National Medical Health Card Systems, Inc.

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National Medical Health Card Systems, Inc.

26 Harbor Park Drive
Port Washington, New York 11050
U.S.A.
Telephone: (516) 626-0007
Toll Free: (800) 251-3883
Fax: (516) 605-6981
Web site: http://www.nmhc.com

Public Company
Incorporated: 1981
Employees: 484
Sales: $800.5 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: NMHC
NAIC: 524210 Insurance Agencies and Brokerages

National Medical Health Card Systems, Inc. helps institutional customers control costs related to the prescription drug coverage they offer their employees or members. National Medical offers its services to health maintenance organizations, corporations, unions, school districts, local government agencies, and employer groups. The company provides a full range of services to its customers, including pharmacy benefits management, health information management, home delivery pharmacy, and specialty pharmacy services. National Medical, through the plans offered by its customers, serves nearly nine million individuals. The company maintains service centers in Latham, New York; Little Rock, Arkansas; Dallas, Texas; and Sacramento, California. The company's home delivery facility is located in Miramar, Florida, and its specialty pharmacy is located in Portland, Maine.

ORIGINS

National Medical was not the first company started by Bert E. Brodsky, nor was it the last expression of his entrepreneurial talents. Once a top sales agent for Union Mutual Life Insurance, Brodsky began forming his own companies in 1970, more than a decade before he founded National Medical. His first company was named Medical Arts Services, Inc., a business formed to manage medical practices for hospital-based physicians, specifically anesthesiologists, who typically had no need to occupy their own offices and, consequently, welcomed assistance in bookkeeping. In 1973, Brodsky added software capabilities to the company's repertoire, making Medical Arts the first firm to offer computer-automated billing in its industry niche. In 1977, he sold the company to San Francisco-based Itel Corp., a claims processing company, gaining $3 million from the transaction. With the cash in hand, Brodsky began to demonstrate his penchant for starting his own companies, a predilection that soon led to the formation of National Medical. "Now I had the cash where I could do things," he said in an August 6, 2001 interview posted on the web site of E-Data Corp., one of numerous ventures Brodsky was involved with during the early 21st century.

Brodsky had capital and he also had the data center Medical Arts used to process claims. The assets were used to start Sandata, Inc. in 1978, a healthcare billing firm that later became one of the country's leading providers of advanced computer, telephony, and Internetbased technologies for the industry. Next, in 1981, he started National Medical, a company that would share resources with Sandata throughout its existence. In later years, Brodsky continued to form companies, launching Identification Data & Imaging; Mobile Health Management Services, Inc.; Brookhaven Magnetic Resonance Imaging, Inc.; several real estate holding companies; and a restaurant, Island Mermaid Inn, located on New York's Fire Island. "If the opportunity arises and it makes sense, I'm there," he said in a November 7, 2003 interview with Long Island Business News. Brodsky typified what the business press liked to refer to as a "serial entrepreneur."

National Medical began as a locally oriented enterprise. Brodsky started the company to provide automated processing services for prescription drug claims, setting his sights on customers in the greater Long Island, New York, area. Toward this end, he secured a valuable customer early on, signing ChoiceCare Long Island, Inc., later to become Vytra Health Plans Long Island, Inc. For years to come, Vytra Health would account for a substantial portion of National Health's business, sustaining the company during its first years in business and contributing more than 40 percent to its revenue total throughout the 1990s.

National Medical gradually expanded its services and its geographic reach, demonstrating a more conservative approach to expansion than it would after its first 15 years of business. The change in the company's demeanor was attributable, in part, to changing conditions in the company's market. National Medical developed into what was known as a prescription benefits management company, or PBM. Brodsky expanded upon the company's initial service offering, automated processing services for prescriptions, and fashioned National Medical into a full-service PBM: a company that helped its customers control costs related to prescription drug coverage by offering a host of services, including claims management; a pharmacy network; benefit design consultation; drug review and analysis; disease information services; and physician profiling. National Medical helped its customers save money, serving health maintenance organizations, corporations, local governments, unions, and other third-party administrators of prescription drug programs. The need for such services began increasing when healthcare costs began to escalate, becoming an issue of great concern during the 1990s and creating fertile ground for a company of National Medical's ilk to grow.

