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Dsp investor deck may 2017 051017
- 1. Diplomat.is/more I’m Jay. I havechronic lymphocytic leukemia. I’m a retired submarine commander, a father, a husband, an avid woodcarver. I bike 20 miles a day. I know the Diplomat Difference. Copyright © 2015 by Diplomat Pharmacy Inc. Diplomat is a registered trademark of Diplomat Pharmacy Inc. All rights reserved. May 2017
- 2. Confidential 1 This presentation containsforward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance, and include Diplomat’s expectations regarding revenues, net income (loss) attributable to Diplomat, Adjusted EBITDA, EPS, Adjusted EPS, market share, the performance of acquisitions and growth strategies. The forward-looking statements contained in this press release are based on management's good-faith belief and reasonable judgment based on current information, and these statements are qualified by important risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those forecasted or indicated by such forward-looking statements. These risks and uncertainties include: our ability to adapt to changes or trends within the specialty pharmacy industry; significant and increasing pricing pressure from third-party payors; the amount of direct and indirect remuneration fees, as well as the timing of assessing such fees and the non-transparent methodology used to calculate such fees; the outcome of material legal proceedings related to direct and indirect remuneration fees; our relationships with key pharmaceutical manufacturers; bad publicity about, or market withdrawal of, specialty drugs we dispense; a significant increase in competition from a variety of companies in the health care industry; our ability to expand the number of specialty drugs we dispense and related services; maintaining existing patients; revenue concentration of the top specialty drugs we dispense; our ability to maintain relationships with a specified wholesaler and two pharmaceutical manufacturers; increasing consolidation in the healthcare industry; managing our growth effectively; limited experience with acquisitions and our ability to recognize the expected benefits therefrom on a timely basis or at all; managing recent turnover among key employees; potential disruption to our workforce and operations due to recent cost savings and restructuring initiatives; and the additional factors set forth in "Risk Factors" in Diplomat’s Annual Report on Form 10-K for the year ended December 31, 2016 and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Except as may be required by any applicable laws, Diplomat assumes no obligation to publicly update such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether as a result of new information, future developments, or otherwise. In addition to U.S. GAAP financials, this presentation includes certain non-GAAP financial measures. These historical and forward-looking non-GAAP measures are in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP measures is included in the appendix to this presentation. Diplomat is a registered trademark of Diplomat Pharmacy, Inc. This presentation also contains additional trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies’ trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Important note
- 3. Confidential Investment Highlights • SpecialtyPharmacy industry is a growth market • Drug development pipeline remains robust − Oncology is the largest and fastest growing segment of the Diplomat portfolio • Limited distribution model growing in importance • Diplomat is unique within the specialty pharmacy industry • Taking market share as the largest independent specialty pharmacy • Access to ~100 limited distribution drugs • Multiple growth opportunities • Organic • Strategic complimentary acquisitions • Strong financial performance • Five-year revenue CAGR of 42% & EBITDA CAGR of 48% • Diversified revenue and profitability streams • Modest balance sheet leverage – ample dry powder • Experienced senior management team • CEO founded Diplomat 40+ years ago • Leadership team has broad ranging experience across the industry 2 (1) CAGR based on 2011-2016 results (1)
