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PMC - PharMerica Corporation at JPMorgan Healthcare Conference
EVENT DATE/TIME: JANUARY 16, 2014 / 10:00PM GMT
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JANUARY 16, 2014 / 10:00PM, PMC - PharMerica Corporation at JPMorgan Healthcare Conference
CORPORATE PARTICIPANTS
Greg Weishar PharMerica Corporation - CEO
PRESENTATION
Greg Weishar - PharMerica Corporation - CEO
I'm Greg Weishar, CEO of PharMerica; and Dave Froesel, our Executive Vice President of Finance, Chief Financial Officer, and Treasurer. What we
would like to do today is to share with you why we think PharMerica is poised for growth and that we are at inflection point.
We have strong tailwinds that will offset some of the challenges we face in 2014. For those who have -- might be new to our Company, we lost two
of our largest clients in successive years, so that has been a challenge. But if you look into 2015, and this is how we have been approaching our
challenge here, and we firmly are strongly convinced that we are on the right track, you will see that we do have a compelling story.
And that is what I would like to talk about today. So let's get started.
We operate in -- PharMerica operates in several pharmacy sectors. We serve the institutional, which is our long-term care; specialty home infusion;
specialty oncology; and also we operate in the hospital pharmacy segment.
The institutional pharmacy segment represents -- it's our core business; it represents 85% of revenues, with specialty making up the rest. I will
comment, though, last year at this time roughly 100% of our revenues were long-term care. So we'll do in 2014 roughly $300 million in non-core
revenues.
In the long-term care space, we serve primarily skilled nursing centers, but we also serve freestanding institutional care sites such as group homes,
resident homes for the handicapped, and so forth. Any time, anywhere, anyplace there is a group of people who need prescriptions delivered and
some form of management around those prescriptions, that would be a candidate for our services.
We operate nationally. We serve in over 45 states.
And we are only one of two national institutional pharmacy providers in the nation. We manage about 80 hospital pharmacies; we have 95
institutional pharmacies; and now we have 16 specialty pharmacies.
Everything we do is centered around three growth drivers. From an organic growth perspective, we seek to drive market share through superior
service and value.
In the core LTC book of business, it has inherent organic growth through drug price increases and utilization increases. Talk a little bit more about
that in a minute.
And we have made significant progress in driving down labor costs through efficient use of technology and also lowering COGS through strategic
purchasing. We are one of the largest purchasers of generics in the country, in the industry.
Last quarter we just began generic drugs generically -- excuse me, directly from the generic manufacturer. This is a low-cost way to procure generic
drugs and will drive margin improvement over the next several years. That program will step up our generic drug purchasing program over the
next several years to the point in 2016 when we can buy 100% of our generics direct.
Additionally on the purchasing front, we recently signed a strategic relationship with Innovatix. About 15% of our product is bought through a
GPO, and they are a GPO that serves our segment.
So we reduced pretty significantly the cost of service on that portion of drug spend as well. So from a purchasing standpoint, it is clearly a tailwind.
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JANUARY 16, 2014 / 10:00PM, PMC - PharMerica Corporation at JPMorgan Healthcare Conference
We have been actively pursuing acquisitions. Clearly over the past years we've made at least one a year. This year we've made several smaller ones,
including the Onco360.
But given the progress we've made on turning around the Company, with the majority of heavy lifting behind us, and the solid operating platform
in the core business, we are looking to increase the number of acquisitions that we've typically made in any given year. We recently are beefing
up our acquisition group; Chris Schaefer recently joined the Company as Senior VP of Corporate Development. Chris's job is to increase deal volume,
and we expect to close a number of small but highly accretive acquisitions in 2014.
As you know, acquisitions drive scale and market share in the core business. Typically we buy something that is 6 times, 8 times multiple and
post-synergy 2 to 4. So these are highly accretive, they're tuck-ins, and we are cranking up the activity around those types of acquisitions.
But we are also looking to expand our footprint in home infusion. The acquisition of Amerita and recently Onco360 positions us to participate in
higher industry growth rates.
The long-term care space is a great space, but it's fairly slow growth. The Amerita space grows around 10% to 12% to year, with margin growth
comparable. The specialty space is growing 20% to 25% a year, so you can see we are trying to crank up top-line growth.
Each one of those segments have their own margin. Margins in the long-term care space, 6% to 8%; margins in the home infusion roughly 10% to
12%; and then margins in the high-growth specialty, 3% to 5%.
So our strategy is to leverage the human capital, the physical capital, and the intellectual capital. And I will talk a little bit about how we do that.
For those of you who are not familiar with the demands of long-term care, this will give you a pretty good overview. Think of us as a pharmacy on
wheels.
