美源伯根 (ABC) 2008 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the ABC third quarter earnings conference call.

(OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to our host, Mr.

Michael Kilpatric.

Please go ahead.

Good morning, everybody and welcome to AmerisourceBergen conference call covering fiscal 2008 third quarter results.

I am Mike Kilpatric, VP of Corporate and Investor Relations and joining me today are David Yost, AmerisourceBergen 's President and CEO and Mike Dicandilo, Executive Vice President.

Chief Financial Officer, and Chief Operating Officer for AmerisourceBergen Drug Corporation.

During the conference call today, we will make some forward looking statements about our business prospects and financial expectations.

We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations.

For a discussion of some key risk factors we refer you to our SEC filings including our 10-K report for fiscal 2007.

Also AmerisourceBergen assumes no obligation to update the matters discussed in this conference call and this call cannot be taped without the expressed permission of the Company.

As always, those connected by telephone will have an opportunity to ask questions after our opening comments.

Here is Dave Yost, AmerisourceBergen 's President and CEO to begin our remarks.

Good morning and thank you for joining us.

We delivered excellent performance across our pharmaceutical distribution businesses this quarter, our third fiscal quarter.

Total revenues were a record and up year-over-year in double digits and we demonstrated excellent expense control.

Our operating margin expanded again this quarter and we have excellent asset management.

Our other segment now includes only pharma long-term results from last fiscal year, as we have an agreement to see our PMSI workers compensation business.

As a result we have reclassified PMSI to discontinued operations and taken a large non-cash impairment charge based on the sale price.

We were very disappointed with PMSI's performance this quarter, which was below our internal expectations and after reevaluating our alternatives, decided it was best to sell the business and focus on our core pharmaceutical distribution and related services businesses.

PMSI remains a viable business with opportunities ahead but is not core for us.

The pharmaceutical distribution business continues to be very strong with excellent fundamentals.

Those of you who have followed us for a while have heard me refer to the ABC circle of life.

The older people get, the more drugs they take and the more drugs they take the older they get.

Sound fundamentals as far out as anybody can see.

Total revenue in our pharmaceutical distribution segment was $18 billion.

Our largest revenue quarter ever.

Revenues were up a strong 11% including a 3% benefit from the acquisition of [Belco], which we made last October.

Expenses were down as a percent to revenue by 10 basis points with substantially all our dollar increase for the quarter compared to the previous year due to the acquisition.

Our operating margin in the pharmaceutical distribution segment expanded by a very strong 10 basis points.

We generated $131 million worth of cash.

Consolidated diluted EPS from continuing operations was $0.70 and excluding the impact of special items in both fiscal years and for America, EPS from continuing operations was up a very robust 30%.

Lots to like about the quarter.

At AmerisourceBergen we continue to focus and execute on the basics.

Increasing profitable revenues, controlling costs, managing our inventory and receivables.

With all the reported data and industry discussion about a retail pharmaceutical market that appears to be growing slower than its historic growth, I want to briefly share with you some of the actions AmerisourceBergen is doing to continue to adapt and succeed in any environment.

First, as I have discussed, over the past year, we have been streamlining the organization and moving to an operating company model and away from a holding company organizational structure.

This has allowed us to remove expense, flatten the organization and better position us to quickly respond to the marketplace.

Second, we have started an internal campaign called CE2, which stands for customer efficiency and cost effectiveness.

The customer is always our primary focus and customer efficiency means doing what the customer wants and needs, doing it well and doing it in the most efficient manner possible.

It means focusing on programs and offerings that are valued by the customer and adding new programs that enhance value.

For example, we announced our new good neighbor pharmacy premiere program at our recent trade show.

The new offering includes business coaching for community pharmacies, which pilot test show significantly increases the pharmacies profitability and efficiency.

The program was received very enthusiastically.

Cost effectiveness is our internal focus on cost.

That doesn't mean we will arbitrarily slash costs.

What it does mean is we have to be very cost effective in everything we do.

For example, we need to be responsive to our customers needs for HBC merchandise, but that doesn't mean we need to stock 70SKUs of one brand of tooth paste.

The focus must continually be on what is most cost effective for us and our customer.

