UBS Recommends Buying The Dip On Diplomat Pharmacy

• UBS initiated coverage of Diplomat Pharmacy Inc DPLO with a Buy rating and $35 price target on Wednesday.
• The stock fell more than 50 percent from the 52-week high set back in July, even in spite of “minimal change in the near-term business outlook.” In this context, the firm recommended taking advantage of the dip.
• Shares of Diplomat fell almost 4 percent on Wednesday morning.

Shares of specialty pharmacy provider Diplomat seem to have been caught up in the recent sell-off of biopharmaceutical stocks, triggered by “general concerns about a potential slowdown in brand drug price inflation due to perceived political pressure,” analysts Steven Valiquette and Jonathan Yong explained in a report issued Wednesday.

The experts then looked into the marked decline the stock saw since July, noting that the company posted 40 percent sales growth in the first half of the year, including 29 percent organic growth, driven mainly by volume surges and the introduction of new drug.

Related Link: Morgan Stanley Sees Drug Pricing Still An Overhang For Diplomat, AmerisourceBergen

By contrast, the analysts noticed, “the major underlying drugs have witnessed price increases of only 5% on average. So price inflation is simply not a critical driver of the DPLO thesis.”

UBS’ View

According to the research note, UBS’ political consultants believed the Democratic overtures related to drug price inflation were not “likely to translate into legitimate changes in the US pharmaceutical marketplace.” Consequently, the firm assured it continued to expect brand price inflation trends around 7 or 8 percent in 2016, same as in previous years.

Moreover, they argued, Diplomat’s anticipated earnings growth “is simply not very sensitive to price inflation, but is instead driven much more by volume growth and new biologic approvals.” As such, the experts assured they believed sentiment in the stock “will witness a recovery as the company will likely remain on pace to meet or exceed Street consensus sales and earnings expectations in the remainder of 2015 and 2016.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.