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Diplomat Pharmacy (NYSE:DPLO)
Q2 2018 Earnings Conference Call
Aug. 6, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to Diplomat's second-quarter 2018 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period.

I'd like to turn the call over to now to Terri Anne Powers, vice president of investor relations.

Terri Anne Powers -- Vice President Investor Relations

Good afternoon, everyone. Please note, after the market closed today, Diplomat issued its second-quarter 2018 earnings press release. Before we begin today, I need to read the following safe harbor statement.

As you know, some of the company's statements made on this conference call will be forward-looking statements, which may include financial projections or other statements of the company's plans, objectives, expectations, or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested in any forward-looking statement due to a variety of risk and uncertainties, which are discussed in detail in the company's annual 10-K report and subsequent filings with the Securities and Exchange Commission.

These statements speak only as of the date hereof or the date specified on the call and except as required by law, the company does not undertake any obligation to update or otherwise release publicly any revisions to its forward-looking statements.

During this call, the company will also discuss non-GAAP financial measures. Please refer to the tables included in the company's earnings press release just issued for reconciliation of these non-GAAP measures to the comparable GAAP measures and a related discussion thereof.

A replay of the call and associated slide presentation is accessible through a link on the Investor Relations page of the company's website and will be available for 90 days.

I'd like to now turn the call over to Brian Griffin, Diplomat's chairman and CEO. Brian, please go ahead.

Brian Griffin -- Chairman and Chief Executive Officer

Thank you, Terri Anne, and good afternoon, everyone. Thank you for joining us as we review Diplomat's second-quarter and year-to-date 2018 performance and our plans for continued growth in 2019 and beyond. It's my pleasure to host Diplomat's second-quarter 2018 earnings call. I'm joined on this call by Joel Saban, our president, and Atul Kavthekar, our CFO.

First, I'll provide some high-level comments on the quarter and then I'll provide more commentary on recent administration proposals, before concluding with my thoughts on Diplomat and the company's outlook for growth. I'll then turn the call over to Atul to go over the quarterly financial results in greater detail.

This afternoon, we reported second-quarter 2018 revenue of $1.4 billion, up 26%, and adjusted EBITDA of $43 million, up 70%, which demonstrates our continued progress into a broader-based healthcare services company.

Our results were driven by strong execution of the CastiaRx integration of the MPS and LDI, PBM businesses, and their outperformance against expected synergies, as well as solid growth within our specialty and infusion businesses. This quarter, we added an additional eight limited-distribution drugs to our already extensive limited distribution drug portfolio.

We are pleased with our improved business performance in the quarter, which has allowed us to invest in our operations to drive efficiency and competitive advantage. We have made significant investments this year in building a world-class specialty sales and service organization to support our commitment to the physician community, as well as to further develop partnerships with payers and hospital systems.

We have also invested in a new state-of-the-art high-efficiency dispensing and patient call center in Chandler, Arizona. We believe this investment, and our enhanced road map, will expand critical backup redundancy and growth.

Our investments directly improve patient adherence, operational efficiency, and underscore our commitment to superior service. I know many of you have expressed a keen interest in an update in our PBM business and the selling season. Our approach to the integration has been to use a well-run playbook, executed by a veteran management team. Both PBM acquisitions closed in late 2017, and the integration has proceeded very smoothly, almost reaching its conclusion.

As of the end of the second quarter, we achieved an incremental $2 million in synergies for a total $3 million recorded in the quarter, tracking ahead of our initial guidance of $4 million to $6 million of synergies. We are now anticipating $8 million to $10 million of synergies in 2018. Synergies are being driven by improvements on contracts, PBM services, manufacturer discounts, and improvement in cost of sales.

In the second quarter, we've begun the process of moving PBM patients on limited distribution drugs to Diplomat specialty, a great example of our pull-through opportunities within Diplomat. In addition, we are actively engaged in selling specialty and infusion services across the PBM book of business.

Feedback from consultants, clients and prospective clients since the launch of CastiaRx has been positive, and interest in the CastiaRx offering is quite high. We are in the middle of the busiest part of the 2019 selling season. Proposal volume continues to grow at a steady pace, and we expect above average proposal volume to continue for the next two to three months.

Proposal volume for the month of July was approximately double what we saw a year ago. In the small to middle market, no one has our clinical and specialty services strength. That is what differentiates us.

In short, we are excited to bring a clinically strong, specialty-centric PBM to the middle market. We believe this is a game changer and we expect to provide more insight on our third-quarter earnings call.

In the coming months, I plan to visit existing and prospective clients and key pharma partners and payers as we seek to carve out specialty and drive stronger growth across both the PBM and traditional specialty businesses in 2019 and beyond.

Now I'd like to take some time to provide a perspective on the Trump administration drug blueprint and related proposals.

We strongly support the administration's efforts to simplify the regulatory approval process, facilitate increased competition, and reduce consumers' out-of-pocket cost in order to make drugs more affordable and improve patient access. That is the core of what we do.

As you know, recently the Department of Health and Human Services filed a proposal with the Office of Management and Budget, OMB, which would remove the safe harbor protection for rebates and create a new safe harbor provision. The language of the proposed rule is not available until the OMB completes its review.

