Diplomat.is/more -...
-
Upload
phungkhanh -
Category
Documents
-
view
215 -
download
0
Transcript of Diplomat.is/more -...
Diplomat.is/more
I’m Jay.
I have chronic lymphocytic leukemia.
I’m a retired submarine commander,
a father, a husband, an avid woodcarver.
I bike 20 miles a day.
I know the Diplomat Difference.
Copyright © 2015 by Diplomat Pharmacy Inc. Diplomat is a registered
trademark of Diplomat Pharmacy Inc. All rights reserved.
Investor Presentation
November 2016
Confidential
1
This presentation may contain “forward-looking” statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to, any projections of financial information; any statements about historical results that may suggest trends for our business and results of operations; any statements of the plans, strategies and objectives of management for future operations; any statements of expectation or belief regarding future events, health care developments, or specialty pharmaceutical industry market sizes, shares, trends or growth; and any statements of assumptions underlying any of the foregoing.
Any forward-looking statements contained in this presentation are based on management's good-faith belief and reasonable judgment based on current information, and these statements are qualified by important factors, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, including but not limited to the following risks related to our business: our ability to adapt to changes or trends within the specialty pharmacy industry; significant and increasing pricing pressure from third-party payors, our relationships with key pharmaceutical manufacturers; our limited history with integrating acquisitions; and the effects of competition. These and other risks and uncertainties associated with our business are described in the prospectus for our proposed follow-on offering, including under the heading “Risk Factors.” We assume no obligation and do not intend to update these forward-looking statements.
In addition to U.S. GAAP financials, this presentation includes certain non-GAAP financial measures. These historical and forward-looking non-GAAP measures are in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP measures is included in the appendix to this presentation.
Diplomat is a registered trademark of Diplomat Pharmacy, Inc. This presentation also contains additional trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies’ trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
Important note
Confidential
Investment Highlights
• Specialty Pharmacy industry is a high growth market
• Drug development pipeline remains robust
− Oncology is the largest and fastest growing segment of the Diplomat portfolio
• Limited distribution growing in importance
• Diplomat is unique within the specialty pharmacy industry
• Taking market share as the largest independent specialty pharmacy
• Access to ~100 limited distribution drugs
• Significant progress in building out the platform since the IPO (Oct. 9, 2014)
• Expanded access to limited distribution drugs; ~ 30 new LDs
• Completed three strategic acquisitions which broadened service offerings, deepened therapeutic
expertise, and improved geographic footprint
• Strong financial performance
• Five-year revenue CAGR of 42% & EBITDA CAGR of 65%
• Diversified revenue and profitability streams
• Modest balance sheet leverage – ample dry powder
• Experienced senior management team
• CEO founded Diplomat 40+ years ago
• Leadership team has broad ranging experience across the industry
2
(1) CAGR based on 2010-2015 results
(1)
Confidential
3
Diplomat at a glance
Founded: 1975; Headquarters: Flint, MI
Employees: ~1,900
2016E revenue: ~$4.5 billion
Diversified base of marquee partners
Corporate Overview
CVS Health/Omnicare
33%
Express Scripts25%
Walgreens10%
3%
OptumRx/Catamaran
8%
Avella 1%
Others20%
2015 Market share ($98 billion total market size) (1)
Exceptional above market revenue growth
Scaled business: National footprint
($ in millions)
Source:(1) 2015 – 2016 Economic Report on Retail, Mail and Specialty Pharmacies, Drug Channel
Institute (2) Based on mid-point of management’s estimate range for FY 2016
(2)
Pharmacy Locations
Arizona
California
Connecticut
Florida
Illinois
Iowa
Maryland
Massachusetts
Michigan
Minnesota
North Carolina
Ohio
Pennsylvania
Texas
(2)
$27 $58$167 $271 $377
$578$772
$1,127
$1,515
$2,215
$3,367
$4,500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
Confidential
4
DIR (Direct and Indirect Remuneration) Fees
• Term used by CMS to address price concessions that ultimately impact the prescription drug costs of Medicare Part D plans, but are not captured at the point of sale
Some PBMs use DIR as a “catch-all” term to encompass a number of different types of fees
• Final 2014 Part D rule established a new definition of “negotiated price”, effective in 2016, to include all pharmacy price concessions which can be reasonably determined at point of sale
Some Plans / PBMs restructured programs for 2016, to make it more difficult for their DIR fees to be “reasonably determined” in anticipation of this legislation
