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AmerisourceBergen's PharMEDium Slows Down, Competition Rife

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On Sep 12, we issued an updated research report on Chesterbrook, PA-based AmerisourceBergen Corporation (ABC - Free Report) – one of the world’s largest pharmaceutical services companies. The company focuses on providing drug distribution and related services to reduce health care costs and improve patient outcome. The company currently has a Zacks Rank #3 (Hold).

AmerisourceBergen had an unimpressive run on the bourse in the last three months, trading below the industry in terms of price performance. A glimpse at the price movement reveals that AmerisourceBergen’s shares have lost 10.7%, comparing unfavorably with the 1.3% gain of the broader industry.

The unfavorable performance was led by pricing pressure in the generic drug space and lackluster guidance for the full year. AmerisourceBergen expects fiscal 2017 revenue growth in the range of 5.5% to 6.5%, significantly lower than the previous 6.5% to 8% band. The company expects brand drug inflation in the range of 7% to 9%.

AmerisourceBergen took over PharMEDium Healthcare Holdings for $2.58 billion back in 2015. We believe that the temporary slowdown in PharMEDium growth will mar AmerisourceBergen's bottom line in the coming quarters. Notably, the company aims to boost its investments to enhance PharMEDium's quality assurance (QA) and quality control (QC) systems in terms of product quality and patient safety. Although this lends AmerisourceBergen a competitive advantage in the long haul, this might result in a bottom-line headwind for the business in fiscal 2017.

Lackluster performance in the hepatitis C revenue segment is another concern. AmerisourceBergen witnessed a negative revenue impact from declining sales at the segment in the last reported second quarter. Revenues improved only 4% to $37.1 billion in the quarter, which might have been around 5.5% without the adverse impact of the hepatitis C segment.

Cutthroat competition in the niche space is an additional concern. AmerisourceBergen operates in a highly competitive pharmaceutical distribution and related health care services market. The company’s primary competitors are national generic and regional distributors.

The generic industry is witnessing consolidation of customers and manufacturers, globalization and increasing quality along with regulatory challenges. The company also faces competition from manufacturers, chain drugstores, specialty distributors and packaging and health care technology companies.

Key Picks

A few better-ranked medical stocks are Edwards Lifesciences Corporation (EW - Free Report) , Lantheus Holdings, Inc. (LNTH - Free Report) and Chemed Corporation (CHE - Free Report) . Edwards Lifesciences sports a Zacks Rank #1 (Strong Buy), while Lantheus Holdings and Chemed carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences has a long-term expected earnings growth rate of 15.2%. The stock has rallied roughly 23% over the last six months.

Lantheus Holdings has a long-term expected earnings growth rate of 12.5%. The stock has gained 19.2% over the last six months.

Chemed has a long-term expected earnings growth rate of 10%. The stock has gained around 4.1% over the last six months.

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