Diplomat Pharmacy Inc (DPLO) Q4 2018 Earnings Conference Call Transcript

Diplomat Pharmacy Inc (NYSE: DPLO) Q4 2018 Earnings Conference Call March 15, 2019, 8:00 a.m. ET

Prepared Remarks:

Operator

Hello and welcome to Diplomat's fourth quarter 2018 and full-year 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 Terri Ann Powers, Vice President of Investor Relations.

Terri Anne Powers -- Vice President of Investor Relations

Good morning, everyone. As you're aware, Diplomat issued fourth quarter and full-year 2018 financial results before market opened today. 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 plan, objective, expectations, or intention.

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 revision to its forward-looking statements.

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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 and a related discussion thereof. A replay of the call and its 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 -- Chairman and Chief Executive Officer

Thank you, Terri Anne. And good morning, everyone. While we're pleased with the company's financial performance in 2018, operational challenges experienced in 2018 continue to impact the PBM business at the beginning of the year. And market conditions in 2019 are more challenging than expected in our specialty business. Despite these challenges, I remain confident that Diplomat is making the right investments and executing the right strategy to grow, which combined with the incremental measures to right size our organization are expected to stabilize the company in 2019 and position Diplomat for growth in 2020 and beyond. Before I get more granular on what has happened since January, let me briefly review our 2018 results. This morning, we reported on an 18% increase in revenue to $1.4 billion for the fourth quarter of 2018. While adjusted EBITDA increased 63% to 43 million. full-year 2018 revenue increased 22% to $5.5 billion. And 2018 adjusted EBITDA increased 65% to $168 million, in line with guidance. 2018 topline results were driven by solid revenue growth within our specialty segment as well as the addition of the CastiaRx business.

Given a reduced near-term outlook for our PBM business, Diplomat recorded a non-cash impairment charge of $262 million in the fourth quarter. In addition, due to lower forecast from specialty, Diplomat was required to book a $46 million non-cash impairment charge with a specialty reporting unit. Taking into account these factors, 2018 GAAP EPS loss was $4.00 in the fourth quarter and $4.07 for the full year. These fourth quarter non-cash charges impacted GAAP EPS by $4.03 in the fourth quarter and full-year. In the fourth quarter, we added two limited distribution drugs to our already extensive limited distribution drug portfolio, which now includes more than 125 LBD products. Roughly half of the LBDs added throughout the year were in oncology underscoring our deep clinical expertise in this fast-growing category. Turning to our outlook for the year, as we noted at the end of February, January results were significantly below expectations. We experienced additional customer losses in our PBM business since early January, which combined with a softer outlook for client wins and other factors, led to a further reduced forecast for the PBM in 2019.

And we are observing increased competitive pressures in the specialty market, driving a reduced outlook for script volumes and associated revenues and profits in 2019. Going into further detail on what has changed since January. First, actual January results were below expectations due primarily to lower than expected volumes in both specialty and PBM. While we have visibility on historical script volumes and trends with our payers, volumes received by Diplomat in January were below our expectations and quarter-to-date volume trends appear to be similar to January. As we analyze what drove the shortfall, we're observing increasing competitive pressure in the core specialty pharmacy market in both commercial and Medicare Part D. while payers have been narrowing their networks on the commercial side for a long time, we're observing a higher than expected impact connected to increasingly narrow and/or exclusive networks by large PBMs and health plans. In addition, in both commercial and Medicare, we have observed that integrative competitors, as well as health plans that own their own specialty pharmacies, are increasingly implementing aggressive member channel management techniques.

In addition, claims processed by the PBM were down significantly year-over-year given known client losses. But even so, we're still lower than expected. Combined, these factors are reducing the volume that scripts sent to Diplomat. In addition, in the first weeks of the year, we also observed less favorable drug mix within certain payer contracts compared to last year. Variations in drug mix include, but aren't limited to, brand versus generic mix and associated generic conversion rates, and the mix of higher profit versus lower profit drugs dispense due to payer formulary changes. These factors combined with lower than expected volumes are negatively impacting Diplomat's revenue and profitability. As we have discussed in the past, reimbursement pressure is a continuous headwind across our business. Reimbursement rates and payer contracts tend to reset on January 1 and we have factored further reimbursement pressure into our forecast that were the basis of January communications. However, with respect to certain payer agreements, reimbursement rates can change at any time and in late January, we were notified of significant changes in reimbursement rates from one of our larger payers.

This is an incremental factor contributing to lower revenue and profit expectations for 2019. Turning to the PBM business, since early January we were notified of some additional PBM customer losses. These losses were primarily due to price as well as service and execution issues experienced in 2018 tied to the migration of the legacy PBM businesses to a single operating platform. While service performance today is consistent with industry standards, we still saw some additional clients move away after the new year. These losses, in addition to a softer outlook for client wins that will contribute to 2019 and a more measured approach to moving clients to our new destination operating platform, have led to a lower PBM forecast. Finally, there are a number of other small items impacting our outlook, including a slightly lower than expected benefit from price inflation. In aggregate, these factors lead us to reduce our 2019 adjusted EBITDA outlook to a range of $110 million to $116 million.