Currently, there are no further details regarding the plan but I'd like to share a few thoughts based on the information as we know it today.

First, we believe that the changes to safe harbor don't necessarily mean that rebates will be eliminated entirely. From our perspective, the impact on potential changes to the safe harbor wouldn't be observed in 2018 or 2019, and the earliest potential impact would be 2020.

If the government removes the safe harbor, we believe it would only apply to the Medicare and Medicaid business. And consequently, only impact a small portion of our PBM profitability, which, as you know, is primarily commercial business.

In addition, in Medicare part D, most rebates are essentially pass-through and are fully disclosed and audited for CMS statue. Therefore, the future exposure to our profitability from rebates in the government sector is expected to be negligible.

We believe that it's highly unlikely rebates will go away in the near term. Price concessions negotiated by PBMs, most of which are in the form of rebates, have been proven to significantly lower drug cost for covered patients, and we believe that the elimination of rebates done in aggregate across the industry and without regard the formulary management would result in increased cost to payers and patients via increased premiums and cost sharing.

However, we cannot ignore the possibility that the traditional performance-based pricing model could evolve in the commercial sector, whether influenced by changes in government regulation or driven by market choice. We have multiple levels of profitability for our PBM and flexible business models that can be tailored to meet client demand.

CastiaRx offers a full menu of services and flexible contract structures, from a fully transparent service fee model to the traditional pricing model and depending on what the client wishes, alternatives in between.

In our PBM business, we expect to be in the position to renegotiate the economics of our contracts, which generally allow for modification if there are any changes in law that materially alter our PBM's duties or make provisions of the contract impossible to perform.

Over time, we can envision a shift in the contracting model as clients select options with greater transparency. Moreover, the U.S. healthcare sector continues to shift toward value-based care, and we would expect the profit levers for PBMs to shift accordingly. Ultimately, we believe that our high-touch patient care model creates clinical and financial value, consistent with the objectives of value-based care models.

Moving on to another key topic of the Trump blueprint that has been at the forefront of investors' minds, the lowering of drug list price. While the government generally doesn't have the authority to regulate list prices, pressure from the Trump administration has led several manufacturers to delay price increases and at least one manufacturer to announce price reductions.

This is clearly an unprecedented time in the industry. And while we cannot predict whether more industry participants will follow suit, we will continue to closely monitor trends going forward.

Today, we expect to continue to see price increases in the second half of the year, although at a more moderate level. We've always remained thoughtful in the way that we build our budget, and we do not expect more moderate price inflation in the second half of the year to impact our ability to achieve adjusted EBITDA guidance.

We strongly support the administration's efforts to increase competition in the industry and that would be a positive for Diplomat, particularly as it relates to biosimilars and specialty generics.

Last month, the FDA released its biosimilars action plan, which advances policies to promote a more efficient process for biosimilar development and approval. To date, the FDA has approved 12 biosimilars with three approvals coming in the last three months alone.

However, due to legal challenges, only four biosimilars are actually on the market today with the fifth soon to be launched. While the timing of the additional biosimilars launch is difficult to predict with certainty, when new launches do come to the market, we expect them to benefit Diplomat's business.

Also as the dispensing pharmacy, we have relationships with both the provider and the patient. So we believe we can help facilitate uptake of biosimilars which, by definition, are not interchangeable and thus cannot be automatically substituted today.

In the case of biosimilars or specialty generics, the launch of more computing products should generally result in lower drug cost for payers and consumers, as well as improved patient access due to a better affordability.

For Diplomat, more competing products would potentially create a drag on revenue, which would allow us to drive lower cost of sales through better purchasing and thus higher profits, both gross profit and EBITDA dollars and margins for the company.

Today, we currently benefit from dispensing biosimilars for Neupogen, Zarxio and Remicade, Inflectra and Renflexis. We also have sales generated from some specialty generics. Generic Copaxone, Gleevec, and Termidor are notable.

As we have indicated previously, we see $70 billion of specialty products facing generic competition over the next five years, which will contribute to the company's ability to drive long-term sustainable profit growth.

Finally, we note that any effort to reduce out-of-pocket costs for consumers and facilitate greater patient access to drugs should be positive for Diplomat. If access were to improve due to more affordable drugs, we could potentially see a decrease in the double-digit abandonment rates that we typically observe from patients who can't afford to fill their prescriptions.

In aggregate, we believe that many of the ideas proposed in the blueprint would be either neutral or positive for our business. The healthcare sector in the United States is changing daily. And we at Diplomat, believe we are positioned to capitalize on that change.

Last year, we expanded into the PBM sector to create a more diversified, specialty-focused healthcare services company. Our strategy hasn't changed. It remains centered on taking care of the patient. We leverage our specialty expertise across diversified services and care models to drive innovative solutions to grow our business, improve patient care and access and help manage total healthcare costs.

Lastly, I wanted to share my thoughts on Diplomat. Since I joined the company in June, I've spent my time visiting our facilities, meeting our associates and gaining better insights into our operations. I have been very impressed by the depth of the talent across the organization and the incredible patient-centric culture.