- 4. Confidential Others 29% CVS Health/ Omnicare 28% Express Scripts 19% Walgreens 10% OptumRX 7% 4% Prime Therapeutics 3% $58 $167 $271 $377 $578 $772 $1,127 $1,515 $2,215 $3,367 $4,410 $4,500 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 3 Diplomat at a glance Founded: 1975; Headquarters: Flint, MI Employees: ~1,800 2017E revenue: ~$4.5 billion Diversified base of marquee partners Corporate Overview 2016 Market share ($115 billion total market size) (1) Exceptional above market revenue growth Scaled business: National footprint ($ in millions) Source: (1) 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers (2) Based on mid-point of management’s estimate range for FY 2017 (2) Pharmacy Locations Alabama Arizona California Connecticut Florida Illinois Iowa Kansas Maryland Massachusetts Michigan Minnesota Nebraska New York North Carolina Ohio Pennsylvania Texas Wisconsin (2)
- 5. Confidential 4 Diplomat’s revenue andprofits come from multiple industry sectors Complementary Opportunities Minimize Payor/PBM Risk, AND Mitigate Risk of Inflation Abatement Other Services ▪ EnvoyHealth o HUB o Noncommercial Pharmacy o Hospital Specialty Network o 340B Contract Pharmacy o Formulary and Rebate Management o Clinical Research Specialty Infusion ▪ Subset of specialty pharmacy o Many similar characteristics (chronic, high cost, etc.) o Few differentiators (nursing component, more medical billing) ▪ Higher margin business ▪ Unique/separate payor networks ▪ Payor-driven site of care transition opportunities Core Specialty Pharmacy (orals and self-injectables) ▪ Oncology dominance ▪ Limited distribution expertise ▪ Outpacing industry revenue growth organically o Mix shift driving revenue and profit growth o Price inflation a very small component of revenue ▪ Serving open, preferred, narrow, and exclusive payor networks ▪ Increase focus on direct contracts with payors Pharmaceutical Manufacturer Services ▪ Discounts, rebates, services, data fees ▪ High margin ▪ Not dependent on payers or price inflation ▪ Making progress, but significant upside opportunity remains Revenue Source: Payers Revenue Source: Pharma & Others Financial Impact: Higher Revenue, Lower Margin Financial Impact: Lower Revenue, Higher Margin
- 6. Confidential Growing list ofservices across the specialty pharmacy eco-system EnvoyHealth Services 5 Pharma Partners Medical Information Hub Services PAP / Wholesale / 3PL Technology Solutions Medical Management Formulary & Rebate Management Specialty Pharmacy Services Customer Care Inside Sales The continued growth and expansion of small biotech companies creates a dramatic and growing marketplace Clinical Research Educational Services TM
- 7. Confidential WRB fully enhancesthe capabilities of EnvoyHealth Services 6 Medical Information •Educational support for patients and providers through pharmacists, nurses, and non- clinical staff Customer Care •Care and remote patient monitoring for new patients, including support for product inquiries, complaints, and troubleshooting Reimbursement and Access •Traditional reimbursement services, including benefits verification; PA and appeals; and data aggregation and reporting Inside Sales •Lead generation, appointment scheduling, and field collaboration WRB Operates in Four Segments Diplomat acquired WRB Communications in May 2017
- 8. Confidential Diplomat controls thejourney of a specialty patient 7 Patient Physician Payor Patient Patient visits physician Payor approves script Diplomat monitors adherence and collects data for manufacturers Diplomat dispenses drug Diplomat provides: Benefit verification Prior authorization Clinical intervention Physician writes script Patient receives drugs