Today, the healthcare system is going through significant change given industry consolidation and a dynamic regulatory environment. While these changes are creating challenges, it's important to recognize they also create important market opportunities for Diplomat. We believe we have the right strategy in place to capitalize on strong, underlying specialty growth dynamics, the demand for better clinical outcomes and management of specialty spend, and opportunities resulting from industry consolidation to drive incremental volumes to Diplomat. As we've discussed in the past, specialty market growth is expected to exceed that of the broader pharmaceutical market and almost two-thirds of expected launches over the next five years are expected to be specialty products. Diplomat's industry-leading portfolio of more than 125 limited distribution drugs and our strong position in oncology and infusion categories, makes us an attractive partner for health plans and hospital systems that are seeking better service, improved patient clinical outcomes, and lower total healthcare costs.

Lastly, we believe that industry consolidation will generate opportunities for growth across our specialty segment, which includes our infusion business, and also in PBM as clients seek solutions from an independent provider. We remain convinced that there is a place and a significant opportunity in the market for an independent specialty-focused healthcare services provider to thrive. Near-term initiatives will help us get back on track. Sales growth strategies in both specialty and PBM are expected to gain traction throughout the year, positioning Diplomat well for 2020 and beyond. Focusing on the near-term, our 2019 strategic priorities are driving incremental volumes to Diplomat, including rebuilding our PBM business. Accelerating operational improvement and cost reduction initiatives to improve profitability while recruiting and retaining the best talent to support our growth. To this first point, we continue to pursue our strategy to create new partnerships with health plans and hospital systems. These payers are focused on improved patient care and lowering total healthcare costs. And many are dissatisfied with their current service providers.

Currently, the vast majority of the RFPs that we see from health plans and health systems seeking to carve out specialty have an incumbent that is one of our larger competitors. As an independent specialty healthcare services provider, we can provide a full suite of services to regional mid and large-tier health plans and hospital systems that would help them improve their competitive positioning relative to larger, vertically integrated competitors, while at the same time driving Diplomat's growth. Diplomat can provide a range of specialty services from simple limited distribution, drug clinical wrap-around services to a full specialty carve out, or even a combined specialty pharmacy infusion and PBM service offering that can commit to reducing specialty costs under both the pharmacy and medical benefit. We can also find value for patients and payers by offering comprehensive care management focused on optimized utilization and improved outcomes.

In addition, we envision becoming an independent data partner to contribute to predictive analytic solutions that can lead to further improvement in clinical outcomes and lower total healthcare costs. The sales cycle is typically longer in the health plan market, but we have a robust pipeline and we are in active discussions with a number of mid and large tier health plans. Relative to ROPs for full or partial specialty carve out or wrap around care management services. While it's too early to provide any further details, we are encouraged by the level of our engagement we the market and expect our unique value proposition to gain further traction with additional awards expected in the coming months. We also believe that there will be incremental demand as a result of opportunities associated with recently merged entities as they move through the integration process. We are also improving our value proposition with innovative data and analytics capabilities.

We believe we can leverage the data that Diplomat generates daily as nurses administer infused products and clinicians speak to patients in order to enhance data intelligence and develop predictive analytics capabilities. In the short-term, our objective is to become a strategic data partner. We plan on launching new products tailored to the needs of our pharma manufacture partners, health plans, and hospital systems with an objective of developing predictive analytics capabilities to help our clients improve clinical outcomes and reduce total healthcare costs. At the same time, we aim to develop the foundation for value-based contracting, which will contribute to growth across all of our businesses. Turning to the PBM, we are dedicated to rebuilding the PBM business. We have taken specific actions to address CastiaRX service performance. The CastiaRX team has successfully executed on several quality improvement initiatives targeting customer service during the fourth quarter and into 2019.

Service levels have demonstrated significant improvement, particularly in mail order and call center operating metrics, which are now consistent with industry standards. We have also dedicated additional management resources to help expedite service improvements. We are committed to providing best in class service to our CastiaRX clients and to executing continuous quality improvements as we position CastiaRX for growth beyond 2019. While I'm disappointed in further losses, I think it's very important to note that I continue to believe that what we are seeing in our PBM business is not due to market pressures and that we are taking the right steps to position the business for growth.

We have made significant improvement in service performance and based on conversations we're having, we do expect further client wins in 2019. We are well positioned to win in the market based on our broad range of flexible solutions. We continue to offer traditional pricing models all the way to full rebate pass through models and offerings in between. This includes planned designs with point of sale rebates at the consumer level. We continue to believe in the unique value proposition offered by CastiaRX as a specialty benefit manager with focus, time, and investment, we can turn around the business and position it to grow in the future. We also believe there's an opportunity to upsell broader specialty offerings to help plans and hospital systems that combine specialty pharmacy and infusion to close gaps in care and reduce total healthcare costs.

