Ebos' Scale Has It Leading the Pack, but Shares Screen as Expensive

Australia’s Pharmaceutical Benefits Scheme, or PBS, drug wholesalers face regulation that caps gross margins for distributed drugs at 7% for community pharmacy and 10% for hospitals, as well as ongoing price reform which lowers the prices for these drugs. However, Ebos is best placed within the industry. Its superior scale and efficiency of operations translate into better operating margins than peers and an ability to earn economic profits at a time when competitors are falling short. We do not anticipate the Australian government to make any major changes to the PBS. We forecast industry PBS-related wholesale and distribution revenue to increase at approximately 1.5% per year, in line with population growth estimates, and the major participants to at least broadly maintain their existing market shares.