Pennsylvania-based AmerisourceBergen (ABC, Financial), the $17.7 billion pharmaceutical company, reported a beat in earnings-per-share (EPS) consensus by 6 cents at $1.43 in its third-quarter 2017 results.
In the recent three quarters, the company reported 4.3% revenue rise to $114 billion and a contrasting (-)44.7% profit drop to $709 million – just 0.6% margin compared to 1.2% in the same period last year.
In its moderately higher expenses, AmerisourceBergen recorded a 258% jump in employee severance, litigation and other to $317.5 million while income taxes also rose to $380.4 million compared to benefits of $82.9 million the year prior thus resulting in nearly a 50% drop in profits in the recent period.
In addition, the company expects revenue growth in the range of approximately 5% (vs. 8% growth in 2016), lower when compared to the previous assumption of 5.5% to 6.5%; adjusted diluted earnings per share to be in the range of $5.82 to $5.92 (vs. $5.62 in 2016) compared to the previous range of $5.77 to $5.92; and free cash flow to be approximately $750 million to $1 billion (vs. $2.71 billion in 2016).
“AmerisourceBergen continues to execute successfully in a dynamic marketplace. We are providing our customers with the highest quality pharmaceutical distribution services and the most innovative solutions to grow their businesses. For example, we are fully rolling out and implementing our innovative ABC Order platform – an ordering system designed by pharmacists for pharmacists that completely changes the way independent pharmacies manage their product orders. Early customer feedback on the platform has been extremely positive with pharmacists citing ease of use and real-world business value.
“Additionally, in the third quarter of the fiscal year, we continued to lead the market in specialty distribution, delivered strong growth across our Consulting Services, MWI Animal Health and World Courier businesses and effectively managed our operating expenses.
“As we move further into 2017 and look beyond to fiscal 2018, we are transforming the company to work even more seamlessly with customers, optimize our offerings and drive our corporate growth over the long term.
“We have great confidence in our broad portfolio of integrated services, the significant value we bring to our customers and our ability to enable access to health care products, ultimately improving the lives of patients. AmerisourceBergen is living our corporate purpose – we are united in our responsibility to create healthier futures – while continuing to drive and deliver long-term value for our shareholders.” – Steven H. Collis, chairman, president and CEO of AmerisourceBergen
Valuations
AmerisourceBergen is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 15.74 times vs. the industry median of 20 times, a price-book (P/B) ratio of 7 times vs. 2.4 times and a price-sales (P/S) ratio of 0.12 times vs. 0.91 times.
The company also had a trailing dividend yield 1.79% with 27% payout ratio.
Average 2017 estimates for revenue and EPS indicated forward multiples 0.11 times and 13.8 times.
Total returns
AmerisourceBergen has underperformed the broader Standard & Poor's 500 index so far this year with 4.3% total returns vs. the index’s 11.9%. On the other hand, the company actually outperformed the broader index in the past five years with 17% total returns (annualized) vs. the index’s 14.65%.
AmerisourceBergen
AmerisourceBergen is an American drug wholesale company that was formed by the merger of Bergen Brunswig and AmeriSource in 2001.
According to filings, AmerisourceBergen currently serves its customers (health care providers, pharmaceutical and biotech manufacturers and certain specialty drug patients) through a geographically diverse network of distribution service centers and other operations in the U.S. and selected global markets.
In its pharmaceutical distribution business, AmerisourceBergen is typically the primary supplier of pharmaceutical and related products to its health care provider customers.
Further, AmerisourceBergen is one of the largest global pharmaceutical sourcing and distribution services companies, helping both health care providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care.
The company delivers innovative programs and services designed to increase the effectiveness and efficiency of the pharmaceutical supply chain in both human and animal health.
Walgreens Boots connection
In March 2013, AmerisourceBergen and Walgreens Boots (WBA, Financial) entered into various agreements and arrangements pursuant to which subsidiaries of Walgreens Boots were granted the right to purchase a minority equity position in AmerisourceBergen, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of AmerisourceBergen’s common stock in open market transactions (approximately 7% of AmerisourceBergen’s common stock on a fully diluted basis as of the date of issuance of the warrants).