During the years when National Medical gradually developed into a full-service PBM, Brodsky took an active role in running the company on an occasional basis. Serving stints as the company's chairman and president, Brodsky did not occupy the posts on a long-term basis until 1998, several years after the company reached a turning point in its development. In 1995, the company decided to ramp up its efforts directed toward growth, articulating for the first time its desire to become a leading national PBM services provider. The proclamation set the company in motion, as new executives were hired, a national marketing program was begun, and information systems capabilities were enhanced. When the announcement was made, National Medical was a $45 million-in-sales company whose services were provided to approximately 230,000 individuals, figures that would increase substantially as the movement toward expansion gained momentum.

COMPANY PERSPECTIVES

The focus of NMHC's Total Healthcare Solutions is on outcomes—better health outcomes for members and better cost outcomes for plan sponsors. This unique approach is based on our ability to access and analyze a rich set of pharmacy and medical claims data across the entire health plan. With this information and intelligence in hand, we can predict member health outcomes based on claims history and benchmarks, communicate with physicians, pharmacists and patients, and help intervene with improved care and cost-controlling strategies.

ACQUISITION CAMPAIGN BEGUN AFTER 1999 PUBLIC OFFERING

Another turning point in National Medical's development occurred at the end of the 1990s. Brodsky was firmly in charge by that time, having assumed the post of president in June 1998 and adding the title of chairman at the end of the year. His first major project was taking the company public. In early 1999, the company filed with the Securities and Exchange Commission (SEC) for a public offering, hoping to raise $15.7 million to enhance marketing efforts, update equipment, and, the most important reason for the initial public offering (IPO), to fund future acquisitions. "We are in an expansion mode and want to increase our capital," Brodsky explained in a February 26, 1999 interview with the Long Island Business News. "We have targeted several companies," he added. By the time the company completed its IPO in mid-1999, the number of individuals it served had increased more than 90 percent, to 430,000. Sales, after a 40 percent increase in 1998, reached $100 million. The number of participating pharmacies comprising the company's network had increased to 42,000. The gains achieved since 1995 were substantial, but from 1999 forward acquisitions would accelerate National Medical's pace of growth, extending its geographic reach and increasing the ranks of those receiving its services.

As National Medical entered the 21st century, Brodsky led the company's acquisition campaign. He began targeting other PBMs, beginning with the purchase of two companies. The smaller of the two acquisitions was Provider Medical Pharmaceutical, a Tulsa, Oklahoma-based PBM with 90,000 participants covered by its prescription drug plan. The second acquisition was Pharmacy Associates Inc., a Little Rock, Arkansas-based PBM with 200,000 members. These two acquisitions, though meaningful, paled in size to the purchase made by Brodsky soon after the deals were completed.

Escalating healthcare costs underscored the need for the services offered by National Medical, stoking demand in the PBM market. The increase in market demand spurred consolidation within the industry, as PBMs began acquiring one another in an effort to seize control of new business. "This is clearly a game of scale," an analyst remarked in a July 1, 2002 interview with Investor's Business Daily. "The bigger you are, the more leverage you have." Brodsky understood the nature of the game, as demonstrated by a landmark acquisition he completed in early 2002. National Medical's third acquisition was the 14-year-old PBM division belonging to Health Solutions Ltd. Known as Centrus, the division generated $272 million in revenue in 2001, doubling National Medical's revenue volume. The addition of Centrus also nearly doubled National Medical's membership count, lifting it to 2.5 million. The total was far less than the membership counts of the industry's leaders, companies including AdvancePCS, Caremark Rx Inc., and Express Scripts Inc., who managed prescription benefit plans covering tens of millions of individuals, but the acquisition did much to elevate National Medical's stature.

