DIPLOMAT PHARMACY, INC., 10-K filed on 3/1/2018
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Feb. 27, 2018
Jun. 30, 2017
Document and Entity Information
 
 
 
Entity Registrant Name
Diplomat Pharmacy, Inc. 
 
 
Entity Central Index Key
0001610092 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 709 
Entity Common Stock, Shares Outstanding
 
74,069,226 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and equivalents
$ 84,251 
$ 7,953 
Accounts receivable, net
332,091 
275,568 
Inventories
206,603 
215,351 
Prepaid expenses and other current assets
11,125 
6,235 
Total current assets
634,070 
505,107 
Property and equipment, net
38,990 
20,372 
Capitalized software for internal use, net
36,520 
50,247 
Goodwill
832,624 
316,616 
Definite-lived intangible assets, net
392,011 
199,862 
Deferred income taxes
 
6,010 
Other noncurrent assets
6,208 
1,040 
Total assets
1,940,423 
1,099,254 
Current liabilities:
 
 
Accounts payable
413,463 
320,684 
Borrowings on line of credit
188,250 
39,255 
Short-term debt, including current portion of long-term debt
11,500 
7,500 
Accrued expenses:
 
 
Compensation and benefits
9,584 
5,674 
Contingent consideration
8,100 
 
Other
20,560 
12,233 
Total current liabilities
651,457 
385,346 
Long-term debt, less current portion
521,098 
100,184 
Deferred income taxes
14,367 
 
Contingent consideration
4,000 
 
Total liabilities
1,190,922 
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)
619,235 
503,828 
Additional paid-in capital
38,450 
33,268 
Retained earnings
91,816 
76,306 
Total Diplomat Pharmacy shareholders' equity
749,501 
613,402 
Noncontrolling interests
 
322 
Total shareholders' equity
749,501 
613,724 
Total liabilities and shareholders' equity
$ 1,940,423 
$ 1,099,254 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Consolidated Balance Sheets
 
 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common shares, par value (in dollars per share)
$ 0 
$ 0 
Common shares, authorized shares
590,000,000 
590,000,000 
Common shares, issued shares
73,871,424 
66,764,999 
Common shares, outstanding shares
73,871,424 
66,764,999 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Operations
 
 
 
Net sales
$ 4,485,230 
$ 4,410,388 
$ 3,366,631 
Cost of products sold
(4,136,552)
(4,085,560)
(3,103,392)
Gross profit
348,678 
324,828 
263,239 
Selling, general and administrative expenses
(330,113)
(277,751)
(217,302)
Income from operations
18,565 
47,077 
45,937 
Other (expense) income:
 
 
 
Interest expense
(10,716)
(6,573)
(5,239)
Equity loss and impairment of non-consolidated entities
 
(4,659)
 
Other
213 
370 
308 
Total other expense
(10,503)
(10,862)
(4,931)
Income before income taxes
8,062 
36,215 
41,006 
Income tax benefit (expense)
7,126 
(11,195)
(16,234)
Net income
15,188 
25,020 
24,772 
Less net loss attributable to noncontrolling interest
(322)
(3,253)
(1,004)
Net income allocable to Diplomat Pharmacy, Inc.
$ 15,510 
$ 28,273 
$ 25,776 
Net income per common share:
 
 
 
Basic (in dollars per share)
$ 0.23 
$ 0.43 
$ 0.42 
Diluted (in dollars per share)
$ 0.23 
$ 0.42 
$ 0.41 
Weighted average common shares outstanding:
 
 
 
Basic (in shares)
68,130,322 
65,970,396 
60,730,133 
Diluted (in shares)
68,780,053 
68,047,723 
63,096,951 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
 
Net income
$ 15,188 
$ 25,020 
$ 24,772 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
66,566 
50,045 
30,841 
Net provision for doubtful accounts
9,424 
9,534 
5,990 
Share-based compensation expense
7,281 
5,412 
3,936 
Changes in fair values of contingent consideration
3,675 
(8,922)
6,724 
Contingent consideration payments
 
(4,174)
(3,738)
Deferred income tax (benefit) expense
(10,795)
8,779 
(4,615)
Amortization of debt issuance costs
2,655 
1,176 
963 
Impairment expense
 
