Zacks Investment Research



| AmerisourceBergen Corp. |(ABC-NYSE) |$84.77 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: Feb 16, 2018; 4Q17 Earnings Update With Estimate Revisions

Firms’ Recommendations: Positive: 50% (7 firms); Neutral: 50% (7); Negative: 0.00% (0); Prev. Ed.: 8; 4; 0.

Firms Target Price: $102 (↑ $88.91 from the last edition; 11 firms); Firms’ Avg. Expected Return: 20%

* Note: Though dated May 15, 2018 share price and broker materials are as Mar 23, 2018.

Portfolio Manager Executive Summary

AmerisourceBergen Corporation is one of the largest pharmaceutical services companies, which focuses on providing drug distribution and related services to reduce health care costs and improve patient outcomes. The company serves health care providers and pharmaceutical manufacturers in the pharmaceutical supply channel. AmerisourceBergen has operations in the U.S., Canada, and the UK, along with select global markets. The company offers a broad range of services designed to enhance the operating efficiencies and competitive position of its customers and suppliers.

Of the firms covering the stock, 50% (7 firms) gave a neutral rating and 50% (7 firms) assigned a positive rating. None of the firms provided a negative rating on the stock.

Neutral outlook (7/14 firms): The neutral firms believe that AmerisourceBergen’s strong performance in 1Q18, reflects the company’s improving core fundamentals. However, in the past year, shares of the company saw heightened volatility largely due to deflationary pressures on generic drug pricing (both sell-side and buy-side). Firms further believe that, while the buy-side pricing continue to decline, the sell-side pricing have started to stabilize.

Positive outlook (7/14 firms): AmerisourceBergen posted solid earnings results in 1Q18. Bullish firms have raised their estimates and further believe that the company will also benefit from the U.S. tax reform. The solid performance by the core distribution business segment and the recent acquisition of H.D. Smith are major positives. For FY19, the management expects to outpace the U.S. pharmaceutical market growth rate over the next few with leadership in Specialty, Biosimilars, and the company's new highly automated distribution network which now includes 6 of 7 new planned distribution centres.

Overview

AmerisourceBergen Corporation distributes drugs and related services to pharmaceutical manufacturers and health care providers in the U.S., the UK and Canada. AmerisourceBergen acquired IntrinsiQ and Premier Source in Sep 2011, CVS Caremark Corporation’s subsidiary TheraCom in Nov 2011, and World Courier in Apr 2012.

Following the acquisition of World Courier Group, AmerisourceBergen made some adjustments to its reporting format. The company decided to report results of AmerisourceBergen Drug Corporation and AmerisourceBergen Specialty Group under its Pharmaceutical Distribution segment. Results of the World Courier Group and AmerisourceBergen Consulting Services (ABCS) have been clubbed under the “Other” head effective 3QFY12.

In Mar 2013, AmerisourceBergen Corporation entered into a distribution agreement with Walgreen Company and Alliance Boots GmbH. The agreement includes a 10-year pharmaceutical distribution contract with Walgreens and access to generic drugs and related pharmaceutical products through the Walgreens Boots Alliance Development joint venture. Both Walgreens and Alliance Boots have been granted rights to jointly purchase a minority equity position in AmerisourceBergen.

For more information on the company, please visit its website .

The firms have identified the following issues for evaluating the investment merits of AmerisourceBergen:

|Key Positive Arguments |Key Negative Arguments |

|AmerisourceBergen’s distribution businesses for physicians, which focus on |The company’s shares saw heightened volatility in the last 18 months due |

|specialty drugs, continue to drive growth more efficiently than the overall |to deflationary pressures on generic drug pricing. Moreover, the buy-side|

|pharmaceutical market. The company has captured 35–40% of the pharmaceutical |pricings continue to decline. |

|market as focus on specialty drugs is yielding solid results for the company. | |

|The company continues to benefit from a favorable mix of generics and |Small exposure to opioids might continue to be a headwind for the |

|specialty. AmerisourceBergen’s expertise in specialty products and a |company. |

|differentiated understanding of manufacturer and patient requirements for | |

|these products will continue to strengthen the company’s oncology offering. | |

|AmerisourceBergen’s IntrinsiQ, TheraCom and World Courier acquisitions have | |

|enhanced its portfolio. Further, the distribution deal with Walgreens and |In the last quarter, earnings suffered an unexpected decline owing to the|

|Alliance Boots will augment its strong distribution network. In addition, the |suspension of the operations of Memphis, which also had an impact on the |

|combination of the Walgreens business has enhanced the company’s purchasing |company’s FY18 guidance. |

|power, particularly for generics. The MWI Veterinary acquisition has | |

|diversified the company’s existing pharmaceutical distribution & services | |

|businesses into the attractive animal health market. | |

Note: The company’s fiscal year ends in September.

