Thursday, June 16, 2011

What’s Next for AmerisourceBergen

At last week’s HDMA Business Leadership Conference, Dave Yost, CEO of AmerisourceBergen (NYSE:ABC) received a well-deserved Nexus Award for Lifetime Achievement. Read all the details in R. David Yost Honored With 2011 Nexus Award For Lifetime Achievement.

Since he is retiring next month, I thought it might be a good time to check in on ABC’s current business and speculate on what’s next.

Incoming CEO Steve Collis will lay out an updated vision for the company in the coming months. But as I discuss below, he will also have to deal with important structural challenges to sustaining the company’s historical performance. Suffice to say, it won’t be as easy as 1-2-3 for ABC.

And for today’s special bonus, check out the picture below of me posing with an HDMA DIANA award.

BUSINESS TRENDS AT ABC

As a reminder, you can read much more about pharmaceutical wholesalers and AmerisourceBergen in The 2010-11 Economic Report on Pharmaceutical Wholesalers. The report is on sale for 40% off until the end of August.

Here’s my estimate of ABC’s revenue growth by major business area over the past six years. Click the chart to enlarge it.

As you can see, nearly all of ABC’s revenue growth in recent years has come from its Specialty Group and the company’s supply relationship with Medco Health Solutions' (NYSE:MHS) mail-order pharmacy. The ABSG business segment grew from $4.9 billion in fiscal 2004 to $16.4 billion in fiscal 2010, contributing 42% of AmerisourceBergen’s total revenue growth during this six-year period.

Steve Collis built ABSG for ABC. The lesson? Lead the fastest-growing, most-profitable business segment of a Fortune 30 company and you too can become CEO, kids.

Observations:
  • Looking forward, “Generics” and “Specialty” are the company’s “growth drivers,” as ABC noted in its December 2010 investor day. In their own words, this has “not changed for several years” and the management team has “Laser focus, no distractions.” Fair enough, but it’s tough love for manufacturers of traditional brand-name drugs. Translation: ABC is just not that into you. So sorry.
  • ABC has a historically strong position with smaller customers—independent pharmacies, physician practices, and infusion clinics. Smaller customers are much more likely to purchase generic drugs from wholesalers instead of direct from manufacturers like the big buyers. Retaining these customers is crucial for succeeding with generics, especially because both Cardinal and McKesson are each pursuing innovative strategies for upstream generic supply.
  • ABC recently started referring to two of its specialty businesses--the reimbursement hub Lash Group and the consulting/communications business Xcenda—as the AmerisourceBergen Consulting Services (ABCS). Operating profit margins for ABCS are 10-12% versus about 1.2% for ABDC and 2.2% for ABSG. Lots of potential in ABCS given the potent mix of market growth and extreme complexity.
  • Since there is scarcity of traditional distribution acquisition targets, I would expect ABC’s future acquisitions to be focused on (1) specialty consulting services that mesh with ABCS, (2) channel and market data services targeted to manufacturers or payers, (3) niche distribution businesses that add to the existing platforms within ABSG, and possibly (4) contract packaging.
NOT AS SIMPLE AS DO RE MI

After such a successful run in the past few years, Steve Collis is inheriting keen challenges, some of which fall into the category of “nowhere to go but down.”
  • The Post-Oxaliplatin Hangover—In 2010, ABC made the inventory buy of the century. Sanofi-Aventis settled with several generic manufacturers of its Eloxatin (oxaliplatin) cancer product such that the generic drug makers suspended sales of their products from June 30, 2010 to August 9, 2012. However, ABC bought enough product (at generic prices) to sell through mid-2011 although providers would be reimbursed based on the branded Average Sales Price (ASP). KA-CHING! This one single product contributed 11% ($0.25 of $2.22) of ABC’s total corporate earnings per share in its last fiscal year. Alas, the inventory is almost gone. The incremental benefit from upcoming generics is unlikely to fill the earnings hole, making year-over-year comparisons look weaker.
  • The Hangover Part II—ABC was formed by the 2001 merger of Bergen Brunswig Drug Co. with AmeriSource Corporation. Both predecessor companies were loosely-integrated roll-ups of local and regional wholesalers. Over the past ten years, ABC has knitted everything together, cut the number of distribution centers in half, and implemented a modern ERP computer system. SG&A as a % of revenues dropped by a startling 25% from 2007 to 2010 as this internal rationalization wrapped up. I’m sure there are incremental efficiency gains, but it’s structurally improbable for ABC to trim costs at the same rate over the next 10 years.
  • McKesson’s Specialty Challenge—For years, ABC was the unquestioned leader in the specialty distribution business. But over the past five years, competitor McKesson (NYSE:MCK) has turned into a strong #2 in both specialty distribution and the oncology GPO business. (See Fresh Consolidation in the Oncology Channel from 2007 and McKesson Snags US Oncology from last October). While everyone will ride the growth of specialty, the level of competition is much greater than when Steve Collis built ABSG.
  • The Uncertain Future of Buy-and-Bill—The most profound threat to both McKesson and ABC is the challenge occurring to the physician office/clinic channel. The traditional buy-and-bill channel is under attack from both external and internal forces. (See The Future of Buy-and-Bill According to Payers and Oncology Practices and the links within that article.) ABC needs the physician-provider channel to remain independent and viable.
  • Increasing competition for independents—For years, ABC’s relatively decentralized business model has helped the company gain the top position with independent pharmacies. But now McKesson is again aggressively chasing this segment, exemplified by its heavy investments in the HealthMart franchise program, growth of the Access Health PSAO, and acquisitions such as McQueary Brothers. Cardinal is also renewing its focus on independent pharmacies, especially with the acquisition of Kinray.
A SPECIAL BONUS

Here’s a photo of me posing with an HDMA DIANA award. For some reason, Mrs. Yost did not let Dave bring a DIANA award home.

At last, I was finally able to indulge my Goldfinger fantasy. Thanks, HDMA!

(Photo courtesy of Bill Bertizmann.)

5 comments:

  1. AnonymousJune 16, 2011

    Excellent writeup. Any thoughts on the VA contract? Will ABC try to win it back or will MCK keep it? Thanks.

    ReplyDelete
  2. AnonymousJune 16, 2011

    Great analysis Adam. Very informative. Thanks.

    ReplyDelete
  3. AnonymousJune 16, 2011

    I want to know more about the girl in the picture.

    "The name is Fein. Adam Fein."

    Keep up the great work!

    ReplyDelete
  4. Adam has created an excellent overview of the current state and forward looking commentary on AmerisourceBergen. Very thoughtful. Very accurate.

    ReplyDelete
  5. Adam has created an excellent overview of the current state and forward looking commentary on AmerisourceBergen. Very thoughtful. Very accurate.

    ReplyDelete

Related Posts Plugin for WordPress, Blogger...