Generics Power Amerisource

7/12/2010


  Recent Price
$31
  Dividend
$0.32
  Yield

1.0%

  P/E Ratio
15
  Shares (millions)
287
  Long-Term Debt as % of Capital
32%
  52-Week Price Range
$33.27 - $17.54

Shares of wholesale drug distributor AmerisourceBergen ($31; ABC) have advanced in each of the last eight months while cruising to a 41% gain since the end of October. A couple of catalysts should help sustain the stock’s momentum.

The aging of the baby boomers and health-care reform legislation should boost demand for medicines in the years ahead, good news for the company’s biggest growth drivers — specialty and generic drugs. Pharmaceutical distribution is known for its razor-thin profit margins, but both of these drug types have higher margins than traditional branded medications. As the patents of major drugs expire in the next few years, new generics will flood the market.

Amerisource has grown sales in each of the last 15 years, and the company sees 7% to 8% higher revenue in fiscal 2010 ending September. Complementing this operating momentum, Amerisource has a strong history of dividend growth and share repurchases, trends that should continue in coming years. Amerisource is a Focus List Buy and a Long-Term Buy.

Business breakdown

Amerisource’s drug group distributes pharmaceuticals to hospitals and pharmacies. The group’s sales rose 13% in the first six months of fiscal 2010, up from 2% in fiscal 2009, on the strength of new customers. The specialty group focuses on generic and oncology drugs, though it also distributes vaccines and plasma. Specialty drugs account for about one-fifth of total revenue. The packaging group repackages bulk drugs into blister packs and bottles for consumer use.

Amerisource’s operating margins have crept higher in the last two quarters, and the company sees further expansion from a combination of cost-cutting measures and recent generic-drug launches. Cost controls have decreased operating expenses as a percent of revenue in three consecutive years.

Generic-drug volumes are rising faster than branded volumes, a trend with staying power. Pharmaceuticals set to lose U.S. patent protection from 2010 through 2012 — including the world’s two biggest sellers — currently generate annual revenue of nearly $65 billion. A generic version of cancer drug Eloxatin has helped drive Amerisource’s recent growth. Three more oncology generics are expected to launch in November and December.

Political developments could further accelerate the use of generics. Lawmakers are trying to curb agreements between drug companies that delay the introduction of generics.

Conclusion

In the wake of Amerisource’s rally, the stock’s valuation is no longer a big selling point. But it still earns an above-average Value score, and at 15 times trailing earnings, the shares trade 13% below the five-year average P/E ratio. Analyst estimates project profits of $2.11 per share for fiscal 2010 ending September, implying 25% growth, best among health-care distributors in the S&P 1500 Index. But the stock’s P/E on that estimate is 15, in line with the peer-group average. An annual report for AmerisourceBergen Corp. is available at 1300 Morris Drive, Chesterbrook, PA 19087; (610) 727-7000; www.amerisourcebergen.com.

AMERISOURCEBERGEN
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '10 $0.63 vs. $0.47 + 11% $29.43 -

$25.66

16 - 14
Dec '09 0.52 vs. 0.36 + 12% 26.58 - 21.44 16 - 13
Sep '09 0.44 vs. 0.37 + 9% 22.84 - 17.54 14 - 11
Jun '09 0.42 vs.

0.35

+ 2% 18.99 - 15.90 12 - 10
           
Year
(Sep.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $71.76 $1.69 $0.24 $22.84
-
$13.33 14 - 8
2008 $70.19 $1.44 $0.15 24.30
-
18.30 17 - 13
2007 $66.07 $1.32 $0.10 28.28
-
21.33 21 - 16
2006 $61.20 $1.13 $0.05 24.48
-
18.33 22 - 16
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
91 85 57 86 35 92 90

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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