AmerisourceBergen Corporation: Increase the "Health" of your Portfolio
by David Fessler, Advisory Panelist
Friday, February 27, 2009: Issue #945
Several weeks ago, we focused on the distribution side of the health care industry as yet another overlooked area that should continue to do well during our economic downturn.
We discussed one of the largest "Grainger-like" companies in the health care industry, Cardinal Health, Inc. (NYSE: CAH). Cardinal is an $87 billion global manufacturer, supplier and distributor of medical products.
Given the sheer size of the medical equipment and drug market - the global pharmaceutical market alone is estimated to be north of $700 billion annually - it shouldn't be too surprising that Cardinal has a competitor or two...
One of its biggest is AmerisourceBergen Corporation (NYSE: ABC), a large, global pharmaceutical services company with operations in Canada, Great Britain and the United States.
AmerisourceBergen Corporation's Products & Services
AmerisourceBergen Corporation was formed in August 2001, with the merger of Amerisouce and Bergen Brunswig, the company's 13,000 employees provide its 27,000 customers with a wide range of products and services:
- Pharmaceutical distribution and delivery to hospitals, critical care facilities, retail pharmacies, clinics and long-term care facilities.
- Specialty pharmaceutical delivery services directly to physicians.
- Delivery of over-the-counter and health and beauty aids.
- Packaging, logistics and commercialization services for pharmacies and drug manufacturers.
- Consulting services in each of the above areas.
One of AmerisourceBergen's growth drivers is specialty drugs, an area that's growing faster than the overall drug market.
These drugs are normally administered directly by physicians, and include cancer-fighting oncology products, plasma and plasma derivatives, vaccines, ophthalmic drugs for the eyes and dialysis drugs.
AmerisourceBergen Corporation - A Leader In Specialty Drug Distribution
AmerisourceBergen Corporation is the undisputed leader in the specialty drug distribution market:
- It's the largest oncology products distributor in the United States, delivering products to more than 4,600 oncologists.
- It's the largest physicians services organization in America.
- It's the biggest nephrology/dialysis products distributor.
- It's the largest blood plasma products distributor.
- It has the biggest market share in ophthalmology products.
Another growth story will be the oncology drug market. There are currently 750 different medicines in development for cancer, making it the strongest area of drug development.
The company estimates that the market for oncology drugs alone will be roughly $80 billion annually by 2012. Currently oncology drugs are only 2% of the company's revenue, representing a huge upside potential as many new drugs come on-line.
AmerisourceBergen's Biggest Growth Area - Generic Drugs
Perhaps the biggest growth area for AmerisourceBergen is generic drugs. The company has formed key relationships with its manufacturers and its biggest customers through 2011.
But here's the best part: Over the next five years, patents will expire on many top branded drugs representing over $85 billion in sales. The soon-to-be-available generic forms of Flomax, Lipitor, Prevacid and six other blockbuster drugs should be huge sales drivers for the company.
And while it's true that generics sell for as much as 80% less than their branded counterparts, there's a great upside: Gross margins are up to five times higher, resulting in similar gross profit numbers on much reduced receivables.
It's all paying off in spades: Last year's earnings were up a whopping 19% from 2007, on a 7% increase in overall revenue. This is even more remarkable when you consider an industry-wide annual growth rate of only 1% to 2%.
Not too unlike other companies in the drug distribution space, AmerisourceBergen has grown both organically and through acquisitions, completing nine of them in the last three years.
It's increased the number of products it handles as well, with nearly 32,000 different items in its distribution system. Most of these products can be ordered one day, and delivered the next.
All this bodes well for the AmerisourceBergen's future, and the company expects 2009 revenue growth of 5% to 7%. And while few other sectors can boast recession resilience, the health care sector is proving to be a sector that should be part of everyone's portfolio, while the broader market continues to struggle.
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