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Diplomat Pharmacy, Inc. Announces Strong Q4 Results, Weak 2016 Forecast

By Keith Speights - Mar 1, 2016 at 9:37AM

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Organic growth helps the specialty pharmacy post solid year-over-year growth, but 2016 isn't looking as good as many hoped.

Image source: Diplomat Pharmacy.

Shareholders of Diplomat Pharmacy (DPLO) have been on something of a roller-coaster ride so far in 2016. The specialty pharmacy's stock plunged over 22% by early February. However, since then, Diplomat's shares have mounted a big comeback and were up nearly 4% year to date by the end of the month.

Diplomat announced its fourth-quarter earnings results after the market closed on Monday. Were those results good enough to keep the upswing going? Doesn't look like it based on investors' initial reaction -- the stock is down 22% as of 9:35 a.m. ET. Here are the highlights from the earnings results.

Diplomat Pharmacy results: The raw numbers

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Sales

$986.8 million

$612.1 million

61.2%

Net Income From Continuing Operations

$3.57 million

($3.13 million)

N/A

Earnings Per Share

$0.06

($0.06)

N/A

Data source: Yahoo Finance! 

What happened with Diplomat Pharmacy this quarter?
It's obvious that Diplomat closed out 2015 much stronger than it did the previous year. The improved revenue picture stemmed primarily from organic growth. Increased sales volume accounted for an additional $101 million in revenue. New drugs kicked in another $58 million. Price increases contributed $57 million in additional revenue. However, acquisitions during 2015 were also important -- adding around $159 million in revenue compared to the prior-year period. 

Diplomat's bottom line also improved significantly during the fourth quarter. Gross profit jumped to $76.7 million from $40.9 million in the same period of 2014. Drug mix changes, including the impact of acquired drugs, played a key role in boosting gross profit.

However, expenses were on the rise during the quarter. Diplomat's selling, general, and administrative expenses jumped 65% year over year to $69.7 million. Nearly half of this increase stemmed from higher employee costs, which in turn resulted from higher prescription volumes.

The specialty pharmacy also provided guidance for full-year 2016. Diplomat expects revenue between $4.3 billion and $4.6 billion. The company projects adjusted earnings per share between $0.84 and $0.89.

What management had to say
Phil Hagerman, chairman and CEO of Diplomat, highlighted the strong growth. Hagerman said:

During the fourth quarter, we delivered our strongest organic and overall revenue growth quarter of the year. At the same time, we continued to meaningfully improve margins and to deliver growth from multiple diverse areas within our business including: growing prescription volume and revenue from existing drugs, continuing to win access to nearly all meaningful specialty drug approvals, and generating additional revenue synergies from our recent acquisitions. 2015 was a record year for drug approvals from the FDA, and this recent influx of approvals, combined with the remaining rich pipeline of drugs in development, keeps us very confident in our ability to deliver solid growth for the foreseeable future.

Looking forward
Why such a big drop after seemingly solid fourth-quarter results? Wall Street cares more about what lies ahead than what's in the rearview mirror. Diplomat's earnings guidance for 2016 wasn't as strong as analysts expected.

One key area to watch in 2016 is how the changing hepatitis C market impacts Diplomat. The acquisition in June of Burman's Specialty Pharmacy makes hep C drugs more important for the company. 

Perhaps the biggest change in the hep C market is the launch of Merck's (MRK 0.53%) Zepatier. Diplomat began offering Zepatier in mid-February. Merck priced Zepatier at $54,600 for a 12-week regimen, well below the list prices of competing hep C drugs already on the market. However, Merck stated publicly that its pricing is in the range of those other drugs after discounts are taken into account. 

Merck's entrance into the hep C market with a lower list price could help ease the way for payers to relax restrictions on which patients can use the new still-costly treatments. If that happens, Diplomat should benefit. However, Diplomat's lower-than-expected guidance could indicate that the company isn't counting on awe-inspiring results from hep C drugs.

Investors might want to keep in mind, though, that last March Diplomat predicted full-year 2015 revenue of $2.8 billion to $3.1 billion and adjusted earnings between $0.47 and $0.50 per share. The company easily topped both ranges, thanks in part to strategic acquisitions. If history repeats itself -- or even just rhymes -- 2016 could turn out all right. One thing seems certain: Diplomat shareholders' roller-coaster ride isn't slowing down.

 

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