Diplomat's strong legacy of commitment to patient care became immediately evident when I met with associates in our specialty pharmacies and patient call centers. That commitment is supported by a very strong culture of innovation and execution. I have to say that I'm even more excited about Diplomat's growth opportunities than when I joined the company.

With a foundation in specialty pharmacy, Diplomat's high-touch patient care model remains attractive to our pharma partners, payers, and patients and remains the core tenant our strategy, putting patients first.

Strong specialty market growth, supported by a robust pipeline of products and development, many of which expected to be on limited distribution panels and additional indications for existing products are expected to continue to drive strong growth in our specialty business.

In addition, the coming opportunity in biosimilars and generic launches, while creating a moderating effect on the top line should contribute materially to profit growth over the coming years.

As previously noted, we are seeing a high degree of interest in the specialty benefit management services that we offer. Payers are concerned about the impact of specialty on their overall healthcare cost and are hungry for new solutions to these challenges.

Our value proposition is about managing the fastest-growing cost within healthcare: specialty pharmacy. Although we offer and deliver all the services at the PBM, it is our specialty expertise and our unique set of services that set us apart and are gaining traction.

Given the expected significant increase in specialty costs, a comprehensive solution is essential for payers. The fact that we offer one of the most comprehensive portfolios of specialty pharmacy services in the industry, including solutions for specialty pharmacy costs under the medical benefit, is resonating in the market.

We continue to believe there is a substantial market opportunity to gain share in the $100 billion middle market, and I believe that eventually we'll be positioned to leverage our robust platform to penetrate the small to mid-size health plan market.

I believe there is a unique opportunity for an independent, integrated, specialty focus PBM to capture market share. In addition, I see an opportunity to leverage the strong growth in our infusion business to drive revenues and profits, as well as contribute to the lowering of healthcare costs for our patients and payers.

As many of you may recall in my prior career at Medco, we grew a strong pharma services platform. And at Diplomat, I see a real opportunity for the company to further leverage EnvoyHealth, our pharma services business.

Already, EnvoyHealth supports multiple clients in multiple traditional spaces. One nontraditional space well-positioned for growth is digital health. Our partnership with Pear Therapeutics is a clear example. Pear is the leader in this space.

Their prescription, digital therapeutic for substance use disorder reset, was the first prescription digital therapeutic to treat the disease authorized by the FDA.

Just as Sandoz is partnered with Pear to further develop and commercialize reset, we are partnering with Pear to bring the industry's first patient services center for prescription digital therapeutics. The center will support patients and clinicians in facilitating and driving adoption of this new treatment modality from prescriptions to reimbursement claims to adherence. This partnership is at the forefront of digital health and an example of our drive to implement innovative solutions.

Innovation is driven by our employees in recruiting talented employees to drive the execution of the company's strategy has been paramount. After touring sites, conducting town hall meetings and meeting employees in small groups and one-on-one, I believe that Diplomat has the right people and assets in place to drive the company to the next level, and I'm excited about the coming journey.

With that, I'll turn the call over to Atul for review our financial performance in the quarter. Atul?

Atul Kavthekar -- Chief Financial Officer

Thank you, Brian, and good afternoon, everyone. Second-quarter results demonstrate a continuation of the company's progress following the hard work around the growth initiatives launched last year and in the first quarter but before I begin, I want to note an accounting change to the presentation of our specialty segment's GAAP results. As I referenced on our Q1 call, over the past several weeks, we reassessed our presentation of cost of sales.

Starting this quarter, we reclassified certain variable expenses for our specialty pharmacy segment, such as nursing and shipping and handling cost, into the cost of sales rather than as part of SG&A, where they have been historically classified.

This has the benefit of providing greater visibility into the segment's variable contribution and of course, there is no impact from this reclassification to net income or adjusted EBITDA. The new presentation leads to a numerically smaller gross profit margin for the segment and historical comparisons on a similar basis are provided in our accompanying slides in 10-Q.

In the second quarter, our specialty segment generated revenue of $1.2 billion, or about a 10% increase from the prior year. Oncology and infusion continued to be important drivers in the quarter, with revenue growth of 11% and 18%, respectively.

Specialty segment prescription volume in the quarter was 236,000, or approximately 7% over the past year. We've mentioned in the past our new sales realignment and are already beginning to see the impact of those efforts. We look forward to continued dividends from those investments gradually over the next several quarters.

Our specialty segment gross margins in the quarter were 5.9% and generated $301 per script. On the same basis of measurement, this would have compared to 5.9% and $299 per script in the prior-year period.

Our PBM segment, CastiaRx, generated revenues of $189 million and gross profit of $26 million in the second quarter. In the quarter, and as Brian mentioned earlier, we generated $2 million of incremental synergies for a total of $3 million recorded in the second quarter. Combined with the synergies called out during our Q1 call, we are now exceeding our initial synergy estimate and now expect a total of $8 million to $10 million in synergies in 2018.

We continue to be quite pleased with our PBM results as they demonstrate the tremendous progress the team has made in the integration process.

