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AmerisourceBergen Corp. (ABC) –Hold Recommendation Equity Research As of January 24, 2020

Company Price Target AmerisourceBergen Corp. $95.75 (+6.48%) United States GICS Sector Chesterbrook, PA Healthcare

Executive Summary Investment Thesis We are recommending a hold of AmerisourceBergen (ABC) as of 1/24/20 with a price target of $95.38. AmerisourceBergen has solidified itself as one of the foremost Pharmaceutical Distributors in the United States. The firm continues to leverage its scale and the negotiating power derived from its highly concentrated industry to further capitalize on the distribution requirements of the massive US Healthcare system. AmerisourceBergen has positioned itself favorably in some of the most exciting segments of the drug ecosystem, such as the specialty and biosimilar markets. We believe their position of leadership in the industry and continued strategic execution will allow them to maintain stable top-line growth rates, and steady levels of free cashflow throughout the long-term, despite the mounting near-term headwinds facing the Pharmaceutical Distribution Industry as a whole. Based on our valuation, we believe the market has moderately overpriced the risks facing AmerisourceBergen by approximately 6.48%. However, we believe the current levels of inherent risk imbued in this industry skew this opportunity for return to a less favorable level. It is due to this that we are recommending a ‘Hold’ of AmerisourceBergen (ABC). Business Description Company Background AmerisourceBergen is a pharmaceutical sourcing and distribution services company. Founded in 1985, AmerisourceBergen has grown to operate 26 strategically placed distribution centers. Working with healthcare providers, retailers, as well as pharma and biotech manufacturers, the firm strives to enhance patient access to products. AmerisourceBergen’s services are designed to increase the efficiency of pharmaceutical supply chains for both human and animal healthcare products. The firm distributes a comprehensive offering of brand-name, specialty brand-name, and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, outsourced compounded sterile preparations, and related services to a wide variety of healthcare providers located in the United States and select global markets, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, physician practices, medical and dialysis clinics, veterinarians, and other customers. Business Model ABC’s success is chiefly determined by the firm's capacity to provide value added distribution and commercialization services to healthcare providers and manufacturers. The firm generally generates extremely low margins on the product that it delivers to the healthcare providers, and as such has its growth potential tied to volume, innovation and cost reduction. Due to ABC’s reliance on higher volume,

Jane Doe & John Doe Price on January 24, 2020 $88.92 Beta 0.96 52-week Range $94.75-$70.55

Return (%) 1m 6m 12m

Absolute 4.28% 3.48% 11.62%

Sector -0.57% 11.69% 15.23%

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management's capacity to predict which form of product will see elevated demand is crucial. A current example of this is ABC’s presence in the market for generics. Generics have recently seen stark increases in their broad demand, which necessitates greater shipment volume. ABC’s management was keen on this and the firm presently maintains a stronghold in the niche. Regarding innovation, ABC leverages its data analytics capabilities to provide supply chain logistics consulting services. This may include services working to manage inventory and provide outcome research. Within its “other” segment ABC has been successful in the development of divisions with higher profitability through MWI, its animal health segment. Segments AmerisourceBergen has two main operating segments: Pharmaceutical Distribution Services and Other. Pharmaceutical distribution services is by far the firm’s largest segment, accounting for 96.2% of the firm’s revenue. The segment has several functions, predominantly the distribution of aforementioned pharma products. The segment also provides data analytics, outcomes research, and additional services for biotech and pharma manufacturers and provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers. The segment includes the Good Neighbor Pharmacy Program and Elevator Provider Network. The Good Neighbor Pharmacy Program enables independent community pharmacies to compete more effectively through pharmaceutical benefit and merchandising programs. The Elevate Provider Network connects the retail pharmacy customers to payor plans throughout the country and is one of the largest in the United States. The “Other” segment comprises 3.8% of revenue, and focuses on global commercialization services and animal health. It also includes AmerisourceBergen Consulting Services ("ABCS"), World Courier, and MWI. World Courier is a leading global specialty transportation and logistics provider for the biopharmaceutical industry, while MWI operates as a leading animal health distribution company in the United States and in the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets. News The Wall Street Journal: Talks to Settle Opioid Lawsuits Intensify (10/17/19)

• Various drug companies look to cut a deal with state and local governments before a federal judge in hopes of settling more than 2,500 individual lawsuits across the country

• Some state attorney's value the settlement at as high as $50 billion, with AmerisourceBergen, Cardinal Health and McKesson offering to pay $18 billion in cash over 18 years

