dsp investor deck march 2017 barclays 030917
TRANSCRIPT
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.
Copyright © 2015 by Diplomat Pharmacy Inc. Diplomat is a registered trademark of Diplomat Pharmacy Inc. All rights reserved.
Barclays Healthcare ConferenceMarch 2017
Confidential
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This presentation contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance, and include Diplomat’s expectations regarding revenues, Adjusted EBITDA, cost-saving efforts, and expectations regarding acquisitions. The 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 risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those forecasted or indicated by such forward-looking statements. These risks and uncertainties include: 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; bad publicity about, or market withdrawal of, specialty drugs we dispense; a significant increase in competition from a variety of companies in the health care industry; our ability to expand the number of specialty drugs we dispense and related services; maintaining existing patients; revenue concentration of the top specialty drugs we dispense; our ability to maintain relationships with a specified wholesaler and pharmaceutical manufacturer; increasing consolidation in the healthcare industry; managing our growth effectively; our ability to estimate the impact of DIR fees amid considerable uncertainty due to current regulatory efforts and current and future payor disputes; limited experience with acquisitions and our ability to recognize the expected benefits therefrom on a timely basis or at all; and the additional factors set forth in "Risk Factors" in Diplomat’s Annual Report on Form 10-K for the year ended December 31, 2016 and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Except as may be required by any applicable laws, Diplomat assumes no obligation to publicly update such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether as a result of new information, future developments or otherwise.
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.
Important note
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Investment Highlights
• Specialty Pharmacy industry is a growth market • Drug development pipeline remains robust
− Oncology is the largest and fastest growing segment of the Diplomat portfolio• Limited distribution model growing in importance
• Diplomat is unique within the specialty pharmacy industry• Taking market share as the largest independent specialty pharmacy• Access to ~100 limited distribution drugs
• Multiple growth opportunities• Organic• Strategic complimentary acquisitions
• Strong financial performance• Five-year revenue CAGR of 42% & EBITDA CAGR of 48%• Diversified revenue and profitability streams• Modest balance sheet leverage – ample dry powder
• Experienced senior management team • CEO founded Diplomat 40+ years ago• Leadership team has broad ranging experience across the industry
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(1) CAGR based on 2011-2016 results
(1)
Confidential
Others 29%
CVS Health / Om-nicare 28%
Express Scripts 19%
Walgreens 10%
OptumRX 7%4% Prime Therapeutics 3%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E
$58 $167 $271 $377$578
$772$1,127
$1,515
$2,215
$3,367
$4,410 $4,500
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Diplomat at a glance
Founded: 1975; Headquarters: Flint, MI Employees: ~1,800 2017E revenue: ~$4.5 billion Diversified base of marquee partners
Corporate Overview
2016 Market share ($115 billion total market size) (1)
Exceptional above market revenue growth
54% CAGR 2006-2016
Scaled business: National footprint
($ in millions)
Source:(1) 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers(2) Based on mid-point of management’s estimate range for FY 2017
(2)
Pharmacy Locations
ArizonaCaliforniaConnecticutFloridaIllinoisIowaKansasMarylandMassachusettsMichiganMinnesotaNebraskaNew YorkNorth CarolinaOhioPennsylvaniaTexasWisconsin
(2)
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Diplomat’s revenue and profits come from multiple industry sectors
DIR fees primarily affect core specialty pharmacy sector only
Complementary Opportunities Minimize Payor/PBM Risk, AND Mitigate Risk of Inflation Abatement
Other Services EnvoyHealth
o HUB o Noncommercial Pharmacy o Hospital Specialty Networko 340B Contract Pharmacy o Formulary and Rebate Management o Clinical Research
Specialty Infusion Subset of specialty pharmacy
o Many similar characteristics (chronic, high cost, etc.)
