AmerisourceBergen Earnings: Strong Specialty Business Boosts Sales and Affirms Switching Costs

Narrow-moat AmerisourceBergen’s ABC third-quarter results landed slightly ahead of our expectations. Strong volume growth supported a top-line increase of 11.5% year over year and pushed management to slightly raise full-year guidance to at least 8% revenue growth from a prior range of 6%-8%. We are raising our fair value estimate to $162 from $149 after baking in impacts from an improved near-term outlook and time value of money.

U.S. healthcare revenue increased 12.2% year over year, driven by robust sales of GLP-1 products (diabetes or weight loss drugs) as well as growth in the specialty products business. Gross margin tightened from two major factors: Amerisource, along with other distributors, continues to feel the loss of higher-margin COVID-19 sales, and GLP-1s’ boosted top line thanks to their high price tag, although they have also lower gross margin.

International healthcare sales were up 5.6% on healthy growth across the business. Solid performance by global logistics and the inclusion of the January 2023 acquisition of Pharmalex (a specialty services provider) offset the continued weight of the divestiture of a Brazilian specialty services provider from last year.

Amerisource continues to widen its footprint in oncology by introducing an oncology support program in Europe that aids community pharmacists and provides support to patients. Not only do we see this as top-line and margin accretive, given the high-margin nature of specialty business and customers, but we also see this as another supplement to the company’s broad switching costs.

Management announced that the change of company name to Cencora (ticker: COR) will occur at the end of August. The new name represents the company’s efforts to expand its international business, given its dominant positioning as one of three market leaders in the U.S. We expect this transition of name and ticker to have no impact on the fundamental growth drivers of the business.