PolyMedica Corporation

11 State Street
Woburn, Massachusetts 01801
U.S.A.
Telephone: (781) 933-2020
Fax: (781) 938-6950
Web site: http://www.polymedica.com

Public Company
Incorporated: 1988 as Emerging Sciences, Inc.
Employees: 1,900
Sales: $451.4 million (2005) Stock Exchanges: NASDAQ
Ticker Symbol: PLMD
NAIC: 325412 Pharmaceutical Preparation Manufacturing; 339112 Surgical and Medical Instrument Manufacturing; 454113 Mail-Order Houses

PolyMedica Corporation provides healthcare products and services primarily to seniors with Medicare insurance coverage. PolyMedica is best known through its Liberty Healthcare division, which provides blood glucose testing supplies and related services to diabetics. Through Liberty, which is advertised in a national television marketing campaign featuring actor Wilford Brimley and broadcaster Paul Harvey, PolyMedica also operates a mail-order pharmacy that provides a broad range of prescription medications. PolyMedica serves more than 800,000 patients through facilities in Woburn, Massachusetts; Port St. Lucie, Florida; Salem, Virginia; and Deerfield Beach, Florida.

RIGINS

PolyMedica experienced two distinct periods during its first 15 years in business, enjoying far greater financial success in its second incarnation. The company was founded in 1988 as Emerging Sciences, Inc., a name it kept for two years before adopting the name PolyMedica Industries, Inc. in 1990 (the company made the slight alteration to "PolyMedica Corporation" in 1997). The name change in 1990 was made to reflect more accurately the company's mainstay technology and services, which was the manufacture of polyurethane-based medical products. PolyMedica, using proprietary polymer-based technology, competed in the ethical wound care market, providing dressings prescribed by doctors, a $415 million global market during the early 1990s. The company's first commercial applications of its polyurethane expertise was a group of wound care products marketed under the Mitraflex and Spyroflex names, although, in contrast to the later manifestation of the company, PolyMedica did not engage in any marketing activities. The company's products were sold through exclusive licensing agreements with two pharmaceutical companies, U.S.-based Merck and Germany-based Rauscher, who marketed PolyMedica's products in the United States and in Europe.

PolyMedica, in name and business, changed significantly during its first decades in business. Doctor-prescribed wound dressings continued to define its core business as it began to evolve into a different type of company, but the additions to its business were important, nevertheless. PolyMedica's most meaningful changes were engendered by acquiring other companies, and in 1992 two acquisitions were completed that broadened its scope of operations. PolyMedica completed its initial public offering (IPO) of stock in 1992, the same year it purchased American CDI, Inc., a manufacturer and distributor of consumer home healthcare products, which led to the formation of the company's healthcare division. The division manufactured and distributed nearly 100 products through a distribution network covering the United States and Canada. Although varied, the core of the division's product line comprised branded and private label digital thermometers, a new line of PolyMedica's business that soon accounted for roughly one-fifth of the company's revenue total. Before the end of the year, the company established the foundation for another division, acquiring the WEBCON line of products from Alcon Surgical, Inc. The acquisition, a $45 million deal, gave PolyMedica products consisting primarily of prescribed and over-the-counter (OTC) urological and suppository remedies, providing the framework of the company's pharmaceutical division.

Through its PolyMedica Healthcare division, the company focused on urinary health maintenance products, beginning with AZO Standard, a urinary pain reliever that initially was limited to regional distribution. In 1993, the company began expanding distribution, seeking to turn the label into a national brand. In 1995, AZO Cranberry, a daily urinary health maintenance product, was introduced to the consumer market, broadening the AZO line. The company, with $27 million in revenue that year, was still reliant on its proprietary polymer-based technology. PolyMedica then comprised three principal business groups. PolyMedica's Technology Group consisted of research and development efforts aimed at patented manufacturing processes that were applied to advanced wound care products. The company's Materials Group provided new polymers with applications for medical devices and other consumer products. PolyMedica's third facet, its Medical Group, which manufactured pharmaceuticals, wound care, and home healthcare products, became the new home of the company's transforming acquisition, a purchase completed in August 1996.

1996 ACQUISITION OF LIBERTY MEDICAL SUPPLY

The emergence of a new, integrated developer, manufacturer, and marketer of medical products was signaled when PolyMedica revealed it was acquiring Liberty Medical Supply. Based in Palm City, Florida, Liberty Medical was founded in 1989 to serve as a reliable source of diabetic supplies primarily for patients with Medicare insurance coverage. PolyMedica completed the estimated $9 million acquisition largely because changes by Medicare in its reimbursement policy for ethical wound care dressings had reduced PolyMedica's revenue-generating potential in the market. The acquisition of Liberty gave the company a new line of business, one that in later years would account for 80 percent of its revenue and define its corporate identity.

