Q3 2019 Earnings Call
And answer period I'd like to turn the call over to Perion powers, Vice President of Investor Relations. Please go ahead.
Good morning, everybody as you're aware this morning diplomat issued third quarter 2019 financial result, 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 statements made on this conference call will be forward looking statement, which may include financial projections or other statements of the company's plans objectives expectations or intention.
These matters involve certain risks and uncertainty.
Comedies 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 in the company's Form 10-K report for 2018 and subsequent filings with the Securities and Exchange Commission.
These statements speak only as of the date your own or the date specified on the call and except as required by law. The company does not undertake any obligation to update or otherwise released publicly any revisions to forward looking statements.
Further as previously noted 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 development or provide updates on the progress or status of the review of strategic alternative unless and until required.
Or when the company determines appropriate.
As such management will provide a brief update but not comment on the specifics of this process in today's prepared remarks, except as expressly noted all comments today regarding historical and anticipated results of operations exclude any potential impact from our previously announced review of strategic alternative.
During this call. The company will also discuss non-GAAP financial measures. Please refer to the table included in the Companys earnings Press release, just issued for a reconciliation of these non-GAAP measures to the comparable GAAP measures and a related discussion thereof.
A replay of the call and associated slide presentation is accessible through link on the Investor Relations page of the company's website and it will be available for 90 days I will now from the turn the call over to Brian Griffin, Brian . Please go ahead.
Thank you Jerry and good morning, everyone I'd like to begin this morning's remarks with a brief update on the strategic alternatives process.
We're engaged in a comprehensive process and we have an interest in both the whole company and its businesses.
Sure that you saw west much announcement of the sale of certain assets.
Oh Boy Health business. This was not a divestiture of the entire envoy health business.
Diplomat is retain key portions of the operations located in our Flint, Michigan headquarters.
We remain committed to services supporting our manufacturer partners, particularly in support of specialty drugs and digital therapeutics.
Well this transaction was not material from a financial or operational perspective, we determined that certain assets were not core to the overall company and made the decision to divest them.
I want to reiterate that we remain focused on maximizing shareholder value and pursuing all avenues to that end.
We are in advance discussions, but at this time, we're not in the position to provide any further detail regarding our process.
There can be no assurance that this process will result in the approval or completion of any particular strategic alternative or transaction and the future.
However, we believe that we will be able to provide a substantive update on this process and then your future.
Moving onto discussion at the quarter I'm encouraged by some recent wins that demonstrate that our strong clinical value proposition is a differentiator in the market.
Continuing our strategy to focus on our exceptional disease state clinical care model. We're pleased to announce we have executed on innovated value based agreement for exclusive oncology care management with a national PBM.
Diplomat is reaching beyond the typical unit based pricing models for specialty pharmacy services with a value based care approach based on our strong clinical value proposition and delivery of high touch patient care.
In addition, we were awarded access to three additional limited distribution drugs during the third quarter, increasing our access to more than 135 limited distribution drugs.
In the third quarter. We also continue to gain new name business from hospital systems for wrap around limited distribution drug access clinical services and 3.3 40 be services.
Within infusion therapies diplomat continues to successfully increased network access with major health plans nationwide as a specialty infusion provider.
Since the beginning of the year, we have added access to 15 million additional lives.
We continue to increase access with major Blue Cross Blue Shield plans, including Bluecross Blueshield at Kansas City Blue Cross Blue Shield of North Carolina, healthy Bloom, and Blue Cross Blue Shield of Wyoming, and the third quarter.
We also recently signed an agreement with Amerihealth Caritas in New Hampshire.
Finally, I'm pleased to report that the implementation of the previously announced allergy partners agreement is progressing well.
As it was as we continue to ramp up direct referrals from their practice locations.
I'd now like to turn to an update on our PBM business.
Despite investments in sales and account management and Remediating prior service issues, our PBM business continues to be under pressure.
Subsequent to our second quarter report, we have continued to experience client losses, which are expected to impact 2020 results.
