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Diplomat Pharmacy Inc. Expands Its Offerings

Diplomat Pharmacy (NYSE: DPLO) continues to diversify away from being just a traditional specialty pharmacy, announcing the acquisition of National Pharmaceutical Services, a pharmacy benefit manager, in conjunction with its third-quarter earnings. Previous additions of specialty infusion and pharma services have already worked their way into the company's earnings, making up more than half of the company's EBITDA.

Diplomat Pharmacy results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$1,125 million

$1,181 million

(4.7%)

Income from operations

$2.31 million

$1.37 million

68%

Earnings per share (EPS)

$0.01

$0.08

(88%)

Adjusted EPS

$0.25

$0.21

19%

Data source: Diplomat Pharmacy.

What happened with Diplomat Pharmacy this quarter?

  • Revenue dropped a little, as Diplomat continues to deal with lower demand for hepatitis C drugs and previously announced lost contracts. But gross profit was up, with gross margin increasing 1000 basis points, to 7.6%, thanks to higher margin drugs and services. A $4 million DIR (direct and indirect remuneration) fee true-up in the year-ago quarter also helped boost the year-over-year comparison.
  • Sales of new oncology and infusion therapeutic drugs helped make up for some of the decline, with revenue from the two categories increasing 11% and 25% year over year, respectively.
  • In the last quarter, the company added eight new drugs to its offerings, including one that is exclusive to Diplomat and three that are on limited-distribution panels.
  • Charges associated with acquisitions affected the GAAP numbers in both quarters, so the adjusted EPS is a better indication of Diplomat's earnings growth.
  • Diplomat resolved its arbitration with CVS Health (NYSE: CVS) over the DIR fees, establishing a direct contract with CVS.

Image source: Getty Images.

What management had to say

Philip Hagerman, Diplomat's CEO and chairman, explained that the addition of National Pharmaceutical Services won't necessarily have it competing with the large pharmacy benefit managers:

[W]e're not looking to go after the biggest, largest clients in the country. There's a huge amount of need in that small to midsize client base -- that's zero to 100,000, 200,000 lives, and a little smaller, a little larger -- where they're not necessarily the largest client in the world for the big three, but they've got needs and they want customized services.

According to Hagerman, the switch from being a pharmacy services administrative organization (PSAO) to a direct contract with CVS will help with Diplomat's long-term growth, but it's also a sign that Diplomat has reached the big leagues:

Remember, as a smaller company, many of the people use these PSAOs, these pharmacy service organizations. They act as an intermediary between the major contract holders. We believe that we have arrived as a major player in healthcare and we need to have direct payer.

Looking forward

Management increased the bottom end of its previous earnings guidance while leaving the top in place; it now expects to bring in between $4.4 billion and $4.6 billion this year. Adjusted earnings are expected to be substantially higher than previous guidance, coming in at $0.82 to $0.87 per share versus the previous range of $0.71 to $0.79 per share.

The company is done with most of its contracts for 2018, including all the major ones, and management commented that they're pretty consistent with this year's contracts. This suggests a potential for accelerating growth next year, as the year-over-year comparisons for hepatitis C drugs and lost contracts improve.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and Diplomat Pharmacy. The Motley Fool has a disclosure policy.