-based awards of 2,805,976, 1,165,000 and 893,896 options to purchase common stock
to key employees under its 2014 Plan during the years ended December 31, 2017, 2016 and 2015, 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 granted service-based awards of 200,000 options to purchase common stock to key employees under
its 2014 Plan during the year ended December 31, 2017 that were immediately vested at time of grant. These options
have a maximum term of 10 years.
The Company granted performance-based awards of 260,759, 381,532 and 391,043 options to purchase common stock
to key employees under the 2014 Plan during the years ended December 31, 2017, 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 2017 and 2016 were earned and, therefore, no share-based compensation expense was recorded
for these awards in either 2017 or 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 have a maximum term of 10 years.
The Company granted performance-based awards of 800,000 options to purchase common stock to key employees
under its 2014 Plan during the year ended December 31, 2017 that will be earned or forfeited in increments based on
the cumulative growth in adjusted earnings before interest, taxes, depreciation and amortization of a certain therapeutic
category during the years ending December 31, 2017, 2018, 2019 and 2020. The earned options, if any, will be
determined annually each March 31 of the subsequent year and vest as of that date. These options have a maximum
term of 10 years.
94
At December 31, 2017, the total compensation cost related to non-vested options not yet recognized was $25,633,
which will be recognized over a weighted average period of 3.3 years, assuming all employees complete their
respective service periods for vesting of the options.
The total intrinsic value of options exercised/repurchased during the years ended December 31, 2017, 2016 and 2015
was $11,973, $13,048 and $103,317, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2017, 2016 and
2015 was $6.23, $6.34 and $11.84, 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:
2015
$27.80 - $48.72
Exercise price .............................................. $14.36 - $20.87 $14.40 - $36.60
Expected volatility ....................................... 33.44% - 36.38% 23.90% - 24.76% 25.12% - 26.70%
Expected dividend yield ..............................
Risk-free rate for expected term .................. 1.88% - 2.34%
Expected term (in years) ..............................
0%
1.23% - 2.06%
6.25
0%
1.53% - 2.01%
6.25
5.00 - 6.25
2017
0%
Year Ended December 31,
2016
Estimating grant date fair values for employee stock options requires management to make assumptions regarding
expected volatility of value of those underlying shares, the risk-free rate over the expected life of the stock options
and the date on which share-based payments will be settled. Expected volatility is based on a weighted average of the
Company’s historic volatility and 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). Forfeitures are accounted for when
they occur.
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.
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, 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 historically 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 year ended December 31, 2015, the Company recorded excess
tax benefits related to share-based awards of $20,805 as an increase to shareholders’ equity.
Prior to the Company’s 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. The Company reported $20,805 of excess tax benefits related to share-based awards as a decrease
to cash flows from operating activities and as an increase to cash flows from financing activities for the year ended
December 31, 2015.
95
Restricted Stock Units
A summary of the Company’s RSU activity as of and for the year ended December 31, 2017 is as follows:
Nonvested at January 1, 2017 .............................
Granted .............................................................
Expired/cancelled .............................................
Nonvested at December 31, 2017 .......................
—
90,718
(24,079)
66,639
Number
of RSUs
Weighted
Average
Grant Date
Fair Value
—
$
14.65
14.65
14.65
$
The Company granted 90,718 RSUs to key employees under its 2014 Plan during the year ended December 31, 2017.
The value of an RSU is determined by the market value of the Company’s common stock at the date of grant. This
value is recorded as compensation expense on a straight-line basis over the vesting period, which is three years. Of
the 66,639 RSUs as of December 31, 2017, 34,747 RSUs cliff vest after three years, while the remaining 31,892 RSUs
vest one-third per year.
The Company recorded share-based compensation expense associated with RSUs of $203 for the year ended
December 31, 2017. At December 31, 2017, the total compensation cost related to non-vested RSUs not yet recognized
was $615, which will be recognized over the next 2.3 years, assuming all employees complete their respective service
periods for vesting of the RSUs.
