Diplomat Pharmacy (NYSE:DPLO) continued to launch its new pharmacy benefits manager (PBM) business, CastiaRx, in the third quarter. Unfortunately, added costs ate up all the revenue from the new business.

Diplomat Pharmacy results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$1.37 billion

$1.13 billion

22%

Income from operations

$9.94 million

$2.31 million

331%

Earnings per share

$0.00

$0.01

N/A

Data source: Diplomat Pharmacy.

What happened with Diplomat Pharmacy this quarter?

  • Most of the overall increase in revenue came from the PBM companies Diplomat acquired and rolled into CastiaRx. Revenue for the legacy specialty-pharmacy business grew 8% year over year; drug infusions led the way, up 13%.
  • Gross margin for the specialty segment dropped from 5.8% in the year-ago quarter to 5.5% in the third quarter, but the company is still making almost as much per prescription: $287 per script in the third quarter versus $289 per script in the year-ago quarter.
  • During the quarter, Diplomat added two more limited-distribution drugs to its exclusive or semi-exclusive offering of more than 120 drugs.
  • CastiaRx is profitable, generating $26 million in gross profit in the quarter. But selling, general and administrative expenses, and interest expenses from debt taken on to pay for the acquisitions, resulted in the company only breaking even for the quarter.
  • The integration of the PBMs has generated $7 million in synergies so far this year, putting the company on track to hit its guidance of $8 million to $10 million in synergies in 2018.
Pharmacist looking at medication in a pharmacy drawer

Image source: Getty Images.

What management had to say

Chairman and CEO Brian Griffin laid it out frankly: "With respect to the CastiaRx launch in April, this is really early days relative to our pure PBM performance. It is a rebuilding year for us."

Diplomat is going to lose some Medicare Part D PBM contracts at the start of next year, but those were relatively low-margin contracts set up by the previous owners, as chief financial officer Atul Kavthekar outlined:

We expect the loss of this business to negatively impact Diplomat's 2019 revenue by approximately 4%. Our objective is to offset this revenue loss with new relatively higher-margin business, some of which we've already booked. We are still in the midst of the 2019 PBM selling season, and so a full view into the 2019 outlook is not currently available, but will be incorporated in our 2019 guidance.

Looking forward

Management dropped the top end of its 2018 revenue guidance, which previously went up to $5.9 billion; it now expects revenue to fall between $5.5 billion and $5.7 billion. Bottom-line guidance for 2018 was increased to a range of a loss of $0.10 per share to a gain of $0.03 per share, up from the previous range of a loss of $0.15 per share to a gain of $0.01.

More important than the 2018 numbers is guidance for 2019, to see whether the rebuilding created a better team. Unfortunately, the smaller companies that Diplomat is wooing for its PBM business don't tend to make decisions until late in the year, so management won't be able to give 2019 guidance until early next year.

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