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Edited Transcript of DPLO earnings conference call or presentation 9-Aug-19 12:30pm GMT

Q2 2019 Diplomat Pharmacy Inc Earnings Call

Flint Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Diplomat Pharmacy Inc earnings conference call or presentation Friday, August 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Thomas Griffin

Diplomat Pharmacy, Inc. - CEO & Chairman of the Board

* Daniel Paul Davison

Diplomat Pharmacy, Inc. - CFO & Treasurer

* Terri Anne Powers

Diplomat Pharmacy, Inc. - VP of IR

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* James Auh

Cowen and Company, LLC, Research Division - Associate

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Lisa Christine Gill

JP Morgan Chase & Co, Research Division - Senior Publishing Analyst

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello and welcome to Diplomat's Second Quarter 2019 Conference Call. (Operator Instructions) I'd like to turn the call over to Terri Anne Powers, Vice President of Investor Relations.

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Terri Anne Powers, Diplomat Pharmacy, Inc. - VP of IR [2]

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Good morning, everyone. As you are aware, this morning, Diplomat issued second quarter 2019 financial results as well as a press release indicating that the company is exploring strategic alternatives. Before I turn it over to our Chairman and CEO, Brian Griffin, for his remarks, I will read the following safe harbor statement. Some of the company's statements made on this conference call will be forward-looking statements, which may include financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may 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 earnings release just issued and the company's annual 10-K report and subsequent filings with the Securities and Exchange Commission.

These statements speak only as of the date hereof or the date specified on the call. And except as required by law, the company does not undertake any obligation to update or otherwise release publicly any revisions to its forward-looking statements.

There can be no assurance that the process of reviewing and evaluating strategic alternatives will result in the approval or completion of any particular strategic alternative or transaction in the future.

The company does not intend to disclose developments or provide updates on the progress or status of the review of strategic alternatives, unless and until required or when the company determines appropriate. As such, management will not comment on the specifics of this process in today's prepared remarks. All comments today exclude any potential impact from strategic alternatives.

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

A replay of the call and associated slide presentation is accessible through a link on the Investor Relations page of the company's website, and it will be available for 90 days.

I will now turn the call over to Brian Griffin. Brian, please go ahead.

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [3]

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Thank you, Terri Anne. And good morning, everyone. On previous calls, we shared with you the challenges posed by the current market dynamics to our core specialty pharmacy business and the need to rebuild our PBM.

While we're taking aggressive actions with regard to both businesses, these dynamics have resulted in a need to further reduce our guidance for this year.

By contrast, infusion therapy performance continues to be strong and we are further invested in this area with a small infusion pharmacy acquisition in the third quarter.

We are also happy to report that we continue to partner with health plans nationwide, including increased access with major Blue Cross and Blue Shield plans.

As we work to strengthen each of our businesses, we also are strengthening our financial flexibility. We recently negotiated an amendment to our credit facility to provide covenant relief through the end of 2020. Dan will provide more details on that and our revised guidance later.

From time to time, we've had discussions with third parties, either at their initiation or ours, regarding strategic transactions. Recently, we've had discussions with several parties who see value in acquiring our company or certain of our businesses and have expressed specific interest.

We, along with our advisors, are evaluating these expressions of interest. To ensure that any decisions we make will be in the best interest of our shareholders, we are also exploring the full range of alternatives for value creation, which could include a sale of the company, the sale of individual businesses or other value-enhancing transactions.

Ultimately, we may determine that our best option is to remain an independent publicly traded company in our current configuration.

There can be no assurance that this process will result in an approval or completion of any particular strategic alternative or transaction in the future. The company does not intend to disclose developments or provide updates on the progress or status of the review of strategic alternatives, unless and until required or when the company determines appropriate.