Restricted Stock Awards
A summary of the Company’s RSA activity for the years ended December 31, 2015, 2016 and 2017 is as follows:
Nonvested at January 1, 2015 .............................
Granted .............................................................
Vested ..............................................................
Nonvested at December 31, 2015 .......................
Granted .............................................................
Vested ..............................................................
Nonvested at December 31, 2016 .......................
Granted .............................................................
Vested ..............................................................
Nonvested at December 31, 2017 .......................
$
Weighted
Average
Number
of Shares
Subject to Grant Date
Restriction Fair Value
18.12
26.60
18.12
26.60
32.97
26.60
32.97
17.13
26.80
17.45
8,277
10,805
(8,277)
10,805
5,765
(10,805)
5,765
36,814
(8,288)
34,291
$
$
$
Under the 2014 Plan, the Company issued RSAs to non-employee directors. The value of a RSA is determined by the
market value of the Company’s common stock at the date of grant. The value of a RSA is recorded as share-based
compensation expense on a straight-line basis over the vesting period, which is typically one year.
The Company recorded share-based compensation expense associated with RSAs of $450, $339 and $188 for the
years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, the total compensation cost
related to non-vested RSAs not yet recognized was $255, which will be recognized during 2018, assuming the non-
employee directors complete their service period for vesting of the RSAs.
96
11. INCOME TAXES
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal
corporate tax rate from 35 percent to 21 percent. At December 31, 2017, the Company has not completed its accounting
for the tax effects of enactment of the Tax Act; however, as described below, the Company made a reasonable estimate
of the effects on its existing deferred tax balances. In December 2017, the SEC staff issued Staff Accounting Bulletin
No. 118, which addresses how a company recognizes provisional amounts when a company does not have the
necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its
accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained,
prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
For existing deferred tax balances for which the Company was able to determine an impact and those which the
Company was able to determine a reasonable estimate including the provisional amounts discussed below, the
Company recognized an income tax benefit of $7,828, which is included as a component of income tax benefit for the
year ended December 31, 2017. The Company re-measured these deferred tax assets and liabilities based on the rates
at which they are expected to reverse in the future.
Provisional amounts were provided for deferred tax assets and liabilities for which reasonable estimates were available
associated with the Company’s 2017 acquisitions (Note 3); certain equity interest; and deferred assets impacted by
cash payments after December 31, 2017. The Company re-measured these deferred tax assets and liabilities based on
the rates at which they are expected to reverse in the future, which is generally 21 percent. The provisional amount
recorded related to the re-measurement of these deferred tax balances was an income tax benefit of $9,069, which is
included in the Company’s Tax Act effect of $7,828.
Significant components of the benefit (expense) for income taxes for the years ended December 31, 2017, 2016 and
2015 are as follows:
Current:
Federal ...................................................................... $ (1,748) $
State and local ..........................................................
Total current ......................................................
(1,921)
(3,669)
(703) $ (17,592)
(3,257)
(1,713)
(2,416) (20,849)
2017
2016
2015
Deferred:
Federal ...................................................................... 10,343
452
State and local ..........................................................
Total deferred .................................................... 10,795
(7,989)
(790)
(8,779)
4,061
554
4,615
$ 7,126 $ (11,195) $ (16,234)
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax benefit (expense) is
as follows:
Year Ended December 31,
2015
2016
2017
Income tax expense at U.S. statutory rate ............................................. $
Tax effect from:
(2,822) $ (12,675) $ (14,352)
Share-based compensation (Note 3) ..............................................
State income taxes, net of federal benefit ......................................
Loss on noncontrolling interest .....................................................
Tax Act effect ................................................................................
Other ..............................................................................................
Income tax benefit (expense) ................................................................ $
3,003
—
(418)
(1,563)
(113)
(351)
7,828
—
32
(352)
7,126 $ (11,195) $ (16,234)
4,148
(1,904)
(1,138)
—
374
97
Significant components of deferred tax assets and liabilities are as follows:
December 31,
2017
2016
Deferred tax assets:
Allowance for doubtful accounts ............................... $
Net operating loss and credit carryforwards ..............