While committed to rebuilding the business as I indicated in January, I'm not willing to give an unlimited timeframe to observe some traction. Management and the board will always keep shareholder value at the top of mind. In addition to our focus on growing revenue, Diplomat is accelerating operational efficiency initiatives. Historically, Diplomat experienced very rapid growth, and as a result, operating efficiency was not a priority. However, today our existing cost structure is not supported by the current business environment and we're making needed adjustments now. We recently conducted a broad review of the company's operations and cost structure and have identified and are executing on numerous operational efficiency initiatives that are expected to contribute to 2019 adjusted EBITDA. We are executing on companywide restructuring initiatives, including facilities consolidations, reduce staffing levels while delivering high-quality patient care, and prioritizing investments.

While focused on operational improvement and reducing costs, we remain committed to investing in the business to position Diplomat to return to growth and achieve improved profitability. We will not cut critical investments that are necessary to drive the company's success, such as the implementation of the ScriptMed specialty operating platform and the stand up of our Chandler, Arizona specialty pharmacy and call center. The implementation of ScriptMed is proceeding as expected and once fully implemented at both Chandler and Flint facilities, is expected to significantly reduce our cost to fill. We continue to invest in sales and account management resources across all of our businesses. And as previously indicated, we are stepping up investments in data and analytics that can be commercialized and used to develop new value-added solutions to our manufacturer, health plan, and hospital systems clients.

At the same time, we are focused on recruiting and retaining the best talent to support the company's strategy and execution all while maintaining high-quality service. 2019 is a rebuilding year for Diplomat. We are focused on stabilizing the PBM business and have added incremental sales and account management resources to generate new business while improving service levels in order to deliver on our commitments to our clients. In specialty, we have committed incremental sales resources to combat competitive pressures, create new strategic partnerships with health plans and hospital systems, and drive more volumes to Diplomat. At the same time, we're taking appropriate action to adjust our cost structure to reflect today's market conditions. With that, I'll turn the call over to Atul for a review of our financial performance in the quarter and details of our revised outlook. Atul?

Atul Kavthekar -- Chief Financial Officer

Thank you, Brian. And good morning, everyone. In the fourth quarter, our specialty segment generated revenue of $1.2 billion or about a 4% increase from the prior year. Oncology and infusion continue to drive results with revenue growth of 7% and 3%, respectively. Gross margin in the specialty segment was 5.7% and generated $294 per script. On the same basis of measurement, this would've compared to 6% and $300 per script in the prior year period. CasiaRx generated revenues of $179 million in gross profit of $26 million in the quarter for a gross margin of approximately 14.3%. taken together, our consolidated adjusted EBITDA for the fourth quarter was $43 million, an increase from the prior year period of 63%. Net loss in the quarter was $298 million or $4.00 a share and was impacted by one-time items totaling $300 million on an after-tax basis.

These one-time items break down into two main components. First, based on our expectations for 2019 for our PBM business, and as previously announced, we took a one-time, pre-tax non-cash charge of $262 million against the PBM segment. This is comprised of a $179 million impairment of the associated goodwill and an $83 million impairment of the intangibles. Second, based on a revised expectation for the specialty pharmacy business in 2019, we took a one-time, pre-tax non-cash impairment charge to goodwill for the segment of $46 million. this is not anticipated at the time of our February 22nd press release and was determined subsequently after additional significant work around the identified PBM impairment. Finally, the one-time tax impact of these items in the quarter was a benefit of $8 million. For the 2018 full-year, our consolidated revenues were in line with our recent forecast at $5.5 billion, an increase of 22% over the prior year.

Specialty segment generated revenue of $4.8 billion, a 7% increase from the prior year. Oncology and infusion revenue growth was 10% and 14% respectively. Gross margin for the full year in the specialty segment was 5.9% and generated $301 per script. On the same basis of measurement, this compares to a 6% gross margin and $301 per script in the prior year period. CasiaRx generated total revenues of $729 million and gross profit of $95 million for the year. Full-year gross margin was 13.1%. consolidated adjusted EBITDA was also in line with our recent guidance and amounted to $168 million, an increase of 65% compared to the prior year period. Net loss for the year was $302 million or $4.07 per share and includes a loss of approximately $300 million or $4.03 per share of one-time items in the fourth quarter as previously described. Finally, we ended the year with an improved balance sheet and significant liquidity under a revolving credit facility.

Year-end leverage was 3.7 times or trailing adjusted EBITDA versus 4.5 times at the end of last year. Looking to the 2019 full-year guidance, we had given careful consideration with a number of new factors that have arisen since our preliminary views at the start of the year as Brian outlined in detail. Given these factors, among others, we're presenting the following guidance for 2019. We now expect consolidated revenues between $4.7 billion and $5.0 billion. This includes specialty segment revenue between $4.4 billion and $4.6 billion and PBM segment revenue between $300 million and $400 million. our adjusted EBITDA is expected to be in a range of 110 to 116 million. GAAP net loss expectations for the full-year are between $37 million and $26 million, which translates into a GAAP EPS loss range of $0.50 to $0.34 per share. Assumed in this range is an expected 21% to 18% effective tax rate benefit for the low and the high end of the range, respectively. Capex is expected to be approximately $20 million to $22 million for the year, primarily directed at investments expected to drive unit cost efficiencies as well as enhance analytic capabilities creating new solutions for our manufacture and payer clients.