• Lawsuits seek to recoup the costs of mitigating damage done due to opioid addiction, claiming these companies are to blame

Barron’s: A Walgreens Leveraged Buyout? Don’t Hold Your Breath (11/6/2019)

• Walgreens reportedly met with a banker and private equity firms regarding a potential buyout • The deal would be the largest ever, requiring between $70 and $75 billion in financing • While debt is cheap, PE firms would likely have trouble borrowing over $50 billion in debt, as that

would be ~6x the size of Walgreens current EBITDA • A buyout would likely need to be a club deal as no PE firm has the equity capacity to execute a deal

of such a scale

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Barron’s: Opioid Stocks Fall on News of Criminal Investigation (11/27/19) • Federal prosecutors in Brooklyn are conducting a criminal investigation into the opioid crisis that

could bring up criminal charges against drug makers and distributors • The prosecutors would make use of the Controlled Substances Act, a federal statute used to

prosecute dealers of illicit drugs • The Eastern District of New York is still in the early stages of this process and it may not result in

official criminal charges Industry Overview & Competitive Positioning Industry Competition AmerisourceBergen operates within the Wholesale Pharmaceutical Distribution industry and therefore has a relatively small number of true competitors. Despite this, AmerisourceBergen, Cardinal Health (CAH), and McKesson (MCK) make up approximately 93.15% of all US pharmaceutical distribution revenues. Competition between these three massive companies remains incredibly high, as they vie for a limited number of distribution and commercialization contracts between both drug makers, and pharmaceutical retailers. The industry is highly concentrated oligopoly, as based on a 3 firm concentration ratio of 93.15%, four firm concentration ratio of 95.48%, as well as a Herfindahl-Hirschman Index of 2,979.18 (See Appendix IV). All three of these metrics fall well above the baseline standards for oligopolistic concentration. It is important to note that such high levels of industry concentration will limit the scope and scale of future acquisitions for all three of these companies, hindering inorganic growth potential in the long-term. Strategic partnerships such as that between Walgreens Boots Alliance and ABC have proven highly effective given the concentrated nature of the industry. As Walgreens makes up ~34% of ABC’s revenue, having a contracted purchasing agreement in exchange for partial ownership has allowed ABC to gain a large chunk of market share since the agreement’s inception in 2013. Economic Moat AmerisourceBergen, Cardinal Health, and McKesson attempt to differentiate themselves on the basis of value-added services, such as operational efficiency solutions, cost control solutions, commercialization success, strategic consulting services, and technology solutions. Despite this, the true economic moat of these companies lies within their scale, and the concentrated nature of the industry. While the power of traditional oligopolies is portrayed in their command over pricing power, the nature of the wholesale pharmaceutical distribution industry is far from traditional, as their distribution revenue is derived from a percentage fee from the Wholesale Acquisition Cost of the transported pharmaceuticals. The oligopolistic nature of the distribution marketplace is not manifested in raw pricing power. Instead, it can be found in ABC, MCK, and CAH’s ability to maintain and protect their margins; regardless of the drug pricing environment. Long-term contracts are the primary method in which these companies secure both customers and suppliers. The lack of outside competition allows them to renegotiate their contracts, should decreasing drug prices begin to erode their margins. Industry Outlook The outlook for the Pharmaceutical distribution industry for 2020 and beyond is increasingly uncertain. The economic model behind this industry is incredibly complex, with a myriad of factors influencing the prosperity of its many segments. One of the most significant of these is US drug pricing, and the current push towards cheaper drugs. Which, if sustained, would lead to continued erosion of the profitability of the industry. We foresee generic-drug deflation and branded-drug inflation settling at approximately the same levels as 2019, mid-high single digits, and mid-low single digits respectively. However, with the current political climate targeting drug prices, and recent legislative rhetoric on allowing the import of Canadian pharmaceuticals, these estimates contain substantial risk. The slowing of new branded drug commercialization has aided in the slowing of industry revenues recently. Additionally, continuing