Compensation and benefits .......................................
Investments ...............................................................
Other temporary differences ......................................
Total deferred tax assets .....................................
5,696 $
2,114
4,611
—
679
13,100
8,861
6,383
3,598
1,101
1,014
20,957
Deferred tax liabilities:
Property and intangible assets ...................................
Prepaid expenses and other current assets .................
Investments ...............................................................
Total deferred tax liabilities ...............................
(26,406)
(740)
(321)
(27,467)
(13,825)
(1,122)
—
(14,947)
Net deferred tax (liabilities) assets ................ $ (14,367) $
6,010
At December 31, 2017, the Company had $53,148 of state and local gross net operating loss carry-forwards. The state
and local gross net operating loss carry-forwards expire at various times through 2036.
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, 2017 and 2016, the Company had unrecognized tax benefits of $268; all of which, if
recognized, would reduce both tax expense and the effective tax rate.
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 2016, 2015 and 2014 C corporation tax returns are open to
examination by U.S. federal, state and local taxing authorities. The Company’s 2014 and 2015 tax years are currently
under examination by the U.S. federal tax authority. To date, no material adjustments have been proposed.
98
12. INCOME PER COMMON SHARE
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 RSAs and RSUs, 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,
2017
2016
2015
Numerator:
Net income attributable to Diplomat Pharmacy, Inc. ................ $
15,510
$
28,273
$
25,776
Denominator:
Weighted average common shares outstanding, basic .............. 68,130,322
Weighted average dilutive effect of stock options, RSAs and
65,970,396
60,730,133
RSUs ......................................................................................
Weighted average dilutive effect of contingent consideration ..
649,731
—
Weighted average common shares outstanding, diluted ...... 68,780,053
1,739,750
337,577
68,047,723
2,029,241
337,577
63,096,951
Net income per common share:
Basic .......................................................................................... $
Diluted ....................................................................................... $
0.23
0.23
$
$
0.43
0.42
$
$
0.42
0.41
Service-based and earned performance-based stock options to purchase a weighted average of 3,242,919, 1,542,064
and 649,564 common shares were excluded from the computation of diluted weighted average common shares
outstanding for the years ended December 31, 2017, 2016 and 2015, respectively, as inclusion of such options would
be anti-dilutive. Performance-based stock options to purchase up to a weighted average of 770,503, 291,277 and
410,452 common shares were excluded from the computation of diluted weighted average common shares outstanding
for the years ended December 31, 2017, 2016 and 2015, respectively, as all performance conditions were not satisfied
at some/all quarter-end periods within the respective years. Weighted average RSUs of 21,623 common shares were
excluded from the computation of diluted weighted average common shares outstanding for the year ended December
31, 2017 as inclusion of such RSUs would be anti-dilutive. Weighted average RSAs of 10,038 and 475 common shares
were excluded from the computation of diluted weighted average common shares outstanding for the years ended
December 31, 2017 and 2016, respectively, as inclusion of such RSAs would be anti-dilutive. 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.
13. COMMITMENTS AND CONTINGENCIES
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. Following appointment of lead
plaintiffs and lead counsel, an amended complaint was filed on April 11, 2017. The amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with public filings made
between February 29, 2016 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 filed a motion to dismiss the amended complaint on May 24, 2017. The court
issued an order denying the Company’s motion to dismiss on January 19, 2018. The Company filed a motion for
reconsideration of its motion to dismiss on February 2, 2018. The Company believes the complaint and allegations to
be without merit and intends to vigorously defend itself against the action. The Company is unable at this time to
99
determine whether the outcome of the litigation would have a material impact on its results of operations, financial
condition or cash flows.
On February 10, 2017, the Company’s Board of Directors (the “Board”) received a demand letter from a purported
shareholder containing allegations similar to those contained in the putative class action complaint described above.
