How one family pharmacy just might bring Flint, Michigan back to life

October 17, 2014, 11:00 AM UTC
Flint River in Flint, Michigan
Flint River in Flint, Michigan
Courtesy: U.S. Army Corps of Engineers Digital Visual Library

When Diplomat, a specialty pharmacy, moved into a sprawling former General Motors factory on Flint, Michigan’s south side in 2010, it was—on one hand—just a simple case of one company filling an office that another had vacated years earlier.

On the other hand, it was a perfect illustration of the economic shift from automotive to high tech that Flint—long known for its high crime and unemployment—is desperately trying to make.

Diplomat traces its roots back to Flint, where pharmacist Dale Hagerman opened a storefront shop called Ideal Pharmacy in 1973. Two years later, his son Philip, also a trained pharmacist, joined him after graduating college, and the father-son team launched Diplomat Specialty Pharmacy, which would be headquartered in nearby Swartz Creek, Mich. In founding Diplomat, the pair wanted to assist patients with chronic diseases.

For the next 30 years, the Hagermans ran the specialty pharmacy as a small, regional operation. That changed in 2005, when the business went national; it can now dispense medication to patients with ongoing illnesses like cancer, multiple sclerosis, and HIV/AIDS in all 50 states. Last year it managed the care for 13 million patients. It lands at No. 69 on this year’s Inner City 100 list, a ranking of the nation’s fastest-growing inner city companies by the Initiative for a Competitive Inner City, with 2013 revenue of $1.5 billion and a five-year growth rate of 162.3%.

In July, the company announced it was going public and raised more than $173 million in its IPO. Its 13 million shares priced at $13 and closed their first day of trading in early October at $16.02. The company declined Fortune’s request for comment because of its IPO quiet period.

Given Diplomat’s staggering growth, it’s no surprise that when the pharmacy went shopping for a new headquarters in 2009, it had plenty of suitors.

Flint was a likely bidder not just because of its location 10 miles northeast of Swartz Creek, but because the once-roaring hub of the automotive industry desperately needed an infusion of business, jobs, and morale.

Flint’s decline follows the projection of so many decaying Rust Belt cities. It was the original home of General Motors, which employed 80,000 workers there in 1978, and it was once Michigan’s second largest metropolis by population. But like nearby Detroit and other Midwest cities like Cleveland and Gary, Ind., Flint was too closely tied to industry; as GM went, so did Flint—to a disastrous end.

In the mid-1980s, GM laid off 30,000 workers in Flint. By 2006, the company had cut 72,000 jobs and shuttered several factories in favor of cheaper labor in Mexico. The reductions prompted what Tim Herman, chief executive officer of the Flint and Genesee Chamber of Commerce, refers to as an “economic tsunami.”

In 1990, the city of Flint reported average unemployment of 16.1%, compared to 5.6% nationally, according to the Bureau of Labor Statistics. (The agency does not seasonally adjust city employment figures.) For the next two years, Flint’s jobless rate hovered around 20%. It recovered somewhat in 2000, hitting 6.6% in October—that’s the lowest it’s been over the last decade-and-a-half, even as the city’s workforce has slowly dwindled from 61,406 at the start of 1990 to 46,799 today. Flint’s overall population declined from a high of 200,000 in 1960 to 102,434 in 2010. Home ownership declined form 73% to 45% over the same period.

All the while, the city’s crime rate escalated, as documented in Michael Moore’s 1989 documentary “Roger and Me,” which chronicles the aftermath of GM’s exit from the city. In one scene, President Ronald Reagan visits a pizza parlor in Flint to tout employment opportunities elsewhere in the country. The restaurant’s cash register is stolen during the event.

Flint entered receivership for the first time in 2002 and exited in 2004. “Theoretically, it was in a better position in 2004,” says Eric Scorsone of Michigan State University’s state and local government program. But the city’s police and firefighters received retroactive raises in 2006, which made for a troublesome budget situation by 2006, Scorsone says.

And then came the recession.

In 2009, as Diplomat geared up to shop for a new home, nearly one out of four Flint residents was out of work, according to the BLS. To Flint, Diplomat represented a lifeline.

“It was clear that Diplomat was going in the right direction as a company in an [industry] that was seeing rapid growth,” Dayne Walling, Flint’s mayor, told Fortune.

When Diplomat announced in early 2010 that it would purchase 340,000 square feet of workspace in the factory, Phil Hagerman, Diplomat’s president and CEO said that his company’s move to Flint represented “an opportunity to reinvent and revitalize a community.”

But it wasn’t just goodwill that brought Diplomat to Flint. The 18-year, $61.5 million tax break it received from the Michigan Economic Growth Authority (MEGA) certainly played a major part. The deal called for the company to add 1,000 jobs—positions like pharmacy techs, pharmacists, and call center specialists—over the following five years, and MEGA projected that it would create an additional 3,100 spin-off jobs.

“MEGA was a strong advocate of Diplomat receiving the maximum incentive that the state could offer so we could be competitive with other locations,” Walling says. The incentive was justified, he says, by the company’s growth potential and the prospect that it would attract similar companies to the area.

But at the same time, the deal is keeping the city from collecting tax revenue it desperately needs.

“We had to be competitive,” says Herman of the Chamber of Commerce. Other bidders were offering similar incentives, he says. “We had to match those.” Diplomat was also considering a move to Cleveland or Houston.

“Cities like Flint probably don’t have lot of choices,” Scorsone says. “Tax abatements cost a lot of money.” Cities argue that such deals grow the tax base over time, “but there’s not a lot of evidence that that happens,” he says, “It’s a matter of promises versus actual reality.”

The city is again in state receivership. But since Diplomat moved to Flint, the unemployment rate has dropped from an average of 23.3% in 2010 to 17% in 2013. In August, joblessness stood at a projected 12.4%—the lowest rate since October 2004, but more than double the national average of 6.1% that same month. In 2013, when its residents numbered 100,515, Flint was the nation’s second most dangerous city, with 55 murders on record, according to the Federal Bureau of Investigation. It had clocked in as the most dangerous city in the three years prior.

From Mayor Walling’s perspective, the city’s economy is “slowly stabilizing,” thanks in part to Diplomat. Walling says the company is keeping up with or exceeding its plan to add 1,000 employees by 2015.

According to a Securities and Exchange Commission filing, Diplomat employed 924 full-time employees and 54 part-timers in June 2014. It had about 400 employees in 2010. In April 2013, the company said that 25% of the 760 employees it had at the time lived in Flint; 80% of its workforce lived in surrounding Genesee county.

Walling also credits the company for attracting other business to the city. A few months after Diplomat announced its plans to move into a section of the old GM facility, the Insight Institute of Neurosurgery and Neuroscience announced an $18 million expansion in the same complex.

“We have our challenges, but we’re doing a lot better,” says Herman. In 2004, he says, “you could’ve played touch football in the middle of Saginaw Street,” the city’s main drag. Now, he touts the renovated downtown. “Michael Moore gave us a bad rap,” he says. “I’ll pay for your plane ticket to come in and see us now.”

Editor’s note: A previous version of this story incorrectly stated that Diplomat’s sales grew from $20 billion in 2005 to $63 billion in 2013 at a compounded annual growth rate of approximately 15%. In fact, these figures refer to the total sales of the specialty pharmacy market in the U.S.

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