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Diplomat Pharmacy Inc (NYSE:DPLO)
Q2 2019 Earnings Call
Aug 9, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to Diplomat's Second Quarter 2019 Conference Call. [Operator Instructions] After the speaker's remarks, there will be a question and answer period.

I'd like to turn the call over to Terri Anne Powers, Vice President of Investor Relations.

Terri Anne Powers -- Vice President of Investor Relations

Good morning everyone. As you are aware, this morning Diplomat issued Second Quarter 2019 Financial Results as well as a press release indicating that the company is exploring strategic alternatives.

Before I turn it over to our Chairman and CEO, Brian Griffin, for his remarks, I will read the following safe harbor statement.

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 risks and uncertainties which are discussed in detail in the earnings release just issued 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 it's forward-looking statements.

There can be no assurance that the process of reviewing and evaluating strategic alternatives will result in the approval or completion of any particular strategic alternative or transaction in the future. The company does not intend to disclose developments or provide updates on the progress or status of the review strategic alternatives unless and until required or when the company determines appropriate.

As such, management will not comment on the specifics of this process in today's prepared remarks. All comments today exclude any potential impact from strategic alternative. 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 a reconciliation of these non-GAAP measures to the comparable GAAP measures and 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 it will be available for 90 days.

I will now turn the call over to Brian Griffin. Brian, please go ahead.

Brian Griffin -- Chief Executive Officer and Chairman

Thank you, Terri Anne, and good morning everyone. On previous calls, we shared with you the challenges posed by the current market dynamics to our core specialty pharmacy business and the need to rebuild our PBM. While we're taking aggressive actions with regard to both businesses, these dynamics have resulted in a need to further reduce our guidance for this year.

By contrast, infusion therapy performance continues to be strong and we have further invested in this area with a small infusion pharmacy acquisition in the third quarter. We are also happy to report that we continue to partner with health plans nationwide, including increased access with major Blue Cross and Blue Shield plans.

As we work to strengthen each of our businesses, we also are strengthening our financial flexibility. We recently negotiated an amendment to our credit facility to provide covenant relief through the end of 2020. Dan will provide more details on that and our revised guidance later.

From time to time, we've had discussions with third parties either at their initiation or ours, regarding strategic transactions. Recently, we've had discussions with several parties who see value in acquiring our company or certain of our businesses and have expressed specific interest.

We, along with our advisors, are evaluating these expressions of interest to ensure that any decisions we make will be in the best interests of our shareholders. We are also exploring the full range of alternatives for value creation, which could include a sale of the company, the sale of individual businesses, or other value enhancing transactions.

Ultimately, we may determine that our best option is to remain an independent, publicly traded company in our current configuration. There can be no assurance that this process will result in an approval or completion of any particular strategic alternative or transaction in the future.

The company does not intend to disclose developments or provide updates on the progress or status of the review of strategic alternatives, unless and until required or when the company determines appropriate. I want to emphasize that during the review process, we intend to maintain our focus on executing our strategic plan and improving our businesses. We are leveraging previous investments in sales and account management talent across our businesses to drive additional volumes to Diplomat.

We are implementing enterprise wide initiatives to improve our cost structure and operating efficiency. While continuing to provide the high standard of patient care that Diplomat is known, we are doing all of this because we believe in the prospects of our business, which is also validated by the third party expressions of interest we have received.

Turning to a more detailed business update as we look at the pipeline across the entire company, we continue to see a lot of opportunity and are clearly gaining traction with our strong clinical value proposition. In the health plan market, sales cycles can be long, but we are in the final stages of negotiating contracts with several regional health plans and provide our networks.

We continue to gain new name business from hospital systems for wraparound LDD Access, clinical services and to our 340B services signing additional agreements in Q2 on top of those signed in Q1. Within infusion therapies, Diplomat continues to perform very well, successfully increasing network access with major health plans nationwide as a specialty infusion provider.

We continue to increase access with major Blue Cross and Blue Shield plans, including BlueCross BlueShield of Kansas and BlueCross BlueShield of Vermont in the second quarter. We also recently signed an agreement with health partners in Minnesota and in the Pacific Northwest, First Choice Health Network.