As the company worked to integrate Centrus into its operations, it also adjusted to a change in leadership. In April 2002, Brodsky relinquished his responsibilities as chief executive officer, handing the duties to James Bigl, who had been serving as National Medical's president for the previous two years. Bigl, with nearly two decades of experience in the healthcare industry, continued the expansion campaign started by Brodsky, who stayed on to serve as the company's chairman. Before the end of 2002 another acquisition was completed, the purchase of Wellpartner Inc., a mailorder pharmacy based in Portland, Oregon. Founded in 1988, Wellpartner took prescription orders online, by telephone, and by fax, and delivered the orders to the customer's home. The acquisition marked the completion of the first step toward expanding the company's home-delivery business, following through on a plan announced earlier in the year.

BRODSKY ERA ENDING IN 2004

Fueled largely by acquisitions, National Medical's financial growth during the five years following its IPO was impressive. By the end of 2003, revenues reached $573 million, a more than fivefold increase in five years. By the end of the following year, National Medical had recorded nine consecutive years of double-digit sales gains, an enviable record that represented the legacy left by Brodsky. In March 2004, he and his family sold their majority interest in the company, selling their shares to New Mountain Capital, a private equity investment firm. The transaction, deemed a "seminal event" by Bigl, as quoted in the June 10, 2004 issue of Investor's Business Daily, provided a cash infusion of $80 million. The company used some of the money to acquire Inteq Group in June 2004, paying $31.5 million for the Dallas, Texas-based PBM.

KEY DATES

1981:: Bert Brodsky forms National Medical Health Card Systems.
1995:: Brodsky and his managers decide to turn National Medical into a national, full-service pharmacy benefits management company.
1999:: National Medical completes its initial public offering of stock.
2002:: National Medical acquires Health Solutions Ltd.'s Centrus division, nearly doubling its size.
2004:: Brodsky sells his majority interest in National Medical.
2005:: National Medical acquires Pharmaceutical Care Network.

In the management shuffle that occurred after Brodsky's departure, National Medical leadership for the future was established. Bigl was elected to the chairman's office, while James Smith, previously senior vicepresident of healthcare services and government relations at CVS Corporation, was hired as president and chief executive officer. Under the leadership of Bigl and Smith, National Medical continued to expand through acquisitions, a strategy that was expected to be employed in the coming years. The first purchase completed with the team of Bigl and Smith at the helm occurred in March 2005. National Medical acquired Sacramento, California-based Pharmaceutical Care Network, which managed pharmacy benefits principally for California's Medicaid sector. Pharmaceutical Care was founded in 1984 as a subsidiary of the California Pharmacists Association. The $13 million deal, which increased National Medical's membership count to roughly nine million, offered tangible gains to the company. "We gain a West Coast presence and it's important for us to have a national footprint for all of our clients," a National Medical senior executive explained in the March 12, 2005 edition of the Sacramento Bee. "The addition of 1.3 million will give us more clout, more buying power, and more strength." In the years ahead, the company was expected to continue increasing its leverage and extending its geographic reach, endeavoring to join the industry's elite and rank as one of the country's largest PBMs.

PRINCIPAL SUBSIDIARIES

PBM Technology, Inc.; Interchange PMP, Inc.; Pharmacy Associates, Inc.; Specialty Pharmacy Care, Inc.; Centrus Corporation; NMHCRX Contracts, Inc.; NMHC Funding, LLC; National Medical Health Card IPA, Inc.; NMHCRX, Inc.; NMHCRX Mail Order, Inc.; Integrail Inc.; Ascend Specialty Pharmacy Services, Inc.; Portland Professional Pharmacy; Portland Professional Pharmacy Associates; Inteq PBM, L.P.; Inteq Corp.; Inteq TX Corp.; Pharmaceutical Care Network; PCN DE Corp.