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Edited Transcript of DPLO earnings conference call or presentation 28-Feb-17 10:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Diplomat Pharmacy Inc Earnings Call

Flint Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Diplomat Pharmacy Inc earnings conference call or presentation Tuesday, February 28, 2017 at 10:00:00pm GMT

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Transcript

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Editor: [1]

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Please stand by for realtime transcript.

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Unknown Speaker* [2]

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Good afternoon.

My name is Christine and I will be a conference Operator today.

At this time I would like to welcome, everyone to the Diplomat fourth quarter when he 16 operating results conference call.

(Operator Instructions).

Please note after the market closed earlier today, Diplomat issued its fourth quarter and full-year 2016 earnings press release.

Before we would begin today I need to read the following Safe Harbor statement.

As you know, some of the Company's statement made on this conference call will be forward-looking statements which may include financial projections or other statements of the cover is plans, objectives, expectations or intentions.

These matters involve risks -- certain risks and uncertainties.

The Company's actual results to differ significantly from those projected or suggested in any forward-looking statement due to a variety of risks and uncertainties which are discussed in detail in the Company's annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission.

The statements speak only as of the date hereof or the date specified on the call.

Except as required by law, we do not undertake any allegation to update or otherwise release publicly any revisions to our forward-looking statements.

During this call we will also discuss non-GAAP financial measures . Please refer to the tables and voted in earnings press release just issued for a reconciliation of these non-GAAP esters to the comparable GAAP measures and a related discussion thereof.

A replay of the call is available through a link on the Investor Relations page of our website and it will be available for 90 days.

I will now turn the call over to Phil Hagerman, CEO and Chairman of Diplomat.

Phil?

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Unknown Speaker* [3]

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Thank you , Operator and thank you to everyone for joining us on the call.

This evening I will be reviewing our fourth quarter and full-year 2016 results as well as our outlook or 2017. Let me jump right into the numbers.

For the full-year 2016 , revenue was $4.4 billion an increase of 31%.

Net income was $28.3 million an increase of 10%.

And adjusted EBITDA was $170 million, an increase of 13%.

During the year we generated the $1 million in cash flow from operations.

We added the year with a billion dollars in cash and $150 million in total debt of which $39 million was borrowing on our line of credit.

Also during 2016 are successfully integrated the strategic acquisition of -- advanced Specialty Pharmacy.

Overall 2016 was a challenging year for Diplomat with the impact of -- the greater than expected is here duration of the overall hep C market the decision to not renew contracts with unfavorable terms. However, even with these headwinds we are able to grow our revenue 31% year-over-year on 72% organically.

I would now shift gears and provide specifics related to our fourth court a result . Our revenue for the fourth quarter was $1.145 billion, an increase of $1,508,000,000 or 16% year-over-year.

Of the increase, approximately $71 million was from drugs that were new in the past year and approximately $51 million was from the impact of year-over-year manufacture price increases.

Gross margin of 7.3 was down 50 basis points compared to 7.8 in the fourth quarter of 2015. Our gross profit dollar -- increased from 312 to $342 and improvement of 10% year-over-year.

Here are a few specifics for the quarter related to revenue it is also impacted margin.

Looking into our fourth quarter results I therapy class , oncology continues to be the dominating revenue conjugate year for us increasing 41% agree to a prior-year period and 22% which was organic growth.

Are our infusion business was strong in the quarter am aware than doubling the industry by generating growth in the midteens year-over-year.

Throughout the quarter we continued to realize synergies from our prior infusion acquisitions.

Hep C industrywide has seen a significant pullback.. At Diplomat's, hep C resented 11% of total revenue in the fourth quarter of 2016 down from 19% a year ago and down 33% year-over-year.

We anticipate that our hep C revenue will be well below 10% of our total revenue going forward.

-- in the quarter where in line with are previously announced expectations.

We continue to work with NASP the national Association of Specialty Pharmacy and other partners in the specialty pharmacy industry towards legislative and regulatory solutions around the -- we also also anticipate further negotiations while were legal activity with the outlier PBM that has caused the bulk of the increase in the DIR fees.

Year-over-year drug price inflation for the fourth quarter was 5% which was the lowest level of any recent quarter.