4,804 
150 
Equity loss and impairment of non-consolidated entities
 
4,659 
 
Excess tax benefits related to share-based awards (Note 10)
 
 
(20,805)
Other
85 
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
7,735 
(15,128)
(50,771)
Inventories
13,813 
(44,342)
(41,657)
Accounts payable
24,327 
(5,906)
43,202 
Other assets and liabilities
(4,615)
367 
34,370 
Net cash provided by operating activities
135,254 
31,326 
29,447 
Cash flows from investing activities:
 
 
 
Payments to acquire businesses, net of cash acquired
(623,067)
(67,156)
(293,496)
Expenditures for property and equipment
(6,652)
(6,217)
(4,624)
Expenditures for capitalized software for internal use
(3,505)
(12,595)
(12,021)
Capital investments in and loans to non-consolidated entities
(100)
 
(1,459)
Other
27 
Net cash used in investing activities
(633,319)
(85,967)
(311,573)
Cash flows from financing activities:
 
 
 
Net proceeds from line of credit
148,995 
39,255 
 
Proceeds from long-term debt
575,000 
 
120,000 
Payments on long-term debt
(136,000)
(6,000)
(3,000)
Payments of debt issuance costs
(21,507)
(28)
(5,055)
Proceeds from issuance of stock upon stock option exercises
7,875 
4,448 
10,341 
Contingent consideration payments
 
(2,681)
(3,012)
Proceeds from public offering, net of transaction costs
 
 
187,988 
Payments made to repurchase stock options
 
 
(36,298)
Excess tax benefits related to share-based awards (Note 10)
 
 
20,805 
Net cash provided by financing activities
574,363 
34,994 
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 
27,600 
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 
5,273 
3,949 
Cash paid for income taxes
$ 5,876 
$ 728 
$ 351 
Consolidated Statement of Changes in Shareholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
BioRx, LLC
Common Stock
BioRx, LLC
Diplomat Pharmacy, Inc. Shareholders' Equity
BioRx, LLC
Burman's Apothecary, LLC
Common Stock
Burman's Apothecary, LLC
Additional Paid-In Capital
Burman's Apothecary, LLC
Diplomat Pharmacy, Inc. Shareholders' Equity
Burman's Apothecary, LLC
Valley Campus Pharmacy, Inc
Common Stock
Valley Campus Pharmacy, Inc
Diplomat Pharmacy, Inc. Shareholders' Equity
Valley Campus Pharmacy, Inc
Several Acquisitions
Common Stock
Several Acquisitions
Diplomat Pharmacy, Inc. Shareholders' Equity
Several Acquisitions
Common Stock
Additional Paid-In Capital
Retained Earnings
Diplomat Pharmacy, Inc. Shareholders' Equity
Noncontrolling Interest
Total
Balance at Dec. 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 148,901 
$ 9,893 
$ 5,354 
$ 164,148 
$ 4,579 
$ 168,727 
Balance at the beginning of the period (in shares) at Dec. 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
51,457,023 
 
 
 
 
 
Changes in Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25,776 
25,776 
(1,004)
24,772 
Proceeds from follow-on public offering, net of issuance costs
 
 
 
 
 
 
 
 
 
 
 
 
 
187,988 
 
 
187,988 
 
187,988 
Proceeds from follow-on public offering, net of issuance costs (in shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
6,821,125 
 
 
 
 
 
Repurchase of stock options
 
 
 
 
 
 
 
 
 
 
 
 
 
(34,194)
(2,104)
 
(36,298)
 
(36,298)
Issuance of stock as partial consideration
125,697 
125,697 
125,697 
9,578 
 
9,578 
9,578 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock as partial consideration (in shares)
4,038,853 
 
 
253,036 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock issued upon stock option exercises
 
 
 
 
 
 
 
 
 
 
 
 
 
13,650 
(3,309)
 
10,341 
 
10,341 
Stock issued upon stock option exercises (in shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
1,943,022 
 
 
 
 
 
Excess tax benefits related to share-based awards
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,805 
 
20,805 
 
20,805 
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,936 
 
3,936 
 
3,936 
Restricted stock awards (in shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
10,805 
 
 
 
 
 