This contributed to the need for an incremental hundred 56 million dollar impairment of PBM goodwill and intangibles recorded and third quarter results, which Dan will discuss in greater detail.
Now I'd like to provide an update on the competitive environment, specifically as it relates to our core specialty pharmacy business.
In prior calls we noted that the challenges that we're facing in core specialty pharmacy in particular, a more challenging reimbursement environment and increased competition from our larger vertically integrated specialty pharmacy competitors.
As was announced this morning diplomat was unable to reach an agreement to renew network participation with one of our largest specialty pharmacy network payers.
As of November 28, 2019 diplomat will no longer participate in a large group of this payers specialty and retail networks.
While this group of networks is not the only network group that diplomat participates in for this pair.
It does comprise the vast majority of the specialty pharmacy business diplomat does with despair.
We will continue to support their patients in these other networks.
As well as the compliance with whom we have direct contracts.
Diplomat remains committed to the patients that we serve and we will support the transition of impacted patients to other specialty pharmacies as needed.
The loss of this business is not expected to material impact our revenue or profitability and fourth quarter 2019.
For 2020 is expected to significantly impact our revenue and volumes.
We do not expect the loss of this business to materially impact the company's profitability in 2020 based on our plan to reduce related cost to service. This pair.
We are disappointed that we are aren't able to come to an agreement with this pair and we'd be open to further discussions to find a solution that works for all parties and importantly, the impacted patients.
I know that many of you will have lot of questions regarding this matter, but based on confidentiality obligations and our agreement with this pair we're precluded from making any public statements about them, we're providing any further detail regarding this agreement or recent negotiations.
Before I turn the call over to Dan I'd like to discuss our third quarter results I'll give a high level overview.
Within our specialty segment infusion therapy is continue to perform very well, while the core specialty pharmacy business continues to be under pressure.
In the third quarter. In addition to the adverse impact of previously disclosed and continuing contract losses PBM performance was negatively impacted by a 4 million dollar litigation reserve and a 9 million dollar contractual rebate volume penalty, resulting in a $13 million negative.
Impact to adjusted EBITDA.
Total adjusted EBITDA for the quarter was 11.5 million.
In addition, diplomat recorded a further write down of PBM goodwill and intangibles of 156 million, leading to an EPS loss of $2.35. A disappointing result for the company overall.
As a result, we're lowering our 2019 guidance and now expect 2019 adjusted EBITDA to be in the range of 71 million to 74 million and GAAP loss per share to be in the range of negative $4, a 91 cents to a negative $4.81.
As of September Thirtyth, 2019, we've paid down 75 million and debt compared to December 30, Onest 2018.
We also remain in compliance with our debt covenants.
However, as we take into account lower than expected third quarter results are reduced 2019 outlook and continued industry headwinds. It is possible we may be in violation of covenants for the period ending December 30, Onest 2019 absent the successful execution.
Of mitigating strategies.
Mitigating strategies could include an additional amendment to our credit facility or further progress on initiatives being considered as part of the strategic alternatives process.
And we'll provide more detail on this momentarily.
We remain focused on executing our strategy to drive more volumes to diplomat.
Improve operational efficiency and improve our clinical value proposition.
We have observed some increased traction in terms of new business awards as the market is recognizing diplomats clinical value proposition and specialty pharmacy and specialty benefits solutions in the PBM.
And as noted infusion therapies continued to expand pay our network access and performed very strong financially.
I'll now turn the call over to Dan for a review of our financial performance in the quarter.
Dan.
Thank you, Brian and good morning, everyone.
This morning, we reported 1.3 billion in revenue for the third quarter down 5% year over year, well adjusted EBITDA was 11.5 million down 73% versus the prior year.
Adjusted EBITDA was negatively impacted by two discrete items totaling 13 million in our PBM business, which I will discuss in more detail momentarily.
Looking at revenue at the segment level in the third quarter, our specialty segment generated revenue of 1.2 billion up 3% from the prior year segment revenue benefited from strong growth in infusion therapies and brand price inflation, partially offset by payer reimbursement compression and the increase in volume.
Some of newer generics.