All within the increase from Q4 2015 to Q4 2016 was 5% , the bulk of those price increases were taken by manufacturers in the first three quarters of 2016 and we saw very few individual price changes in the fourth quarter of 2016. Our adjusted EBITDA of $26.1 million in the fourth quarter of 2016 decreased by $2 million versus 2015 this was primarily a result of incremental DIR fees in the quarter and the initial impact of the volume declined from hep C of in the nonrenewal of contract with unfavorable terms. Our dispense volume in the fourth quarter was 242,000 prescriptions an increase of 2% year-over-year.

A large oncology and our infusion volumes were up year-over-year , challenges that impacted our fourth quarter volumes were the decline in hepatitis C, the previously mentioned impact from nonrenewal and an unfavorable EBM contract and our business decision to continue to reduce non-core restrictions.

Before I discuss our outlook for 2017 want to take a moment to comment on our Search for a new CFO.

We met some highly qualified candidate so far I hope to pay have an update for you in the near future but in the meantime want to FSAs and unsupported by skilled internal financial team.

Do the members of our finance team Rob Johnson who -- and finance and CFO of our specialty infusion group , Michelle Schultz, Vice President Vice President of financial planning and analysis and Tim Tisch, reported director are all here with me today to us assist with your questions later on the call.

Finally I'd like to wrap up our discussion by reviewing our initial 20s 17 guidance.

What a full-year 2017 we expect revenue to be between 4.3 and $4.7 million , net income to be between 6.5 and $15.5 million, adjusted EBITDA to be between 95 and $103 million, diluted earnings-per-share to be between $0.9 and $0.23 per share and adjusted earnings per share to be between $0.54 and $0.70 per share.

Let me take a moment to discuss the factors impacting our current outlook for the year.

First the impact of contracts that we did not renew will be approximately $500 million of revenue loss for 2017. To give you a little more color on the contracts that we did not renew one was a Regional PBM that we mentioned last order that we elected not to renew go to unfavorable pricing.

This contract started to wind down in the fourth quarter of 2016 and will be completed by the end of the first quarter of 2017. The two additional contracts were with health lines that they are not renew . It is plans Joseph PBM for services that do not include the format.

As a result, we have seized work on those plans as of January one, 2017. Second, the expected continued decline of hepatitis C market.

Third, when we 16 was a lower than normal here for specialty drug approvals than in past years.

Two years after drug launch, your two after drug launch offered significant growth and because fewer drugs were approved we do expect to see less of that growth this year.

Fourth, regarding the -- will remain optimistic and are working towards a positive resolution and in 2017 issue is not yet been resolved.

Therefore we continue with our past estimates of 20 to $30 million for 2017. Fifth in 2017 we are anticipating a slight negative impact from the 21st century -- with that said,, this does not under review and provisions may be made -- to lessen the impact.

I may, for drug ice inflation we have taken a conservative approach for 2017 . For the last five quarters including 24 2016 we have reported inflation between 5% and 10% our current expectation for 2017 assumes that price inflation will have hover around the lower end of this range on an average for the full year.

On a positive note, we did implement restructuring initiatives that should net approximately $10 million of benefit on an annualized basis.

Additionally, we will continue to show nine operations as we integrate further and centralize our prior and our current acquisitions.

Ago is important to emphasize that we were able to accomplish this cost cost-saving initiative with absolutely no reduction in our core capabilities.

While we traditionally only provide annual guidance and will continue to do so going forward, given all the moving parts right now I wanted to give you some of my thoughts on the first-quarter revenue for 2017. We expect first-quarter revenue will be down three to 6% sequentially from the fourth quarter of 2016 primarily due to those contracts a mentioned earlier that were not renewed.

Overall, 2016 was a tough year for Diplomat are we still see many positive long-term trends in the industry and do for Diplomat.

For 2017 we remain focused on growing our core infusion and services business.

For example, Diplomat remains well-positioned to benefit from the strong oncology the pipeline.

According to farmers 2016 profile on the biopharmaceutical research industry all most 30% of the drugs in development are in the oncology space and we are poised to take advantage of those new drugs as they come to market.

Further we expect to see additional expanded indications on existing successful limited distribution drugs.

I do want to point out that just last week -- received an expanded indication as a maintenance therapy for -- myeloma patients additionX it -- moving forward.

We continue to believe the limited distribution drugs model will it dominate specialty drug approvals and lend itself to program solutions that are both patient and partner centric.

