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Diplomat Pharmacy, Inc. Q1 Earnings Suffer From Hepatitis C Headwinds and Higher DIR Fees

By Keith Speights – Updated May 8, 2017 at 7:29PM

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The specialty pharmacy grew revenue in Q1 but continued to face challenges from a decline in hep-C sales and higher payer fees.

Diplomat Pharmacy (DPLO) encountered significant headwinds in 2016, particularly with its hepatitis C business. The specialty pharmacy entered 2017 with much lower expectations.

The company reported its first-quarter 2017 results after the market closed on Monday. Did Diplomat meet its reduced expectations, or was another disappointing quarter in store? Here are the highlights.

A sheet of paper titled "Financial Report," with a pen lying on top of it.

Image source: Getty Images.

Diplomat Pharmacy results: The raw numbers


Q1 2017 

Q1 2016 

Year-Over-Year Change


 $1.08 billion $995.9 million 


Net income from continuing operations

 $4.23 million $15.2 million 


Adjusted EPS

 $0.19 $0.23 


Data Source: Diplomat Pharmacy.

What happened with Diplomat Pharmacy this quarter?

There were several factors that contributed additional revenue for Diplomat in the first quarter. The company's acquisitions kicked in $116 million. Manufacturer price increases generated an added $74 million in sales. New drug launches contributed another $48 million. You might notice, though, that these factors added up to significantly more than Diplomat's actual first-quarter revenue increase. That's because lost some contracts and continued to face hepatitis C drug headwinds, both of which partially offset the company's revenue gains.

Diplomat's earnings fell in the first quarter compared with the prior-year period for several reasons. First, the company incurred higher direct and indirect remuneration (DIR) fees. These DIR fees originally related only to Medicare Part D rebates, but they now include a variety of fees that payers and pharmacy benefits managers charge pharmacies.

Second, Diplomat's product mix shifted to higher-price but lower-margin drugs. Third, the company's spending increased in the first quarter. Selling, general, and administrative expenses rose 41% year over year. Much of that increase, though, stemmed from a change in the fair value of contingent consideration for acquisitions made in the first quarter of 2016. However, Diplomat also reported higher employee costs and amortization expenses related to acquisitions that helped drive overall costs up.

What management had to say

Diplomat Pharmacy Chairman and CEO Phil Hagerman said, "Our financial results in the first quarter of 2017 were in-line with our expectations. Diplomat's high-touch, high-service model serves as a competitive advantage in the growing trend of independent specialty pharmacies leading smaller limited distribution panels. We further expanded our hub and pharma service offering through the acquisition of WRB Communications, Inc., and firmly believe these services will prove to be highly complementary to our core specialty pharmacy business."

Looking forward

Diplomat maintained its full-year 2017 guidance issued previously. The company continues to expect 2017 revenue between $4.3 billion and $4.7 billion. Full-year net income is projected to come in between $6.5 million and $15.5 million, or $0.09 to $0.23 per diluted share. Diplomat projects adjusted earnings per share will be in the range of $0.54 to $0.70.

The two primary things for investors to watch with Diplomat Pharmacy in the days ahead are two of the issues that caused the company's earnings to fall in the first quarter. Diplomat hopes for DIR fees to decrease. There is bipartisan support for legislation to prohibit DIR fees. The company also would benefit if sales for hepatitis C drugs stabilize.

Diplomat appears to be well positioned for the long run. However, there could be shorter-term choppiness as these issues are resolved.  

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Diplomat Pharmacy. The Motley Fool has a disclosure policy.

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