Diplomat Pharmacy Stock Prediction: Buy or Sell?

Shares of Diplomat Pharmacy [NYSE: DPLO] have cratered in the past year, losing more than two-thirds of their value from March 2018.

Is this an excellent opportunity to scoop up an undervalued stock, or is it a worrying trend that’s likely to see further decline?

Read on to see Diplomat Pharmacy stock price forecast.

What Does Diplomat Pharmacy Do?

Diplomat is the largest independent provider of specialty pharmacy services in the United States. “Specialty drugs” are those that are particularly high in costs or complexity, or that require special handling or monitoring.

The company distributes medications for serious conditions such as cancer, HIV, multiple sclerosis, and Hepatitis C. These include drugs that are delivered orally, injectably, and intravenously.

Diplomat’s competitors include other specialty pharmacies such as Avella, PANTHERx, Benzer, and Onco360.

Brian Griffin, who has decades of experience as a healthcare executive, assumed the positions of CEO and chairman in June 2018. The company is headquartered in Flint, Michigan.

The Risks of Buying Diplomat Pharmacy Stock

One thing is for sure: holding Diplomat [NYSE: DPLO] isn’t for the faint of heart. In the past several months, Diplomat shares have had two stomach-churning plummets: one in November 2018, and one in February of this year.

The November drop of 27% came after a lackluster Q3 2018 earnings report, in which the company failed to show returns from its recent acquisitions.

Diplomat Acquisitions

Diplomat’s new CastiaRx business was recently formed from its purchases of pharmacy benefits manager (PBM) companies such as Leehar Distributors and National Pharmaceutical Services. As a result of the debt that Diplomat took on for these acquisitions, it barely broke even on its bottom line.

These PBM acquisitions have continued to cause trouble for Diplomat.

In February, the company delayed its annual earnings report by three weeks after revealing that it was suffering customer losses. This disclosure sent Diplomat shares plunging, losing more than half their value in a single day.

Diplomat chairman and CEO Brian Griffin has sought to underplay these struggles, saying that “this is really early days relative to our pure PBM performance. It is a rebuilding year for us.” However, investors still aren’t convinced, and the stock has remained flat since its latest drop in February.

Regulatory Risk

In addition to Diplomat’s challenges as a company, the specialty pharmacy industry currently faces a good deal of risk.

President Donald Trump has repeatedly criticized the high prices of many pharmaceutical drugs, calling it “unacceptable that Americans pay vastly more than people in other countries for the exact same drugs.”

Trump has proposed basing Medicare drug prices on their average prices in other industrialized countries.

While the Trump administration has not yet moved to enact this policy, Diplomat’s fate as a company is intricately tied to the prices of specialty drugs. Naturally, the higher the prices, the greater the opportunity for Diplomat to profit.

In July 2018, Diplomat shares dropped by 10% in one day—not due to the company itself, but because the Trump administration successfully pressured Pfizer [NYSE: PFE] and Novartis [NYSE: NVS] to freeze their drug prices.

Is Diplomat Pharmacy Stock A Buy?

Despite the risks of owning Diplomat stock, their PBM integration strategy has worked well before for companies such as UnitedHealth [NYSE: UNH] and CVS Health [NYSE: CVS].

According to Diplomat president Joel Saban: “In the small and middle market, no one has our clinical and specialty services strength. This is what differentiates us. In short, we are excited to bring clinically strong specialty-centric PBMs to the middle market. We feel this is a huge game changer.”

However, investors have reacted negatively to Diplomat’s PBM acquisitions since the deals were announced. When the company announced its purchase of LDI Integrated Pharmacy Services in November 2017, shares tumbled by 20%.

Although the CastiaRx business is profitable, generating $26 million in Q3 2018, nearly all of these funds were eaten up by general and administrative expenses, as well as lingering interest expenses from debt taken on to complete the acquisition.

In addition, Diplomat [NYSE: DPLO] lost some Medicare Part D PBM contracts at the beginning of 2019, which the company expects will negatively affect this year’s revenue by 4 percent.

Diplomat Pharmacy Stock Prediction: The Bottom Line

Diplomat stock has been bruised and battered over the past year, and its value is now less than one-fourth of its high in June 2018. With the company’s narrow recent profit margins, Diplomat is in danger of operating at a loss this year.

In addition, industry-wide uncertainty about drug prices is likely to continue throughout 2019. The Trump administration unveiled a new plan in January that would require health insurance companies to pass through the discounts they receive on prescription drugs to the consumer, rather than collecting them as a benefit.

Due to the risk that Diplomat currently faces—both specific risk and industry risk, caution is needed before you buy Diplomat stock at this time.

Once the dust settles from Diplomat’s PBM acquisitions by the end of the year, there’s a good chance that the stock will see a turnaround.