PharMerica Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: PharMerica Corporation (PMC)

PharMerica (NYSE:PMC)

Q3 2013 Earnings Call

November 05, 2013 10:00 am ET

Executives

Cynthia Archer

Gregory S. Weishar - Chief Executive Officer, President and Director

David W. Froesel - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Charles Rhyee - Cowen and Company, LLC, Research Division

Jason Gurda - KeyBanc Capital Markets Inc., Research Division

Brendan Strong - Barclays Capital, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Diego Hernandez Diaz

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 PharMerica Corporation Earnings Conference Call. My name is Gwen, and I'll be your operator for today.

[Operator Instructions]

I would now like to turn the conference over to Ms. Cynthia Archer, Manager, Treasury and Risk. Please proceed.

Cynthia Archer

Good morning, and thank you for joining us for the third quarter conference call. On the call with me today are Greg Weishar, Chief Executive Officer; and David Froesel, Executive Vice President, Chief Financial Officer and Treasurer.

Before beginning our remarks regarding the third quarter results, I would like to make a cautionary statement. During the call today, we will make forward-looking statements about our business prospects and financial expectations. We want to remind you that there are many risks and uncertainties that could cause our actual results to differ materially from our current expectations.

In addition to the risks and uncertainties discussed in this morning's press release and in the comments made during this conference call, more detailed information about the additional risks and uncertainties may be found in our SEC filings, including our annual report on Form 10-K and quarterly report on Form 10-Q. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. PharMerica assumes no obligation to update the matters discussed on this call.

During the call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release and in our Form 10-Q. We have made available to you our press release and our 10-Q filed with the SEC. In addition, this webcast will be on our website along with the transcript from this call.

And now, at this time, I would like to turn the presentation over to Greg.

Gregory S. Weishar

Thank you, Cynthia. Thanks to everyone on this call this morning for your attendance. We certainly appreciate that.

Given what our stock has done this morning, I think it's probably best that we just sign off now, but no. With all due -- I will go through this just to -- as you saw in this morning's earnings release, we significantly exceeded expectations.

Revenue, adjusted diluted earnings per share and cash flow from operations all exceeded expectations for the third quarter of 2013.

Compared to the third quarter of 2012, adjusted diluted earnings per share increased 29% to $0.49. Adjusted EBITDA increased 18% to $33.9 million, and adjusted EBITDA margin increased 120 basis points to 7.7%.

On a sequential quarter basis, revenues, excluding the onetime impact of $2.9 million reduction due to California Medicaid legislation, increased 2.1%, and that was primarily due to drug -- price inflation, brand drug price inflation.

Gross profit margin declined from 19.2% to 18.7%, also due to brand drug price inflation.

As you know, brand drug gross profit margins typically are less than generic drug gross profit margins.

Regarding cash flows provided by operations, we achieved new records for the quarter and on a year-to-date basis. Cash flow provided by operations for the current quarter was $78.1 million or 52% greater than the prior year's comparable quarter. Cash flow was $152 million for the first 9 months of 2013, which is 47% higher than last year's comparable period.

Cash flow improved primarily due to a reduction in inventory and higher year-over-year adjusted EBITDA.

In the core institutional pharmacy business, we continue to see evidence that sales and account management team is making progress in driving new sales and retaining existing clients.

On a year-to-date basis, excluding the impact of Golden Living and Kindred, net customer account activity showed an improvement of approximately 27%, and that's compared to the same period last year.

And as we sit here early in the fourth quarter, we remain optimistic of further improvement over the coming quarters.

If we exclude Golden Living and Kindred from the calculus, for 2013 we will come very close to achieving our much anticipated goal of organic growth.

We believe we can sustain sales and retention momentum over the coming quarters. This momentum is a direct reflection of the many organizational and product changes we have put in place over the past several years.

Today we have the best client solutions in the industry, superior cost-containment programs, best-in-class pharmacy services and an industry-leading generic dispensing rate of 83.3%.

We are well-positioned to aggressively compete in the long-term care market by saving our clients' money and helping them better compete in their markets.

Let me give you a couple of examples of how we do that. First, generics have been and will continue to be a big win for our clients and customers. As we move into 2014 and 2015, given the brand patent expirations, we estimate, in 2014, the generic dispensing rate will be between 85% to 86% of all prescriptions dispensed; and in 2015, 88% to 89% of all prescriptions dispensed.

