Diplomat.is/more I m Jay. I have chronic lymphocytic leukemia. I m a retired submarine commander, a father, a husband, an avid woodcarver. I bike 20 miles a day. I know the Diplomat Difference. Investor Presentation September 2015 Copyright 2015 by Diplomat Pharmacy Inc. Diplomat is a registered trademark of Diplomat Pharmacy Inc. All rights reserved.
Important note This presentation may contain forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forwardlooking statements. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to, any projections of financial information; any statements about historical results that may suggest trends for our business and results of operations; any statements of the plans, strategies and objectives of management for future operations; any statements of expectation or belief regarding future events, health care developments, or specialty pharmaceutical industry market sizes, shares, trends or growth; and any statements of assumptions underlying any of the foregoing. Any forward-looking statements contained in this presentation are based on management's good-faith belief and reasonable judgment based on current information, and these statements are qualified by important factors, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, including but not limited to the following risks related to our business: our ability to adapt to changes or trends within the specialty pharmacy industry; significant and increasing pricing pressure from third-party payors, our relationships with key pharmaceutical manufacturers; our limited history with integrating acquisitions; and the effects of competition. These and other risks and uncertainties associated with our business are described in the prospectus for our proposed follow-on offering, including under the heading Risk Factors. We assume no obligation and do not intend to update these forward-looking statements. In addition to U.S. GAAP financials, this presentation includes certain non-gaap financial measures. These historical and forward-looking non-gaap measures are in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-gaap measures is included in the appendix to this presentation. Diplomat is a registered trademark of Diplomat Pharmacy, Inc. This presentation also contains additional trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. 1
Diplomat continues to deliver on key growth drivers Continue to Gain Share in Core Therapeutic Areas (1) 49% y-o-y revenue growth relative to industry growth of ~20% Continued new limited distribution drug contracts won in 2015 Grow High Margin Businesses (2) 310bps margin expansion y-o-y Focused on growing our specialty infusion platform organically Manufacturer Services Selectively Pursue Strategic Acquisitions Strong financial position to pursue additional strategic acquisitions 5 incremental limited distribution drugs Hep C and Technology (1) Based on $542mm revenues in Q2 2014 and $808mm revenues in Q2 2015. (2) Based on 5.5% gross margin in Q2 2014 and 8.6% gross margin in Q2 2015. 2
Diplomat s base business continues to gain momentum Improving trends across specialty pharmacy Specialty pharmacy market grew 24% from $63bn in 2013 to $78bn in 2014 driving key milestones and achievements at Diplomat Diplomat grew revenues by 49% from 2Q 14 to 2Q 15 Specialty drug approvals comprised ~50%+ of all FDA drug approvals in 2014 3,000+ oncology and immunology drugs in global drug development Recent new drug contracts Oncology Hepatitis C Increased prevalence of limited distribution panels Biosimilars launching in U.S. Cystic Fibrosis Other The majority of which are limited distribution drugs 3
with strong financial performance Revenue Gross Profit /Script ($ in millions) ($ in millions) (1) Adjusted EBITDA Gross (2) margin 5.5% 8.6% EBITDA 1.1% 2.8% margin 310 bps expansion 170 bps expansion (1) Based on dispensed scripts only. (2) Gross profit / net sales (i.e., based on dispensed and serviced scripts). 4
Company overview 5
Diplomat: Largest independent specialty pharmacy Diplomat at a glance Founded: 1975; Headquarters: Flint, MI Employees: ~1,550 FY 2014 revenue: ~$2.2 billion Diversified base of marquee partners Exceptional above market revenue growth ($ in millions) (2) 2014 Market share ($78 billion total market size) (1) Scaled business: National footprint Avella 1% OptumRx/ Catamaran 8% 3% Others 20% Walgreens 10% CVS Health/ Omnicare 33% Express Scripts 25% Pharmacy Locations Arizona California Connecticut Florida Illinois Iowa Massachusetts Michigan Minnesota North Carolina Ohio Pennsylvania (1) Source: 2014 2015 Economic Report on Retail, Mail and Specialty Pharmacies, Drug Channel Institute and Morgan Stanley Research (2) Based on mid-point of management s estimate range for FY 2015 6
