Morningstar | Lowering Our Pharmaceutical Distributor Moats, Trends, and Fair Value Estimates Across the Board
We are reassessing the pharmaceutical distribution segment in light of the evolving competitive and regulatory environment. Based on continued decline of pharmaceutical spend growth and external shock threats, we are lowering our moat ratings for all three distributors from wide to narrow with a negative moat trend outlook. We are also reducing our fair value estimates.Despite the stable foothold provided by the oligopoly market structure where the three companies handle 90% of the market, the role of a pharmaceutical distributor continues to evolve in an increasingly competitive and highly regulated environment. Scale and regulatory requirements have provided insulation to maintain share and generate market returns, but competitive pressures continue to build with declining reimbursement, healthcare consolidation, and decline in overall pharmaceutical spending growth.
Pharmaceutical revenue growth has declined due to slower inflation and shift in revenue mix. Consistent with overall pharmaceutical spending trends, we expect revenue growth for these pharmaceutical distributors to decline, with overall growth in pharmaceutical spend of 3% to 4%, a decline from double-digit growth in 2014 and 2015. Over the last three to four years operating margins for the industry have declined, and these lower levels are likely to persist in the long term.
The significant decline in pharmaceutical market growth has caused distributors to seek out alternative growth channels through acquisitions, but entry into these new areas outside of core competencies has proved to be costly. External shocks such as the elimination of rebates or increased price transparency would diminish some of the pharmaceutical distributors' value as negotiators. With more transparency on pricing, providers and manufacturers would less likely need a middle man to negotiate rates, which would give customers more leverage to renegotiate distribution contracts and further deteriorate distributor margins.
AmerisourceBergen is a pharmaceutical sourcing and distribution services company. The company's Pharmaceutical Distribution Services reportable segment provides pharmaceutical distribution and additional services to physicians who focus on a variety of disease states, especially oncology, and to other healthcare providers, including hospitals and dialysis clinics. Additionally, this segment provides data analytics, outcomes research, and additional services for biotechnology and pharmaceutical manufacturers. This segment also provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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