Long-Term Growth

AmerisourceBergen has been taking steps to streamline its business and focus on its core distribution businesses. Recently, AmerisourceBergen sold its Canadian pharmaceutical distribution business, AmerisourceBergen Canada Corporation (ABCC). Biosimilars and specialty are believed to be major growth drivers. The company continues to offer the industry’s broadest range of clinical trial support, data analytics and specialty product distribution.

The company is rolling out eight new IT systems, including ABC Order, for the Pharmaceutical Distribution business and World Courier, which will enable the company to efficiently serve the customers.

Moreover, per bullish firms, the alliance with Walgreens is likely to be beneficial. It is also believed that the top-line benefit of RAD and H.D. Smith will manifest as the company approaches the end of FY18. The company further on-boarded 300 Walgreens stores in 1Q18, which transitioned in late December. This indicates that revenues and earnings per share is likely to grow as the company progresses through FY18. Till date, Walgreens has acquired more than 600 Rite Aid stores and is looking forward to move with an increasing pace.

The company’s new highly automated distribution network includes 6 of the 7 newly planned distribution centers. AmerisourceBergen is also deploying 8 new IT systems across its distribution network.

The company is also currently undertaking remediation efforts of the previously suspended Memphis facility. Per management, they are working diligently and communicating with the FDA to fully comply with the Agency's 503B regulations and new compounding policy barring.

The company is further poised for a long-term growth, owing to the new tax rate that enhances its ability to invest, innovate and deliver the value to the shareholders.

Target Price/Valuation

|Rating Distribution |

|Neutral |50% ↓ |

|Positive |50% ↑ |

|Negative |0.0% |

|Avg. Target Price |$102 ↑ |

|Maximum Target Price |$113 |

|Minimum Target Price |$87 |

|No. of analysts with Target Price/ Total |13 |

|Analysts | |

Recent Events

On Feb 6, AmerisourceBergen reported 1Q18 results. Highlights are as follows:

• Revenues surged 6% year over year (y/y) to $40.47 billion

• Adjusted EPS increased 14% y/y to $1.55.

On Jan 3, AmerisourceBergen announced that it has completed the acquisition of H. D. Smith, the largest independent wholesaler in the U.S., for $815 million in cash.

Revenue

AmerisourceBergen’s revenues improved almost 6% to $40.47 billion in 1Q18. The upside can be attributed to a stellar performance by the company’s core Pharmaceutical Distribution business. Notably, this was the company’s 16th consecutive quarter with a 10% or greater revenue growth.

Per firms, the company is experiencing good trends owing to the customers led by Walgreens.

Segmental Analysis

Pharmaceutical Distribution Segment

Revenues in the segment were $38.94 billion, up 5.8% y/y. Operating income was $388.2 million, up 2.4% y/y.

However, the segment was affected by lower-than-expected production at PharMEDium's Memphis 503B outsourcing facility. Notably, operations in the facility were voluntarily suspended by the company following a few inspections by the FDA in 1Q18.

Other Segment

This segment includes AmerisourceBergen Consulting Services (“ABCS”), World Courier and MWI Veterinary Supply. Revenues at the segment came in at $1.54 billion, up 11.6% y/y. Operating income in the segment was $100.3 million in 1Q18, down 6.4% y/y.

Despite strong performance in the World Courier unit, sluggishness in the ABCS dampened segmental growth in 1Q18.

|Revenue |1Q17A |4Q17A |FY17A |1Q18A |2Q18E |FY18E |2019E |2020E |

|($ in million) | | | | | | | | |

|Digest Low |$1.36 |$1.32 |$5.88 |$1.55 |$1.70 |$6.55 |$7.85 | |

|Digest Average |$1.36 |$1.33 |$5.89 |$1.55 |$1.70 |$6.55 |$7.85 | |

Guidance: Based upon the expectations from the recently legislated U.S. tax reform, AmerisourceBergen raised guidance for fiscal 2018 (FY18). The company expects adjusted earnings per share in the range of $6.45-$6.65, up from the previously range of $5.90-$6.15. Revenue growth for FY18 is expected in the range of 8-11%, higher than the previous range of 7-9%.

Outlook: Firms estimate EPS exposure to be around 1-2% in FY18.

|Analyst |Sreyoshi Mukherjee |

|Copy Editor |Parijat Sen |

|Content Editor |Nabaparna Bhattacharya |

|QCA |Urmimala Biswas |

|Lead Analyst |Nabaparna Bhattacharya |

|Last Updated By |Nilendu Saha. |

|Reason for Update |1Q18 Earnings Update |

-----------------------

[pic]

Zacks Investment Research Page 7

May 21, 2018

© Copyright 2017, Zacks Investment Research. All Rights Reserved

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download