- 9. Confidential 8 Specialty spend underpharmacy benefit to grow ~5x(2) Specialty pharmacy industry continues to show exceptional growth Source: (1) 2015 Profile Biopharmaceutical Research Industry – April 2015 & 2016 Profile Biopharmaceutical Research Industry 2016 – April 2016 (2) The 2017 Economic Report on Retail, Mail, and Specialty Pharmacies – February 2017 (3) Barclays Research, EvaluatePharma – January 2017 72% 42% 58% Diplomat 2% $50 billion $240 billion 2011A 2021E Rapid growth in the oncology market(3) $46 billion 2016A 2021E $86 billion Drugs in pipeline by therapeutic class(1) 208 401 510 563 1,123 1,261 1,308 1,919 159 475 511 599 1,120 1,256 1,329 1,813 HIV/AIDS Diabetes Mental health disorders Cardiovascular disorders Immunological disorders Infectious diseases Neurological disorders Oncology 2015 2016 Diplomat 5%
- 10. Confidential Limited distribution acentral and growing theme in specialty 9 Benefits to DiplomatBenefits to biotech / pharma Completely eliminate or reduce reliance on wholesaler Real-time clinical data Commercialization assistance Improves appropriate utilization Barrier to entry Deeper, and earlier, partnerships with pharma / biotech Increased value proposition to payors Market share opportunity Portfolio of ~100 limited distribution drugs, comprising approximately 53% of revenue in 2016, and well positioned for disproportionate growth from future drug approvals Recent unique limited panels…Diplomat exclusive or semi-exclusive What is limited distribution? Targeted channel strategy Provides certain specialty pharmacies with exclusive or preferred dispensing rights to certain drugs Fast-growing trend (2013)(2012) (2015) Traditional: Limited: Manufacturer Multiple Wholesalers 65,000 Pharmacies Patient Manufacturer One/few pharmacies Patient DPLO EXCLUSIVE DPLO LARGEST OF 4 DPLO 1 of 4 (2016) DPLO 1 of 4 DPLO LARGEST OF 2 (2017) DPLO LARGEST OF 3 (2017)
- 11. Confidential 10 Unique competitive position LARGEPBM / RETAIL PHARMACY SMALLER SPECIALTY PHARMACIES Diversification distracts from specialty pharmacy Less flexible / less nimble Limited scale Most focused on one or a few disease states Fragmented market Consolidation opportunity for Diplomat Singularly focused on specialty High-touch model Flexible and nimble Entrepreneurial culture National reach Scalable infrastructure Acquired Feb 2016 Acquired 2013-2017 Acquired Sept 2016
- 12. Confidential Growth Strategy • Growour oncology and infusion businesses with increased access to drugs and broader geographic reach • Enhance our pharma service offering and HUB services • Expansion of direct contracts with payors • Contract with manufacturer partners to insure the highest service levels for patients, physicians, and health plans • Continue to selectively pursue strategic M&A opportunities 11
- 13. Confidential 12 Future M&A criteria Whenconsidering acquisitions, we look for targets that will potentially benefit Diplomat in one or more of the following ways: Expand into new therapeutic areas and/or geographic regions Enhance clinical capabilities to improve competitive advantage Access to Limited Distribution drugs Access to new/expanded specialty prescriber base Accelerate our higher margin business opportunities Bring new services and technologies under our umbrella Makes DPLO better, not just bigger Acquisition Date Accelerated Current Capabilities New Therapy Expanded Geography Expanded Payors Improved Manufacturer Relationships New Technology Expanded Service Offering Q4 2013 ✓ ✓ ✓ Q2 2014 ✓ ✓ ✓ ✓ ✓ Q2 2015 ✓ ✓ ✓ ✓ ✓ ✓ Q2 2015 ✓ ✓ ✓ ✓ Q2 2016 ✓ ✓ ✓ ✓ Q1 2017 ✓ ✓ ✓ Q2 2017 ✓ ✓ ✓ ✓