Balance at Dec. 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
451,620 
29,221 
31,130 
511,971 
3,575 
515,546 
Balance at the end of the period (in shares) at Dec. 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
64,523,864 
 
 
 
 
 
Changes in Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adoption of ASU 2016-09 (Note 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16,903 
16,903 
 
16,903 
Net income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28,273 
28,273 
(3,253)
25,020 
Issuance of stock upon full contingent consideration payout
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
36,888 
 
36,888 
Issuance of stock upon full contingent consideration payout (in shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
1,346,282 
 
 
 
 
 
Issuance of stock as partial consideration
 
 
 
 
 
 
 
9,507 
9,507 
9,507 
 
 
 
36,888 
 
 
 
 
 
Issuance of stock as partial consideration (in shares)
 
 
 
 
 
 
 
324,244 
 
 
 
 
 
 
 
 
 
 
 
Stock issued upon stock option exercises
 
 
 
5,813 
(1,365)
4,448 
4,448 
 
 
 
 
 
 
 
 
 
 
 
 
Stock issued upon stock option exercises (in shares)
 
 
 
564,844 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,412 
 
5,412 
 
5,412 
Restricted stock awards (in shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
5,765 
 
 
 
 
 
Balance at Dec. 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
503,828 
33,268 
76,306 
613,402 
322 
613,724 
Balance at the end of the period (in shares) at Dec. 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
66,764,999 
 
 
 
 
66,764,999 
Changes in Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15,510 
15,510 
(322)
15,188 
Issuance of stock as partial consideration
 
 
 
 
 
 
 
 
 
 
105,433 
105,433 
105,433 
 
 
 
 
 
 
Issuance of stock as partial consideration (in shares)
 
 
 
 
 
 
 
 
 
 
5,852,291 
 
 
 
 
 
 
 
 
Stock issued upon stock option exercises
 
 
 
 
 
 
 
 
 
 
 
 
 
9,974 
(2,099)
 
7,875 
 
7,875 
Stock issued upon stock option exercises (in shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
1,217,320 
 
 
 
 
 
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7,281 
 
7,281 
 
7,281 
Restricted stock awards (in shares)
 
 
 
 
 
 
 
 
 
 
 
 
 
36,814 
 
 
 
 
 
Balance at Dec. 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 619,235 
$ 38,450 
$ 91,816 
$ 749,501 
 
$ 749,501 
Balance at the end of the period (in shares) at Dec. 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
73,871,424 
 
 
 
 
73,871,424 
DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS

 

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.

 

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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.

 

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,

 

 

 

2017

 

2016

 

2015

 

Beginning balance

 

$

(15,257

)

$

(8,123

)

$

(3,043

)

Charged to expense

 

(9,424

)

(9,534

)

(5,990

)

Write-offs, net of recoveries

 

2,631

 

2,400

 

910

 

 

 

 

 

 

 

 

 

Ending balance

 

$

(22,050

)

$

(15,257

)

$

(8,123

)

 

 

 

 

 

 

 

 

 

 

 

 

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 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).

 

The Company derived its revenue from the following therapeutic classes:

 

 

 

Year Ended December 31,

 

 

 

2017

 

2016

 

2015

 

Oncology

 

$

2,545,708

 

$

2,102,130

 

$

1,432,091

 

Specialty Infusion

 

617,904

 

505,240

 

374,884

 

Immunology(1)

 

561,730

 

644,173

 

510,708

 

Hepatitis

 

<10

%

583,751

 

520,771

 

Other (none greater than 10% in the period)

 

759,888

 

575,094

 

528,177

 

 

 

 

 

 

 

 

 

Total revenue

 

$

4,485,230

 

$

4,410,388

 

$

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.

 

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

 

Adjustment

 

As Adjusted

 

Deferred income taxes (current asset)

 

$

14,703

 

$

(14,703

)

$

 

Total current assets

 

519,810

 

(14,703

)

505,107

 

Deferred income taxes (noncurrent asset)

 

 

6,010

 

6,010

 

Total assets

 

1,107,947

 

(8,693

)

1,099,254

 

Deferred income taxes (noncurrent liability)

 

8,693

 

(8,693

)

 

Total liabilities

 

494,223

 

(8,693

)

485,530

 

Total liabilities and shareholders’ equity

 

1,107,947

 

(8,693

)

1,099,254

 

 

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.