In addition, we've been added a networks for WellCare in Kentucky, Wellsense in New Hampshire and Always Help Partners in the New England region. All of the aforementioned agreements would provide access to at least an additional 4.5 million lives.

We also recently announced an innovative first of it's kind agreement with allergy partners, the largest allergy and immunotherapy practice in the United States. Diplomat has entered into a five-year agreement with allergy partners to provide in-home or in-office infusion services for their patients.

Diplomat will provide clinical oversight and staffing and nursing services among a suite of management services on behalf of Allergy Partners, 128 practice locations. This innovative agreement will drive Diplomat's continued growth and infusion therapies, and we look forward to working with Allergy Partners.

Our Pharma Services Business Unit, EnvoyHealth, continues to expand our pipeline of new opportunities with pharma manufacturers to provide hub and medical information services. We recently signed two agreements with a pharmaceutical manufacturer to support product distribution and other services for investigator initiated clinical trials in Oncology.

We also see continued growth in demand for digital therapeutic services as previously discussed, 2019 is a rebuilding year for our PBM business. We continue to work on establishing our specialty focused PBM value proposition and have committed additional sales and account management resources to that effort.

There is still an opportunity to win additional business in 2019, though given where we are in the year any new contract awards would not have a material impact on our 2019 financial performance.

We continue to see a robust pipeline in our PBM business for 1/1/2020. Given the dynamics of the middle market, we expect to be in a position to provide further insight into the PBMs prospects for 2020 early next year.

Moving to the regulatory environment, the situation is fluid, changing day-by-day as new proposals are brought forth and debated. While the Trump administration eliminated the proposed HHS revision to the Safe Harbor rule, there is the potential to see it revived as an addition to one or more bills currently proposed or in future bills.

The HHS proposal would have only impacted Medicare and Managed Medicaid business, but new proposals could apply to commercial business as well. Until we gain more visibility into legislative proposals, it is difficult to predict at this time any potential impacts on our business.

What is clear is that there is bipartisan support and support from the Trump administration for drug pricing reform. There are a lot of moving pieces and implications for timing, given that we are fast approaching campaign season for the 2020 presidential election.

We continue to monitor regulatory developments and we will update the market as necessary, regardless of any regulatory change we are confident in the clinical value we bring and that we will be able to shift our business model accordingly. We support efforts that would make medications more affordable for patients, which can improve adherence, particularly for lifesaving medications like those which Diplomat dispenses.

We continue to be laser focused on driving more volumes to diplomat, improving operational efficiency and further improving our clinical value proposition. I believe in diplomat and the high quality of care that we bring to our patients. I assure you that the Board, Management and I are committed to doing what is in the best interests for Diplomat's shareholders, patients and their providers, payers as well as our pharma partners and employees.

I'll now turn the call over to Dan for a review of our financial performance in the quarter. Dan?

Dan Davison -- CHIEF FINANCIAL OFFICER AND TREASURER

Thank you, Brian, and good morning everyone. This morning we reported $1.3 billion in revenue for the second quarter, down 9% year-over-year, while adjusted EBITDA was $19 million, down 55% versus the prior year.

Looking at revenue at the segment level in the second quarter. Our specialty segment generated revenue of 1.2 billion, down 1% from the prior year. Segment revenue benefited from brand price inflation, but was more than offset by payer reimbursement compression, the increase in volume of newer generics and volume declines in certain therapeutic areas. As we have previously noted, we believe core specialty pharmacy performance is being negatively impacted by increased competition. Infusions sales grew 6% year-over-year, driven by higher volumes. Oncology sales were up almost 2% year-over-year as the benefit of brand inflation was partially offset by reimbursement compression, prescription volume declines and higher generic utilization.

CastiaRx recorded 90 million in revenue, down 98 million from the prior year, as we realize the impact of previously disclosed lost business, including some business that dropped off during the second quarter. Taking a look at gross profit and margin, total company gross profit was 73 million, down 26% year-over-year and gross margin was 5.6% down 130 basis points compared to the prior year.