I want to emphasize that during the review process, we intend to maintain our focus on executing our strategic plan and improving our businesses. We are leveraging previous investments in sales and account management talent across our businesses to drive additional volumes to Diplomat. We are implementing enterprise-wide initiatives to improve our cost structure and operating efficiency, while continuing to provide the high standard of patient care that Diplomat is known for.

We are doing all of this because we believe in the prospects of our business, which is also validated by the third-party expressions of interests we have received.

Turning to a more detailed business update. As we look at the pipeline across the entire company, we continue to see a lot of opportunity and are clearly gaining traction with our strong clinical value proposition.

In the health plan market, sales cycles can be long, but we are in the final stages of negotiating contracts with several regional health plans and provider networks.

We continue to gain new name business from hospital systems for wraparound LDD access, clinical services and to our 340B services, signing additional agreements in Q2 on top of those signed in Q1.

Within infusion therapies, Diplomat continues to perform very well, successfully increasing network access with major health plans nationwide as a specialty infusion provider.

We continue to increase access with major Blue Cross and Blue Shield plans, including Blue Cross Blue Shield of Kansas and Blue Cross Blue Shield of Vermont in the second quarter.

We also recently signed an agreement with HealthPartners in Minnesota and in the Pacific Northwest, First Choice Health network.

In addition, we've been added to networks by WellCare in Kentucky, Well Sense in New Hampshire and AllWays Health Partners in the New England region. All of the aforementioned agreements would provide access to at least an additional 4.5 million lives.

We also recently announced an innovative, first-of-its-kind agreement with Allergy Partners, the largest allergy and immunotherapy practice in the United States.

Diplomat has entered into a 5-year agreement with Allergy Partners to provide in-home or in-office infusion services for their patients.

Diplomat will provide clinical oversight and staffing and nursing services amongst a suite of management services on behalf of Allergy Partners' 128 practice locations. This innovative agreement will drive Diplomat's continued growth in infusion therapies, and we look forward to working with Allergy Partners.

Our pharma services business unit, EnvoyHealth, continues to expand our pipeline of new opportunities with pharma manufacturers to provide hub and medical information services. We recently signed 2 agreements with a pharmaceutical manufacturer to support product distribution and other services for investigator-initiated clinical trials in oncology. We also see continued growth in demand for digital therapeutic services.

As previously discussed, 2019 is a rebuilding year for our PBM business. We continue to work on establishing our specialty-focused PBM value proposition and have committed additional sales and account management resources to that effort.

There is still an opportunity to win additional business in 2019, though, given where we are in the year, any new contract awards would not have a material impact on our 2019 financial performance. We continue to see a robust pipeline in our PBM business for 1/1/2020.

Given the dynamics of the middle market, we expect to be in a position to provide further insight into the PBM's prospects for 2020 early next year.

Moving to the regulatory environment, the situation is fluid, changing day by day as new proposals are brought forth and debated.

While the Trump administration eliminated the proposed HHS revision to the safe harbor rule, there is the potential to see it revived as an addition to one or more bills currently proposed or in future bills. The HHS proposal would have only impacted Medicare and managed Medicaid business, but new proposals could apply to commercial business as well. Until we gain more visibility into legislative proposals, it is difficult to predict at this time any potential impacts on our business.

What is clear is that there is bipartisan support and support from the Trump administration for drug pricing reform. There are a lot of moving pieces and implications for timing given that we are fast approaching campaign season for the 2020 presidential election. We continue to monitor regulatory developments, and we will update the market as necessary.

Regardless of any regulatory change, we are confident in the clinical value we bring and that we'll be able to shift our business model accordingly. We support efforts that would make medications more affordable for patients, which can improve adherence, particularly for lifesaving medications like with those which Diplomat dispenses.

We continue be laser focused on driving more volumes to Diplomat, improving operational efficiency and further improving our clinical value proposition.

I believe in Diplomat and the high quality of care that we bring to our patients.

I assure you that the Board, management and I are committed to doing what is in the best interest for Diplomat's shareholders, patients and their providers, payers as well as our pharma partners and employees.