 

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.

 

BUSINESS ACQUISITIONS
BUSINESS ACQUISITIONS

 

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 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

 

$

521,300

 

4,113,188 restricted common shares

 

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.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

965

 

Accounts receivable

 

38,273

 

Inventories

 

2,979

 

Prepaid expenses and other current assets

 

837

 

Property and equipment

 

2,659

 

Capitalized software for internal use

 

791

 

Definite-lived intangible assets

 

201,523

 

Accounts payable

 

(35,472

)

Accrued expenses — compensation and benefits

 

(2,137

)

Accrued expenses — other

 

(4,862

)

Deferred income taxes

 

(31,173

)

 

 

 

 

Total identifiable net assets

 

174,383

 

Goodwill

 

426,005

 

 

 

 

 

 

 

$

600,388

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

10 years

 

$

184,973

 

Trade names and trademarks

 

4 years

 

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

 

$

34,437

 

835,017 restricted common shares

 

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.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

10,151

 

Accounts receivable

 

21,286

 

Inventories

 

100

 

Prepaid expenses and other current assets

 

650

 

Property and equipment

 

13,713

 

Capitalized software for internal use

 

1,800

 

Definite-lived intangible assets

 

6,720

 

Accounts payable

 

(23,084

)

Accrued expenses — other

 

(4,881

)

 

 

 

 

Total identifiable net assets

 

26,455

 

Goodwill

 

20,735

 

 

 

 

 

 

 

$

47,190

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

10 years

 

$

5,900

 

Trade names and trademarks

 

2 years

 

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

 

$

17,252

 

374,297 restricted common shares

 

5,643

 

Contingent consideration at fair value

 

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.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,809

 

Accounts receivable

 

4,936

 

Inventories

 

1,177

 

Prepaid expenses and other current assets

 

20

 

Definite-lived intangible assets

 

7,100

 

Other noncurrent assets

 

21

 

Accounts payable

 

(5,169

)

Accrued expenses — compensation and benefits

 

(156

)

 

 

 

 

Total identifiable net assets

 

9,738

 

Goodwill

 

15,237

 

 

 

 

 

 

 

$

24,975

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

3,700

 

Non-compete employment agreements

 

3 years

 

2,200

 

Trade names and trademarks

 

3 years

 

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

 

$

9,408

 

131,108 restricted common shares

 

1,776

 

Contingent consideration at fair value

 

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.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,295

 

Accounts receivable

 

2,196

 

Inventory

 

936

 

Prepaid expenses and other current assets

 

34

 

Definite-lived intangible assets

 

3,420

 

Other noncurrent assets

 

3

 

Accounts payable

 

(3,303

)

Accrued expenses — compensation and benefits

 

(152

)

Accrued expenses — other

 

(6

)

 

 

 

 

Total identifiable net assets

 

4,423

 

Goodwill

 

8,741

 

 

 

 

 

 

 

$

13,164

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

2,100

 

Non-compete employment agreements

 

5 years

 

670

 

Trade names and trademarks

 

4 years

 

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

 

$

26,804

 

299,325 restricted common shares

 

4,291

 

Contingent consideration at fair value

 

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.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,018

 

Accounts receivable

 

2,593

 

Prepaid expenses and other current assets

 

179

 

Property and equipment

 

498

 

Definite-lived intangible assets

 

7,730

 

Other noncurrent assets

 

24

 

Accounts payable

 

(100

)

Accrued expenses — other

 

(498

)

 

 

 

 

Total identifiable net assets

 

11,444

 

Goodwill

 

20,181

 

 

 

 

 

 

 

$

31,625

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Customer relationships

 

7 years

 

$

5,200

 

Non-compete employment agreements

 

4 years

 

1,530

 

Trade names and trademarks

 

2 years

 

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

 

$

10,613

 

Contingent consideration at fair value

 

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.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

104

 

Accounts receivable

 

575

 

Inventories

 

118

 

Prepaid expenses and other current assets

 

15

 

Definite-lived intangible assets

 

2,400

 

Other noncurrent assets

 

5

 

Accounts payable

 

(372

)

Accrued expenses — other

 

(101

)

 

 

 

 

Total identifiable net assets

 

2,744

 

Goodwill

 

11,669

 

 

 

 

 

 

 

$

14,413

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Physician relationships

 

7 years

 

$

1,200

 

Non-compete employment agreements

 

5 years

 

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

 

$

17,377

 

Contingent consideration at fair value

 

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.