The letter demanded that the Board take action to remedy the alleged violations. In response, the Board established a
Special Independent Committee of its disinterested and independent members to investigate the claims. Subsequently,
on June 2, 2017, the shareholder filed a putative shareholder’s derivative lawsuit in the Michigan Circuit Court for the
County of Genesee regarding the same matters alleged in the demand letter. The complaint names the Company as a
nominal defendant and names a number of the Company’s current and former officers and directors as defendants.
The complaint seeks unspecified monetary damages and other relief. In connection with the ongoing Special
Independent Committee investigation, on July 20, 2017, by agreement between the Company and the shareholder, the
court ordered a stay of legal proceedings for 90 days, after which time by further agreement of the Company and the
shareholder, the court has extended the stay until April 3, 2018. 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.
The results of legal proceedings are often uncertain and difficult to predict, and the Company could from time to time
incur judgments, enter into settlements, materially change its business practices or technologies or revise its
expectations regarding the outcome of certain matters. In addition, the costs incurred in litigation can be substantial,
regardless of the outcome.
The Company’s business of providing specialized pharmacy services and other related services may subject it to
litigation and liability for damages in the ordinary course of business. Nevertheless, the Company believes there are
no other legal proceedings, the outcome of which, if determined adversely to the Company, would individually or in
the aggregate be reasonably expected to have a material adverse effect on its business, financial position, cash flows
or results of operations.
Purchase Commitments
The Company’s amended contract with AmerisourceBergen expires on September 30, 2018. This amended contract
commits the Company to a minimum purchase obligation of approximately $2,000,000 per contract year to maintain
its current negotiated discounts and rates.
Lease Commitments
The Company leases multiple pharmacy and distribution facilities and office equipment under various operating lease
agreements expiring through December 2027. Total rental expense under operating leases for the years ended
December 31, 2017, 2016 and 2015 was $4,215, $4,179 and $3,295, respectively, exclusive of property taxes,
insurance and other occupancy costs generally payable by the Company.
Future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one year
as of December 31, 2017 are as follows:
2018 .................................................................... $
2019 ....................................................................
2020 ....................................................................
2021 ....................................................................
2022 ....................................................................
Thereafter ...........................................................
2,740
2,761
2,476
2,142
1,677
2,348
$ 14,144
100
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for each of the quarters in the years ended December 31,
2017 and 2016:
Net sales ................................................................. $ 1,078,740
85,049
Gross profit ............................................................
6,532
Income (loss) before income taxes .........................
4,225
Net income .............................................................
4,367
Net income attributable to Diplomat ......................
0.07
Basic income per common share ............................
0.06
Diluted income per common share.........................
For the 2017 Quarter Ended
March 31 June 30 September 30 December 31
1,155,069
$
93,492
(1,714)
6,513
6,536
0.09
0.09
$ 1,126,464
84,834
2,946
3,490
3,591
0.05
0.05
1,124,957
85,303
299
961
1,016
0.01
0.01
$
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
$
The Company’s results were impacted by the following:
- Quarter ended December 31, 2017: The Company recognized $1,710 of changes in the fair values of contingent
consideration. The Company recognized a $7,828 income tax benefit due to the enactment of the Tax Act (Note
11).
- Quarter ended September 30, 2017: The Company recognized $1,965 of changes in the fair values of contingent
consideration.
- Quarter ended December 31, 2016: The Company recognized a $4,659 impairment of its cost method
investment in PRM (Note 9).
- 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 related to share-based awards (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.
101
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 chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Our management, with the participation of the chief executive officer and the chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgated under
the Exchange Act) as of December 31, 2017. Based on these evaluations, the chief executive officer and the chief
financial officer concluded that our disclosure controls and procedures required by paragraph (b) of Rule 13a-15 or
15d-15 were effective as of December 31, 2017.
Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered
Public Accounting Firm
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included within this Annual Report on Form 10-K
Management’s Report on Internal Control over Financial Reporting as of December 31, 2017. Our independent
registered public accounting firm also attested to, and reported on, the Company’s Internal Control over Financial
Reporting. Management’s report and the independent registered public accounting firm’s report are included in Item
8 of this Annual Report on Form 10-K.
