IPO Report: Diplomat Pharmacy (DPLO)

Diplomat Pharmacy (DPLO) is the nation's largest independent specialty pharmacy and is focused on improving lives of patients with complex chronic diseases. It is headquartered in Flint, MI.

Seven other companies are scheduled for the week of Oct. 6, 2014.  The full IPO calendar is available at IPOpremium.

The Manager and Co-Managers are:Credit Suisse, Morgan Stanley, J.P. Morgan, Wells Fargo Securities.  The Joint Managers are: William Blair, Leerink Partners

DPLO scheduled a $200 million IPO with a market capitalization of $756 million at a price range midpoint of $15 for Friday, Oct. 10, 2014 on the NYSE.  SEC filings

DPLO IPO Overview

DPLO is the nation's largest independent specialty pharmacy and is focused on improving lives of patients with complex chronic diseases.

DPLO Valuation

Glossary

DPLO Conclusion

Positive, but may need to be priced down because of 67 P/E Rev +49%, gross profit +65%

Operating income +100%, Net income +59%

Net income  .5% of rev

Adj EBITDA +128%

Adj EBITDA per prescription +106%, total prescriptions +11%

Business

DPLO is the nation's largest independent specialty pharmacy and is focused on improving lives of patients with complex chronic diseases.

DPLO was founded in 1975 by its Chief Executive Officer, Philip Hagerman, and his father, Dale, both trained pharmacists who transformed its business from a traditional pharmacy into a leading specialty pharmacy.

Market growth

In 2005, DPLO began to expand the scope of its specialty pharmacy business from a small regional operation to a large national enterprise, allowing DPLO to capitalize on the growth of the specialty pharmacy market from $20 billion in sales in 2005 to $63 billion in sales in 2013.

2% market  share

As a result, DPLO has grown its revenues organically to over $1.5 billion in 2013, achieving a compounded annual growth rate of over 65% since 2005, and DPLO is now the fourth largest overall specialty pharmacy in the United States, with a 2% overall market share (based on 2013 revenues from pharmacy-dispensed specialty drugs).

To achieve this growth, DPLO has consistently strengthened its clinical expertise in key therapeutic categories, such as oncology and immunology, broadened the scope of its services to retailers, hospitals and health systems and strengthened its relationships with patients, payors, pharmaceutical manufacturers and physicians.

Specialty pharmacy services

DPLO believe its independence, which its defines as its singular focus on specialty pharmacy services independent of other operations such as pharmacy benefit management or managed care, allows DPLO to focus on the patients first and to address the specific needs of all of its constituents.

Patient-centric approach

DPLO believes it has a unique patient-centric approach that positions it at the center of the healthcare continuum for the treatment of complex chronic diseases and enables it to drive superior care coordination through partnerships with patients, payors, pharmaceutical manufacturers and physicians.

Broad range

DPLO offers a broad range of innovative solutions to address the dispensing, delivery, dosing and reimbursement of clinically intensive, high-cost specialty drugs.

DPLO believes that it is a chosen partner for leading biotechnology and pharmaceutical companies based on its ability to deliver customized support services and dispense new drugs to complex chronic disease patient populations.

Focus

Diplomat opened its doors in 1975 as a neighborhood pharmacy with one essential tenet: "Take good care of patients, and the rest falls into place."

Today, that tradition continues and DPLO has focused on creating a culture that is highly focused on increasing adherence and improving outcomes.

DPLO believes that its primary focus on the patient differentiates DPLO from its significant competitors that also provide pharmacy benefit management services or other health care services that do not focus singularly on managing the patient experience.

DPLO understands that the primary concerns of a patient facing a chronic and serious condition are quality of care and ease of working with the pharmacy.

DPLO believes that its detailed, well managed, high-touch patient care program that is designed to address these concerns is essential to its success.

DPLO’s specialty drug dispensing and services business model described below creates partnerships with patients, payors, pharmaceutical manufacturers and physicians—with a focus on improving adherence and the patient experience.

Dividend Policy

No dividends are planned.

Intellectual Property

DPLO has registered and/or applied to register a variety of its trademarks and service marks used throughout its business. DIPLOMAT SPECIALTY PHARMACY® and DIPLOMAT®, among others, are service marks registered with the U.S. Patent Trademark Office. DPLO believes that its trade names are becoming increasingly recognized by many referral sources as representing a reliable, cost-effective source of specialty pharmacy services.

Competition

DPLO’s competitors include: pharmacy benefit managers; retail pharmacy chains and independent retail pharmacies; health plans; national, regional and niche specialty pharmacies; specialty infusion therapy companies; physician practices and hospital systems; and group purchasing organizations.

DPLO believes that its singular focus on specialty pharmacy services allows it to more nimbly adapt to the needs of its constituents, while its size relative to other singularly focused specialty pharmacies will enable DPLO to continue to be a leader among such entities.

DPLO is currently the largest independent specialty pharmacy and the fourth largest specialty pharmacy in the U.S., with a 2% overall market share (based on 2013 revenues from pharmacy-dispensed specialty drugs).

The three largest specialty pharmacies are Express Scripts, CVS Caremark and Walgreens.

DPLO understands that a number of other traditionally non-specialty pharmacies with significant resources are attempting to build, acquire or partner with specialty pharmacies due to the double-digit growth anticipated in spending on specialty prescription drugs compared to low to mid single digit growth in spending on traditional prescription drugs.

There are also many smaller specialty pharmacies and other entities in the healthcare industry that provide limited specialty pharmacy services that compete with DPLO to a lesser extent. Some of these smaller entities, however, may be able to invest significant resources, through acquisition or otherwise, to compete with DPLO on a larger scale.

5% stockholders pre-IPO

Philip R. Hagerman   97.9%

Jeffrey M. Rowe   7.7%                    

Use of proceeds

DPLO intends to use the $137 million in proceeds from its IPO as follows:

to repay indebtedness to certain current or former stakeholders and employees, which as of September 16, 2014 are as follows:

(i) $12.1 million to Mark Chaffee, a former shareholder, to satisfy a promissory note bearing interest at 1.3% per annum and maturing in January 2017;

(ii) $7.0 million to Jeffrey M. Rowe, an existing shareholder, executive officer and director, to satisfy a promissory note bearing interest at 1.3% per annum and maturing on July 20, 2017;

(iii) $0.1 million to Deborah Ward, an existing shareholder and the sister of Philip Hagerman, its Chairman and Chief Executive Officer, to satisfy a promissory note bearing no interest and maturing on April 20, 2015; and

(iv) $0.9 million to Stephen M. Lund, a former employee and option holder, to satisfy a promissory note bearing interest at the prime rate plus 1.0% and maturing on July 20, 2017.

The balance of the net proceeds from this offering will be used to fully repay borrowings under DPLO’s revolving line of credit to the extent of any borrowings outstanding as of the completion of this offering and for working capital and other general corporate purposes, which DPLO expects will include opportunistic acquisitions or strategic investments.