Shares of Diplomat Pharmacy (DPLO) are down 59% at 11:28 a.m. EST after the specialty pharmacy and pharmacy benefit manager released shocking news during its third-quarter earnings report:
As of November 28, 2019, we will no longer participate in a significant group of specialty and retail networks with one of our largest payers. We were unable to reach an agreement to renew network participation rates. While this group of networks is not the only network group that we participate in for this payer, it does comprise the vast majority of the specialty pharmacy business that we do with this payer.
The group of networks is expected to add $700 million in revenue in 2019. That's about 14% of the approximately $5 billion in revenue that Diplomat Pharmacy expects to bring in this year.
As if that news weren't bad enough, management also said it may not be able to meet its total net leverage and interest coverage ratio covenants in its credit agreement at the end of the fourth quarter. That would give lenders the right to terminate the funding of its revolving credit line, accelerate its debt, and potentially foreclose on its assets. As a result, management has substantial doubt about its ability to continue as a going concern.
Management is continuing with its review of strategic alternatives, and a sale of all or part of the business could generate cash to pay down the debt. Alternatively, management also plans to try to work with its lenders to renegotiate its covenants or amend its credit agreement.
Unfortunately, the ultimate outcome is out of Diplomat Pharmacy's hands.
It needs a white knight to come in and buy some or all of the company. Chairman and CEO Brian Griffin said, "There has been interest in both the whole company and its businesses, and we are engaged in advanced discussions." But it's hard to know if a sale will come to fruition.
The other plan requires help from the company's creditors to strike a deal. Creditors are likely to want to work with the company rather than foreclose, but only if they can see a turnaround in progress. The loss of the $700 million contract is certainly a step in the wrong direction.
While Diplomat Pharmacy might be a value stock that's worth more than its current valuation, the unknowns make it hard to figure out whether the potential rewards are worth the risk that the company could eventually go bankrupt if neither plan works out.