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AmerisourceBergen in Neutral Zone - Analyst Blog

Posted: 11/28/2011 9:45:00 AM
Referenced Stocks: ABC;ABCS;ESRX;JNJ;MHS

We continue to have a Neutral recommendation on AmerisourceBergen Corp. ( ABC ), with a target price of $38.00.

AmerisourceBergen reports revenues through its Pharmaceutical Distribution segment, which consists of four operating segments: AmerisourceBergen Drug Corporation (ABDC), AmerisourceBergen Specialty Group (ABSG), AmerisourceBergen Consulting Services ( ABCS ) and AmerisourceBergen Packaging Group (ABPG). The ABCS segment, which was previously a part of the ABSG segment, was formed in fiscal 2011, ended September 30.

The company has been pretty active on the acquisition front in order to supplement organic growth, the most recent being the acquisition of TheraCom for $250 million. We believe TheraCom's services will complement ABCS's existing services and expand the group's pharmacy benefit reimbursement capabilities. Moreover, during the fourth quarter of fiscal 2011, AmerisourceBergen completed the acquisition of IntrinsiQ and privately-held Premier Source. We believe that while the combination of IntrinsiQ's software applications and ION Solutions existing oncology technology platform will enhance AmerisourceBergen's proprietary data offerings, the takeover of Premier

Source will help the company strengthen its focus on emerging diagnostic, biotech and device manufacturers.

Going forward, we believe AmerisourceBergen will continue to pursue acquisitions, which will help drive growth. The company exited fiscal 2011 with a cash balance of about $1.8 billion and plans to spend around $200 - $300 million in 2012 on the acquisition of pharmaceutical, distribution or related services businesses.

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 ) Concerta in May 2011 and the upcoming launch of Pfizer 's ( PFE ) Lipitor in November 2011 should boost revenues of the generics segment. 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.

We are concerned about the company'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 revenue in fiscal 2011. The company's top ten customers accounted for about 43% of total revenue in fiscal 2011. AmerisourceBergen also has contracts with group purchasing organizations (GPOs), which accounted for 10% of total revenue in fiscal 2011.

The loss of a significant customer or GPO relationship would have an adverse impact on the company's revenues and operations. AmerisourceBergen's contract with Medco Health is set to expire in March 2013. If Express Scripts Inc. ( ESRX ) (the entity formed by the merger of Medco Health and Express Scripts) decides against renewing the contract, AmerisourceBergen will suffer a major setback.

Keeping the aforementioned issues in mind, we maintain a Neutral recommendation on the stock.

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