 

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

1,043

 

Accounts receivable

 

3,583

 

Inventories

 

79

 

Prepaid expenses and other current assets

 

74

 

Definite-lived intangible assets

 

5,100

 

Other noncurrent assets

 

5

 

Accounts payable

 

(1,075

)

Accrued expenses — compensation and benefits

 

(144

)

Accrued expenses — other

 

(25

)

 

 

 

 

Total identifiable net assets

 

8,640

 

Goodwill

 

8,772

 

 

 

 

 

 

 

$

17,412

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

7 years

 

$

4,000

 

Non-compete employment agreements

 

5 years

 

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

 

$

70,267

 

324,244 restricted common shares

 

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.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Cash

 

$

2,114

 

Accounts receivable

 

16,271

 

Inventories

 

4,740

 

Prepaid expenses and other current assets

 

46

 

Property and equipment

 

200

 

Capitalized software for internal use

 

14,000

 

Definite-lived intangible assets

 

13,890

 

Other noncurrent assets

 

21

 

Accounts payable

 

(29,773

)

Accrued expenses — compensation and benefits

 

(400

)

Accrued expenses — other

 

(1,962

)

 

 

 

 

Total identifiable net assets

 

19,147

 

Goodwill

 

60,627

 

 

 

 

 

 

 

$

79,774

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Physician relationships

 

10 years

 

$

7,700

 

Non-compete employment agreements

 

5 years

 

4,490

 

Trade names and trademarks

 

1 year

 

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

 

$

77,416

 

253,036 restricted common shares

 

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.

 

The following table summarizes the fair values of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Accounts receivable

 

$

17,109

 

Inventories

 

8,064

 

Prepaid expenses and other current assets

 

7,513

 

Property and equipment

 

88

 

Capitalized software for internal use

 

17,000

 

Definite-lived intangible assets

 

22,200

 

Accounts payable

 

(25,761

)

Accrued expenses — compensation and benefits

 

(169

)

Accrued expenses — other

 

(6

)

 

 

 

 

Total identifiable net assets

 

46,038

 

Goodwill

 

40,956

 

 

 

 

 

 

 

$

86,994

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Physician relationships

 

10 years

 

$

14,000

 

Noncompete employment agreements

 

5 years

 

5,500

 

Favorable supply agreement

 

1 year

 

2,700

 

 

 

 

 

 

 

 

 

 

 

$

22,200

 

 

 

 

 

 

 

 

 

BioRx

 

On April 1, 2015, the Company acquired BioRx, a highly specialized pharmacy and infusion services company based in Cincinnati, Ohio. BioRx provides treatments for patients with ultra-orphan and rare, chronic diseases — predominately administered in the home and often via intravenous infusion. The Company acquired BioRx to expand its existing specialty infusion business and increase its national presence. The following table summarizes the consideration transferred to acquire BioRx:

 

Cash

 

$

217,024

 

4,038,853 restricted common shares

 

125,697

 

Contingent consideration at fair value

 

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.

 

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

 

$

1,786

 

Accounts receivable

 

37,716

 

Inventories

 

5,546

 

Prepaid expenses and other current assets

 

287

 

Property and equipment

 

494

 

Definite-lived intangible assets

 

181,700

 

Other noncurrent assets

 

163

 

Accounts payable

 

(25,088

)

Accrued expenses — compensation and benefits

 

(1,653

)

Accrued expenses — other

 

(852

)

Deferred income taxes

 

(7,780

)

 

 

 

 

Total identifiable net assets

 

192,319

 

Goodwill

 

191,402

 

 

 

 

 

 

 

$

383,721

 

 

 

 

 

 

 

Definite-lived intangible assets that were acquired and their respective useful lives are as follows:

 

 

 

Useful
Life

 

Amount

 

Patient relationships

 

10 years

 

$

130,000

 

Noncompete employment agreements

 

5 years

 

39,700

 

Trade names and trademarks

 

8 years

 

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.

