Shares Are Cheap as Ebos' Margins Are Set to Expand Long-Term on Improving Utilization and Mix

Australia’s Pharmaceutical Benefits Scheme, or PBS, drug wholesalers face regulation that caps gross margins for distributed drugs at 7% for community pharmacy and 10% for hospitals, as well as ongoing price reform which lowers the prices for these drugs. However, Ebos is well placed within the industry. Its large scale and efficiency of operations translate into better operating margins than most peers and an ability to earn economic profits at a time when most competitors are falling short. We do not anticipate the Australian government to make any major changes to the PBS. We forecast industry PBS-related wholesale and distribution revenue to increase at approximately 3% per year, largely driven by aging population growth, and the major participants to at least broadly maintain their existing market shares.