Infusion sales grew 17% year over year, driven by higher volumes and the small infusion acquisition, we made in the third quarter.
Excluding the acquisition infusion revenue would have still increased by low double digits compared to the prior year.
On colleges sales were up more than 2% year over year as the benefit of brand inflation was partially offset by reimbursement compression.
Prescription volume declines and higher generic utilization.
Cast the Rx recorded 82 million in revenue down 87 million from the prior year, reflecting the impact of previously disclosed and continued lost business.
In addition revenue in the third quarter was negatively impacted by a $4 million litigation reserve.
Taking a look at gross profit and margin total company gross profit was 63 million down 32% year over year and gross margin was 4.9% down 190 basis points compared to the prior year.
Gross profit in the specialty segment was 65 billion down 4% year over year and gross margin in the segment was down 30 basis points to 5.2%.
Which was similar to the Q2 margin.
Reimbursement pressure in our core specialty pharmacy business continues to drive specialty segment gross profit and margin performance downward despite the contribution from higher margin generics.
Specialty prescription volumes increased 3% year over year to 237000.
Infusion therapy volumes grew while most other therapeutic area of volumes were down year over year.
Gross profit per script in the third quarter of 2019 was $268 per script compared to $287 per script in the prior year period.
Cast the Rx recorded a loss of 1 million at the gross profit level in the quarter.
The loss was driven primarily by two discrete items in the third quarter, one of which was the previously mentioned 4 million dollar litigation reserve that negatively impacted revenue and therefore gross margin.
The second item relates to a contractual volume rebate penalty because we were unable to meet minimum membership level requirements given the amount of business loss this year.
While we have been in negotiations with the third party to eliminate this penalty and extend our agreement beyond 2019, we were not able to agree to new terms during the third quarter.
This resulted in a discrete $9 million rebid penalty for the first nine months of 29 team, which impacted cost of sales in the third quarter.
Addition, a further $3 million penalty is expected to be recorded in the fourth quarter of 2019 in the form of reduced rebates reduced rates on rebates associated with this agreement.
These impacts are related only to 2019.
Effective January Onest 2020, we expect to implement a rebate agreement with a new third party at terms more favorable than the current pre penalty terms.
Total company as DNA was down 10% year over year to 75 million driven by lower amortization expense, primarily resulting from the prior and current year impairments of intangibles as well as lower share based compensation costs.
We continue to make progress on our operational efficiency initiatives.
We are moving forward with facilities consolidation, including closing down certain pharmacy locations. We are also consolidating functions between major locations and moving worked the most cost effective location.
We also continue to progress with the implementation of script med, which is expected to be largely complete by year end with some spillover into the beginning of the year.
We have generated cost savings related to lower headcount, but these cost savings are being reinvested in sales teams and also had been offset by increased utilization of outside nursing labor to support the continued growth in infused product administration and increased facility costs from opening the new facility in Chandler, Arizona.
As of the end of the third quarter and on a year to date basis, we have achieved approximately 6 million in savings related to cost cutting initiatives initiatives.
We still expect to achieve seven to 8 million in savings for the full year exiting the year $10 million run rate.
Taken together, our consolidated adjusted EBITDA for the third quarter was 11.5 million down 73% from the prior year period.
The third quarter includes an additional noncash impairment of goodwill and intangibles totaling $156 million associated with our PBM business due to a lower forecast rate of new wins lower than expected rate of renewals and the reduction in anticipated rebate value in 2019 all.
Of which have contributed to a further reduced outlook for future PBM financial poor performance.
Net loss in the quarter was negative 177 million or.
Two dollar and 35 cents per share compared to net income of 169000 or zero per share in the third quarter of 2018.
Turning to the balance sheet, our working capital improved by 79 million compared to December 30, Onest 2018, driven primarily by an improvement in payables and inventories. We will continue to look at ways to improve our working capital position.
At September Thirtyth, 2019, net debt, including contingent consideration amounted to 563 million and our total net leverage ratio was 5.7 X. In addition, our interest coverage ratio was 2.66, we paid down debt net debt by a total of 75 million compared to the end.