Liberty, in 1996, ranked as one of the largest diabetic healthcare suppliers in the country. It relied almost exclusively on print advertising to attract customers, figuring prominently as a direct-to-consumer provider of diabetic supplies; yet, such providers only controlled a small percentage of the market. During the mid-1990s, there were approximately 1.5 million insulin-dependent diabetics with Medicare insurance, but only 125,000 of the 1.5 million patients obtained their supplies through such companies as Liberty. Seniors were largely unaware of Liberty-type companies and obtained their supplies primarily at drugstores, either unaware that Medicare reimbursed for products such as glucose test machines, test strips, and control solutions or opting to endure the lengthy reimbursement process on their own. PolyMedica greatly heightened the awareness of the mail-order availability of diabetic supplies and reimbursement services, and, remarkably considering its roots as a non-marketing company, it did so with a hugely successful marketing campaign. As the years went by, with PolyMedica promoting and expanding Liberty, the time when direct-to-consumer diabetic supplies providers controlled only a fraction of the market ended. "If you're a senior with diabetes, you know who Liberty is," a PolyMedica executive said in an August 22, 2004 interview with the Palm Beach Post.

COMPANY PERSPECTIVES

PolyMedica cares about people—patients, healthcare providers, team members, and shareholders. We believe our mission statement best expresses our corporate philosophy: PolyMedica strives to be the provider of choice, delivering indispensable healthcare products and services to patients with chronic diseases; the partner of choice for healthcare professionals; and the employer of choice, rewarding team members who invest and work in our company to achieve outstanding performance for shareholders.

In many respects, the importance of the Liberty acquisition was not the acquisition itself, but what PolyMedica did with the acquisition in succeeding years. The Liberty of 1996 barely resembled the Liberty of 2006 in scope and stature. When PolyMedica acquired Liberty, approximately 17,000 customers had signed up to receive their diabetic supplies through the company's Palm City operations. The ranks of insulin-dependent patients who turned to Liberty increased exponentially under PolyMedica's control after executives in Woburn decided to abandon Liberty's print advertising marketing approach and develop a national television campaign. Commercials featuring broadcaster Paul Harvey and actor Wilford Brimley began airing and a largely unknown source of diabetic supplies became widely known. PolyMedica also expanded its other lines of business during the second half of the 1990s, building a new pharmaceutical manufacturing facility at its headquarters in Woburn in 1997 and adding AZO Test Strips to its urinary health maintenance line of products in 1998. The expansion coincided with the company's retreat from the wound care market, a move made in 1997 when PolyMedica sold its wound care assets to Innovative Technologies Group PLC.

By the end of the 1990s, the wholesale changes that had occurred during the decade produced a much larger PolyMedica. In 1999, when trading of the company's stock moved from the American Stock Exchange to the NASDAQ, it eclipsed the $100 million-in-sales mark for the first time, a fourfold increase from the total registered five years earlier. Driving the financial growth was the company's Liberty assets, which were expanded during the year by the launch of Liberty Home Pharmacy, a business created to serve seniors suffering from chronic obstructive pulmonary disease (COPD), a chronic lung disease such as asthma or emphysema. The heart of the Liberty assets, and by 1999 the heart of PolyMedica, was the diabetic supplies business. The national television campaign had worked wonders, fueling the expansion of Liberty's customer base to a staggering 265,000 patients by the end of the decade. As PolyMedica entered the 21st century, rapid financial growth continued, despite events that otherwise might have caused the company's collapse.

2001–03: FEDERAL INVESTIGATIONS TAKING CENTER STAGE

PolyMedica's 13th year in business gave credence to the superstition, resulting in perhaps the single most dreaded event any public company could experience. In August 2001, 85 agents from the Federal Bureau of Investigation (FBI) raided four Liberty offices and two executives' homes, spending two days confiscating reams of documents and hard-disk drives as they launched an investigation into Medicare fraud. The FBI acted on information from former employees, who alleged Liberty purposefully shipped diabetic supplies to patients who had not ordered them and then did not reimburse Medicare when the products were returned. Exactly one year after Liberty's offices were raided, PolyMedica announced Liberty was being investigated by the U.S. Attorney's Office for the Southern District of Florida, an investigation that centered around allegations of improper revenue recognition. The Securities and Exchange Commission (SEC) launched a formal inquiry, which was followed by a shareholder lawsuit, portending further disaster. The mounting controversy struck at the heart of Liberty's success: once PolyMedica launched its national marketing campaign, it treated its television commercial expenses as assets instead of subtracting expenses from its revenue total, amortizing the expenses over two to four years. PolyMedica argued that it operated like an insurance company because its customers purchased its product immediately upon viewing a commercial. The SEC approved the unusual accounting method in 2003, resulting in a major victory for PolyMedica.

