AmerisourceBergen Corporation (Holding Co) (ABC)

QUOTE AND NEWS
TheStreet.com  Jan 30  Comment 
Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.  TheStreet Ratings quantitative algorithm...
Benzinga  Jan 28  Comment 
Shares of AmerisourceBergen Corp. (NYSE: ABC) gained more than 1% in pre-market trading after the company reported stronger-than-expected results for the fiscal first quarter and lifted its earnings forecast for the full year. AmerisourceBergen...
Wall Street Journal  Jan 28  Comment 
AmerisourceBergen said Wednesday its revenue rose 15% in the December quarter, buoyed by strong demand for its specialty products and gains from its collaboration with Walgreen Boots Alliance.
Forbes  Jan 27  Comment 
Wall Street is optimistic about AmerisourceBergen, which is slated to report its first quarter results on Wednesday, January 28, 2015. Analysts project a profit of 96 cents a share, a rise from 80 cents per share a year ago.The consensus estimate...
Benzinga  Jan 26  Comment 
AmerisourceBergen (NYSE: ABC) today announced that it has commenced a tender offer to purchase all outstanding shares of MWI Veterinary Supply, Inc. (NASDAQ: MWIV) for $190.00 per share, net to the seller in cash, without interest, less any...
Benzinga  Jan 12  Comment 
TSR, Inc. (NASDAQ: TSRI) shares reached a new 52-week high of $4.61. On Friday, TSR reported Q2 earnings of $0.07 per share on revenue of $14.50 million. MWI Veterinary Supply, Inc. (NASDAQ: MWIV) shares surged 8.17% to touch a new 52-week high...
Wall Street Journal  Jan 12  Comment 
AmerisourceBergen agreed to buy MWI Veterinary Supply for $2.5 billion as the drug wholesaler expands into the growing area of animal health.




 

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.

Company Overview

Business Financials

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.[1] 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.[1]

Business Segments

ABC has three main business segments.

Pharmaceutical Distribution

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.

Specialty Distribution

ABC's Specialty Distribution is the leader in oncology products and also a leading distributor of vaccines and other injectables.

PMSI

PMSI provides home delivery of prescription drugs (through mail order and on-line pharmacy services) to patients under workers’ compensation programs.

Trends & Forces

Declining growth of pharmaceutical sales

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.

Fee-for-Service Compensation leads to less volatile revenue

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.

Generic Drugs Drive margin growth, but may depress revenue

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.

  • Benefits

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.

  • Pitfalls

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.

Competition

ABC competes in the pharmaceutical distribution market primarily with McKesson (MCK) and Cardinal Health (CAH).

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)
AmerisourceBergen 99% n/a n/a n/a n/a $61.7
Cardinal Health (CAH)[2] 80% 13% 4% 3% n/a $81.4
McKesson (MCK)[3] 94% 4% 2% n/a n/a $93.0




References

  1. 1.0 1.1 ABC 10-K 2009 Item 6 Pg. 19
  2. CAH 10K 2006
  3. MCK 10K 2007
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