Gross profit in the specialty segment was 63 million, down 13% year-over-year and gross margin in the segment was down 70 basis points year-over-year to 5.2%. Both the gross profit and margin decline were the direct result of lower reimbursement in our core specialty pharmacy business, despite the contribution from higher margin generics. Specialty prescription volumes decreased slightly by 40 basis points year-over-year to 235,000, infusion therapy volumes grew while other therapeutic area volumes were down year-over-year.

Gross profit per script in the second quarter of 2019 was $264 per script compared to $301per script in the prior year period. CastiaRx recorded gross profit of 10 million in the quarter, down 16 million and generated a gross margin of 10.7% versus 13.7% in the prior year. The gross margin decrease was primarily driven by a $2.5 million non-recurring client rebate payment in the second quarter. Total company SG&A declined by $10 million compared to the prior year to 81 million driven by lower amortization expense resulting from the fourth quarter '18 impairment of intangibles as well as lower acquisition related expense and share compensation costs.

In addition, while cost saving efforts have resulted in lower employee costs in certain areas, savings have been reinvested in sales teams such as that employee costs were flat year-over-year. Taken together, our consolidated adjusted EBITDA for the second quarter was $19 million, down 55% from the prior year period.

Additionally, our results were approximately $4 million below our prior guidance due to multiple factors that were not predictable, including the non-recurring PBM client rebate payment. The second quarter includes a non-cash impairment of $85 million to write off the remaining portion of goodwill and intangibles associated with our specialty pharmacy business.

The impairment was booked due to lower than expected second quarter results, which combined with the impact of challenging market dynamics and slower than expected realization of new business awards, resulted in reduced expectations for future projected earnings and cash flows.

In addition, results also include an additional non-cash impairment of goodwill and intangibles, totaling $56 million associated with our PBM business due to lower than expected second quarter results and a more conservative outlook for growth beyond 2019.

Net loss in the quarter was a $159 million or $2.13 per share compared to a loss of $4 million or $0.5 per share in the second quarter of 2018.

Turning to the balance sheet, our working capital improved by $41 million, compared to December 31, 2018, driven primarily by an improvement in inventories and payables. We will continue to look at ways to improve our working capital position. We reported $585 million in net debt including contingent consideration as of June 30, 2019, and our leverage ratio was 4.5X. We paid down net debt by a total of $53 million compared to the end of last year, mainly on our revolving credit facility.

As Brian previously mentioned, we recently amended our debt covenants, effective August 6, covenants have been amended from 3Q, 2019 through for Q4, 2020. There were no changes in interest rates as a result of the amendment, but we did pay a onetime fee to facilitate the amendment.

Details of the modifications to our total net leverage ratio and interest coverage ratio covenants are provided in the slide presentation and accompanying today's results. Details are also available in the 8-K filed today. Less restrictive covenants are expected to ensure continued compliance and give the company additional financial flexibility to execute our strategy.

As a part of the agreement with our lenders, we agreed to reduce the size of our revolving credit facility from $250 million to $200 million. Even with the reduced size of the revolver, we can to have significant availability under our credit facility and our priority is to continue to reduce debt with any excess cash flow. Given that we have already paid down 53 million in net debt compared to the end of last year. Any further debt pay down will be dependent on additional working capital improvement and any potential asset sales. Additionally, we are required to use the net proceeds from certain asset sales over 1 million to pay down our term loans.

Turning to our outlook. First, while we remain encouraged by the pipeline of opportunity across all of Diplomat's businesses and we are being awarded new business recent awards are expected to be more beneficial to 2020 performance with limited impact on 2019 results. Second, we now expect brand price inflation to come in at the lower end of our previously forecasted 4% to 6% range. We continue to see volumes in our core specialty pharmacy business being reduced by member channel management and efforts by larger, vertically integrated peers to push volumes to their specialty pharmacies.

In addition, we have also observed competitors cherry picking prescriptions, leaving lower profit margin scripts for Diplomat.