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mergers amongst Pharmacy Benefit Managers is leading to consolidation in the supply chain of wholesaler’s customer base. Specifically, smaller pharmacies that have garnished attention from distributors in recent years may face bottom-line pressure should consolidation continue throughout the coming years. Despite this, positive revenue drivers are looking promising for 2020 and beyond. Constant advances in technology such as Blockchain boosting supply chain integrity and transparency, AI and robotics driving down operational costs and minimizing human error, and Internet of Things allowing distributors to provide real time updates to pharmacy and provider customers. The biosimilar drug market, while relatively small, has incredible growth potential for distributors, as well as the uptick in highly profitable specialty drugs has proven beneficial to the industry as a whole. ABC is the industry leader in specialty distribution and commercialization through its AmerisourceBergen Specialty Group (ABSG). This coupled with an aging population paints a promising picture for long-term growth in the industry, despite near term uncertainty. Porter’s Five Forces Analysis Rivalry Amongst Existing Competitors – High With the big three pharmaceutical distribution companies, ABC, MCK, and CAH, making up ~93.15% of the market, competition for long term contracts is incredibly high, with primary differentiation coming from value added services. Recent expansions into the high-cost specialty pharmaceutical industry via acquisitions from ABC, MCK, and CAH have highlighted the intense competition within this industry, as all parties jockey for leadership in the remaining niche markets. Threat of New Entrants – Low Given the nature of this industry, scale and scope of distribution networks is key in acquiring and maintaining customer relationships. Less mature companies will find difficulty in taking on the considerable financial and inventory risk involved in the intermediation of drug distribution. Additionally, smaller, less mature companies will find inherent difficulty in maintaining margins via long-term contracts from both buyers and sellers due to their diminished negotiating power. Bargaining Power of Suppliers – Low to Medium Pharmaceutical manufacturers rely on the Big 3 for ~93% of all Pharmaceutical distribution in the US, as well as their commercialization and consulting services. A crucial aspect of the industry is the distributors ability to take on wholesale inventory and credit risk. Distributors act seemingly like bankers in their ability to extend credit to manufacturers, infusing crucial revenues, and allowing for further investments in innovation for the healthcare system as a whole. Suppliers rely heavily on these value-added services, and utilize the distributors for their commercialization services as they bring new, unreleased drugs to market. Suppliers negotiate long-term commercialization and distribution contracts as a means to secure efficient services for their products. Given that +93% of the industry is concentrated between three distributors, supplier’s ability to favorably negotiate the terms of these contracts is severely limited. Bargaining Power of Buyers – Medium While the buying power of buyers is greater than that of suppliers, it can also be categorized as medium. Long-term contracts allow distributors to have consistent, stable cash inflows, while keeping buyers supplied with all the pharmaceutical and medical products necessary for their business. However, rising

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levels of Pharmacy Benefit Manager consolidation have boosted the negotiating power of industry buyers. It is important to note that ABC has the highest buyer concentration amongst the big three. Threat of Substitutes – Low Threat of substitutes is incredibly low for this industry. Due to the massive barriers to entry, it is inherently difficult to imagine manufacturers wanting to enter the wholesale distribution network. Additionally, this intermediation between manufacturers and pharmaceutical retailers adds an incredible amount of value to the overall healthcare system through their comprehensive and highly efficient services. SWOT Analysis Strengths ABC see’s significant strengths within their current business model. Primarily, their industry leading distribution network with 27 distribution centers in the US allows for over 3MM unit shipments per day. This allows ABC to more effectively supply over 95% of US Hospitals, more than 65,000 community practices, and more than 34% of US retail pharmacies. With an order accuracy of greater than 99.9% across all segments. Their position as the largest distributor of specialty drugs in North America allows for greater commercialization optimization of new therapies in one of the most exciting, and profitable pharmaceutical segments. With an onslaught of new therapies expected to launch throughout 2020, ABC’s leadership in specialty commercialization and distribution positions it to capitalize on these extraordinary opportunities. The strategic partnership between AmerisourceBergen and Walgreens Boots Alliance is yet another strong point for ABC’s business. The long-term contract allows for both ABC and WBA to have steady inflows of cash and inventory, allowing for greater focus and innovation in other aspects of their business. Additionally, ABC’s diversification efforts into their “Other” revenue segment has been fruitful. This revenue stream is not only more profitable, with margins in the mid-single digits, but has grown faster than that of their pharmaceutical distribution segment. This growth can be attributed to the MWI Animal Health segment as well as strength in their Global Commercialization Services segments. Weaknesses Despite their resounding strengths, ABC’s business model does not come without weaknesses. Firstly, ABC has the highest buyer concentration of any industry player. With approximately 34% of revenue derived from Walgreens Boots Alliance, and their top 10 customers including government agencies and group purchasing organizations making up 64% of revenue as of FY2019. This is an especially large concern given the ongoing consolidation of PBM’s and other pharmaceutical retailers outside of their current concentration, which could marginally impact ABC’s future margins. Furthermore, ABC’s consistently high M&A activity is not without its risks. This is exemplified with the ongoing PharMEDIUM issues after their acquisition in late 2015. The subsequent safety issues led to a $570MM impairment charge to ABC’s 2019 Financial statements. While management has signaled that PharMEDIUM is not expected to be a headwind for the company in FY2020, the nature of their acquisition-based risk remains. Finally, ABC’s industry low inventory turnover rate is somewhat of a concern. While it has not been a large issue in the past, the financial risk distribution companies take on when purchasing products is amplified the longer the inventory remains on the balance sheet. Additionally, the cost of maintaining their inventory increases, as well as ABC’s need for rapid turnover as a means to pay off their high levels of accounts payable. Any extended holding periods could create a disjoint in their payment cycle to manufacturers. However, this remains a low-level weakness, as ABC has more than enough dry powder on their balance sheet to cover such instances.