Of last year, mainly on our revolving credit facility.
Moving onto our outlook.
We are adjusting our 2019 guidance figures primarily to reflects the impact of the litigation reserve and the rebate related item for the PBM business previously discussed and the third quarter impairments of PBM goodwill and intangible assets.
We are increasing our consolidated revenue expectation and narrowing the range to between 4.9 billion and $5.1 billion versus the prior expectation between 4.7 and 5.0 billion.
Specialty segment revenue is now expected to be between 4.6 billion and 4.7 billion versus our prior expectation between 4.4 billion and 4.6 billion.
The revision to specialty segment revenue expectations, mainly reflects year to date performance and the contribution of the small infusion acquisition completed in July .
No not expected to have a material impact on 2019 revenues and volumes updated guidance does include the expected impact of the previously mentioned large payer network participation loss effective November 28 2019.
We continue to expect PBM segment revenue of 325 to 375 million.
We now expect adjusted EBITDA in the range of 71 million to 74 million versus the prior $87 million to $93 million range. The change is primarily driven by the rebid penalty and litigation reserve totaling 13 million in the PBM business recorded in the third quarter as well as the pro.
Obviously indicated 3 million impact of the rebid penalty expected in the fourth quarter of 2019.
GAAP net loss expectations for the full year are now between negative 368 million, a negative 361 million, which translates into a GAAP EPS loss range of negative $4 in 91 cents to negative $4.81.
We now expect an income tax benefit of approximately $1 million.
Capex is still expected to be approximately 21 million to $23 million for the year and we continue to expect 2019 operating cash flow between 60 and 80 million.
As previously indicated any further debt paydown will be dependent on additional working capital improvement and the potential sale of assets.
We are not going to provide 2020 guidance on todays call. However, I'd like to provide some additional insight into some factors that are expected to impact our 2020 outlook.
First as Brian previously indicated as of November 20 at 29 team, we will no longer be able to filled prescriptions for patients whose health plans are covered under one of our largest payers group of specialty pharmacy and retail networks.
For the full year 2019, the associated large pair business is expected to generate approximately 700 million in revenue and be approximately breakeven at the operating income level, including the associated corporate costs.
Related prescription volume is approximately 100000 scripts per year.
While the associated revenue revenue and volume losses, not expected to have a material impact in 2019 results. It is expected to significantly impact 2020 revenue and prescription volumes.
We do not expect the loss of this business to materially impact the company's profitability in 2020 based on our plan to reduce related costs to service despair.
Second you'll recall that in the third quarter, we amended our credit facility to make these covenants, which consist of a net leverage ratio and interest coverage ratio less restrictive for the third quarter 2019 through December 30, Onest 2020.
As of the end of the third quarter 2019, we are in compliance with these amended covenants.
While we originally expected to remain in compliance with the amended covenants. We have determined given recent operating results and deteriorated forecasts, but the company may be in violation of covenants for the period ending December 30, Onest 2019.
If we violate our covenants the lenders would have the right to prohibit borrowings under our revolving line of credit.
Celebrate the payment of our outstanding debt or for close on our assets.
As of September Thirtyth 29 team, we have approximately 8 million in cash on the balance sheet and $95 million available under our revolving credit facility.
As previously indicated we still expect to generate 60 to 80 million in operating cash flow. In 2019, we also expect to generate positive adjusted EBITDA and operating cash flow in 2020.
As such we expect to generate enough cash flow to make our debt service payments on time and as required by our credit agreement.
We have a variety of initiatives that we plan to pursue in order to eliminate the potential that we will fall out of compliance with these covenants. We are working with our administrative agent to initiate the process of amending our credit agreements in order to remain in compliance with our debt covenants. We're doing this while we are actively pursuing cost cutting initiatives.
As well as our strategic alternatives process.
However, our emitters mitigation plans are relying on third parties and are therefore beyond our control. Accordingly, we are identifying today in our 10-Q that these conditions raise substantial doubt about the company's ability to continue as a going concern as accounting rules do not permit us to conclude that it is probable that end.
