Catamaran Corp - 10-Q filing on 2015-05-04

Business Combinations

3 Months Ended

Mar. 31, 2015

Salveo Specialty Pharmacy Acquisition

On January 2, 2015, the Company completed the acquisition of all of the outstanding capital stock of Salveo Specialty Pharmacy, Inc. ("Salveo"), an independent specialty pharmacy platform with pharmacy locations in New York and California, for a purchase price of $260.0 million in cash, subject to certain customary post-closing adjustments (see the table below for the preliminary purchase price calculation). The purchase price was funded from Catamaran's existing cash balance. The acquisition provides the Company with the opportunity to expand its geographic footprint and therapy mix in the specialty pharmacy market. The results of Salveo have been included in the Company's results since January 2, 2015. The consolidated statement of operations for the three months ended March 31, 2015 includes Salveo's total revenues of $157.8 million following the acquisition.



Purchase Price (in thousands):	Amount
Cash paid at closing	$	270,599
Preliminary post-closing adjustments	9,485
Total purchase price	$	280,084

The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of their maturities. Fair values for acquired amortizable intangible assets were determined as follows: customer relationships were valued using an excess earnings model based on expected future revenues derived from the customers acquired, non-compete agreements were valued using discounted cash flow models based on expected future results of Salveo, trademarks/tradenames were valued using a royalty savings model based on future projected revenues of Salveo and applicable market royalty rates, and licenses utilized a replacement cost approach. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.

All of the assets and liabilities recorded for the acquisition are included within the Company's PBM segment. The residual amount of the purchase price after allocation to identifiable net assets represents goodwill. Goodwill is non-amortizing for financial statement purposes. Goodwill of $199.0 million related to the Salveo acquisition is tax deductible. The goodwill recognized by the Company represents many of the synergies and business growth opportunities that the Company anticipates may be realized from the acquisition of Salveo. The synergies include improved pricing from the Company's suppliers due to the increased volume of prescription drug purchases, pull through opportunities of the Company's specialty service offerings, and a more efficient leveraging of resources to achieve operating profits.

The following summarizes the preliminary fair values assigned to the assets acquired and liabilities assumed at the acquisition date and are subject to change as the valuation processes for intangible assets, rebates, and pharmacy related receivables and payables are not complete. Final determination of the fair values may result in further adjustments to the amounts presented below (in thousands):



	Initial Amounts Recognized at Acquisition Date
Cash	$	8,931
Accounts receivable	32,622
Inventory	9,421
Other current assets	10,919
Total current assets	61,893
Intangible assets	64,900
Goodwill	199,026
Other long term assets	972
Total assets acquired	326,791
Accounts payable	28,656
Accrued liabilities	840
Total current liabilities	29,496
Deferred income taxes	17,211
Total liabilities assumed	46,707

Net assets acquired	$	280,084

During the three months ended March 31, 2015, the Company recognized $2.5 million of amortization expense from intangible assets acquired in the Salveo acquisition. Amortization associated with the Salveo acquisition for the remainder of 2015 is expected to be $10.0 million.

The estimated fair values and useful lives of intangible assets acquired are as follows (dollars in thousands):



	Fair Value		Useful Life
Trademarks/Trade names	$	26,500	10 years
Customer relationships	37,100		5 years
Non-compete agreements	1,000		5 years
License	300		1 year
Total	$	64,900

None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.

Restat Acquisition

On October 1, 2013, the Company completed the acquisition of all of the outstanding equity interests of Restat, LLC ("Restat"), a privately-held PBM based in Milwaukee, Wisconsin, for a purchase price of $409.5 million in cash subject to certain customary post-closing adjustments. The purchase price was funded from the Company’s existing cash balance and $350.0 million in borrowings under a five-year senior secured revolving credit facility (the “Revolving Facility”). The acquisition provides the Company the opportunity to bring Catamaran's full-suite of technology and clinical services to Restat's clients, including mail and specialty pharmacy services. The results of Restat have been included in the Company's results since October 1, 2013.

The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of their maturities. Fair values for acquired amortizable intangible assets were determined as follows: customer relationships were valued using an excess earnings model based on expected future revenues derived from the customers acquired, non-compete agreements were valued using discounted cash flow models based on expected future results of Restat and trademarks/tradenames were valued using a royalty savings model based on future projected revenues of Restat. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.