Moving to the balance sheet, we have significant availability under our credit facility. And during 2019, we will continue to utilize excess cash flow to reduce debt. Even at the low end of our 2019 EBITDA guidance, we expect to comfortably remain in compliance with our debt covenants throughout the year. In addition, we see potential improvement over the course of the year as we improve operational efficiency and working capital. Our approach to this revision in guidance is based on a conservative interpretation of the data available to us, including the impact our growth initiatives will have on the current calendar year. Although we've spoken in detail about our refreshed views on the specialty pharmacy and PBM businesses, we continue to remain bullish on infusion. Our performance to date in the business leaves us encouraged with continued traction from our growth investments over the prior several quarters. As a result, we've not changed our expectation for our infusion business since the beginning of the year. Thank you again for your time and I'll now turn the call back over to Brian.

Brian Griffin -- Chairman and Chief Executive Officer

Thanks, Atul. As I indicated, 2019 is a rebuilding year. And we're focused on growing revenue with new client wins in both business segments, the commercialization of new data and analytics services, and executing on enterprisewide efficiency initiatives. I remain confident that Diplomat is making the right investments and executing the right strategy to leverage our competitive strengths and position Diplomat for future growth and profitability. I'm absolutely convinced that there is a significant opportunity for an independent, specialty-focused healthcare services provider to succeed in the market. I'd like to close our initial remarks by welcoming Dan Davidson, who will be Diplomat's next CFO.

As you saw in our press release this morning, he joins us from CBS and brings a significant depth and breadth of experience. Dan will report to me and lead our finance function, which will be streamlined under his direction. We would like to thank Atul for his service to Diplomat and wish him well. He will be staying on through a brief transition period to ensure a smooth transition of responsibilities. As we continue to execute on our strategy, our first priority remains our patients, and we will provide high-quality patient care as always. Finally, I want to thank each of our associates for their commitment to Diplomat and to the patients we serve. Thank you for your time and we look forward to your questions.

Terri Anne Powers -- Vice President of Investor Relations

Thanks, Brian. We'll now move to Q&A. I'd ask everyone to please limit your questions to one and a follow-up question so that all participants may be able to ask a question. Operator, can you please provide the instructions?

Questions and Answers:

Operator

At this time, if you would like to ask a question, you can press *1 on your telephone keypad. And we'll pause for just a moment to compile the Q&A roster.

And your first question comes from the line of Steven Valiquette with Barclays. Your line is open.

Steven Valiquette -- Barclays -- Analyst

Great, thanks, good morning everybody. So, the first question I have is really from investors. I think they focus on the specialty pharmacy business, that some of the pressure points for 2019 really aren't short-term. They could sorta be pressure points may be for several years down the road. So maybe just to address, maybe just beyond 2019, additional patterns you can do to sorta combat the pressure points. Really, this speaks to the large mergers, et cetera, and just the fact that competitors are bigger than Diplomat right now in the specialty pharmacy.

Brian Griffin -- Chairman and Chief Executive Officer

Thanks very much, Steven. This is Brian. I'll start and then I'll obviously ask Atul if he'd like to add any color. Yes, so as we indicated in our initial remarks, obviously, there are a number of key factors in specialty that are impacting our view of 2019. We talked obviously about the reimbursement pressure. To your point, I think we can expect that to continue. We typically, as you can expect, we offset that by improvements in cost of goods through our negotiations with respect to our wholesalers and our pharma negotiations. We had some just mix issues in the mix, so to speak, for 2019, as well. And in terms of how we combat that set of broader dynamics, I think it really goes back to our key strategy here which is developing strategic partnership with respect to specialty and infusion with health plans and with hospital systems.

And our conversations with health plans and hospital systems are going very well. That gives us an opportunity to really go out after much larger volumes than the traditional business model that we've had here, which has been, as you know, developing relationships with the physician community and specifically the specialty specialist community to become the preferred specialty pharmacy for the physician community. The new strategy allows us to go after larger volumes. So, in the context of the vertical integrations and the narrowing of networks, the big move for us will be to build on those partnerships and capture bigger volumes.

Operator

Your next question comes from the line of Lisa Gill with JP Morgan. Your line is open.

Lisa Gill -- JP Morgan -- Analyst

Thanks very much. Brian, is there a way to size some of those opportunities as we think about the pipeline, whether it's number of covered lives, potentially? And then how do we think about the timeline? Are these all 1-1 start? So, you work throughout 2019 and then it would be 2020? Or is there an opportunity for you to start to bring some of this business on in 2019?

