A conversation with Phil Hagerman, Diplomat Pharmacy

What is Diplomat Pharmacy today started as a community pharmacy in 1973 in Flint, MI, known as Ideal Pharmacy. Dale Hagerman, later joined by his son Philip, took ownership of that store in 1975, renamed it Diplomat Pharmacy, and began a growth path that led to the largest independent specialty pharmacy in the US, with 2013 revenues of more than $1.5 billion. In 2010, it took over what had been the GM Great Lakes Technology Center in Flint, which has allowed it to maintain its double-digit growth; additionally, the company has satellite offices in Michigan, Illinois, Florida, California, Connecticut, North Carolina and Massachusetts.

This fall, the company went public (listed on the NYSE as “DPLO”) and through the end of 2014, saw its stock price rise by around 50%. Through this growth, it has been guided by the philosophy, “Take good care of the patients, and the rest will follow.”

Pharmaceutical Commerce recently sat down with Diplomat’s CEO, Philip Hagerman. Here’s what he had to say.

1. Diplomat Pharmacy started out as a community pharmacy in the mid-1970s. Take us from that time to when you identified specialty pharmacy as a new category of pharmacy services.

We recognized very early on in the late 1970s and early 1980s that there were medications that the majority of pharmacies did not want to carry. These medications were either expensive, had to be special ordered, or custom-compounded. We became the go-to pharmacy in southeastern Michigan for any medication that was unusual or hard to find. As specialty pharmacy began emerging as a true industry sector in the early 2000s, we accelerated our services with the growing need.

In 2005, we began to expand the scope of our specialty pharmacy business from a small, regional operation by opening a second location in Grand Rapids to capture a greater share of Michigan, and launched a distribution center in Cleveland, Ohio to expand our business nationally. This platform allowed us to capitalize on the growth of the overall specialty pharmacy market from approximately $20 billion in sales in 2005 to $63 billion in sales in 2013, a compound annual growth rate of approximately 15%.

2. Several years ago, you took a fairly radical step of acquiring the former GM Great Lakes Technology Center in Flint as the headquarters for the growing company. What was it like to convert an automotive-centered facility into a pharmacy?

In December 2010, we moved our corporate headquarters to a 550,000-sq. ft. facility in Flint. Our operations within this facility are highly scalable, as we currently utilize approximately 40% of the facility, which gives us the capacity to execute our long-term growth plan without significant additional capital expenditures.

It was an exciting project for us and became an even more important step than I had imagined when we bought it. We knew the amount of physical space would be important for us to support our long-term growth, but we completely underestimated the positive response from the industry. As business clients arrived at our headquarters and we gave them a tour, we became a different company in their eyes. It was clear to them we had grown from a small regional pharmacy to a true national player that had the size and scale to compete with anyone in the industry.

Our physical footprint has enabled us to develop a centralized infrastructure that we have successfully scaled to dispense to all 50 states. We now have an advanced distribution center to ship medications nationwide, as well as a centralized clinical call center that helps us deliver localized services on a national scale.

3. Specialty pharmacy, at its core, is a group of patient-support services wrapped around delivering the needed pharmaceutical products. Tell us how Diplomat approaches these wraparound services, and what distinguishes Diplomat from other specialty pharmacies providing more or less the same service.

The value we deliver to all constituents is centered upon our core focus on patients. We never forget that at the end of everything we do there is a patient in need. Regardless of our size, it must always remain about “one patient at a time.” We have created comprehensive, patient-focused services, driven by both people and technology solutions, which ensure our patients receive the highest standard of care, including assistance with complicated medication therapies, refill processing, third-party funding support programs, side effect management and adherence monitoring.

Part of our differentiation comes from using our technology systems to customize solutions for each patient based on the patient’s overall health, disease and family history, lifestyle, and financial means. We also use patient data, reporting and tracking to ensure all stakeholders work together as a uniform care team.

4. Diplomat operates nationwide, but has only a few brick-and-mortar locations. That implies a lot of online, call center and telehealth services. How does Diplomat make all those remote services operate effectively?

