AmerisourceBergen Seeks More Profitable Accounts
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Source: DJ
Date: 07/21/05
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By Dinah Wisenberg Brin
Of DOW JONES NEWSWIRES
PHILADELPHIA (Dow Jones)--AmerisourceBergen Corp. (ABC), going through what executives call a difficult transition year as it shifts to a new compensation model, is "moving aggressively to discontinue doing business with accounts that do not meet our profitability standards," the drug wholesaler's chief executive, R. David Yost, said Thursday.
The Valley Forge, Pa., company also continues to look for acquisition opportunities although recent candidates were too pricey, Yost said on a conference call after AmerisourceBergen posted a 25% decline in fiscal third- quarter profit.
The company raised the midpoint of its fiscal 2005 per-share earnings estimate range, reflecting what it considers strong third-quarter results, and raised its operating revenue outlook to 1% to 2% growth for the year.
Yost said he expects the new Medicare prescription-drug benefit, which goes into effect in January, to help AmerisourceBergen.
"It is still too early to tell what the impact will be, but at this point we remain very optimistic," Yost said. "Anything that increases the number of prescriptions dispensed should be good for our business."
AmerisourceBergen President Kurt J. Hilzinger said the company continued to work on efforts during the third quarter to improve margins, including improving or eliminating less profitable customer accounts and maintaining price discipline. Executives wouldn't identify which customers don't meet its profitability requirements.
Yost, speaking generally of customers, voiced enthusiasm for the nonwarehousing sector of the retail business - namely independent drugstores and regional chains.
As for acquisitions, AmerisourceBergen has set $100 million to $200 million deals as its "sweet spot, but would consider something larger if it made good sense," Yost said.
AmerisourceBergen continues to look for well-run companies in the pharmaceutical supply channel with attractive growth prospects and synergies, good margins and good return on capital, he said.
AmerisourceBergen pays a modest dividend and will review its dividend policy in fiscal 2006, as it does every year, he said.
The company continues on the path to return operating margins in the core pharmaceutical distribution business to the 100 to 110 basis-point range this fiscal year.
Fiscal 2006, which starts Oct. 1, is shaping up to be a solid year, Yost said.
"The fundamentals of this industry and our role in it continue to be excellent. Our future is bright," Yost said.
AmerisourceBergen, one of three major pharmaceutical distributors, said it is making solid progress in converting to a fee-for-service compensation model with manufacturers and should largely complete the transition by the end of the calendar year, as it previously forecast.
Wholesalers are making the change from a more speculative, less predictable buy-and-hold model that depends on increases in the prices of drugs. Earnings in the distribution industry have taken a hit during the transition, as wholesalers have dealt with more limited inventories and manufacturer price increases haven't always come when or in the amounts expected.
The company posted fiscal third-quarter net income of $94.8 million, or 91 cents a share, down from $125.8 million, or $1.09 a share, a year earlier. Earnings from continuing operations declined to 96 cents a share from $1.10 a share year over year.
Excluding unusual items in both periods and the effect of a lower tax rate in the recent quarter, AmerisourceBergen earned 90 cents a share from continuing operations, compared with $1 a share a year earlier, a company spokeswoman said.
Analysts surveyed by Thomson First Call, on average, had estimated operating earnings of 86 cents a share.
Operating revenue, which excludes shipments to customer warehouses, rose 4% to $12.6 billion from nearly $12.1 billion. The company noted that operating revenue increased despite the loss of two customers that accounted for more than 8% of operating revenue a year earlier.
Operating revenue in the drug-distribution segment, including some intersegment sales, rose 4% to $12.4 billion in the third quarter, but the ongoing transition to the new fee-for-service compensation model reduced gross profit and operating margins from a year earlier. Customer mix was 58% institutional and 42% retail.
For fiscal 2005, the company expects earnings per share from continuing operations, before the cumulative effect of an accounting change, of $3.30 to $ 3.50, the upper end of its previous guidance range of $3.10 to $3.50, including special items.
AmerisourceBergen continues to forecast fiscal 2006 earnings of $3.60 a share to $4.40 a share
The bottom of the range reflects pharmaceutical market growth in the high single-digit percentage range and the full-year effect of fiscal 2005 capital deployment initiatives, the company said.
AmerisourceBergen said the top of the fiscal 2006 guidance range depends on its ability to improve its pharmaceutical distribution operating margin by 30 basis points. The company expects to update its guidance for fiscal year 2006 in early November, when it announces results for fiscal 2005.
The company also said it started to outsource a significant portion of its information technology activities to International Business Machines Corp. (IBM) this month. IBM will hire more than 30% of AmerisourceBergen's IT associates, Hilzinger said on the call.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@ dowjones.com
(END) Dow Jones Newswires
07-21-05 1423ET
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