Brian Griffin -- Chairman and Chief Executive Officer

Yeah, thanks, Lisa. There is absolutely the opportunity to bring business in on '19. And to your point, a lot of the health plans make decisions around their new partnerships on a 1-1 effective date. There clearly is opportunity to -- with respect to specialty, we're seeing that many of the health plans and even the hospital systems have the ability to carve out specialty. In the case of the hospital systems, even carve out specific therapeutic categories. In terms of sizing that market, obviously, it's an enormous market. And I referenced in my initial commentary here that we're focused on mid to large-tier plans.

And so, as you know, that can be a couple hundred thousand lives all the way up to over 1 million lives. And again, I think that based on the vertical integrations, that's gonna put pressure on the market as it relates to specialty and infusion partnerships. I do believe that our value proposition, which is focused on being an independent provider, a partner in terms of analytics, predictive analytics applied to specialty, managing the benefit across both the traditional specialty and medical benefit. That is really resonating within the market. And so, I can't give you a specific sizing of the immediate opportunity, but it is an enormous market that is undergoing significant change right now.

Lisa Gill -- JP Morgan -- Analyst

And then just as a follow-up. You talked positively about infusion several times during the discussion. So, can you just remind us of the size of your infusion business today?

Atul Kavthekar -- Chief Financial Officer

Yeah, Lisa, this is Atul. Thanks for the question. The size of the infusion is around $700 million. we think that that's gonna grow nicely in '19. The fourth quarter, we saw some nice volume growth coming out of the business. This is sort of a continuation of the same story we've been talking about. We put a lot of dollars into sales resources at the tail end of 2017 and they continue to generate a lot of new leads and a lot of new patient growth. We're focused in on the categories that are growing. And we expect that to grow nicely into '19 as well. And that's been part of the forecasting. And as I mentioned in the prepared remarks, hasn't really -- our view really hasn't changed.

Operator

The next question comes from the line of John Kreger with William Blair. Your line is open.

Courtney Owens -- William Blair -- Analyst

Hi, guys. This is Courtney Owens on for John. Just a quick question around the restructuring and I guess kind of small restructuring and optimization of the cost structure that you talked about a bit earlier on in the call. What's the general timeline around that and how will you kind of balance that with like any service or execution issues that you kinda mentioned or alluded to a little bit earlier on in the call? Thanks.

Brian Griffin -- Chairman and Chief Executive Officer

Great question. In terms of -- and I obviously had this in some of my initial remarks here. The company candidly historically has not been focused on operating efficiencies. I think we've been growing very nicely over our history. And starting mid last year to into the fourth quarter, I brought in some consultants to help us evaluate our end-to-end processes, our structure. These are folks that have operated the largest PBMs and come with a lot of experience. And that was the start of this process of evaluating our operating structure.

And in terms of sizing it, the immediate -- we've got immediate line of sight to over $10 million in savings and we believe that there's upside beyond that. And I should note that that's baked into our 2019 guidance. And again, I believe there's upside. But to the second part of your question, in terms of the balancing; clearly, particularly as we think about some of the losses that we sustained in the PBM, I can assure you that we are absolutely focused in both and all of our core operations on delivering the highest quality customer and client service -- the PBM, the specialty, and the infusion business.

Operator

Your next question comes from the line of David Larsen with SVB Leerink. Your line is open.

David Larsen -- SVB Leerink -- Analyst

Hi. Can you talk a little bit about the claims platform upgrade process in the PBM? How's that coming along? Is it complete? Have you -- what has been the response for the client base? Is the attrition stemming from that and are we past that or not? Thanks.

Brian Griffin -- Chairman and Chief Executive Officer

Thank you for the question. In terms of the operating platform within the PBM, that's the Rx claim platform. In terms of the migration of -- I should note that for those of you who aren't as close to that operating platform, it is in my opinion, the best in the industry. So, this is an operating platform that can manage the most complex of business, from large corporate union health plan, Med D. so it's a very strong operating platform. And this was the operating platform that was apart of the legacy LDI business. And the migration that took place was the legacy NPS business transitioning over to the new LDI Rx claim platform. And that is largely behind us.

We have some groups that still need to transition over. I would say, in terms of the reason behind the contract losses, I'd say that there were clearly during mid to through third quarter of '18 service issues connected to that transition process that clearly had an impact on the 2018 losses that we sustained within the PBM business. But I'd say we've stabilized that. As you can appreciate, we got aggressively focused on ensuring that we don't lose additional business and that we improve our customer service performance and our mail order turn around times. And we've done that. We've stabilized the business and it's now operating within industry standards.

David Larsen -- SVB Leerink -- Analyst

Okay, great. And then just one more on the specialty side, Brian. I mean, you've got a lot of experience in the market and in sales in particular. It seems to me that a lot of these plans are now getting into these more aggressive restricted narrow networks. I mean, what is your sales force doing about it? Can you give any details around the number of sales guys that you have calling on the health plans? Are they using some sort of a very detailed CRM database where they can record the risk of each key client, expected revenues from them? What sort of incremental pricing pressure are you seeing? Like are you gonna have to give them reduced rates in order to create your own sort of preferred networks? Any more color around that would be very helpful.