Remediation of Prior Material Weakness in Internal Control over Financial Reporting
As reported in our Annual Report on Form 10-K for the year ended December 31, 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.
In the fourth quarter of 2017, management completed its remediation plan to ensure that deficiencies that contributed
to the material weakness were remediated such that these controls operate effectively, which included steps to
strengthen our inventory costing and reconciliation controls. The remediation actions that were taken included:
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. As a result of these measures,
management has concluded that it has remediated the material weaknesses that existed as of December 31, 2016.
102
Changes in Internal Control over Financial Reporting
Except as otherwise discussed above, 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 2017 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On January 4, 2018, the Board appointed Jeff Park as interim CEO and the Board’s Compensation Committee
approved a compensation package for Mr. Park that provided he would continue to receive compensation pursuant to
the non-employee director compensation program of the Board, and also would receive (i) cash compensation of
$41,666.67 per month (with pro ration) and (ii) a grant of restricted stock with a value of $1,000,000 (“Restricted
Stock Grant”), vesting quarterly over one year. On February 26, 2018, the Board’s Compensation Committee further
refined Mr. Park’s compensation package by (i) terminating the receipt of (a) the compensation pursuant to the non-
employee director compensation program of the Board, and (b) the aforementioned cash compensation, and (ii)
cancelling the Restricted Stock Grant, and in lieu thereof approved a grant of 69,349 restricted stock units (“RSUs”)
in accordance with the 2014 Omnibus Plan. The RSUs will vest during his service as interim CEO, with 9,166 RSUs
vesting on February 26, 2018 and 60,183 RSUs vesting in five equal monthly installments on the fourth day (or the
immediate prior business day) of each month between March and July 2018 (with pro rata vesting).
103
PART III
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 2018 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 2019 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.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS
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.”
104
PART IV
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
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
2.2**
Securities Purchase Agreement and Plan of
Merger by and among Diplomat
Pharmacy, Inc., LDI Holding Company, LLC
and the other parties named therein, dated
November 15, 2017
3.1
Third Amended and Restated Articles of
Incorporation
Incorporated by reference
Period
ending
Exhibit
number
Filing
date
2.1
06/22/15
Form
8-K
8-K
2.1
11/16/17
S-1/A
3.1
09/17/14
3.2
Bylaws
8-K
3.1
01/05/18
4.1
Form of Common Stock Certificate
S-1/A
4.1
09/11/14
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)
S-1
S-1
10.4
07/03/14
10.5
07/03/14
S-1/A
10.6
09/11/14
S-1/A
10.7
09/29/14
S-1/A
10.11
10/03/14
105
Exhibit
number
10.6*
10.7*
Exhibit description
Form of Restricted Stock Award Agreement
(2014 Omnibus Incentive Plan)
Form of Stock Option Award Agreement
(Performance-Based) (2014 Omnibus Incentive
Plan)
10.8*
Form of Restricted Stock Award Agreement
(Non-Employee Directors) (2014 Omnibus
Incentive Plan)
10.9*
Form of Stock Option Award Agreement
(Time-Based) (2014 Omnibus Incentive Plan)
10.10*
Form of Restricted Stock Unit Award
Agreement (Time-Based)
Filed/Furnished
herewith
Incorporated by reference
Period
ending
Exhibit
number
Filing
date
10.12
10/03/14
Form
S-1/A
8-K
10.1
06/09/15
10-Q
09/30/15
10.3
11/04/15
8-K
8-K
10.1
12/09/16
10.1
04/06/17