I'll now turn the call over to Dan for a review of our financial performance in the quarter. Dan?

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Daniel Paul Davison, Diplomat Pharmacy, Inc. - CFO & Treasurer [4]

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Thank you, Brian, and good morning, everyone. This morning, we reported $1.3 billion in revenue for the second quarter, down 9% year-over-year, while adjusted EBITDA was $19 million, down 55% versus the prior year. Looking at revenue at the segment level in the second quarter, our Specialty segment generated revenue of $1.2 billion, down 1% from the prior year. Segment revenue benefited from brand price inflation but was more than offset by payer reimbursement compression, the increase in volume of newer generics and volume declines in certain therapeutic areas.

As we have previously noted, we believe core specialty pharmacy performance is being negatively impacted by increased competition.

Infusion sales grew 6% year-over-year, driven by higher volumes. Oncology sales were up almost 2% year-over-year as the benefit of brand inflation was partially offset by reimbursement compression, prescription volume declines and higher generic utilization.

CastiaRx recorded $90 million in revenue, down $98 million from the prior year as we realized the impact of previously disclosed lost business, including some business that dropped off during the second quarter.

Taking a look at gross profit and margin, total company gross profit was $73 million, down 26% year-over-year and gross margin was 5.6%, down 130 basis points compared to the prior year.

Gross profit in the Specialty segment was $63 million, down 13% year-over-year and gross margin in the segment was down 70 basis points year-over-year to 5.2%.

Both the gross profit and margin decline were the direct result of lower reimbursement in our core specialty pharmacy business, despite the contribution from higher-margin generics.

Specialty prescription volumes decreased slightly by 40 basis points year-over-year to 235,000.

Infusion therapy volumes grew, while other therapeutic area volumes were down year-over-year.

Gross profit per script in the second quarter of 2019 was $264 per script compared to $301 per script in the prior year period.

CastiaRx recorded gross profit of $10 million in the quarter, down $16 million and generated a gross margin of 10.7% versus 13.7% in the prior year.

The gross margin decrease was primarily driven by a $2.5 million nonrecurring client rebate payment in the second quarter.

Total company SG&A declined by $10 million compared to the prior year to $81 million, driven by lower amortization expense, resulting from the fourth quarter '18 impairment of intangibles as well as lower acquisition-related expense and share compensation costs.

In addition, while cost-saving efforts have resulted in lower employee costs in certain areas, savings have been reinvested in sales teams such that employee costs were flat year-over-year.

Taken together, our consolidated adjusted EBITDA for the second quarter was $19 million, down 55% from the prior year period. Additionally, our results were approximately $4 million below our prior guidance due to multiple factors that were not predictable, including the nonrecurring PBM client rebate payment.

The second quarter includes a noncash impairment of $85 million to write off the remaining portion of goodwill and intangibles associated with our specialty pharmacy business. The impairment was booked due to lower-than-expected second quarter results, which, combined with the impact of challenging market dynamics and slower-than-expected realization of new business awards, resulted in reduced expectations for future projected earnings and cash flows.

In addition, results also include an additional noncash impairment of goodwill and intangibles, totaling $56 million associated with our PBM business due to lower-than-expected second quarter results and a more conservative outlook for growth beyond 2019.

Net loss in the quarter was $159 million or $2.13 per share compared to a loss of $4 million or $0.05 per share in the second quarter of 2018.

Turning to the balance sheet, our working capital improved by $41 million compared to December 31, 2018, driven primarily by an improvement in inventories and payables. We will continue to look at ways to improve our working capital position.

We reported $585 million in net debt, including contingent consideration as of June 30, 2019, and our leverage ratio was 4.5x.

We've paid down net debt by a total of $53 million compared to the end of last year, mainly on our revolving credit facility. As Brian previously mentioned, we recently amended our debt covenants, effective August 6. Covenants have been amended from 3Q 2019 through 4Q 2020. There were no changes in interest rates as a result of the amendment, but we did pay a onetime fee to facilitate the amendment.