Taken together, our segment performance helped drive a strong consolidated adjusted EBITDA for the quarter of $43 million, a 70% increase from the prior year. Net loss in the quarter was $4 million, which was negatively impacted in the quarter by $3 million of stock-based compensation in connection with the accelerated vesting of equity awards related to our CEO transition, as well as a $2.3 million charge to contingent consideration as a result of better-than-expected performance of our previous acquisition.

Beginning with the third quarter of 2018, and as required by the SEC, we will no longer be presenting adjusted EPS but will continue to provide the same itemized adjustments as we presented in the past.

Our balance sheet continues to strengthen. We ended the quarter with roughly 3.6 times our trailing pro forma adjusted EBITDA, and we continue to make progress toward our long-term target leverage of between 2 and 3 times trailing adjusted EBITDA. As for 2018 full-year guidance, we are only making a few adjustments to reflect our updated views on the business.

We are making no changes at this time to our revenue guidance of $5.5 billion to $5.9 billion but do note that we are expecting a slight decrease in PBM revenues in the second half as certain legacy, low-margin contracts are exited, consistent with our comments on our first-quarter call.

As we look forward to the remainder of the year, we anticipate start-up costs related to the launch of the new distribution facility in Chandler, Arizona, as well as from new investments we're making in our broader operations and processes.

Once the new facility is fully operational in early 2019, and as our various improvements are completed toward the end of the year, we expect to be in a position to gain operating leverage, as well as provide critical backup capacity for our call centers and specialty operations, a key differentiator among specialty pharmacies and middle market PBMs.

We believe that when taken together, the positive gains made relative to our synergy expectations, the start-up costs related to the Chandler facility, the increased investment in our other operating systems and processes and the muted drug pricing environment we expect for the remainder of the year, largely cancel one another out and thus we are leaving our adjusted EBITDA guidance at its current range of $164 million to $170 million for the full year. We will continue to monitor the market for subsequent updates.

In line with my comments around stock-based compensation, as well as the limitations to their tax deductibility, the increase in contingent consideration we observed in the current quarter and a more conservative outlook on interest rates for the remainder of the year, we are updating our GAAP net income expectations for the full year ranging from a loss of $11 million to a small gain of $0.5 million and corresponding GAAP EPS of a loss of $0.15 to a gain of $0.01 per share.

Notwithstanding the heightened activity in our industry as of late, we remain pleased with our progress to date as demonstrated by our financial performance, as well as the opportunities ahead.

Thank you, again, for your time and your interest in understanding the Diplomat's story. And I'll now turn the call back over to Brian.

Brian Griffin -- Chairman and Chief Executive Officer

Thanks, Atul. It's fair to say these are interesting days in our industry. The commentary from the administration, potential rule changes to the safe harbor protection, the multiple announcements around pricing by pharma, plus all the speculations around even further changes to the healthcare supply chain have created a lot of uncertainty as of late.

In times like these, I think it's important to go back to fundamental principles. Diplomat was founded on the simple tenet of "Take good care of patients and the rest falls into place."

I don't think of that concept as a naive one whose time has passed. It has been the company's north star for over 40 years and it is one of the key reasons I joined the company as CEO. In fact, I joined the company because I believe in Diplomat's commitment to helping patients manage the most complex conditions through a holistic high-touch patient care model.

In the future, I suspect there will be changes that impact some business models in our industry but we do not live in a static world and with change often comes opportunity and we are preparing for all scenarios.

After taking some time to become more familiar with the team, I have an even greater confidence that no matter what happens on our sector, we have the right team to navigate those changes and to find opportunities to grow and to thrive.

Before I turn it back to the operator for Q&A, I want to thank Phil Hagerman for having built such a great company, which has such tremendous opportunity for growth and one I have respected throughout my 35-year healthcare career. In addition, I'd also like to thank our board member Jeff Park for his leadership as Interim CEO since the start of the year. And finally, I want to thank each of our associates for their commitment to Diplomat and to the patients we serve.

In closing, our strategy hasn't changed. It remains centered on taking care of the patient. I'm confident that we are well positioned to leverage our unique specialty pharmacy assets and our new specialty-focused PBM platform to drive future growth.

Thank you for your time and I look forward to your questions.

Questions and Answers:

Operator

Thank you. [Operator instructions]. Your first question comes from the line of John Kreger with William Blair. Your line is now open.

John Kreger -- William Blair & Company -- Analyst

Thanks very much. Brian, there is a statement in the release that was interesting, I was hoping you might be able to expand on it. You talked about increased specialty volumes due to payer and physician relationships. Can you just talk about what might be behind that? And are you seeing any shifts in, sort of, specialty patient access dynamics? Thanks.

Brian Griffin -- Chairman and Chief Executive Officer

Yeah. Thank you very much for the question and I'll start it and maybe ask Joel to give a little bit more color as well but I think really what we're pointing to there is, that the company you know, historically has built its specialty business by building very strong relationships within the physician community.