Diplomat is in the unique position to serve small emerging and a virtual biotech startups that are contracting for a wider variety of services than ever before as opposed to build a brick and brick-and-mortar capabilities.

We believe our commitment to grow and our specialty pharmacy drug management services will also set the stage a long-term growth.

District we saw in 2016 especially infusion is a clear indication of the distributors and we have built built as well as the runway in front of us. In 2017 we will continue to expand our services to my capabilities and salesforce in this higher-margin business sector.

Given the strength of our balance sheet we will continue to take a very selective and disciplined approach back in highly attractive strategic opportunities.

With that, I'll now turn the call back to the Operator for questions.

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Unknown Speaker* [4]

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+++q-and-a.

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Unknown Speaker* [5]

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(Operator Instructions).

Eric Percher, Barclays.

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Unknown Speaker* [6]

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Thank you , Phil.

A question on the DIR these fees to begin.

I believe when you give us the initial guidance for 2016 you spoke about the potential for 2017 , have you have seen a spread of those fees beyond I think you characterized it as an outlier -- do those appear to be expanding and were they expected to expand when you talk about the initial guidance?

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Unknown Speaker* [7]

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That's a great starting question, Eric and the answer is no, we have seen no additional a perforation perforation of those fees in the manner of the outlying PBM.

Remember -- been around a one-time, they are not new but the outlier behavior was what was dramatically new in this past year.

We have not seen anybody else move towards that model nor have we've seen anybody with almost thousand to 10,000% increase in DIR fees that are higher DIR fees that the outline PBM has been charging.

So the answer is we feel good about our guided in 2017 at this time.

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Unknown Speaker* [8]

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Okay.

By way follow-up, the two plans that you mentioned that shows a PBM relative to Diplomat, how does that compare to prior years ? Are you seeing more plants turning to a captive PBM and how to offset that maybe your limited distribution offering and services?

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Unknown Speaker* [9]

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Eric, we've always seen contracts that we win and contracts that we lose and this deleted those contracts we one were larger than some -- contracts that we lost were little larger the sum of the contracts that we've won but in the meantime you are right, we've added some small contracts around a limited is division drugs only and so while I would say this is always been a tough competitive environment , Diplomat continues to work aggressively on a minute market strategy we continue to look at small to midsize health plans that are looking for both take services and we continue to look across the industry including the larger health plans or limited is division drugs give us a foot in the door.

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Unknown Speaker* [10]

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Thank you.

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Unknown Speaker* [11]

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Lisa Gill, JPMorgan.

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Unknown Speaker* [12]

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Great, thank you.

Hi, Phil, how are you?

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Unknown Speaker* [13]

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Great, thanks.

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Unknown Speaker* [14]

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On the DIR fees at the said in your prepared comments that were in the process of for the negotiation are potentially litigation against that specific PBM . Can you just talk about what you are to what are they Re stepped up to having conversations around this back to that there's only they are the only one that's clicking the DIR fees from you?

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Unknown Speaker* [15]

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Pace, we have said from the start that we expect this process to move fairly rapidly to 2017 , I think early people or wondering if this would be a multi-year process and we have conclude that we believe it is not and I think the answer is yes, we believe that because the behavior was connect on the outlier behavior and because it still becomes outlier behavior that model is really not sustainable and gives us a very strong leg up in the negotiation process . Again, while we cannot give any specific details around the and visual contracts we fill a very positive about the progress we're making and confident in the path forward for that said, we continue to reserve and to manage this considerably at this time.

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Unknown Speaker* [16]

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Nicely in January when you talk talked talk about potentially Specialty Pharmacy getting it is all -- trade, is there any update on that at all?

As far as discussions with same as I know we are in the midst of a transition of the administration, but do you think that would help to solve for any of these issues?

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Unknown Speaker* [17]

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Yes, great question, Lisa.

For those on the call that was part of a panel group with the national Association of Specialty Pharmacy has been talking about that is an important focus moving forward sometime in the next 12 to 24 months and yes, Lisa.

The biggest challenge right now especially pharmacy 's it so far in the middle of the old paradigm , it is really not retail and is absolutely not mail order and as a result there are some using proceeds around it probably showed more by the be one that any any of the time history that need to be addressed specifically so yes, what I cannot that we're going to be get that in the next 12 to 24 months it is a continue to be an important focus for the industry.