Drugs such as NEXIUM, Namenda, ABILIFY, PROCRIT and others will become available generically.

Secondly, the recently announced agreement with Innovatix, a full service group purchasing organization will assist us in several ways. Most importantly, we want to raise the bar on how we manage newly admitted patients into client facilities. We believe ACOs will play an emerging role in coordinating patient care in the years ahead. The partnership with Innovatix positions us to assist clients and partner -- partnering with ACOs, hospitals and physicians.

We want to assure our clients that PharMerica is assisting them in reducing hospital readmissions.

Now, let me give you an update on direct generic purchasing program -- the direct generic purchasing program we have discussed in the past. On October 1, we commenced buying generics directly from generic manufacturers. This program is exceeding our expectations in terms of reducing the cost of goods sold. Buying generics direct is a milestone in the company's history and we will improve the overall purchasing economics as we move into 2014.

Thereafter, the purchasing economics will improve in each of the following years, to the point where we anticipate buying a vast majority of generic drugs directly from manufacturers.

And, excluding the direct generic drug program, you may recall, effective this October 1, overall drug purchasing costs improved versus the prior quarter, due to the renegotiated client-vendor agreement.

Finally, we have lowered the cost of drugs purchased with the GPO as part of the Innovatix relationship.

So in summary, with the renegotiation of the prime-vendor agreement and the GPO agreement, coupled with the direct purchasing initiative, we improved all aspects of drug purchasing.

Now let me touch on Amerita. As I mentioned last quarter, we are working to start pilot operations in the latter part of this year. These pilots will determine the feasibility of leveraging existing pharmacy bricks and mortars in order to expand Amerita's platform nationally.

Great progress is being made, and we plan to commence pilots in around 5 to 6 markets over the coming quarters. If successful, we will roll out Amerita nationally.

The home infusion market has attractive fundamentals, and we're optimistic that the current business will continue to post organic growth and service a platform for national expansion.

Now let me discuss acquisitions. Some of you may have read yesterday's press release on Chris Schaefer, and I'm happy Chris has joined us. As I've discussed in the past, with the majority of the heavy-lifting behind us and a solid operating platform in the core business, we desire to increase the number of acquisitions we have typically made in any given year. Acquisitions drive scale and market share.

Additionally, though, we are committed to diversifying into the specialty infusion market.

We are in active discussions with a number of companies in all segments, and we will continue to be disciplined buyers and not trade off value for volume.

Recall, we do not include acquisitions in the early guidance, and today's changing guidance does not reflect any material acquisitions. However, I am pleased to announce that we recently closed -- just recently, in this quarter, 2 acquisitions, one in New Mexico and one in South Carolina. Both of these acquisitions, while small, will be accretive and help us offset business losses related to Kindred and Golden. We can expect more acquisitions over the coming quarters. Again, these acquisitions are not incurred in the guidance.

So with that, I'll turn it over to Dave, who will walk you through the financials.

David W. Froesel

Thank you, Greg, and good morning. I would like to spend the next several minutes discussing our results of operations for the third quarter of 2013.

Adjusted diluted earnings per share for the third quarter of 2013 was $0.49 compared to $0.38 in the third quarter of 2012.

Included in the third quarter of 2013, adjusted diluted earnings per share of $0.49, is $0.05 attributable to tax benefits associated with tax planning strategies, which, for the first time, reduced the company's average historical effective tax rate of approximately 40% down to 38%.

Furthermore, the $0.05 benefit recorded in the current quarter consists of $0.03 attributable to the first 6 months of 2013 and $0.02 associated with the current quarter.

The improvement in adjusted diluted earnings per share on a year-over-year basis of approximately 29% was attributable to the improvement in gross profit tied to the company's purchasing strategies, Amerita's third quarter 2013 contribution and the aforementioned tax benefits. The $0.05 increase in adjusted diluted earnings per share on a sequential basis is primarily attributable to implementation of tax planning strategies and continued strong operating performance.

Revenues for the third quarter of 2013 were $439.7 million, excluding $2.9 million associated with a reduction of reimbursement pertaining to certain drugs dispensed by providers under the California Medicaid program associated with legislation retroactive back to June 2011, and represents a slight decrease of $2.3 million from the third quarter of 2012 and an increase of $8.9 million from the sequential second quarter of 2013.