Details of the modifications to our total net leverage ratio and interest coverage ratio covenants are provided in the slide presentation accompanying today's results. Details are also available in the 8-K filed today.

Less-restrictive covenants are expected to ensure continued compliance and give the company additional financial flexibility to execute our strategy.

As a part of the agreement with our lenders, we agreed to reduce the size of our revolving credit facility from $250 million to $200 million.

Even with the reduced size of the revolver, we continue to have significant availability under our credit facility, and our priority is to continue to reduce debt with any excess cash flow.

Given that we have already paid down $53 million in net debt compared to the end of last year, any further debt paydown will be dependent on additional working capital improvement and any potential asset sales. Additionally, we are required to use the net proceeds from certain asset sales over $1 million to pay down our term loans.

Turning to our outlook. First, while we remain encouraged by the pipeline of opportunity across all of diplomats businesses and we are being awarded new business, recent awards are expected to be more beneficial to 2020 performance with limited impact on 2019 results.

Second, we now expect brand price inflation to come in at the lower end of our previously forecasted 4% to 6% range.

We continue to see volumes in our core specialty pharmacy business being reduced by member channel management and efforts by larger, vertically integrated peers to push volumes to their specialty pharmacies.

In addition, we have also observed competitors cherry-picking perceptions, leaving lower-profit margin scripts for Diplomat.

Finally, the reimbursement environment in specialty pharmacy is driving continued downward pressure on margins.

Taking into account these trends and recent developments, we have lowered our 2019 adjusted EBITDA net income and EPS guidance.

We continue to expect consolidated revenues between $4.7 billion and $5 billion.

This still includes Specialty segment revenue between $4.4 billion and $4.6 billion. As we are halfway through the year, we have tightened the range of expected PBM segment revenue from $300 million to $400 million to $325 million to $375 million.

We now expect adjusted EBITDA in the range of $87 million to $93 million versus the prior $110 million to $116 million range.

Factors driving the reduced outlook compared to prior guidance include: actual second quarter results that were below expectations; lower-than-expected generic volumes; potential for additional reimbursement pressure in the latter half of the year; lower-than-anticipated new core specialty pharmacy contracts; and cost savings that are running behind forecast.

We now expect $7 million to $8 million in cost savings generated in 2019 with an annualized run rate exiting 2019 now expected to be $10 million or more.

This is due to a number of factors, including delays in restructuring and facilities consolidation as well as delays in the full implementation of ScriptMed, our new specialty operating platform.

Given the revised outlook, we expect third and fourth quarter adjusted EBITDA to each be sequentially stronger than the second quarter due to typical seasonality, growth in infusion patients and timing of PBM rebate recognition.

GAAP net loss expectations for the full year are now between negative $201 million and negative $191 million, which translates into a GAAP EPS loss range of negative $2.69 to negative $2.55. We continue to expect income tax expense to be approximately $2 million.

CapEx is expected to be approximately $21 million to $23 million for the year, primarily related to investments expected to improve unit cost efficiencies as well as enhanced analytic capabilities. And to support the creation of new solutions for our manufacturer, PBM and payer clients in our core specialty pharmacy business.

Based on our revised outlook, we expect 2019 operating cash flow between $60 million and $80 million. As previously indicated, any further debt paydown will be dependent on additional working capital improvement and the potential sale of assets.

It is important to note that even with the revised 2019 outlook, we expect to remain in compliance with the new terms of our credit facility, giving us the financial flexibility to pursue our strategy into the future.

Thank you again for your time. I'll now turn the call back over to Brian.

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [5]

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Thank you, Dan. We remain focused on executing our strategy to grow the company and improve operational efficiency.

Our clinical value proposition is differentiated from our competitors due to our therapeutic areas of expertise, in particular, oncology, our limited distribution drug access and the fact that we put our patients first always.