Journey of a specialty patient Diplomat monitors adherence and collects data for manufacturers Patient visits physician Patient Patient receives drugs Physician Physician writes script Patient Diplomat dispenses drug Payor Diplomat provides: Benefit verification Prior authorization Clinical intervention Payor approves script 7
Specialty pharmacy industry continues to show exceptional growth Specialty share of spend growing dramatically (1) Specialty spend under pharmacy benefit to more than double (2) 2012A 2015E 2018E 2012A Diplomat 2% 2018E 70% 30% 58% 42% 50% 50% $51 $51 million billion Traditional 58% $118 billion Traditional Specialty Specialty continues to dominate top 10 drug spend (3) 2014A 2020E 7 out of top 10 9 out of top 10 Source: (1) Specialty Drug Trend Across the Pharmacy and Medical Benefit Artemetrx 2013. (2) 2013-2014 Economic Report on Retail, Mail and Specialty Pharmacies. (3) Pembroke Consulting analysis of World Preview 2015, Outlook to 2020, EvaluatePharma. 8
Limited distribution a central and growing theme in Specialty Benefits to biotech / pharma Completely eliminate or reduce reliance on wholesaler Real-time clinical data Commercialization assistance Improves appropriate utilization What is limited distribution? Targeted channel strategy Provides certain specialty pharmacies with exclusive or preferred dispensing rights to certain drugs Fast-growing trend Benefits to Diplomat Barrier to entry Deeper, and earlier, partnerships with pharma / biotech Increased value proposition to payors Market share opportunity Traditional: Limited: Manufacturer Multiple Wholesalers 65,000 Pharmacies Patient Manufacturer One/few pharmacies Patient Portfolio of over 80 limited distribution drugs, comprising approximately 40% of revenue in 2014, and well positioned for disproportionate growth from future drug approvals Recent unique oncology limited panels Diplomat exclusive or semi-exclusive (2012) (2013) (2014) (2014) DPLO EXCLUSIVE DPLO LARGEST OF 5 DPLO LARGEST OF 4 DPLO EXCLUSIVE Diplomat is an opportunity to invest in pharma / biotech drug pipeline, without the binary risk 9
Unique competitive position LARGE PBM / RETAIL PHARMACY Diversification distracts from specialty pharmacy Less flexible / less nimble Singularly focused on specialty High-touch model Flexible and nimble Entrepreneurial culture National reach Scalable infrastructure SMALLER SPECIALTY PHARMACIES Limited scale Most focused on one or a few disease states Fragmented market Consolidation opportunity for Diplomat 10
Continue to gain share in core therapeutic areas ($ in billions) Large and high growth Oncology and Immunology are Diplomat's power alley Significant growth expected to continue in the future US Oncology revenue Diplomat 11-14 CAGR Over 3,000 oncology and immunology drugs in global drug development 45% Oncology / Immunology drugs accounted for ~70% of Diplomat s revenues in 2014 US Immunology revenue (1) Addition of several new limited distribution drugs across these areas since the IPO 27% Rapidly growing Hepatitis C franchise additions of Viekira Pak and Harvoni, and acquisition of Burman s, since the IPO Source: EvaluatePharma and company presentations. (1) Includes all indications as defined by EvaluatePharma under Immunology excluding Multiple Sclerosis. 11
Grow high margin businesses Continued expansion into specialty infusion market Grow high margin specialty infusion business Recently announced acquisition of BioRx has significantly higher margins 29% gross margin and ~10% EBITDA margin New drug launches creating product preferencing Competition in specialty space creates discount and rebate opportunities Creates new data and service fees with pharma for high margin revenue Hepatitis C Oncology Specialty generics and biosimilars New generics finally coming to specialty Oncology: Temodar and Xeloda Multiple Sclerosis: Copaxone Emerging biosimilars opportunity expands addressable market for Diplomat (longer term) 12
Unique strategic partnerships with leading retailers and health systems Needs / benefits for retail / health systems Traditional drug trend low to mid single digit growth Participate in high growth specialty without having to build expensive infrastructure internally One stop shop for patients / consumers Improve portfolio of wellness solutions How does Diplomat support retail and health system partners? Fee-for-service offering Clinical and administrative support services Patient engagement Adherence programs Integrated with retailers dispensing platforms Private label programs Benefits to Diplomat High margin business Leverage infrastructure Improved value proposition with pharma Pharmacy of choice for limited distribution drugs Diplomat s retail and health system partners Recent wins Strong pipeline of future opportunities 13
