Financing for Managerial Decision Making

AdvancePCS used to be a subsidiary of the Rite Aid Corporation. The company’s web site states that it is the nation’s largest provider of health improvement services, and that the company offers the most extensive array of health care resources available from any single source. The company has 75 million health plan members linked to 58,000 pharmacies and manages $28 billion annually in health care expenditures, the company specialty is to provide and managing the drug benefits for its members.
The company’s mission statement states that the company’s mission is to simultaneously lower health care costs while improving health outcomes are as follows, and its strategy for achieving these goals are as follows:AdvancePCS pioneered the modern pharmacy benefit management industry 30 years ago by establishing the first online pharmacy claim processing system. AdvancePCS was created in 2000 when Advance Paradigm purchased PCS Health Systems from the Rite Aid Corporation and changed the company’s name to AdvancePCS.
PCS Health Systems was founded in 1969 and was the nation’s first pharmacy benefit management company, and David and Jon Halbert founded Advance Paradigm, Inc in 1987. AdvancePCS has been named one of Fortune 100 fastest growing companies, but this growth has been mainly achieved through acquisitions and mergers. While the company has been profitable, it is facing some future problems. The company is highly leveraged, and it is operating in a highly political market. The costs of pharmaceutical drugs are rising, and the government is under pressure from consumers to regulate the pharmaceutical industry.

These two elements could threaten the profitability and long-term viability of the company. Also the company’s efficiency ration of average collection days shows that the company is having increasing difficulty in collecting its accounts receivable. The following are the ration calculations for Advance PCS: It is hard to adequately judge how Advance PCS are handling their credit policies and account receivables. The company has gone through so many acquisitions and mergers, which has caused the company to restate their financials on numerous occasions.
It was extreme difficult to determine which was the latest financial reports. On one of the financial report, it showed the company’s accounts receivable collection period jumped to 232 days in 2002, however the latest financial numbers on yahoo shows the collection period to be a respectable 42 days. An analysis of the company’s cash conversion period shows that the collection period may not be as harmful to the company’s finances as we may expect. Advance PCS is averaging 57 days to pay their accounts payable, and their inventory turnover has decreased from 253 days in 2001 to 165 days in 2002.
The formula for calculating the Cash conversion cycle is (inventory period + receivables period) – accounts payable period. Advance PCS cash conversion cycle is 150 days (165 days + 42 days – 57 days). Advance PCS management team seems to be monitoring their accounts receivable and accounts payable, and the numbers has show improvements of over the past 3 years. The only thing that I have noticed that may be a potential problem is the size of the accounts payable, because I believe that the accounts payable includes the claims from their members that needs to be processed and paid.
Many States and local government will impose stiff fines and penalties if these claims are not paid within 45 days, so this can be an expensive source of loans. The company has to constantly balance the benefits of not paying their accounts payable on time versus the liability. I believe the company should put more emphasis on their inventory turnover, because they could realize an additional $37 Million for each day that they reduce their inventory turnover days.
The following page includes tables that show the price trend and performance of the company’s stock. I would recommend a hold for Advance PCS. It is extremely hard to adequately value the companies stock since it has not paid any dividends and it has grown mainly through acquit ions and mergers. Not paying any dividends shows that the company is committed to future growth. AdvancePCS earnings have being growing since the company’s formation and merger, and the company’s cash flow and income from operations has continually improved.
With the continual aging of the population, the need for prescription drugs should continue to increase in the foreseeable future, and Advance PCS has years of experience in this market. However, the cost of prescription drugs have become a major political item, There is uncertainty about how current prescription drug bill presently before congress will affect the industry. Lastly, the company’s growth has been mainly through acquisitions and mergers, and the verdict is still out on whether the company will be able to successfully integrate the various systems and business cultures.