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  • 8/19/2019 Report Orignal

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    Strategy Analysis

    always about being the best. And sometimes bigger can help you be the best.? Ce went on to claim,

    ?9e/re excited about our position because, first, it gives us much larger scale than we ever had before,

    and we think this scale will translate into our ability to develop new programs and services for our 

    customers.? *n addition, he added, ?9e/re bringing together two companies that have a large array of 

    value!added services for the retail trade.?

    *ndeed, by $&&: revenues and profits had climbed substantially, and the company was well on its way

    to achieving the 4'3& million in cost savings as a result of the merger. ;uring that year, the company

    ac(uired Anderson )ackaging *nc., Bridge 8edical *nc., and .S. Bioservices #orp. *t faced a minor 

    setback when it lost the ;epartment of Deterans Affairs contract worth 4: billion in operating revenue.

    ndeterred, AmerisourceBergen forged ahead, anticipating nothing but success in the years to come.

    A new 8edicare drug benefit, expected to lead to an increase in drug use, promised to be (uite

    lucrative for the company in the future. AmerisourceBergen appeared to be well positioned for growth

    in the years to come as it operated in a 4$&& billion industry that was expected to grow at a steady clip

    over the next decade.

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    Strategy Analysis

    External Environment Analysis

    eneral Environment Analysis

    Demographics and Social Environment

    Aging population

    9orldwide, the average human life span has increased substantially over the last few decades.Cowever, more infections and diseases have come along with this longevity growth. This has led toincreased research on aging populations. The goals are to prevent infections and maintain health sothat these populations can enFoy better lives.

    #hanging lifestyles

    Cectic daily schedules have led to unhealthy eating habits, a lack of exercise, less sleep, and other problematic lifestyle choices. This has resulted in high obesity rates, poor digestion, hallucinations, breathing difficulties, and other physical problems. Cealth supplements have been introduced toremedy all of these issues, reduce the chance of getting sick, and meet daily nutritional needs throughvitamins and minerals.

    Economic Environment

    *ncreased income and chronic diseases

    The middle class has been growing in both the emerging and developed markets. )eople in thesemarkets have more disposable income and expect better healthcare solutions.

    #hronic disease cases have risen in number. This has made people become more dependent onmedications and health supplements.

    ther economic trends

    lobaliation and urbaniation have led to increased environmental disturbances. These are maFordriving forces in the growing demand for improved medication and health supplements for each agegroup and geographic location.

    Political and Legal Environment

    )harma regulations

    There is a web of regulations in the research!intensive, highly dynamic pharmaceutical sector. *n fact,the industry regulates the entire drug life cycle, including the patent application, competition withgenerics, marketing approval, and patent expiration. =egulations also control all prescribing

     physicians, wholesalers, retailers, and manufacturers in the pharma industry.=egulation obFectives

    )harma industry regulators seek to monitor various drug!related concernsG

    safety

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    Strategy Analysis

    (uality(uantitymarket flowresearch and development incentives

     pricing patentsAccording to the 2;A +S 2ood and ;rug Administration-, American consumers benefit from havingaccess to the safest, most advanced pharmaceutical system in the world. The main consumerwatchdog in this system is the 2;AHs #enter for ;rug Evaluation and =esearch +or #;E=-, whichassesses new drugs before they hit the market. The center ensures that brand!name and generic drugswork correctly and that their health benefits outweigh their known risks.

    *nternational regulatory bodies

    *nternational regulatory bodies for the pharma industry include the 9C +9orld Cealthrganiation-, the 2;A, and the 8C=A +8edicines and Cealthcare )roducts =egulatory Agency-. *t

    is important for companies in the pharmaceutical industry to follow the policies set by theseorganiations. =egulatory bodies monitor not only manufacturers, but also drug sellers and

     prescribing physicians.

    Iegislative =eform.S. healthcare reform is centered on the core issues of access, affordability and (uality healthcare.)roviding health insurance for the currently uninsured, improving the (uality of care delivered andlowering costs of existing activities will impact pharmaceutical companies, directly and indirectly.An increasing focus on drug safety, constraints on marketing and continuing healthcare regulationsgovern every aspect of the drug value chain, from bringing a product to market, to itseventual use in patient care. *n addition, .S. healthcare reform may fundamentally impact howa product reaches a patient, at what price and who pays for it. )rovisions in the reform re(uire

     pharmaceutical companies to offer discounts on branded prescription drugs for 8edicare )art ; participants, shrinking the margins on such drugs. *t will also significantly add to the number of  patients covered under insurance.overnments in developed and emerging markets J sensitive to price largely due to the absence of widespread healthcare insurance and out!of!pocket payments made by uninsured consumers J areenacting healthcare regulations and reforms to reduce spiraling healthcare costs. )harmaceuticalcompanies need to understand the tradeoffs they must make to factor in necessary price cuts withways to improve profitability