Our CE2 program, which we rolled out in May and is already getting track traction, is about re-thinking everything we do to make sure it ads value to the customer and we are doing it in a most cost effective manner.

It is a logical extension of our culture, which is customer focused and operationally and productivity oriented and is critical to thriving in any environment.

Now for some general industry observations.

I will continue to describe the customer pricing environment as I have throughout this fiscal year, as stable but competitive.

On the manufacturer's side, I would also describe the environment as stable and also similar to what we have seen in the recent past.

Price depreciation has been north of our 5% expectation so far this year in branded pharmaceuticals.

The impact mitigated of course by fee for service agreements.

The average manufacturer price A&P issue has had a very positive turn.

A&P you recall, will be used to set the ceiling for reimbursement for Medicaid generic prescriptions.

A&P implementation is currently delayed by a lawsuit filed by MCPA and NACVS.

Independent of the lawsuit A&P implementation will be delayed until September of 2009 by legislation passed by both the House and Senate and passed again into law, by over riding the Presidential Veto.

The new timeline will provide the opportunity to correct the deficiencies in the calculation of A&P.

The new law also suspends the Medicare DME competitive bidding program for one year and created a 14 day prompt pay requirement for part DPDPs.

All good news for retail pharmacy.

It also prevents the 10.6 physician pay cut, very good news for our physician customers of our specialty group.

ABC actively joined NCPA and NECBS and COA , the Community Oncologist Alliance and many others in this process.

Next I would like to hit a few company specific topics, some under appreciated in my opinion.

I would first call attention to the fact that we have relatively low account concentration with only one account commanding more than 10% of our revenues.

Our specialty business AmerisourceBergen Specialty Group continues to differentiates ABC among our peers and continues to deliver strong performance with revenues over $12 billion on an annual basis including $9 billion in oncology sales to physicians.

I had the opportunity to meet with many of our large practice oncologists last month and continue to be impressed with the integral role these physicians play in the delivery of healthcare.

ABSG has the widest array of value added services in the market by far, reinforced by the physicians I met.

We continue to be convinced that many of the new pharmaceutical therapies will be specialized products and we are well positioned to capture this emerging market.

Generics.

We continue to get good traction with our generic program, in part, because of our customer base weighted toward regional change, food, drug combos, independent and alternate sites that rely upon us for their generic offerings.

While, in general, we are uncomfortable talking about specific products that were speared down the launch the first this month that was very successful and met expectations we established at the beginning of the fiscal year.

Our packaging group continues to be an integral part of our total offering of ABC and this quarter again received recognition from a major manufacturer, this time receiving MERCK's 2007 outstanding operational award for a contract formulation and packaging.

Next I want to mention the strength and critical healthcare role played by community pharmacy.

Mike and I just returned from our trade show with 1,300 stores and 4500 people, the largest gathering of community pharmacists in the industry.

Community pharmacy has demonstrated incredible resiliency in the three decades I have been in the industry and I do not look for that to change.

The mood among the group was very upbeat, particularly given the recent legislative victory.

We have now over 3,000 stores in our good neighbor pharmacy program and noted in the press release are rolling out a new franchise program within G&P called G&P Premiere.

Since fuel costs continue to be in the news, I want to take a moment to put them in perspective for ABC.

Our total delivery costs run about 15 to 20 basis points as a percent of our total revenue.

These total costs include the people, equipment and fuel necessary to deliver our products.

Substantially all of our deliver is outsourced generally on a contracted basis, so there is some delay to us on the impact of fuel increase.

And so far, we have actively managed our delivery cost as part of our CE2 program mentioned previously.

In rough times, if gasoline were to increase $1 per gallon, it could affect our total cost in a couple basis point range.

Clearly manageable within our total cost structure.

So, lots to like about our quarter and more good things to like as we move forward.

With one quarter left in our fiscal year with our strong performance to date, we have raised our EPS guidance for continuing operations for the year to a range from $2.81 to $2.89 with no contribution from PSMI and a $0.03 per share special charge.

We would expect our yearly total revenues for FY'08 to be up 7% to 9% over the previous year and would expect to be in the low end of the range.