We travel over 75 million miles delivering prescriptions yearly. Unique packaging; clinical services are also key differentiators as compared, if you
will, to retail or mail service pharmacy. We are really very much of a unique segment of pharmacy.
But at the end of the day we do dispense scripts. That is a fundamental component of our business, and we do it at a low cost and we do it at a
high level of service. And also a key component of our business is saving our clients money.
Here is how we go to market. We've worked hard over the past several years. We have built a product line.
For those of you who are maybe not familiar with the Company, we went public in 2007 by merging two companies together, and both of those
companies were reasonably broke. It has taken us a number of years, but we are running at a strong, high level of performance today.
We've worked hard to build out a product line, and these products and services have been focused around our value proposition, which is cost
containment, medication availability, and regulatory compliance: three key drivers of value for our long-term care customers.
We have also expanded what we would call core pharmacy service offerings. We have the traditional remote. We have on-site, which is on-site
dispensing, using dispensing technology that is both safe and cost-effective, that gives our clients the ability to provide emergency and first-starter
doses.
They are getting a lot of churn today as their business becomes more acute. The average length of stay has gone from 30-something days to 15
days. So they are getting a lot of new patients every day, and that helps them.
And then some folks are looking at full on-site pharmacy, basically the pharmacy doing a tremendous amount of the dispensing on-site. And we
have a product that does that as well. We have maybe only 1,000 beds doing that today, but that product is out there and is expected to grow.
That product line will grow over time.
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JANUARY 16, 2014 / 10:00PM, PMC - PharMerica Corporation at JPMorgan Healthcare Conference
So we are evolving to meet the needs of our customers which, again, are becoming more acute. We have the most comprehensive product line in
the industry, and that is why I think our retention trends and new sales trends are very positive.
Brand drug patent expirations also represent a tailwind in 2014 and 2015. Generic drugs drive client value and also gross margins. We anticipate
generic dispensing rates of about 89%; we are coming off 84%, 85% in 2013; and we will be up to 89% or so by late 2015.
Here is the pipeline. You can see that 2014 and 2015 represents a tremendous amount of drugs that have quite a bit of revenue around them.
Namenda is a big drug for us, Abilify, Procrit. Nexium, believe it or not, is a big drug; Copaxone.
So these are important drugs and those represent a nice tailwind for us in 2014 and 2015, particularly 2015 as the momentum from 2014 kicks in
and then we get more drugs coming off on 2015 as well.
So I mentioned earlier we benefit organically from an increase in drug prices. This is clearly a reflection of all of the changes in healthcare and how
the Obama administration basically permitted the pharma industry to maintain their pricing authority; but in exchange for that they had to give
up $100 billion over 10 years.
Well, this is what we're seeing. We're seeing price increases take off again.
75% of our revenues, 75% of our revenues are brand revenues. 85% roughly of the scripts, but 75% of the revenues are brand. So this is a nice
tailwind for us every year.
We anticipate this to increase and continue to -- we will continue to see these increases. And also we're starting to see an uptick, as you can tell in
the green there, in generic prices as the industry is becoming a little more stable. So both of these trends are good for us.
As I mentioned, we are in the hospital pharmacy management sector. We currently manage about 80 hospital pharmacies throughout the nation.
We provide the full spectrum of services and believe over time that the hospital segment will grow as hospitals seek to lower operating costs in
their pharmacy. So this is an area that we're looking to expand. Don't be surprised if we do something in this area in the next year or so, but
nevertheless we've got our eye out in this space.
As I mentioned earlier we entered the specialty home infusion market at the end of 2012 with the acquisition of Amerita. We like the home infusion
market. It gets us into a faster growing specialty segment.
Reasonably low cost of entry. We don't have to worry about disintermediation by PBMs and so forth. And that also gets us into the home, which
we think is a key strategic goal over the next three to five years for us.
So we're positioning PharMerica to serve those folks in the home. And our goal, again, is to leverage existing pharmacies and develop a national
specialty platform.
We've got 95 pharmacies. We have got roughly 10 specialty infusion pharmacies. And we want to see if we can move our pharmacy and become
a multidisciplinary pharmacy in each one of our long-term care pharmacies.
So we've got five markets targeted to see if that concept has any salt in it. And then, depending on proof of concept, we will rapidly expand Amerita
nationally, which is our goal, in addition to making acquisitions in that space.
Here is what we are piloting. There's two concepts here. As an example, just use Nashville.
