In January, Diplomat Pharmacy (NYSE:DPLO) noted that its 2017 revenue would fall in the middle of its previous range while EBITDA would be in the upper end of its guidance range -- so there weren't any big surprises in the official fourth-quarter earnings announcement, which met those objectives.

Rather than focusing on the fourth quarter, investors are looking forward as the company integrates its new pharmacy benefit manager (PBM) with its specialty pharmacy and infusion businesses.

Diplomat Pharmacy results: The raw numbers


Q4 2017

Q4 2016

Year-Over-Year Change


$1.155 billion

$1.145 billion


Income from operations

$2.87 million

$6.81 million


Earnings per share




Data source: Diplomat Pharmacy.

What happened with Diplomat Pharmacy this quarter?

  • While revenue was basically flat year over year due to lower sales of hepatitis C drugs and some lost contracts, gross profit margin increased from 7.3% to 8.1%.
  • Diplomat increased its gross profit to $353 per prescription dispensed, up from $342 in the year-ago quarter. That $11 per prescription adds up: Diplomat dispensed 248,000 prescriptions in the fourth quarter.
  • Unfortunately, an increase in selling, general, and administrative expenses ate up all the extra gross profit and then some. There was a one-time $1.7 million charge associated with acquisitions, but even adding that back in, income from operations was down year over year.
  • Earnings per share were affected by acquisition-related expenses and a one-time benefit from the changes in federal tax law, making the result hard to interpret. On an adjusted basis, earnings per share were $0.18 in the fourth quarter, more than double the $0.08 per share in the year-ago quarter.
  • Toward the end of the quarter, Diplomat closed the acquisition of its new PBM, LDI Integrated Pharmacy Services. While the new business didn't have much effect on the fourth-quarter numbers, the transition into offering PBM services should be what investors focus on in 2018.
Person holding medications in front of a shelves with stacked medicine packs

Image source: Getty Images.

What management had to say

Joel Saban, Diplomat's president, stressed that the company's legacy offerings as a specialty pharmacy and infusion business should help it compete in the PBM business for small- to medium-sized clients:

In the small and middle market, no one has our clinical and specialty services strength. This is what differentiates us. In short, we are excited to bring clinically strong specialty-centric PBMs to the middle market. We feel this is a huge game changer.

One concern about moving into the PBM business is that PBM clients would be looking to lower the drug costs for the employees they insure, which is at odds with the goals of drugmakers -- Diplomat's customers for the specialty pharmacy business -- which benefit from higher drug costs. Saban pointed out that the added access to more patients through the PBM negates some of that concern:

Our increased scale and capabilities in both specialty distribution and now PBM services increases our value to the manufacturers and drug innovators.

Looking forward

Management is looking for revenue to fall between $5.3 billion and $5.6 billion, a substantial increase, thanks to the acquired companies, over the $4.49 billion it posted in 2017. Adjusted EBITDA is expected to come in the range of $164 million to $170 million, up from $101.8 million last year.

But, by definition, EBITDA doesn't include interest expenses, which have increased as the company took on debt to make its acquisitions. So the company expects adjusted earnings in the range of $0.87 to $0.97 per share, only a little higher than the $0.84 per share in adjusted earnings last year -- especially if the result only hits the low end of the guidance.

Whether Diplomat can make its new strategy pay off should become known this year. If it can generate cash to pay down debt, it should see accelerating earnings growth in 2019.

Brian Orelli has no position in any of the stocks mentioned. The Motley Fool recommends Diplomat Pharmacy. The Motley Fool has a disclosure policy.