EUR 850.00 For Business Accounts Only

Morningstar | Amerisource Reports Positive Results With a Stabilization of Its Operating Environment

Even though there may be some material changes to how the various parts of the U.S. pharmaceutical market operate over the next several years, the need to source and deliver drugs in a cost-effective and efficient manner will not change. We believe this fundamental factor has formed a strong foundation for AmerisourceBergen, as its core drug wholesaling operations will be needed by both drug manufacturers and retail pharmacies no matter how any market dynamics shift. Thus, we are reiterating our wide-moat rating and our $106 fair value estimate for the drug distributor.

Unlike recent quarters, AmerisourceBergen reported continued stabilization for its core drug distribution operations. We believe a firm pricing environment and improved operational efficiencies contributed to the decent results. AmerisourceBergen maintained its 7%-9% generic deflation expectation and is confident a lower branded gross price inflation outlook will not adversely affect its operations as 90% of its branded manufacturer agreements are fee-for-service based.

For the quarter, Amerisource reported relatively solid results as gross profit remained flat and was offset by a moderate increase in centralized costs, with the net result being a 12-basis-point decrease in adjusted operating margin to 1.10%. Pressuring these results was the firm's realignment of its PharMEDium compound manufacturing and Lash Group consulting businesses. We have factored these issues into our outlook as we have modeled operating margin for the firm’s core distribution business to fall for fiscal 2019 to 1.09% from 1.11% produced in fiscal 2018. We expect profits to begin to expand beginning in fiscal 2020, but not by a significant amount. We have modeled in drug distribution operating margins to expand moderately to only 1.12% and overall firmwide operating margins to increase to 1.3% by the end of fiscal 2022. We believe this represents a conservative outlook for the firm’s profit expansion efforts.

From our perspective, Amerisource has performed admirably over the past few quarters as its focus on driving as much value from its core drug distribution operation, and we believe the firm is positioned extremely well for the long-term. We think it's important for investors to factor in the critical role drug distributors play in the operations of branded manufacturers. The major three wholesalers (AmerisourceBergen, Cardinal Health, McKesson) are essential in the development of an appealing drug, the determination of market demand, product production runs/inventory management, and global distribution. These services are largely compensated through a fixed fee structure and will likely remain so under a scenario where aggregate branded pricing becomes significantly altered.