o Few differentiators (nursing component, more medical billing)
Higher margin business Unique/separate payor networks Payor-driven site of care transition
opportunities
Core Specialty Pharmacy(orals and self-injectables)
Oncology dominance Limited distribution expertise Outpacing industry revenue growth
organicallyo Mix shift driving revenue and profit
growtho Price inflation a very small component of
revenue Serving open, preferred, narrow, and
exclusive payor networks Increase focus on direct contracts with
payors
Pharmaceutical Manufacturer Services Discounts, rebates, services, data fees High margin Not dependent on payers or price inflation Making progress, but significant upside opportunity remains
Revenue Source: Payers
Revenue Source: Pharma & Others
Financial Impact:Higher Revenue, Lower Margin
Financial Impact:Lower Revenue,Higher Margin
Confidential
Growing list of services across the specialty pharmacy eco-system
EnvoyHealth Services
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Payors Partners
Call Center Support
Specialty PBM Services
Clinical Trials
TechnologySolutions
Higher MarginServices
Medical Management
Specialty Pharmacy Services
HUB/PAP/Wholesale Distribution
Utilization Management
The continued growth and expansion of small biotech companies creates a dramatic and
growing marketplace
Branding Services Educational
Services
TM
Confidential
Diplomat controls the journey of a specialty patient
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Patient
Physician
Payor
Patient
Patient visits
physician
Payor approves script
Diplomat monitors adherence and collects data for
manufacturers
Diplomat dispenses drug
Diplomat provides:Benefit
verificationPrior
authorizationClinical
intervention
Physician writes script
Patient receives
drugs ClinicalLo
gist
ics
Operational
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Specialty spend under pharmacy benefit to grow ~5x(2)
Specialty pharmacy industry continues to show
exceptional growth
Source:(1) 2015 Profile Biopharmaceutical Research Industry – April 2015 & 2016 Profile
Biopharmaceutical Research Industry 2016 – April 2016 (2) The 2017 Economic Report on Retail, Mail, and Specialty Pharmacies – February 2017(3) Barclays Capital Inc. Research
72%42%
58%
Diplomat 2%
$50 billion $240 billion
2011A 2021E
Rapid growth in the oncology market(3)
$46 billion
2016A 2021E
$86 billion
Drugs in pipeline by therapeutic class(1)
HIV/AIDS
Diabetes
Mental health disorders
Cardiovascular disorders
Immunological disorders
Infectious diseases
Neurological disorders
Oncology
208
401
510
563
1,123
1,261
1,308
1,919
159
475
511
599
1,120
1,256
1,329
1,813
2015
2016
Confidential
Limited distribution a central and growing theme in specialty
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Benefits to DiplomatBenefits to biotech / pharma Completely eliminate or reduce
reliance on wholesaler Real-time clinical data Commercialization assistance Improves appropriate utilization
Barrier to entry Deeper, and earlier,
partnerships with pharma / biotech
Increased value proposition to payors
Market share opportunity
Portfolio of ~100 limited distribution drugs, comprising approximately 53% of revenue in 2015, and well positioned for
disproportionate growth from future drug approvals
Recent unique limited panels…Diplomat exclusive or semi-exclusive
What is limited distribution? Targeted channel strategy Provides certain specialty
pharmacies with exclusive or preferred dispensing rights to certain drugs
Fast-growing trend
(2013)
(2012)
(2015)
Traditional:
Limited:
Manufacturer
Multiple Wholesalers
65,000 Pharmacies
PatientManufacturer
One/few pharmacies Patient
DPLO EXCLUSIVE DPLO LARGEST OF 4
DPLO 1 of 4
(2016)
DPLO 1 of 4 DPLO LARGEST OF 2
(2017)
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Unique competitive position
LARGE PBM / RETAILPHARMACY
SMALLER SPECIALTYPHARMACIES
Diversification distracts from specialty pharmacy
Less flexible / less nimble
Limited scale Most focused on
one or a few disease states
Fragmented market
Consolidation opportunity for Diplomat
Singularly focused on specialty