10.11.1† Pharmacy Distribution and Services
S-1/A
10.8.1
08/19/14
Agreement, dated July 1, 2013, by and between
Celgene Corporation and Diplomat
10.11.2† 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
10.11.3† 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
10.11.4† Amendment to Pharmacy Distribution and
Services Agreement, executed October 19,
2015 and effective as of June 1, 2016, by and
between Diplomat and Celgene Corporation
10-K
12/31/15
10.18
02/29/16
10.11.5† Pharmacy Distribution and Services
10-Q
03/31/17
10.1
05/09/17
Agreement, dated as of March 31, 2017 and
effective as of July 1, 2017 by and between
Celgene Corporation and the Company
10.12.1† Prime Vendor Agreement, dated January 1,
S-1/A
10.9.1
08/19/14
2012, by and among AmerisourceBergen Drug
Corporation, Diplomat and its subsidiaries
named therein
10.12.2
First Amendment to Prime Vendor Agreement,
dated July 20, 2012, by and among
AmerisourceBergen Drug Corporation,
Diplomat and its subsidiaries named therein
106
S-1/A
10.9.2
08/19/14
Exhibit
number
10.12.3† Second Amendment to Prime Vendor
Exhibit description
Agreement, effective August 1, 2015, by and
among Diplomat, AmerisourceBergen Drug
Corporation, and each Company subsidiary
named therein
Filed/Furnished
herewith
Incorporated by reference
Period
ending
Exhibit
number
Filing
date
10.1
09/15/15
Form
8-K
10.12.4† Third Amendment to Prime Vendor Agreement,
8-K
10.1
10/06/16
effective October 1, 2016, by and among
AmerisourceBergen Drug Corporation and the
Company subsidiaries named therein
10.12.5† Fourth Amendment to Prime Vendor
10-Q
09/30/17
10.3
11/06/17
Agreement, effective May 9, 2017, by and
among AmerisourceBergen Drug Corporation
and each Company subsidiary named therein
10.12.6† Fifth Amendment to Prime Vendor Agreement,
10-Q
09/30/17
10.4
11/06/17
effective August 3, 2017, by and among
AmerisourceBergen Drug Corporation and each
Company subsidiary named therein
10.12.7† Sixth Amendment to Prime Vendor Agreement,
X
10.13
10.14
10.15
10.16
effective October 24, 2017, by and among
AmerisourceBergen Drug Corporation and each
Company subsidiary named therein
Joinder Agreement, dated November 1, 2015,
by and among AmerisourceBergen Drug
Corporation, Diplomat and the Diplomat
subsidiaries named therein
Commitment Letter by and among Diplomat
Pharmacy, Inc., JPMorgan Chase Bank, N.A.,
and Capital One, National Association dated
November 15, 2017
Credit Agreement, dated December 20, 2017,
by and among the Company, the Lenders party
thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent
Guarantee and Collateral Agreement, dated
December 20, 2017, by and among the
Company, the other Loan Parties, and
JPMorgan Chase Bank, N.A., as Administrative
Agent
10-K
12/31/15
10.20
02/29/16
8-K
10.1
11/16/17
8-K
10.1
12/21/17
8-K
10.2
12/21/17
10.17* Diplomat Pharmacy, Inc. Annual Performance
8-K
10.2
06/09/15
Bonus Plan
107
Exhibit
number
10.18
Exhibit description
Consent to Sale of Compounding Business,
dated August 27, 2015, by and among
Diplomat, General Electric Capital Corporation,
and the other lender parties thereto
10.19* Diplomat Non-Employee Director
Compensation Program (April 2017)
10.20*
10.21*
Permanent Release and Settlement Agreement,
dated October 25, 2016, by and between the
Company and Sean Whelan
Employment Agreement, dated October 25,
2016, by and between the Company and Paul
Urick
Incorporated by reference
Filed/Furnished
herewith
Form
10-Q
Period
ending
Exhibit
number
Filing
date
9/30/16
10.2
11/04/15
10-Q
03/31/17
10.2
05/09/17
8-K
10.2
10/26/16
8-K
10.1
10/26/16
10.22† Distribution and Services Agreement dated
10-K
12/31/16
10.24
03/08/17
10-K
12/31/16
10.25
03/08/17
8-K
8-K
10.1
08/07/17
10.2
08/07/17
August 7, 2013 by and between Pharmacyclics,
Inc. and Diplomat
10.23† Amendment No. 1 to Distribution and Services
Agreement by and between Pharmacyclics, Inc.
