PharMerica Corporation (PMC)
February 25, 2013 2:15 pm ET
Michael J. Culotta - Chief Financial Officer and Executive Vice President
George Hill - Citigroup Inc, Research Division
Michael J. Culotta
Thank you, all very much for being here today for the presentation. Again, we appreciate Citi for hosting this, and inviting us to the conference. So with that, I will get started. Just to give you a fair warning, I'm probably going to go through these slides very, very quickly. So if anyone has any questions or anything, I'll be more than happy to answer questions a little bit later. I will repeat your questions because this thing is getting webcast from that regard. So very quickly. All right. Everybody, obviously, cannot read that. But be that as it may, it is on our website which is the Safe Harbor Statement. So I just want to let you know that this presentation will be out on our website, should you have a chance to look at it. But please, we stress very strongly you take a look at our Safe Harbor Statement. Oops. Let me go back. A little fast here.
Okay. Who we are, just -- again, I'm going to go through this quickly, some of you may know who we are, some of you may not know who we are, we are PharMerica Corporation. We are a leading institutional pharmacy specialty infusion and hospital pharmacy management services company. We were a spin out of 2 different companies, AmerisourceBergen and Kindred Healthcare in 2007. We have pharmacies in 45 states and can fill over 40 million prescriptions a year. A little bit we'll get into very quickly, in a second, what institutional pharmacy business means. So here are our locations. As you can see across the United States including Hawaii, we are located there, and you can see we have a very strong footprint throughout the United States.
Again, only 1 of 2 companies in the institutional pharmacy space that has a U.S.-wide platform. Again, what is institutional pharmacy business? It's very -- it's not like what you're used to from the standpoint -- like if you went to fill your prescription at CVS or Walgreens. Basically, what we do is we usually get -- the prescription comes in usually via fax or usually via e-mail that comes into our pharmacies, it's called a closed-door pharmacy. You would not see our sign anywhere out there. Customers do not come walking in the front door, but that prescription comes in. From there, it is loaded into our system, it is checked by a pharmacist. At that point, once the pharmacist approves it, it then gets adjudicated. Also, it gets sent to the backroom, where the drugs will be filled and dispensed. Back there, the label will be printed, a check will pick that label up, they will pick up the bingo cards, as you see there, or a blister pack affectionately known, as you see on the screen there, which is anywhere from 14- to 30-day packs with the prescription that's in there. On the backside of that card, you'll see numbers 1 through 30, 1 through 31. So when it's being given to the patient, they'll pop it out and they'll know what day of the month it is for that prescription. Purpose of this is for safety measures for the nurses in the nursing home, at the skilled nursing facilities. We dispense predominantly to skilled nursing facilities, assisted living facilities and group mental homes is predominantly where it goes. So getting back to the prescription, that label would be put on one of the blister packs. From there it would be going into a tote, it would be checked by a pharmacist to make sure the drug ties directly to the label. From there, it would be delivered to the nursing home. And from there, the nurses would dispense that drug. So the difference is you don't have customers walking in, you have the prescriptions being e-mailed in, but we deliver. We deliver to the skilled nursing facilities. We are 24/7. A number of our -- majority of our pharmacies are open 24 hours. However, those that are not, they're constantly on call, 7 days a week, 24 hours of the day. The whole concept here is to get the drugs to the patient as soon as possible. Usually, we can get the drug to the patient within 2 to 3 hours of once the patient prescription has changed or a patient has been admitted to the nursing home. So again, that's all the requirements of the institutional pharmacy business in the setting we're in. Remember, we're in a long-term care setting. So the types of drugs that we're dispensing are not what you would normally see. If you looked at the top 50, top 100 drugs that are being dispensed throughout the United States, we may have 1 or 2 or 3 of those that we dispense. Remember, we have a large population base, dementia, Alzheimer's, et cetera, et cetera, elderly population types. So the types of drugs that they're taking are different than the general population as a whole. Our specialty infusion business, which we just got into at the end of 2012, in December of 2012, we acquired Amerita, which is a home infusion specialty business and they have 12 specialty pharmacies or specialty infusion centers in the -- across the United States. They administer the drug, the patient training by the registered nurses there and a very locally based model. People are asking, "Okay, you're in the institutional pharmacy business, why infusion business?" Well, part of it is the first the prescription dispensed is usually by Amerita because it's local. Their pharmacies normally ship. So they're shipping via FedEx, UPS, usually dry ice, they're shipping those IVs. However, the first prescription or first couple of prescriptions usually come from a local pharmacy. And because as you saw the map, we have pharmacies all over the United States, the majority of our pharmacies, guess what, they also have the capability of doing infusion business, albeit that infusion business are for the patients that's in the skilled nursing facilities, we still can fill those prescriptions and get those couriered out to the homes from our first fill perspective. So there is a little bit of synergies there, purchasing synergies also. Not any other synergies like the sales force anything of that nature. Again, this is another market, it's another opportunity for us to grow our business and get into multi-markets and also be able to use our current vendor agreement and to acquire drugs at a cheaper way.