Regarding the quarterly year-over-year slight decline in revenues of $2.3 million, the decrease is attributable to an unfavorable volume variance of approximately $17.8 million associated with 391,000 fewer prescriptions dispensed in the third quarter of 2013. And the decline in prescriptions dispensed was partially offset by a favorable price variance of $15.5 million and revenues from Amerita.

Amerita was acquired in December 2012 and did not have an impact on revenues for the quarter ended September 30, 2012.

As previously mentioned, revenues increased $8.9 million for the 3 months ended September 30, 2013 compared to the 3 months ended June 30, 2013. The increase in revenues is primarily associated with brand name drug price inflation, which more than offset 100,000 less prescriptions dispensed in the third quarter of 2013 versus the second quarter of 2013.

The gross profit margin, excluding the California Medicaid revenue adjustment in the third quarter of 2013, was 18.7%, which was 150 basis points higher than the gross profit margin in the third quarter of 2012 of 17.2%.

The improvement in gross profit margin for the third quarter of 2013 versus the third quarter of 2012 was largely attributable to the company's purchasing strategies.

On a sequential basis, the gross profit margin in the third quarter of 2013 was 18.7% versus 19.2% in the second quarter of 2013. The primary reason for the 50 basis point decline in gross profit margin was due to strong brand drug price inflation in the current quarter.

SG&A cost in the third quarter of 2013 were $55.5 million compared to $54.5 million in the third quarter of 2012. The increase in SG&A is primarily attributable to the acquisition of Amerita in December of 2012.

On a sequential basis, SG&A cost is -- SG&A costs were flat.

Provisions for doubtful accounts in the third quarter of 2013 were $5.2 million or 1.2% of revenues, and $7.3 million or 1.7% of revenues in the third quarter of 2012. The decline in the provision for doubtful accounts versus the third quarter of 2012 was due to improved collections.

On a sequential basis, the provisions for doubtful accounts were the same at $5.2 million and 1.2% of revenues.

Furthermore, the company's DSOs improved in the third quarter of 2013 to 39.8 days versus 44.1 days in the comparable quarter of last year and improved on a sequential basis from 41.6 days in the second quarter of 2013.

Adjusted EBITDA for the third quarter of 2013 was $33.9 million compared to $28.8 million for the third quarter of 2012. Furthermore, adjusted EBITDA margin percent improved 120 basis points from 6.5% in the second quarter of 2012 to 7.7% in the third quarter of 2013. The improvement in adjusted EBITDA margins is primarily attributable to the company's strategic purchasing initiatives.

Cash flows provided by operations for the third quarter of 2013 was a record $78.1 million compared to $51.4 million in the third quarter of 2012.

In addition, cash flows provided by operations for the first 9 months of 2013 was $152 million and established a new record. The improvement in cash flows from operations is associated with a significant improvement in networking capital, primarily associated with the reduction in inventories and higher year-over-year adjusted EBITDA.

As illustrated on Page 8 of the press release, for PharMerica's inventories days on hand, our DOH, was 18.1 days, and the day sales outstanding, our DSO, was 39.8 days. PharMerica's working capital metrics represent the best in the industry.

One additional comment I would like to make regarding cash flows. PharMerica has approximately $116 million in tax-deductible goodwill, which represents a future cash flow benefit of approximately $40 million to $45 million, which is an asset that should be factored into the value of the company.

In addition, we repurchased stock in the current quarter. We repurchased approximately 1% of the outstanding shares, or 349,091 shares, at an average purchase price of $12.33.

Furthermore, approximately $19.7 million remains available under a stock repurchase program previously approved by the Board of Directors.

And last, before a few important comments regarding guidance for the full year, we recorded a $17 million reserve in the current quarter associated with various government investigations and litigation as disclosed in our Form 10-Q.

Regarding guidance for the full year, we are raising guidance for revenue, which was previously $1.625 billion to $1.675 billion, upwards to $1.70 billion to $1.725 billion. The new range reflects improved organic account activity and timing associated with the movement of the Golden Living facilities.

Furthermore, we are raising our previous guidance for adjusted diluted earnings per share, which was $1.55 to $1.60, to our new guidance of $1.71 to $1.76.

And last, our cash flows from operations forecast for the full year 2013 was $85 million to $95 million. Our new guidance is $120 million to $130 million, and is lower than our year-to-date results due to planned strategic purchasing initiatives in the fourth quarter.

In addition, based on the improvement in cash flows from operations and capital expenditures for the year of, let's say, approximately $27 million to $28 million, our free cash flow yield is very attractive.

