Image source: Diplomat Pharmacy, Inc.

What happened

After the company reported second-quarter revenue that was shy of industry watchers' estimates, shares in Diplomat Pharmacy (DPLO) fell 12.9% in August, according to S&P Global Market Intelligence. 

DPLO Chart

DPLO data by YCharts.

So what

The pure-play specialty-pharmacy operator reported second-quarter sales of $1.09 billion, up 34.7% year over year, and non-GAAP earning per share of $0.23, up from $0.16 per share in the prior-year period. Sales were $20 million shy of consensus estimates. However, EPS was 9.5% better than Wall Street was guessing.

Mergers and acquisitions, not volume growth, contributed heavily to the top-line increase; however, organic growth was still solid at 23%.

Prescription volume inched up only 3% year over year, but that figure doesn't tell the whole story. Diplomat Pharmacy exited the high-volume, low-profit compound business in 2015, and that move offset rising demand in the company's oncology and specialty infusion businesses. Oncology revenue grew 38% and the specialty infusion segment grew 22% year over year during the quarter, and if we exclude the impact of the compounding business, volume increased 13% from a year ago. 

Now what

Diplomat Pharmacy has been riding tailwinds associated with growing demand for high-price biologics, but second-quarter results suggest there's some slowing this year from 2015. Organic sales growth totaled 31% and prescription growth was 14% in 2015, both of which were better than the second-quarter results. Investors will also want to keep an eye on gross margin to see if it stabilizes. Last quarter, it fell to 7.6% from 8.6% in the same quarter of 2015.

Nevertheless, there are a ton of biologics in development industrywide, and Diplomat Pharmacy's 3% market share suggests there's plenty of expansion opportunity. Furthermore, there's a limited supply of pure plays in the industry, which could make Diplomat Pharmacy an attractive takeover candidate someday.

Overall, the stock's 27.4 forward P/E ratio means it isn't cheap, but I think this company's potential to capture more market share and expand earnings makes it a savvy buy for growth investors.