And really what I was pointing to in the statement is that there are a shift and new emphasis in developing relationships within the payer community. So I think this may have been discussed in the first-quarter call but we made significant investments here in bringing in a new leadership team to drive sales to the payer and integrated hospital system community.

And so we're expecting that very experienced team, as well as investments in the field organization to drive incremental growth through the payer and hospital systems. I'll turn it over to Joel and Joel if you have any additional comments.

Joel Saban -- President

Thanks, Brian. Yes, we continue to see strong growth in Oncology, specifically, as you know, one of our core therapies we continue to see new drugs coming to market and just very strong growth in that category.

As well as in our infusion business, we continue to integrate our acquisitions from last year and continue to see synergies as we expand our territories and overall access to medical contracts from our acquisitions.

John Kreger -- William Blair & Company -- Analyst

Great. Thanks. And then just one follow-up. Since you've acquired the PBM businesses, can you just talk about how your pharma service relationships have evolved, if at all? How are pharma companies dealing with the PBM capability? Thanks.

Brian Griffin -- Chairman and Chief Executive Officer

For that one, I think, I'll turn it over to Joel.

Joel Saban -- President

Great. So obviously, it is a great asset for us with the pharma companies there. We concentrate our services on biotech and emerging pharma companies with products in our categories. So we've had an extremely positive response from the manufacturers.

We're also able to bring to the manufacturers additional relationships with payers and provide additional services to them with our new PBM core competencies. So it's been extremely well received by the pharma company.

John Kreger -- William Blair & Company -- Analyst

Great. Thanks.

Operator

Your next question comes from the line of Lisa Gill with JPMorgan. Your line is now open.

Lisa Gill -- J.P.Morgan -- Analyst

Thanks very much. And good afternoon. Brian, let me just start with your comments around the shift in the model. I know you and I worked together many years ago and we had just another PBM models but I think as investors look at the current smaller to mid-market and look at the amount of rebate retention versus your comments around shifting toward value-based care.

Can you talk about what you think the evolution looks like? No. 1. And No. 2, as we start to think about the value-based care, how do you think about the economics? And do you believe that Diplomat CastiaRx is going to have to take more risk? And if so, how do you think about how that risk model looks?

Brian Griffin -- Chairman and Chief Executive Officer

Lisa, first of all, great to hear your voice again, and I look forward to working with you now in my new role as well. So there was a lot packed into that question. And I would say, first, relative to the model overall. I mean, as we look at the business, my experience at both Anthem and at Medco, clearly there has been a shift toward transparency and the identification of rebates in that business model.

So to your point, I have seen a lot of change over many decades. And despite that change, the PBM industry has managed to do well from a margin perspective.

In terms of how that might likely shift, you can certainly envision a model where, particularly for us at Diplomat, given our high-touch patient care model on the specialty side and the infusion business as well, is that we could have a performance-based model.

Now that does not suggest risk per se to one of the parts of your question but you can envision where we could develop a relationship with the payer to work together on a coordinated basis, to close gaps in care through gaps in care model. Obviously, I think historically, we've done very well in demonstrating our ability to drive improved adherence as just one example. And you can envision a model where we partner with the payers to achieve improved overall outcomes and importantly, to lower total healthcare costs.

So I think it's that total healthcare cost view that we bring, and I think, again, our position as a specialty pharmacy, our relationship with the physicians and our relationships with the patients puts us in a unique position to be able to execute on that type of model.

So from my perspective, it's hard to tell where the model will go per se but we're evaluating all of the scenarios and I would imagine with the shift toward value-based care, that type of the model would resonate and fits very well into where we've got a strong competitive advantage.

Lisa Gill -- J.P.Morgan -- Analyst

And I would agree with those comments. I guess, my follow-up though would be, as we shift toward that model and we think about how the economics are generated today, do you believe that your customer, the planned sponsors understand the value of what you're bringing and therefore, the economics would be comparable or potentially better or do you think that there is still some opaqueness to the model and therefore we could see some amount of transition. I think if you look at the recent performance, I think that's what the concern is by the investor community. So just any kind of color would be really helpful?

Brian Griffin -- Chairman and Chief Executive Officer

Yes. And obviously, Lisa, I have seen a number of those reports that were really focused to your point on the rebate retention component. Naturally, there are multiple levers of profitability across the PBM.

As you look at our business today, the legacy, LDI and MPS business, we have very flexible business models that we're executing on behalf of our clients, from fully transparent service-fee based models to all the way to traditional models and several versions in between.

So I think it's up to us to really underscore the value proposition that we bring as a specialty pharmacy and the impact that we're having on total healthcare cost. So I agree with you that, that is an important part of any potential future structure but I think we're very well positioned to do it. I think we've got the execution, as well as the analytics to support that value proposition. I'll ask Joel if he has any additional commentary.

Joel Saban -- President

Yes. The one thing that I would add, Lisa, is that as we see over 40% of the total healthcare cost in the PBM business is in specialty and continue to rise and as that happens puts us in a very unique position since we are taking care of patients, getting the prescription, filling prescription in our own pharmacies.

We have a unique opportunity to actually influence that cost and that value much greater than with other drugs. So I believe as specialty becomes a bigger part and bigger parts of the cost, we are positioned in a unique to better provide value, as well as solutions for our payers.

