Diplomat Pharmacy Considers Its Options

In conjunction with its second-quarter earnings, Diplomat Pharmacy (DPLO +0.00%) disclosed that it's undergoing a review of strategic alternatives that could result in selling all or part of the business. Considering that the second quarter didn't live up to expectations, that may end up as the best option for shareholders.

Diplomat Pharmacy results: The raw numbers

Data source: Diplomat Pharmacy.

What happened with Diplomat Pharmacy this quarter?

• Sales in Diplomat's legacy specialty pharmacy slipped slightly from $1.234 billion in the year-ago quarter to $1.216 billion in the most recent quarter, due to the launch of cheaper generics and volume declines as Diplomat faces competition from specialty pharmacies run by large pharmacy benefit managers (PBMs). On the plus side, the infusion business grew sales 6% year over year and sales of oncology drugs were up 2% year over year.
• Diplomat signed a five-year agreement with Allergy Partners to provide in-home or in-office infusion services for their patients, which should further strengthen the infusion business.
• Revenue from the new PBM business CastiaRx was cut by more than half, to $90 million in revenue. With most customers on annual contracts, the second quarter was expected to be similar to last quarter's decline.
• The large loss came from a non-cash impairment charge of $85 million associated with the specialty pharmacy business and a $56 million charge for the PBM business.

Image source: Getty Images.

What management had to say

CEO and chairman Brian Griffin was light on the details of the review of strategic alternatives but basically said all options are still on the table:

From time to time, we've had discussions with third parties either at their initiation or ours, regarding strategic transactions. Recently, we've had discussions with several parties who see value in acquiring our company or certain of our businesses and have expressed specific interest. We, along with our advisors, are evaluating these expressions of interest to ensure that any decisions we make will be in the best interests of our shareholders. We are also exploring the full range of alternatives for value creation, which could include a sale of the company, the sale of individual businesses, or other value enhancing transactions. Ultimately, we may determine that our best option is to remain an independent, publicly traded company in our current configuration.

Griffin also reiterated the opportunity to win new PBM business that would mostly start next year:

There is still an opportunity to win additional business in 2019, though, given where we are in the year, any new contract awards would not have a material impact on our 2019 financial performance. We continue to see a robust pipeline in our PBM business for 1/1/2020. Given the dynamics of the middle market, we expect to be in a position to provide further insight into the PBM's prospects for 2020 early next year.

Looking forward

Management kept 2019 revenue guidance in line with revenue expected to fall in the $4.7 billion to $5.0 billion range.

With the charges this quarter, the loss per share is expected to be in the $2.69 to $2.55 range, which is much worse than previous guidance for a loss of $0.65 to $0.44 per share.

But even guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which factors out the one-time charges, was ratcheted down to between $87 million and $93 million from the previous range of $110 million to $116 million. Chief financial officer Dan Davison had a laundry list of reasons for the lower expectations: "actual second-quarter results that were below expectations lower than expected generic volumes, potential for additional reimbursement pressure in the latter half of the year, lower than anticipated new course specialty pharmacy contracts and cost savings that are running behind forecast."

That review can't be completed quickly enough for shareholders.