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Amerisource Moves Ahead

The drug distributor posts solid numbers.


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delivered a healthy fourth quarter.

The company beat Wall Street expectations for both revenue and profit growth, as strength in its core drug distribution business offset disappointing results from its institutional pharmacy division. Specifically, the company posted fourth-quarter revenue of $13 billion -- up 7% from a year ago -- that beat the consensus estimate by $300 million. It did see operating profits fall 11% to $155 million as a result of one-time charges. Excluding special items, however, it reported fourth-quarter profits of 95 cents a share that beat Wall Street forecasts by 2 pennies.

The company also issued 2006 guidance of between $3.95 and $4.25 a share that offers the potential for significant upside to Wall Street's current $4.02 estimate. Its stock rose 1.8% to $77.57 on the upbeat report.

AmerisourceBergen saw clear reason to celebrate. The company -- which has spent the past year undergoing a major strategy change -- declared on Thursday that it has now gathered important momentum to carry it into a "promising" 2006.

"The transition to a fee-for-service model with our branded pharmaceutical manufacturers is largely complete," said CEO R. David Yost. And "we are enthusiastic about our future with increasing business opportunities, including our recent entry into the Canadian market, completion of our new distribution network, continued expansion of generic usage, continuation of our specialty business's strong growth and our ability to leverage over time the added pharmaceutical utilization of the Medicare Modernization Act."

In the meantime, AmerisourceBergen also took a big step toward silencing some of its critics during the latest quarter. Notably, the company promised in September to start buying all of the drugs it supplies in the U.S. only from the manufacturers. It has allegedly wound up with counterfeit drugs by dealing with other suppliers who trade on the so-called "gray market" in the past.

Still, AmerisourceBergen's new presence in the Canadian market -- where some Americans seek more affordable drugs -- could raise some eyebrows. Industry critics have already warned that drugs supposedly headed for foreign countries often wind up getting counterfeited and sold in the more lucrative U.S. market instead.

For its part, however, AmerisourceBergen has already pledged to buy drugs directly from manufacturers no matter where the medications are headed.

Meanwhile, the company continues to strengthen its big drug delivery business. There, fourth-quarter revenue jumped 7% to a record $12.8 billion. In contrast, revenue for the company's institutional pharmacy business grew at less than half that rate. That business, known as PharMerica, weathered a quarterly drop in profits as well.

"Management blamed the usual suspects, including competitive market pricing and government reimbursement, for the disappointing profitability at PharMerica," noted Raymond James analyst John Ransom, who has a market-perform rating on the company's stock. "The company stated that industry consolidation ... should buttress industry profitability, although (it) indicated 2006 would likely be a transition year as the institutional pharmacy converts many of its patients to Medicare Part D."


Kindred Healthcare


, which operates a big institutional pharmacy of its own, has been struggling as well. Earlier this week, the company reported a major earnings miss due in part to weak results in that particular business. Specifically, the company posted third-quarter operating profits of 35 cents that fell 12 cents short of the consensus estimate. It lowered its full-year guidance as well.

To be fair, Kindred did report improvements in its long-term hospital business. However, the company's institutional pharmacy and skilled nursing divisions dragged overall results down.

Going forward, some fear, Kindred could face more tough times.

"The company is entering into what should be a difficult environment ... without any business line to act as a clear source of potential upside," wrote Lehman Brothers analyst Kevin Fischbeck, who has an equal-weight rating on the company's stock. So "we continue to believe that 2006 consensus estimates will be under more pressure."

In the meantime, Fischbeck reiterated his own 2006 profit estimate -- which is 49 cents below consensus -- of $1.74 a share.

Industry giant



delivered a stronger update. The big institutional pharmacy on Wednesday posted record third-quarter sales of $1.46 billion that topped the $1.43 billion consensus estimate. It also posted operating profits of 64 cents a share that matched Wall Street expectations exactly.

Moreover, the company this week promised even better things to come.

"Overall, Omnicare's revenue and earnings growth outlook remains positive, given our strong underlying fundamentals and our proven growth strategy -- one that has allowed us to provide shareholder value in many types of industry conditions," said Omnicare CEO Joel Gemunder. "With this, and our demonstrated ability to maintain financial strength and flexibility, we see numerous opportunities to leverage our business both through internal and external growth in the year to come."