Our Flint corporate headquarters is where we house our main national call center, as well as our centers of excellence where we manage all key aspects of patient care. It also houses our distribution center, where we dispense the majority of our prescriptions nationwide. We have made significant investments in our technology, infrastructure and service lines to build a scalable foundation for growth, which we believe provides significant capacity to grow revenues and enhance key operating metrics. We believe our investments in technology, both completed and in-process, will improve our data collection and delivery capabilities, services that are highly valued by our partners.

We have a total of eight pharmacy locations nationwide, including our corporate headquarters, that offer dispensing and patient services. The location of our corporate headquarters, and satellite service sites on the East and West Coasts, South and Midwest, serve three different time zones and offer us the best model for consistent, cost effective services, while creating backup services and shipping efficiencies.

For our specialty infusion services, we acquired two companies over the past year. We purchased AHF in December 2013, serving primarily the hemophilia community, with locations in Connecticut and Massachusetts; and in June of 2014, we purchased MedPro Rx, serving primarily IVIG therapies and the hemophilia community, with headquarters in North Carolina. For our services in the specialty infusion space, we utilized both in-house nursing and clinical care, as well as a national, validated nursing network to ensure services in every state.

5. Specialty pharmaceutical manufacturers have many expectations on how business partners like specialty pharmacies can help them market their products. What is the basic proposition Diplomat makes to these manufacturers?

The needs of pharmaceutical manufacturers are complex and becoming even more so. At Diplomat, we made the decision a number of years ago that we needed to be much more than just a pharmacy that dispenses high-cost specialty drugs. We recognized that we needed to develop and create customized solutions to meet those needs. We also recognized that there were needs and opportunities to work with all industry stakeholders including some that were not normally considered as channels for specialty drugs.

We created national programs for retail pharmacy partners (“RSN” or Retail Specialty Network), hospitals and health systems (“HSP” or Hospital Specialty Program) that were not historically present in the industry. By providing clinical and administrative services that our retail, hospital and health system partners could purchase, we offered manufacturers specialty pharmacy services in settings where they had not previously existed. We also recently launched hub capabilities under a new division, Envoy Health. This service offers customized drug and patient management services to manufacturers that often do not include dispensing the drug. Hub services are generally contracted by the manufacturer and delivered before the drug is dispensed to support optimal outcomes.

Another division that has helped to ensure our success is Diplomat University (DU). Launched in 2010 when we were preparing to move into our new headquarters, DU has become a central aspect of our success. DU not only trains our employees through a very complete formal education model named NEOP (New Employee Orientation Program), it also offers specialty pharmacy educational services outside of Diplomat, including modules available for manufactures and industry partners.

6. A particular element of specialty pharmacy/manufacturer relationships is the use of limited-distribution networks. What’s your take on the value of limited-distribution networks for better patient care, and more efficient marketing of pharmaceutical products?

I believe the Limited Distribution (LD) model brings great value and is here to stay. The first note is that with LD, one size does not fit all—different drug categories and patient populations may require different LD models. These models allow manufacturers to customize their approach to distribution. This customization can bring great value to new drug launches by improving adherence, managing complex side effects, and tracking key data elements that may not be available from broad pharmacy networks.

Benefits to biotech/pharma are extensive and include:

• improving access to real-time clinical data
• offering commercialization assistance
• improving performance of appropriate utilization
• bringing the manufacturer closer to the patient.

Further, there are also significant benefits for specialty pharmacies, including deeper, and earlier, partnerships with pharma/biotech and an increased value proposition to payers. At Diplomat, we currently have a portfolio of more than 70 limited distribution drugs.

7. Diplomat makes a case for using its services during clinical trials. How does that work, and what advantages are there to working with Diplomat rather than through conventional clinical research organizations?

The conventional clinical-trial model remains the leading model used during all phases of the drug development process. However, specialty pharmacy is playing a greater role in the commercialization process. Many of the companies running clinical trials are new and emerging small biotech companies. Because they are new or young companies, they have limited infrastructure and sometimes limited experience launching drugs in the specialty pharmacy channel. As experts in the specialty pharmacy channel, we can formulate strategies to market to, educate, and fulfill the needs of patients, prescribers and payers. We refer to this tailored, multifaceted approach as ‘‘channel strategies.”