High-touch model
Flexible and nimble
Entrepreneurial culture
National reach
Scalable infrastructure
Acquired Feb 2016
Acquired 2013-2017
Acquired Sept 2016
Confidential
Legal and Regulatory Strategies for combating DIR fees
• Proposed legislation – already in House and Senate to prevent DIR (Direct and Indirect Renumeration) Fees being implemented in current fashion
• Multiple industry stakeholders reviewing other legislative options
• Direct discussion with CMS to control PBM interpretations of DIR language
• Legal challenges being reviewed by multiple SP groups and stakeholders
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Confidential
Growth Strategy
• Grow our oncology and infusion businesses with increased access to drugs and broader geographic reach
• Enhance our pharma service offering and HUB services
• Expansion of direct contracts with payors
• Contract with manufacturer partners to insure the highest service levels for patients, physicians, and health plans
• Continue to selectively pursue strategic M&A opportunities 12
Confidential
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Future M&A criteriaWhen considering acquisitions, we look for targets that will potentially benefit Diplomat in one or more of the following ways:
Expand into new therapeutic areas and/or geographic regions Enhance clinical capabilities to improve competitive advantage Access to Limited Distribution drugs Access to new/expanded specialty prescriber base Accelerate our higher margin business opportunities Bring new services and technologies under our umbrella Makes DPLO better, not just bigger
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Financial profile
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Traditional Drug
Specialty Drug A
Specialty Drug B
Specialty Drug C
Specialty Drug B (10% price
incr.)
Revenue $100 $3,700 $10,000 $27,000 $11,000
Gross Profit ($) $10 $185 $400 $810 $440
Gross Margin (%) 10% 5% 4% 3% 4%
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RevenuePayors
Distributors / pharmaceutical manufacturers
Patient
DiplomatCOGS
Physical drug movement$ flows
How we make money and grow profitability(Illustrative example)
How we make money
Drug mix and positive pricing trends are tremendous profit tailwinds for Diplomat
Inflation Impact
Diplomat mix shift movement over time
Our core focus
$342
Diplomat’s 4Q’16 Average*
(AWP – Y%) (WAC – X%)
Note AWP = WAC x 1.20
(1)
(1)
Example:AWP $11,905 - 16% = $10,000 Revenue WAC $9,921 - 3% = $9,600 COGS
$400 Gross Profit4% Gross Margin
Confidential
4Q15A 4Q16A
$987
$1,145
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Fourth Quarter 2016 Results
(1) Based on dispensed scripts only.(2) Gross profit / net sales (i.e., based on dispensed and serviced scripts).(3) 4Q16 includes a $4.7 million impairment expense to write down related to Physician Resource
Management
Revenue
AdjustedEBITDAmargin 2.8%
Adjusted EBITDA
Gross Profit /Script($ in millions)
($ in millions)
2.3%
7.3%7.8%
(1)
Grossmargin(2)
(3)
4Q15A 4Q16A
$312
$342
4Q15A 4Q16A
$3.6
-$1.1
Net Income (Loss) ($ in millions)
4Q15A 4Q16A
$28.1$26.1
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2010A 2011A 2012A 2013A 2014A 2015A 2016A
$8 $15 $11 $19$35
$95$107
Strong long-term financial performance…
Adjusted EBITDA2010 – 2016
Total Revenue2010 – 2016
% margin
% growth
($ in millions)
% growth
($ in millions)
Pre-IPO infrastructure investments
Volume, price and mix all driving superior revenue growth
Natural operating leverage and acquisitions driving EBITDA growth
53%
27%
Note: Historical financials are not pro forma for any acquisitions.
2010A 2011A 2012A 2013A 2014A 2015A 2016A
$578 $772$1,127
$1,515$2,215
$3,367
$4,410
34% 46% 34% 46% 52% 31%
96% (28%) 75% 85% 170%
13%1.3% 2.0% 1.0% 1.3% 1.6% 2.8% 2.4%
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… with continued growth in profitability
Gross Profit / Script (1)
2010 – 2016
Note: Financials are not pro forma for acquisitions.(1) Based on dispensed scripts only.(2) Gross profit / net sales (i.e., based on dispensed and serviced scripts).
