Wholesale drug distributor AmerisourceBergen (NYSE:ABC) reported increased second-quarter earnings today, despite intimations earlier this year that things could be tough for the company and the industry. However, the transition of one of its major contracts to a rival has not occurred as of yet.
Amerisource reported net income of $142.2 million, or $1.23 per share. Operating revenues increased 10% to $12.3 billion. The company reiterated its 2004 earnings outlook, which is for earnings of $4.10 to $4.20 per share. (That matches the lowered forecast the company gave after a major event shook up the company several months ago.)
Specifically, that major event would be the loss of its $3 billion contract with the Veterans Administration (VA). Though we learned of the shakeup back in January, the veterans' switch to rival McKesson (NYSE:MCK) won't occur until May. (You may remember Amerisource vowed to take legal action, but in March, a court refused its protest of the contract switch.)
This was a significant industry topic in January, when the big question was whether aggressive price cuts to woo contracts like this one were destined to undermine profits for all the industry players, including Cardinal Health (NYSE:CAH).
For now, though, Amerisource cited strength from strong demand from mail-order customers and hospitals. Going forward, the company sees strong growth from the increasingly aging population of Baby Boomers. That's nothing to laugh at -- modern technology has indeed increased our life expectancy, but also increased our reliance on medications to retain health and quality of life.
Amerisource said it expects annual earnings growth of 15%. In its conference call (transcript courtesy of CCBN StreetEvents), management cited aggressive cost reduction measures that are being refined after the loss of the VA contract. It also said that it plans to work hard to retain existing customers, through aggressive means if necessary, though it said it's being disciplined and hoping that competitors approach pricing in the same manner.
While pharmaceutical distribution is an industry with obvious opportunities for financial reward, the potential for a price war remains a risk. Amerisource shares were recently flat at $58. Nowadays, the stock's been trading at levels similar to those in February, before the company's VA protest was slapped down and there was still hope for a court-mandated retention or extension of the contract. Although the stock trades at 14 times forward earnings, the competitive landscape seems to be enough reason to remain cautious.
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Alyce Lomax does not own shares of any of the companies mentioned.