Finally, the reimbursement environment in specialty pharmacy is driving continued downward pressure on margins. Taking into account these trends and recent developments, we have lowered our 2019 adjusted EBITDA net income and EPS guidance. We continue to expect consolidated revenues between $4.7 billion and $5 billion. This still includes specialty segment revenue between 4.4 billion and 4.6 billion. As we are halfway through the year, we have tightened the range of expected PBM segment revenue from 300 million to 400 million to 325 million to 375 million.

We now expect adjusted EBITDA in the range of 87 million to 93 million versus the prior 110 million to 116 million range. Factors driving the reduced outlook compared to prior guidance include actual second quarter results that were below expectations lower than expected generic volumes, potential for additional reimbursement pressure in the latter half of the year, lower than anticipated new course specialty pharmacy contracts and cost savings that are running behind forecast.

We now expect 7 million to 8 million in cost savings generated in 2019 with an annualized run rate exiting 2019 now expected to be 10 million or more. This is due to a number of factors, including delays in restructuring and facilities consolidation as well as delays in the full implementation of ScriptMed, our new specialty operating platform.

Given the revised outlook, we expect third and fourth quarter adjusted EBITDA to each be sequentially stronger than the second quarter due to typical seasonality, growth in infusion patience, and timing of PBM rebate recognition.

GAAP net loss expectations for the full year are now between negative $201 million and negative $191 million, which translates into a GAAP EPS loss range of negative $2.69 to negative $2.55. We continue to expect income tax expense to be approximately $2 million.

capex is expected to be approximately $21 million to $23 million for the year, primarily related to investments expected to improve unit cost efficiencies as well as enhanced analytic capabilities and to support the creation of new solutions for our manufacturer, PBM and payer clients in our core specialty pharmacy business.

Based on our revised outlook, we expect 2019 operating cash flow between $60 million and $80 million. As previously indicated, any further debt pay down will be dependent on additional working capital improvement and the potential sale of assets.

It is important to note that even with the revised 2019 outlook, we expect to remain in compliance with the new terms of our credit facility, giving us the financial flexibility to pursue our strategy into the future.

Thank you again for your time. I'll now turn the call back over to Brian.

Brian Griffin -- Chief Executive Officer and Chairman

Thank you, Dan. We remained focused on executing our strategy to grow the company and improve operational efficiency. Our clinical value proposition is differentiated from our competitors due to our therapeutic areas of expertise, in particular Oncology. Our limited distribution drug access and the fact that we put our patients first always. Every day, our employees are committed to the Diplomat difference in taking care of the patient and I'd like to thank them for their unwavering commitment to go the extra mile to make our patients lives easier. At the same time, management and the board are committed to maximizing shareholder value.

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

Operator -- Chief Executive Officer and Chairman

Thank you, Brian. We'll now move to Q&A [Operator Instructions]

Terri Anne Powers -- Vice President of Investor Relations

Operator, can you please provide the instructions?

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from Lisa Gill with J.P. Morgan. Please go ahead.

Lisa Gill -- JPMorgan -- Analyst

Thanks very much. Good morning. Brian, can you talk to us about the timeline for evaluating those strategic decisions? This is my first question and as a follow up, I know historically you haven't broken out the EBITDA of the three different businesses that you have today. Would you be, one, comfortable giving that to us or at least giving us an indication as to the relative size? It seems to me that the business that probably has the greatest value today would be the infusion business of the three.

Brian Griffin -- Chief Executive Officer and Chairman

Good morning, Lisa. Yeah, I know that is true. I think you're right. Historically, we haven't given, you know, a perspective on the breakdown by business unit and I don't think we would do that at this point. I let Dan add any additional color in terms of that. You know, the first part of your question on the timing, you know, we as we said in obviously our press release and in our prepared remarks, you know, we aren't going to make additional commentary on the evaluation of strategic alternatives. Dan, any additional color?

Dan Davison -- CHIEF FINANCIAL OFFICER AND TREASURER

No, Brian. That's right. The infusion business continues to perform very strongly and we're very encouraged by the results there, but we're not in a position to break it out from a specialty.

Brian Griffin -- Chief Executive Officer and Chairman

Obviously. Lisa, you said that we had some pretty solid wins in the infusion area with the additional help plan winds that we had in this quarter. You undoubtedly saw the press release on the new partnership with Allergy Partners. That's going to continue to drive the infusion growth into the future. So we're obviously excited about that unique new model, provider focused model and what it means for us in terms of infusion growth.

