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Wednesday, December 29, 2010

Predictions for 2011: Generic Drug Wave part II

Another way to play the generic drug wave is through the drug distributors - Cardinal, McKesson and Amerisource Bergen.  In this space, I like Amerisource Bergen (ticker: ABC).

Customer Base:
ABC has a very diversified customer base that includes mostly independent pharmacies.  On the other hand , Cardinal has two large customers in Walgreen's and CVS Caremark.  In similar fashion, McKesson also has many large customers, of which a couple are known to be at risk (Katz Group, IPC).    ABC's smaller customers rely heavily on ABC's distribution channels and do not have the size to take this function of the supply chain in-house.

Specialty Niche
Per ABC's recent investor day presentation, ABC has over 50% on oncology offices in the United States in their network.  They are also the leading distributer in dialysis, blood plasma and opthalmology products as well.  The demand for specialty drugs, especially oncology, has significantly increased over the past several years. This trend will stay intact as our country's largest generation reaches retirement age and demands such treatment.  ABC offers a full range of solutions to these specialty physicians, such as Nucleus Solutions, which offers tools to monitor your clinical and financial performance, along with manage claims and inventory.  In addition, ABC offers consultation with many of the manufacturers in these areas to provide insight as seen from the end users of their products.  ABC also combines like-specialities and organizes GPO's to obtain group purchasing discounts that their clients could not obtain individually due to their size.  In fact, ABC has organized the US's largest oncology GPO.

The other major distributors have been late to to the game in this area.  McKesson recently acquired US Oncology and Cardinal Health acquired Health Solutions Holding, LLC, both of which offer an opportunity to tap into the growing oncology and specialty drug distribution channel.  However, ABC has long been the undisputed leader in the specialty area and grabbing market share will be an uphill battle.

Due to ABC's dominance in the specialty space, the growth in specialty generics will benefit ABC much more than Cardinal and McKesson.

Generic Wave
As I spoke in a previous post, ABC and the other distributors will benefit from the generic drug boom as big pharma go through the patent cliff.  At the investor day, ABC discussed their focus on growing their generic growth greater than the market through efforts such as PRxO Generics and TruVu, both parts of their Prime Vendor Model.

In addition to generics, biosimilars serve as another great growth opportunity as that technology catches on.

Uninsured Demand
Fueling the growth in specialty and generic is the 30 million (est provided by Dave Yost, CEO) uninsured patients coming on-line provided by the healthcare reform bill.

I like both my Watson and ABC play for different reasons.  For Watson, the aspect of international growth in compelling, which would drastically increase their market cap, earnings power and ultimately their share price.  In addition, Watson is a great takeover candidate for other generic or big pharma companies due to its smaller size and gateway into the generic growth story.  As for ABC, its more of a conservative bet on the generic growth story without the risk that Watson has, where its developing and manufacturing a generic version in which other players can easily bring their versions to market.  With ABC, the generics offer higher gross margins (as compared to branded drugs) and their customer base is diverse and greatly depends on their supply chain and other services.

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