Some PBMs assert that DIR fees cannot be determined at the point of sale as the performance against certain quality measurements are not known at the time of adjudication
Confidential
5
DIR Fees
• Not New – been around in some format for a few years
Major changes in 2016; rates, methodology, timing, transparency
• Retroactive – Received first 2016 scorecard in 3Q 2016, but retroactive to 1/1/2016
Measured with very dissimilar retail pharmacies
• DIR fees were originally intended to be a tool to improve care in retail pharmacy categories such as diabetes, high blood pressure and cholesterol management
Confidential
6
Impact of DIR Fees to DPLO YTD 2016
• $10.1 million year to date total DIR fees recognized
• DIR fees have a minor impact on revenues, but all drop to the bottom line
• Going forward we anticipate DIR fees of $5-$6 million in 4Q16 and approximately $20-$30 million in 2017
(millions)1Q 2016 2Q 2016 3Q 2016 YTD 2016
Recognized in GAAP Financials
$0.6 $1.0 $8.5 $10.1
Appropriate "Normalized" Timing
2.3 3.3 4.5 10.1
Retroactive Impact $1.7 $2.3 $(4.0) $--
Confidential
Legal and Regulatory Strategies for combating DIR fees
• Proposed legislative – already in House and Senate to prevent
DIR Fees being implemented in current fashion
• Multiple Industry stakeholders reviewing other legislative options
• Direct discussion with CMS to control PBM interpretations of
DIR language
• Legal Challenges being reviewed by multiple SP groups and
stakeholders
7
Confidential
Ongoing business strategies
• Continued expansion of direct contracts with payors not affected
by DIR fees
• Continued contracting with manufacturer partners to insure the
highest service levels for patients, physicians and health plans
• Continued expansion of our service with multiple industry
stakeholders
• Continued review of M&A opportunities in areas unaffected by
DIR
8
Confidential
9
Diplomat’s revenue and profits come from multiple industry sectors
DIR fees primarily affect core specialty pharmacy sector only
Complementary Opportunities Minimize Payer/PBM Risk, AND Mitigate Risk of Inflation Abatement
Other Services
Envoy Health – HUB and other services
Retail Specialty Network
Hospital Specialty Network
340(b)
PAP
All services enhance DPLO’s relevance in
healthcare
Specialty Infusion Subset of specialty pharmacy
Many similar characteristics
(chronic, high cost, etc.)
Few differentiators (nursing
component, more medical billing)
Higher margin business
Unique/separate payer networks
Payer-driven site of care transition
opportunities
Core Specialty Pharmacy(orals and self-injectables)
Oncology dominance
Limited distribution expertise
Outpacing industry revenue growth organically
Mix shift driving revenue and profit growth
Price inflation a very small component of
revenue Serving open, preferred, narrow, and exclusive
payer networks
Increase focus on direct contracts with payors
Pharmaceutical Manufacturer Services
Discounts, rebates, services, data fees
High margin
Not dependent on payers or price inflation
Making progress, but significant upside
opportunity remains
Revenue Source:
Payers
Revenue Source:
Pharma & Others
Financial Impact:
Higher Revenue,
Lower Margin
Financial Impact:
Lower Revenue,
Higher Margin
Confidential
Growing list of services across the specialty pharmacy eco-system
Envoy Health Services
10
Payors Partners
Call Center
Support
Specialty PBM
Services
Clinical Trials
Technology
Solutions
Higher Margin
Services
Medical
Management
Specialty Pharmacy Services
HUB/PAP/
Wholesale DistributionUtilization
Management
The continued growth and expansion of small biotech
companies creates a dramatic and growing marketplace
Branding
Services Educational
Services
Confidential
Diplomat controls the journey of a specialty patient
11
Patient
Physician
Payor
Patient
Patient visits physician
Payor approves script
Diplomat monitors adherence and collects data for manufacturers
Diplomat dispenses drug
Diplomat provides:
Benefit verification
Prior authorization
Clinical intervention
Physician writes script
Patient receives
drugs
Confidential
12
Specialty spend under pharmacy benefit to grow ~5x(1)
Specialty pharmacy industry continues to show exceptional growth
Specialty share of spend growing dramatically(1)
Specialty continues to dominate top 10 drug spend(1)
Source:(1) The 2016 Economic Report on Retail, Mail, and Specialty Pharmacies – January 2016
7 out of top 10 9 out of top 10
2014A 2020E
85%
15%27%
73%
44%56%
Diplomat 2%
$41 billion $212 billion
2010A 2020E
Traditional
2010A 2015E 2020E
Specialty
Confidential
Limited distribution a central and growing theme in specialty
13
Benefits to DiplomatBenefits to biotech / pharma
Completely eliminate or reduce reliance on wholesaler
Real-time clinical data
Commercialization assistance
Improves appropriate utilization
Barrier to entry Deeper, and earlier, partnerships with
pharma / biotech Increased value proposition to payors Market share opportunity
Portfolio of ~100 limited distribution drugs, comprising approximately 45% of revenue in 2015, and well positioned for disproportionate growth from
future drug approvals
Recent unique limited panels…Diplomat exclusive or semi-exclusive
What is limited distribution?
