Neutral on AmerisourceBergen

We recently reiterated our Neutral recommendation on AmerisourceBergen Corp. (ABC - Analyst Report), which carries a Zacks #3 Rank (Hold rating) in the short-run.

AmerisourceBergen, one of the world’s largest pharmaceutical services companies recently reported first quarter fiscal 2012 earnings of 63 cents per share, representing a year-over-year increase of 10.5%. Earnings, which were in line with the Zacks Consensus Estimate, were spurred by higher revenues and a lower share count. Total revenue for the quarter climbed 2.4% to $20.4 billion.

The company reiterated its fiscal 2012 earnings expectation of $2.74 to $2.84 per share. Our fiscal 2012 earnings estimate of $2.81 lies towards the higher end of the guidance range.

Over the last several years, AmerisourceBergen has been benefiting from the growth of the pharmaceutical industry in the US. The company should continue to benefit from the growth in the pharmaceutical industry, which is driven by several factors like an aging population, increased use of generics, introduction of new treatments, increased use of drug therapies and favorable legislative developments.

Additionally, 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 - Analyst Report) Concerta in May 2011 and Pfizer’s (PFE - Analyst Report) Lipitor in November 2011 boosted generic 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.

AmerisourceBergen’s specialty pharmaceuticals business has a major presence in the rapidly growing specialty pharmaceutical segment. The company enjoys a leading position in distributing products and services to community oncologists and other physicians and is working on expanding its offerings in specialty distribution and services. The company is well positioned to provide service and support many of the new biotech therapies, which will make their foray into the market in the near future.

However, AmerisourceBergen operates in the highly competitive pharmaceutical distribution market. The company’s primary competitors include Cardinal Health Inc. (CAH - Analyst Report), McKesson Corporation (MCK - Analyst Report) as well as national generic distributors and regional distributors.

The company faces additional competition from manufacturers, chain drugstores, specialty distributors, and packaging and health care technology companies. AmerisourceBergen’s Specialty Group also operates in a highly competitive environment with primary competitors including players such as McKesson, FFF Enterprises, Henry Schein Inc. (HSIC - Snapshot Report), Med-Path, Express Scripts Inc. (ESRX - Analyst Report), Covance Inc. (CVD - Snapshot Report), and UPS Logistics.

Moreover, in recent years, the health care industry has been witnessing increasing consolidation. If this trend continues among AmerisourceBergen’s customers and suppliers, it could increase the bargaining power of the resulting entities, which may lead to greater pressure to reduce prices of products and services. This will have a negative impact on the company’s top-line.

We are also concerned about AmerisourceBergen’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 19% of total revenues in fiscal 2011. AmerisourceBergen’s contract with Medco Health is set to expire in March 2013. If for some reason, Express Scripts (the merged entity of Medco Health and Express Scripts) decides to terminate the contract, AmerisourceBergen will suffer a major setback.