What happened

Shares of Diplomat Pharmacy, Inc. (NYSE:DPLO) dropped 10.4% on Friday. The specialty pharmacy didn't announce any news, but investors appear to have been rattled by the potential impact from the Trump administration's efforts to reduce drug prices.

President Trump has publicly attacked drugmakers for price hikes, resulting in several major pharmaceutical companies agreeing to hold off on price increases. In addition, the Department of Health and Human Services (HHS) is considering changes that could limit rebates paid to pharmacy benefits managers (PBMs) by drugmakers.  

Pills on top of $100 bills

Image source: Getty Images.

So what

Diplomat Pharmacy makes more than 85% of its revenue from selling specialty drugs, including high-priced cancer therapies, immunology drugs, and infusions. If the prices of those drugs drop, the company's revenue will also fall. If drug prices go up, Diplomat makes more money.

So far, four major drugmakers have announced that they will keep drug prices in check -- Pfizer, Merck, Novartis, and Roche. Each of these big pharma companies markets high-cost cancer drugs, although it remains to be seen if the prices of these drugs will be affected much. 

Diplomat also owns a PBM, CastiaRx, that generates more than 14% of the company's total revenue. Few details are available at this point on HHS' plans to change how rebates are paid to PBMs, but it's possible that the agency could remove safe-harbor provisions that protect PBMs from anti-kickback lawsuits related to rebates. If this happens, it could negatively impact Diplomat's PBM revenue.

Now what

Investors don't have a whole lot to go on right now with the Trump administration's plans for controlling prescription drug prices. Today's drop in the share price for Diplomat Pharmacy could prove to be an overreaction.

There's plenty of skepticism about how far drugmakers will really go to contain drug prices, especially for their biggest moneymakers. As for the potential for drastic changes in rebates paid to PBMs, Jefferies thinks there will only be a "modestly negative" impact.

However, the risk associated with investing in specialty pharmacies and PBMs has increased because of the recent developments. With Diplomat Pharmacy having its eggs placed in both baskets, I think that investors should be cautious before buying the dip with this stock.