Specialty drug distributor Diplomat Pharmacy sets terms for $200 million IPO

Diplomat Pharmacy, which operates the fourth largest specialty pharmacy in the US, announced terms for its IPO on Monday. The Flint, MI-based company plans to raise $200 million by offering 13.3 million shares (25% insider) at a price range of $14 to $16. At the midpoint of the proposed range, it would command a fully diluted market value of $814 million.

Diplomat distributes drugs that require coordinated regimens required by patients with complex chronic diseases. In addition to dispensing these prescriptions, it also provides support services to health systems related to the complexity of administering the treatments. The company has built a national distribution network with one main facility and seven regional locations across the US.

Diplomat claims to be the largest independent specialty pharmacy in the US but lags behind multinational pharmacies Express Scripts, Walgreens and CVS Caremark. Its primary suppliers are Amerisource Bergen and Celgene, which represented 58% and 19% of 2013 cost of goods sold, respectively. Revenue is derived primarily from government programs (51% of 2013 revenue), including Medicare and Medicaid, as well as managed care organizations (27%) and commercial payors (22%).

Diplomat generated revenue from about 1 million prescriptions in the LTM (79% dispensed, 21% where it provided support services). Prescriptions increased by about 8% in the MRQ, and its gross profit per dispensed prescription rose 36% to $148, while fees from services increased just 4% to $27 per prescription. Adjusted EBITDA per prescription jumped 71% to $29. The company is controlled by its founder and CEO, Philip Hagerman, and other primary shareholders include the Janus Capital Group, T. Rowe Price and EVP of Operations Jeffrey Rowe.

Historical net sales increased 43% to $1.0 billion for the six months ended June 30, 2014, as new specialty drugs came to market, sales of existing drugs increased through penetration in physician's offices with the rest due to price increases and payor mix. Its gross margin expanded slightly to 5.9% ($59 million). Adjusted EBITDA almost doubled to $14 million as the company gained leverage. 

Diplomat Pharmacy, which was founded in 1975 and booked $1.8 billion in sales for the 12 months ended June 30, 2014, plans to list on the NYSE under the symbol DPLO. Credit Suisse, Morgan Stanley, J.P. Morgan and Wells Fargo Securities are the joint bookrunners on the deal. It is expected to price during the week of October 6, 2014.