We expect our operating margin to expand in the low to middle single digit basis points for the fiscal year, an improvement over our previous guidance of low single basis points.

Looking ahead to FY'09, which starts October 1st for us, our planning process is in full gear and includes very detailed bottoms up input and on-site review on each of our regional locations.

We will provide FY'09 guidance, when we release FY'08 year end results on October 30th.

However, at this stage of planning, I remain confident that our growth rate for FY'09 EPS from continuing operations will be in the low to double digit range, as we shared last quarter.

We continue to be very excited about our industry and the role ABC plays in that industry.

Here is Mike to drill down the

Thanks Dave and good morning, everyone.

Another very strong quarter for our pharmaceutical distribution business including solid revenue growth operating margin expansion and significant benefits from our deployment of capital.

Our year to date nine month results are excellent as well and we are on track to meet everyone of the financial targets we set out at the beginning of the year.

Our continued resiliency and ability to adapt to any type of environment continues to give us great confidence as we look to the fourth quarter of fiscal 2008 and fiscal 2009.

My comments are going to focus on results from continuing operations, as Dave detailed are dissatisfaction with PMSI's performance this quarter which led to our decision to exit this business.

The non-cash write down of PMSI's net assets fair market value was reflected in discontinued operations this quarter and our income statements reflect the reclassification of current and prior year PMSI results to discontinued operations as well.

Our results from continuing operations in the prior year continue to include our long-term care business which was spun off last July, the impact of which I will detail.

Now, moving to our consolidated results.

Total revenue increased 10% in the quarter to $18 billion driven by the 11% increase in pharmaceutical distribution, which included a 3% benefit from our [Belco] acquisition.

For the nine months, our total revenue increased 7%, well above market, reflecting strong intrinsic growth, complimented by our acquisition strategy.

Consolidated operating income was $198 million, down 3% from last year on an unadjusted basis.

But after excluding special items in both years and long-term care's operating income of $6 million in the prior year quarter, operating income was up a robust 22% on an apples to apples basis.

Current year special items included in operating expenses were employee severance and other special costs of $7.9 million primarily relating to the Company's CE2 cost effectiveness program compared to $3.5 million of special expense items in the prior year.

Prior year special items also included a $32 million benefit from brand manufacturer and antitrust litigation settlements included in gross profit which did not repeat this year.

Net interest expense of just under $16 million was up significantly over the prior year as expected, due to reductions in interest income as average cash balances were significantly less than last year at this time due to our share repurchase activity.

Our effective tax rate for the quarter was 37.6% up from last year's 34.8%, but slightly below our expectations as we benefited from certain adjustments.

Our normalized effective rate continues to be slightly over 38%.

Diluted EPS from continuing operations in the quarter was $0.70 and excluding the $0.03 of special charges was a very strong $0.73 in the quarter.

This compares to $0.67 on a GAAP basis last year and $0.56 on an adjusted basis last year, excluding the special items and long-term care contribution resulting in a very strong 30% increase in diluted EPS from continuing operations in the quarter.

For the nine months GAAP diluted EPS from continuing operations was $2.16, up 13% from last year and excluding special items and long-term care was up a robust 24%.

The quarterly increase in EPS was driven by outstanding operating performance in pharmaceutical distribution which had a 22% increase in operating income and a significant reduction in average outstanding shares net of the impact of the increase and interest expense.

Average diluted shares outstanding for the quarter were 161 million down 27 million or 14% from the prior year reflecting our share repurchase activity over the last 12 months.

Now, drilling down the pharmaceutical distribution segment where our performance in the quarter was once again outstanding.

Total revenue was up 11% driven by the drug company, which increased 8% and [Belco] which contributed 3% of the top line growth.

The expert group grew a stronger than expected 4% in spite of the OTN acquisition by a competitor earlier in the year and anemia drug challenges, as its non oncology distribution business grew in double digits and its oncology distribution business top line increased 2%.

For ABC in total, anemia drugs used in oncology represented 2% of total revenues in the quarter and were down 28% from the prior year quarter but were up sequentially from Q2.

The drug company growth was once again driven by our institutional customers including significant growth from our largest PBM customer.

Gross profit increased 11% for the quarter and 8% for the nine months.