Lisa Gill -- JPMorgan -- Analyst

Just as I think about the three businesses -- you talk about the gross profit for CastiaRx. Are all three businesses profitable on the EBIT outlined today?

Dan Davison -- CHIEF FINANCIAL OFFICER AND TREASURER

Well, we don't take these segments down to an EBITDA level. They're simply broken out at the gross margin for our public reporting.

Lisa Gill -- JPMorgan -- Analyst

Okay. Thank you.

Brian Griffin -- Chief Executive Officer and Chairman

Thanks Lisa.

Operator

Your next question comes from Steven Valiquette with Barclays. Please go ahead.

Steven Valiquette -- Barclays -- Analyst

Thanks. Good morning. I kind of have a similar question to Lisa. Maybe to go just a little bit deeper on that, you know, our own view is that the specialty infusion business may comprise about 75% of the -- for 2019. Any of this year -- now, with today's adjustments, the EBITDA gains may be closer to a 100%. I'm not asking you to comment on that. I'm sorry about that. I guess my question is I just want to confirm that the specialty infusion business remains intact both from the revenue and profit perspective. You mentioned the 6% revenue growth in that business, but I want to make sure that the EBITDA is intact. I mean, those are things you mentioned in the press release that was leaving softer EBITDA seemed to be tied to the PBM operation on the core specialty doesn't make sure that the infusions in fact from an EBITDA perspective. Thanks.

Brian Griffin -- Chief Executive Officer and Chairman

Thanks for the question. Yeah. That's correct. The growth and margin prospects for the infusion therapies within specialty are intact.

Steven Valiquette -- Barclays -- Analyst

Okay, the other quick follow up. You mentioned the lower earned rebates in the PBM due to drug mix. Ironically, there was another large PBM that said that they actually had an increase in retained rebates to the drug mix. Is there any color on either, you know, which drugs or if not that, at least which therapeutic categories we're seeing maybe some shifting around a market share that might have led know one PBM to get greater rebates and then unfortunately for yourselves, maybe to be wrong -- so, any color either on the drugs or the therapeutic category. Thanks.

Brian Griffin -- Chief Executive Officer and Chairman

Not really, because it's not just drug mix, it's also client mix, so margins and rebated retention vary by client and growth -- the relative growth of an individual client would also impact our aggregate numbers. So it's not specific, it's going to be different for every client. There's really no general trend there on a therapeutic chapter level.

Steven Valiquette -- Barclays -- Analyst

Okay. All right. I appreciate the color. Thanks.

Brian Griffin -- Chief Executive Officer and Chairman

Thank you.

Operator

Your next question comes from Rivka Goldwasser with Morgan Stanley. Please go ahead.

Rivka Goldwasser -- Morgan Stanley -- Analyst

Yeah, hi, good morning. So I have a few questions here, but just to follow up on the questions on the health of the business. So obviously on the specialty side, you highlighted the vertical integration and the larger enterprises focus on carving in the specialty business. One of these entities does have an infusion business, another one has a partnership. How is infusion different and why wouldn't we see those same trends happening on that market?

Brian Griffin -- Chief Executive Officer and Chairman

Yeah. Good morning, Ricky. If I understood the question is why is infusion different than core specialty in terms of the vertical integration, is that I'd capture that correctly?

Rivka Goldwasser -- Morgan Stanley -- Analyst

Correct, when we think about the characteristics of the infusion market, what's in it that is making it more defensive?

Brian Griffin -- Chief Executive Officer and Chairman

Yeah. Well, I think, you know, I think, as you know, the market is definitely a more fragmented market and I think the idea that with an infusion we're managing across the medical benefit as well as the specialty benefit does make it different. You know, we haven't seen, you know, the same dynamics to your point in the infusion side of the business, you know, from a trajectory perspective, obviously, you saw our announcements this morning. We continue to be successful in gaining at additional access through partnerships with health plans. So, on the core side, the vertical integrations that are -- that have occurred and that are impacting us, in terms of volume, you've heard us, obviously point at during our last quarter call is also on the flip side creating opportunities for us to become the strategic partner for independent health plan.

