Diplomat Pharmacy is seeing revenue decline from its PBM segment, as the Flint, Mich-based company swung to a loss in the third quarter, according to the company’s earnings announcement Tuesday.
Revenue decreased 5% from $1.4 billion to $1.3 billion and gross profit decreased from $93.4 million to $63.4 million from the prior-year quarter. Adjusted EBITDA was $11.5 million compared to $41.9 million in the prior-year period, and earnings loss per share were $2.35.
"Our third quarter results and updated outlook for the year reflect the challenges we continue to face in our business, including the ongoing pressures on our PBM business. In addition, we are disappointed we were unable to come to an agreement with one of our large payers to renew network participation in their specialty pharmacy network. We continue to pursue a comprehensive strategic alternatives process. There has been interest in both the whole company and its businesses, and we are engaged in advanced discussions. At the same time, we are focused on executing our strategy and continuing to put measures in place to help mitigate the impact of industry headwinds. The board, management and I are committed to doing what is in the best interest of shareholders, employees and other Diplomat stakeholders," Diplomat chairman and CEO Brian Griffin said.
In the third quarter, revenue was comprised of $1.2 billion from the company’s specialty segment and $82 million from its pharmacy benefit manager segment.
Diplomat said the increase in its specialty segment, was driven by growth in infusion therapies and manufacturer price inflation. This was partially offset by payor reimbursement compression and the conversion of certain brand name drugs to their generic equivalent.
The PBM segment was down from $170 million for the prior-year period. The decrease in its PBM segment was due to previously disclosed and continued contract losses, as well as price compression to retain current business and win new business, the company said.
Gross profit generated a 4.9% gross margin compared with 6.8% in the third quarter of 2018. Gross profit was comprised of $64.5 million from the specialty segment. The company reported a $1.1 million gross loss from the PBM segment.
The $177 million net loss for the quarter was compared with $0.2 million worth of income in the year-ago period, but the company said the loss was driven largely by a $156 million non-cash impairment charge related to goodwill and definite-lived intangible assets associated with its PBM segment due to a lower anticipated win rate, a lower expected rate of renewals, and the reduction in rebate value in 2019, all of which have contributed to a reduced outlook for the financial performance of its PBM segment. The decrease in net income/earnings was partially offset by a $2 million change in income tax benefit versus the prior year period.
Diplomat expects its full-year revenue to be between $4.9 and $5.1 billion. This includes specialty segment revenue between $4.6 and $4.7 billion and PBM segment revenue between $325 and $375 million. Diplomat now projects its net loss to be between $368 and $361 million, versus the previous range of $201 and $191 million. It now expects EBITDA between $71 and $74 million, versus the previous range of $87 and $93 million. It expects diluted earnings per share to be between $4.91 and $4.81, versus the previous range of $2.69 and $2.55.
The company also announced that as of Nov, 28, 2019, it will no longer participate in a significant group of specialty and retail networks with one of its 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. We will continue to support the patients in the networks where we retain access, as well as the patients of their clients with whom we have direct contracts. For the full year 2019, this group of networks is expected to contribute approximately $700 million in revenue and while the loss of this business is not expected to have a material impact on 2019 results, our updated guidance does include the impact of this volume loss effective Nov. 28, 2019,” the company said.