% growth 12% 20%31% 4%
% margin 7.1% 5.9%7.3% 6.2%
Several factors drive growth in our Gross Profit / Script(1): Continued mix shift towards higher price, higher profit drugs (including acquisitions) Favorable pricing trends
(2)
Gross margin expansion opportunities: Recent acquisitions with higher gross margins (%) Pharma services opportunities Specialty generics and biosimilars (longer term)
44%
6.3%
68%
7.8%
16%
7.4%
2010A 2011A 2012A 2013A 2014A 2015A 2016A
$71$93 $97
$116
$167
$280$325
Confidential
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Components of Quarterly Revenue Growth($ in millions)
Quar
terly
Rev
enue
• Price inflation comprised 4% of revenue in 4Q16 after four straight quarters of contributing 6% Diplomat’s 2017
outlook assumes inflation will moderate in 2017
• Chronic disease expertise provides an annuity-like revenue base Limited distribution
leadership and rich drug pipeline driving revenue growth from new drugs
Confidential
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Annual Revenue by Drug Year Launch
$1.5B
$2.2B
$3.3B
5%
18%
3%
16%
95%$1.4B
77%$1.7B
63%$2.1B
21%
2%
$4.4B
18%
13%
8%
4%
57%$2.7B
• Drugs across all launch years continue to grow over time
• 2012 and prior drugs have grown 93% from 2013 to 2016
• Pipeline remains an important element of near-term and long-term growth; existing drugs will also contribute meaningfully
Confidential
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Balance Sheet / Cash Flow snapshot
($ in millions)
(1) Includes $6mm in cash-based contingent consideration(2) ProForma to include 12 months of TNH
2016 2015Cash $8 $28
Total Debt $150 $119 (1)
Shareholders’ equity $614 $516
Net Debt/ProForma TTM EBITDA(2) ~1.0x ~.8x
Cash Flow From Operations (period ended) $31 $29
December 31,December 31,
Confidential
Investment Highlights
• Specialty Pharmacy industry is a growth market • Drug development pipeline remains robust
− Oncology is the largest and fastest growing segment of the Diplomat portfolio• Limited distribution model growing in importance
• Diplomat is unique within the specialty pharmacy industry• Taking market share as the largest independent specialty pharmacy• Access to ~100 limited distribution drugs
• Multiple growth opportunities• Organic• Strategic complimentary acquisitions
• Strong financial performance• Five-year revenue CAGR of 42% & EBITDA CAGR of 48%• Diversified revenue and profitability streams• Modest balance sheet leverage – ample dry powder
• Experienced senior management team • CEO founded Diplomat 40+ years ago• Leadership team has broad ranging experience across the industry
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(1) CAGR based on 2011-2016 results
(1)
Confidential
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Appendix
Confidential
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Revenue by Therapeutic Class($ in thousands)
2016% of Total 2015 2014 2013
Oncology 2,102,130$ 48% 1,432,091$ 1,068,751$ 736,987$ Immunology 644,173$ 15% 510,708$ 438,145$ 378,685$ Hepatitis 583,751$ 13% 520,771$ <10% <10%Specialty Infusion 505,240$ 11% 374,884$ <10% <10%Multiple Sclerosis <10% N/A <10% 226,805$ 169,470$ Other (none greater than 10% in the period) 575,094$ 13% 528,177$ 481,255$ 229,997$
4,410,388$ 3,366,631$ 2,214,956$ 1,515,139$
Limited distribution drug % of total 53% 45% 44% 40%
Confidential
Acquired Company Consideration Rationale
February 1, 2017
• $20M gross purchase price• $16M cash, $4M earn-out• ~6.7x CY 2016 EBITDA
