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Waiting on Diplomat Pharmacy to Rebuild

By Brian Orelli, PhD – May 13, 2019 at 3:54PM

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It'll be a few months before the company can secure new clients for its pharmacy benefit manager business.

Diplomat Pharmacy (DPLO) started off its rebuilding year with mediocre revenue, which was to be expected after its specialty pharmacy business ran into stiff competition and the pharmacy benefit manager (PBM) business lost quite a few clients. With most potential clients on a Jan. 1 start date, investors will have to wait until later in the year to hear about a potential rebound.

Diplomat Pharmacy results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Revenue

$1.26 billion

$1.34 billion

(6.3%)

Income from operations

($3.6 million)

$8.7 million

N/A

Earnings per share

($0.19)

($0.01)

N/A

Data source: Diplomat Pharmacy.

What happened with Diplomat Pharmacy this quarter?

  • Revenue from the company's legacy specialty pharmacy segment was up 1% year over year. The infusion business continues to be the star, with revenue up 8% year over year. Sales of oncology drugs, which had been another growth driver, were flat year over year as the benefit from higher sales prices of branded drugs were offset by the use of lower-priced generics, decreased reimbursement, and lower volumes.
  • The decreased reimbursements and lower volumes of higher-priced medications hurt the segment's margins; gross profit per prescription decreased to $298, compared to $318 per prescription in the year-ago quarter.
  • On the plus side, the company added six limited-distribution drugs during the quarter, increasing the total to more than 130.
  • Revenue from CastiaRx, the PBM business, was cut nearly in half. Fortunately, at $98 million in revenue, it's a small portion of the overall business, so the decrease doesn't have a huge effect on overall revenue. It does hurt the bottom line a little more, since CastiaRx's gross margin of 11.9% is higher than the specialty pharmacy segment's 5.8% gross margin.
Hands taking prescription drugs from a shelf

Image source: Getty Images.

What management had to say

Diplomat's CEO and chairman Brian Griffin highlighted the infusion business as one of the shining spots for the company: "Within our infusion therapeutic area, Diplomat continues to be successful and partnering with major health plans as a specialty infusion partner, and in 2019 is on track to sign more participating provider agreements than in 2018. We continue to observe strong performance in this area and remain positive for 2019."

While CastiaRx struggled to keep clients and sign up new ones for 2019, the company has fixed its issues with poor service, and Griffin noted an uptick in requests for proposals (RFPs) that could help Diplomat get the business back on track:

CastiaRx is making a concerted effort to develop opportunities with larger clients. We've seen RFPs from some larger corporations, which if awarded would be a substantial opportunity relative to the size of the business today. We still expect to be awarded new business in 2019. In addition, our 2020 pipeline is extremely encouraging. It is substantially higher today than it was at the same time last year. We remain confident in our PBM strategy, but as we previously indicated, 2019 is a rebuilding year.

Looking forward

Management reiterated its previous guidance for revenue of $4.7 billion to $5.0 billion, which breaks down to $4.4 billion to $4.6 billion for the specialty segment and $0.3 billion to $0.4 billion for CastiaRx.

The profit line was revised down to an expected loss of $33 million to $44 million, from a previous expectation of a loss between $26 million and $37 million. The larger loss comes from an adjustment to tax expectations; the company expected to get a state tax benefit but will now have to record a valuation allowance, wiping out -- on a GAAP basis -- any benefit it receives.

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

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