In August 2016, AmerisourceBergen and Walgreens amended the 2017 warrants so that they became exercisable in whole or in part during the six-month period beginning in August 2016 at an exercise price of $52.50 (vs. average August 2016 share price of $88.2).
In the same month, Walgreens Boots exercised the 2017 warrants and purchased 22,696,912 shares of AmerisourceBergen Common Stock for $1.19 billion. As a result of Walgreens’ exercise of the warrants, it now owns more than 10% of AmerisourceBergen’s common stock.
As per Business Wire, Walgreens Boots Alliance now beneficially owns 56,854,867 shares of AmerisourceBergen common stock, or 23.9% of AmerisourceBergen’s outstanding equity (as of July 31, 2016).
According to filings, AmerisourceBergen operates under various agreements and arrangements with Walgreens, including a pharmaceutical distribution agreement, pursuant to which AmerisourceBergen distributes branded and generic pharmaceutical products to Walgreens and an agreement that provides AmerisourceBergen the ability to access generics and related pharmaceutical products through a global sourcing arrangement with Walgreens Boots Alliance Development GmbH. Both of these agreements expire in 2026.
Walgreens served as AmerisourceBergen’s largest customer in fiscal 2016. Walgreens accounted for 30% of revenue and represented approximately 43% of accounts receivable, net.
Express Scripts connection
Express Scripts (ESRX, Financial) was AmerisourceBergen’s second-largest customer in fiscal 2016, accounted for 16% of revenue and represented approximately 10% of accounts receivable, net.
AmerisourceBergen’s operations are comprised of the Pharmaceutical Distribution reportable segment and Other.
Pharmaceutical Distribution
The Pharmaceutical Distribution segment is comprised of two operating segments, which include the operations of AmerisourceBergen Drug Corp. and AmerisourceBergen Specialty Group (1).
AmerisourceBergen Drug Corp.
AmerisourceBergen Drug Corp. distributes a comprehensive offering of brand-name and generic pharmaceuticals (including specialty pharmaceutical products), over-the-counter health care products, home health care supplies and equipment, outsourced CSPs and related services to a wide variety of health care providers including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies and other customers.
AmerisourceBergen Drug Corp. also provides pharmacy management, staffing and additional consulting services and supply management software to a variety of retail and institutional health care providers. Additionally, AmerisourceBergen Drug Corp. delivers packaging solutions to institutional and retail health care providers.
AmerisourceBergen Specialty Group
AmerisourceBergen Specialty Group, through a number of operating businesses, provides pharmaceutical distribution and additional services to physicians who specialize in a variety of disease states, especially oncology, and to other health care providers including hospitals and dialysis clinics.
The group also distributes plasma and other blood products, injectible pharmaceuticals, vaccines and other specialty products. Additionally, the group provides third-party logistics, outcomes research and additional services for biotechnology and pharmaceutical manufacturers (2).
In the recent three quarters of operations, revenue in the pharmaceutical distribution business grew 4.2% year over year to $109.13 billion or 95.5% of total unadjusted sales and had operating margins of 1.1% compared to 1.2% the year prior.
Other
Other consists of the AmerisourceBergen Consulting Services operating segment, the World Courier operating segment and the MWI Veterinary Supply Inc. operating segment.
AmerisourceBergen Consulting Services
AmerisourceBergen Consulting Services, through a number of operating businesses, provides commercialization support services including reimbursement support programs, outcomes research, contract field staffing, patient assistance and co-pay assistance programs, adherence programs, risk mitigation services and other market access programs to pharmaceutical and biotechnology manufacturers.
World Courier
World Courier, which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry.
MWI Veterinary Supply
In February 2015, AmerisourceBergen acquired MWI Veterinary Supply for a purchase price of $2.6 billion.
MWI is a leading animal health distribution company in the U.S. and in the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients and various other products to customers in both the companion animal and production animal market.
In the past nine months of operations, revenue in the Other segment grew 7.4% year over year to $5.1 billion (4.5% of total unadjusted sales) and delivered margins of 6.1% compared with 5.7% last year.
Sales and profits
In the past three years, AmerisourceBergen’s revenue growth averaged 18.6%, profits rise on an average 48.77%, and had profit margins 0.37%.