Every day, our employees are committed to the Diplomat difference and taking care of the patient. And I'd like to thank them for their unwavering commitment to go the extra mile to make our patients' lives easier.

At the same time, management and the Board are committed to maximizing shareholder value. Thank you for your time, and we look forward to your questions.

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Terri Anne Powers, Diplomat Pharmacy, Inc. - VP of IR [6]

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(Operator Instructions) Operator, can you please provide the instructions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Lisa Gill with JP Morgan.

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [2]

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Brian, can you talk to us about the timeline for evaluating those strategic decisions? It would be my first question. And as a follow-up, I know historically, you haven't broken out the EBITDA of the 3 different businesses that you have today. Would you be, one, comfortable giving that to us or at least giving us an indication as to the relative size? It seems to me that the business that probably has the greatest value today would be the infusion business of the 3.

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [3]

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Yes. That is true. I think you're right. Historically, we haven't given a perspective on the breakdown by business unit and -- so -- and I don't think we would do that at this point. I'll let Dan add any additional color. In terms of the first part of your question on the timing, we -- as we said in obviously our press release and in our prepared remarks, we aren't going to make additional commentary on the evaluation of strategic alternatives. Dan, any additional color?

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Daniel Paul Davison, Diplomat Pharmacy, Inc. - CFO & Treasurer [4]

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No, Brian. That's right. The infusion business continues to perform very strongly, and we're very encouraged by the results there. But we're not in a position to break it out from core specialty.

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [5]

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Obviously, Lisa, you saw that we had some pretty solid wins in the infusion area with the additional health plan wins that we had in this quarter. You undoubtedly saw the press release on the new partnership with Allergy Partners. That's going to continue to drive the infusion growth into the future. So we're obviously excited about that unique new model, a provider-focused model and what it means for us in terms of infusion growth.

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [6]

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Just as I think about the 3 businesses, I know you talked about the gross profit for CastiaRx. Are all 3 businesses profitable on the EBITDA line today?

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Daniel Paul Davison, Diplomat Pharmacy, Inc. - CFO & Treasurer [7]

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Well, we don't take these segments down to an EBITDA level. They're simply broken out at the gross margin for our public reporting.

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Operator [8]

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Your next question comes from Steven Valiquette with Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [9]

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Yes. I had kind of a similar question to Lisa's, so maybe to go just a little bit deeper on that. The -- our own view was that the specialty infusion business may comprise about 75% of the company for 2019 beginning of this year. Now with today's adjustments, the EBITDA guidance may be closer to 100%. I'm not asking you to comment on that so don't worry about that. But I guess my question is just want to confirm that the specialty infusion business remains intact both from the revenue and profit perspective. You mentioned the 6% revenue growth in that business, but I just want to make sure that the EBITDA is intact, I mean most of the things you mentioned in the press release that, that was leading (inaudible) EBITDA seemed to be tight, just the PBM operation and core specialty. Just want to make sure that the infusion is intact from an EBITDA perspective.

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Daniel Paul Davison, Diplomat Pharmacy, Inc. - CFO & Treasurer [10]

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Thanks for the question. Yes, that's correct. The growth and margin prospects for the infusion therapies within specialty are intact.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [11]

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Okay. I have a quick follow-up here. You mentioned the lower earned rebate in the PBM due to drug mix. Ironically, there was another large PBM that said they actually had increase in retained rebate due to drug mix. Is there any color on either which drugs or if not that, at least which therapeutic categories we're seeing, maybe some shifting around the market share that might have led one PBM to get greater rebate? And then unfortunately for yourselves, maybe

(technical difficulty)

wrong end of that? So any color either on the drugs or the therapeutic category?

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Daniel Paul Davison, Diplomat Pharmacy, Inc. - CFO & Treasurer [12]

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Not really because it's not just drug mix, it's also client mix. So margins and rebate retention vary by client and the growth -- the relative growth of an individual client would also impact our aggregate numbers.