Getting into -- back into the institutional pharmacy business, as you can see, everybody knows the aging of the population. This is a great demographics for our business in terms of future growth, in terms of what would be taking place as the aging of the population takes place. So both from the standpoint of being able to service ALFs, being able to service skilled nursing facilities, And also being able to service home infusion is very beneficial to what we'd be doing with the demographics that are taking place across the United States.
Our corporate growth strategy, organic growth, driving scale economies and acquisitions, as you can see there, constantly striving, get sales and retention. You normally see brand price increases normally between 9% and 11%. Growth in utilization in terms of the patients -- in terms of the prescription per beds. You also see the growth that you can see with the brand, the generic conversion that's taking place. And also as you well know, we just renegotiated our Prime Vendor Agreement, which also has been beneficial to us from the standpoint of increasing our margins from that perspective. And then also, from the standpoint of an acquisition. We'll get into that a little bit later in just a second.
Other value propositions that we're constantly looking at is innovative solutions, also from the standpoint of service and also cost reductions because -- so you can see there from a cost containment, medication availability and a regulatory compliance. So I won't go through each one of those, but we'll pick 1 or 2 of those and give you a little bit of an example there. Medication availability solution with our RxNow. We do have the capability of having on-site dispensing. Now remember, you can't do everything because yes, you are issuing IVs, you couldn't do that through the machine, lotions you couldn't put through the machine, any liquids you couldn't put through the machine. But from the standpoint of pills and capsules and those kinds of things, can those be dispensed there locally, quicker and from a standpoint of savings? And we do see that from the standpoint of savings with stats or stat runs, which are delivery runs. So we're constantly making about 2 delivery runs to our nursing homes each and every day, except on weekends, usually there's a 1 delivery on Saturdays and Sundays.
Medication availability solution, this is another thing. If you get a new patient into the home, for example, or a change in medication again, the home wants to know where is that prescription, where is it and when will it be delivered? And this is the whole concept that Show N Tell is making sure that we're driving the orders through, we're getting the orders on time and we have that efficient order system and our customers can see when that delivery will be made.
Jumping now to generics, you probably saw we had a very, very strong wave in 2012, 2013 is not as strong but we are getting some of the tale of 2012 a couple of the drugs were later part of the year in 2012. So we are seeing things in 2013 that are -- that's taking place. 2014 will be another good year. However, 2015 is a very big year, with Namenda and Abilify. So you'll see those being a very good year coming on board in 2015. And we'll talk a little bit further when I get nearer the end of the presentation, I'll go through some of the questions that's being raised today and last week. So I'll give you a little head start there. Generic dispensing rates, as you can see, our generic dispensing rate has been going up. And as you can see that, so has our margins. From that standpoint, again, you have the tailwind of the generics that are taking place and plus the fact of certain renegotiations that we've -- been taking place with that Prime Vendor Agreement.
Again, we talked about this a little bit earlier, from the brand pricing, you normally see about 9% to 11% there. You can see in 2011, it was about 9.8%. We will update this slide, we should be able to update it in the next few months with 2012 numbers to see what is all taking place. Some of the jumps you're seeing in the generic, it's -- a lot of these aren't apples-to-apples, so if you have a lot of brand to generic conversions, so for example, let's just say your average generic is only $18. However, if you have a big number of brands that are taking place, which we did in 2011 and 2012, what happens is those sort of overlay on those existing generic, so what happens it's sort of inflates it. So you sort of got a little bit of over inflation there that's taking place, when you look the generic slide, of the newer generics that are coming into play with higher prices.
And then again, you can see the dispensing rate that has been increasing and what we do expect. Again, in our space, what we're really going to be looking for and as you've seen some of the companies coming out with, is if there are any new drugs coming into the market, particularly as it relates to Alzheimer's and dementia, that would be a very big positive for our space. Again, think through some of our patients that we are serving, are -- basically, the nursing home patients.