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- 15. Confidential Traditional Drug SpecialtyDrug A Specialty Drug B Specialty Drug C Specialty Drug B (10% price incr.) Revenue $100 $3,700 $10,000 $27,000 $11,000 Gross Profit ($) $10 $185 $400 $810 $440 Gross Margin (%) 10% 5% 4% 3% 4% 14 Revenue Payors Distributors / pharmaceutical manufacturers Patient Diplomat COGS Physical drug movement $ flows How we make money and grow profitability(Illustrative example) How we make money Drug mix and positive pricing trends are tremendous profit tailwinds for Diplomat Inflation Impact Diplomat mix shift movement over time Our core focus $383 Diplomat’s 1Q’17 Average* (AWP – Y%) (WAC – X%) Note AWP = WAC x 1.20 (1) (1) Example: AWP $11,905 - 16% = $10,000 Revenue WAC $9,921 - 3% = $9,600 COGS $400 Gross Profit 4% Gross Margin
- 16. Confidential Net Income Gross margin 15 First Quarter2017 Results (1) Based on dispensed scripts only. (2) Gross profit / net sales (i.e., based on dispensed and serviced scripts). (3) 1Q16 includes a one-timer favorable $9.1 million change in fair value of contingent consideration associated with acquisitions in the quarter Revenue Adjusted EBITDA margin 2.9% Adjusted EBITDA Gross Profit /Script ($ in millions) ($ in millions) 2.5% 7.9%8.0% (1) (2) (3) ($ in millions) $996 $1,079 1Q16A 1Q17A $29.0 $26.8 1Q16A 1Q17A $15.4 $4.4 1Q16A 1Q17A $332 $383 1Q16A 1Q17A
- 17. Confidential $29 $27 1Q'16 1Q'17 $996$1,079 1Q'16 1Q'17 $8 $15 $11 $19 $35 $95 $107 2010A 2011A 2012A 2013A 2014A 2015A 2016A Strong long-term financial performance… Adjusted EBITDA 2010 – First Three Months of 2017 Total Revenue 2010 – First Three Months of 2017 % margin % growth ($ in millions) % growth ($ in millions) Pre-IPO infrastructure investments Volume, price and mix all driving superior revenue growth Natural operating leverage and acquisitions driving EBITDA growth 53% 27% Note: Historical financials are not pro forma for any acquisitions. $578 $772 $1,127 $1,515 $2,215 $3,367 $4,410 2010A 2011A 2012A 2013A 2014A 2015A 2016A 34% 46% 34% 46% 52% 31% 96% (28%) 75% 85% 170% 13% 1.3% 2.0% 1.0% 1.3% 1.6% 2.8% 2.4% 16 2.9% 2.5%
- 18. Confidential $332 $383 1Q'16 1Q'17 17 … withcontinued growth in profitability Gross Profit / Script (1) 2010 – First Three Months of 2017 Note: Financials are not pro forma for acquisitions. (1) Based on dispensed scripts only. (2) Gross profit / net sales (i.e., based on dispensed and serviced scripts). % growth 12% 20%31% 4% % margin 7.1% 5.9%7.3% 6.2% Several factors drive growth in our Gross Profit / Script(1): Continued mix shift towards higher price, higher profit drugs (including acquisitions) Favorable pricing trends (2) Gross margin expansion opportunities: Acquisitions with higher gross margins (%) Pharma services opportunities Specialty generics and biosimilars (longer term) 44% 6.3% 68% 7.8% 16% 7.4% $71 $93 $97 $116 $167 $280 $325 2010A 2011A 2012A 2013A 2014A 2015A 2016A 8.0% 7.9%
- 19. Confidential 18 Components of QuarterlyRevenue Growth ($ in millions) QuarterlyRevenue • Price inflation comprised 7% of revenue in 1Q17 ➢ Diplomat’s outlook assumes 1Q will be the period most impacted by manufacturer price increases ➢ Full year outlook assumes inflation will be moderate • Chronic disease expertise provides an annuity-like revenue base • Limited distribution leadership and rich drug pipeline driving revenue growth from new drugs • Management decision not to renew unfavorable contracts causing some year-over-year impact on existing drug growth
- 20. Confidential 19 Annual Revenue byDrug Year Launch $1.5B $2.2B $3.3B 5% 18% 3% 16% 95% $1.4B 77% $1.7B 63% $2.1B 21% 2% $4.4B 18% 13% 8% 4% 57% $2.7B • Drugs across all launch years continue to grow over time • 2012 and prior drugs have grown 93% from 2013 to 2016 • Pipeline remains an important element of near-term and long- term growth; existing drugs will also contribute meaningfully
- 21. Confidential 20 Balance Sheet /Cash Flow snapshot ($ in millions) (1) Includes $4mm in cash-based contingent consideration (2) ProForma to include 12 months of TNH, Affinity, and Comfort Infusion 2017 2016 Cash $17 $8 Total Debt $144 $150 Shareholders’ equity $622 $614 Net Debt/ProForma TTM EBITDA(2) ~1.4x ~1.0x Cash Flow From Operations (period ended) $44 $31 December 31,March 31, (1)
