(ABC) AmerisourceBergen Analyst Reiterates Neutral on Shares

We recently reiterated our Neutral recommendation on AmerisourceBergen Corporation (ABC) with a target price of $40.00.

Over the last several years, the company has been benefiting from the growth of the pharmaceutical industry in the US. We believe AmerisourceBergen should continue to benefit from growth in the pharmaceutical industry, which is driven by several factors like aging population, increased use of generics, introduction of new treatments, increased use of drug therapies and favorable legislative developments. The aforesaid points are continually helping the company, which increased its 2011 earnings guidance range following the release of the third quarter fiscal 2011 financial results. AmerisourceBergen now expects 2011 earnings to lie in the range of $2.52 – $2.56 per share (previous guidance: $2.41 – $2.49). We expect fiscal 2011 earnings to increase almost 18% year over year to $2.56.

Further, AmerisourceBergen’s generics business continues to perform well with the company benefiting from the rapid growth of generic pharmaceuticals in the US market. The generic launch of Johnson & Johnson’s (JNJ) Concerta in May 2011 and the potential launch of Pfizer Inc.’s (PFE) Lipitor in November 2011 should boost generics business revenues. With several branded products scheduled to lose exclusivity in the coming years, we expect AmerisourceBergen’s generics business to continue witnessing growth. Moreover, the introduction of a legislative pathway for biosimilars would be a major positive for the company.

We note that the company has been pretty active on the acquisition front in order to supplement organic growth, spending more than $1 billion on acquisitions in the last eight years. The October 2007 acquisition of Bellco Health has allowed AmerisourceBergen to expand its presence in New York City where Bellco has a strong presence. In 2009, AmerisourceBergen acquired Innomar Strategies Inc., a Canadian specialty pharmaceutical services company. This acquisition helped the company strengthen its position in Canada. Going forward, we believe the company will continue to pursue acquisitions, which will help drive growth. AmerisourceBergen exited the third quarter of fiscal 2011 with a cash balance of about $2.0 billion and plans to spend around $200 to $300 million in 2011 on the acquisition of pharmaceutical, distribution or related services business.

However, the company operates in the highly competitive pharmaceutical distribution market. AmerisourceBergen’s primary competitors include Cardinal Health Inc. (CAH), McKesson Corporation (MCK) as well as national generic distributors and regional distributors. The company faces additional competition from manufacturers, chain drugstores, specialty distributors, and packaging and healthcare technology companies.

We are also concerned about the company’s dependence on a small number of customers for a significant part of its revenues. Medco Health Solutions Inc. (MHS), the company’s largest customer, accounted for 18% of total revenue in fiscal 2010. AmerisourceBergen’s top 10 customers accounted for about 42% of total revenue in fiscal 2010. The company also has contracts with group purchasing organizations (GPOs), which accounted for 10% of total revenue in fiscal 2010. The loss of a significant customer or GPO relationship would have an adverse impact on the company’s revenues and operations.

Moreover, safety issues surrounding the use of certain anemia drugs, especially those used in oncology have negatively impacted the company’s revenue growth rate. Revenues related to the distribution of anemia-related products declined about 7% in fiscal 2010. Further reduction in sales, restrictions on the use of anemia drugs or a decrease in Medicare reimbursement rates for these drugs could result in slower growth or lower revenues.

Thus, taking all these issues into account, we continue to have a Neutral recommendation on AmerisourceBergen. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

AMERISOURCEBRGN (ABC): Free Stock Analysis Report

CARDINAL HEALTH (CAH): Free Stock Analysis Report

JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

MCKESSON CORP (MCK): Free Stock Analysis Report

MEDCO HLTH SOL (MHS): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

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