Will Diplomat Pharmacy Survive?


Diplomat Pharmacy (Diplomat) has grown to be the nation’s largest independent provider of specialty pharmacy and infusion services. Diplomat helps people with complex and chronic health conditions in all 50 states, partnering with payers, providers, hospitals, manufacturers, and more. Diplomat also serves payers through CastiaRx, a specialty benefit manager, and offers tailored solutions for healthcare innovators through EnvoyHealth.

Diplomat, worth more than $3 billion as a company in 2015, is now worth about $200 million after a period of financial setbacks, including a poor third quarter. Revenue for the third quarter of 2019 was $1,301 million, compared to $1,373 million in the third quarter of 2018, a decrease of $72 million or 5%.  The Specialty segment revenue amounted to $1,243 million, compared to $1,212 million in the prior year quarter, while revenue from the PBM segment amounted to $82 million, compared to $170 million in the prior year quarter.

Net loss for the third quarter of 2019 was $177 million compared to net income of $0.2 million in the third quarter of 2018. This decrease was primarily driven by a $156 million non-cash impairment charge related to goodwill and definite-lived intangible assets associated with the 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 the PBM segment.

What Does This Mean

As of September 30, 2019, Diplomat had $8.4 million in cash and equivalents, $105 million in borrowings under its revolving line of credit, $456 million outstanding under its term loans, and $95 million of available borrowing capacity under its revolving line of credit.

For the nine months ended September 30, 2019, Diplomat generated $108 million of cash from operations. Diplomat  believes that we it not be able to meet the total net leverage and interest coverage ratio covenants in its credit agreement for the period ending December 31, 2019, which violation would give the lenders the right to terminate funding of the revolving line of credit, accelerate the debt (including amounts under its term loans), or foreclose on the company’s assets, if mitigating plans are not executed prior to December 31, 2019.

What Happened

The decision to launch its PBM, CastiaRx, in April 2018 has accelerated the potential demise of the company. CastiaRx was created to unite the PBM capabilities of LDI Integrated Pharmacy Services and National Pharmaceutical Services with Diplomat’s specialty pharmacy and infusion expertise.

Less than a year later, Diplomat realized it needed to accelerate the implementation of its new payer sales strategy for CastiaRx to improve its performance. CastiaRx had $35 million in revenue in 2018.

Diplomat soon after launch removed Joel Saban, president of Diplomat, and Albert Thigpen, president and chief operating officer of CastiaRx. Diplomat’s preliminary 2019 outlook assumed a revenue contribution from CastiaRx of $450 million to $500 million.

The new payer strategy has not been successful as health insurer payers continue to drop CastiaRx, including one of Diplomat’s largest clients. 

Diplomat found that competing successfully with large specialty pharmacies owned by Cigna/ESI, CVS Health/Caremark and UnitedHealth/OptumRx has been more difficult than projected.

What’s Happening Now

Diplomat sold certain assets of the Envoy Health business, retaining key portions of the operations located in its Flint, Michigan headquarters. Diplomat remains committed to services supporting its manufacturer partners, particularly in support of specialty drugs and digital therapeutics.

Diplomat recently executed and innovated a value-based agreement for exclusive oncology care management with a national PBM and was awarded access to three additional limited distribution drugs during the third quarter, increasing its access to more than 135 limited distribution drugs.

Oncology sales were up more than 2% year-over-year as the benefit of brand inflation was partially offset by reimbursement compression, prescription volume declines and higher generic utilization.

Specialty prescription volumes increased 3% year-over-year to 237,000. Infusion therapy volumes grew while most other therapeutic area volumes were down year-over-year. Gross profit per script in the third quarter of 2019 was $268 per script, compared to $287 per script.


Diplomat continues to have a very strong share within oncology and, if the company survives, may become an oncology-only player, leveraging the growth of oncology limited distribution drugs, and its successful field organization; or will the company become an attractive acquisition candidate for a company looking to gain entry into the market?