Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares in Diplomat Pharmacy (NYSE:DPLO) jumped by more than 10% today on news that it has priced its follow-on public offering of 8.54 million shares at a price of $29 per share.
So What: The specialty drug pharmacy operator came public last year and used its IPO proceeds to pay off its debt. Now, with the fragmented specialty pharmacy market leading to more acquisitions, Diplomat is returning the markets to raise additional financing.
In the offering, the company is selling 5.54 million shares of stock, insiders are selling an additional 3 million shares, and the company is offering up to another 1.28 million shares through an over-allotment program.
If the offering goes as planned, it will bolster Diplomat's balance sheet and give it the financial flexibility to pay off debt that it will be taking on as part of its recent decision to buy BioRx, a smaller competitor.
Now What: It's often cheaper to finance acquisitions with equity offerings than to take on debt, so this offering -- while dilutive -- isn't necessarily a bad thing. What may be concerning, however, is that so many shares are being sold by insiders.
Admittedly, since Diplomat has been in business for 40 years, shareholders shouldn't be faulted too much for wanting to unlock some of their investment. That said, since insider selling may indicate that insiders view shares as being at or above fair value, investors ought to keep a close eye on insider activity going forward.
Regardless, Diplomat's offering should put it in better financial shape to pursue more bolt-on offerings like BioRx that can allow it to win more business away from market share leaders Express Scripts and CVS Health.
Although that potential for growth is intriguing, in my view Diplomat is a bit pricey. Analysts expect that Diplomat will deliver EPS of $0.66 in 2016, which means that shares are trading at 51.8 forward estimates. As a result, I'm going to stay on the sidelines on this one.