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Opportunities Despite some near-term headwinds, the Pharmaceutical Distribution Industry has incredibly strong long-term growth drivers. An aging domestic population will fuel demand for Pharmaceutical products for years to come. While still small in size, the fledgling biosimilar market will allow exponentially greater patient access to powerful biologic drugs in a broader, and more efficient manner. Ongoing advancements in technology are continuously adding value to the industry. Applications such as Blockchain, Machine Learning, Artificial Intelligence, Automation, and Internet of Things implementation have, and will continue to add value to the Pharmaceutical environment thanks to their system optimization and cost-saving nature. Growing opportunities in the specialty drug market has seen a flurry of M&A activity within the industry, specifically in oncology, where niche therapies are coming to market. Oncology will be a fundamental driver for the industry into the future, as unique gene and cell therapies continue to undergo clinical trials, and drive a subsequent need for commercialization. Threats The majority of threats to the Pharmaceutical Distribution Industry are primarily legal and regulatory based. First, and most certainly foremost is the industry’s liability in potential legal settlements regarding the Opioid Epidemic in the US. Settlements that have been discussed publicly range across decades, hampering ABC and its competitor’s ability to conduct business efficiently. Another incredibly impactful threat to the industry is legislative drug pricing reform. There has been an ongoing push by the current administration, and potential Presidential candidates for massive decreases in drug prices. Rhetoric is expected to increase throughout 2020 as the election looms closer, and candidates signal their positions and plans for potential reform. Yet any action on the topic would impart massive cost pressure on manufacturers, and surely disrupt the longstanding models of the entire pharmaceutical Ecosystem. Another imminent threat is that of industry wide regulatory standards. There has been rapid uptick in tech-based solutions for Pharmaceutical enterprises throughout 2019. This comes as means to ensure compliance with new “Track and Trace” regulations, that are likely to continue, and expand into the future. This will require large recurring investments into new technologies to enhance oversight, visibility, accountability, and auditability across the entire Pharmaceutical marketplace. Valuation

Discounted Cashflow Method For the bulk of our valuation of AmerisourceBergen, we chose to conduct a discounted cashflow analysis. We began by created a three statement pro-forma operating model as the base of our DCF. Forecasting across a five-year time horizon allowed us to quantify the impacts of near/mid-term drivers on the various financial statements with a higher degree of confidence and accuracy (assumptions in Appendix V.). After projecting bear, base, and bull cases for AmerisourceBergen, we then calculated the terminal value using two distinct methods: A Perpetual Approach, as well as an Exit EBITDA Approach. Assumed in these two methods was a long-term growth rate of 2%, as well as a 9.75x Enterprise Value to EBITDA multiple for our Exit Multiple Approach, based on the peer average five-year forecast. Both of these terminal values were discounted by a WACC of 6.20%. After applying weights to all three cases, we derived share prices of $97.77 from the perpetual terminal value, and $91.45 from the Exit

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EBITDA approach, weighted at 50% and 35% of our final price target respectively.