Let's jump to the acquisition markets. Our largest competitor owns about 43% of the market share. We own roughly about 15% of the market share, I should say serve the market share in terms of skilled nursing facilities. Again, 43% there, 15%, with 42%, basically more of the local regional players. When you step down and you see our #1 competitor, their roughly revenues are probably around $6 billion, ours are close to $2 billion. And then from there, you pretty much jump way down, probably the next largest player, it's probably between $200 million and $250 million in revenues. You've got a couple of players in that area and then after that it drops tremendously. You see a lot of players in anywhere between the $10 million and $35 million in terms of the local regional types of customer base or competitors.
And then this gives you our acquisition that's taking place. This is from the most recent to the oldest, with Amerita being the most recent, which was not institutional pharmacy business, as we talked about, it's the specialty infusion business. But as you can see there, the other acquisitions that we've made. And if you -- historically, if you look at most of those, most of those have closed on 12/31, or at least in the fourth quarter, that's what we normally see in these institutional spaces. A lot of our acquisitions are usually right near the end of the year.
So why invest in PharMerica? We're a leading institutional pharmacy, specialty infusion business, also hospital management services company. As we showed you before, the demographic trends are there. We do have scale from the standpoint of having such a large footprint and a very strong financial position on our company. And we're very, very growth-focused on growing this company and diversifying this portfolio as best as we can and keeping it in the space in terms of a distribution type of business space. So with that, I'm going to open it up for questions. But probably just start it with -- is just go through a couple of things that we've mostly been -- being asked a lot of questions for.
We did update and we had stated this on our call, we did renew our Prime Vendor Agreement. We did go out for a bid on that. So we will see improvements in our margins, both in, obviously, in 2013 and again in 2014. That contract's been extended through September 30, 2016. So again, we do have much better pricing than what we've historically had from that regard. So just a little bit of flavor there. On the short cycle dispensing that occurred effective January 1, we did see that. Our expectations were -- we're probably going to see short cycle dispensing in about 2.6% of our scripts that go out the door. It jumped to about 3.8% when we looked at it in January. So we are seeing some generics that are also going short cycle. As you recall, the short cycle dispensing started effective January 1, 2013. It related to brands that were under Part D. So still under Part D but we did see more generics on that. We did renegotiate a number of our contracts to increase our dispensing fees because again, we're dispensing twice as many prescriptions out the door than we were originally. And what you're doing predominantly is the same as you're doing with the -- other than the ingredient cost, the whole process, as I described to you before is identical. So again, you're using the same amount of labor pool, et cetera, that's taking place there from the standpoint just because it's a 15-day pill set as opposed to a 30-day pill set. You're still going through the same process as we described before. And with that, I think that's the majority of the questions that we've been getting asked. And so I think if there's any other questions from out there, I would be more than happy to take them.
George Hill - Citigroup Inc, Research Division
You would -- George Hill from Citigroup. You had mentioned the change in the - well, not the change in the relationship -- the renewal of the Prime Vendor Agreement on the drug side and the improved pricing that you'll get this fiscal year, next fiscal year. I guess is there any more color that you can provide around the -- like I don't understand the two-step mechanism. Is there a two-step mechanism by which that happens? Or I guess any additional color that you can provide around the renewal will be helpful.
Michael J. Culotta
Yes. When we went out to bid, we went to all the Big 3, and from the standpoint, the contract was going to be renewed from October 1, 2013 through September 30, 2016. So AmerisourceBergen did sort of have the insights because they were existingly in there. So they could improve our terms during a time period when others that weren't, obviously, dispensing drugs to us could. So we did have some improvements over our existing contract that take place from January 1 to September 30, 2013. And again, another pricing structure that takes place October 1, 2013, through September 30, 2016. It also gave us more flexibility in terms of generics. We did not really have that as well and so the opportunity for us to go direct with generics. We also are in the process right now of looking at, what they call TPLs or third party logistics companies, where we would be going directly. So we are in the process of meeting with a number of TPLs to start that process because we really want to get that process started further going in the end of 2013 into the fourth quarter. Again, we didn't have the infrastructure in place at the time, so this is sort of a "crawl before you walk, walk before you run" sort of scenario. So what we want to do is work with the TPL at this point in time. We'd be ordering the drugs directly from a manufacturer, from a generic manufacturer. Let's say they come in cases and there's like, for simplicity's sake, 24 bottles that have 100 drugs each. We would not be opening up the bottles. We'd be just shipping the bottles out to our pharmacy, so not getting into the individual drugs per se. At this point in time, we're trying to repackage.