And now, I would like to turn the call back over to Greg for some final remarks.

Gregory S. Weishar

Thanks, Dave. Turning towards the end of this year and looking into 2014, in light of the Kindred and Golden Living bed losses, the company is in the final planning phase of developing a plan to offset these losses.

We will provide an update on that plan on the later part of the fourth quarter, but we are optimistic that we will be able to protect shareholder value in the near term as we manage through the loss of volume.

So in summary, as we look back over the past 9 months, we're making solid progress across multiple fronts: improved sales and retention, improved purchasing economics, solid performance by Amerita, strong operating cash flow, a fertile acquisition pipeline, favorable demographic trends, brand patent expirations and a strategic partner to further advance our client value proposition.

We are confident our business strategy is sound and that we are executing on initiatives that drive performance and shareholder value. I'm proud of the company's progress and remain very confident in the company's long-term prospects.

I'll now turn the call back to Gwen.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mr. Charles Rhyee of Cowen and Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

Greg, can we just -- I know you're going to give us some more of an update on 2014 later, but can we talk a little about -- you're talking about acquisitions that help offset some of the losses, obviously, some declines as you come next year. Can you talk about sort of what kind of -- what can you do to offset sort of maybe some fixed costs deleverage, particularly as Kindred all comes off at once at the beginning of the year? And so maybe if you can touch on that first.

Gregory S. Weishar

Okay. Well, look, the Kindred piece comes off at the first of the year. We have a plan in place, as we sit here right now, on how we're going to deal with that. And it's not something that we're going to be sitting there flat-footed on as we sit here looking forward to January 1. Obviously, there's going to be some fixed cost that we can offset through various different strategies, but then there's going to be some that we're not going to be able to offset. However, we -- as we work through this, we'll provide that guidance to you as we indicated in the fourth quarter.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. And then just maybe a follow-up question over to cash flow. The inventory reduction, the improvement in working capital, do we see a lot more opportunities to continue to improve that? Or are we going to start -- do you think we'll start to stabilize at sort of these levels?

David W. Froesel

Yes. There are continuing opportunities for PharMerica to reduce their inventory levels, but I would say what you saw or what was evidenced in the third quarter was a big part of reducing our overall inventories, but there's still more to come. And we'll address that when we give guidance for 2014.

Operator

Our next question comes from the line of Jason Gurda from KeyBanc.

Jason Gurda - KeyBanc Capital Markets Inc., Research Division

Wanted to ask you little bit about the acquisitions. Are these -- the 2 deals, do they close in October?

Gregory S. Weishar

I believe they've closed -- well, yes, the answer is absolutely yes.

Jason Gurda - KeyBanc Capital Markets Inc., Research Division

Okay. And can you give us some information on how big these acquisitions were?

Gregory S. Weishar

They're small, as I indicated. $10 million in revs, but we will take a large portion of synergy out of the business and we anticipate them to be a meaningful contributor to 2014.

Jason Gurda - KeyBanc Capital Markets Inc., Research Division

Okay. And you mentioned, I think, one was in California, and I missed the other state the other one was.

Gregory S. Weishar

No. New Mexico, Jason, and South Carolina. The South Carolina acquisition also gives us presence there, which we didn't have before, so...

Jason Gurda - KeyBanc Capital Markets Inc., Research Division

And I wanted to get a sense for if you have any -- or if you guys have a better sense for the pace of the Golden Living transition and your expectations for that next year.

Gregory S. Weishar

We wouldn't be able to have a call without that one coming up. I think we continue to see bed loss there, Jason, at the speed of which is variable and unpredictable. And we believe that as we enter 2014, as we sit here today, this could change, that we will still maintain some volume of Golden Living's business throughout 2014, albeit a reduced rate over what we have experienced in 2013. Recall that Golden Living was originally supposed to have basically vacated our services, certainly, in 2013. And originally, that goal was 2012. So they continue to make some progress. It's been slow. We'll just have to take a wait-and-see attitude because, surely, there's virtually no way for us to understand what the pace will be.

Jason Gurda - KeyBanc Capital Markets Inc., Research Division

Okay. And then my last question is, with the strong cash flow in the quarter, you guys paid down some more debt, and it looks like you have a little over $50 million cash on the balance sheet. Maybe if you could give me your thoughts on your capital allocation outlook from this point?