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Unknown Speaker* [18]

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If I can squeeze one last one and that would just be around the pipeline of drugs that you talk about that are coming to market . Talking about on the oncology side , I think you made the comment that for some of the smaller biotech companies those are ones that are really looking to partner with you, can you dash indications of things with we could potentially see on the positive side in 2017?

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Unknown Speaker* [19]

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We said, the guy right.

At your recent conference I heard the Term A number of times are virtual biotech, the smaller biotech companies are becoming more and more nimble and with cost associated in many drugs to market finding more and more ways to bring high-quality service providers and companies to them to deliver the services that historically large from suitable companies and watch biotech companies delivered on their own.

We've talked extensively and the late half of 2016 and will continue in 2017 about service opportunities that at Diplomat that we both had in the past on our expanding new service opportunities that we -- expect to launch organically and an acquisition opportunity around the service space to also believe there a lot of unique companies that can bring value to Diplomat . Our goal really is to look across this whole list the ecosystem around drug launch and delivery and find ways to bring more value to our partners.

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Unknown Speaker* [20]

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Great,.

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Unknown Speaker* [21]

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John Kirker -- John cougar, William Blair .

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Unknown Speaker* [22]

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(inaudible)

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Unknown Speaker* [23]

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Job, we are not hearing you right now, apologize.

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Unknown Speaker* [24]

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Is that better?

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Unknown Speaker* [25]

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Perfect, thanks, John.

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Unknown Speaker* [26]

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If you can just expand on your guidance for 2017, what sort of underlying prescription drugs do expect to go along with that?

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Unknown Speaker* [27]

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John, we did not talk a lot on volume there yeah we continue in the oncology space in the specialty infusion space we continue to expect them growth to be strong.

Mix of drugs in oncology of course oftentimes renewal more costly drugs to market so there's revenue growth opportunities that are not directly linearly tied to volume but in those core areas we do expect volume growth remained solid as we have historically . We have seen some pretty significant pull downs and volume with hepatitis C within Diplomat anticipated it is really more than a marketplace and anticipated and while we have in the past expected that at the level set in 2017 we are seeing some analyst projections that hepatitis C could continue to pull down for a little while, that may change of we get NASP, NASH, folks coming to market we have not seen that happen in 2017 is -- it will be a mix.

We will see accommodation of some strong categories Diplomat and a couple of areas that will be pullback like hepatitis.

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Unknown Speaker* [28]

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Okay, great and next line, what is the percentage of revenues in that come from limited distribution drugs at this point?

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Unknown Speaker* [29]

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To, I don't have the big number of front of me, spent over 40% the last several years moving towards 50%.

I certainly expect that number to go in the marketplace.

Again a big part of the decision for Diplomat to get more involved in the service offerings is oftentimes that allows us to start interacting with forms pharmaceutical manufacturers earlier in the stage in mid to late Phase 2 with their starting to pickup service providers and other service providers and also work later in Stage 4 and so as we create again a bigger rasp of services across the ecosystem I actually expect John that the limited distribution drugs will be the target there and that number will continue over time.

We have not called out a specific four on the 17 but that number will continue to rise probably in 2017 and 2018.

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Unknown Speaker* [30]

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Rethinks and one last one more payor strategy.

As you look out to a year from now , what is your goal ? Can we expect to have more pair contracts in place that would perhaps allow you to recover some of the volume that you are going to lose from these two health plans or is that not realistic?

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Unknown Speaker* [31]

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No, that's where question, John.

One of the challenges in the payor world as everybody knows is it is a a very, very slow cell cycle and delivery cycle and so as we saw some of these changes coming into place in 2016 at think we announced in the fourth quarter of 2016 that we will looking at and more less let's call it back to plan strategy and that does take a lot what -- I think it is absolutely reasonable to think that Diplomat can make some strides in this space and there's a combination of things when we think about the group plans out there that is also challenging but as most people know as there's lots of consolidation at the upper end in the PBMs space is a number of small or independent and enable PBMs that are also going on the lower level and below that that creates opportunities as well so on, we are going to continue to focus on our services and we're going to continue to remind the industry that are independent and particularly our access to the limited distribution drugs allows us opportunities to contract always for a full, covenant of drugs but for the limited this be to so think about -- my opportunity to have specific specific subcontracts for elder drugs remains greater.