and Diplomat, dated March 3, 2014
10.24*
Employment Agreement, dated August 7, 2017,
by and between the Company and Joel Saban
10.25*
Separation and Release Agreement, dated
August 7, 2017, by and between the Company
and Paul Urick
21
23
List of subsidiaries of Diplomat
Consent of BDO USA, LLP
31.1
Section 302 Certification—CEO
31.2
Section 302 Certification—CFO
32.1
Section 906 Certification—CEO
32.2
Section 906 Certification—CFO
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document
X
X
X
X
X
X
X
X
X
108
Exhibit
number
101.DEF XBRL Taxonomy Extension Definition
Exhibit description
Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase
Document
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document
Incorporated by reference
Filed/Furnished
herewith
Form
Period
ending
Exhibit
number
Filing
date
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.
ITEM 16. FORM 10-K SUMMARY
None
109
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.
SIGNATURES
DIPLOMAT PHARMACY, INC.
(Registrant)
By: /s/ ATUL KAVTHEKAR
Atul Kavthekar
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: March 1, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of March
1, 2018 by the following persons on behalf of the registrant and in the capacities indicated.
/s/ JEFFREY PARK
Jeffrey Park
Interim Chief Executive Officer and Director
(Principal Executive Officer)
/s/ ATUL KAVTHEKAR
Atul Kavthekar
/s/ BENJAMIN WOLIN
Benjamin Wolin
/s/ REGINA BENJAMIN
Regina Benjamin
/s/ DAVID DREYER
David Dreyer
/s/ PHILIP R. HAGERMAN
Philip R. Hagerman
/s/ KENNETH O. KLEPPER
Kenneth O. Klepper
/s/ SHAWN CLINE TOMASELLO
Shawn Cline Tomasello
110
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Exhibit 21
DIPLOMAT PHARMACY, INC. SUBSIDIARIES
The direct and indirect operating subsidiaries of the Company and their respective States of incorporation as of December
31, 2017 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
Diplomat Clinical Services, 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.
At-Home IV Infusion Professional, Inc.
PharmTrack, LLC
MedPro Rx, Inc.
Diplomat Specialty Pharmacy of Philadelphia, LLC
Diplomat Specialty Pharmacy of Boothwyn, LLC
Diplomat Specialty Pharmacy of Los Angeles County, Inc.
XAS Infusion Suites, Inc.
Accurate Advantage, LLC
Accurate Rx Pharmacy Consulting, LLC
Affinity Biotech, Inc.
Comfort Infusion, Inc.
Diplomat Pharmacy Holdings, Inc.
Focus Rx, Inc.
Focus Rx Pharmacy Services, Inc.
LDI Holding Company, LLC
LDI Nautic VII Blocker, Inc.
LDI Nautic VIII-A Blocker, Inc.
Leehar Distributors, LLC
Oak HC/FT LDI Blocker Corp.
Pharmaceutical Technologies, Inc.
Pharmaceutical Technologies Independent Practice Association, LLC
PSC Bellevue, LLC
PSC Properties, LLC
PSC Coventry, LLC
WRB Communications, LLC
8th Day Software and Consulting, LLC
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Michigan
Connecticut
Delaware
Delaware
Maryland
Nevada
North Carolina
Pennsylvania
Pennsylvania
California
Texas
Missouri
Missouri
Texas
Alabama
Delaware
New York
New York
Delaware
Delaware
Delaware
Delaware
Delaware
Nebraska
New York
Nebraska
Nebraska
Nebraska
Delaware
Tennessee
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%
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%
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%
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 1, 2018, 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.
/s/ BDO USA, LLP
Troy, Michigan
March 1, 2018
Exhibit 31.1
CHIEF EXECUTIVE OFFICER’S 302 CERTIFICATION
I, Jeffrey Park, 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, 2017;
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;
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;
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
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
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.
Date: March 1, 2018
By: /s/ JEFFREY PARK
Jeffrey Park
Interim Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICERS’ 302 CERTIFICATION
I, Atul Kavthekar, 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, 2017;
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;
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;
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
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
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.