The quarterly increase was driven by solid price appreciation including certain select generic price increases as well as a steady increase in contributions from our pro-generics program.

This more than off set an increase in our LIFO charge and an $8 million write down of certain pharmacy dispensing equipment inventory.

We had a LIFO charge in the quarter of $5 million compared to a credit of $1.7 million in the prior year quarter.

For the nine months, our LIFO charge was $18 million compared to $7 million in the prior year.

As usual, we will true up our LIFO calculation in the September quarter, which has historically resulted in significant adjustments.

Operating expenses as a percent of revenue in the quarter were 163 basis points, down an impressive 10 basis points as our continued organizational streamlining through our CE2 cost effectiveness program continues to moderate expense growth.

Substantially all of the dollar expense growth in the quarter is a result of our [Belco] acquisition.

Operating expenses in the quarter benefited by $4 million reduction to equity compensation expense as a result of our organizational streamlining.

As a reminder, prior year quarter expenses were also benefited by $6 million net relating primarily to incentive compensation adjustments last June.

This disciplined expense performance is even more impressive when considering it has occurred despite incremental cost related to the Company's business transformation program.

Business transformation, as you might remember, is our ERP designed to improve our end to end business processes.

Operating income in the quarter of $205 million increased an impressive 22% versus last year.

Operating margins expanded by 10 basis points to 114 basis points primarily due to the expense leverage I just mentioned.

For the nine months, operating income was up 12% and the operating margin was 119 basis points increasing 4 basis points from last year.

All in all, it has been an excellent nine months for the segment and again, speaks to our ability to adapt to the changing environment, while continuing to meet our goals.

Now, let's turn to our consolidated cash flows and the balance sheet.

We generated cash from operations of $131 million for the June quarter or $223 million for the nine months.

We continue to expect to meet our free cash flow of $450 million to $525 million for the year.

As we have stated all year, we would expect a strong finish from a cash perspective, including a networking capital reduction in the fourth quarter.

We had capital expend towers of $26 million for the quarter and $81 million for the nine months.

Our fourth quarter CAPEX will be heavier than normal due to a large software purchase, but we still expect CAPEX to be in the $125 million range for the year.

We continue to be very disciplined in the working capital management arena, as is our hallmark and our success is reflected in our working capital statistics, as average inventory days on hand during the quarter were an industry lowest 24 days, down two days compared to June of ' 07.

DSOs were down one day to 19 days.

From a share repurchase perspective, we bought back $159 million of our shares during the third quarter and have now bought back $554 million for the year exceeding our target of $400 million to $500 million.

We have $144 million remaining under our share repurchase program and expect to spend a majority of this amount in the September quarter.

As usual, the board will consider dividend increases and/or a new share repurchase program this fall.

Our debt to total capital ratio at the end of the June was 31% in line with our 30% to 35% target range.

We expanded our liquidity during the quarter by increasing our availability under our receivable securitization facility by $475 million to $975 million increasing our financial flexibility.

Our ability to execute this amendment in a tough credit market is a reflection of our strong credit profile and the market's confidence in our financial strength.

Now, moving to our guidance for fiscal 2008.

Our updated GAAP diluted EPS guidance from continuing operations is a range from $2.81 to $2.89.

An increase from the prior quarter and includes $0.03 of special charges and reflects zero contribution from PMSI which again has been reclassified to discontinued operations.

So in affect, we have increased the midpoint of our annual range by $0.06 without any of the anticipated $0.04 to $0.05 contribution from PMSI.

This guidance implies a range of $0.65 to $0.73 per diluted share for the fourth quarter.

It continues to assume 7% to 9% total revenue growth for the year most likely at the low end with the fourth quarter expected to be slightly below the annual range, as we start to feel the impact of the shift of some of our low margin Walgreens business to a competitor in July.

The guidance includes the positive impact of a GSK price increase, which occurred in July meeting our expectations.

So, we are in great position to finish out our fiscal year with above market revenue growth, operating margin expansion in the low to mid single digit basis point range and a significant reduction in outstanding shares all contributing to grow EPS from continuing operations at least 20% after factoring out prior year contributions from long-term care and special items in both years.

