The stock prices of the big three drug distributors, Bergen Brunswick, McKesson and Cardinal Health have taken different courses over the last 5 years. Mckesson’s ill-fated purchase of HBO & Company put the company into a funk from which it has taken years to get out. Cardinal steered away from those problems by building a very diverse set of businesses, including specialty pharmacy services and niche information technology services. It has been a consistent profit generator and has generally had the stock result to match, although it had a big setback in late July when it announced that future growth would be 15% rather than 20%.
Bergen which merged with Amerisource to match the scale of the big two in 2001 saw seen its stock rise dramatically faster than Cardinal’s for the next year (2001-2) and also since May 2003 . Bergen’s revenue (of the two merged companies combined) at the time of the merger was around $35bn, and that’s shot up to $45 billion with profit growth to match. However, over the last year both stock prices have been mostly in negative territory and Bergen’s summer rally (up 40% between May and July) is well and truly over.
Friday’s news of an investigation into Bergen’s alleged double billing of rebates from pharma manufacturers may be old news (according to the company’s rebuttal). However, the stock fell about another 5% on Friday and Bergen now has a significantly lower PE ratio than its competitors (15 vs 18 for Cardinal and 17.5 for McKesson).
Don’t forget that drug distribution is a complex, very low margin business. Cardinal’s long term success in has been both due to its operational success and its push into several niche businesses in health information and specialty pharma services. It hasn’t made the big misstep that McKesson made with the HBO& Company deal. McKesson, meanwhile, has also been regrouping and making pushes into related markets, such as pharma market research. It’s worth watching to see if Bergen has hit a real snag or if it’s just a hurricane in a tea cup, which gives what the traders call "a good buying opportunity". It’s also worth seeing what these three sizable companies do regarding the on-or-off Medicare reform package, and whether any of them decide to get closer with the PBMs or the mail-order business.