Drug Wholesaler Earnings Preview: 2009Q4

This week, the big 3 drug wholesalers—AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK)—will all report their financial results from the fourth calendar quarter of 2009. These financial reports and accompanying conference calls provide invaluable insights into the strategies and economics of companies within U.S. drug channels.

Below are my thoughts on general business issues that you should listen for in these reports. As a service to Drug Channels readers, I am also including links to the earnings conference call webcasts for each company. If you don’t have time to listen to the calls, free transcripts show up on Seeking Alpha within a few days.

Stay tuned in early February for my new report reviewing each company’s financial and business results for the quarter.

BUSINESS ISSUES FOR DRUG WHOLESALERS

As I note in Strategic Questions for 2K10, the drug wholesaling industry is in a period of relative stability. In this week’s earnings, I’ll be paying attention the following topics related to the drug distribution business of the public companies.

Revenues. Revenue growth should be very strong in the quarter, although there will be variance among the companies due to contract switches and differences in customer mix. Note that AmerisourceBergen previously announced its expectations for very strong revenue growth (10%+) in the quarter. As an independent data point, consider that the Census Bureau recently reported drug wholesaler revenues up 5.1% in October/November of 2009 versus the prior year.

Direct versus Bulk Warehouse Revenue Growth. Both Cardinal and McKesson generate significant revenues—but limited profits--from bulk deliveries to the warehouses of self-distributing retail chains. Shifting sales from bulk to direct distribution deepens the wholesaler-customer relationship, limits the possibility of disintermediation, and (ultimately) reduces the manufacturer’s leverage. Pay attention to relative growth rates and commentary on the earnings call.

Profits. Gross margin percent is a poor indicator of true profitability for drug wholesalers. I'll be looking at gross profit dollars and operating earnings (EBIT).

Generics. Generic drugs remain crucial for wholesaler profitability. Listen for comments regarding “generic compliance,” which refers the share of generic spend that a customer purchases through its primary wholesaler. Oral solid generics launches will start ramping up in 2010 and some specialty injectables are going generic shortly. Generic sourcing strategy has emerged as a point of differentiation, so it will be interesting to hear the spin on the alternate approaches.

Specialty. Specialty drug distribution to providers is especially important to McKesson and AmerisourceBergen, so expect incremental insights into the growth prospects for this important segment. Note that AmerisourceBergen typically reports revenue information about its specialty group while McKesson buries the information within its reported direct distribution segment.

Cash. The wholesalers are carrying lots of cash on their balance sheets. The Wall Street analysts will surely be asking questions during the earnings conference calls to figure out how the companies plan to deploy all of the moola.

Health Care Reform. I always find it valuable to hear the top executives’ insights on the overall environment, especially given the now-uncertain fate of health reform legislation.

FUN FACT

A recent report by the inestimable Larry Marsh of Barclays Capital noted that drug wholesalers stocks did very well in 2009. An index of the big 3 wholesalers’ stocks increased 46.8% in 2009. In contrast, a stock index of 9 branded pharmaceutical manufacturers increased by only 13.4%.

As you know, I don’t make investment recommendation or comment on future stock prices, so you can draw your own conclusions about 2009’s performance and 2010’s prospects.

LINKS TO THE EARNINGS CALLS

Thanks in part to the U.S. Securities and Exchange Commission's (SEC's) Regulation Fair Disclosure, we all get to listen to the earnings calls. The hippies finally got something right. Just kidding. But not really.

AmerisourceBergen (NYSE:ABC)
Tuesday, January 26, 2010
Earnings Conference Call at 11:00 a.m. ET

Cardinal Health (NYSE:CAH)
Thursday, January 28, 2010
Earnings Conference Call at 8:30 a.m. ET

McKesson (NYSE:MCK)
Tuesday, January 26, 2010
Earnings Conference Call at 5:00 p.m. ET

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