So, the teams have had some nice success there. They've also developed strong relationships here in 2Q with a number of major hospital systems across the country, so that's going well. So that vertical integration actually is creating opportunity for us in terms of our -- both our core specialty as well as the infusion.

Rivka Goldwasser -- Morgan Stanley -- Analyst

Okay, and then question on the rebate side. So, Brian it seems that your tone kind of like in terms of the potential regulatory impact has changed since the last call. And I understand that there are kind of like more bills now that are proposed in Congress and Senate. But, when you think, step back and you think about your comments and in the impact that you had in the quarter, it also the comment around the fact that client mix matters here. Are you starting to also see kind of like clients coming to you in asking questions about kind of like the rebate and thinking about ways to kind of exchange that -- the model?

Brian Griffin -- Chief Executive Officer and Chairman

Yeah, great, great question. Yeah. We are actually so, it's given the fact that we're focused on the middle market, which as you know, we define that as groups of 500 to 5000 -- that barrier is a bit across the PBMs and within health plans. We are not seeing any request from either the consultant community or directly from clients to change the traditional rebate model.

So, there, is still a very important component of cost management efforts of our clients and their decision to retain a certain level of rebate to offset their overall healthcare costs. That model continues to be the model within our middle market and we really have not seen any change or any indication that it will change here in the near term.

And, so, I'd say that, my view of potential legislation in any one of the proposed bills that might effect, rebate retention or spread pricing. I just think that, the value that we create, particularly with our specialty that we bring to bear in our PBM offering drives a differentiated clinical value proposition that ultimately will be paid for. And I think that's really -- that is consistent with my view from really our Q1 discussion as well.

Rivka Goldwasser -- Morgan Stanley -- Analyst

Okay, thank you.

Brian Griffin -- Chief Executive Officer and Chairman

Thank you.

Operator

Your next question comes from Charles Rhyee with Cowen. Please go ahead.

Unidentified Speaker

Hi, it's James for Charles, actually. You know, given how other PBM's arms are starting to move away from rebates, can you maybe talk about, you know, where -- is within that process?

Charles Rhyee -- Cowen

So, yeah, we good. First of all, good morning, James. We are actually going back to just a year ago when I started with the company, we began to look at alternative models in that area and so we made some investments that we've spoken about in terms of data and analytics that support our clinical value proposition, specifically in PBM and our specialty business. In anticipation of significant market movement around rebates and obviously at that point it was right after the Trump blueprint was published and the Secretary was pointing to a change in the rebate model.

We have not. As I just mentioned, you know, with respect to Ricky's question, we have not seen any demand for a different model. In fact, we've seen a continued focus on the traditional pricing model that we've been in market with. However, we are preparing an alternative model that is more focused on a clinical value proposition and my hope is that I can bring that out into the market as an alternative offering really just to capture more share. But, you know, from a market perspective, we're just not seeing a different demand than we have historically.

Unidentified Speaker

Okay. Can you maybe talk more about the RFP activity so far this year and the level of conversion that you're seeing and maybe how that, you know, compared to last year?

Brian Griffin -- Chief Executive Officer and Chairman

So, you know, in terms of RFP activity, certainly relative to the last year on the PBM side, we've seen an increase in the RFP activity. And I think that's really a function of the fact that we have fielded, you know, a professional, experienced sales organization that candidly, you know, we didn't have in the company a year ago. And, you know, that basically is leveraging folks that had been out in the in the PBM business for, you know, 20 plus years and have significant relationships with the consultants and broker community.

And that is -- that's driving a higher level of overall RFP activity within the PBM business, and so, we obviously we don't comment in terms of new wins during the quarter. We'll give more guidance on that, as we get into 2020, as we've discussed, our selling season obviously goes through the entirety of the year given that we are focused on small group and -- but we've seen an increase in our RFP activity and we're excited about it. We think, the specialty value proposition that's really core to our PBM offering, is really resonating within the consultant community. And I think there's certainly a growing appreciation for the fact that here in the near term specialty is going to represent over 50% of total pharmacy costs and really almost the entirety of pharmacy trend. And as a result of that, we're getting more play out in the market within the consulting community.

