Diplomat posts Q2 loss along with drop in PBM, specialty revenue

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Diplomat posts Q2 loss along with drop in PBM, specialty revenue

By Sandra Levy - 08/09/2019
Diplomat Pharmacy is seeing revenue decline from its PBM and specialty segments, as the Flint, Mich-based company swung to a loss in the second quarter, according to the company’s earnings announcement Friday.

Revenue decreased 9% from $1.4 billion to $1.2 billion and gross profit decreased from $98.4 million to $72.7 million from the prior-year quarter. Adjusted EBITDA was $19.3 million compared to $42.7 million in the prior-year period, and earnings per share were $2.13.

"We continue to believe in our business model and long-term prospects and we remain encouraged by our pipeline for 2020, despite our reduced guidance for 2019. We are pleased that infusion therapies continue to demonstrate strength and we are taking actions to improve our core specialty pharmacy business, rebuild our PBM and enhance our financial flexibility. At the same time, our board has concluded that a broad review of strategic alternatives is in the best interests of the company and our shareholders. While this is taking place, we intend to maintain our focus on executing our strategic plan, improving our businesses and supporting our shareholders, patients and their providers, payers, as well as our manufacturer partners and our employees," Diplomat chairman and CEO Brian Griffin said.

In the second quarter, revenue was comprised of $1.2 billion from the company’s specialty segment and $90 million from its pharmacy benefit manager segment.

Diplomat said the decrease in its specialty segment, was driven by payer reimbursement compression and the conversion of brand name drugs to their generic equivalent. The decrease was partially offset by the benefit of manufacturer price increases and growth in infusion therapies, the company said.

The PBM segment was down from $189 million for the prior-year period. “The decrease in our PBM segment was due to previously disclosed contract losses,” the company said.

Gross profit generated a 5.6% gross margin compared with 6.9% in the second quarter of 2018. Gross profit was comprised of $63 million from the specialty segment and $9.7 million from the PBM segment.

The $159.5 million net loss for the quarter was compared with $4 million worth of income in the year-ago period, but the company said the loss was driven largely by an $85 million non-cash impairment charge related to goodwill and definite-lived intangible assets associated with its specialty segment, as well as a $56 million non-cash impairment charge related to goodwill and definite-lived intangible assets associated with its PBM segment both due to a reduced forecast.

Diplomat expects its full-year revenue to be between $4.7 and $5 billion. This includes specialty segment revenue between $4.4 and $4.6 billion and PBM segment revenue between $325 and $375 million. Diplomat now projects its net loss to be between $201 and $191 million, versus the previous range of $49 and $33 million. It now expects EBITDA between $87 and $93 million, versus the previous range of $110 and $116 million. It expects diluted earnings per share to be between $2.69 and $2.55, versus the previous range of $0.65 and $0.44

Diplomat also announced that at the direction of its board of directors, the company is reviewing strategic alternatives focused on maximizing shareholder value. The strategic alternatives expected to be considered include, but are not limited to, a sale or merger of the company, continuing to pursue value-enhancing initiatives as a standalone company, capital structure changes, or the sale or other disposition of certain of the company's businesses or assets.

"We are focused on growing our specialty business with health plans and hospital systems, positioning the PBM business for growth and improving operating efficiency, while maintaining high standards of patient and customer care," Griffin said, adding, "At the same time, the board believes that a broad review of strategic alternatives is in the best interests of the company and our shareholders."

Griffin also said, "Diplomat remains committed to supporting our patients, physicians and manufacturer partners, as well as clients and team members during this process."

“There can be no assurance that this process will result in the approval or completion of any particular strategic alternative or transaction in the future. The company does not intend to disclose developments or provide updates on the progress or status of the review of strategic alternatives unless and until required or when the company determines appropriate," the company said.

Diplomat has retained Foros Securities as financial advisor and Sidley Austin as legal advisor to assist with its strategic alternatives review.

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