Cash, debt and book value
As of June, AmerisourceBergen had $1.31 billion in cash and cash equivalents and $3.43 billion in debt with debt-equity multiple 1.34 times compared with 2.35 times in the prior year period. Overall debt has declined by $974 million while equity rose by $674.2 million.
Of its $34.65 billion assets 25.7% were identified as blue sky elements (goodwill and intangibles) while book value rose 35.9% year over year to $2.55 billion.
Cash flow
In the first half, AmerisourceBergen cash flow from operations dropped by 93% to $123.7 million. In addition to lower profits, the company had cash outflow in relation to its LIFO (last in first out) expenses and accounts receivables.
Capital expenditures were $371.4 million leaving it with (-)$247.7 million free cash outflow compared to $1.51 billion the year prior. Despite the outflows, the company provided $470.1 million in dividends and repurchases.
AmerisourceBergen also allocated $762.4 million in debt repayments and others net any issuances. These outflows in relation to operations among others not mentioned dampened the company’s total cash holdings by $1.43 billion in the period.
Repurchase activities
In estimation, AmerisourceBergen repurchased its shares in fiscal years 2014, 2015 and 2016 on average prices of $74.12, $103.42 and $58.37.
The cash flow summary
In the past three years, AmerisourceBergen allocated $961 million in capital expenditures, raised $5.07 billion in debt net repayments and other financing activities, generated $7.6 billion in free cash flow and paid out $5.64 billion in shareholder dividends and repurchases on an average free cash flow payout ratio of 77%.
In addition, AmerisourceBergen also acquired a privately held leading national provider of outsourced compounded sterile preparations to acute care hospitals in the U.S., which was PharMEDium Healthcare Holdings, for $2.575 billion.
Conclusion
Only one quarter missing to complete its fiscal year 2017 operations, AmerisourceBergen demonstrated steady overall business growth in the past nine months. More importantly, margins have been maintained when compared to the company’s three-year revenue growth averages.
AmerisourceBergen’s arrangement with Walgreens definitely brings security in one-third of its business revenue, but at the same time shows some form of vulnerability whenever Amazon (AMZN, Financial) encroaches on this business later on.
Nonetheless, given the razor-thin margins (three-year average 1.2% margin) may require a good amount of expenditures for the Bezos-led behemoth.
Further, AmerisourceBergen’s acquisitions may have raised its leverage through recent acquisitions now at 1.34 times albeit lower than the prior year, but these acquisitions have been helpful in expanding AmerisourceBergen’s "Other" operations that may steadily deliver growth and higher margins than its primary distribution business.
AmerisourceBergen also has been prudent in its cash flow allocation including its shareholder payouts in recent years.
Analysts have an average price target of $93.9 a share vs. $80.83 at the time of writing. Using analyst average revenue 2017 estimates multiplied by three-year average multiple and a 15% margin indicated a per share figure of $100.
In summary, AmerisourceBergen is a buy with $90 target price.
Notes
(1) Company filings
AmerisourceBergen Drug Corp.
AmerisourceBergen Drug has a distribution facility network totaling 26 distribution facilities in the U.S. This network includes a national distribution center in Columbus, Ohio, which offers pharmaceutical manufacturers a single shipping destination. We continue to seek opportunities to achieve productivity and operating income gains as we invest in and continue to implement warehouse automation technology, adopt "best practices" in warehousing activities and increase operating leverage by increasing volume per full-service distribution facility.
(2) Company filings
Both the drug corporation and specialty group distribute specialty drugs to their customers, with the principal difference between these two operating segments being that the latter operates distribution facilities that focus primarily on complex disease treatment regimens. Therefore, a product distributed from one of the group’s distribution facilities results in revenue reported under the specialty group and a product distributed from one of the drug corporation's distribution centers results in revenue reported under it. Essentially all of the group’s sales consist of specialty pharmaceutical products. The drug corporation's sales of specialty pharmaceutical products have historically been a relatively small component of its overall revenue.
Disclosure: I do not have shares of any companies mentioned.
**Correction: Early title was Flashing Sell Sign** 10:38 am (8/11/2017).