    Technical Environment

    Strong emphasis on =K;

    ne of the distinctive characteristics of the LBig )harmaM companies is a very high level ofinvestments in research and development. n average, it takes about '&!'3 years, and millions ofdollars to develop a new medicine. According to industry statistics, only about one in ten thousandchemical compounds discovered by pharmaceutical industry researchers proves to be both medicallyeffective and safe enough to become an approved medicine, and about half of all new medicines failin the late stages of clinical trials.

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    Strategy Analysis

    *ndustry Environment Analysis

     

    Cere are four significant industry trends that will substantially impact the drug wholesaling industryin the coming years.G

     

    rowing )rescription ;emand and #ustomer #onsolidationJ9holesalers will benefit from theexpected overall growth in demand for prescription pharmaceuticals and the corresponding increase indrug spending. +See #8S 2orecastG Big ;rug Spending rowth, But Cospitals and ;octors 9ill Still#apture 8ost Cealthcare Spending.- .S. healthcare reform will increase spending on drugs due tosuch factors as the healthcare coverage expansion, the shrinking 8edicare )art ; coverage gap, andnew re(uirements for prescription drug coverage.

     

    Iarge pharmacy customers have restructured their wholesale relationships, shifting from self!warehousing to direct!store deliveries from a wholesaler. +See 8cNesson, =ite Aid, and the #hanging

    eneric #hannel.- Cowever, the pharmacy industryHs ongoing consolidation will continue to pressurewholesaler profit margins from drug distribution. +See $&':Hs Top )harmacies by =x =evenuesG TheBig et Bigger.- Iarger chains, which provide much lower profit margins for wholesalers, keepgrowing faster than other market segments. +See $&': )harmacy 8arket AnalysisG #hains p, 8ail;own.-

     

    The #hanging eneric 8arketplaceJeneric drugs now dominate .S. prescription activity.9holesalers benefit from this trend, since a maFority of their gross profits comes from generic drugs.9holesalers are also gaining from the unexpected generic inflation windfall. +See =etail eneric;rug *nflation =eaches

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    Strategy Analysis

     

    *n $&'&, #ardinal Cealth entered #hina, which now accounts for 4$.1 billion of its revenues. +See#ardinal ets to #hina 2irst.-

     

    As part of its $&'$ supply arrangement with 9algreens +page ''6-, AmerisourceBergen gained theopportunity to expand its specialty and manufacturer services businesses internationally in partnershipwith Alliance Boots. The new 9algreens!Alliance Boots organiation will hold a significantownership stake in AmerisourceBergen, suggesting future cross!border linkages. +See 9algreens andAlliance Boots Explain Their AmerisourceBergen =elationship.-

     

    *n $&'7, 8cNesson ac(uired #elesio, a global retail and wholesale company operating in ':European countries and Brail. +See 8cNesson 2inally Snags #elesioG Analying the ;eal.-

    #ompetitive Environment Analysis

    9e face a highly competitive environment in the wholesale distribution of pharmaceuticals andrelated healthcare solutions. 9e compete with both national and regional distributors. ur nationalcompetitors include #ardinal Cealth, *nc. and 8cNesson #orporation. *n addition, we compete withlocal distributors, direct!selling manufacturers, warehousing chain drugstores and other specialtydistributors. #ompetitive factors include price, value!added service programs, product offerings,service and delivery, credit terms, and customer support.

    )har8ericaHs competitors principally include national institutional pharmacies such as mnicare, 

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    Strategy Analysis

     branded drugs within the same therapeutic category.6 Even though generics benefit from insurersH and)B8sH efforts to incre generic substitution, generics have little incentive to offer price discountsdirectly to insurers and )B8s because these entiti not influence which generic version is substitutedfor the brand by the pharmacist. 2or similar reasons, generics do not h incentive to promote to

