Diplomat Pharmacy Integrates With New Leadership

Diplomat Pharmacy (NYSE:DPLO) started the first quarter with decent revenue growth. This is due in part to its new pharmacy benefit manager (PBM) business, now rebranded as CastiaRx, although the acquisition and integration are cutting into the bottom line — for now.

Diplomat Pharmacy results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$1.34 billion

$1.08 billion

24%

Income from operations

$8.69 million

$8.55 million

1.7%

Earnings per share

($0.01)

$0.67

N/A

Data source: Diplomat Pharmacy.

What happened with Diplomat Pharmacy this quarter?

  • Oncology drugs and the infusion business continue to drive revenue growth with 13% and 26% year-over-year increases, respectively. That benefit was offset a little by decreases in hepatitis C sales, but the decline of those drugs seems to be tapering off.
  • The specialty pharmacy business added another 15 limited-distribution products, although some of those aren’t approved yet, so they won’t start adding sales for a bit.
  • The PBM integration has already created $1 million in synergies during the first quarter alone, well on its way to creating $4 million to $6 million in synergies for this year.
  • Gross margin improved as the specialty infusion business, which has higher margin, becomes a larger percentage of overall revenue; the specialty pharmacy business is also able to drive lower purchase prices as it grows.
  • Despite the solid revenue growth, operating income declined due to the acquisitions, because of severance packages and increased stock-based compensation to retain key people through the transition.
  • The earnings line turned negative due to a large increase in interest expense on debt to fund the PBM acquisitions.
  • Last week, after the earnings report, Diplomat announced that Brian Griffin would be taking over as CEO starting next month.
Pharmacist looking at drugs in a drawer

Image source: Getty Images.

What management had to say

Interim CEO Jeff Park highlighted the benefits of the new PBM to the legacy business:

CastiaRx will be a growth engine for Diplomat by helping drive specialty and infusion services, as well as savings to more patients and payers. Additionally, our increased scale will help us with our manufacturer partners, continuing to position us for access to limited-distribution products and driving more effective pricing for the drugs we acquire. This is the winning combination.

Joel Saban, Diplomat’s president, pointed out the potential future growth from biosimilars, which are copycats of biologic drugs:

Unlike a traditional medication with multiple generic competitors, a biosimilar or specialty generic is often the only competitive alternative. This means pricing can look more like a single-source generic, and these discounts can usually be matched by the branded product. Every product is different, but this can reduce price by at least 10% to 15% over the referenced brand product, stop price inflation, improve price affordability and access for certain patients, and increase our profitability per Rx by 50% or greater.

Looking forward

Management upped its revenue guidance for the year, but that was simply a change in how it accounts for revenue from the PBM business; it doesn’t have an effect on earnings, which remain at $0.06 to $0.17 per share, or between $0.87 and $0.97 per share on an adjusted basis.

For Diplomat, this year will be about integrating the PBM business, and seeing it drive revenue of the specialty pharmacy and infusion businesses with its members. But the key thing for investors to watch will be the upcoming selling season for next year’s PBM contracts, which will determine whether the diversification was truly a good move.

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

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