So it's not specific. It's going to be different for every client. There's really no general trend there on a therapeutic-chapter level.

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Operator [13]

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Your next question comes from Ricky Goldwasser with Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [14]

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So I have a few questions here. But just to follow up on the questions on the health of the [infusion] business. So obviously, on the specialty side, you highlighted the vertical integration and the larger enterprise's focus on carving in the specialty business. One of these entities does have an infusion business, the other one has a partnership. How is infusion different? And why wouldn't we see those same trends happening on that market?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [15]

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If I understood, the question is why is infusion different than core specialty in terms of the vertical integration. Is that -- did I capture that correctly?

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [16]

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Correct. When we think about the characteristics of the infusion market, what's in it that is making it more defensive?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [17]

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Yes. Well, I think as you know, the market is definitely a more fragmented market. And I think, the idea that with infusion, we're managing across the medical benefit as well as the specialty benefit does make it different. We haven't seen the same dynamics to your point in the infusion side of the business. From a growth trajectory perspective, obviously, you saw our announcements this morning, we continue to be successful in gaining additional access through partnerships with health plans.

So on the core side, the vertical integrations that are -- that have occurred and that are impacting us in terms of volume, you've heard us, obviously, point at that during our last quarter call, is also on the flip side creating opportunities for us to become the strategic partner for independent health plans.

So the teams have had some nice success there. They've also developed strong relationships here in 2Q with a number of major hospital systems across the country. So that's going well. So that vertical integration actually is creating opportunity for us in terms of our -- both our core specialty as well as the infusion.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [18]

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Okay. And then question on the rebate side. So Brian, it seems that your tone kind of like in terms of the potential regulatory impact has changed since the last call. And I understand that there are kind of like more bills now that are proposed in congress and senate. But when we think -- step back and you think about your comments and the impact that you had in the quarter and also the comment around the fact that client mix matters here, are you starting to also see kind of like clients coming to you and asking questions about kind of like the rebate and thinking about ways to kind of like change that -- the model?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [19]

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Yes. Great question. Yes, we are actually. So it's -- given the fact that we're focused on the middle market, which, as you know, we define that as groups of 500 to 5,000, that varies a bit across the PBMs and within health plans, we are not seeing any request from either the consultant community or directly from clients to change the traditional rebate model. So there are -- it's still a very important component of cost management efforts of our clients and their decision to retain certain level of rebates to offset their overall health care costs. That model continues to be the model within our middle market and we really have not seen any change or any indication that it will change here in the near term. And so I'd say that my view of potential legislation in any one of the proposed bills that might affect rebate retention or spread pricing, I just think that the value that we create, particularly with our specialty expertise that we bring to bear in our PBM offering, drives a differentiated clinical value proposition. That ultimately will be paid for. And I think that's really -- that is consistent with my view from really our Q1 discussion as well.

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Operator [20]

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Your next question comes from Charles Rhyee with Cowen.

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James Auh, Cowen and Company, LLC, Research Division - Associate [21]

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It's James on for Charles, actually. Given how other PBMs are starting to move away from rebates, can you maybe talk about where Diplomat is within that process?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [22]

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So, yes, we -- actually, going back to just a year ago when I started with the company, we began to look at alternative models in that area. And so we made some investments that we've spoken about in terms of data and analytics that support our value proposition -- our clinical value proposition, specifically in PBM and in our specialty business. In anticipation of significant market movement around rebates, and obviously, at that point, it was right after the Trump blueprint was published and the Secretary was pointing to a change in the rebate model.

We have not -- as I just mentioned, with respect to Ricky's question, we have not seen any demand for a different model. In fact, we've seen a continued focus on the traditional pricing model that we've been in market with. However, we are preparing an alternative model that is more focused on clinical value proposition. And so my hope is that I can bring that out into the market as an alternative offering really just to capture more share. But from a market perspective, we're just not seeing a different demand than we have historically.

