Medicine for America

Phil Hagerman was two weeks away from graduating college when his father surprised him with a phone call.

“Get your butt down here,” he told Phil. “We’re going to work together.”

At first, Phil had no idea what his dad was talking about. But soon that phone call would lead to the creation of Diplomat Pharmacy, the largest independent specialty pharmacy in the United States and one of the nation’s fastest-growing companies. Diplomat’s success has skyrocketed in the last few years; in 2012, Inc. magazine ranked it fourth in total revenue among the country’s specialty pharmacies. Over the past three years, the business has generated roughly $2.5 billion and currently employs more than 765 people.

It didn’t start out that way.

When Phil’s father called him in May 1975, he had just sold his shares of a small chain of drugstores and taken over a new store, one he called Diplomat. Initially, Diplomat was your typical corner drugstore, with an important twist: The Hagermans endeavored to form a personal relationship with their clients, gaining a deep familiarity with their overall medical regimens. Such a familiarity is increasingly important in a world with so many pharmaceuticals—and so many potential pharmaceutical interactions.

In this growing complexity, the Hagermans saw potential to help customers and grow their business simultaneously. Patients who needed new, expensive treatments could count on Diplomat to carry their medication. And Diplomat explained to clients the intricacies of their therapies, a crucial but often overlooked touch that set it above the typical pharmacy. For patients with complicated medical regimens, for example, Diplomat placed pills in a compliance blister pack with instructions on how and when to take each medicine. And doctors who treated these patients were informed by Diplomat that the company could provide them with the absolute highest standard of service.

With each innovation, Diplomat prospered. From 1993 to 2005, the company averaged 20 percent growth per year; from 2005 to today, it has averaged 70 percent annual growth. That’s nearly triple the growth of the pharmaceutical industry as a whole. Moreover, the company—which recently moved to Flint, Mich., less than an hour outside of Detroit—has succeeded without tethering its fate to the roller coaster of the auto industry. In fact, Phil Hagerman sees his location as a help, not a hindrance.

“Flint and Detroit are great manufacturing cities with great infrastructure—and a core of good Midwestern people with good work ethics,” Hagerman says. And while “both cities were decimated by reductions in the automotive industry,” Diplomat used the downturn to its advantage, buying up an abandoned GM facility and thereby dramatically expanding the scale of its operations. The company has also leaned into the automotive workforce, hiring hundreds of employees who found themselves out of a job as the car industry collapsed. For a business like Diplomat, Michigan is a great place to be.

“We’ve seen a change here in terms of technology and business,” Hagerman says. “For too long, Michigan relied so heavily on one industry. The state wasn’t seen as a creative place to drive business anymore.” But following the recession, Michigan “realized it must diversify itself.” And two industries—technology and health care—are the “driving forces” in its renaissance.

Diplomat happens to belong in both camps, and it has taken advantage of another trend in American industry: the rise of high-tech industrial production (often called advanced manufacturing). Diplomat is serviced by companies that must combine science and technology not only to create drugs, but also to mass-produce them. The process is labyrinthine, and always expensive, but American manufacturers are developing new methods to make better drugs, faster. They’ll deliver those drugs to Diplomat, which can quickly get them out to clients—and ensure that they use them exactly as they’re intended.

Although Diplomat’s business model has proved highly successful, the company has no intention of abandoning the middle market. Much of its success is due to its size: By refusing to adopt a inflexible bureaucratic structure, Diplomat is able to adjust to new market trends, sustaining a nimble business model that can react adroitly to shifting demands.

“We see companies move out of the middle market all the time,” Hagerman notes. “But they become more rigid, less of a custom shop. We work hard every day to never forget what got us here”—that is, their middle market flexibility.

Growth is good; sustainability is better. Over the past several decades, Diplomat has learned to do both. As the health care industry gets increasingly complex, Diplomat’s services will be in greater demand. And thanks to the company’s middle market ingenuity, clients across the country will continue to get the medications they need.

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