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Shares of Diplomat Pharmacy (NYSE: DPLO), a Michigan-based specialty pharmacy, gave shareholders a taste of the Mondays and tanked as much as 13% after an analyst note from Cowen & Co. signaled that higher costs could be on Diplomat's horizon. The stock rebounded ever so slightly from its lows and is currently lower by a little over 10% as of 3 p.m. EDT.
Cowen & Co. analyst Charles Rhyee, after meeting with pharmacy-benefit management (PBM) giant Express Scripts' (NASDAQ: ESRX) management team, now believes that Express Scripts will be more aggressive with direct and indirect remuneration (DIR) fees with specialty pharmacies. According to Rhyee, Express Scripts hasn't specifically targeted DIR fees in the past with specialty pharmacies, but after watching PBM rival CVS Health (NYSE: CVS) get aggressive with its DIR fees and receive no regulatory pushback, it only seems logical to pass along some of its costs back to specialty pharmacies like Diplomat.
Additionally, Rhyee's note suggests that Express Scripts should be able to implement these changes "relatively quickly," which could mean a surge in costs for Diplomat Pharmacy in the near term.
For those who may not recall, a rapid rise in DIR fees last year is what caused the company to lower its profit guidance and more than halved its valuation. Diplomat CEO Phil Hagerman was exceptionally critical of DIR fees last year following the company's earnings revision. Here's what Hagerman had to say at the time:
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While DIR fees are not new in terms of their existence, the rates, methodology, timing and transparency associated with them have all changed dramatically in 2016 and they are now impacting the entire specialty pharmacy industry. Because the fees are performance-based, some PBMs claim that the fees cannot be calculated at the time of adjudication. Those PBMs contend that it is only after the fact and sometimes months or quarters later that these fees can be accurately calculated and collected.
Diplomat and the entire specialty pharmacy industry do not agree with how the practice has evolved and the broad expansion that has taken place in 2016. We don't feel that the way some of the PBMs are calculating these fees meet the goals, outcomes or spirit of CMS's [Centers for Medicare and Medicaid Services'] intentions.
Despite being a controversial topic that should probably be tackled by Congress, DIR fees are unlikely to be on the docket anytime soon, which means there's little Diplomat Pharmacy may be able to do in the meantime if it receives higher cost pushback from PBM giants like Express Scripts.
What makes things a bit more unnerving is DIR fee data is very much out of the public's view, so it's not as if investors have any true way of quantifying how much Diplomat could see in the way of higher costs, or if it will even cause the company to readjust its profit outlook as it did late last year.
What we do know at this point is that Diplomat is healthfully profitable, and the growing focus on genetic and biomarker-based drugs should only fuel the growth potential for specialty pharmacies in the future. This will likely prove to be a bump in the road rather than a milewide canyon for Diplomat, but it's nonetheless a disappointing turn of events in the near term if Rhyee's prediction proves accurate.
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Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of Express Scripts. The Motley Fool recommends CVS Health and Diplomat Pharmacy. The Motley Fool has a disclosure policy.