David W. Froesel

Sure. We're going to primarily use the cash that's generated from operations to fuel our M&A program. And we'll also continually look at buying back stock if it makes sense, but that's kind of how it lines up.

Operator

Our next question comes from the line of Brendan Strong with Barclays.

Brendan Strong - Barclays Capital, Research Division

I guess, maybe first, as you think back at your ability to deliver upside over the past couple of quarters, it clearly seems like it was better than what you guys had been expecting going into those quarters as well. And what do you think the biggest driver has been?

Gregory S. Weishar

I think there's been a couple of drivers. First of all, as I mentioned in my remarks, our salesforce is getting stronger. And the reason why our salesforce is getting stronger's for 2 reasons: Number one, we have a better product offer than we used to; and secondly, we've reorganized the sales group and we've brought in what I would consider to be outstanding leadership. So it's a team effort. Everybody's working very hard to offer good service levels to our customers, and we rejuvenated our product line and now we have a stable sales and account management group to help us get out our message and retain business and sell new business. So that's been one dimension of it. The other dimension is as we originally had in our guidance that we were going to be losing Golden, and that was a key component of why we were beating guidance compared to where we thought we would be this time as we were sitting here last year, preparing our budgets. And I think we've done a better job in selling. As I mentioned, we're very close to doing -- having a year of organic growth if you exclude the Kindred, Golden situation. And so, bottom line is, I think, we are seeing great progress in the organization. So from that standpoint, we're particularly buoyant about the company's prospects.

Brendan Strong - Barclays Capital, Research Division

;

All right. And then, I guess, as I look at the guidance for the year, I mean, obviously, it keeps going up but it's -- at least in my mind, it seems to imply reductions in revenue and earnings in the fourth quarter. Is that right? And why is that?

David W. Froesel

What I can say about the guidance for the fourth quarter, it's conservative. And as we mentioned before, the conservatism comes into play primarily associated with the movement of the Golden Living beds.

Brendan Strong - Barclays Capital, Research Division

And earlier this year, you guys had broken out that Golden was around 8% of scripts. Is that -- I mean, it sounds like -- it's not clear to me if that number is similar or if that number has declined in a material way since then.

Gregory S. Weishar

Brendan, it's gone down and continues to go down. It's just a question of pace, and the outflow has been much less than we anticipated. Basically, Golden gives guidance on -- they've been working with us trying to give us guidance on what we can expect with regards to bed losses. And some of those -- some of their goals have not been hit. So, we continue to provide them high level of service and -- but to suggest that they may ultimately not take those beds away, we think, ultimately, they're probably going to -- we're going to lose those beds. And it's just a bit of uncertainty, as I indicated to Jason.

Brendan Strong - Barclays Capital, Research Division

Yes. And then just last question on Chris coming on board to focus on development. I guess, are you more expecting him to be focused on maybe changing the company strategy in any way? Or is he maybe more focused on executing against acquisitions that you would've wanted to have done but maybe you didn't do in recent years?

Gregory S. Weishar

It's more of the latter, Brendan. We've been doing maybe 1 acquisition a year, and we just got to crank the volume up. There's a couple of reasons for that, as I indicated. We now have 2 platforms we're trying to build out: the long-term care platform and the home infusion specialty platform. And so we've got a bigger outlook in terms of what we're trying to accomplish, and we need to increase the volume of those transactions. So that and the other piece that Chris is going to help us with is there's some business development/corporate development things that we would like to work on, and he's going to give us some manpower in that area that we can focus some of these corporate development initiatives. It may not be pure acquisitions but maybe more like partnership things that we want to do with different players out there.

Operator

Your next question comes from the line of Steven Valiquette from UBS.

Steven Valiquette - UBS Investment Bank, Research Division

Greg and Dave, it seems like the whole world's still kind of waiting for the AMP implementation, we've been getting some questions recently on this NADAC reimbursement scheme. So I'm just trying to get a sense for how prevalent that might be within your book of business, if at all, if it's even material. Also just any color on why you think it even exists. I mean, it's just a reimbursement scheme that was created by CMS. Is it sort of a stopgap until AMP is implemented? Or, I guess, what are your overall thoughts around this?