Lisa Gill -- J.P.Morgan -- Analyst

OK. Great. And, Atul, if I could ask a quick one. I appreciate your comment on the adjusted EBITDA going forward.

Can you update us on how to think about adjusted EPS guidance post the quarter?

Atul Kavthekar -- Chief Financial Officer

Yes. It's a great question, Lisa. So I think that when you think about adjusted EPS and as you are probably hearing and experiencing from a lot of other companies, we're going to be moving away from that going forward. We've presented for this quarter for sake of completeness but the EPS, the net income changes that we talked about on the call were really arising from three things, and those are going to carry themselves over into a reset for adjusted EPS as well.

And principally, those are around share-based comp expense, and you will see in the back of the earnings release you will see a reset in that amount and expectation for the year, as well as on interest expense, as well as on the contingent consideration. So those are things that are all going to factor their way into the adjusted EPS calculation.

The amortization related to the M&A items that are the adjustments in the adjusted EPS are not changing for the remainder of the year. So if you just factor in those, as I mentioned SP fee and interest, those are all sort of carried away through to adjusted EPS.

Lisa Gill -- J.P.Morgan -- Analyst

Right, thank you and Brian, I definitely look forward to working together again. Thanks so much for all the comments today.

Operator

Your next question comes from David Larsen from Leerink. Your line is now open.

David Larsen -- Leerink Partners -- Analyst

Hi. Can you talk a bit about PBM selling season and how it's progressing relative to your expectations? And then what impact are the mega deals having on the selling season, if any? And then, Brian, if you can give some color and your thoughts around IngenioRx and CastiaRx, why you made the move, that'd be very helpful. Thank you.

Brian Griffin -- Chairman and Chief Executive Officer

OK. I'll ask Joel to comment and provide some additional color around the selling season but I'd say that as I indicated in my introductory comments, the integration within CastiaRx is going really, really well.

In terms of the selling season, ironically, I've got a number of my former Medco sales and account management folks managing for us here at CastiaRx but the RFP volume has increased dramatically. It's hard to tell for me and, again, maybe Joel has more color on this, whether that's tied specifically to the vertical integrations within the Big 3, but within the middle market, we're seeing an increase in volume. And I think relative to July of last year, we're seeing roughly double the RFP volume that we saw last year. So, excited about the opportunities that, that will bring.

In terms of the next part of your question around IngenioRx and CastiaRx, I'd just say obviously different models, different areas of focus. The CastiaRx model obviously is historically been focused on the small to middle market, traditionally ASO market but really, our value proposition is very different in that you know, we come to it with a specialty focused orientation.

And to Joel's earlier comments on answering Lisa's questions, I think just given where specialty costs are going and the percentage of total spend that they will represent that specialty focus, I think, will create a unique competitive advantage for CastiaRx and for Diplomat overall. So let me turn it over to Joel and Joel, any other comments regarding the selling season.

Joel Saban -- President

Great. Thanks, Brian. Yes, as indicated by Brian, we continue to have a large increase in our RFP request. As you remember, our clients are small and midsize employers and TPAs.

The selling season is right now, we're currently in the finalist meetings. We're currently talking to various constituents out in the marketplace, and they will be making decisions here at the end of third quarter, even at the beginning of the fourth quarter as these clients tend to make these final decisions at that part of the year.

So we're extremely pleased with not only the activity of the RFPs but also with the actual conversations that we're having with the plan. It's really hard to tell right now any activity from the upcoming PBM acquisitions by the health plans or the health plans being acquired by PBM but for us we're extremely pleased with not only as I said the RFP activity but also with the response we've been getting from the consultants and the clients that we presented to.

David Larsen -- Leerink Partners -- Analyst

That's really helpful. And then one quick follow-up. What percentage of your Medicare book is Medicare? I think that you mentioned in the press report about 2 million claims for PBM. Any sense for what percentage of those is Medicare?

Joel Saban -- President

Yes, this is Joel. So the Medicare from a claims perspective is fairly small, somewhere in the 10% to 15% as of today for our current clients, and we expect that to be a smaller part as we continue to grow our PBM today.

David Larsen -- Leerink Partners -- Analyst

And those typically are not PDP claims where you own PDP and would retain a rebate, those are typically Medicare accounts where you're serving the sponsorship PDP so that rebate typically pass through. Is that correct?

Joel Saban -- President

That's correct.

David Larsen -- Leerink Partners -- Analyst

OK, thank you.

Operator

Your next question comes from the line of Brooks O'Neil with Lake Street Capital. Your line is now open.

Brooks ONeil -- Lake Street Capital -- Analyst

Good afternoon and thanks for taking my questions. I was hoping and don't think you've addressed the elephant in the room on at least some level, our friends at Amazon, Brian, do you have any thoughts about how more active Amazon in the pharmacy supply chain might impact your business?

Brian Griffin -- Chairman and Chief Executive Officer

Yes. Thank you for the question. Obviously, I'd say that you can never underestimate Amazon. I think that would definitely be pollyannaish.

