Organic Growth and Acquisitions Help Diplomat Pharmacy, Inc. in Q2

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When Diplomat Pharmacy (DPLO) reported its first-quarter results in May, investors were perhaps a little worried. After all, the specialty pharmacy had set expectations lower for 2016 than Wall Street wanted. But Diplomat dispelled any worries by posting strong growth in the first quarter and raising its 2016 outlook.

Diplomat announced its second-quarter results after the market closed on Tuesday. Were there reasons for investors' worries to resurface? 

Diplomat results: The raw numbers

YOY = year over year. Data source: Diplomat Pharmacy. 

What happened with Diplomat this quarter

Diplomat's stock sank over 7% in after-hours trading. What could investors possibly not like with those results? As good as the company's second-quarter results were, revenue wasn't enough to meet investors' high expectations.

Despite revenue coming in a little below expectations, investors had to like how Diplomat achieved its numbers. Organic growth grew 23% year-over-year, with new drugs making up more of the organic growth than price increases of existing drugs. Sales growth was also bolstered by acquisitions, in particular Diplomat's buyout of Burman's Apothecary.

Gross margin in the second quarter wasn't as strong as in the past -- 7.6% compared to 8.6% in the prior-year period. This decline primarily resulted from a continued shift to higher-priced drugs that have lower margins and Diplomat's sale in September 2015 of its compounding business.

The strong revenue growth obviously helped earnings. However, Diplomat also benefited from lower interest expense and a lower income tax rate in the second quarter compared to the same period in 2015.

On a non-GAAP basis, Diplomat posted earnings of $0.23 per share compared to $0.16 per share in the prior-year period. That reflects impressive growth and was higher than what investors expected.

What management had to say

Phil Hagerman, Diplomat's chairman and CEO, said:

This was a solid quarter for Diplomat with total growth of 35%, organic growth of 23% and continued leadership in the oncology space as we gained access to new limited distribution drugs. While our overall business was impacted by a slowing hepatitis C market, the remainder of our business was strong, growing almost 30% organically. This growth was driven by our oncology business increasing 38% and our specialty infusion segment growing by 22%. Overall prescription growth was much stronger than the 3% implies, as we exited the high volume, low profit compounding business in late 2015 and we intentionally moved away from other high volume, low revenue non-specialty business.  Net of these changes, our volume increased approximately 13%. I remain very confident in Diplomat's position in the industry, organic growth prospects and opportunities to make strategic acquisitions.

Looking forward

Diplomat affirmed its previous full-year 2016 revenue and adjusted EBITDA guidance. Revenue for the year is still expected to be between $4.5 billion and $4.9 billion, with adjusted EBITDA between $121 million and $129 million.

The company increased the lower end of its guidance for adjusted earnings per share. Diplomat now expects 2016 adjusted earnings per share to come in between $0.90 and $0.95, up from the range of $0.88 to $0.95 provided earlier.

Diplomat's pricey valuation (with an earnings multiple of 63) makes the stock vulnerable to any hiccups. Lower-than-expected revenue qualifies as a hiccup. But the company's long-term prospects matter more than the results from one quarter.

As Hagerman noted, Diplomat continues to fire on all cylinders, with the one exception of the slowing hepatitis C market. The company's organic growth remains impressive. Its acquisitions appear to be paying off. And the moves Diplomat has made to sell off low-profit businesses make sense. Despite a negative market reaction to the company's second-quarter results, the long-term future for Diplomat Pharmacy still appears to be positive.