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Unknown Speaker* [32]

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Okay, great, thank you.

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Unknown Speaker* [33]

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Charles Re , Cowen & Company.

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Unknown Speaker* [34]

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It is actually James -- on for Charles.

So I first question is how much of a decline are you expecting in hep C this year and when does Diplomat expect hep C to stabilize?

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Unknown Speaker* [35]

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James, again a great question that I think the industry has been very much again that ago we called out the money 16 was a pretty significant decline.

We have not specifically called out 2017 and I would say the industry originally had expected 2017 to be a stabilizing area for hepatitis and we originally thought that as well . We have seen some analyst calling for a little longer tale of the client and than we had anticipated in the past so we're saying -- on hepatitis C and we have not called out the fact that we think it is stabilized and stabilize and it will stop declining in 2017. We're going to stay conservative and take a little bit of a wait and see approach.

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Unknown Speaker* [36]

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How is was inflation been in January and February relative to 2016?

For January and February and how much confidence does that give you in achieving your 2017 expectation?

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Unknown Speaker* [37]

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James, that's a great question because we spent time earlier this year and on this call on the call I just missed on the recording talking about the pullback of inflation and we are certainly staying very conservative on inflation in overall 2017. I will share and we a red an analyst have reported on the fact that a number of key drugs it is a very high volume drugs to price increases and first half of this year but in the first month or two preservative lily in January so I think that got a little people confused we called out conservatism of the industry's called out conservatism and yet we saw a lot of pricing creases.

Remember many of the manufacturers over the last few years I've got to taking price increases twice a year and what we are hearing behind the scenes is pivoted to the price increases very early in 2017 and very possibly they were only take a single price increase in 2017 so because of that we are not looking at January is any Benchmark and we are considered to track between to be conservative on 2017 to the lower and of any trend we've seen over the last four to five corridor.

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Unknown Speaker* [38]

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Thanks so much.

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Unknown Speaker* [39]

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Thanks, James.

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Unknown Speaker* [40]

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Ricky Goldwasser , Morgan Stanley.

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Unknown Speaker* [41]

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Yes, hi. Good evening pick out so to that I have some questions around the -- business that decided to move to PBM.

We think about these health plans -- -- today manage -- did they have their own -- PBMs and now they went to a new PBM or is that an existing PBM relationship that they had they just extended now into specialty as well?

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Unknown Speaker* [42]

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That's a great question, Ricki.

A time for me to give a lot more color on those two plans.

The first plan was a health plan and where they had decided to do a PBM RFP, request for proposal and they decided to change out there PBM and they did not give an opportunity for specialty.

In that particular one we had been the specialty pharmacy of record for a while and of course we're Specialty Pharmacy for many PBMs and health plans can carve that thousand as well so this was a case with the PBM did not have a Specialty Pharmacy and we with the specialty pharmacy of record without plan.

When they carved it out to a new PBM the only carved out a PBM RFP and there was not an opportunity for Specialty Pharmacy to be separated and for us to win it so we did not lose the business to another Specialty Pharmacy due go to services originally, we frankly then I have the opportunity to bid on uptick there other one.

On the second plant it was almost the same thing with a slightly different timing.

Again, a PBM that we were a common partner with lost health plan two years ago in early 2015 and they have had Specialty Pharmacy carved out and over a period of time there PBM was able to put a program together and when that business and that was really a little bit more like the other PBM where we ultimately elected not to compete for it because we will dash that we made a decision that we want to be able to win health plan business that we can offer the level of services that we can offer are limited our limited edition drugs with a -- capabilities we need to offer and there are times and we believe those opportunities are out there to offer that level of services at a fair reimbursement.

There are sometimes when reimbursement just doesn't match what our goals are and this was one and so the PBM that one not business ultimately to be Specialty Pharmacy business on that as well.

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Unknown Speaker* [43]

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Is there a way for us to gauge what percent of your when revenues are currently with -- with the PBM that -- not carved out looks think it goes back -- strategic decision that the customer has -- do I want to consolidate all my specialty?

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Unknown Speaker* [44]

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What do I want to carved out -- you have a sense of what percent of your health plan customers proactively decided to carve out specialty versus that was that just are with PBMs that don't have that offering?

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Unknown Speaker* [45]

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I don't think there's an industry information out there as to what% -- percent of individual plus be making -- but what I will tell you is that this trend in model is a new.