     physiciansJ physicians have no influence

    Porter’s 5 forces analysis

    '- Threats of entry posed by new or potential competitors P I9Cigh barriers to entry the company needs to put a lot of capital into research and development,lengthy approval process, marketing before it is able to receive any returns.The Lbig pharmaM companies that were able to build global operations are benefiting from economiesof scale in terms of manufacturing. They are able to access low!cost supplies, as a result.#hallenging regulatory conditions +hurdles to get 2;A drug approvals for new products- industry ishighly regulated which to some extend protects from new competition. The 2;A approvals appear tohave slowed during $&&5. This could be one measure indicating that the 2;A is taking a morecautious position on new drug approvals. *n addition, legislative changes in the upcoming years mayhave a negative impact for the industry.)harmaceutical companies benefit from continuation of .S. employer!based health coverage.#ustomers buy medication that was prescribed by the doctors.)atent expirations may lead to an entry of new competitors +generic competitions-, resulting indecreased revenues. Cigh rates of patent expirations are approaching in $&'& through $&'$.The ability of a pharmaceutical company to offset loss of revenue from patent expirations depends ongrowth in existing products as well as successful execution from the new product pipeline.  $- ;egree of rivalry among existing firms P C*C

    8ature, consolidating, highly competitive industry +many large pharmaceutical ac(uisitions closed in$&&5 including AstraQenecaHs 4'3.1Bn purchase of 8edlmmune *nc. and Schering!)loughHs 4'3Bnac(uisition of rganon BioSciences-.Strong credit profilesG companies operate off of high margins +high 5&0-, healthy balance sheets, andgood li(uidity*ndustry benefits from strong demand from consumers.9eak, small companies usually go out of business +bankruptcy- if they have no potentialLblockbusterM in future pipeline. thers that have some significant research or valuable assets will be

     bought by big and strong pharmaceutical companies.

    :- Bargaining power of suppliers P I9

    Suppliers generally have little room for negotiation. Iarge pharmaceutical companies generally enFoysignificant buying power. They can dictate the price they want to buy or take their business elsewhere.  7- Bargaining power of buyers P I9

    enerally consumers have very little bargaining power. 8ost of the medication is prescribed by thedoctors. #onsumers will have to buy the drug at any given price if they need it. 8ore educatedconsumers may buy a generic alternative +which have the same impact but less expensive- if availableon the market.)ricing pressure P The .S. remains one of the few developed markets where drug manufacturershave significant pricing flexibility, and this is in Feopardy due to increasing pressures from consumersand legislators to control health care costs. overnments in other markets are generally the primarycustomers, and therefore, enFoy substantial pricing leverage.

    Shareholders continue to pressure the companies for increases in the share repurchase programs. Thecompanies looking for ways to increase shareholders returns partly because the industry is

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    Strategy Analysis

    approaching maturity and is not growing as rapidly, and because many companies have a lot of cashon their balance sheet.

    3- #loseness of substitute products P 8E;*8

    Threat from generic competition.#ustomers can find substitute medicine if the original product has an expired patent. Cowever, if it isa new product the consumer generally will have no choice for an alternative.ver the few years generic drug manufacturers face excellent opportunities for utiliation and volumetrends. eneric companies are increasing focused on establishing global operations in order to achievea lower!cost of supplies, thus posing even more threat to non!generic drug manufacturers.

    Based on )orterHs model I9 to 8E;*8 forces are present among the strong players in the pharmaceutical industry. Thus, the industry is attractive to investors largely due to the high!barriers toentry, purchasing and pricing power, and strong credit profiles of existing firms.

    *nternal Environment Analysis

    Market Growth Strategy

    At AmerisourceBergen ;rug #orporation, it/s our business to help you use your pharmacy as a

    strategic asset. ur market growth strategies and medication management programs strengthen tieswith physicians, patients ! even regional employers ! to differentiate your services and expand yourmarket presence.

    8ove your pharmacy from a cost center to revenue!generating enterprise throughG

    Employee and utpatient )harmacy ServicesG 9eHll work with you to help build a new or optimie anexisting outpatient pharmacy to offer services to employees, clinic, emergency room, volunteer anddischarged patients.#linical Ambulatory #are ServicesG By exploring and implementing 8edication Therapy8anagement +8T8- andOor #hronic ;isease 8anagement +#;8- clinics, you can improve the total(uality and cost of patient care provided by your healthcare enterprise.

    Finance

    This AmerisourceBergen stock analysis is based on latest R' earnings for $&'1. The stock priceanalysis takes into account a company/s valuation metricsAmerisourceBergen a Stock to Buy=evenue has grown at a compounded annual rate of '6.60 over the last : years.AmerisourceBergen #orporation +holding #o- has an perating cash flow which is $.: times the

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    Strategy Analysis

    Amerisourcebergen #orporation +holding #o- reported a low

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    Strategy Analysis

    *n $&&&, AmerisourceBergen purchased )harmacy Cealthcare Solution which was a pharmacyconsulting company and was preferred provider in '666. Through this step AmerisourceBergen

     became the largest supplier to hospitals and aid systems in the nited States.To this day, AmerisourceBergen has introduced several value!added programs since late '66&s,including 8ed Assess and the ;iabetes Shoppe. ther programs included American Cealth)ackaging, 2amily )harmacy, E#C, and Cealth Services )lus, the companyHs proprietary codesystem.

