Diplomat Pharmacy Inc Makes Up for Lost Contracts

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Diplomat Pharmacy (NYSE: DPLO) lost some contracts and gained some others, which netted out to slightly higher revenue in the second quarter. Operating income and earnings weren't nearly as flat, but that was because of higher acquisition-associated costs.

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Diplomat Pharmacy results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$1.13 billion

$1.09 billion

3.5%

Income from operations

$4.84 million

$13.85 million

(65%)

Earnings per share

$0.05

$0.13

(62%)

What happened with Diplomat Pharmacy this quarter?

  • Revenue was bumped up $83 million from recently made acquisitions, $63 million because of manufacturer price increases, and $32 million from contracts that were new in this past year. Most of that was offset by previously mentioned contracts that were not renewed in 2017, as well as hepatitis C drug sales that continued to decline. Hep C drugs are down to 7% of revenue and appear to be stabilizing, but will still hurt the comparisons through the second half of 2017.
  • Much of the growth came from cancer drugs, which increased 25% year over year, and infusion, which grew 20% year over year. Some of that growth came from recent acquisitions, but even backing that out, the categories organically grew 15% and 12%, respectively.
  • Gross margins were down, but that's mostly because the company's selling more drugs that are expensive, and therefore have lower gross margins. Gross profit in dollars per script increased to $371 from $339 in the year-ago quarter.
  • Backing out the aforementioned acquisition-related costs, adjusted earnings were up slightly from $0.23 per share in the year-ago quarter to $0.25 per share in the second quarter.
  • Diplomat added nine new drugs to its offering, including five that are limited distribution. For one of those limited distribution drugs, Cycle Pharmaceuticals' Nityr, Diplomat will be the sole source.
  • After the quarter closed, Diplomat acquired Accurate Rx, a specialty pharmacy focusing on infusion services, which should further drive revenue in the infusion category.

What management had to say 

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Philip Hagerman, Diplomat's chairman and CEO, pointed out that it's becoming easier for the company to win contracts for cancer drugs as it grows the segment:

Based on the strength of the oncology drug pipeline, our ability to continue to win access to limited distribution drugs and the new indications that expand the potential patient population for existing drugs, we expect the momentum in this therapeutic category to persist and continue to be a substantial growth driver for Diplomat moving forward.

The recent acquisition of WRB Communications, which brought in medical information services, remote patient monitoring, sales, and customer-care capabilities for its drugmaker clients, has also helped generate new business according to Hagerman:

It is important to note that we believe Diplomat won this new business in part because we were able to present a dramatically enhanced profile to the marketplace due to our acquisition of WRB. We don't believe either company could have won these mandates on their own.

Looking forward

Management lopped off $100 million from the top of its revenue guidance and now expects revenue between $4.3 billion and $4.6 billion versus the previous range of $4.3 billion to $4.7 billion. Nevertheless, new business at a higher margin will result in more growth of the bottom line, with adjusted earnings per share expected to come in between $0.71 and $0.79, up substantially from a previous range of $0.54 and $0.70.

Looking into 2018, management wasn't willing to give firm numbers, but Diplomat's new CFO Atul Kavthekar said the company anticipates a "return to top-line growth next year."

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Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Diplomat Pharmacy. The Motley Fool has a disclosure policy.