We've always had to compete added head-to-head with the PBMs that on their own specialty pharmacies and I know cases in the past for example nothing to do with the services or the performance we've been able to offer so Ricki, guess what I would say is in Medicare Part B -- provider in any willing provider -- and in particular when our with our limited distribution drugs we believe that we have the opportunity to continue to compete and so we have changed our structure around bidding for this business and we are aggressively talking to plants throughout 2017 , it is a slow sell cycles with that we have opportunities moving forward in this to go area and again the old the drugs in the service offerings will probably be paramount to the way we deliver that.

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Unknown Speaker* [46]

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Okay and one last question in terms of customer the mix -- you mentioned Medicare Part B, can you break out for us what your customer mix is ? Medicare Part D versus commercial versus other?

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Unknown Speaker* [47]

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Historically the number has been general I think we've given it as about a third, third, third, but a third open networks , a third Medicare Part D and about a third mix of commercial plans . It certainly as Diplomat has gone more and more into the oncology sector and we've got more more in the limited distribution drugs , what's many of those are in the elderly capabilities the categories have seen a larger and larger percentage of Medicare Part B, do not have the numbers directly in front of me and we have not given projection for 2017 . I think if you look at some of our IR information you will see how we've broken some of that information out historically and I think what our analyst can do is take a look at that and continue to recognize that as oncology gross so gross Diplomat.

And oncology tends to be a little bit are part -- Part D a little bit more open network.

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Unknown Speaker* [48]

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Thank you very much.

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Unknown Speaker* [49]

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Thanks, Ricki.

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Unknown Speaker* [50]

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David Larsen, Leerink Partners.

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Unknown Speaker* [51]

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Hi, guys, it is not in for David.

Question on the growth in the quarter.

Did you say how much of a headwind existing drugs were to the organic growth?

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Unknown Speaker* [52]

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Math, I don't know that we called out specifically existing drugs . And try to remember , I'm going to pull the number, I don't believe we've pulled that out to my thing that number was more neutral.

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Unknown Speaker* [53]

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Okay.

Then how much did acquisitions helped in help in the quarter?

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Unknown Speaker* [54]

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Hang on, Matt.

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Unknown Speaker* [55]

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The oppositions was a pretty good part of that ago remember.

Remember we made the acquisition of TNH at the end of the second quarter , TNH as a Company we reported previously was around $400 million in revenue at the time we have wired it so that gave us a pretty strong boost in that and if you remember back to oncology numbers for the year I think we reported 40 plus percent overall and oncology yeah 22% of that organic so a big portion of that growth was in that.

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Unknown Speaker* [56]

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Okay.

Then going forward you mentioned the pipeline looks pretty good . How would you describe the FDA pipeline in 2017 -- 2016.

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Unknown Speaker* [57]

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That's a great question Matt and I'm glad you brought it up. 2060 was little bit of a surprise and as I said in the ViaSat workaround that JPMorgan conference we had expected the very end of 2016 to strengthen a little bit of that did not happen so 2016 was the worst year in the last three or four.

2017 looks good so far pick we never really no early in the year because we don't take on these drugs into our guidance until they become released early on many 17 looks to us like it is going to perform or like 2014, 2015 and 2060 to go -- we are not saying that many 17 is going to be a record year but it is going to be more indicative of what we've seen in the past with 2016 being what's lower.

There are a number of drugs already in the FDA decision cycle in 2017 over -- already so we feel this early in the season we feel optimistic about the pipeline.

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Unknown Speaker* [58]

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So when they launch could that impact your second half or is that more of a 2018 boost?

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Unknown Speaker* [59]

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That's another great question.

It is really more of a 2018 boost and remember first first while later in the year that they launch the less impact they have on the individual your bed even drugs that launch early remember the hepatitis C drugs are really outliers where they hit this guy really quickly.

Most the time limited dissipation drugs in oncology drugs the ramp-up at a steady level so it is not until your two that we really see any kind of significant benefits from them ago so while we are looking forward to robust 2017 it is part where because 2016 was we , we call that out earlier, it is part of why what he 17 is a little bit more of a reset year and as a drugs launch will have opportunities in 2018 and 2019 and beyond.

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Unknown Speaker* [60]

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Okay, thanks a lot.