Multiples As a supplement to the Discounted Cashflow Method, we used a trading multiples model based on Price to Earnings and Enterprise Value to EBITDA, as well as a trading comps or relative valuation model. To forecast share price in 2020 using Price to Earnings, we used the consensus EPS estimate of $7.51 from FactSet, multiplied by the peer average forecasted Price to Earnings for FY2020 of 13.09x, also pulled from FactSet, to come to a share price of $98.35. For the EV/EBITDA multiple, we multiplied the peer average forecasted EV/EBITDA multiple for FY2020 of 9.9x by the EBITDA forecasts derived in our pro forma operating model of $2,190mm for the same year. We then subtracted out AmerisourceBergen’s total debt of $4,493mm and added their current cash balance of $3,374mm to reach their total equity value, before dividing by total shares outstanding to come to a share price of $99.74. The share prices derived from AmerisourceBergen’s Price to Earnings and Enterprise Value to EBITDA multiples were then averaged to reach a final share price of $99.04, which was then weighted as 15% of our final price target. After running our trading multiples model, we elected to conduct a trading comps model to analyze the firm’s relative valuation. After comparing metrics from AmerisourceBergen to those of McKesson, Cardinal Health, and Henry Schein, it would appear that AmerisourceBergen is undervalued relative to its peers. This is portrayed below, with the blue box representing the peer high and low values per multiple, and the yellow dot representing AmerisourceBergen. (Further data can be found in Appendix I.)

Discussion of Opioid Settlement Valuation One of the most important aspects of our valuation is the potential legal settlement between Pharmaceutical Distributors and the US Attorney General stemming from liability over the current Opioid Crisis in America. Based on a public settlement in two Ohio Counties, we have made several assumptions on AmerisourceBergen’s proportional settlement liability of ~31% as well as the respective tax rate of ~22.88%. Given the wide breadth of current estimates on the total size of the settlement, we decided to create a range of valuations containing the settlement offered by AmerisourceBergen, McKesson, and Cardinal Health of $18,000mm, the current street consensus estimate of $27,000mm, to a high of $36,000. We then calculated time horizons and payment sizes for each case. These payment streams were then present valued at a WACC of 6.20%. These estimates were then assigned a relatively conservative probability of 25%, 50%, and 25% respectively, to reach an expected present value for

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AmerisourceBergen’s Opioid Settlement Liability of $3,010.02mm. This value was factored into the Bear, Base, and Bull Discounted Cashflow cases via a deduction to the case’s enterprise value. This was done to avoid incorrectly adversely impacting our terminal value calculations due to an artificially low terminal year cash flow. Valuation Summary After concluding a DCF price per share of $97.77 from the perpetual method, $91.45 from the Exit EBITDA approach, and $99.04 from the trading multiples valuation, we then took a weighted average of the three, weighted at 50%, 35%, and 15% respectively, to reach our final price target of $95.75. Based on ABC’s closing price as of 1/24/20, this indicates that ABC is moderately undervalued by the market, however given the immense amount of pressure, and myriad of uncertainties currently facing this industry, we feel that ABC is fairly priced and our price target does not warrant a “Buy” recommendation. Financial Analysis Income Statement AmerisourceBergen creates most of its revenue through the distribution of pharmaceuticals alongside medical equipment and devices. The main revenue segment makes up approximately 96.2% of the entire revenue mainly driven by the specialty pharmaceutical distribution; However, in recent years the decrease in the revenue growth can be attributed to the consolidation of the healthcare industry along with the laws and restrictions governing the industry. Furthermore, low operating margins, which tread below 1%, necessitate cost controls as any material uptick would significantly affect their net income. In 2019, we saw a decrease in net income over 40%, though this was a result of an impairment to PharMEDIUM’s long lived assets. In order to combat the slowdown ABC created other areas in which they can derive revenue, which include data analytics, outcome research, reimbursement & pharmaceutical consulting, niche premium logistics services, inventory management, pharmacy management and more that allow for the company to have supplemental income for the company to invest at their discretion. The “Other” segment, although not large, has been reaching growth rates in the mid-double digits and high single-digits. This segment, which includes MWI and World Courier, is also more profitable, boasting operating margins of 4.83%. However, this “Other” revenue segment remains a small fraction of revenue, approximately 3.80% of total revenue as of FY2019. Another way to counter slowing growth is to drive for efficiency. Internal investment in efficiency is crucial in this market, and we currently see ABC already estimating that they plan to spend at least $400 million USD on updating items and investing in more efficient ways to conduct business throughout FY 2020. Balance Sheet The company is currently levered with its debt totaling roughly 1.3 times the book value of the firm's equity. If we consider accounts payable to be a form of debt, then the firm has a debt to equity ratio of roughly 10. Regarding ABC’s capacity to pay its creditors, it maintains relatively strong key coverage ratios. The net debt to EBITDA ratio of around 1.15, implying that the firm is profitable enough to maintain the level of debt it takes on without creditors fearing default. The interest coverage ratio of 11.66, meaning the firm could pay its interest expense 11.66 times over with its EBIT, highlights the stability of the firm from a credit standpoint. In this industry, the most important item on the company’s Balance Sheet is the inventory as it both is crucial for the company’s business model, and inventories account for roughly one third of all assets; However, the company’s inventory turnover rate of 15 day is in worse than the two next largest competitors. Another important area for this company is the Accounts Receivable turnover due to the high leveraged nature of this company, which takes approximately 15 days, which is in the middle of the two next largest competitors. Other areas within this section are the Cash and Accounts Payables sections, and due to AmerisourceBergen’s business model of initially buying all the items and then reselling, ABC is taking on the initial cost of the pharmaceuticals along with