- 22. Confidential Investment Highlights • SpecialtyPharmacy industry is a growth market • Drug development pipeline remains robust − Oncology is the largest and fastest growing segment of the Diplomat portfolio • Limited distribution model growing in importance • Diplomat is unique within the specialty pharmacy industry • Taking market share as the largest independent specialty pharmacy • Access to ~100 limited distribution drugs • Multiple growth opportunities • Organic • Strategic complimentary acquisitions • Strong financial performance • Five-year revenue CAGR of 42% & EBITDA CAGR of 48% • Diversified revenue and profitability streams • Modest balance sheet leverage – ample dry powder • Experienced senior management team • CEO founded Diplomat 40+ years ago • Leadership team has broad ranging experience across the industry 21 (1) CAGR based on 2011-2016 results (1)
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- 24. Confidential 23 Revenue by TherapeuticClass ($ in thousands) 2016 % of Total 2015 2014 2013 Oncology 2,102,130$ 48% 1,432,091$ 1,068,751$ 736,987$ Immunology 644,173$ 15% 510,708$ 438,145$ 378,685$ Hepatitis 583,751$ 13% 520,771$ <10% <10% Specialty Infusion 505,240$ 11% 374,884$ <10% <10% Multiple Sclerosis <10% N/A <10% 226,805$ 169,470$ Other (none greater than 10% in the period) 575,094$ 13% 528,177$ 481,255$ 229,997$ 4,410,388$ 3,366,631$ 2,214,956$ 1,515,139$ Limited distribution drug % of total 53% 45% 44% 40%
- 25. Confidential Acquired Company ConsiderationRationale May 8, 2017 • $30M gross purchase price • $24.5M cash, $4.5M stock, $1M earnout • ~13.6x CY 2016 EBITDA • Significantly expands Diplomat’s HUB & Pharma services capabilities • Robust growth potential with meaningful sales synergies in existing accounts and pipeline • Allows Diplomat to serve pharma partners earlier in the drug lifecycle February 1, 2017 • $20M gross purchase price • $16M cash, $4M earn-out • ~6.7x CY 2016 EBITDA • Hemophilia focused specialty pharmacy and infusion services company • Strengthens Diplomat’s footprint in key geographic markets (New York and Houston) • Revenue synergy opportunities June 1, 2016 • $75M gross purchase price • $65M cash, $10M stock • ~8.0x CY 2015 EBITDA • Oncology focused specialty pharmacy; 22 LDs • Strengthens Diplomat’s footprint in key geographic markets (California and Texas) • Revenue synergy opportunities • Promising proprietary technology; some components of TNH’s portal can be leveraged across Diplomat’s platform June 19, 2015 • $87M gross purchase price* • $77M cash*, $10M stock • ~4.2x CY 2014 EBITDA • Hep C dominance in Mid Atlantic • Proprietary technology (HealthTrac) with applicability across Diplomat’s Hep C platform • Proven management team • 50 year old company, run by 2nd generation pharmacist • No marketed sales process April 1, 2015 • $272M adjusted purchase price* (~$50M tax benefit) • $217M cash*, $105M stock • ~11.8x CY 2014 EBITDA • One year earnout of 1.35M shares (all stock) • Adds significant scale to specialty infusion business • Provides ability to compete for national contracts • Increases exposure to higher margin businesses • Addition of new disease states, therapeutic categories & 5 new LD’s Recent Acquisitions 24 * Value includes closing working capital adjustments