PMSI is behind us and we remain confident in our ability to grow EPS in the low double digits in fiscal 2009, even in a low market growth environment through our demonstrated ability to control costs, benefit from increased generics, while continuing to generate significant cash which can be used to grow our business through acquisitions like we did with [Belco] or reduce our outstanding shares.

Here is Mike Kilpatric for Q and A.

Thank you, Mike.

Now, we will open it up to questions and answers.

(OPERATOR INSTRUCTIONS).

We will go to the line of Larry [Marsh] with Lehman Brothers.

Please go ahead.

Thanks and good morning, everyone.

Dave, I never thought I would say this, but a hearty congratulations on selling PMSI for whatever price.

Thanks Larry.

I appreciate it.

I know you had said you didn't want that to fester, I want to make sure I am clear.

Tell me again when do you hope to close the transaction and are there any specific conditions that are necessary to get it done?

We hope to have it closed by the end of this fiscal quarter that we are in, by the end of September.

And no unusual conditions.

Okay.

At that time you would be able to determine whether you would get the extra $10 million or not.

That's a really earn out -- it is rated on performance so it will be a while before --

Got it.

Okay.

The bigger picture question, you had another good top line quarter and that's been hallmark obviously this year for you guys and you are communicating confident with the lower end of the revenue range, which in my numbers suggest sequential reduction of revenues of a $1.5 billion or so from Q3.

I know you called out the new relationship with Walgreens that will pull some of that business away.

Is that the -- that is the difference between Q3 and Q4 as we think about it?

I guess that's a bigger number than I was thinking.

Yeah, Larry, it sounds like your GAAP is higher than we had anticipated.

We did have 10% growth in total this quarter.

We are anticipating slightly below the low end of our annual range which is 7%.

So probably in the 6% to 7% arena in the fourth quarter and that difference is solely the impact of some of the bulk wall greens business that is going to be transferring to a competitor.

Right.

I'm still thinking of the operating versus gross.

I know you are talking about revenues as a gross number.

That's not quite as big as I would have thought.

And then just I know last quarter, just curious to get your view, David on how you sort of talk about some of the take down last quarter.

PMSI and the headwinds, slower market growth and the anemia sort of issue, as you step forward, it sounds like you are a bit more bullish on the pricing environment on the drug industry and not changing your view of top line.

Also, it sounds like you are a bit more comfortable about current trends in anemia.

Am I hearing that right and is there anything else that would cause you to think about a little more confidence in those two data points from what you talked about in April?

You are hearing me right, Larry.

The only caution I would have is ODAC, the Oncologic Drug Advisory Committee has not yet ruled.

We are kind of waiting to hear -- pardon?

The FDA --

The FDA hasn't ruled on their recommendation.

That could have an impact.

So the ESA is a little -- continues to be uncertain as we go forward.

But other than that, I think you described it well and we continue to be impressed by the optimism of the retailers we just saw in our trade show, which I mentioned in my remarks.

From a manufacturing pricing environment it has been strong and it has been strong for those suppliers who we do not have fee for service agreements with, which benefited this quarter with a small price increase from Pfizer and some generic price increases and we have some confidence in the fourth quarter with GSK having the price increase that we had anticipated.

Right.

And then finally, just -- Dave, I know one of the other hallmarks that you recently reiterated to me and others is no out of the box acquisitions.

So here you are.

You have a clean -- operating companies you are talking about versus a holding company structure.

You are generating lots of cash.

You are buying back stock and you are looking opportunitistically for acquisitions when you talk about [Belco] are there other assets as you see it like [Belco] still that you can pull off in the next few years?

Is that realistic expectation?

There are still some that we have our eye on.

That would be the kind of acquisition that we would be comfortable with.

We are very comfortable making acquisitions.

The biggest one we've made was this fiscal year [Belco], which was $162 million.

We spent over a billion dollars in acquisitions in the last six or seven years.

We are constantly looking for acquisitions, but they would be in our sweet spot, Larry and not going far field from an acquisition that would not have some kind of managerial or operating efficiencies or sin synergies associated with AmerisourceBergen .

Very good.

Thanks.

