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These Undervalued Drug Distributors Are Critical Cogs

Vishnu Lekraj

Vishnu Lekraj: Among other companies we cover at Morningstar, the drug distributors are some of the strongest with some of the widest economic moats. AmerisourceBergen, Cardinal Health, and McKesson all dominate the space they are in with 90% combined market share. They are able to dictate pricing to pharmaceutical manufacturers and are able to get the drugs that we take day-to-day as consumers most efficiently from the manufacturing facility to the retail pharmacy. Without these players that doesn't exist.

Over the last six months these companies have faced some pressure as a result of generic pricing fluctuations and some contract reformulations among the major retail pharmacy chains. This has pressured a few of the stocks, AmerisourceBergen and McKesson, in particular. We believe at Morningstar that these companies are undervalued deeply and are discounted by a significant amount from our fair value estimate.

These three dominate the space with 90% market share, and again, are some of the strongest companies we cover at Morningstar. They are able to build in a lot of the efficiency and a lot of the pricing discounts we need day-to-day within the pharmaceutical supply chain. Without these players, that falls apart. Thus they play a critical role within the healthcare supply chain that should last for decades to come and supports a wide economic moat rating for all three major pharmaceutical distribution companies.