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Unknown Speaker* [61]

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(Operator Instructions).

Steven Valiquette, Bank of America/Merrill Lynch.

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Unknown Speaker* [62]

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Thanks.

Good afternoon.

-- just quickly , where do we stand nowadays on the evolution of these performance-based pharmacy networks expanding beyond the Karen into the commercial segment ? Are you willing to participate in these and -- terms warfare first posting pharmacy Company commercial versus some of the rules that you are having to abide by within Medicare?

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Unknown Speaker* [63]

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Steve, that's a great question and we have never shied away with there it from health plan or from a manufacturer of performance-based opportunities.

FEGLI we embrace that because as we said before from a service point point of view this is an area where we have the ability to shine and when the can control our own destiny we do really well.

The issue around DIR which we we've been very clear about was the performance metrics that were set up by some of these early DIR fees and by the CMS programs had not no involvement at all around specialty pharmacy so there were no Specialty Pharmacy metrics of any kind associated with any of the DIR on the Medicare the tape plan so yes because commercials got a little more flexibility we would expect that if we see more performance-based networks coming to market and we think we have not seen major six in that area I think we here maybe more talk that we see action so far , we would not only embrace the opportunity of performance been asked work boat we get the weeds with those plans and try and show them how our capabilities around service and revenue was issued and waste management generally save a lot more than small reductions and basis points.

It is a great place for the industry to move.

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Unknown Speaker* [64]

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Okay and real quick apologize for the background noise by labor but the other question just on the side apologize but as far as the accounting for DIR fees and 20 seen -- is there any change or even though it is sort of -- amid year to up , your calculation by the plan sponsors to now make a provision for this particularly throughout each quarter of their just to spread out ? On target think about some of the year-over-year comparisons Cordova quarter, any extra color you can provide about that when thinking about the DIR impact?

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Unknown Speaker* [65]

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We sure can state.

The biggest challenge we've been very clear and our discussions that the biggest challenges in 2016 or what we consider and we continue to believe was very, very challenging and some thank you us thank you us language in the contracts that did not spell out the link between performance-based initiatives that were about categories like diabetes drugs in the generic drugs had no reflection on specialty pharmacy services and the actual implementation of those fees.

Of course though that was the blind side that hit us and most of the other specialty pharmacies quite clearly . Once the true-up started in the later part of 2016 we had much more color on that and while we certainly are in discussions about that language as we speak still , the clarity came in the later part of 2016, Steve.

So we feel much better positioned to provision and to manage the flow in 2017 . The other challenge in 2016 was there was no color or clarity early on on what expected growth might be some of do the utilization of those plans and also companies like like Diplomat that were so involved in the oncology side so that they your modeling around that again I would say that we feel much better about where we are at.

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Unknown Speaker* [66]

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Okay, got it , okay, thanks.

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Unknown Speaker* [67]

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(Operator Instructions).

Michael Paula, Robert Baird.

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Unknown Speaker* [68]

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Good evening, Phil.

Question on infusion and 20 for centric year years hoping you could just frame your exposure within your infusion business to the reimbursement adjustments and that legislation ?

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Unknown Speaker* [69]

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Great, Mike.

It is a good question because there's already been a little confusion on that and obviously some others reported revenue for centric years we driving out a couple of sidebar called . The jury is still out a little bit of some of the details around 21st century cures but the main components here I think that people are identifying is what the mix?

Some of the home infusion companies that are not driven on specialty infusion or in the home infusion clearly may have had or exposure to some of the areas that were affected by 21st century cures.

20 for centric century cures at this time only affects that's a very small portion of our overall volume in the specialty infusion space and some of those questions around that are still being discussed on whether legislators went to make any changes that might lessen the impact . At this time is fairly clear to us that 21st century cures affects a very small addition of our business potential a and there is some potential negative but because we don't have the real large exposure in those areas are you going to be possibly less impacted than some the sum of the people that may have been reported so far.

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Unknown Speaker* [70]

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Are you willing to maybe ossify EBITDA headwind in 2017 related to what assumptions around the cures legislation?