Of our Mitigations plans will be effectively implemented prior to any such covenant violation.
It is important to note that absent a transaction the company would need to further rightsize. The business. We would expect to provide further detail on any restructuring anish initiatives at a later time.
All of US on the leadership team at diplomat are taking these issues very seriously. We are diligently looking at all options available to us in order to limit the negative impact on our ability to operate as a going concern as well as to ensure a successful outcome going forward for our company our employees and our shareholders.
Thank you again for your time I'll now turn the call back over to Brian .
Thank you Dan.
Even as we are pursuing stirred these strategic alternatives process, we remain focused on executing our strategy I.
I believe in diplomat and the high quality care that we bring to our patients.
Although we are facing and we'll continue to face a number of challenges as Dan just outlined we are thoroughly looking at all of our options.
Sure you that the board management and I remain committed to doing what is in the best interest of diplomats shareholders employees and all of our other stakeholders. Thank you for your time and we look forward to your questions.
Thank you Brian will now move onto Q any I would ask everyone to please limit your questions to one and a follow up to that all participants may be able to ask a question. Lisa can you. Please provide the instruction.
Thank you at this time, if you would like to ask a question Press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound with key.
As for just a moment to compile acuity roster.
And our first question today comes from the line of Lisa Gill from JP Morgan Your line is open.
Hi, Thanks, very much good morning.
Ryan I know you don't want to comment about the client loss, but I'm. Just curious you talked about the ability to still serve some of those members in patients is that.
I think about that is being the part D business, where there isn't any willing provider component to it.
Good morning, Lisa it's it's it probably includes that but really what we're referring to is for this specific payer.
For lack of that better term there are sub networks.
Where we can still participate in those networks and.
For this payer.
We also have direct contracts with some of their clients and we'll be able to continue to participate in those networks.
To your point I'd love to be able to provide more detail around this but again, we're precluded from doing that based on our contract with this pair.
Okay, and then just my follow up with the on the $4 million Litigation Reserve can you just give us more color around that four.
Yes, Hi, Lisa this is Dan.
It's related to a former client PBM client.
Where we have a dispute over the sharing of rebates.
So Lisa we've made the decision we obviously we try to.
Negotiate to a resolution with the client and unfortunately, we were unsuccessful in doing that.
We've made the decision to bring it into arbitration and we feel like we've got a really strong case around it.
Okay, great. Thank you.
Our next question comes from the line of Ricky Goldwasser from Morgan Stanley . Your line is open.
Yes, hi, good morning, So I understand thank you don't expect material impact on profitability front and also to contract, but if we think about it.
10% of yours scripts with this contract about 10% next year. So can you talk a little bit about.
How should we think about implication to your supply chain purchasing cost.
Thank you the confidence that next year.
You won't see.
Increased rate of fees from your channel partners. This does.
You just renewed contracts and how should we be.
Thinking about.
The other indications outside just servicing to specific contract.
Yes. Thanks for the question Ricky This is Dan.
We have looked at this we are confident we will still be complying with our purchasing agreement next year in terms of volume commitments.
We don't anticipate an impact from.
The the loss of this payer to our purchasing.
Okay and in when we think about.
It seems to be from December 2020 renewals are there any other.
Large contract renewal as did our IP doing 2020 or 2021 could should we be aware off.
For the most part we've renewed all of the material contracts.
Okay. Thank you.
And our next question comes from the line of Charles Rhyee from Cowen Your line is open.
Yes, thanks for taking the question.
Right if I just ask real quickly on the the contract loss for next year does that.
When you talk about the impact for next year does that include any potential volume libbey penalties that as well.
I was the last part of your your question Charles.
Well you talked about sort of this year, obviously, we're having an impact with.
Rebate penalty does that is there any risk for rebate penalty next year with this country.
As you think about next year sort of what what does that incorporate in terms of.
Overall, we did levels to me volumes.
Got it okay, yeah. Thanks Genx for the question.
Relative to the the rebate penalty again that was.
Yes contained to 2019 as we.