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equipment and devices. ABC will not be paid back until they deliver the items to the providers, at which time they are able to collect from the providers and, possibly, the manufacturers depending on the individual reimbursements and distribution agreements. Capital Structure AmerisourceBergen’s capital structure currently has outstanding debt of approximately $4 billion USD, while having a Market Capitalization of $18 billion USD. This puts ABC in a situation in which they are substantially more leveraged than their closest competitors, McKesson and Cardinal. On the other hand, they currently have a large revolving credit facility to cover and short-term obligations to payables, bank loans, or other debt, set to expire in 2023 to a syndicate of lenders. Financial Statement Concerns Lastly, the two concerns regarding the ABC’s financial statements in the 570 million USD impairment of PharMEDIUM’s long lived assets, a manufacturer of high quality sterile compounded service. PharMEDIUM was issued a consent decree for compounding drugs under substandard conditions. This resulted in PharMEDIUM being unable to manufacture or distribute drugs from its Tennessee facility. The other concern is the potential settlement or legal fine for the distribution of opioids because this will leave a damaging figure going forward if it stays on the balance sheet, and if it is expensed, it will also directly impact the company’s ability to conduct business in the future. Return on Invested Capital AmerisourceBergen currently holds a return on invested capital (ROIC) of around 11.66%. This is a very strong figure and an area of optimism for the firm. We estimated a weighted average cost of capital for the firm of around 6.2%, meaning that by returning 11.6% of all invested capital in profit, the management team is generating value for the firm. One area of concern with this metric is its reliability as it is an accounting metric and can be skewed, and we do not know which specific investments are generating these returns. This 11.66% is roughly in line with the firms average ROIC over the past two decades or so. Our optimism is furthered when considering that ABC has the highest ROIC of its direct in market peers, Cardinal Health and McKesson, which return 9.74% and 0.21% of their invested capital respectively. Dupont Identity AmerisourceBergen’s return on equity of 50.20% is by far the highest amongst its peers. McKesson follows with a return on equity of around 33.52% and Cardinal Health lags with a 25.51% return on equity. While this demonstrates strong operating efficiency for ABC, it is critical to look at the components that are driving these strong return figures. ABC has a return on assets of 2.22%, which we view as a strong figure, but not one that inspires excess confidence in the firm’s efficiency. This 29.44% return on equity is driven by an equity multiplier of 13.28, implying that it is the firm’s leverage that gives it such a perceivably strong return. Compare this to Cardinal Health which maintains a return on assets of 3.37%, nearly 50% higher than that of ABC. Cardinal’s equity multiplier is 6.53, and therefore while their return on equity is lower, it is driven by a higher return on assets rather than high leverage. While using leverage to drive return is not a sound practice, this is not an area of concern for us given our previous assessment of ABC’s capacity to pay its creditors. Financials as Compared to Peers The main peers that we have identified for AmerisourceBergen are Cardinal Health and McKesson. Regarding the financial results of these companies, we see interesting comparables with respect to implied efficiencies as well as capital structure. Firms in this industry tend to have extremely low margins, generally speaking. ABC’s efficiency in managing its cost of goods sold seems to be, from an accounting standpoint, inferior to both Cardinal Health and McKesson given their superior margins of