Brian Griffin -- Chairman and Chief Executive Officer

Sure. Yeah, that's a great question. And as you know, this is a relatively new strategy for us. So, we've been at this now just since I think we launched in August of '18 with this strategy focused on health plans and hospital systems. We've got a really strong experienced team. These are folks that have come in from other organizations that were also focused on hospitals and health plans during their careers. So tremendous experience. And so what we're focused on -- and I think that is our key competitive advantage is -- while we can compete on cost of goods or price points, the real focus -- and this is clearly something that's playing out right now in the market, particularly driven by the larger consulting firms that are focused on specialty, is number one, we have the ability to focus on both the traditional specialty benefit as well as the benefit under the medical benefit.

And that comprehensive approach coupled with strong sight of care strategies puts us in a great position to build these strategic partnerships with health plans. We also, as I mentioned in my introductory comments, we've invested in a set of analytics and predictive analytic capabilities that we're coupling with our specialty offering. And that will allow us to put us in the position to really provide insights to our health plan and hospital system partners as they manage the benefit. So, it's really that new focus with a differentiated patient care model. So, we've got centers of excellence that are exclusively focused on specific disease categories. So that's all they do all day long is a specific disease category. In some cases, given the volume of the drug, it can even be focused on a specific drug. That puts us in a very different position in terms of the patient care model that we provide. So that's really the differentiated Diplomat advantage for health plans and hospital systems.

Operator

Your next question comes from the line of Michael Polark with Baird. Your line is open.

Michael Polark -- Baird -- Analyst

Hey, good morning. thanks for taking the question. First one, hoping for a free cash flow or minimum debt reduction target for 2019?

Atul Kavthekar -- Chief Financial Officer

Yeah, hey, Mike. Thanks. This is Atul speaking. So, we didn't provide free cash flow guidance as you noticed. But let me just try to give you a little bit of color. As part of our EBITDA guidance and as part of the table in the back of the press release, I think you can see a lot of detail around, not just EBITDA, but some of the cash-related add backs, the interest expense. Clearly, we're going to be in a tax benefit position this year. We talked a little bit about capex on the prepared remarks. The item that we didn't give was with regards to working capital. The reason we didn't give that is because, at this point, we know we're going to improve our working capital situation, but the range of likely outcomes is quite significant.

So, we have line of sight into our initial sort of inventory reduction, as you know and as you've seen in the past. Q4 tends to be a relatively high point for our inventory hold. We've already got some plans in place to extract some cash from our inventory and use that obviously to repay our debt. But even at the lower boundaries of our EBITDA guidance, as I mentioned, and even at the lower boundaries of our free cash flow estimate, we expect to remain nicely within our existing debt covenants. And those are all the leverage and coverage covenants that are in the public documents. But we do expect to remain sort of in the high threes and about 4x at times during the year.

Michael Polark -- Baird -- Analyst

Thank you for that response. Second question; a largely integrated plan PBM acquired a close competitor of yours last year. That close competitor, you shared a lot of very small panels with that company, especially in the oncology category. I'm wondering in this guidance for 2019, what sort of risk is considered from potential volume loss for some of those products? Any color around that would be helpful.

Brian Griffin -- Chairman and Chief Executive Officer

Yeah, so this is Brian. Thanks for the question. Obviously, with that acquisition came access to a number of limited distribution products. And we clearly have taken that into consideration in terms of our expected volumes and into the 2019 guidance. I think in terms of us and the potential impact of that on our ability to sell in the market -- again, I think that we're fortunate in that we still have the broadest limited distribution drug portfolio. I think you know that we've got a significant franchise in oncology LDD. And as a result, I think from a health plan and hospital system perspective, we're still very well positioned to compete against one of the larger vertically integrated players.

Operator

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

Erin Wright -- Credit Suisse -- Analyst

Can you quantify a little bit more on the client losses on the PBM segment that were new relative to January? And what's remaining in that business and how would you characterize the type of business lost and the profit profile thereon? In other words, what does the mix look like now across that business? Thanks.

Brian Griffin -- Chairman and Chief Executive Officer

Hey, Erin. This is Brian. So, we haven't obviously identified the impact post-January and/or the business mix within that. In terms of -- and that we also, by the way, did not identify new wins. We do have new wins post-January as well, so we haven't given a net new view yet. And obviously, that's a result of where we are in terms of our selling season. We've talked about that in previous calls that we're -- our selling season basically goes month-to-month and we have our opportunities in each month. So, in effect, we don't want to give a monthly scorecard. However, I think you can, in terms of net result, you can see the impact of that expressed in our revised revenue guidance for the PBM.