- 26. Confidential Calendar year endingDecember 31, ($ in millions) 1Q'17A 1Q'16A 2016A 2015A 2014A 2013A 2012A 2011A 2010A Net income (loss) attributable to Diplomat $4.4 $15.4 $28.3 $25.8 $4.8 ($26.1) ($2.6) $9.2 ($7.8) Depreciation & Amortization $15.4 $10.1 $50.0 $30.8 $8.1 $3.9 $3.8 $3.1 $2.2 Interest Expense $2.0 $1.4 $6.6 $5.2 $2.5 $2.0 $1.1 $0.6 $0.5 Income tax expense $2.3 $8.5 $11.2 $16.2 $4.7 - - - - EBITDA $24.1 $35.5 $96.1 $78.1 $20.1 ($20.2) $2.3 $12.8 ($5.2) Share-based compensations expense $1.0 $1.5 $5.4 $4.0 $2.9 $0.9 $0.9 $1.4 $0.8 Change in fair value of redeemable common shares - - - - ($9.1) $34.3 $6.6 - $10.7 Termination of existing stock redemption agreement - - $0.2 - $4.8 - - - - Employer payroll taxes - option repurchases $0.1 $0.0 - $1.6 - - - - - Restructuring and impairment charges - - $7.1 $0.2 - $1.0 $0.4 $0.4 $1.5 Equity loss of non-consolidated entity - - - - $6.2 $1.1 $0.3 $0.1 - Severance and related fees $0.7 - $1.1 $0.5 $0.4 $0.2 $0.4 $0.7 - Merger and acquisition related expenses $0.5 ($8.4) ($6.6) $9.2 $7.2 $0.7 - - - Private company expenses - - - - $0.2 $0.2 - - - Tax credits and other - - - - $1.0 - ($0.1) ($0.6) - Other items $0.4 $0.4 $4.0 $1.5 $1.4 $0.7 $0.1 $0.2 ($0.0) Adjusted EBITDA $26.8 $29.0 $107.4 $95.0 $35.2 $19.0 $10.9 $15.1 $7.7 Reconciliation of Net income (loss) and Adjusted EBITDA 25 (1) (2) (3) (4) (5) (6) (7) (8) Note: Financials are not pro forma for acquisitions. Detailed footnotes on the following page.
- 27. Confidential Reconciliation of Netincome (loss) and Adjusted EBITDA 26 1) Share-based compensation expense relates to director and employee share-based awards. (2) Restructuring and impairment charges reflect decreases in the fair market value of non-core property and assets, or actual losses on disposal of such assets. The full year 2016 includes both the Q4 2016 impairment to write down our cost method investment in Physician Resource Management, LLC (“PRM”) and the Q3 2016 full impairment of the definite-lived intangible assets associated with Primrose Healthcare LLC. 2013 charges primarily relate to the $932 write-down of our former Swartz Creek, Michigan headquarters facility to its fair value, after we vacated it in favor of our present Flint, Michigan facility. 2012 charges primarily relate to our write-down of an externally purchased software package we no longer utilize, as well as sales of Company-owned vehicles. 2011 charges include expense associated with the closure of our former Cleveland, Ohio facility, the move of our Chicago, Illinois area facility, and sales of Company-owned vehicles. (3) During the fourth quarter of 2014, we reassessed the recoverability of our investment in our non-consolidated entity, Ageology. Based upon this assessment, we determined that a full impairment of $4,869 was warranted, primarily due to updated projections of continuing losses into the foreseeable future. The remaining amounts in 2014, 2013 and 2012 represents our share of losses recognized by Ageology, using the equity method of accounting. We first invested in Ageology, an anti-aging physician network dedicated to nutrition, fitness and hormones, in October 2011, in connection with its formation. (4) Employee severance and related fees primarily relates to severance for former management. (5) Fees and expenses directly related to merger and acquisition activities, and the impact of changes in the fair value of related contingent consideration liabilities. (6) Primarily includes philanthropic activities performed at the direction of our majority shareholder. (7) Represents (a) various tax credits received from the state of Michigan for facility improvement and employee hiring initiatives, (b) the one-time costs associated with converting from an S-Corporation to a C-Corporation, and (c) a 2014 charge of $1,825 related to non-income tax obligations. (8) 2016 includes a $2.4 million inventory loss due to a cooler failure. Other expense is predominantly option redemption payroll taxes and IT operating leases. Operating leases were initiated, in lieu of purchases or capital leases for a subset of our IT spend, for a short period of time in 2013 and 2014 for liquidity purposes. We have since discontinued the practice of leasing IT equipment. The cost of purchased IT equipment is reflected in depreciation and amortization.