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JANUARY 16, 2014 / 10:00PM, PMC - PharMerica Corporation at JPMorgan Healthcare Conference
Nashville, we have an Amerita pharmacy; Knoxville, we have a PMC pharmacy, a long-term care pharmacy. Knoxville pharmacy, the PharMerica
LTC pharmacy, will provide the first dose. We will take and put the expertise that we have in Nashville, carry that over into Knoxville. Now we are
in two markets.
That is an adjacent market. We believe we're already beginning to see some returns in Knoxville, as an example, as a result of that. They could not
serve Knoxville -- they being Amerita -- from Nashville, because first dose is too -- takes too long to get to the first dose.
Then there is a concept we have we call Amerita [Inside]. Ultimately PharMerica does IV and infusion services in every one of the pharmacies that
we operate today, but we only serve our LTC customers.
Now to be sure, the home infusion segment requires a little more expertise than what we have. So using Amerita's expertise, using our physical
plant in each one of our pharmacies, our view is that we think there is an opportunity to just basically put Amerita inside and go to work building
out every one of those markets that we operate in the 95 sites.
So that is what we are looking at. That is our plan. Irregardless of whether this plan works or not, we believe there is still a tremendous amount of
opportunity for us in the home infusion.
Just as an example, I think you saw what happened with CVS. They bought Coram, paid a big number for it, and somebody else thinks that space
is quite attractive as well.
Onco360. I mentioned we were in the oncology pharmacy space. It's our latest acquisition. We just closed late December on this company.
We are really bullish about the oncology pharmacy segment, and I would like to tell you why. Oncology is a $47 billion segment. This is oncology
drugs. That will grow fourfold to $175 billion in 2020.
Oncology has a significantly -- it has the most robust pipeline of any segment in healthcare, and that is going to fuel growth. That is what is going
to fuel the growth to $175 billion.
Here is the third thing. The oncology segment will increasingly have barriers to entry as, what we are seeing right now, pharma and payers are
picking their partners. So if oncology, onco med -- Onco360, basically their go-to-market strategy is to get restricted distribution drugs and then
go to payers and get paid for dispensing those.
So they are clearly focused on getting restricted distribution drugs, and they've got a portfolio of about 30-some-odd drugs and growing rapidly.
We are want to talk more about that at our February earnings call, lay out what we see the trajectory for this business, which is going to be quite
impressive, I think.
But we like onco. We like the oncology space, but we really like Onco360 and the main reason is it's the largest independent provider of oncology
pharmacy services in the country today. They have, as I mentioned earlier, a large and growing portfolio of limited distribution drugs that really
positions the company for growth.
We see revenues at the end of 2014, our forecast for revenues is $170 million, and that is roughly a 25% increase over 2013. So, it is a high-growth
opportunity for us and we are really excited about that.
We own 37.5% of OncoMed with the option to buy 100% of the company in three years. It would be 2014, 2015, 2016 -- at the end of 2016.
Let me go back and talk a little bit about acquisitions. I mentioned earlier we are ramping up our level of acquisitions both in core pharmacy as
well as specialty sectors. We believe that acquisitions will drive share in the core. And also we think there's a significant amount of opportunities
in the home infusion, and I will share with you the market there.
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JANUARY 16, 2014 / 10:00PM, PMC - PharMerica Corporation at JPMorgan Healthcare Conference
In addition to the Onco360 acquisition, we have added this year -- or excuse me, 2013, mainly in the fourth quarter, $15 million in new revenues
in the LTC segment alone as we enter the 2014 fiscal year. So we have been fairly acquisitive. We will continue to be acquisitive.
Here is the landscape for the institutional pharmacy market. You can see there's 45% of the market that is available for consolidation. Some of that
is going to go through share, just basically selling into it; and that will in turn force more ability for us to drive more acquisitions, as folks decide it
is time to turn in their chips and sell the company.
Many, mostly smaller regional pharmacies, revenues less than $50 million. We made two or three, four pharma acquisitions this year that were like
$5 million, and those are just really, really easy for us to deal with. We can basically put on $2 million in EBITDA on a $5 million revenue, base revenue,
which is pretty attractive for us.
The specialty market is, on the other hand, dominated by large PBMs. I know it is hard to believe we have a $47 billion market and we think it is a
niche market, but we do look at the oncology as a niche market. Because there is a lot of players in it; no one has a lot of share; and there is a lot of
crosscurrents going on.
But the big thing about the oncology segment, much like the home infusion specialty segment, our concern with getting disintermediated by the
PBMs -- i.e. cannot fill that script -- our risk there is somewhat low. The reason why it's low is because we have restricted distribution rights and the
PBMs aren't getting access to a lot of these drugs, so they have to come through us.
So again the market is $47 billion, growing over 20% a year. And again, we're going to focus particularly now on the home infusion piece. Probably
won't be looking at too many acquisitions in what I would call the oncology specialty, but we would not rule those out.