In recent years, there has been increased attention on the need to continue drug studies after drugs have been launched—post market surveillance or Phase IV studies. I believe this is an area where the specialty pharmacy industry can offer strong support. Along with large and concentrated patient populations around specific diseases or drugs, we have the extensive infrastructure to capture data and manage the patients—two of the critical elements of Phase IV studies.

8. The high prices of many specialty pharmaceuticals is an ongoing source of friction in the US healthcare system, and it impacts patient access and reimbursement issues. When you talk with payers and healthcare providers, what is the reaction you get to this situation?

Rising costs of specialty drugs is on the radar with virtually every plan and payer in the country. I believe one of the best ways to combat these rising costs is to offer customized solutions that look at every disease and drug therapy differently, and create the most efficient care algorithm for each. By ensuring each patient is managed “one patient at a time,” we can provide the highest level of care with less wasted resources. Offering financial assistance to patients is a complex but critical element in specialty care. Financial support may be available for patient’s medication in the form of a copay card, for another patient in the form of copay assistance from a charitable organization, and for a third patient from a manufacturer’s Patient Assistance Program (PAP).

Ultimately, we believe the most critical service we can offer is to ensure the right patient can be treated by the right drug, for the right amount of time. I believe it requires integrating all available avenues and resources to maximize patient adherence at the lowest possible cost of care.

9. What’s the future of the specialty pharmacy industry as a whole? Is it more than to say that there will be ever more specialty products and more volume being handled through specialty pharmacy?

The specialty industry trend reports show strong growth of 15% per year, while traditional pharmacy growth has slowed to low to mid-single digits. The specialty portion of the pharmacy spend is expected to catch, and then pass the traditional pharmacy spend by 2018, according to the CVS Caremark Insights 2013 report. Many of us in the industry say that “Specialty pharmacy IS the new pharmacy.” The drug pipeline is enormous and being led by more than 3,000 oncology and immunology drugs in global drug development.

As new therapies become both more expensive and more complex, the need for services to manage these patients has never been greater. A few trends I see as important future drivers are:

• More focus and need for management of specialty drugs that are paid on the medical benefit. We are seeing pressure to move drugs that were previously paid on the medical benefit being paid under the pharmacy benefit due to the better control, tracking and reporting under pharmacy.
• Continuation of and increases in drugs being launched and dispensed under the limited distribution model. I believe this model will continue to take on many forms and one size will not fit all drugs or manufacturers.
• Increased prevalence and relevance of small biotech companies. More and more companies are bringing drugs to market instead of just selling the rights to larger manufacturers. This will continue to create needs and opportunities for specialty pharmacy services.
• More focus on total cost of care. This will require even greater patient management, on both the pharmacy and medical benefit on expensive complex drugs to ensure every patient on a complex costly specialty drug has the needed support for the best outcome.

10. Diplomat is heavily involved in local charitable efforts. How did that get started, and what does it mean personally for you?

As a profession, pharmacists give back every day to the patients they serve. Pharmacy is a business that I believe offers both the opportunity AND the obligation to help people in need. Beyond our obligation as pharmacists, I believe all of us can make an impact in our community as well. When we moved the headquarters into the city of Flint in 2010, this community and the entire state was weathering some of the toughest economic times in the nation. Yet, I believe the Midwest has wonderful, resilient people. We were able to be a catalyst for improvement first from the new jobs we offered, and then we went beyond that to work with local civic groups and community charities.

As we saw our efforts making a difference, we expanded further and created a department called Community Affairs and Government Relations. This gave us a more defined platform to work from and allowed us to partner with other local and like-minded businesses to create even more momentum. The work we have done and continue to do in this community has been some of the most satisfying work of my career. I think this is a model others can easily replicate, and I would love to share how valuable this is to our community, our company and to me personally.