Diplomat Pharmacy Shares Downgraded To Underperform

Credit Suisse downgraded shares of Diplomat Pharmacy Inc DPLO to Underperform from Neutral on concerns over continued growth and profitability.

“We are incrementally negative on DPLO's slowing organic growth and profit challenges that exacerbate our concerns over its limited value proposition to health care payors,” analyst Robert Willoughby wrote in a note.

Willoughby doesn’t expect the company to grow operating income in 2017, while acquisitions may provide some cushion to slowing growth. But, the capital base is ballooning, making it unlikely for an improvement in ROIC unless stronger profit performance.

“The 3Q16 guidance set removes some near term risk, but our conviction in our EPS estimates is lower, and a clear pathway to higher ROIC is still not apparent,” Willoughby highlighted.

Diplomat has been weighed down by pricing pressure on the drugs in the therapeutic category, while the dependable oncology revenues too slowed sequentially in the third quarter.

Further, the company faces stiff competition from traditional wholesalers and the PBMs are set to make greater inroads through expanding internal capabilities.The company is trying to offset these headwinds by adding limited distribution drugs.

“[B]ut many of the recently approved compounds by the FDA target smaller therapeutic opportunities and/or patient subsets that will make it difficult for DPLO to drive organic revenue growth at the prior level,” Willoughby added.