George Hill - Citigroup Inc, Research Division
And I guess I might follow that up with just -- could you talk about the process of evaluating the direct procurement decision? Because to your point, right, it's not just "I'm going to buy drugs direct" as opposed to "I'm going to buy them from ABC." There is palletization of shipments, there's breakdown of the bottles, there's -- whether or not you're doing unit dose packaging for administration of the patients. I guess, could you walk us through some of the considerations that contribute to whether you make the process to go direct, whether does it make sense to commit the capital to go direct. And just what are the things that we, as investors, might not think about that are the operational hurdles that you come up against from working with a wholesaler on procurement to going direct?
Michael J. Culotta
Okay. Well, first thing, remember, when we spun out of AmerisourceBergen, remember, we were a wholly owned subsidiary of AmerisourceBergen, or at least part of our company was the PharMerica LTC side. So the contract that we obtained came from AmerisourceBergen. We had not put that contract out for bid. So the contract terms, we had renewed it a couple of years ago, extended it for about 1 year and 2 months, I think. And then from there, this was a full blown we went out to proposal. We worked with 2 different consulting firms, and those consulting firms not only helped us from the standpoint of understanding pricing but they also helped us from the standpoint of writing the RFPs and evaluating everything that came back from all parties. In addition, we're working with one of those consulting firms from the standpoint of determining exactly, as you said, how do we go about -- how do we go about, since we didn't have the infrastructure in place, we were reliant pretty heavily on our wholesaler, how do we go about starting that? So again, we looked at everything from that standpoint. And then from there, what we're going to be doing is, it's not like we're going to be blanketing 100% of all the generic drugs. We're going to be taking a look at the drugs with the most movement, the drugs that we can get some pretty good deals and we're going to evaluate. From the standpoint is can we buy it from ABC cheaper than we can buy it direct from a manufacturer? If we can buy it cheaper from ABC, we'll buy it from ABC. If we can buy it cheaper from the manufacturer, go through a third-party logistics company and the cost of that. So we are gathering all those costs. So each one of those drugs that you're looking at to acquiring, you've got to see how does it impact to your existing Prime Vendor Agreement and how does it -- how much money is that saving all up in everything that's taking place. So there's -- as people say, there's a lot of knobs that are going on in there. So you sort of have to evaluate, do I buy it from here? Is this better by buying it through here and the discount that's taking place? Or is it better to go direct? Is it a cheaper drug? Are my payment terms better than paying 7 days practically, which is -- we pay every week to AmerisourceBergen. So there's a lot of -- and we take a look at the working capital. How much spend are we going to be spending to build any of that inventory up. Because there will be a buildup of inventory if you're going to be bringing that in-house as you say. So again, our first step was -- is let's not jump into this and try to do it all ourselves. Let's look at companies that have the experience and pay them their fee, the costs associated with it. So what you find in a lot of these cases, you're not talking about a whole lot of different drugs. You're talking about possibly your top 100 drugs. This is the old 80-20 rule. When you take a look at your top 100 drugs, either it's brand or generic. It probably accounts for about 75% or so of all the purchases that you make. So you're looking at things that are going to turn very rapidly, very quickly. And then from the standpoint, as you could imagine, your shipping it in and you're holding some of it and then in turn, guess what, you're freight out. So yes, you're going to have more money, more expense going out from the standpoint of freight. But all in all, you're looking at that from the savings that are taking place.
You spoke a little bit about the acquired growth. Can you give us a little flavor around any organic growth stories?
Michael J. Culotta
Yes. I think we've been pretty open. We do have a couple of headwinds that are taking place in 2013. As you well know, we've been very public about it. Kindred had announced, I think in first or second quarter last year, that a number of their homes, roughly that represent a little over 5,200 beds -- and again, I could be off a little bit in terms of my numbers there -- that they're going to be giving those beds -- or they're going to not be renewing those leases. So those beds are going to be going back to Ventas who is the REIT or the holder of those leases or the owners of those. So with that, our contract is -- will be with whoever is the new provider that wants to take it. In those cases, they'll either put it out for bid, some cases, those that are picking up some of those nursing homes actually have their own institutional pharmacy business. So some of those we won't be keeping. We factored in a number of those that we would be losing in our 2013 forecast and the guidance we gave. We also mentioned that Golden Living is also bringing their in-house over a period of time. So we will be losing those over a period of time. But what we've told is we've been seeing better improvements, our satisfaction scores are improving. And if we said, if we factor out Golden, if we factor out Kindred, we're going to be plus or minus a slight increase to a slight decline in terms of the number of beds. So we're starting to see some stability. In the fourth quarter, I know it didn't look that way but we did roughly lose a little over I think 3,000 beds to Golden as they brought it in-house. We also were impacted, if I remember the number, right around between 4,000 and 5,000 beds that took place up here with Hurricane Sandy. So we had seen a number of losses that took place in the fourth quarter relating to that.