I'd say in terms of what we see immediately from their announced acquisition of PillPack, I don't believe that we see near or midterm impact to Diplomat given our specialty pharmacy focus that I referenced earlier.

I think the fact that we've got a unique high-touch patient service model tied to the specialty medications, in addition highly sensitive and regulated storage and handling requirements for all of those products, I'm sure you're very familiar with, I do think that that creates a very different barrier to entry. And I just think that the relationships that we built within the physician community and with our pharma partners put us in a position to be able to compete very effectively.

Now, again, I don't discount the possibility that Amazon will continue to expand and ultimately become a bigger player in the pharmacy space but I do believe that we're in a position to leverage that unique high-touch patient care model that we built over time.

Brooks ONeil -- Lake Street Capital -- Analyst

That makes a lot of sense to me. Just forward, I know you talked a little bit about the consolidations occurring with the big players in the PBM space and the health plan space but could you just offer any thoughts you have about what impact those mergers might have on your business over time?

Brian Griffin -- Chairman and Chief Executive Officer

Sure. So I think actually, they present an opportunity for us, because having been out in the market here in my new role at Diplomat, I think it has become clear that there is a subset of the market and I would argue a growing subset of the market. So that is looking for an independent integrated partner.

And again, our unique position as it relates to specialty, I think puts us in a position to partner very well actually not only with large employers, labor and government but potentially even small to mid-size health plans to the degree that we can start to, for example, integrate data on behalf of other health plans and create a coordinated clinical care model, where we're sharing data back and forth with those health plans.

Ultimately, I think we are in the position to place them in a position to compete effectively against the vertically integrated players. So I just think that it potentially creates an opportunity for us as an independent player.

Brooks ONeil -- Lake Street Capital -- Analyst

That makes still sense to me. Two more questions. One, we've talked about the speculation about changes in the Medicare rules, particularly related to rebates. Are you seeing any significant movement on the part of your commercial customers to try to change the business model in anticipation of that or thinking about other forces in the marketplace now?

Brian Griffin -- Chairman and Chief Executive Officer

No. Actually, we haven't. So as I referenced earlier, we offer various models or structures to our contracts with our clients and it's really at clients choices to which of those financial models that ultimately they decide to use but I haven't seen an increased demand for a different type of financial arrangement between us and our planned sponsors. Joel, any additional color?

Joel Saban -- President

No. I would agree with Brian as he outlined. When we're in the marketplace bringing solutions to our clients, we often present them with a variety of different contracting solution and the client is the one that chooses the contract and what type of contract that they have. We often see movement from transparent models or fee-based models to traditional models that allow us to take risks for pricing.

And so it's been ongoing for many years, and we believe that the marketplace will dictate by client demand which way it will go.

Brooks ONeil -- Lake Street Capital -- Analyst

That makes still sense. Last question. Atul, you talked a little bit about the stock-based compensation as the other factors that had an impact on guidance for net income and net income per share. Could you just clarify what changes have occurred in terms of your expectation for the tax rate, as well just so I'm sure I understand what you're thinking now and how it's changed here in this quarter?

Atul Kavthekar -- Chief Financial Officer

Brooks, it's a great challenge. It's going to be a little challenge to answer very quickly on this call. And just because of that in the Q, which has just been filed a few minutes ago, you will see a new schedule that walks you through the statutory tax rate in the first six months of the year down to the level that was actually entered into the P&L.

And so what you will see there are a number of changes that are fairly substantial, and we've been talking about stock-based compensation and some of the changes that will put into effect with the changes to the tax code at the end of last year really do have an impact.

So a substantial amount of share-based comp that was expensive non-tax deductible. So what that does, it forces us to be in a net loss position from an EBT standpoint. However, we are still going to be accruing tax expense. We're still going to be a taxpayer.

And so what we've done is, again, in the earnings release, we have put together a range of our expected tax expense in the year, and you will see that it is a relatively small amount. And just given the range between high and low net income expectations, it sort of plays havoc with effective tax rates.

So the better way to think about it is really going to be around looking at the schedule in the Q and going from there.

Brooks ONeil -- Lake Street Capital -- Analyst

OK...

Atul Kavthekar -- Chief Financial Officer

Hope that helps.

Brian Griffin -- Chairman and Chief Executive Officer

Thanks for the question, Brooks.

Operator

Your next question comes from the line of Erin Wright with Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Hey, thanks. You stepped up your synergy target for the PBM and what was that specifically attributable to and what has been sort of surprising thus far in the integration process? Where are you now in moving on-board legacy PBM customer or clients onto the specialty platform with limited-distribution drugs and other solutions?

Atul Kavthekar -- Chief Financial Officer

Yes. Erin, this is Atul speaking. I think Brian mentioned in his prepared remarks, there were a number of components. So hard to really breakout and slice and dice the incremental in any one area but it's really a list of things.

It's really just improving the base contracts, the legacy contracts we inherited. It is a set of services around other services that clients that are going to be driving some of that manufacturer, discounts as part of it, and just a general improvement in the cost of sales. That's been something we've talked about for a while, and that's experiencing some food at the PBM as well.