Look into 2020.
We're expecting to execute and implement a new agreement, which would actually create more value than the pre penalty value under the under the previous agreement.
And is that Charles just to add that the new new contract also has more favorable terms not just in terms of.
Rebid value, but in terms of minimum commitments and so on so we are believed we will not have any issues next year.
Okay and as follow up you know you talked about your in three more limited distribution networks, which certain specialty drugs.
If I look over the past you've talked about your ability within limited networks to take gains or outsized market share. It's are particularly oncology and I'm. Just curious you know how are you seeing what your market share stands in a lot is limited network trust given sort of shifts we've seen more broadly.
Yes.
Obviously these vertically integrated competitors that are kind of pushing share into their own networks. How does your market share stand compared to maybe a few years back in these drugs, particularly.
Well, we we continue to have very strong share within oncology and I think.
Given this.
New relationship that we are announcing this morning relative to the new PBM relationship where we'll be managing.
The oncology care component.
That I think underscores our competitive position as it relates to oncology, but that is our strongest franchise, we continue to grow LDS and that franchise.
And our our field organization has been successful obviously in this situation with the new value value based model, but in discussions with other.
Health plans and Pbms as well so I think we'll maintain a very strong competitive position.
Despite the broader macro.
Competitive pressures.
And maybe just im sorry, one quick follow up could you envision yourself being really just an oncology only player. I mean is there do you think market can support that kind of the.
Type of service and the end market.
I think it is feasible we have certainly in our strategic discussions are evaluation of.
Each of the the key therapeutic categories that we have big franchises and Weve evaluated whether we should focus on oncology care given the strong portfolio that we've got there.
I would say a market differentiating clinical model. So you could envision in the future us becoming.
Very focused on that and continuing to be.
Very strong and continued growth in that area.
Ultimately you obviously in this new PBM relationship.
It is a value based model and to the degree that we can.
Demonstrate our success here with the value based approach.
Obviously, I think that that will create a nice growth opportunity for us in that segment, meaning the oncology segment.
Great. Thank you.
Our next question comes from the line of Courtney Owens from William Blair. Your line is open.
Hi, good morning.
So I guess clarifying question, so with the lower.
Gross profit than expected in the PBM business was that.
Solely the result, the result of that litigation and rebate charge.
Over the other thing kind of in that that caused.
Hi, Good morning. This is Dan no it was primarily.
Those two items that.
The decrease.
Okay got it and then just a follow up to the PBM business broadly now I guess, when you're kind of looking out outside of the I guess the business that you called out active routing that you expect to continue to erode in 2020 outside.
I guess that business concentrated.
A few specific contract.
More broad based.
Well, it's actually.
Somewhat concentrate.
As.
We think about the PBM business.
We are being impacted by larger M&A consolidation.
So you've heard us talk about our Ta relationships, we've had very strong relationships with a number of ta is that.
Drive our PBM business and you just as one example, one of those key partnerships was just acquired by.
One of the larger vertically integrated players. So we as a result, we lose that Ta.
Volume and continued growth.
Got it thanks. Thank you.
Sure.
And again, if you'd like to ask a question that star one on your telephone keypad. Our next question comes from the line of Jason Adler from JP Morgan Your line is open.
Hey, Thanks for taking the question.
One more question about the contracts.
Going to lapse the end of the month.
As we think about the specialty infusion business is there any direct impacts on on any of your contracts. There any volume that you expect to see on that side.
You had no we do not expect to see any impact on our infusion business.
Okay, and then maybe just follow up there I don't know of if you're able to you, but can you give any any color in terms of.
At the contribution.
Margin as their revenue EBITDA anything like that about the this that segment specifically.
No, we're not able to comment on the infusion business separately, so part of the the specialty segment.
Okay. Thank you.
We have no further questions in queue I'll turn the call back to our presenters for closing remarks.
Well. Thank you. Thank you very much for your time today will be available after the call for any further questions were available all day really appreciate you joining us today. Thank you.
Thank you for participating this concludes today's conference call you may now disconnect.