What happened
AmerisourceBergen (ABC +0.94%) closed down 10.5% on Thursday after announcing disappointing fiscal third-quarter earnings and reducing its expectations for revenue for the entire fiscal 2017. Fellow drug distributors fell in sympathy, with McKesson (MCK +2.38%) down 2.7% and Cardinal Health (CAH +2.11%) down 2.3%.
Cardinal Health had already fallen dramatically yesterday after announcing its own disappointing guidance for its 2018 fiscal year. And McKesson was down about 4% since reporting earnings last week going into today's further slump.
Image source: Getty Images.
So what
After revenue increased 4.9% in the third fiscal quarter, AmerisourceBergen lowered its revenue guidance to 5% for the fiscal year, which ends in September, from a previous range of 5.5% to 6.5%. The company raised the low end of its expectations for adjusted earnings per share to a range of $5.82 to $5.92, compared to the previous range of $5.77 to $5.92, but that seems to be mostly because of an expected decrease in its tax rate. Guidance for adjusted operating income was revised down from a range of somewhere between flat and up 2% to an expectation of just being flat.
The culprit for the disappointing forecast comes from a slowing of drug-price increases for branded drugs, which will likely come in at the low end of AmerisourceBergen's expectations of an increase of 7% to 9%. At the same time, generic drug prices continue to fall, with expectations that they'll be down 7% to 9% this fiscal year.
Now what
Being a middleman is a tough business in an industry where politicians are constantly complaining about high prices. Drugmakers are starting to take notice, reducing their typical annual -- and sometimes more -- increases in prices.
Of course, the solution for pressures on revenue, which seems largely out of AmerisourceBergen's control, is to keep operating costs in check. Investors should watch the company's operating-income guidance for fiscal 2018 for signs that it's able to increase its operating margin to adjust to its new reality.
