Express Scripts 2014 Annual Report Download - page 41

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Express Scripts 2014 Annual Report
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
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OVERVIEW
Asthelargestfull-servicepharmacybenefitmanagement(“PBM”)companyintheUnitedStates,weprovide
healthcaremanagementandadministrationservicesonbehalfofourclients,whichincludemanagedcareorganizations,health
insurers,third-partyadministrators,employers,union-sponsoredbenefitplans,workers’compensationplansandgovernment
healthprograms.Wereportsegmentsonthebasisofproductsandservicesofferedandhavedeterminedwehavetworeportable
segments:PBMandOtherBusinessOperations.OurintegratedPBMservicesincludeclinicalsolutionstoimprovehealth
outcomes,specializedpharmacycare,homedeliverypharmacyservices,specialtypharmacyservices,fertilityservicesto
providersandpatients,retailnetworkpharmacyadministration,benefitdesignconsultation,drugutilizationreview,drug
formularymanagement,Medicare,MedicaidandPublicExchangeofferings,administrationofagrouppurchasingorganization
andconsumerhealthanddruginformation.
ThroughourOtherBusinessOperationssegment,weprovidedistributionservicesofpharmaceuticalsandmedical
suppliestoproviders,clinicsandhospitalsandprovideconsultingservicesforpharmaceuticalmanufacturerstocollect
scientificevidencetoguidethesafe,effectiveandaffordableuseofmedicines.
Revenuegeneratedbyoursegmentscanbeclassifiedaseithertangibleproductrevenueorservicerevenue.We
earntangibleproductrevenuefromthesaleofprescriptiondrugsbyretailpharmaciesinourretailpharmacynetworksand
fromdispensingprescriptiondrugsfromourhomedeliveryandspecialtypharmacies.Servicerevenueincludesadministrative
feesassociatedwiththeadministrationofretailpharmacynetworkscontractedbycertainclients,medicationcounseling
servicesandcertainspecialtydistributionservices.TangibleproductrevenuegeneratedbyourPBMandOtherBusiness
Operationssegmentsrepresented98.4%ofrevenuesfortheyearendedDecember31,2014,ascomparedto98.8%and99.0%
fortheyearsendedDecember31,2013and2012,respectively.
MERGER TRANSACTION
OnApril2,2012,ExpressScripts,Inc.(“ESI”)consummatedamerger(the“Merger”)withMedcoHealth
Solutions,Inc.(“Medco”)andbothESIandMedcobecamewholly-ownedsubsidiariesofExpressScriptsHoldingCompany
(the“Company”or“ExpressScripts”).“We,”“our”or“us”referstoExpressScriptsHoldingCompanyanditssubsidiaries.
Theconsolidatedfinancialstatements(andotherdata,suchasclaimsvolume)reflecttheresultsofoperationsandfinancial
positionofESIforallperiodspriortoApril1,2012.ReferencestoamountsforperiodsaftertheclosingoftheMergeronApril
2,2012relatetoExpressScripts.
AsaresultoftheMerger,MedcoandESIeachbecamewholly-ownedsubsidiariesofExpressScriptsandformer
MedcoandESIstockholdersbecameownersofExpressScriptsstock,whichislistedfortradingontheNasdaq.Uponclosing
oftheMerger,formerESIstockholdersownedapproximately59%ofExpressScriptsandformerMedcostockholdersowned
approximately41%ofExpressScripts.
EXECUTIVE SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS
Weoperateinadynamicenvironmentinfluencedbyanumberofmarketplaceforcesincludinghealthcarereform,
increasedregulation,macroeconomicfactorsandcompetition.Ourclaimsvolumehasbeenimpactedbythetransitionof
UnitedHealthGroup,in-groupattrition,andcertainclientlossesandimplementationdelays.However,wecontinuetoexecute
oursuccessfulbusinessmodel,whichemphasizesthealignmentofourfinancialinterestswiththoseofourclientsandpatients
throughgreateruseofgenericsandlow-costbrands,homedeliveryandspecialtypharmacies.Wealsocontinuetobenefitfrom
bettermanagementofingredientcoststhroughrenegotiationofsuppliercontracts,increasedcompetitionamonggeneric
manufacturersandahighergenericfillrate(82.9%in2014comparedto80.8%in2013).Wehaveachievedhighergenericfill
ratesaswecontinuetoprovideourclientswithadditionaltoolsdesignedtoproactivelymanagetotaldrugspendbyincreasing
lowercostalternatives.Weexpecttheongoingpositivetrendsinourbusinesswillcontinuetooffsetnegativefactors.
Revenuerelatedtoalargeclientwasrealizedinthesecondquartersof2014and2013duetothestructureofthe
contract.QuarterlyperformancetrendsmayvaryfromhistoricalperiodsasaresultofthetransitionofUnitedHealthGroup
claims,aswellasvariability,includingtiming,ofourcontractualrevenuestreams.
Astheregulatoryenvironmentevolvesandexpands,itisnecessaryforustomakesignificantinvestmentsinorder
tooperatewithintheregulatoryframework.Theseinvestmentsinclude,amongotherthings,preparationforchangestothe
MedicareregulationsandtheimplementationoftheHealthReformLaws.