Thanks, we will go to the line of Lisa Gill with JP Morgan.

Thanks very much and good morning.

On another conference call yesterday, they had talked about some of the manufacturing relationships adding to gross profit in the quarter.

I was wondering are you seeing some similar?

Are you seeing on the fee for service side as you are providing more services you are getting better rates with the manufacturers, maybe if you can give us some color there.

And secondly, as we think about generics and generic trends, can you talk about our customer purchasing patterns, do they buy all of their generics from you?

Do you still view this as an opportunity to get additional penetration from your customers.

Thanks..

First in terms of the manufacturer relationships.

I would say our manufacturer relationships are very, very strong, Lisa.

We just got back from our trade show.

Mike and I had an opportunity to interface with a lot of manufacturers.

I would say our manufacturer relationships are very, very strong.

We are happy with the next generation of fee for service agreements that we are executing right now.

So we are very, very positive on how we are -- our relationship with the manufacturers.

In terms of generics, Lisa, I will tell you as a general rule we like to capture all of the generic business that our customers have.

We are not doing that.

I think we are doing better at that than we were at this time last year but that continues to be an opportunity for us.

We track that very, very closely.

We just got back from our trade show again and that was one of the key issues we had with our sales force was to focus on that.

I would say, yes, we are doing better and yes, we still have more opportunities there.

Do you want to quantify what the opportunity is by any chance?

It is really customer by customer, Lisa.

I'm not comfortable assessing it, but we clearly have some more work to do and the good thing about the generics is that we have to keep raising the bar.

What was good generic concentration with a customer a year ago is not good today because new generics come out on the marketplace.

We have to constantly keep challenging our salesman to keep raising the bar what the percentage should be with our customers.

Its a good opportunity.

I was wondering if you could follow-up retail and the slowing market growth.

Are you actually seeing prescription trends slowing with your customers?

I know as we look forward, we have the Walgreens rolling off.

Are you starting to see a slowing trend as far as people that are picking up their prescriptions on a retail side.

What I was reacting to, Lisa, was the industry numbers that IMS and others have reported about the increase of prescriptions year-over-year.

I would have a couple of cautions about prescriptions.

The first is one prescription for 30 day generic versus a 90 day brand is huge difference in dollars.

As a general rule we have not been as sensitive to prescriptions as others who observe the industry.

That's the first thing.

The second thing I would note, many of our customers have other parts of their business that we clearly participate in, DMA, diabetes shot outside of prescriptions.

What we were trying to note with that is even if the retail market is somewhat slower an it has been historically, we can adapt to that very well as our customers appear to be doing as well.

Very helpful.

Thank you.

Next we will go to the line of Robert Willoughby with Banc of America Securities.

Realistically, how much lower can you pull the inventory days and secondarily, is there a new level where you feel comfortable bringing the cash levels down to?

Bob, our inventory performance has really been outstanding, as I mentioned.

We are well below where others in the industry are and it is really a tribute to our supply chain group which looks to bring every dollar out.

I mean, there is still some dollars we are carrying in our inventories that we are required to under some of our fee for service agreements with our manufacturers that we think we could do without.

We will continue to have conversations with certain manufacturers about bringing those inventories down or potentially being compensated higher if we are asked to carry those inventories at a higher level.

I think we have done a pretty good job.

There is probably a day or two days that we could bring those down further depending upon some of those further negotiations.

As far as the cash balances, I think I have said historically, that we can very comfortably operate with a couple hundred million dollars in maintenance cash running through our system.

We still have some room to bring the cash balances down.

We do have fluctuations throughout the month.

I think that is one thing people have to understand we do have into some intra-period volatility as well.

That's why we do things like making sure we have plenty of ample liquidity as well.

I think we have done an excellent job in managing our working capital overall, our inventories, our receivables and we continue to as we look forward, continue to expect to generate free cash in line with our net income as we look to the future.

The inventory for your specialty business is that on a consignment business primarily or do you take title to that?

No, it is primarily on an own business.

Because of the high price of some of the products they carry we turn it just a bit quicker than we do the overall broad inventory, but it is owned.

Okay.

Thank you.

Thanks, Bob.

Thank you.