Targeted channel strategy
Provides certain specialty pharmacies with exclusive or preferred dispensing rights to certain drugs
Fast-growing trend
(2013)(2012) (2015)
Traditional:
Limited:
Manufacturer Multiple Wholesalers 65,000 Pharmacies Patient
Manufacturer One/few pharmacies Patient
DPLO EXCLUSIVE DPLO LARGEST OF 4 DPLO 1 of 4
(2016)
DPLO 1 of 4
Confidential
14
Unique competitive position
LARGE PBM / RETAILPHARMACY
SMALLER SPECIALTYPHARMACIES
Diversification distracts from specialty pharmacy
Less flexible / less nimble
Limited scale
Most focused on one or a few disease states
Fragmented market
Consolidation opportunity for Diplomat
Singularly focused on specialty
High-touch model
Flexible and nimble
Entrepreneurial culture
National reach
Scalable infrastructure
Acquired
Feb 2016
Acquired
2013-2016
Acquired
Sept 2016
Confidential
15
Base business continues to gain momentum
Specialty pharmacy market grew ~25% in 2015
3,000+ oncology and immunology drugs in global drug development
Increased prevalence of limited distribution panels
Biosimilars launching in U.S.
2015 record year for drug approvals
Improving trends across specialty pharmacy…
…driving key milestones and achievements at Diplomat
Diplomat grew revenues by 52% from 2014 to 2015
Recent new drug contracts
The majority of which are limited distribution drugs
Oncology
Hepatitis C
Other• 51 total approvals:
- 45 NMEs and 6 biologics
• 21 of 45 NMEs were Orphan designation
• 16 of 45 NMEs were “First in Class”
• 69% of all approvals were specialty
Confidential
Accomplishments since the IPO
16
Core Capabilities
# of LD Drugs
Successful Acquisitions
Management Team
Board of Directors
Trailing Revenue
Gross Profit /Script
Trailing Adjusted EBITDA
Market Share
At IPO – October 9, 2014 September 30, 2016
~2% of $63 billion market ~4% of a $100+ billion market
Oncology, Immunology, MS Oncology, Infusion, Immunology, MS, HepC
~70 ~100
2 prior to IPO 3 since IPO
Diverse Expanded/Improved
6 Members, 1 Independent 7 Members, 4 Independent
$2.0 billion $4.3 billion
$143/prescription $305/prescription
$30.5 million $109.4 million
(1)
(2)
(1)
Source:(1) Trailing four quarters(2) 2Q14 compared to “normalized” 3Q16
Confidential
17
Future M&A criteria
When considering acquisitions, we look for targets that will potentially benefit Diplomat in one or more of the following ways:
Expand into new therapeutic areas and/or geographic regions
Enhance clinical capabilities to improve competitive advantage
Access to Limited Distribution drugs
Access to new/expanded specialty prescriber base
Accelerate our higher margin business opportunities
Bring new services and technologies under our umbrella
Makes DPLO better, not just bigger
Confidential
Traditional Drug Specialty Drug A Specialty Drug B Specialty Drug C Specialty Drug B
(10% price incr.)