Date: March 1, 2018
By: /s/ ATUL KAVTHEKAR
Atul Kavthekar
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
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,
2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey Park, Interim
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 1, 2018
By: /s/ JEFFREY PARK
Jeffrey Park
Interim Chief Executive Officer
(Principal Executive Officer)
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,
2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Atul Kavthekar,
Chief Financial 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 1, 2018
By: /s/ ATUL KAVTHEKAR
Atul Kavthekar
Chief Financial Officer
(Principal Financial Officer)
NOTES REGARDING FORWARD-LOOKING STATEMENTS
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 expected benefits and 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. 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 methodology used to calculate such
fees; the outcome of material legal proceedings; our relationships with wholesalers and 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; increasing consolidation in the healthcare industry; managing our growth effectively; our ability to drive
volume through a refreshed marketing strategy in traditional specialty pharmacy; our capability to penetrate the
fragmented infusion market; the success of our strategy in the pharmacy benefit manager (“PBM”) space; our ability
to effectively execute our acquisition strategy or successfully integrate acquired businesses, including any delays or
difficulties in integrating the combined businesses, and the ability to achieve cost savings and operating synergies and
the timing thereof; CEO succession planning and the dependence on our senior management and key employees and
managing recent turnover among key employees; and the additional factors set forth in “Risk Factors” in Diplomat’s
Annual Report on Form 10-K for the year ended December 31, 2017 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.
JEFF PARK
Interim Chief Executive Officer
Diplomat Pharmacy, Inc.
SHAWN C. TOMASELLO (2)
Chief Commercial Officer
Kite Pharma, Inc., a subsidiary of Gilead
Sciences, Inc.
BENJAMIN WOLIN (1,3)
Chairman of the Board
Former Chief Executive Officer
Everyday Health, Inc.
OFFICERS AND DIRECTORS
BOARD OF DIRECTORS
REGINA BENJAMIN (2,3)
Physician, NOLA.com/Times Picayune
Endowed Chair in Public Health Sciences at
Xavier University of Louisiana
DAVID DREYER (1,2)
Chief Financial Officer
Prolacta Bioscience, Inc.
PHILIP R. HAGERMAN
Chairman Emeritus
Chief Executive Officer
Skypoint Ventures, LLC
Former Chief Executive Officer
Diplomat Pharmacy, Inc.
KENNETH O. KLEPPER (1,3)
Co-Founder, Chairman, and Chief Executive
Officer of ReactiveCore, LLC
EXECUTIVE OFFICERS
ATUL KAVTHEKAR
Chief Financial Officer
Diplomat Pharmacy, Inc.
JEFF PARK
Interim Chief Executive Officer
Diplomat Pharmacy, Inc.
GARY RICE
Executive Vice President of Operations
Diplomat Pharmacy, Inc.
JOEL SABAN
President
Diplomat Pharmacy, Inc.
________________________________________________________________________________________________________________________________________________
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating and Corporate Governance
Committee Member
ANNUAL MEETING
The 2018 Diplomat Pharmacy, Inc. Annual
Meeting will be held on Tuesday, June 12, at
the Lotte New York Palace in New York,
New York. The meeting will begin at 4:30
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
OUR WEBSITE:
www.diplomat.is
Investor information on our website
includes press releases, supplemental
investor information, corporate
governance information, our Code of
Conduct, SEC filings, and webcasts of
quarterly earnings conference calls.
CONFIDENTIAL HOTLINE:
833.367.3756
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 Conduct 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 2018 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.
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 2017.
MARKET QUOTATIONS
2017 QUARTER HIGH LOW
First
Second
Third
Fourth
$15.95 $12.50
$18.84 $14.06
$21.78 $14.43
$21.57 $14.63
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
BDO USA LLP
Troy, Michigan
SHAREHOLDER INQUIRIES
Terri Anne Powers
Diplomat Pharmacy, Inc.
4100 S. Saginaw Street
Flint, MI 48507
312.889.5244
tpowers@diplomat.is
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