Next we will go to the line of Charles Boorady with Citigroup.

Thanks, good morning.

First on the ESA growth that you talked about, what was the driver of that?

Did it reflected growth in the customer end market or was it a result of winning new customers?

We have been pretty good at picking up new customers.

We continue to do a good job on that happen and that's based on our full service offerings and I made reference in my comments about our large practices and we have been able to attract some new large practices because of the services we provide to them.

So we are getting we are picking up some new customers as well and we have got some utilization changes within our customers.

Just an ESA in general Charles, just to reiterate, we were down from last year in the quarter about 28%.

Again, it is about 2% of our business.

We were up sequentially from the second quarter of ' 08.

Right.

Understood.

I was curious about that sequential improvement and what drove that if that was customer end market, demand seasonality or -- It sounds like you are winning new customers.

I think it is a little bit of new business.

As Dave said earlier we were helped by the fact that the FDA hasn't ruled on the ODAC recommendations.

We are kind of waiting to see what happens there.

I see.

Unrelated to that, what would you attribute the high price increases to by manufacturers this year and do you think it is sustainable into next year?

Is there something unusual going on this year.

The truth of the matter is we are not qualified to judge what causes them to raise their prices.

I would say it is how they found the research and as the increase of demand of research, more sophisticated, more dollars, there will probably be more demands there.

The truth of the matter is I don't think we are really qualified to judge.

We are kind of observing and the first part of this year has been a little stronger than we anticipated.

Nine months doesn't make a year but a little stronger than we originally thought.

Look at low double digits EPS growth for ' 09 are you contemplating a similar magnitude of price increases by manufacturers?

We are.

We don't see the environment changing dramatically from the 5% or so that we anticipated this year and has been the trend recently.

Got you.

Great.

Finally, curious of what your take is on the competitive environment for MNA?

It was not that long ago, maybe a year ago, you were talking about the financial buyers really bidding up the price of assets to levels that you thought didn't pencil and then once they had a tougher time accessing capital, there was a strategic buyer that you had commented, paid an amount that you thought didn't pencil.

Are you still seeing prices for deals being higher than what you think they're intrinsically worth or are valuations down to where you think you are seeing more attractive opportunities on the MNA front.

?

I think it remains to be seen.

It is almost anecdotal, one at a time.

The ones we look at are the ones that have operating or managing synergies for us.

You would think we would have an advantage over the financial buyers.

The financial buyers will be more aggressive than they have in the past which will probably bode very well for us.

With the cash position that we've got, we're in a good position to act.

We're inclined to move that direction.

Again, the biggest one we made, we made this year and it has worked out very well for us.

Very happy with the [Belco] acquisition.

Great.

Just one housekeeping questions.

When I look at operating expenses for this quarter, is it the right jumping off point to project going forward or is there still some overhead related to the planned sale that would be reduced?

Yeah, the operating expenses quarter would exclude any impact at all from PMSI or the sale process.

We probably will have -- we have historically had a bit of a step up between Q3 and Q4 historically for a couple of reasons.

The biggest of which we hold our annual trade show in July which is a significant expense for the Company.

You will see some trend up between 3Q and 4Q in expenses, well within our guidance.

Great.

Thank you.

Next, we will go to the line of Tom Gallucci with Merrill Lynch.

This is Colleen [Lang] for Tom.

I'm going back to the branded price inflation.

I guess it is running a bit ahead of expectations and we were wondering, at this point is the percent of profits from inflation larger than the 20% to 25% we have heard about previously or is it still in that range?

You know I will go first, Colleen and I think the answer is no.

The inflation has been very much within our expectations particularly for the couple accounts that we have that are not on fee for service.

Occasionally we do get surprise.

Like I mentioned earlier, we had some positive news from certain generic items that gave us a boost this year.

Overall, its been pretty much as planned.

Obviously we have volatility from quarter to quarter with the companies that are not under fee for service agreements and we continue to work under that atmosphere.

I think as we look through nine months and we forecast through for the 12 months I think appreciation very much in line with our expectations.

Great.

On the expense side, can you talk about in a little more detail what are the biggest areas of savings?

It really has been totally across the board Colleen.