The other question I have is around services in the business. The institutional pharmacy business has been notorious about frankly giving away services to facilities. Are you starting to see any change in that and in the mindset of the buyers? Or is it still -- everything is usually, "I expect all the quality additional services in there for free," as kind of a wrapper around the pharmaceuticals?
Michael J. Culotta
Well, I think you'd probably see that more with the local pharmacies. When we go in there and we're doing our -- taking a look in acquiring a business, I think you've got to be very, very careful in terms of your services. We do charge for medical records, we do charge for consulting pharmacy, we do charge market rates for all of those. Do we see certain things that are given away relating to when we make acquisitions? Yes. And some of those -- if we have a regulatory issue with it, we're going to back off and not acquire it. So you really have to be very, very careful in terms of the business model there that's taking place.
Can you talk about the pipeline of new business, how does that look for the next 12, 18 months? You mentioned you are in the process of phasing out some of the existing accounts. How does it look for new business? And then also, if you look at that map you showed and the market share, are there specific geographic areas where you are under-indexed and where you could be gaining additional market share?
Michael J. Culotta
Well I think first thing is we've realigned our sales force and our account management force, so as far as the backlog is concerned, we're very positive and upbeat in terms of what we're seeing right now. I think there's a lot of opportunities. But remember, these are contracts. So as contracts come up for expiration anywhere from 6 months to 1 year, we're getting our foot in the door, making sure we're bidding for the work and getting as much work as we possibly can. We are looking at hopefully having one of the best years in terms of sales than we've had in some time. So I would say the backlog is extremely solid, and everything we've seen so far is very positive from that respect. Talking about the geographic map, however, it's really all over the board. I can't say that California's better than Texas or Texas is better than the Carolinas. I would just say everywhere we're looking so far has been very, very positive from that respect and we are taking a look at a number of large accounts. So we're very, very pleased about that. So hopefully we'll see a very solid, good year in terms of sales.
Can you talk a little bit about the home infusion business that you -- mentioned in the slides, how big it is now, how big you think it could be and also what the M&A pipeline environment looks for that business as you look to grow it?
Michael J. Culotta
Okay. Yes. The business as we acquired it is about $85 million in revenues, between $85 million and $90 million in revenues. Their EBITDA in that business runs -- when you take a look at our business, it's between 5% and 6%. That business is usually between about 9% and 12% in terms of the EBITDA of those businesses. We -- when we got into this business and we started looking at business, we wanted to have a business large enough that had a platform, that had a strong management team that would be able to continue with us and grow this business. And that's what we found with Jim Glynn and his team at Amerita, with the ability to grow this business, and they're doing just that. From the standpoint of acquisitions, there is quite a lot of opportunities in acquisitions. Again, Amerita grew through acquisitions. There are a number of players out there. Your larger players are like Coram, which is part of Apria, if I'm not mistaken. Another one is a company called BioScrip, which is a public company also that's out there. But there are also a lot of smaller players and that's what we're also looking at because now with Jim Glynn and the Amerita team, we're able to bring in those smaller players and bring those into an existing management team. When we stepped back and looked, yes, we saw some smaller specialty pharmacy business. We saw some smaller infusion businesses. But we did not want to be trying to bring them together without first having a large enough platform and a team to be able to do that, and we have that with those guys. So we're really excited about having Jim and his team on board and being able to grow that business. And you're going to see it, we'll be giving stats and information about it each and every quarter and I think you're going to be extremely pleased, you're going to see that growing. And we're definitely taking a look at acquisitions in that market. We're basically -- obviously, we're not giving up on the institutional pharmacy business by any stretch of the imagination. But as you noticed, most of our acquisitions come at 12/31, so we're all going to be looking pretty hard at these specialty business throughout the year. Those come up a lot more.
Any other questions? Well again, thank you, all, for being here and thanks very much for Citi for inviting us here again. Thank you very much.
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