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We are maintaining our Neutral recommendation on AmerisourceBergen Corporation (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 reported third quarter fiscal 2012 (ended June 30, 2012) adjusted earnings of 72 cents per share, representing a year-over-year increase of 9%. Earnings, which beat the Zacks Consensus Estimate of 69 cents, were aided by a lower share count. Total revenue for the third quarter slipped 1.9% to $19.8 billion.

The company narrowed its projected earnings per share range for fiscal 2012 to $2.80-$2.84 from $2.74-$2.84. AmerisourceBergen continues to project flat-to-modest revenue growth for fiscal 2012. The company continues to expect operating margin to grow in the high single-digit basis points range. Free cash flow, which includes capital expenditures of approximately $200 million, is expected in the range of $800- $900 million.

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 generics business revenues. The generics business at AmerisourceBergen should benefit from increased generic utilization, thanks to many products going off-patent in the next few years and an aging population.

AmerisourceBergen has been actively pursuing deals and acquisitions to drive growth. In May 2012, the company acquired World Courier Group, Inc. The erstwhile World Courier was a specialty transportation and logistics provider for the biopharmaceutical industry.

Additionally, the three year $18.5 billion supply deal inked with Express Scripts (ESRX - Analyst Report) earlier this year, effective from October 2012, is a positive for AmerisourceBergen. AmerisourceBergen is on the lookout for more such prudent deals which will help drive growth.

However, AmerisourceBergen operates in a 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. We are also concerned about AmerisourceBergen’s dependence on a small number of customers for a significant part of its revenues.

In view of these challenges, we see limited upside potential from current levels.

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