 

 

 

Year Ended December 31,

 

 

 

2017

 

2016

 

Net sales

 

$

4,954,494

 

$

5,117,678

 

 

 

 

 

 

 

 

 

Net income attributable to Diplomat Pharmacy, Inc.

 

$

6,733

 

$

8,498

 

 

 

 

 

 

 

 

 

Net income per common share — basic

 

$

0.09

 

$

0.12

 

 

 

 

 

 

 

 

 

Net income per common share — diluted

 

$

0.09

 

$

0.11

 

 

 

 

 

 

 

 

 

 

FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

 

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:

 

 

 

Asset /

 

 

 

Valuation

 

 

 

(Liability)

 

Level 3

 

Technique

 

Contingent consideration

 

$

(12,100

)

$

(12,100

)

C

 

 

The following table sets forth a roll forward of the Level 3 measurements:

 

 

 

Contingent
Consideration

 

Balance at January 1, 2015

 

$

(11,691

)

BioRx acquisition

 

(41,000

)

Change in fair value

 

(6,724

)

Payments

 

6,750

 

 

 

 

 

Balance at December 31, 2015

 

(52,665

)

Change in fair value

 

8,922

 

Payments

 

43,743

 

 

 

 

 

Balance at December 31, 2016

 

 

Affinity acquisition

 

(35

)

Comfort acquisition

 

(3,800

)

WRB acquisition

 

(530

)

Accurate acquisition

 

(1,980

)

Focus acquisition

 

(2,080

)

Changes in fair values

 

(3,675

)

 

 

 

 

Balance at December 31, 2017

 

$

(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.

 

PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT

 

5.PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

 

 

December 31,

 

 

 

Useful Life

 

2017

 

2016

 

Land

 

 

$

5,232

 

$

332

 

Buildings

 

40 years

 

18,818

 

10,007

 

Leasehold improvements

 

5 - 15 years*

 

5,247

 

1,644

 

Equipment and fixtures

 

5 - 10 years

 

14,116

 

12,178

 

Computer equipment

 

3 - 5 years

 

8,527

 

6,657

 

Construction in progress

 

 

 

2,425

 

485

 

 

 

 

 

 

 

 

 

 

 

 

 

54,365

 

31,303

 

Accumulated depreciation

 

 

 

(15,375

)

(10,931

)

 

 

 

 

 

 

 

 

 

 

 

 

$

38,990

 

$

20,372

 

 

 

 

 

 

 

 

 

 

 

 

 

* 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.

 

CAPITALIZED SOFTWARE FOR INTERNAL USE
CAPITALIZED SOFTWARE FOR INTERNAL USE

 

6.CAPITALIZED SOFTWARE FOR INTERNAL USE

 

Capitalized software, consisting of software acquired and developed internally, was comprised as follows:

 

 

 

 

 

December 31,

 

 

 

Useful Life

 

2017

 

2016

 

Capitalized software for internal use

 

3 years

 

$

82,017

 

$

74,471

 

Construction in progress

 

 

 

502

 

1,994

 

 

 

 

 

 

 

 

 

 

 

 

 

82,519

 

76,465

 

Accumulated amortization

 

 

 

(45,999

)

(26,218

)

 

 

 

 

 

 

 

 

 

 

 

 

$

36,520

 

$

50,247

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2019

 

13,599

 

2020

 

640

 

2021

 

83

 

 

 

 

 

 

 

$

36,520

 

 

 

 

 

 

 

GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

 

7.GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

 

The following table sets forth a roll forward of goodwill:

 

Balance at January 1, 2015

 

$

23,148

 

BioRx acquisition

 

191,402

 

Burman’s acquisition

 

40,956

 

Miscellaneous

 

812

 

 

 

 

 

Balance at December 31, 2015

 

256,318

 

TNH acquisition

 

59,275

 

Miscellaneous

 

1,023

 

 

 

 

 

Balance at December 31, 2016

 

316,616

 

Affinity acquisition

 

8,772

 

Comfort acquisition

 

11,669

 

WRB acquisition

 

20,181

 

TNH purchase price adjustment

 

1,351

 

Accurate acquisition

 

8,741

 

Focus acquisition

 

15,237

 

NPS acquisition

 

20,735

 

LDI acquisition

 

426,005

 

Miscellaneous

 

3,317