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AmerisourceBergen's PharMEDium Slows Down, Competition Rife

Zacks Equity Research

On Oct 3, we issued an updated research report on Chesterbrook, PA-based AmerisourceBergen Corporation ABC – one of the world’s largest pharmaceutical services companies. The company focuses on providing drug distribution and related services to reduce health care costs and improve patient outcome. The company currently has a Zacks Rank #4 (Sell).

AmerisourceBergen had an unimpressive run on the bourse in the last three months, trading below the industry in terms of price performance. A glimpse at the price movement reveals that AmerisourceBergen’s shares have lost 13.0%, comparing unfavorably with the 3.7% gain of the industry it belongs to.

The unfavorable performance was led by pricing pressure in the generic drug space and lackluster guidance for the full year. AmerisourceBergen expects fiscal 2017 revenue growth in the range of 5.5% to 6.5%, significantly lower than the previous range of 6.5% to 8% band. The company expects brand drug inflation in the range of 7% to 9%.

AmerisourceBergen took over PharMEDium Healthcare Holdings for $2.58 billion back in 2015. We believe that the temporary slowdown in PharMEDium growth will mar AmerisourceBergen's bottom line in the coming quarters. Notably, the company aims to boost its investments to enhance PharMEDium's quality assurance (QA) and quality control (QC) systems in terms of product quality and patient safety. Although this lends the company a competitive advantage in the long haul, this might result in a bottom-line headwind for the business in fiscal 2017.

Lackluster performance in the hepatitis C revenue segment is another concern. AmerisourceBergen witnessed a negative revenue impact from declining sales at the segment in the last reported second quarter. Revenues improved only 4% to $37.1 billion in the quarter, which might have been around 5.5% without the adverse impact of the hepatitis C segment.

Cutthroat competition in the niche space is an additional concern. AmerisourceBergen operates in a highly competitive pharmaceutical distribution and related health care services market. The company’s primary competitors are national generic and regional distributors.

The generic industry is witnessing consolidation of customers and manufacturers, globalization and increasing quality along with regulatory challenges. The company also faces competition from manufacturers, chain drugstores, specialty distributors and packaging and health care technology companies.

Key Picks

A few better-ranked medical stocks are IDEXX Laboratories, Inc IDXX, Luminex Corporation LMNX and Masimo Corporation MASI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

IDEXX Laboratories has a positive earnings surprise of 9.3% over the last four quarters. The stock has roughly surged 39.2% over the last year.

Luminex Corporation has a long-term expected earnings growth rate of more than 16%. The stock has gained around 8% over the last month.

Masimo has long-term historical adjusted earnings growth of 14.4%. The stock has rallied nearly 29% year to date.

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