    9eaknessesn the other hand, in '661, many of its previous customers were less than satisfied with the productand services of the company. *n a case, which was later dismissed in ;istrict #ourt, many retail

     pharmacies asserted that AmerisourceBergen had worked against to deprive them of discounts offered by hospitals, accumulation order pharmacies and C8s. This affected the reputation of the company badly and is therefore, one of the weaknesses.ne of the weaknesses of AmerisourceBergen related to the management is the fact that the #E andthe # of the firm also are members of Board of ;irectors.

    pportunitiesThe pharmacy industry has continued to expand, fuelled by an aging population +the baby boomers-and there is a rising need for upbeat care. The trend in pharmaceutical distribution was toward fewcompetitors that handled greater market share.=ising demand, usage of drugs, medicines and increasing prices can drive long!term revenue for thecompany even in excess of inflation.AmerisourceBergen has cut down its administrative expenses over the years to a great extent byfinance in profession and developing more economical operating methods, which could support thecompany in the long run.

    Threats

    The current economic recession has affected everything even prescription drug sales. unlikecompetitors like 8cNesson, AmerisourceBergen has divested itself of everything right of its coredrug!distribution business so a minor change in anything related to the pharmacy industry results inreduction of revenues of the company. *f prescription writing doesnHt picks up AmerisourceBergenHs

     business might find it hard to survive in the market. Therefore, this is a serious threat for the company.#ompetition in the industry is very strong and some of the maFor players and competitors areconstantly looking better strategic solutions in the organiation channels or ac(uisitions in order toincrease market share. The competitors of AmerisourceBergen include #ardinal Cealth *nc,8cNesson #orporation and mnicare *nc and all pose serious threat to the market share of company..AmerisourceBergen has significantly lower market estimation than #ardinal Cealth and 8cNesson#orporation but also a much lower number of employees.

    !ecommen"ation

     Ad covers the pageStop seeing this ad

    nder the current global climate, the middleman industries emerging under pharmaceutical sector

    have a maFor bearing on the ;) of any economy. ;rug retail distributors often purchase their drugsfrom these manufactures or maFor of these manufactures target brick and mortar chains to sell their

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    Strategy Analysis

     produce under generic licenses. 9ith the advent of ecommerce, maFority of these pharmaceuticalwholesalers sell their drugs via online retail platform and directly to targeted physicians as well. Thisspace is dominated by : maFor players, with the largest being San 2rancisco!based 8cNesson +8#N-, which has recorded the largest revenue almost to the tune of 4'$1.' billion. The second beingAmerisourceBergen +AB#- with a recorded revenue of 4'$'.5 billion and finally #ardinal Cealth+#AC- with a revenue of 456.6 billion. AmerisourceBergen +AB#-, 8cNesson +8#N- and #ardinalCealth +#AC- count for %10 of the market share. These players operate under the market with thin

     profit margins.

    Iooking forward the pharmaceutical sector poises a number of challenges as well as potential growth benefits for any company operating in this domain. The expansion on an international scale coupledwith growth in high priced specialty drugs, medical product portfolio diversification and governmentinitiatives like bamacare for health insurance coverage.

    The important feature for this industry lies in the fact that maFority of the competition is going to bewaged on price billed to the end!user. Thus the strategy for any organiation needs to be set on this

     premise. 2or this purpose, a partnership agreement needs to be signed between drug wholesaler anddrugstore pharmacies. By virtue of this agreement the spread between the $ entities can be based onwholesaler price charged by the drug manufacturer and the retail price, with due consideration of theinsurer. nder this arrangement, the price pressure can be mutually shared and greater profits can begenerated or profit crunch can be handled efficiently.9ith reference to the data published by 2B= capital markets, the recent partnership of 8cNesson with=ite Aid corporation has started to bear fruit. As per the latest (uarterly results of the venture, theinventory for =ite Aid has reduced by 4 $37.5 million, which translates into improved working capitaland greater profit margin for the venture.The current ventures between the top threeG AmerisourceBergen!9algreen, #ardinal Cealth!#DS and8cNesson!=ite Aid are sure to prove profitable for the sector and the companies as well.

