AmerisourceBergen Corp. (NYSE: ABC). The company’s planned acquisition of the Alliance Health distribution business in Europe and North Africa adds another growth driver for revenue and earnings. Our revised price target is $140, raised from $120.
On January 6, it announced an agreement to acquire Alliance Healthcare, the European distribution arm of Walgreens Boots Alliance (WBA). While ABC already has overseas operations in its Global Commercialization Group, which includes the World Courier logistics business and AmerisourceBergen Consulting, this transaction significantly expands its pharmaceutical distribution and manufacturing support operations to overseas markets.
ABC will be acquiring Alliance’s distribution territories in the U.K., Western Europe (except Germany and Italy) and North Africa. The transaction does not include China. ABC will pay $6.5 billion for the Alliance assets. The transaction is expected to be accretive to EPS at a high-teens percentage rate in the first full year after the closing.
In addition to the transaction, ABC and WBA have agreed to extend their U.S. distribution agreement by three years to 2029. These moves extend the term of distribution revenue.
We have a positive view of the transaction as it expands ABC’s overseas reach and adds scale on an international level. This scale should also benefit ABC’s pharmaceutical distribution, consulting, commercialization support, and logistics businesses.
On November 5, the company reported fiscal 4Q20 adjusted EPS of $1.89, up 17.4%. Revenue growth improved sequentially from +0.3% in 3Q20.
The GAAP results included a number of items that were excluded from the adjusted results. The largest item was a $6.6 billion charge ($5.5 billion after tax) for expense accrual related to opioid litigation.
The company saw stronger revenue growth in both its Pharmaceutical Distribution and ‘Other’ segments. ‘Other’ includes Consulting Services, World Courier, and MWI Animal Health. Pharma Distribution revenue grew 7.8%, with earnings growing at a rate consistent with revenue (after backing out benefits from the PharMEDium exit and the reversal of a bad debt reserve). Distribution revenue was driven by strength in antivirals and antibody drugs.
Revenue in the ‘Other’ segment grew 10% and segment profit grew 20%. The World Courier logistics business posted exceptional results as it supported clinical trials of vaccines and therapies for COVID-19.
For all of fiscal 2020, adjusted EPS rose to $7.90 from $7.09 a year earlier. The GAAP net loss was $3.409 billion or $16.65 per share, compared to net income of $855.4 million or $4.04 per share in fiscal 2019. Revenue rose 5.7% to $189.9 billion.
EARNINGS & GROWTH ANALYSIS
As noted above, the company has raised its adjusted EPS guidance for fiscal 2021. It now expects adjusted EPS of $8.25-$8.50, up from $8.20-$8.45. However, we are factoring the Alliance transaction into our fiscal 2022 estimate since it is expected to close by the end of fiscal 2021. Reflecting management’s positive outlook and likely accretion from Alliance, we are raising our adjusted fiscal 2021 EPS estimate to $8.45 from $8.30 and establishing a fiscal 2022 estimate of $9.26.
FINANCIAL STRENGTH & DIVIDEND
It posted $1.837 billion in free cash flow in FY20, exceeding its guidance of $1.5 billion. Free cash flow generation enabled ABC to return value to shareholders. In FY20, the company returned more than $760 million to shareholders through share buybacks and dividends.
Above the average multiple of 9.7 for our coverage universe of pharma distribution stocks. We believe that the premium is warranted based on the company’s strong growth opportunities and superior business execution. Specifically, we note projected earnings accretion from the Alliance Health acquisition.