Citi: 'Size Matters' For Independent Pharmacies, Still Bullish On AmerisourceBergen And McKesson

In a report published Monday, Citi analysts highlighted that larger pharmacies have fewer woes related to distributor joint ventures, following a survey of 53 small- to mid- size pharmacies.

The survey indicated that the larger the independent pharmacies, the smaller were their concerns related to distributor/retailer partnerships. The other two key takeaways were (1) retention levels were higher than they had been in the past three surveys conducted and (2) y/y Rx trends for 1Q suggested robust growth.

Citi analysts maintained a Buy rating on both drug distributors AmerisourceBergen Corp (NYSE: ABC) and McKesson Corp (NYSE: MCK).

The survey participants were asked about their expectations of the recent JVs between AmerisourceBergen / Walgreens Boots Alliance, Inc (NYSE: WBA) and Cardinal Health, Inc (NYSE: CAH) / CVS Health Corp (NYSE: CVS). "There was an inverse correlation between the size of a pharmacy practice and the expected negative impact from these new business combinations," the analysts wrote.

"Respondents managing 30+ pharmacies were less than half as likely to expect a negative impact from recent distributor/retail partnerships versus the less than 30 group. More limited concern from larger independents suggests their relationships with the Big Three remain solid, but distributors have an opportunity to strengthen ties with smaller pharmacies," the report added.

The survey indicated that merely 8% of the pharmacies had plans to switch drug distributors over the next 12-18 months, which the analysts highlighted was "modest." The trend for retention suggested by this survey is higher than that observed during the past three surveys - "increasing from 86% in January 2014 to 89% in December 2014 to 92% in today's survey," the analysts commented.

"Our respondents expect generic Rx volume to grow an average of 7.1% in 1Q 2015, slightly below 4Q 2014's 7.4%, but remains impressive when compared to IMS trends published in our recent March 6th note…Solid generic script growth and smaller declines in branded scripts is consistent with our most recent analysis of IMS data and a positive for distributors," the analysts added.