Gregory S. Weishar

Well, it's funny AMP comes up again. This is a bit of a black box that CMS is going through. We do have NADAC-like pricing in Alabama, and -- but it's not "a classic NADAC approach." We have been, over the years, moving away from contracts that have Medicaid pricing component tied to them. The market has changed a lot. As far as whether NADAC or AMP ultimately survives the -- and CMS basically imposes that type of philosophy on the Medicaid agencies, I think it's going to be down on a state basis, certainly. And ultimately, I think that, mostly, either -- whether it's NADAC or AMP, I'm not sure that the ability for CMS to drive prices down on the generics is going to be that much greater than what's happening today. So I've always said that AMP could be a good guy for us because it would create a much more certain revenue stream around generics than we have today under the MAC pricing, where PDPs can going in and change the price pretty much at will. And we will remain -- and I will continue to take that position, but I'm very doubtful that this juncture that we're going to see in the near term, either AMP or NADAC. But, again, I could be proven wrong. I mean, first quarter is again, another target date, if I recall. I have kind of put it out of my mind. And this is probably the first call that I haven't talked about AMP in the last 2 years, but maybe we should have. The onetime I do that. But I think we just have to wait and see. I wish I could be more definitive on that. Both are cost base systems, so at the end of the day they have a different dynamic than somebody setting the price for us.

Operator

Your next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Greg or Dave, what are you backing out the $2.9 million number for the new generic? I mean, isn't this essentially new generic pricing from California that carries forward? Or is there just a onetime correction on something, and we're back to some normal pricing schematic going forward?

David W. Froesel

What the $2.9 million was, Bob, is on August 14, 2013, the California Department of Health Care Services announced its intent to implement a 10% reimbursement reduction from numerous health care providers, including long-term care pharmacies. And originally, the California Department of Health Care Service received federal approval for the reduction effective June 1, 2011, but the California Department of Health Care Services has been prevented from implementing the reductions due to accordant junction and the United States Court of Appeals for the Ninth Circuit denied the plaintiff's motions for a Stay of Mandate allowing for the implementation of the reimbursement reduction. And going forward, the California Department of Health Care Services plans to implement the reduction perspectively beginning January 9, 2014, and will begin recouping a percentage of provider payments representing the 10% reduction on certain drug reimbursements retroactive to June 1, 2011. And that's what the $2.9 million represents.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

So, it's a 6-month kind of an aggregate number here? It's not just simply an operating cost? This is the way generics will be priced going forward?

David W. Froesel

The $2.9 million, what we excluded, represents the time period for June 1, 2011 through September 30, 2013. But more importantly, Bob, Medicaid revenues for all of PharMerica are about 8% of sales. And, specifically, California represents about 2% of our sales, and this 10% reduction on certain drugs to providers, including long-term care pharmacies, will impact PharMerica on a go-forward basis, about $300,000 a quarter pretax. And we've got that built in to our fourth quarter guidance. And we'll, obviously, build that in to our 2014 and beyond guidance.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And Greg, can you just flesh out the Premier opportunity? How do the economics work there? What are you expecting to gain from there?

David W. Froesel

There's 2 components to the deal. One is mainly tactical. We're going to buy through Innovatix with -- which is, obviously, owned by Premier, just so we're clear about that. But we'll -- Innovatix becomes our standard GPO partner, and we were able to improve our terms versus what we had with our GPO partner prior. So there's some, directionally, a good guy there for us. The other component of the Innovatix relationship is their ownership with both the hospital associations in New York, as well as Premier, which is a large purchasing organization for hospitals and physicians and so forth. They basically are positioning us to work very closely with a lot of their institutions to develop programs, where we can improve our ability to admit patients in long-term care facilities, most of that you probably don't know, but there's a tremendous amount of discoordination and discordant activities that occur when someone gets discharged from a hospital and admitted into a nursing home. And we're trying to help that, both from a quality of care standpoint, as well as a cost containment standpoint because to the extent we're able to get information early on, we're able to improve the cost and improve the quality of care for our long-term care customers. So that's a big component of what we're working on. Another component that ties into this is, as you know, with Amerita's business model, they rely on the hospital discharges and so forth, and we want to -- Innovatix is going to help us. And we're sitting at the table with a lot of their committees and trying to improve the discharge process and the infusion segment as well. So this is really going upstream and trying to create some influence in the hospital segment, in the ACO segment, which we're on the ACO committees. So there's a lot of what we believe is improvement of understanding and influence into the hospital and in the ACO communities that we get with the Innovatix relationship.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And actually 2 questions that come out of that. Can you share any possible goals for the second opportunity there? What's -- how do you define success there? Secondarily, you're buying through Innovatix. Does that translate to any changes to an Amerisource relationship? Maybe I'm comparing apples and oranges there.

