Rite Aid 2016 Annual Report Download - page 23

We may be subject to significant liability should the consumption of any of our products cause injury, illness
or death.
Products that we sell could become subject to contamination, product tampering, mislabeling or
other damage requiring us to recall our private brand products. In addition, errors in the dispensing
and packaging of pharmaceuticals could lead to serious injury or death. Product liability claims may be
asserted against us with respect to any of the products or pharmaceuticals we sell and we may be
obligated to recall our private brand products. A product liability judgment against us or a product
recall could have a material, adverse effect on our business, financial condition or results of operations.
Risks of declining gross margins in the PBM industry could adversely impact our profitability.
The PBM industry has been experiencing margin pressure as a result of competitive pressures and
increased client demands for lower prices, enhanced service offerings and/or better service levels, and
higher rebate yields. With respect to rebate yields, we maintain contractual relationships with brand
name pharmaceutical manufacturers that provide for rebates on drugs dispensed by pharmacies in our
retail network and by its mail order pharmacy (all or a portion of which may be passed on to clients).
Manufacturer rebates often depend on a PBM’s ability to meet contractual market share or other
requirements, including in some cases the placement of a manufacturer’s products on the PBM’s
formularies. If we lose our relationship with one or more pharmaceutical manufacturers, or if the
rebates provided by pharmaceutical manufacturers decline, our business and financial results could be
adversely affected. Further, changes in existing federal or state laws or regulations or the adoption of
new laws or regulations relating to patent term extensions, rebate arrangements with pharmaceutical
manufacturers, or to formulary management or other PBM services could also reduce the manufacturer
rebates we receive.
We also maintain contractual relationships with participating pharmacies that provide for discounts
on retail transactions for generic drugs and brand 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. In addition, changes in federal or state laws or regulations or the adoption of new laws or
regulations relating to claims processing and billing, including our ability to collect network
administration and technology fees, could adversely impact our profitability.
The possibility of PBM client loss and/or the failure to win new PBM business could impact our ability to
secure new business.
Our PBM business generates net revenues primarily by contracting with clients to provide
prescription drugs and related health care services to plan members. PBM client contracts often have
terms of approximately three years in duration, so approximately one third of a PBM’s client base
typically is subject to renewal each year. 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. In addition, the reputational impact of a service-related incident could negatively affect our
ability to grow and retain our client base. Further, 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. For these reasons, we continually face challenges in competing for new
PBM business and retaining or renewing our existing PBM business. 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. These circumstances, either individually or in the aggregate, could result in an adverse effect on
our business and financial results.
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