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Unknown Speaker* [71]

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We really are on I are not yet Mike and the challenge here is again the categories for the change -- where the changes are made a very narrow band we frankly and those category changes that they made eye going to potentially affect care and that's why I get can legislators are looking at this very closely and even physicians are looking at this closely so while we don't know today and why we cannot do that yet is it could be reaction to some of the changes in 20 for first century cures that were meant to be positive that could end up with negative or patient and that reaction my us in the impact or create upside opportunities and so again all we can say right now is the early stage is a slight negative and we really just need to get into this more and see where the markets going to go with both addition usage and with legislative changes before we can put a tighter number on it.

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Unknown Speaker* [72]

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That's helpful and maybe just on and vision midteens growth in the quarter.

What's the outlook for Tony 17 and if you had to bring the drivers of that midteens which event as above market growth is it some contract wins , new product launches, any color around what striving the revenue in infusion would be helpful?

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Unknown Speaker* [73]

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Yes, great and that's an area of real excitement for us and I would say it is a lot of things driving its.

It. I t is not a specific be going in a new plan but it is the contingent crossover selling synergy right from the start of making acquisitions we talked about the selling synergy and it is limited is the vision there as well.

We continue to win new drugs and in that area.

There are a number of limited distribution drugs in specialty infusion over the last 36 months . Those drugs are still very a very new and continue to ramp up this are creating opportunities both in IG and then him in hemophilia . We also have seen I get some benefit in some of the new drugs coming to market around the IGN diplomats continued service-level about some of the ultra- orphan space is wrapped specialty infusion around HAE and around the alpha-1 diseases.

The answer is really is we will position ourselves in a lot of areas , we felt like we are continuing to build position relationships across the country here and Diplomat but three assets that all had good names on their own but together we think the some of the parts as much number than the individuals and we think that message is getting out to the marketplace.

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Unknown Speaker* [74]

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That is great if I could sneak one more in on the restructuring 10 million a run rate benefit , what are the focus areas for that initiative ? It sounds like maybe additional M&A integration but any specific items to call out would be helpful.

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Unknown Speaker* [75]

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Yes, you are right about the M&A and that's an area that we looked at and we certainly what we did was we made a clue decision to look at areas within the Company where we had been in hyper growth for many years and where we could become more efficient and we were able to take a look at some of the more not direct activities, we are able to look outside vendor contracts and relationships , we are able to look at areas where in hyper growth we have created a bubbly any to service that was not as efficient so it was really about all of those.

What we didn't have to do is we did not have to look any of our core services and make a decision to again those those in fact I would actually profess that in this restructuring we had the ability to strike the strengthen some of our core services , we are bringing some new technologies to market, we feel very well-positioned for 2017 I now to move forward.

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Unknown Speaker* [76]

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Thank you, that's it

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Unknown Speaker* [77]

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Thanks, Mike.

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Unknown Speaker* [78]

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David Larson, Leerink .

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Unknown Speaker* [79]

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Hey Phil, can you talk about new drugs coming to market over the next year or so and the impact of biosimilars, what impact that's had on your book and what you expect the impact to be going forward?

Thanks.

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Unknown Speaker* [80]

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Is, thanks David.

Each drug that has come to market whether it is been a biogeneric core biosimilar has brought benefit to to Diplomat.

Remember the biosimilars that have been in the market so far have been more on the physician dispensing side or the physician office management side so they have brought only limited impact to specialty.

Depending if any of the blockbuster biosimilars come to market we are today, we are engaged and we are excited because again we believe that biosimilars create opportunities for Diplomat because the biosimilar drugs are going to B2B massaged into the market and managed by specialty pharmacies to they aren't just an automatic switch as result decreased service opportunities on the biosimilars that also also great that also create service opportunities for us as the branded drugs compete for market share.

When the drugs move over into the generic side there's a less opportunity perhaps for the manufacturers to compete but there's generally more opportunities for us because we create spread opportunities as more manufacturers to market and we can reduce the price from the existing marketplace . We have a opportunity for us to create service offerings so I would say that the pipeline looks good for us right now in general . Again I spoke to the a little earlier . We don't expect to see a landslide of opportunity around generics and around biosimilars, but each drug that comes to market like that is an opportunity for us.

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Unknown Speaker* [81]

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Great, thanks very much.

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Unknown Speaker* [82]

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Thank you.

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Unknown Speaker* [83]

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Thank you, ladies and gentlemen, there are no further questions.

At this time.

This concludes today's conference call.

You may now disconnect.

Thank you.

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Unknown Speaker* [84]

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End of Transcript.