Diplomat Pharmacy, Inc. Q3 Earnings Hurt by Price Concessions and Hep-C Drugs

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Diplomat Pharmacy (DPLO) disappointed investors in the second quarter, with revenue missing expectations. And the specialty pharmacy didn't make shareholders any happier when it announced third-quarter results after the market closed on Wednesday. Here are the highlights from Diplomat's update.

Diplomat Pharmacy results: The raw numbers

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

What happened this quarter?

The only bright spot for Diplomat in the third quarter was solid growth in revenue. A little over half of that growth, though, stemmed from the company's acquisition of TNH Advanced Specialty Pharmacy. The rest of the revenue growth came from newly introduced drugs and price increases for existing drugs.

Despite the higher revenue figure, investors' expectations still weren't met. Diplomat faced a couple of key challenges during the third quarter that negatively affected revenue. The company incurred around $8 million in direct and indirect remuneration (DIR) fees. These fees are price concessions made to Medicare Part D plans that aren't included at the point of sale. Diplomat also saw a shift from older hepatitis C drugs to new drugs that generated less revenue.

Earnings comparisons suffered for several reasons, including the higher DIR fees and the shift in mix to less profitable drugs. Diplomat also received a one-time $3 million incentive in the third quarter of 2015 that helped improve financial results in the prior-year period.

Higher selling, general, and administrative (SG&A) costs took a toll on Diplomat's bottom line as well. The company spent nearly 58% more on SG&A than in the same quarter last year. This large increase stemmed in large part from higher employee costs resulting from the TNH acquisition and a one-time favorable change in the third quarter of 2015 in the fair value of contingent consideration associated with the company's acquisitions.

What management had to say

Diplomat's CEO Phil Hagerman said: "We are disappointed with our third-quarter results, which were significantly impacted by the softness in the hepatitis C business nationwide, as well as by DIR fees. The methodology and transparency around how PBMs [pharmacy benefit managers] are applying these DIR fees changed materially in 2016, and while we cannot reverse the impact they had on this quarter, we are working with our partners in the specialty pharmacy industry and with legislators to achieve an amicable solution to this problem."

Hagerman added:

Despite the pressure we felt during the third quarter, our largest therapeutic category, oncology, continued to lead our growth. Driven by strong trends such as limited distribution, our oncology business increased 57% year over year, and 36% on an organic basis. We also have confidence in Diplomat's future prospects as we see continued growth in the robust drug-development pipeline, a number of early wins from our strategy of marketing directly to payors and health plans, and our ability to make strategic acquisitions in the core specialty pharmacy industry, as well as in expanding complementary service areas.

Looking forward

Diplomat's outlook for full-year 2016 grew more pessimistic as a result of its third-quarter performance. The company now projects revenue between $4.4 billion and $4.6 billion, down from the previous range of $4.5 billion to $4.9 billion. Adjusted earnings per share for the year are expected to be between $0.83 and $0.87. Diplomat's previous guidance estimated adjusted earnings per share between $0.90 and $0.95.

The weak third-quarter results came on the heels of musical chairs in Diplomat's executive ranks. CFO Sean Whelan is leaving the company at the end of the year "to spend more time with his family." Gary Kadlec is retiring as president at the same time but will continue to serve his current term on the company's board of directors.

All of this adds up to a season of uncertainty for Diplomat Pharmacy. However, the company still has several growth drivers, including a couple that Hagerman pointed out: prospects for new drugs on the way and acquisitions.