Revenue $100 $3,700 $10,000 $27,000 $11,000
Gross Profit ($) $10 $185 $400 $810 $440
Gross Margin (%) 10% 5% 4% 3% 4%
19
RevenuePayors
Distributors / pharmaceutical manufacturers
Patient
DiplomatCOGS
Physical drug movement
$ flows
How we make money and grow profitability(Illustrative example)
How we make money
Drug mix and positive pricing trends are tremendous profit tailwinds for Diplomat
Inflation Impact
Diplomat mix shift movement over time
Our core focus
$305
Diplomat’s 3Q’16 Average*
(AWP – Y%)(WAC – X%)
Note AWP = WAC x 1.20
(1)
(1)
Example:
AWP $11,905 - 16% = $10,000 Revenue
WAC $9,921 - 3% = $9,600 COGS
$400 Gross Profit
4% Gross Margin
*Normalized to remove Q1 and Q2 DIR fees from Q3 results
Confidential
20
Normalized Third Quarter 2016 Results
(1) Based on dispensed scripts only.(2) Gross profit / net sales (i.e., based on dispensed and serviced scripts).(3) 3Q15 Adjusted EBITDA benefited from one time pharma dollars and reversal of 2Q 2015 bad debt expense
Revenue
AdjustedEBITDAmargin
3.5%
Adjusted EBITDAGross Profit /Script($ in millions) ($ in millions)
2.2%7.0%8.0%
(1)
Grossmargin
(2)
$947
$1,185
3Q15A 3Q16
$33
$27
3Q15A 3Q16
$301$305
3Q15A 3Q16
(3)
Confidential
$2,380
$3,265
First Nine Monthsof 2015
First Nine Monthsof 2016
$67
$81
First NineMonths of 2015
First NineMonths of 2016
$8
$15$11
$19
$35
96% (28%) 75% 85% 170%
1.3% 2.0% 1.0% 1.3% 2.8%
2010A 2011A 2012A 2013A 2014A 2015A
Strong long-term financial performance…
Adjusted EBITDA2010 –First Nine Months of 2016
Total Revenue2010 –First Nine Months of 2016
% margin
% growth
($ in millions)
$578$772
$1,127$1,515
$2,215
34% 46% 34% 46% 52%
2010A 2011A 2012A 2013A 2014A 2015A
% growth
($ in millions)
Pre-IPO infrastructure investments
Volume, price and mix all driving superior revenue growth
Natural operating leverage and acquisitions driving EBITDA growth and margin expansion
53%
27%
Note: Historical financials are not pro forma for any acquisitions.
1.6%
$3,367
$95
2.8% 2.5%
Confidential
$269
$319
First NineMonths of 2015
First NineMonths of 2016
22
… with continued growth in profitability
Gross Profit / Script (1)
2010 –First Nine Months of 2016
Note: Financials are not pro forma for BioRx acquisition.(1) Based on dispensed scripts only.(2) Gross profit / net sales (i.e., based on dispensed and serviced scripts).
$71
$93 $97$116
$167
2010A 2011A 2012A 2013A 2014A 2015A
% growth 12% 20%31% 4%
% margin 7.1% 5.9%7.3% 6.2%
Several factors drive growth in our Gross Profit / Script(1):
Continued mix shift towards higher price, higher profit drugs (including acquisitions)
Favorable pricing trends
(2)
Gross margin expansion opportunities:
Recent acquisitions with higher gross margins (%)
Pharma $$ opportunities
Specialty generics and biosimilars (longer term)
44%
6.3%
68%
7.8%
$280
7.8% 7.4%
Confidential
23
Components of Quarterly Revenue Growth($ in millions)
Quart
erly
Reve
nue
• Price inflation has
comprised 5-6% of
revenue over the last 5
quarters
No meaningful change
to date
• Chronic disease expertise
provides an annuity-like
revenue base
Limited distribution
leadership and rich
drug pipeline driving
revenue growth from
new drugs
Confidential
24
Annual Revenue by Drug Year Launch
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
2013 2014 2015
2015
2014
2013
2012
2011
2006 - 2010
2001 - 2005
1996 - 2000
1995 and Prior
$1.5B
$2.2B
$3.3B
5%
21%
2%
18%
3%
16%
95%$1.4B
77%$1.7B
63%$2.1B
• Drugs across all launch years
continue to grow substantially
over time
2012 and prior drugs have
grown ~50% from 2013
to 2015
• 2015 a record year for FDA
approval of specialty drugs, yet
2015 launch drugs contributed
less than 3% of 2015 revenue
Will ramp up dramatically
in 2016 and beyond
• Pipeline remains an important
