Diplomat Specialty Pharmacy Defends the Specialty Industry; Reports Increased Revenues

Diplomat Specialty Pharmacy held its third-quarter earnings call on Nov. 3, 2015, and throughout the call, the company’s CEO spoke of the recent misrepresentation of the specialty pharmacy industry in news reports linked to Valeant. Specialty pharmacies dispense complex medications that are typically (but not always) large-molecule biologics.

Overall profitability does not rely on high drug prices
Although Diplomat admitted during the call that it does benefit from manufacturer price increases-contrary to many recent news reports, most specialty pharmacies do not rely on inflation for the bulk of their revenues. "It's important for me to [note] that many of the stories you heard in the news recently are not about specialty drugs as a knowledgeable participant would define them," Hagerman said on the call. "Drug price inflation is a very small contributor to our overall financial results today as we have worked diligently over the past several years to continuously diversify our business." Diplomat said drug price inflation contributed only approximately 5% to adjusted EBITDA in the third quarter.

Instead, most of Diplomat’s revenue was associated with the clinical management of complex drugs-such as the logistics of drug delivery and the administrative duties related to the navigation of payer requirements such as prior authorizations. Unlike a typical mail-order pharmacy, specialty pharmacies provide clinical support, often in the form of access to pharmacists for medication issues related to the administration of complicated medicines for chronic, life-threatening diseases. Hagerman reiterated that specialty pharmacies specialize in taking care of patients who need medications for serious illnesses like cancer and these pharmacies are typically “not in the business of toenail fungus and teenage acne.”

Indeed, even without the revenue from drug price inflation, Diplomat is doing very well financially. The company recorded revenues of $947 million, representing an increase of 59% compared with 2014. The company's "organic growth of 32% in the quarter was the fastest we have experienced this year," Hagerman emphasized. Revenue came from Diplomat's specialty drug business, specialty infusion business (via the acquisition of BioRx, a specialty infusion company), retail specialty network, hospital specialty program, and from its non-dispensing service offerings to manufacturers.

Limited distribution benefits specialty pharmacies
Although the limited distribution model has received a bad reputation as of late, with multiple news outlets claiming that use of limited models limit a patient's options and could keep drug prices high, these models are often necessary to manage small patient populations for drugs that are known to have the potential to cause severe adverse events. Hagerman said, "trends are shifting towards very targeted therapies, orphan drugs, and smaller patient populations, all of which will likely lend themselves to some form of limited distribution model." Hagerman said this model was Diplomat's "sweet spot,” allowing it to collect patient data that would otherwise be difficult to obtain through a retail pharmacy channel. Hagerman said the company’s expertise utilizing limited distribution models has contributed greatly to its success: "Our access to nearly all meaningful limited distribution drugs, including many drugs in orphan and ultra-orphan categories, continues to be a competitive advantage that allows us to win market share." Hagerman said in a Diplomat press release that he is confident in Diplomat’s ability to continue to win access to limited distribution panels in the future.

Sources: Seeking Alpha, Diplomat Specialty Pharmacy