What happened

Shares of Diplomat Pharmacy (NYSE:DPLO), a distributor of specialty biotechnology and pharmaceutical products, dropped by 37% as of 11:55 a.m. EDT on Thursday after the company reported disappointing third-quarter results.

Image source: Getty Images.

So what

Diplomat continued to rapidly grow its top line during the quarter, producing total revenue of $1.18 billion, which was up nearly 25% year over year. However, this figure was still quite a bit shy of the $1.26 billion that Wall Street was expecting, especially in light of the fact that more than half of the company's growth came as a result of acquisitions. 

Management stated that its revenue growth was held back by a handful of factors, including direct and indirect remuneration (DIR) fees that were paid to Medicare Part D plans and pharmacy benefits managers, as well as a general shift from older hepatitis C drugs to newer ones that generate less revenue. The latter point shouldn't have been all that surprising to investors, as drugmakers Gilead Sciences, AbbVie, and Merck have been engaged in a pricing war in an effort to build market share.

If that wasn't bad enough, Diplomat also struggled to translate its revenue growth into profits. Net income from continuing operations plunged by 66% during the period, to $5.4 million, which produced earnings per share (EPS) of only $0.08. However, if EPS were normalized for the DIR fees, then it would have actually been $0.25, according to management.

In light of the specialty pharmacy's disappointing quarterly results, management decided to pour cold water on its full-year guidance. Revenue is now projected to land between $4.4 billion and $4.6 billion, which is down from a prior outlook of $4.5 billion to $4.9 billion. The company believes that it will generate between $0.83 and $0.87 in adjusted earnings per share for the year, which is also below its previously announced range of $0.90 and $0.95.

Now what

It's been a difficult few months to be a long-term Diplomat shareholder. In late October, shares dropped after news broke that two of the company's executives would be leaving at year-end. With today's huge drop, shares have now fallen more than 59% since the start of the year and are currently trading at an all-time low.  

With pessimism for Diplomat Pharmacy running so high, management did its best to remind investors that there are some positive trends working in its favor. The company's oncology business is growing rapidly, which should continue as new drugs come to market. In addition, the company still plans on using its financial might to make bolt-on acquisitions that should drive additional growth. Finally, there is legislation in Congress right now that, if it passes, could potentially limit the company's future exposure to DIR fees.

Overall, this report leaves investors with both bullish and bearish takeaways. However, given the added uncertainty surrounding the DIR fees and management's lowered guidance, it is hard to blame the markets for knocking down shares today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.