As generic drugs increasingly replace brand names in the coming years, pharmaceuticals wholesalers like Cardinal Health (NYSE:CAH) will see their operating profits rise “dramatically,” according to a report from Barclays Capital.
Barclays shared the report with Adam Fein, a pharmaceuticals industry consultant/blogger/“tough, cynical hard-ass,” who discussed the report on his excellent blog, Drug Channels.
The report draws two key conclusions, according to Fein: First, Dublin, Ohio-based Cardinal and its top two competitors — McKesson Corp. (NYSE:MCK) and AmerisourceBergen Corp. (NYSE:ABC) — in fiscal 2013 will experience their “first-ever” decline in top-line revenues.
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That sounds bad until you get to the second conclusion: The three companies stand to realize big benefits as patents expire on brand-name drugs and those drugs are replaced with generics, which are far more profitable for the three big wholesalers.
McKesson’s operating margins (operating profits as a percentage of revenues) are expected to benefit the most of the three, rising by 29 percent from 2010 to 2013. Cardinal’s operating margins are predicted to grow by 27 percent over the same time period, while Amerisource’s are pegged to increase by 13 percent, according to Fein.
Fein even goes a step further than the report, noting that return on invested capital (ROIC) is a better measure than operating profits for drug distributors, because “97 percent of a wholesaler’s revenues are pass-through dollars.” The gains in ROIC look even more favorable than operating margins for the three companies, Fein wrote.