Recent Acquisitions Acquired Company Consideration Rationale Other June 19, 2015 $94M gross purchase price* $84M cash*, $10M stock ~4.5x CY 2014 EBITDA Hep C dominance in Mid Atlantic Hep C is a fast growing and highly profitable disease state Proprietary technology (HealthTrac) with applicability across Diplomat s Hep C platform Proven management team 50 year old company, run by 2 nd generation pharmacist No marketed sales process Diplomat had a one-off look Lack of auction/marketed process Founder/owner led Management all on board at DPLO April 1, 2015 $272M adjusted purchase price* (~$50M tax benefit) $217M cash*, $105M stock ~11.8x CY 2014 EBITDA One year earnout of $35M (all stock) Adds significant scale to specialty infusion business Provides ability to compete for national contracts Increases exposure to higher margin businesses Addition of new disease states, therapeutic categories & 5 new LD s Lack of auction/marketed process Founder/owner led Management all on board at DPLO June 27, 2014 $68.5 million gross purchase price* $52M cash upfront, $12M stock ~8x CY 2013 EBITDA Two year earnout max. $11.5M (all cash) Strong management team Strong therapy mix: IVIG and Hemophilia Favorable geographic footprint Lack of auction/marketed process Founder/owner led Management all on board at DPLO December 16, 2013 $13.4 million gross purchase price* $12M cash upfront ~6x CY 2013 EBITDA Two year earnout max. $2M (all cash) First DPLO acquisition More than doubled hemophilia/specialty infusion business High margins Lack of auction/marketed process Management all on board at DPLO * Value includes closing working capital adjustments 14
Future M&A Interests When considering acquisitions, we look for targets that will potentially benefit Diplomat in one or more of the following ways: Accelerate our higher margin business opportunities Expand into new therapeutic areas and/or geographic regions Enhance our clinical capabilities to improve competitive advantage Access to Limited Distribution drugs Bring new services and technologies under our umbrella Makes DPLO better, not just bigger 15
Outstanding financial profile 16
How we make money and grow profitability (Illustrative example) How we make money Payors Revenue (1) (AWP Y%) Diplomat COGS (WAC X%) Distributors / pharmaceutical manufacturers Patient Physical drug movement $ flows (1) Note AWP = WAC x 1.20 Drug mix and positive pricing trends are tremendous profit tailwinds for Diplomat Diplomat s 2Q 15 Average Our core focus Traditional Drug Specialty Drug A Specialty Drug B Specialty Drug C Specialty Drug C (10% price incr.) Revenue $100 $3,000 $12,000 $30,000 $33,000 Gross Profit ($) $10 $150 $289 $480 $900 $990 Gross Margin (%) 10% 5% 4% 3% 3% Diplomat mix shift movement over time Positive pricing trends 17
Strong financial performance Volume, price and mix all driving superior revenue growth Total Revenue 2010 First Six Months of 2015 ($ in millions) $578 $772 $1,127 $1,515 $2,215 $1,007 $1,433 2010A 2011A 2012A 2013A 2014A % growth 53% 34% 46% 34% 46% Natural operating leverage and acquisitions driving EBITDA growth and margin expansion ($ in millions) Adjusted EBITDA 2010 First Six Months of 2015 Infrastructure investments including IT, facilities and personnel $8 $15 $11 $19 $35 $14 $34 2010A 2011A 2012A 2013A 2014A % growth 27% 96% (28%) 75% 86% % margin 1.3% 2.0% 1.0% 1.3% 1.6% First Six MonthsFirst Six Months of 2014 of 2015 1.4% 2.4% Note: Historical financials are not pro forma for any acquisitions. 18
with continued growth in profitability Several factors drive growth in our Gross Profit / Script (1) : Continued mix shift towards higher price, higher profit drugs (including acquisitions) Favorable pricing trends $250 $167 $148 $71 $93 $97 $116 Gross Profit / Script (1) 2010 First Six Months of 2015 2010A 2011A 2012A 2013A 2014A % growth 12% 31% 4% 20% 44% (2) % margin 7.1% 7.3% 6.2% 5.9% 6.3% 5.9% 7.7% Gross margin expansion opportunities: Recent acquisitions with higher gross margins (%) Fee-for-service/rebate opportunities with pharmaceutical manufacturers Specialty generics and biosimilars (longer term) Note: Financials are not pro forma for BioRx acquisition. (1) Based on dispensed scripts only. (2) Gross profit / net sales (i.e., based on dispensed and serviced scripts). 19