And so that's why you see the increase in the quarter. The go-forward is also going to be some expectation of opex changes as well. So that's why we called out the $2 million in the quarter of incremental synergies. So that's $3 million in total and brings us to the range that we provided.

As far as surprises go, I think that there is nothing specifically that surprises at all. I think this is just team hard at work and bearing some fruit for their effort. So we hope to continue that and we hope to actually expand upon it and we'll report out as we actually realize some more of those synergies.

Erin Wright -- Credit Suisse -- Analyst

OK, great. And then curious if there is any sort of major shift in capital deployment priorities here with the change in leadership outside of deleveraging their term what are your thoughts on capital deployment. Do you see potential opportunities for future PBM deals and could you offer any sort of detail on timing and magnitude in terms of potential M&A? Thanks.

Brian Griffin -- Chairman and Chief Executive Officer

Yes. So I think the strategy for the company really hasn't changed in that regard either. I think we've historically been very focused on growing organically obviously, and I think we've been opportunistic in terms of opportunities really across each of our key business units, specialty, infusion, and PBM. Obviously, more recently, the PBM, but we will continue to evaluate those opportunities, invest, as I mentioned earlier in my prepared remarks, making investments in organic growth through the focus on the, for example, the specialty field sales and account management organization, our focus on the PBM sales organization as well, but we will continue to evaluate opportunities based on their strategic fit and basically value creation across, again, each one of our business units.

So we will continue to be aggressive but very disciplined as we do that and as we execute on that strategy.

Erin Wright -- Credit Suisse -- Analyst

OK, thank you.

Operator

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley. Your line is now open.

Mark Rosenblum -- Morgan Stanley -- Analyst

Hey, guys. It's Mark Rosenblum for Ricky. Over the course of this earnings season, we've seen a couple of large manufacturers and supply chain players talk about shifting to a net pricing environment. And so if that were to occur, can you just talk about how you would transition your contracts, I guess, from the current rebate retention model to potentially, I guess, of a fee-paying model, is that the right way to think of it?

Brian Griffin -- Chairman and Chief Executive Officer

I'll start and obviously, Joel and Atul can add to it. So I think the bottom line is it's very difficult for us to us to assess that yet since we haven't had the opportunity to review the rule or the proposed rule. And, I guess, just from my perspective, the impact of going from a rebate base model to a brand drug pricing model, where you're basically moving up the upfront pricing in the form of discount. That's currently in place, as you know, on generics.

And I'd expect that given our position, we've been in a position and had similar success in negotiating on brand drug prices under that type of new model. The same type of success that we and the industry have had with respect to the genetic component. So hard to identify exactly where this is going without having full visibility into the rule but I think that we're well positioned to have the same level of impact. Joel, any additional thoughts?

Joel Saban -- President

Great. I would just add some. Just as Brian said if there's an opportunity to negotiate list pricing ... the new list net price is different for entities, meaning that the same drug could have multiple net pricing or a variety of list prices. And I think the PBMs extremely well from a perspective to help influence that list price for formulary position to be able to manage the net cost for our clients.

If it's a uniform list price or a uniform net price, it's hard for me to fathom how will be managing formulary drug choices and net cost and over time that would be a process that may increase the cost to the payers, which is not what is hoped to be able to accomplish by these changes.

So without knowing really the particulars and how that's going to work, I think that the PBMs have shown year-after-year the ability to really adapt to whatever changes in the marketplace or changes in law or changes in legislation happens, and I think we will be able to continue to do that on a go-forward basis.

Mark Rosenblum -- Morgan Stanley -- Analyst

OK, gotcha. And then on the selling season, you guys mention that your RFP volume was up. Who are your main competitors that you're competing with on those RFPs?

Joel Saban -- President

This is Joel. Yes. We have a variety of different competitors. The middle market PBM business often is regional or specific to client type.

So we have a variety of different competitors out there. There are no one or two competitors that we see all the time. There is probably 30 to 40 different PBMs that are out in the marketplace that we compete against and we don't have any one consistent competitor.

Mark Rosenblum -- Morgan Stanley -- Analyst

OK. Thanks, guys.

Brian Griffin -- Chairman and Chief Executive Officer

Thank you.

Operator

At this point, we have reached the end of the allotted time for the question and answer session. I'll turn it back to the presenters for closing remarks.

Brian Griffin -- Chairman and Chief Executive Officer

Thank you, operator, and thank you very much, everyone, for joining the call and for your very insightful questions. Thank you for your interest in Diplomat, and I look forward to speaking with you at future events. Have a good evening.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Duration: 60 minutes

Call Participants:

Terri Anne Powers -- Vice President Investor Relations

Brian Griffin -- Chairman and Chief Executive Officer

Atul Kavthekar -- Chief Financial Officer

John Kreger -- William Blair & Company -- Analyst

Joel Saban -- President

Lisa Gill -- J.P.Morgan -- Analyst

David Larsen -- Leerink Partners -- Analyst

Brooks ONeil -- Lake Street Capital -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Mark Rosenblum -- Morgan Stanley -- Analyst

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