Atul Kavthekar -- Chief Financial Officer

Yeah, Erin, this is Atul. Let me just add one point to that. Just again to give you a little bit of color on the book of business going forward for the PBM. As Brian mentioned, we did call out $300 million to $300 million revenue expectation for the year. You could probably think of that in terms of gross margin. You can probably think of that in terms of a similar range in between a 12% and a 14% gross margin.

Erin Wright -- Credit Suisse -- Analyst

Okay, that's helpful. And on the specialty side of the business in terms of branded price inflation, where are you seeing that shake out thus far in 2019? And what does the guidance assume in terms of branded price inflation relative to historical ranges?

Atul Kavthekar -- Chief Financial Officer

We've assumed a slightly lower range than we have in years past. We've assumed somewhere in the range of 4-6% this year. Just a little bit less. And we've assumed something in the midpoint of that for guidance. The fact of the matter is the impact of fluctuations or variance in inflation does not have as great an impact on the business as a lot of people think. I think the bigger aspect and the bigger impact of the change would be based on the level of inventory we have on hold as prices go up.

But as far as fluctuations in inflation rate, you can think about it as a 1% plus or minus change in the inflation rate for branded inflation on the DSP side. It has about just a little bit over $1 million, about $1.4 million or so, $1.3 million, $1.4 million of EBITDA impact. It obviously has an impact. It's not as great as I think a lot of people might believe.

Operator

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

Ricky Goldwasser -- Morgan Stanley -- Analyst

Thank you, good morning. Going back to the infusion business, you quantified a top line of about $700 million. can you give us a sense of what's the contribution on to EBITDA?

Atul Kavthekar -- Chief Financial Officer

Hey Ricky, this is Atul. Thanks for the question. We really haven't given that publicly, but I think we have said in the past that the gross profit, the gross margin contribution, it does tend to be a little bit higher. It tends to be at least at the drug level, sort of in the 20% and greater range. But that's before really talking about nursing costs and other support costs that follow with it. So, unfortunately, I can't really give you a very specific answer on that.

Ricky Goldwasser -- Morgan Stanley -- Analyst

So just as a follow-up. I mean, but based on your response, I mean, isn't it fair to say that infusion represents a higher percent contribution to profits than it is to revenues? So that's one. And then to add to it, when we think about just the vertical integration in the marketplace, what's the difference? What's different about infusion? And why do the vertically integrated entities are not bringing that in-house? I mean, why is that not a risk in the future?

Atul Kavthekar -- Chief Financial Officer

On your first point, with regards to contribution, I think that's absolutely correct. I think, again, without quantifying it, the EBITDA contribution from $1 infusion revenue is greater than $1 of specialty core contribution. So, I think that that's clearly the case. As far as the growth of the business, and we've talked about some of the local touches and some of the special touches that we have with our delivery model, I think that's generated a lot of growth in the business and has generally proven to be very difficult for the larger firms to replicate. Maybe I'll ask Brian to add to that.

Brian Griffin -- Chairman and Chief Executive Officer

Good morning, Ricky. I agree with Atul's commentary there. I think the infusion asset has been just an incredible competitive advantage for us in the market, particularly as we start these discussions with health plans. And for many of the health plans, they have multiple specialty infusion providers in their networks. For some of the national plans, they've got literally dozens. And so, we can go into a health plan and offer our combined specialty, which obviously covers the traditional specialty side as well as the medical benefit, and then couple on to that the infusion benefit. And to the degree that all of our analytics, et cetera, identifying gaps in care, all of that is applied across each one of those components. It really becomes an incredible value proposition and that's absolutely resonating in the market right now.

Operator

Your next question comes from the line of Charles Rhyee with Cowen. Your line is open.

Charles Rhyee -- Cowen -- Analyst

Yeah, hey, thanks for taking the questions here. Brian, when we think about also the guidance as well and especially the pharmacy side, can you give us a sense -- I know a year or so ago, we were all talking about DIR fees. Can you give us an update to the extent that we're seeing any changes in that environment; is that impacting the guidance at all?

Atul Kavthekar -- Chief Financial Officer

This is Atul. I can briefly answer the DIR question. There really is no news to report on DIR. That's been factored into our guidance. That's not really factored into any adjustments that we have made since early January.

Charles Rhyee -- Cowen -- Analyst

Okay, thanks. And then in terms of the PBM guidance, I think the previous guidance you kinda gave us -- you quantified more of all the moving parts and you've touched on a little bit on that today. Any kind of changes to, in terms of sorta the Med Part D losses that you kinda talked about before? Or is this all really coming from more of the commercial side? The incremental loss.

Brian Griffin -- Chairman and Chief Executive Officer

Yeah, yeah. Great question. The incremental losses are coming from the commercial side. And again, as I referenced earlier, these losses are really the result of the transition and migration of the legacy NPS business over to the LDI platform or Rx claim. So, this is service issues that we experienced during that transition period that we've now fixed. The incremental losses are clearly on the commercial side. We've increased the number of field resources, sales and account management. So now it's basically getting it back out there and winning back those clients. And that's where the real focus is. And clearly, I think that there's an opportunity for us to do that and to win new business in 2019.