• Hemophilia focused specialty pharmacy and infusion services company• Strengthens Diplomat’s footprint in key geographic markets (New York
and Houston)• Revenue synergy opportunities
June 1, 2016
• $75M gross purchase price• $65M cash, $10M stock• ~8.0x CY 2015 EBITDA
• Oncology focused specialty pharmacy; 22 LDs• Strengthens Diplomat’s footprint in key geographic markets (California
and Texas)• Revenue synergy opportunities• Promising proprietary technology; some components of TNH’s portal
can be leveraged across Diplomat’s platform
June 19, 2015
• $87M gross purchase price*• $77M cash*, $10M stock• ~4.2x CY 2014 EBITDA
• Hep C dominance in Mid Atlantic• Proprietary technology (HealthTrac) with applicability across Diplomat’s
Hep C platform• Proven management team
• 50 year old company, run by 2nd generation pharmacist• No marketed sales process
April 1, 2015
• $272M adjusted purchase price* (~$50M tax benefit)• $217M cash*, $105M stock• ~11.8x CY 2014 EBITDA
• One year earnout of 1.35M shares (all stock)
• Adds significant scale to specialty infusion business• Provides ability to compete for national contracts• Increases exposure to higher margin businesses• Addition of new disease states, therapeutic categories & 5 new LD’s
Recent Acquisitions
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* Value includes closing working capital adjustments
Confidential
Calendar year ending December 31,
($ in millions)4Q'16
A4Q'15
A 2016A 2015A 2014A 2013A 2012A 2011A 2010ANet income (loss) attributable to Diplomat ($1.1) $3.6 $28.3 $25.8 $4.8 ($26.1
) ($2.6) $9.2 ($7.8)
Depreciation & Amortization $14.0 $10.0 $50.0 $30.8 $8.1 $3.9 $3.8 $3.1 $2.2 Interest Expense $1.8 $1.5 $6.6 $5.2 $2.5 $2.0 $1.1 $0.6 $0.5 Income tax expense $1.8 $2.3 $11.2 $16.2 $4.7 - - - -EBITDA $16.4 $17.3 $96.1 $78.1 $20.1 ($20.2
) $2.3 $12.8 ($5.2)Share-based compensations expense $0.9 $1.4 $5.4 $4.0 $2.9 $0.9 $0.9 $1.4 $0.8 Change in fair value of redeemable common shares - - - - ($9.1) $34.3 $6.6 - $10.7 Termination of existing stock redemption agreement - - $0.2 - $4.8 - - - -
Employer payroll taxes - option repurchases $0.0 $0.1 - $1.6 - - - - -Restructuring and impairment charges $4.7 - $7.1 $0.2 - $1.0 $0.4 $0.4 $1.5 Equity loss of non-consolidated entity - - - - $6.2 $1.1 $0.3 $0.1 -Severance and related fees $1.0 $0.1 $1.1 $0.5 $0.4 $0.2 $0.4 $0.7 -Merger and acquisition related expenses $0.3 $8.8 ($6.6) $9.2 $7.2 $0.7 - - -Private company expenses - - - - $0.2 $0.2 - - -Tax credits and other - - - - $1.0 - ($0.1) ($0.6) -Other items $2.8 $0.4 $4.0 $1.5 $1.4 $0.7 $0.1 $0.2 ($0.0)Adjusted EBITDA $26.1 $28.1 $107.4 $95.0 $35.2 $19.0 $10.9 $15.1 $7.7
Reconciliation of Net income (loss) and Adjusted EBITDA
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(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Note: Financials are not pro forma for acquisitions.Detailed footnotes on the following page.
Confidential
Reconciliation of Net income (loss) and Adjusted EBITDA
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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. Q4 2016 charge primarily related to an impairment to write down our cost method investment in Physician Resource Management, LLC (“PRM”). The full year 2016 includes both the impairment of PRM and the Q3 2016 full impairment of the definite-lived intangible assets associated with Primrose Healthcare LLC. 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 option redemption payroll taxes and IT operating leases. 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. Q4 2016 includes $2.4 million of inventory loss due to a cooler failure.