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James Auh, Cowen and Company, LLC, Research Division - Associate [23]

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Okay. And can you maybe talk more about the RFP activity so far this year and the level of conversion that you're seeing and maybe how that compared to last year?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [24]

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So in terms of RFP activity, certainly, relative to the last year, on the PBM side, we've seen an increase in the RFP activity. And I think that's really a function of the fact that we had fielded a professional, experienced sales organization that, candidly, we didn't have in the company a year ago. And that basically is leveraging folks that have been out in the PBM business for 20-plus years and have significant relationships with the consultant and broker community. And that's driving a higher level of overall RFP activity within the PBM business. And -- so we don't -- obviously, we don't comment in terms of new wins during the quarter. We'll give more guidance on that as we get into 2020. As we've discussed our selling season, obviously, it goes through the entirety of the year, given that we are focused on a small group. And -- but we've seen an increase in RFP activity and we're excited about it. We think the specialty value proposition that's really core to our PBM offering is really resonating within the consultant community. And I think there's a -- certainly a growing appreciation for the fact that here in the near term, specialty is going to represent over 50% of total pharmacy costs and really almost the entirety of pharmacy trend. And as a result of that, we're getting more play-out in the market within the consultant community.

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Operator [25]

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Your next question comes from A. J. Rice with Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [26]

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I understand you don't want to comment about the process going forward. But I did wonder if you might comment about what prompted you to come to this point where you're considering the strategic alternatives. In your prepared remarks, it seemed like you referenced a couple times outside inquiries. And I guess, I'm wondering is that the driver. Or is it -- do you see market conditions making it more difficult for a standalone player like yourself versus the big guys and what they're doing? Any flavor on what brought you to the point where you thinking about this?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [27]

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Yes. No, we and the -- obviously, as Chair of the Board and in our discussions with the rest of my Board colleagues, we have always been focused on maximizing shareholder value. And it's been a part of every Board meeting that we've had since I've arrived at the company. So it -- we're not going to comment, obviously, on the process itself. But this is just continued focus on the part of the board to ensure that we're maximizing shareholder value.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [28]

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Okay. All right. And a couple of announcements in the last few days, I guess, your own announcement as you referenced in the prepared remarks about the Allergy Partners deal and then also, I guess, CMS announcing CAR T reimbursement approach. Anything about that moved the needle for you? It sounds like in terms of the partnership, you're probably saying, that doesn't impact '19 as much as maybe '20, but is there any way to size that or talk about how the other thing impacts the environment?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [29]

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Well, I mean, we're just really excited about the partnership. Obviously, you saw in the press release, this really is, from our vantage point, a very innovative new approach where it's a partnership with a large scale physician practice, obviously, with a focus on allergic, asthma and immunologic therapeutic categories, which line up and obviously complement Diplomat's focus. And obviously, they've got a network of 161 providers, 128 locations in 20 states.

So that really just gives us broad national access in a true partnership with a physician organization. And so that's why it's so exciting for us. It's new, it represents a new market for us. And the idea that we can, together in that partnership, drive a different value proposition, and clinical outcomes is really key to what we see in terms of the growth opportunity within it.

We have not sized and nor do we intend on immediately sizing that opportunity. That will grow over time, and obviously, we're just very excited about the innovation and the partnership.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [30]

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Okay. Anything on the oncology side? What's happening in CMS?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [31]

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Yes. So no, we -- no additional insight there, A.J., in terms of what's happening on that. Obviously, where -- given our historical focus, right, on -- in terms of our limited distribution model and the success that we've had expanding that portfolio, we think that there are opportunities for us in the market as it relates to some of these disease categories, orphan categories as well because it just splits into our clinical sweet spot. But nothing additional in terms of CAR T.