Charles Rhyee -- Cowen

Okay, great. Thank you.

Brian Griffin -- Chief Executive Officer and Chairman

Thank you.

Operator

Your next question comes from A.J. Rice with Credit Suisse. Please go ahead.

A.J. Rice -- Credit Suisse -- Analyst

Hi, everybody. I understand you don't want to comment about the process going forward, but I did wonder if you might comment about what prompted you to come to this point where you're considering the strategic alternatives? In your prepared remarks, it seemed like you referenced a couple times outside inquiries. And I guess, I'm wondering, is that the driver or is it -- do you see market conditions making it more difficult for a stand-alone player like yourself versus the big guys and what they're doing? Any flavor on what brought you to the point where you're thinking about this?

Brian Griffin -- Chief Executive Officer and Chairman

Good morning, A.J. We obviously, as chair of the board and, in our discussions with the rest of my board colleagues, we have always been focused on maximizing shareholder value and it's been a part of every board meeting that we've had since I've arrived at the company. So, it just, we're not going to comment, obviously, on the process itself. But, this is just, continued focus on the part of the board to ensure that we're maximizing shareholder value.

A.J. Rice -- Credit Suisse -- Analyst

Okay. All right. And a couple of announcements in the last few days, I guess your own announcement as you referenced in the prepared remarks about the Allergy Partners' deal and then also I guess, CMS announcing the Carte reimbursement approach. Any -- anything about that, move the needle for you? It sounds like in terms of the partnership, but you probably saying that doesn't impact '19 as much as maybe '20. But is there any way that size that or talk about how the other thing impacts the environment?

Brian Griffin -- Chief Executive Officer and Chairman

Well, I mean, we're just really excited about the partnership. Obviously, you saw on the press release, you know, this really is from our vantage point, a very innovative new approach where, you know, it's a partnership with a large scale, you know, physician practice, obviously with a focus on allergic asthma and immunology therapeutic categories which line up, you know, obviously and complement Diplomat's focus. And, you know, obviously they've got a network of 161 providers, and 128 locations in 20 states. So that really just gives us broad national access in a true partnership with a physician organization.

And so that's why it's so exciting for us. It's new. It represents a new market for us. And, you know, the idea that we can together in that partnership drive a different value proposition and clinical outcomes is really key to what we see in terms of the growth opportunity within it. And we have not sized, you know, nor do we intend on immediately sizing that opportunity that will grow over time. And obviously, we're just very excited about the innovation and the partnership.

A.J. Rice -- Credit Suisse -- Analyst

Okay. Anything on the Oncology side with what's happening in CMS?

Brian Griffin -- Chief Executive Officer and Chairman

Yes. No additional insight there, A.J., in terms of what's happening on that, obviously we're given our historical focus, right, on in terms of our limited distribution model and the success that we've had expanding that portfolio. You know, we think that there are opportunities for us in, you know, in the market as it relates to some of these disease categories, orphan categories as well, because it just fits into our clinical sweet spot, but nothing additional in terms of [Indecipherable].

A.J. Rice -- Credit Suisse -- Analyst

Okay, thanks.

Operator

[Operator Instructions] And we have a question from Jon Kaufman with William Blair. Please go ahead.

Jon Kaufman -- William Blair -- Analyst

Hi, thanks, Brian. On your PBM business, you know, given what you're seeing in the market in terms of the selling season, how comfortable are you that you can see a nice uptick and in script volume and overall business in 2020?

Brian Griffin -- Chief Executive Officer and Chairman

Yeah, Jon, I have confidence that we're going to start to see it turn within the PBM business. Again for the reasons I outlined earlier, relative to my comments on the RFP activity. We're just seeing, a higher overall level of our RFP volume. Yeah, we know that our value proposition, which we think is different relative to the big three or many of our competitors is really resonating within the consultant community. I've just gotten off of, you know, a several week set of meetings with some of the major national consulting firms, and I think we're going to start -- they've assured us that we're going to get more RFPs in the future based on that value prop. And so looking at, you know, the opportunity within 2020, we think that we're going to start executing on sales given the higher level of opportunity there. And I think that I should also add that there clearly is an appreciation that, you know, in terms of the PBM operating metrics, we've turned the corner on some of the operating issues that we had during the initial migration of the two legacy PBMs onto one single operating platform. And our operating metrics are now completely consistent with the rest of the PBM industry and obviously we're striving to be better than the rest of the industry in that regard.