Let's look at the home infusion market. As I mentioned, similar to a long-term care market in that the operators tend to be much more local. They
are local operators; the deals are smaller. You can see that there are over 300 single-site operators, and they are a big target for us in 2014.
Here is one way to look at our strategy for home infusion. We are going to grow, number one, organically, within existing markets by adding service
capabilities.
We are going to, two, leverage PharMerica locations, as I talked about earlier, assuming that is successful, our pilots. And given the marketing
dynamics, basically the platform companies are cost prohibitive. They've been going at 15 times EBITDA; we are not going to step up and buy
those.
They're too expensive, in our mind. We are going to pursue the 300, and go after the 300 or so, the smaller guys. And that is going to be our target
this year.
This is just a view of our product strategy. We basically grow core infusion; number two, look for adjacency in core infusion markets, i.e., take our
existing markets and go upstream to more attractive segments of the market; and number three, look for other adjacencies in the specialty market.
So, this is what we are looking to do with this platform that we are building out on the home infusion side. And then when the specialty business
becomes ours, there is going to be a lot of synergy across those two platforms as well, three years from now.
Here, changing gears a little bit, the nine-month year-to-date results; I'd also point you to the recent earnings guidance and analyst call we made
last week for more information. But in summary, 2013 was really a great year for us. It was a breakout year, even though we had a little disappointment
with the Kindred loss.
But here is the point. Losing Kindred and Golden, certainly going to pressure 2014. But I think it's going to be looked at as a bump in the road in
2015, as we sit back in 2015 and look what goes on in 2015. We have a lot of tailwinds.
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JANUARY 16, 2014 / 10:00PM, PMC - PharMerica Corporation at JPMorgan Healthcare Conference
The Company is stronger than it has been since we went public and clearly stronger, likely stronger than it has been throughout the history. And
we anticipate a great 2015 and an even stronger 2016.
Here is the most recent 2013 guidance we reaffirmed last week. Revenues, adjusted earnings per share, and cash flow have all increased. We
increased guidance because, number one, Golden terminations are going slower than expected.
But number two, we saw significant -- and this is more important -- improvement in the fundamentals of the business. Sales retention gains better
than forecasted when we first put our guidance together. Margins have improved due to our purchasing initiatives and generic programs.
The Amerita performed really well in 2013, our acquisition. And we are seeing the organic growth repricing utilization increases that we talked
about.
Longer term I think all of you know about the increasing population is going to drive clearly utilization. New therapies in the oncology field extend
life expectancy. Oncology is starting to become a maintenance product as opposed to basically one-and-out, so to speak.
So the long-term outlook for specialty is bright. Our challenge is to position our services to serve the seniors in their home and to expand our
product lines. And the good news here is we have several years to accomplish that task.
We believe we are well positioned across all of our segments that we operate in. Preliminary guidance last week, we provided preliminary guidance
for 2014, given the concerns of what might it look like without Kindred. And we basically came out with adjusted diluted earnings per share in the
range of $1.35 to $1.50.
The guidance does not include any acquisitions, which we are targeting to acquire at least $100 million in annualized revenues per year. That
doesn't mean in 2014 we are going to have $100 million in revenues, but clearly that is what our goal is, and that is our guidance.
We also announced a restructuring program. We plan on saving $50 million annually when our restructuring program is fully implemented, and
that will occur in the fourth-quarter 2014. So we're not going to save $50 million in 2014, but there will be a tailwind coming into 2015 as that will
be a $50 million run rate coming into 2015. Savings are coming from reductions in labor, fixed cost, and reductions in overhead as well.
For those of you who have followed our stock, we have doubled almost since last August, and here is why. Sales productivity, we had net organic
bed growth for the last six months of 2013, first time in history of the Company. I mentioned earlier we are finally getting that right.
Generics as a tailwind will drive margin and profits into 2014 and 2015. The purchasing program will yield successively improving value through
2014, 2015, and 2016. And then in the end of 2016 we will be able to buy 100% of our generics directly.
Our step-up acquisition program, we are pretty excited. We think we can drive acquisition opportunities in the home infusion and in the LTC space.
Favorable demographic trends on our backside, and all-in these tailwinds will more than offset the short-term headwinds we face in 2014. Again,
we believe 2015 will be as good or better than 2013.
So with that, I thank you for your attention and your guts for staying around this long. We can have our Q&A here, because they don't need this
room, obviously. So if there's any questions, we can do them here.
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JANUARY 16, 2014 / 10:00PM, PMC - PharMerica Corporation at JPMorgan Healthcare Conference
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