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Operator [32]

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(Operator Instructions) And we have a question from John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [33]

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Brian, on your PBM business, given what you're seeing in the market in terms of the selling season, how comfortable are you that you can see a nice uptick in script volume and overall business in 2020?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [34]

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Yes. John, I had confidence that we're going to start to see a turn within the PBM business, again, for the reasons I outlined earlier relative to my comments on the RFP activity. We're just seeing a higher overall level of RFP volume. We know that the -- our value proposition, which we think is different relative to the Big 3 or many of our competitors, is really resonating within the consultant community. I've just gotten off a several week set of meetings with some of the major national consulting firms. And I think we're going to start to -- they've assured that we're going to get more RFPs in the future based on that value prop. And so looking at the opportunity within 2020, we think that we're going to start executing on sales, given the higher level of opportunity there. And I think that, I should also add that there clearly is an appreciation that in terms of the PBM operating metrics, we've turned the corner on some of the operating issues that we had during the initial migration of the 2 legacy PBMs onto one, single operating platform. And our operating metrics are now completely consistent with the rest of the PBM industry, and obviously, we're striving to be better than the rest of the industry in that regard. And that is clearly being recognized by the consultant and broker community.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [35]

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Very helpful. Okay. Turning to the specialty pharmacy business. So if you just set the strategic review process aside for a second, what are you guys doing or what can you do to stabilize that business and maybe get it back into a growth mode between now and year-end?

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [36]

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Yes. John, I'll start and then, obviously, ask Dan if he has any additional color. But -- so the key focus for us, and this is a new set of strategies that we started to execute just last year, is this focus on health plans and hospital systems. And so while, obviously, we pointed to the fact that we're being impacted here in 2019 on volumes based on what we see as an aggressive shift of script volume to the vertically integrated players. So they're -- basically, through plan design, narrow network and patient channel management shifting volume. So as you know, that's really what's impacting our overall Specialty volume. And the opportunity for us is to execute on the strategy of building relationships with independent health plans and hospital systems, and we've had some nice successes that -- unfortunately, we don't expect them to contribute materially to 2019, but we do have high expectations for 2020 for continued sales successes in our core specialty with health plans. And these investments that I mentioned earlier around data and analytics really are helping to support our clinical value proposition with those health plans.

So that's going very well. With respect to the hospital system initiative that -- the hospital team is really doing a great job. We've had a number of wins here in both Q1 and in Q2 in the hospital system marketplace. So that's going well. Again, not expecting to impact 2019, but clearly, it's going to create a growth trajectory for us in 2020 and beyond. So that's really key for us is to continue to execute on that strategy. I think the idea that we're able to partner and become a strategic partner with those health plans is clearly resonating.

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Daniel Paul Davison, Diplomat Pharmacy, Inc. - CFO & Treasurer [37]

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This is Dan. That's exactly right. And those clients offer a better margin profile than the vertically integrated payers. So that's part of our growth strategy. And then I would just add that we are focused on increasing our data sales to manufacturers out into the future. I think given all of the clinical data that we have and are accumulating that, that is a real opportunity for us.

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [38]

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And I guess, I'll just finish that -- the commentary herewith, we are also in a position to releverage -- to leverage, obviously, a really strong infusion offering. And the idea that we can, in partnership with a health plan, manage the benefit across both pharmacy and in medical and cutting across infusion really becomes a differentiated advantage for us. And obviously, as you saw in our press release, we've had some really solid wins in the BlueCross BlueShield system market as well as commercial health plan marketplace and we can leverage the relationships that we're building on the infusion side to offer an integrated core specialty and infusion offering to those health plans.

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Operator [39]

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(Operator Instructions) And we do not have any questions at this time. I will turn the call over Mr. Brian Griffin.

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Brian Thomas Griffin, Diplomat Pharmacy, Inc. - CEO & Chairman of the Board [40]

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Thank you very much for your time today. We really appreciate your spending the time with us. Obviously, we'll be available after the call for any further questions. Thank you very much. And have a great day.

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Operator [41]

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This concludes today's conference call. You may now disconnect.