Looking for a Dynamic Health Care Stock? Consider AmerisourceBergen
Nowadays, there seems to be numerous thorny issues dogging the health care industry including patent expirations of major branded drugs in the next three years, greater adoption of generic medicines by consumers, the expected negative impact of Obamacare, a rapidly shifting drug distribution landscape -- to mention just a few. It looks like the halcyon days when the industry effortlessly expanded both its topline and bottom line in double digits are long gone. The drug distribution business is not considered to be naturally geared for high growth, and revenue growth in the low single digits is the norm here.
AmerisourceBergen is, however, proving this thesis to be wrong with its impressive revenue growth rates. The firm's 25.7% revenue growth in the fourth quarter is more than double the industry average of 12.54%. Better still, the firm is expected to grow its revenues at a blistering 30.1% clip in 2014, from its continuing operations alone, easily dwarfing the industry average of 18.89% for a similar time span.
AmerisourceBergen operates in the downstream drug distribution business. The firm, together with its two archrivals in the space, Cardinal Health and McKesson , account for over 90% of the $325 billion-a-year drug distribution business in the U.S. each year.
Although AmerisourceBergen is expected to grow its bottom line at a slower pace than the industry in 2014, with 30.1% EPS growth against an industry average of 60.74%, that growth is still considerably better than the S&P 500 average of 19.74%. The lower EPS growth can be attributed to the company's heavy investments in systems and inventory that have strained its already thin operating margins. AmerisourceBergen experienced a considerable degree of margin compression in the third quarter as a result of these factors, shaving off 34 basis points from its 1.68% operating margin. The company derives less than 2% operating margins from its drug distribution segment -- a segment that makes up 80% of its overall revenues.
With such razor-thin margins, AmerisourceBergen relies heavily on scale and high volume sales for its profits. Luckily for the company and its investors, scale is soon coming, thanks to the firm's deal with Walgreen .
Walgreen deal changes the name of the game
AmerisourceBergen signed a huge multi-year agreement worth $400 billion with Walgreen in March 2013. The deal saw AmerisourceBergen become Walgreen's official distributor beginning from Sept. 1, 2013, running till Aug. 30, 2023 -- a good 10 years. The deal also officially ended Walgreen's relationship with long-term partner Cardinal Health.
Walgreen, together with its partner, Alliance Boots, got a 7% stake in AmerisourceBergen as part of the deal, with an option for a further 23% stake. AmerisourceBergen will do doubt benefit hugely from the agreement. The deal provides excellent future revenue visibility for the firm. In 2014 alone, the company will see its sales grow by $25 billion, representing 30% of its annual revenues. But even better, the deal eliminates the huge risk AmerisourceBergen faces whenever its contracts expire, and it has to face bare knuckle competition with its bigger rivals McKesson and Cardinal Health. With at least 30% of the company's sales covered for the next 10 years, a huge competitive risk element has been removed from the picture.
AmerisourceBergen now has a good chance to get a foothold on the European market, which it will now gain access to, thanks to Alliance Boots' 11,000 European stores strewn across 21 countries. The company will also access Alliance Boots' generic and more expensive branded drugs.