AmerisourceBergen (ABC 80.38, -8.18, -9.2%) is poised to
extend its losing streak to three days following its disappointing fiscal year
2019 guidance and modestly worse-than-expected fourth quarter earnings.
Before jumping into the results and guidance, it may be prudent to hash out the FDA’s investigation into ABC’s subsidiary PharMEDium. The company’s corrective progress at its PharMEDium 503B outsourcing facilities, which were inspected by the FDA in the first and second quarters of fiscal 2018, has certainly taken longer than expected; despite the ongoing challenges, ABC believes the long-term outlook for PharMEDium's business and industry demand remains unchanged.
PharMEDium cannot determine when the FDA investigation will be resolved but does anticipate further communication with the FDA and Department of Justice regarding FDA concerns at the Memphis, Tennessee facility and PharMEDium's other facilities.
ABC falls in part due to disappointing guidance for FY19 earnings per share between $6.65-6.95 on equally soft revenue expectations for growth of mid-single digits, largely driven by growth within its broad portfolio of customers and multiple strategic partnerships. The company also sees free cash flow of $1.4-1.6 bln for the year.
Giving some color on the upcoming year, ABC management gave expectations for brand inflation to be in the mid-single digits in 2019. The company also anticipates a generic pricing environment similar to the one that it experienced at the tail end of fiscal 2018. Given the positive stability and improvement ABC has seen in generic deflation, the company will no longer break it out as a separate line item that it guides to and regularly updates.
Management also expects growth in its higher-margin commercialization services and animal health businesses, which will be positive for the overall margin profile. However, these gross profit benefits will be partly offset in fiscal 2019 by lower volumes at PharMEDium in the first half of the year, and potentially for the year overall.
The company also outlined expectations for EPS in Q1 to likely decrease slightly year/year as the company laps a strong first quarter for PharMEDium in fiscal 2018. EPS growth will improve in Q2, but overall, the company expects that its second half EPS growth will be much better than its first half EPS growth.
Fourth quarter results were mostly mixed as disappointing EPS of $1.45 and revenue growth of 10.7% to $43.3 bln split the difference. Sales growth was helped by a 10.8% increase in Pharmaceutical Distribution Services revenue and a 7.9% increase in revenue within Other.
Gross profit in the quarter was $1.2 bln, which was up 6.2% compared to last year due to an increase in gross profit in Pharmaceutical Distribution Services, which benefited from the acquisition of H. D. Smith and the consolidation of Profarma, both in January 2018, and was partially offset by lower contributions from PharMEDium.
Management also authorized a 5% increase to the quarterly dividend to $0.40 per share as well as a new $1.0 bln share repurchase program.
While the PharMEDium issues and outlook weigh on the stock, shares only hold a 1.6% loss since the start of August. This morning’s losses do push the YTD decline to about 12.3%, though drug distributor peers Cardinal Health (CAH 51.69, -0.40, -0.8%) and McKesson (MCK 127.93, +0.81, +0.6%) both boast worse losses on the year, -15.5% and -18%, respectively.
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