    9ith lowest price being the uni(ue proposition for any end!user, the demand has shifted to genericmedicine to a greater degree than branded drugs. The Foint venture agreement betweenAmerisourceBergen and 9algreen should focus on supply of generic drugs to channel customerdemand.

    Branded drug makers are the maFor source of revenue for wholesalers, and they have long beenutilied by drugs makers rather than selling their produce directly to big drugstore chains. These

     branded drug makers provide the big three with lots of revenue, with the margin of profits isextremely thin. *n comparison generics though priced at a much lower scale provide a greater profitmargin. Thus this opportunity should be realied.

    The current news regarding patent issues being faced by key top branded drugs pharmaceutical

    companies, is both a potential opportunity as well as dampens the revenues for the wholesalers.

     ne of the fastest growing segment in the pharmaceutical industry is the demand for specialty drugs.*f we consider the maFor pathological drugs AB# is currently offering, the portfolio of drugs includedis oral oncology, ophthalmology and plasma, which accounted for revenue growth by nearly '&.%30to nearly $&.' billion last year.

    These high!priced drugs re(uire special handling and delivery mechanisms, so they aren/t normallydistributed through the standard drugstore channels. And the runaway cost associated with these drugsis also a maFor challenge to handle. As per 8orningstar specialty drugs segment is increasing from

    one!fourth of overall drug spending in $&'$ to one half in $&$&, approaching 4$3& billion. Thissegment is a maFor opportunity for any big company to capture.

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    Strategy Analysis

    The company/s oral oncology, opthalmology and plasma revenue grew ''0 to nearly 4$& billion lastyear.

    #ardinal Cealth/s specialty segment has grown from 4' billion to 43 billion the past four years.

    *ndustrywide, 8orningstar sees specialty drugs increasing from one!fourth of overall drug spendingin $&'$ to one half in $&$&, approaching 4$3& billion.

    The growth is an opportunity and a challenge for drug wholesalers, 2ein says.

    Because these high!priced drugs often re(uire special handling and delivery mechanisms, and can begeared to smaller patient pools, they aren/t normally distributed through the standard drugstorechannels.

    Specialty pharmacies sometimes source directly from the manufacturer, bypassing the distributors.

    Also, the runaway cost of the drugs means that insurer efforts to rein them in will challengedistributor margins.

    *n n The Act

    ;rug distributors are enFoying some uplift from the Affordable #are Act, which has added '& millionto the ranks of the insured, with most of those added through 8edicaid. 9ith the second year ofbama#are exchange enrollment underway, Amerisource #hief 2inancial fficer Tim uttman said

    he expects a further &.30 boost to revenue for $&'3.

    But what the government giveth, it can also taketh away, and the health overhaul represents ?one ofthe dark clouds? on the horion for the industry, 2ein said.

    That/s because the law dictated a new formula for the #enters for 8edicare and 8edicaid Services tocalculate the maximum amount a pharmacy could be reimbursed.

    9hen this is implemented, a cut in pharmacy reimbursements could pinch the margins of their new best buddy, the distributors.

    Aggressive )artnering

    AmerisourceBergen has been the pace!setter in the industry. *t kicked off the drugstore!chain partnering trend, striking a deal with 9algreen in 8arch $&':.

    Iast week it pushed into animal health territory, saying it would buy 89* Deterinary Supply+89*D- for 4$.3 billion.

    The game changer was its deal with 9algreen. That relationship, including brand and generic drugdistribution, fueled a $6.'0 Fump in AmerisourceBergen/s revenue from the prior year to 4:'.1 billionin the September (uarter and a :&.'0 rise in operating earnings to 47$:.% million, or '.:70 ofrevenue.

    The deal with 9algreen also provided scale in Europe for the drug wholesaler via 9algreen/scombination with Alliance Boots, the biggest .N.!based pharmacy.

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    Strategy Analysis

    9algreen has since tapped its option to ac(uire an e(uity stake in AmerisourceBergen.

    As of last August, 9algreen had bought ''.3 million shares of AmerisourceBergen on the openmarket, giving it a stake of less than 30, though it has an option to ac(uire $:0.

    8cNesson followed suit, strengthening its generic!buying clout when it ac(uired a controlling stakein erman drug distributor #elesio in anuary $&'7 for 43.7 billion.

    9hile analysts have awaited a similar move into Europe by #ardinal Cealth, the company has insteaddirected its international push into #hina.

    That piece of the business has grown from 4' billion a year to 4$.1 billion since $&''.

    Sales in #hina are growing more than :&0 a year, and account for over '&0 of #ardinal Cealth/s totalrevenue.

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    Strategy Analysis

     !eferences

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