This article refers to the drug wholesaler. For the broadcaster ABC, see Walt Disney Company (DIS).
AmerisourceBergen (NYSE: ABC) sells drugs to health care providers such as hospitals, pharmacies and clinics. The company acts as an intermediary, or middleman, between drug manufacturers and providers and ranks as the third-largest U.S. pharmaceutical distributor in the $250B pharmaceutical distribution industry, behind McKesson (MCK) and Cardinal Health (CAH). Drug distributors provide the specialized delivery services to end consumers. They ensure that the drugs are stored and transported under the prescribed conditions (adequate refrigeration, pressure, etc.) and delivered to secure locations. Whereas ABC's competitors have expanded into medical product manufacturing, healthcare information technology, and other services, ABC remains focused on pharmaceutical distribution.
With over $69B in pharmaceuticals slated to lose patent protection from 2007-2011, lower cost generic drugs carry the very real potential to lower revenue and profits for distributors like ABC. Although ABC earns higher margins on generic drugs, the company earns significantly less in terms of absolute profit from generic drugs because of their lower prices. However, it remains to be seen if ABC will be able to increase the volume of generic drugs it distributes once drugs come off of patents.
Between 2008 and 2009, ABC's total revenues saw a modest increase. In 2009, ABC posted total revenues of $71.7 billion, compared to its 2008 total revenues of $70.2 billion. This had a large impact on ABC's net income though. Between 2008 and 2009, ABC's net income increased from $251 million in 2008 to $503 million in 2009.
ABC has three main business segments.
ABC is an intermediary, or middleman, between drug manufacturers and providers (e.g. pharmacies). The company mainly warehouses and distributes branded and generic drugs to hospitals, pharmacies, clinics, and other customers.
ABC's Specialty Distribution is the leader in oncology products and also a leading distributor of vaccines and other injectables.
PMSI provides home delivery of prescription drugs (through mail order and on-line pharmacy services) to patients under workers’ compensation programs.
Historically, the most significant trend that has affected the pharmaceutical distribution business has been the volume and price of drugs purchased in the United States. Distributors such as ABC benefit directly from a greater amount of pharmaceuticals consumed by the American public. Although total pharmaceutical market sales have been increasing for the past years, the growth has fallen from about 18% at the beginning of 2001 to 5%.
The decline in growth has been attributed to a shrinking number of “blockbuster drugs,” or popular, trendy pharmaceuticals, as patents expired and consumers purchased cheaper generic versions. Less expensive drugs result in lower total market sales, and less profit for distributors. Second, changes in health care such as tighter regulations and cost shifting to consumers have adversely affected total market sales.
The entire pharmaceutical distribution industry has undergone significant changes in recent years, as the compensation system changed from forward buying to fee-for-service payment. Before the transition, wholesalers such as ABC would buy pharmaceuticals ahead of receiving any orders from pharmacies & hospitals, hold them, and hope that the demand and prices of these drugs would go up (primarily due to inflation) in the holding period. However, profit margins shrank as the growth in the price of branded pharmaceuticals slowed. Distributors are now reimbursed by fee-for-service payments, as customers negotiate contracts to pay a certain fee for deliveries and additional services. These changes result in a steadier, more controlled cash-flow for distributors.
The growth of generic drugs represents both an opportunity and a threat for ABC. The drugs have margins up to 5 times higher than generic drugs of branded pharmaceuticals. Generic drugs are also much cheaper than their more exclusive counterparts. With $13.6 billion in branded drugs sales losing patent protection in 2006 and a projected $69 billion in branded drug sales losing protection from 2007-2011, generic drugs can also have the potential to dramatically lower overall revenue growth in the in the pharmaceutical industry.
Because generics are much like normal commodities, they have a large reliance on wholesalers. Because wholesalers contract packages with multiple pharmaceuticals to their clients, they can essentially guarantee their clients as buyers for a generic drug. Therefore, wholesalers control a significant portion of the demand for any individual generic. Competition amongst generic manufacturers allows wholesalers to then extract better terms from the manufacturers, hence the much higher profit margins with generics than with branded drugs. Furthermore, generic distribution involves lower inventory and general operating costs.
There is no guarantee that the pharmaceutical distribution business can maintain profits as the market shifts towards generic drugs. Although currently the generic drugs have a positive impact on the distribution industry, there are concerns that competition between generics could hurt profits. When competition causes prices to collapse, absolute earnings begin to fall, and sometimes distributors earn less with generics than they did previously with the branded version. This occurs when a generic drug’s price is about 3% of its branded version’s price.
Below is a graph comparing the percentages of revenue from the different segments of the three major players. Notice that ABC is much less diversified than the other two.
|Company||Distribution||Med/Surg Supplies||Provider IT||Automation Services||Long-term care pharmacy||Revenues ($B)|
|Cardinal Health (CAH)||80%||13%||4%||3%||n/a||$81.4|