And that is clearly being recognized by the consultant and broker community.

Jon Kaufman -- William Blair -- Analyst

Very helpful, thanks. Okay. Turning to the specialty pharmacy business. So if you just said the strategic review process aside for a second, what are you guys doing or what can you do to stabilize that business and maybe get back into a growth mode between now and year end? Thanks.

Brian Griffin -- Chief Executive Officer and Chairman

Yeah, Jon, I'll start and then obviously as Dan, if he has any additional color. But, you know, so the key focus for us and you know, this is a new set of strategies that we started to execute just last year is this focus on health plans and hospital systems. And so while obviously we've pointed to the fact that we're being impacted here in 2019 on volumes, based on what we see as an aggressive shift of script volume to the vertically integrated players. So, they're basically through plan design, narrow network and patient channel management, shipping volume.

So, you know, that's really what's impacting our overall specialty volume. And the opportunity for us is to execute on this strategy of building relationships with independent health plans and hospital systems. And we've had some nice successes that unfortunately we don't expect them to contribute materially to 2019, but we do have high expectations for 2020, for continued sales successes in our core specialty with health plans. And, you know, these investments that I mentioned earlier around data and analytics really are helping to support our clinical value proposition with those health plans. So that's going very well. With respect to the hospital system initiative, that the hospital team is really doing a great job. We've had a number of wins here in both Q1 and in Q2 in the hospital system marketplace. So that's going well. Again, not expecting to impact 2019, but, you know, clearly is going to create a growth trajectory for us in 2020 and beyond. So that's really key for us is to continue to execute on that strategy. I think the idea that, you know, where we're able to partner and become a strategic partner with those health plans is clearly resonating.

Dan Davison -- CHIEF FINANCIAL OFFICER AND TREASURER

Yeah, this is Dan. That's exactly right. And those clients offer a better margin profile than the vertically integrated payers. So that's part of our growth strategy. And then I would just add that we are focused on increasing our data sales to manufacturers out into the future. And I think given all of the clinical data that we have and are accumulating, that is a real opportunity for us.

Brian Griffin -- Chief Executive Officer and Chairman

And I guess I'll just finish that, you know, the commentary here with. We're also in the position to leverage, obviously a really strong infusion offering. And the idea that we can, in partnership with the help plan manage the benefit across both pharmacy and in medical and cutting across infusion really becomes a differentiated advantage for us. And obviously, as you saw in our press release, you know, we've had some really solid wins in the Blue Cross BlueShield system market as well as commercial health plan marketplace. And we can leverage the relationships that we're building on the infusion side to offer an integrated core specialty and infusion offering to those health plans.

Jon Kaufman -- William Blair -- Analyst

Very helpful. Thank you.

Brian Griffin -- Chief Executive Officer and Chairman

Thank you.

Operator

[Operator Instructions] And we do not have any questions at this time. I'll turn the call over to Mr. Brian Griffin.

Brian Griffin -- Chief Executive Officer and Chairman

Thank you very much for your time today. We really appreciate your spending the time with us. Obviously, we'll be available after the call for any further questions. Thank you very much and have a great day.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Terri Anne Powers -- Vice President of Investor Relations

Brian Griffin -- Chief Executive Officer and Chairman

Dan Davison -- CHIEF FINANCIAL OFFICER AND TREASURER

Unidentified Speaker

Lisa Gill -- JPMorgan -- Analyst

Steven Valiquette -- Barclays -- Analyst

Rivka Goldwasser -- Morgan Stanley -- Analyst

Charles Rhyee -- Cowen

A.J. Rice -- Credit Suisse -- Analyst

Jon Kaufman -- William Blair -- Analyst

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