Gregory S. Weishar

No. Okay. So with regards to the strategic components, we're doing some pilots right now, as we sit, on trying to understand how we can improve the discharge process, and we're doing that and working with some of the Innovatix clients and one of our pharmacies. So we're, again, piloting some things, to try to see if we can improve that process, which we're pretty confident that we can. And so more to come on that. I mean, this relationship doesn't affect -- it doesn't become effective until January 1, just to be clear, Bob, but nevertheless, we are working with them on some of these strategic things already. With regards to the ABC relationship and how Innovatix fits into that, we basically provide -- we're using a different GPO, and that work that, that GPO is doing. AmerisourceBergen distributes those products for -- on behalf of the manufacturer, and the GPO has contracted pricing. So, basically, we're providing [ph] to the GPO is we'll continue to distribute those products through AmerisourceBergen, but our GPO pricing is better.

Operator

[Operator Instructions] Your next question comes from the line of Glen Santangelo with Crédit Suisse.

Diego Hernandez Diaz

It's actually Diego filling in for Glen. If we could just revisit a little bit of the Amerita acquisition. I'm kind of curious as to whether or not you can help us size what the run rate contribution of that acquisition is looking like today. And then, you can take a look at a number of different market sources, but we're trying to pinpoint the sort of the natural growth rate for the specialty fusion market. Any comments around that would also be very helpful.

Gregory S. Weishar

Diego, I think, first of all, we've been very protective of how we're sizing up Amerita and so forth. But nevertheless, the home infusion industry, not the specialty home infusion industry, but the traditional home infusion industry has been growing roughly 10% a year with high single-digit, low double-digit margins, okay? The specialty home infusion industry, on the other hand, has been growing in the mid-teens, and it's basically just an evolving and developing market space. But it will have higher growth but less margins. And as to how those margins sort out, it's certainly not clear at this moment as we sit here. So, you're basically looking at a traditional segment which has reasonably high margin -- operating margins, reasonably robust growth of 10%, call it. But on the other side of the coin, as we start blending the specialty home infusion business into that, we'll see higher top line growth but we'll see pressures on the margins. So I hope that's helpful.

Diego Hernandez Diaz

That is very helpful. And I'll actually just have a quick follow-up then. And I don't know if you can comment ultimately on who the other relevant players are in this space that we should be paying attention to, and additionally, what you're seeing in terms of valuation, and that's not just for the infusion market but also for the long-term care market, that would be very helpful again.

Gregory S. Weishar

With regards to the home infusion market, there's Coram, that's a major player. Walgreens has emerged over the years through various acquisitions as a large player. BioScrip is a large player. What we have seen in terms of valuation, I think everybody's seen what's happened to BioScrip recently, but we have seen multiples as we -- when we first bought Amerita, which was roughly -- looking at it this time last year, I think we closed in December, we anticipated that there were several midsized regional players out there that we had an opportunity to at least land one or two of those, but no more than when the ink signed -- or dried clearly, the price of poker went up, and we started seeing multiples in the 10, 12. I think CarePoint in Cincinnati sold at 15x. And fundamentally, we've walked away from that. We're not going to participate in those types of multiples, and we're going to be conservative buyers from that standpoint. But we still see it, there's over 300 mom-and-pop type home infusion companies out there. And we're confident that we can grow it organically. We're confident that we'll get some traction on some of these pilots that we're talking about, and we're confident that we can roll up some of these smaller mom-and-pops. So we'll see, right now, I think that anybody that has a platform in the home infusion space, they're going to expect outstanding multiples and outstanding valuation both by private equity and other buyers out there. So that's the home infusion market. From the LTC standpoint, we see that some of these economic pressures that we've been referring to over the years are starting to bring to us smaller players who really represent a tremendous opportunity for us to roll up some of those smaller players as well. And we're seeing midsized regional folks now that have a better, what I would say, more realistic view of what valuations are. And we think we can get deals done both in the smaller guys and both the midsized folks in the LTC space.

Is Gwen there? I assume...

Cynthia Archer

Gwen?

Operator

That ends our Q&A session.

Gregory S. Weishar

Thank you, all, very much.

David W. Froesel

Thank you.

Gregory S. Weishar

We appreciate your help and support.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Have a wonderful day.

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