AmerisourceBergen is confident that drug prices will rise 5% ahead of the Jan. 1, 2006 start of the Medicare drug benefit, CFO Michael DiCandilo said.

"We remain optimistic about the 5% for the year. Certainly, the manufacturers are in a position where we think they're going to need to raise prices certainly in advance of any contribution from the Medicare act that's kicking in," DiCandilo said during an analysts call Dec. 22.

AmerisourceBergen's fiscal year 2005 earnings forecast is based in part on price appreciation of approximately 5% for the remainder of the fiscal year.

Lower than anticipated price increases following the November elections led ABC to reduce its fiscal year 2005 earnings per share forecast from $4.20-$4.30 to $4.00-$4.10.

"We certainly, following the elections, saw an uptick in price increases that followed several months of very modest price appreciation," DiCandilo said.

"We expected November momentum would continue and accelerate in December, and I don't think we've seen that at this point, which is the reason we're coming up with the shortfall."

December price increases were "closer to the 4% than the 5% level, which obviously is less than our expectation," DiCandilo said.

ABC is forecasting EPS of $0.60-$0.65 for the quarter ending Dec. 31.

The wholesaler's outlook for the October-December quarter also reflects fewer than anticipated product deals from manufacturers and fewer products purchased through alternate sources.

"To ensure the security of the supply channel, we previously established stringent criteria for alternate source purchasing," CEO David Yost said.

"We anticipated a significant reduction in the impact of deals and alternate source purchasing during the year, but it occurred earlier than we had anticipated."

The flu vaccine shortage also is affecting ABC's quarterly performance, DiCandilo added.

"This is usually a pretty good quarter for us with flu vaccine. While not a big contributor to the top line, it contributes a few pennies on the bottom line, and without the availability of product, we didn't experience that this quarter."

The rate and level of price increases also fell below wholesaler expectations in the July-to-September quarter (¹ Also see "Rx Price Restraint Hits McKesson; Wholesaler Sees Delay, Not Policy Change" - Pink Sheet, 13 September, 2004., p. 26).

In October, McKesson lowered its fiscal year earnings guidance based upon the assumption that price increases that did not occur in the July-September quarter would not be made up in the following quarter.

Cardinal is predicting that pharmaceutical prices will rise an average of 6% over 2005.

ABC noted a shift in the number and size of manufacturers' price increases.

"One of the things that we have seen a little bit as a trend is manufacturers instituting multiple price increases, sometimes a lower rate of price increases several times during the year rather than what they've done in the past, which is more of a one or two larger price increases throughout the year," DiCandilo explained.

The transition of manufacturer contracts to a fee-for-service model will provide more stability for ABC going forward, Yost suggested.

"This lack of predictability in our buy-side profits is exactly why our move to fee-for-service is so important," he said.

"We have not established any firm completion date, but would expect to have a majority of the fee-for-service process completed by about this time next year, and increasing contributions in each of our upcoming quarters," Yost said.

McKesson and Cardinal have set a March 31 deadline for signing manufacturers to fee-for-service agreements (² Also see "Cardinal “Fee-For-Service” Model Includes Rx Product Integrity Payments" - Pink Sheet, 27 October, 2003., p. 25).

Rx Prices Will Rise 5% Prior To Start Of Medicare Drug Benefit, ABC Says

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