Balance Sheet summary (as of June 30, 2015) ($ in millions) Actual Cash $17 Total Debt $191 Shareholders equity $473 Net Debt/Pro Forma EBITDA <2x Modest leverage Ample dry powder for the right opportunities (1) Acquired BioRx on April 1, 2015 for an acquisition price of $384mm ($217mm in cash, $126mm equity issuance and contingent consideration fair valued at $41mm). (2) Amended existing credit facility on April 1, 2015, inclusive of a five-year, $120mm term loan. 20
Key investment highlights Taking share in high growth specialty pharmacy sector Unique competitive position with differentiated business model Highly experienced and incentivized management team Outstanding financial profile Multiple avenues to drive strong long term growth 21
Appendix 22
Diversified therapeutic mix Revenue mix by therapeutic category (FY 2014A) Other 22% Multiple Sclerosis 10% Oncology 48% Immunology 20% 23
Reconciliation of Net income (loss) and Adjusted EBITDA Calendar year ending December 31, ($ in millions) 2Q'15 2Q'14 2014A 2013A 2012A 2011A 2010A Net income (loss) $3.4 $1.7 $4.8 ($26.1) ($2.6) $9.2 ($7.8) Depreciation & Amortization $8.1 $1.2 $8.1 $3.9 $3.8 $3.1 $2.2 Interest Expense $1.9 $0.4 $2.5 $2.0 $1.1 $0.6 $0.5 Income tax expense $2.3 $0.7 $4.7 - - - - EBITDA $15.6 $4.0 $20.1 ($20.2) $2.3 $12.8 ($5.2) Share-based compensations expense (1) $0.7 $0.9 $2.9 $0.9 $0.9 $1.4 $0.8 Change in fair value of redeemable common shares ($0.9) ($9.1) $34.3 $6.6 $10.7 Termination of existing stock redemption agreement $4.8 Employer payroll taxes - option repurchases $0.6 - Restructuring and impairment charges - - - $1.0 $0.4 $0.4 $1.5 (3) Equity loss of non-consolidated entity - $0.3 $6.2 $1.1 $0.3 $0.1 - (4) Severance and related fees $0.1 $0.0 $0.4 $0.2 $0.4 $0.7 - (5) Merger and acquisition related expenses $5.3 $1.1 $7.2 $0.7 - - - Private company expenses - - $0.2 $0.2 Tax credits and other - $0.1 $1.0 - ($0.1) ($0.6) - (8) (7) (6) (2) Other items $0.4 $0.4 $1.4 $0.7 $0.1 $0.2 ($0.0) Adjusted EBITDA $22.7 $5.9 $35.2 $19.0 $10.9 $15.1 $7.7 Note: Financials are not pro forma for BioRx acquisition. Detailed footnotes on the following page. 24
Reconciliation of Net income (loss) and Adjusted EBITDA 1) Share-based compensation expense relates to director and employee share-based awards. (2) Restructuring and impairment charges reflect decreases in the fair market value of non-core property and assets, or actual losses on disposal of such assets. 2013 charges primarily relate to the $932 write-down of our former Swartz Creek, Michigan headquarters facility to its fair value, after we vacated it in favor of our present Flint, Michigan facility. 2012 charges primarily relate to our write-down of an externally purchased software package we no longer utilize, as well as sales of Company-owned vehicles. 2011 charges include expense associated with the closure of our former Cleveland, Ohio facility, the move of our Chicago, Illinois area facility, and sales of Company-owned vehicles. (3) During the fourth quarter of 2014, we reassessed the recoverability of our investment in our non-consolidated entity, Ageology. Based upon this assessment, we determined that a full impairment of $4,869 was warranted, primarily due to updated projections of continuing losses into the foreseeable future. The remaining amounts in 2014, 2013 and 2012 represents our share of losses recognized by Ageology, using the equity method of accounting. We first invested in Ageology, an anti-aging physician network dedicated to nutrition, fitness and hormones, in October 2011, in connection with its formation. (4) Employee severance and related fees primarily relates to severance for former management. (5) Fees and expenses directly related to merger and acquisition activities, and the impact of changes in the fair value of related contingent consideration liabilities. (6) Primarily includes philanthropic activities performed at the direction of our majority shareholder. (7) Represents (a) various tax credits received from the state of Michigan for facility improvement and employee hiring initiatives, (b) the one-time costs associated with converting from an S-Corporation to a C-Corporation, and (c) a 2014 charge of $1,825 related to non-income tax obligations. (8) Includes other expenses, predominantly IT operating leases. These operating leases were initiated, in lieu of purchases or capital leases for a subset of our IT spend, for a short period of time in 2013 and 2014 for liquidity purposes. We have since discontinued the practice of leasing IT equipment. The cost of purchased IT equipment is reflected in depreciation and amortization. 25