element of near-term and long-
term growth; existing drugs will
also contribute meaningfully
Confidential
25
Balance Sheet / Cash Flow snapshot
($ in millions)
(1) Includes $6mm in cash-based contingent consideration
(2) ProForma to include 12 months of TNH
2016 2015
Cash $17 $28
Total Debt $154 $119 (1)
Shareholders’ equity $613 $516
Net Debt/ProForma TTM EBITDA(2) ~1.2x ~.8x
Cash Flow From Operations (period ended) $31 $29
December 31,September 30,
Confidential
27
Revenue by Therapeutic Class
($ in millions)
2015
% of
Total 2014 2013
Oncology 1,432,091$ 43% 1,068,751$ 736,987$
Hepatitis 520,771 15% <10% <10%
Immunology 510,708 15% 438,145 378,685
Infusion 374,884 11% <10% <10%
Multiple Sclerosis <10% N/A 226,805 169,470
Other (none greater than 10% in the period) 528,177 16% 481,255 229,997
3,366,631$ 2,214,956$ 1,515,139$
Limited distribution drug % of total 45% 44% 40%
Confidential
2016 Normalized Income Statement
28
(millions)
Reported Normalized (1) Reported Normalized (1) Reported Normalized (1)
Revenue 995,870$ 1,088,506$ 1,181,173$
994,169$ 1,086,174$ 1,185,206$
Gross Profit 79,238$ 83,270$ 78,512$
77,537$ 80,938$ 82,545$
Gross Margin 8.0% 7.6% 6.6%
7.8% 7.5% 7.0%
Adj EBITDA 29,019$ 29,643$ 22,614$
27,318$ 27,311$ 26,647$
Adj EBITDA Margin 2.9% 2.7% 1.9%
2.7% 2.5% 2.2%
332$ 339$ 289$
325$ 329$ 305$
1Q 2016 2Q 2016 3Q 2016
Gross Profit/
Prescription Dispensed
(1)
Adjustments: 1Q 2015 2Q 2015 3Q 2015 FY
DIR fees (1,701)$ (2,332)$ 4,033$ -$
Confidential
Recent Acquisitions
29
Acquired Company Consideration Rationale Other
June 1, 2016
• $75M gross purchase price
• $65M cash, $10M stock
• ~8.0x CY 2015 EBITDA
• Oncology focused specialty pharmacy; 22 LDs
• Strengthens Diplomat’s footprint in key geographic markets (California
and Texas)
• Revenue synergy opportunities
• Promising proprietary technology; some components of TNH’s portal
can be leveraged across Diplomat’s platform
• Lack of
auction/marketed
process
• Founder/owner led
• Management all on
board at DPLO
June 19, 2015
• $87M gross purchase price*
• $77M cash*, $10M stock
• ~4.2x CY 2014 EBITDA
• Hep C dominance in Mid Atlantic
• Hep C is a fast growing and highly profitable disease state
• Proprietary technology (HealthTrac) with applicability across Diplomat’s
Hep C platform
• Proven management team
• 50 year old company, run by 2nd generation pharmacist
• No marketed sales process – Diplomat had a one-off look
• Lack of
auction/marketed
process
• Founder/owner led
• Management all on
board at DPLO
April 1, 2015
• $272M adjusted purchase price*
(~$50M tax benefit)
• $217M cash*, $105M stock
• ~11.8x CY 2014 EBITDA
• One year earnout of 1.35M shares
(all stock)
• Adds significant scale to specialty infusion business
• Provides ability to compete for national contracts
• Increases exposure to higher margin businesses
• Addition of new disease states, therapeutic categories & 5 new LD’s
• Lack of
auction/marketed
process
• Founder/owner led
• Management all on
board at DPLO
June 27, 2014
• $68.5 million gross purchase price*
• $52M cash upfront, $12M stock
• ~8x CY 2013 EBITDA
• Two year earnout max. $11.5M (all
cash)
• Strong management team
• Strong therapy mix: IVIG and Hemophilia
• Favorable geographic footprint
• Lack of
auction/marketed
process
• Founder/owner led
• Management all on
board at DPLO
* Value includes closing working capital adjustments
Confidential
Calendar year ending December 31,
($ in millions) 3Q'16A 3Q'15A 2015A 2014A 2013A 2012A 2011A 2010A
Net income (loss) attributable to Diplomat $5.4 $16.0 $25.8 $4.8 ($26.1) ($2.6) $9.2 ($7.8)
Depreciation & Amortization $13.7 $9.9 $30.8 $8.1 $3.9 $3.8 $3.1 $2.2
Interest Expense $1.8 $1.5 $5.2 $2.5 $2.0 $1.1 $0.6 $0.5
Income tax expense ($3.2) $9.8 $16.2 $4.7 - - - -