Charles Rhyee -- Cowen -- Analyst

Thanks. And just to clarify, when you talk about new resources for the field, is that -- we're adding more people to the field or we're providing our existing sales force with more tools to compete?

Brian Griffin -- Chairman and Chief Executive Officer

Well, actually, it's both. My reference was meant to refer to new people that we've just hired into the field and focused on new segments within the PBM. So that's one piece. But yeah, in terms of tools, I do believe that we're now articulating our value proposition differently, and I think it's resonating in the market. It's clear that the broker and consultant community have really come to appreciate the importance of specialty relative to overall pharmaceutical spend. And to the degree that we're now looking at over the next couple of years here, 55% of the total is gonna be specialty. Our expertise in specialty is just a critical part of our PBM value proposition. I think we're providing our sales and account management teams improved value propositions and analytics to support their sales of that new value proposition.

Operator

Your next question comes from the line of John Ransom with Raymond James. Your line is open.

John Ransom -- Raymond James -- Analyst

Hi, good morning. One kinda in the weeds question and one bigger picture question. In your specialty infusion business, how do we think about the risks of that on hemophilia and some of the new therapies that could be potentially won and done? How do we think about the exposure to factor spread in that business?

Atul Kavthekar -- Chief Financial Officer

Yeah, John, this is Atul. I'll start with that and I'll offer Brian an opportunity to add to that. But I think, clearly, those are things that have been out there and talked about for a while. And the fact is that they haven't necessarily shown up yet and they may be a few years out. I think one of the things that we think about when we factor in that risk is around the sort of the conversion and the likelihood of conversion.

Not just the cost associated with it, but I think there tends to be a lot of softer decision points that patients and their caregivers have when talking about changing some of the hemophilia patterns of care. And so, I think that's something that we factor in. so I mean, there is some risk. It's probably out a few years out before we're anticipating seeing it. But we're not sure that it's necessarily a certainty that there's gonna be a complete transfer from one therapy class to one course of therapy to another.

Brian Griffin -- Chairman and Chief Executive Officer

Yeah, I would just add to it. As you know, as you think about all of that would be offset by the brand product launches. And as you think about those launches specifically focused -- actually, both on the traditional specialty and on the infusion side, focused on oncology. That's our biggest franchise. That's where we've got these centers of excellence and analytics supporting those centers of excellence that give us a very different value proposition to go out to the market with. So, I think we'll win our share of those new limited distribution products, specifically in oncology, which is the overall largest percentage of the pipeline. And that's' really where the future growth is gonna come from.

John Ransom -- Raymond James -- Analyst

Okay. And then just, obviously, the middle market PBMs like yourself have a much higher level of rebate retainage. Any updated thoughts there? I know you guys don't provide that disclosure on an ongoing basis but there was a filing last year, I believe, that talked about 46% rebate retainage. So how do we think about the risk of a collapsing gross to net and lower level of rebates, and how you would pivot in that event?

Brian Griffin -- Chairman and Chief Executive Officer

Yeah. So, a great question. As we mentioned in, I think your last call, a similar question was asked. Within the small to mid-sized market that we play in, we have not seen a demand from the market, the broker consultant community or our clients around alternative models. Now that being said, we currently are out in the market with a broad range of alternative products, ranging from traditional pricing, which has been -- to your point, that's been the legacy pricing model for the business. Actually, for the LDI business. I think you know that the NPS business was actually more of a pass-through business.

So, we're out in the market today with traditional products, full pass-through. We've got clients now that are basically moving toward rebates at the point of sale. So basically, at the consumer level. So, our model is really just to offer alternatives and let the client make the determination as to what model that works best for them. And we're also -- I've had a team focused on alternative models and I think you'll see us come out in the market in 2019 with some competitive models that are gonna be more performance-based. So, I'm excited to bring those products out in the market. But right now, we're winning across that entire set of alternative products.

Operator

We have no further questions at this time. I will now turn the call back over to Brian Griffin for closing remarks.

Brian Griffin -- Chairman and Chief Executive Officer

I'd just like to thank everybody for their time today. And I appreciate great questions. And we look forward to meeting with you out on our upcoming roadshows. Thanks very much for your time today.

Operator

And this concludes today's conference call. You may now disconnect.

Duration: 58 minutes

Call participants:

Terri Anne Powers -- Vice President of Investor Relations

Brian Griffin -- Chairman and Chief Executive Officer

Atul Kavthekar -- Chief Financial Officer

Steven Valiquette -- Barclays -- Analyst

Lisa Gill -- JP Morgan -- Analyst

Courtney Owens -- William Blair -- Analyst

David Larsen -- SVB Leerink -- Analyst

Michael Polark -- Baird -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Ricky Goldwasser -- Morgan Stanley -- Analyst

Charles Rhyee -- Cowen -- Analyst

John Ransom -- Raymond James -- Analyst

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