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4.33% and 5.02% respectively, compared to ABC’s margin of 2.52%. Moving down the income statement it becomes apparent that ABC still lags behind Cardinal in controlling non-operating costs as Cardinal Health’s net margin is nearly double that of ABC at 0.94% compared to 0.48%, while their operating margins were more comparable. As we will discuss later, these figures can be contrasted with other efficiency metrics where ABC demonstrates to have a clear advantage in its capital deployment. AmerisourceBergen has the shortest operating cycle of its three major competitors, allowing it to require less cash to maintain operations, and maintains a negative net operating cycle. Regarding capital structure, while ABC’s debt levels may make it seem less liquid than its peers, the firms large cash reserves contain any fear credit risk. The firm's current ratio lags behind its peers at 0.95, while Cardinal and McKesson maintain ratios of 1.07 and 1.02, respectively. Due to a large cash reserve however, ABC and Cardinal hold the same quick ratio of 0.54, with McKesson ahead of them at 0.58. ABC demonstrates operating efficiency and capital deployment roughly in line or superior to its peers in many respects which we view as a positive sign for investors and creditors. Downside Risks WBA Privatization As Walgreens Boots Alliance makes up approximately 34% of ABC’s revenue, the recent news that WBA was exploring taking itself private was highly troublesome. Market speculation is ongoing, albeit at a highly diminished level that KKR will enact the largest LBO in history and buyout WBA. We foresee this outcome as extremely unlikely in the near term, as recent news points to a wide disparity in valuations between WBA and KKR. However, should this unfold, there is a high probability that WBA will divest much, or all of their stake in ABC. After analyzing the 2013 shareholders agreement, and the provisions outlined in both Warrant 1 and Warrant 2 of the aforementioned agreement, WBA can freely sell or transfer their non-controlling equity stake in ABC. While currently owning ~26% of outstanding ABC shares, WBA has the right, but not the mandate to appoint up to two members to ABC’s board. Currently, WBA has appointed only one board member, but any divestiture that drops their ownership below 14% of outstanding shares restricts their board rights to one member. Any change in ownership that results in WBA owning less than 5% of outstanding shares will terminate their right to appoint any board members. With that being said, any such outcome is very unlikely, yet would be extremely impactful. Amazon Disruption With their recent acquisition of PillPack, a mail order pharmacy, Amazon has officially entered the pharmaceutical industry. While their strategy, and the extent of their disruption capacity is not yet known, recent early marketing efforts for PillPack have seemingly shone some light on their plans. While many targets of their emails have no recurring medicinal needs, a large portion were chronic patients needing recurring medications. This strategy plays into the recent shifts towards consumers preferring to speak to pharmacists about their new medications. Amazon is seemingly attempting to circumnavigate this trend by using their new mail order service to target those who do not require such services. As chronic patients have been, or will be on the same types of medication for extended periods of time. Due to this, we see the threat of Amazon’s disruption as starkly less impactful than many others. Outstanding Settlements As we previously discussed in the ‘Valuation’ section, AmerisourceBergen, Cardinal Health, and McKesson are involved in ongoing legal cases regarding their liability in fueling the Opioid Crisis in the US. The scope of the settlement is still unknown, as negotiations are ongoing. However, given the three companies have already offered to pay $18,000mm across 18 years to reach a global settlement, it is clear that there will be significant financial burden placed on them for years to come, regardless of size. Although it is important to note that after the $18,000mm settlement offer, the US Attorney General responded with a counter offer of $45,000mm. While such a number is exceedingly unlikely, the value of

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the final settlement could be massively impactful on the industry’s ability to generate value to shareholders going forward. Political Pressure on Drug Pricing and Disintermediation Recent political rhetoric has placed heavy scrutiny on the Pharmaceutical Distribution Industry. President Trump has spoken at length about potential legislation allowing for the import of Canadian pharmaceutical products into the US. While this seems like a large threat, the Congressional Budget Office reviewed the prospects of drug importation in 2004, and concluded that such efforts would lead to few drugs entering the US, and small savings for the populace. The ideas of importation and direct negotiation are simple fixes for an incredibly complex industry, that have been labeled as a political “stunt” rather than truly impactful legislation. However, with drug pricing as a leading platform for both the current President, and many of the potential democratic candidates, reform, and therefore pricing pressure appears imminent. While the scope, and therefore impact of such reforms is not yet known, regulated decreases in drug prices will drastically alter the profit models of current industry players. Despite no near-term legislative risks to the Pharmaceutical Distribution Industry, such sentiment remains a long-term risk to the industry as a whole. Risk Matrix