EBITDA $17.7 $37.2 $78.1 $20.1 ($20.2) $2.3 $12.8 ($5.2)
Share-based compensations expense $1.4 $1.3 $4.0 $2.9 $0.9 $0.9 $1.4 $0.8
Change in fair value of redeemable common shares - - - ($9.1) $34.3 $6.6 - $10.7
Termination of existing stock redemption agreement - - - $4.8 - - - -
Employer payroll taxes - option repurchases $0.1 $0.3 $1.6 - - - - -
Restructuring and impairment charges $2.5 - $0.2 - $1.0 $0.4 $0.4 $1.5
Equity loss of non-consolidated entity - - - $6.2 $1.1 $0.3 $0.1 -
Severance and related fees $0.1 $0.1 $0.5 $0.4 $0.2 $0.4 $0.7 -
Merger and acquisition related expenses $0.4 ($6.3) $9.2 $7.2 $0.7 - - -
Private company expenses - - - $0.2 $0.2 - - -
Tax credits and other - - - $1.0 - ($0.1) ($0.6) -
Other items $0.4 $0.4 $1.5 $1.4 $0.7 $0.1 $0.2 ($0.0)
Adjusted EBITDA $22.6 $33.0 $95.0 $35.2 $19.0 $10.9 $15.1 $7.7
Reconciliation of Net income (loss) and Adjusted EBITDA
30
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Note: Financials are not pro forma for acquisitions.Detailed footnotes on the following page.
Confidential
Reconciliation of Net income (loss) and Adjusted EBITDA
31
1) Share-based compensation expense relates to director and employee share-based awards.
(2) Restructuring and impairment charges reflect decreases in the fair market value of non-core property and assets, or actual losses on disposal of such assets. Q3 2016 charge primarily related to the full impairment of the definite-lived intangible assets associated with Primrose Healthcare LLC. 2013 charges primarily relate to the $932 write-down of our former Swartz Creek, Michigan headquarters facility to its fair value, after we vacated it in favor of our present Flint, Michigan facility. 2012 charges primarily relate to our write-down of an externally purchased software package we no longer utilize, as well as sales of Company-owned vehicles. 2011 charges include expense associated with the closure of our former Cleveland, Ohio facility, the move of our Chicago, Illinois area facility, and sales of Company-owned vehicles.
(3) During the fourth quarter of 2014, we reassessed the recoverability of our investment in our non-consolidated entity, Ageology. Based upon this assessment, we determined that a full impairment of $4,869 was warranted, primarily due to updated projections of continuing losses into the foreseeable future. The remaining amounts in 2014, 2013 and 2012 represents our share of losses recognized by Ageology, using the equity method of accounting. We first invested in Ageology, an anti-aging physician network dedicated to nutrition, fitness and hormones, in October 2011, in connection with its formation.
(4) Employee severance and related fees primarily relates to severance for former management.
(5) Fees and expenses directly related to merger and acquisition activities, and the impact of changes in the fair value of related contingent consideration liabilities.
(6) Primarily includes philanthropic activities performed at the direction of our majority shareholder.
(7) Represents (a) various tax credits received from the state of Michigan for facility improvement and employee hiring initiatives, (b) the one-time costs associated with converting from an S-Corporation to a C-Corporation, and (c) a 2014 charge of $1,825 related to non-income tax obligations.
(8) Includes other expenses, predominantly option redemption payroll taxes and IT operating leases. Operating leases were initiated, in lieu of purchases or capital leases for a subset of our IT spend, for a short period of time in 2013 and 2014 for liquidity purposes. We have since discontinued the practice of leasing IT equipment. The cost of purchased IT equipment is reflected in depreciation and amortization.