Pharmerica Corporation (PMC)

PMC 
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PharMerica (PMC)

Q2 2013 Earnings Call

August 02, 2013 10:00 am ET

Executives

Dennis Humble

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

David W. Froesel - Chief Financial Officer

Analysts

Brendan Strong - Barclays Capital, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Michael John Petusky - Noble Financial Group, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 PharMerica Corporation Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host, Mr. Dennis Humble, Vice President, Finance.

Dennis Humble

Thank you, Lisa. Good morning, and thank you for joining us for the second 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 second quarter results, I would like to make a cautionary statement. During the call today, we will be making 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 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 this 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 in 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, Dennis. Thanks to everyone on the call this morning for your attendance. We, as always, appreciate your interest in PharMerica.

As you saw in this morning's earnings release, we exceeded expectations for the second quarter of 2013 and delivered solid results. Compared to the second quarter of 2012, adjusted diluted earnings per share increased 26% to $0.44. Adjusted EBITDA increased 26% to $33.7 million. And adjusted EBITDA margin increased 200 basis points to 7.8%. On a sequential quarter basis, we maintained the record quarterly gross margin percent achieved in the first quarter of 19.2%. And in the second quarter, we achieved records with respect to gross profit and EBITDA per prescription dispensed, as illustrated in our second quarter 10-Q. Furthermore, cash flows provided by operations were $26.6 million for the quarter. And on a year-to-date basis, through June 30, 2013, cash flows provided by operations were $74.3 million and represent a 43% improvement over the same period in 2012.

I've mentioned last quarter that we were seeing improvement in client retention. We see that continuing this quarter as well. Excluding Kindred and Golden Living, the percent of beds lost to service and pricing has fallen 22%. And the sales pipeline is growing, and we believe we are well positioned for a strong selling season in the later half of the year. We are beginning to see the rewards of the hard work and investments we have put into building a scalable infrastructure capable of providing consistent pharmacy services and to improving PharMerica's value proposition. We firmly believe the company is well positioned to aggressively compete in the long-term care pharmacy services market. Given superior cost-containment programs, best-in-class pharmacy services and improved organizational effectiveness, we anticipate continued progress towards our goal of organic growth.

Let me give you an example, RxNow installs. RxNow is PharMerica's proprietary emergency and first-dose medication dispensing system, and installs continue to grow. RxNow is recognized by our clients as a practical and low-cost solution to the med availability challenges in the subacute segment. We expect the RxNow units to more than double over the next year. And we are saving our clients money as we continue to lead the industry in generic utilization. Over 83% of drugs are dispensed generically. Recall this amount fell from over 86% due to the impact of short-cycle dispensing, which started in the first quarter of this year.

Generics have been a big win for our clients. This year, we will see a bit of a pause in brand drug patent expirations, but 2014 and 2015 will usher in another wave of savings opportunity for our clients, when drugs like Nexium, Exelon, Namenda, Abilify and others become generically available.

Speaking of generics, we are making great progress on building out the direct purchasing program we have discussed over the past several quarters. Based on recent bids we received from manufacturers, we have verified previous margin improvement assumptions and are confident we can improve overall purchasing economics. Recall when we renegotiated the Prime Vendor Agreement, we estimated that roughly half of the margin improvement would come from direct purchasing. We expect to begin direct purchasing operations in the fourth quarter. So we should see some benefit this year, and we'll clearly see value over the next several years.

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