Corporate Governance ABC is in accordance with the primary principles of good corporate governance by implementing leading practices and policies to ensure accountability to the shareholders. ABC’s specific policies include board independence, succession planning, risk oversight and diversity. The company’s unitary board of directors consist of diverse individuals with business experiences, backgrounds and expertise in a wide range of fields. Steve Collis has been the CEO since 2011 and Chairman since 2016. Jane Henney was selected as lead Independent Director, a necessary position since the Chief Executive Officer also serves as Chairman of the Board. Another key member of the management team is Tim G. Guttman who is the Executive Vice President and Chief Financial Officer of AmerisourceBergen. The compensation received by key members of management are funded through stock awards and compensation plans. (See Appendix II.) The majority of the director nominees are independent (seven out of nine). One of ABC’s specific policies requires a minimum of 70% independent directors on its board. In addition to a majority of the board being independent, the leaders of the audit committee, compensation and succession planning committee and governance and nominating committee are independent as well. In terms of risk oversight, the board actively engage in risk assessment and management for all aspects of its business,

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including compensation policies and practices. While ABC has policies for reducing waste, energy efficiency, and other social and environmental initiatives, their involvement in the US opioid crisis has a significant impact on society. With this in mind, the guidelines and policies set in place by this specific company make it favorable to the shareholder retaining an ESG score of 6.5 out of 10. (See Appendix III for more ESG) Conclusion We are recommending a hold of AmerisourceBergen (ABC) as of 1/25/20 with a price target of $95.38. AmerisourceBergen has solidified itself as one of the foremost Pharmaceutical Distributors in the United States. The firm continues to leverage its scale and the negotiating power derived from its highly concentrated industry to further capitalize on the distribution requirements of the massive US Healthcare system. AmerisourceBergen has positioned itself favorably in some of the most exciting segments of the drug ecosystem, such as the specialty and biosimilar markets. We believe their position of leadership in the industry and continued strategic execution will allow them to maintain stable growth rates in the long-term, despite the mounting near-term headwinds facing the Pharmaceutical Distribution Industry as a whole. Our hold recommendation is further supported by the scorecard that we created to arrive at a final quantitative score of 3.5, or a ‘Hold’. Our scale, which ranges from 1-5 is as follows: 1=Strong Sell, 2=Sell, 3=Hold, 4=Buy, 5=Strong Buy. Each of our five categories displayed below were given a weighting based on how important we believe each was to our recommendation. Our rationale is as follows:

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Appendix Relative Valuation (I.)

Executive Compensation (II.)

ESG (III.)

Social The social impact ABC has set in place, not only internally, but throughout the community is significant. Within the organization, ABC ensures a safe, diverse workplace by providing meaningful development tools to ensure their success and encourage personal wellness. In terms of safety, ABC has producers and rules when handling products. Not only does ABC place an emphasize on conventional diversity in terms of gender and race, but intellectual diversity exists throughout the company across the healthcare supply chain. Essentially, they work alongside their customers and partners to collaborate and innovate to advance responsible principles. AmerisourceBergen is also committed to making a positive social impact on the communities through corporate contributions, product donations and volunteerism.

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“AmerisourceBergen Corporation provided $1,785,964 in financial contributions to more than 300 organizations that promote health and wellness in their patient populations, both human and animal in fiscal year 2018” – AmerisourceBergen. Additionally, ABC has a Foundation which partners with nonprofit organizations that focus on increasing access to healthcare, education and community-building initiatives. Although ABC has positive social impacts, their apparent role in the opioid epidemic has had significant adverse impacts in communities across the nation. Environmental ABC has many environmental improvement initiatives set in place. They are managing greenhouse gas emissions, improving energy efficiency, minimizing waste and maximizing recycling. In terms of waste and water optimization, ABC is committed to recycling, as well as the reduction or total elimination of waste. Their distribution center associates use reusable and recyclable totes instead of packaging materials to reduce waste. They increase their pallet recycling program in each of their distribution centers and advanced their commitment to responsible disposal of electronic waste. Also, their distribution centers have implemented water efficiency practices and invested in automated and low-flow plumbing fixtures. They also are transportation efficient. Their third-party carriers utilize sophisticated delivery-route planning methods to consolidate orders and shipments, minimizing both the number of vehicles required to serve their customers and total miles traveled. They also place a strong emphasis on responsible sourcing by buying goods and services from suppliers, contractors and vendors who share the same responsible sourcing goals. They incorporate sustainability into their procurement process for indirect goods, encouraging bidders to include socially, economically and environmentally friendly products and service options in their offerings. Concentration Metrics (IV.)

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Valuation (V.) Base Operating Model Assumptions

DCF Assumptions – Base Case

DCF Assumptions – Bull Case

DCF Assumptions – Bear Case