KEY DATES

1988:: The company is founded as Emerging Sciences, Inc.
1992:: An initial public offering of stock coincides with creation of healthcare and pharmaceutical divisions.
1996:: Liberty Medical Supply is acquired.
1999:: The company, now known as PolyMedica Corporation, generates more than $100 million in sales for the first time.
2001:: Allegations of Medicare fraud followed by a federal investigation into PolyMedica's accounting methods do little to tarnish the company's business.
2004:: PolyMedica acquires National Diabetic Assistance Corporation.
2005:: PolyMedica sells its Women's Health division to Amerifit Nutrition Inc.

Remarkably, PolyMedica thrived during the protracted investigation into improper revenue recognition. The company physically expanded and recorded substantial financial growth, exhibiting impressive resilience while undergoing federal scrutiny. In 2000, Liberty's headquarters were moved to Port St. Lucie, Florida, where a new 72,000-square-foot facility was established. In 2001, a new 64,000-square-foot facility was built to accommodate Liberty's expanding respiratory business. The following year, PolyMedica opened the company's first full-service, mail-order pharmacy, launching Liberty Medical Supply Pharmacy, which opened a new 120,000-square-foot building in 2004 to serve its growing business. Annual revenue during this period of physical expansion leaped upward, increasing from $220 million in 2001 to $419 million in 2004.

As PolyMedica neared its 20th anniversary, the company was exuding enviable strength. The strategic moves of the 1990s, particularly the decision to purchase Liberty, had created a more diverse and much larger healthcare products competitor, transforming a company with $25 million in annual sales into an industry leader flirting with the $500 million-in-sales mark, all within the course of decade. In the final years before its 20th anniversary arrived, PolyMedica moved in two directions, shedding some of its assets and acquiring new ones. In 2004, the company acquired National Diabetic Assistance Corporation, a mail-order provider of diabetic supplies based in Deerfield Beach, Florida. In 2005, PolyMedica completed two more acquisitions, but the year also included a pair of divestitures. Reductions in Medicare reimbursement rates prompted PolyMedica executives to put its respiratory business up for sale, which was expected to sell for between $20 million and $25 million. Talks also were underway to sell the company's Women's Health division, which included the AZO line of urinary products. PolyMedica sold the division to Amerifit Nutrition Inc. in October 2005, receiving $45 million from the sale. On the acquisition front, PolyMedica announced an agreement to purchase Salem, Virginia-based National Diabetic Pharmacies in August 2005, adding another mail-order provider of diabetic supplies. PolyMedica closed the year with the purchase of IntelliCare, Inc. in December. IntelliCare provided telephone-based nursing services, offering patients triage advice and helping them to determine whether they required immediate care.

PRINCIPAL SUBSIDIARIES

Liberty Healthcare Group, Inc.; Polymedica Pharmaceuticals USA Inc.; Polymedica Pharmaceuticals Securities Inc.

PRINCIPAL COMPETITORS

Bristol-Myers Squibb Company; Matria Healthcare, Inc.; Medtronic MiniMed, Inc.

PolyMedica Corporation

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PolyMedica Corporation

11 State Street
Woburn, Massachusetts 01801
U.S.A.
Telephone: (781) 933-2020
Fax: (781) 938-6950
Web site: http://www.polymedica.com

RIGINS

1996 ACQUISITION OF LIBERTY MEDICAL SUPPLY

COMPANY PERSPECTIVES

2001–03: FEDERAL INVESTIGATIONS TAKING CENTER STAGE

KEY DATES

1988:: The company is founded as Emerging Sciences, Inc.
1992:: An initial public offering of stock coincides with creation of healthcare and pharmaceutical divisions.
1996:: Liberty Medical Supply is acquired.
1999:: The company, now known as PolyMedica Corporation, generates more than $100 million in sales for the first time.
2001:: Allegations of Medicare fraud followed by a federal investigation into PolyMedica's accounting methods do little to tarnish the company's business.
2004:: PolyMedica acquires National Diabetic Assistance Corporation.
2005:: PolyMedica sells its Women's Health division to Amerifit Nutrition Inc.