All of the assets and liabilities recorded for the acquisition are included within the Company's PBM segment. The residual amount of the purchase price after allocation to identifiable net assets represents goodwill. Goodwill is non-amortizing for financial statement purposes. Goodwill of $227.8 million related to the Restat acquisition is tax deductible. The goodwill recognized by the Company represents many of the synergies and business growth opportunities that the Company anticipates may be realized from the acquisition of Restat. The synergies include improved pricing from the Company's suppliers due to the increased volume of prescription drug purchases, pull through opportunities of the Company's mail and specialty service offerings, and a more efficient leveraging of resources to achieve operating profits.

The following summarizes the fair values assigned to the assets acquired and liabilities assumed at the acquisition date (in thousands):



	Initial Amounts Recognized at Acquisition Date (a)		Measurement Period Adjustments (b)			Current Amounts Recognized at Acquisition Date
Accounts receivable	$	13,842	$	—		$	13,842
Rebates receivable	6,635		(254		)	6,381
Other current assets	383		—			383
Total current assets	20,860		(254		)	20,606
Property and equipment	1,263		—			1,263
Intangible assets	182,720		—			182,720
Goodwill	223,474		4,364			227,838
Total assets acquired	428,317		4,110			432,427
Accounts payable	22,370		—			22,370
Rebates payable	16,106		—			16,106
Accrued liabilities	7,231		—			7,231
Other long-term liabilities	—		2,084			2,084
Total liabilities assumed	45,707		2,084			47,791

Net assets acquired	$	382,610	$	2,026		$	384,636

(a) As previously reported in the Company's Form 10-K for the period ended December 31, 2013.

(b) These measurement period adjustments were recorded through June 30, 2014 to reflect an additional $2.0 million paid to former Restat owners for working capital reconciliation as well as changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing as of the acquisition date.

During the three months ended March 31, 2015 and March 31, 2014, the Company recognized $7.7 million and $8.7 million, respectively, of amortization expense from intangible assets acquired in the Restat acquisition. Amortization associated with the Restat acquisition for the remainder of 2015 is expected to be $22.0 million.

The estimated fair values and useful lives of intangible assets acquired are as follows (dollars in thousands):



	Fair Value		Useful Life
Customer relationships - PBM	$	143,200	10 years
Customer relationships - cash card	35,500		3 years
Trademarks/Trade names	1,000		1 year
Non-compete agreements	3,020		5 years
Total	$	182,720

None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined historical results of operations of the Company and its acquisition of Salveo as if the acquisition had occurred on the first day of the fiscal year prior to the fiscal year when the acquisition was completed. The unaudited pro forma financial information includes certain adjustments related to the acquisition, such as increased amortization from the fair value of intangible assets acquired recorded as part of the purchase accounting, the elimination of transactions between the Company and the acquired entities, and related income tax effects.

Unaudited pro forma results of operations are as follows (in thousands, except share and per share amounts):



	Three Months Ended March 31, 2014
Revenue	$	5,041,057
Gross profit	$	324,950
Net income attributable to the Company	$	66,624
Earnings per share attributable to the Company:
Basic	$	0.32
Diluted	$	0.32
Weighted average shares outstanding:
Basic	206,525,188
Diluted	207,086,677

This unaudited pro forma financial information is not intended to represent or be indicative of what would have occurred if this transaction had taken place on the date presented and is not indicative of what the Company's actual results of operations would have been had the acquisition been completed at the beginning of the period indicated above. Further, the pro forma combined results do not reflect one-time costs to fully integrate and operate the combined organization more efficiently or anticipated synergies expected to result from the combination and should not be relied upon as being indicative of the future results that the Company will experience.

Healthcare Solutions Acquisition

Subsequent to the end of the current reporting period, on April 8, 2015, the Company completed the acquisition of Healthcare Solutions, Inc. ("Healthcare Solutions"), a current PBM customer operating in the workers' compensation space, for a purchase price of $405.0 million in cash, subject to customary post-closing adjustments. The acquisition provides the Company the opportunity to further expand our presence in the workers' compensation market as well as to bring Catamaran's full suite of technology and services to Healthcare Solutions' clients. The initial accounting for this acquisition was incomplete at the time these financial statements were available for issuance.