It has not been focused on the lower end of the pay scale.

It has been across the board.

Vice Presidents as well as pickers and packers.

We have looked at literally everything we do from delivery to how we handle receipt of merchandise and it is a basis point business and we manage the business that way.

I will tell you under our CE2 program, there has not been a single rock we haven't turned over.

It is really part of an operating philosophy and I think it is essential in a business that works on as tight of margins as we do.

Great.

Thanks.

Thank you.

Next we will go to the line of Randall Stanicky with Goldman Sachs.

It is actually Alex [Beckwith] for Randall.

Couple of quick one.

What are you assuming for the use of PMSI proceeds?

We are talking about a $40 million proceeds from the sale.

I think we will use it for general purposes.

Certainly we have shown in the past where we have had extra cash.

We have tended to increase our share repurchases and I think that's a good possibility.

Is it safe to say that whatever it is, it will be a fiscal 2009 event?

Yeah, I think we expect to close by the end of this fiscal year and any benefit will flow through in ' 09.

Within special specialty have you seen any change in the industry competitive dynamics, following the acquisition of OTM?

We really haven't.

I think they have brought some stability to the market.

Before you had an operation that was controlled by private equity and try to pump up revenues at the expense of all other things.

I think having [MacKessen] in the market is a positive issue.

I haven't really seen a big impact so far.

Great.

Thanks.

Thank you.

Next we will go to the line of Ricky Goldwasser with UBS.

Yes, congratulations on the quarter and the guidance.

Appreciate it.

Few follow-up questions.

First of all, regarding platonics some of the other channel participants said they have supplies that will last them for the full year.

Can you just comment if you still have platonics in the channel and is it included in the guidance revision?

And then on the GSK price increase, should we assume that the increase that took place a few days ago makes you -- is any -- factored into guidance and if GSK is going to rise prices again in August or September, that there will be an upside with two numbers.

Talking about platonics, we are uncomfortable talking about specific products and where our inventory levels are because we think it is a pretty dangerous precedent to start.

In terms of GSK.

The GSK price increase met our expectations in terms of timing in what we had anticipated when we started the fiscal year.

What we try to deal with, we try to communicate that so there will not be a surprise.

Mike will --

That's one of the reasons we have a range for the fourth quarter and obviously depending upon the magnitude of any further action, it is most likely we will be in the range of earnings that we have provided for the fourth quarter.

So even if they have an additional pricing action, that's already factored into the high end of guidance range?

Yes, based on historical practice, yes.

Lastly, following up on Lisa's question, can you discuss some of the strategies that you have in places to increase compliance with your customers on the generic side.

It seems this is one of the biggest growth opportunities for you in the next couple of years.

We will be a little careful that we don't get too granular here.

Our competitors may be listening.

We need to continue to have our sales force properly incentivized.

We need to provide rebates and incentives to our customers.

We are doing those kinds of things.

Monitoring very closely, customer by customer, item by item.

Again, the good news is that I think we have got the right tools in place.

We have opportunities.

We just -- as a result of having the trade show, we just had our sales force in mass and this is one of the key issues, to really make sure they continue to focus on generics and capture the new launches that come down the road and so forth.

I think we are well positioned versus our competitors and I think the opportunity for us is not -- I don't think our competitors are -- other large wholesalers are getting that business from our customers is going direct.

Our opportunity there is to capture that direct business that is going around us and our whole prime vendor model really places that where the customers is best served by buying everything from us focusing on selling and letting us worry about buying.

Great.

Thank you.

Nice to hear from you.

Thank you.

Our last question will come from the line of Glenn Santangelo with Credit Suisse.

I just had one follow-up question on the distribution operating margins.

It seems like relative to what you saw in the beginning of the year, things are shaking out ahead of expectations.

You now officially raised your guidance here.

What is driving that higher margin relative to what you saw a quarter or two quarters ago, is it the exclusivities on these drugs or price increases coming in greater than what you thought or rebates?

How would you think about that?

Glenn, if I had to focus on one thing, it is our expense management.

We streamline the organization.

It started early in the fiscal year.

We have kept it going and I will tell you we have been relentless on expenses and you saw our expenses year-over-year down 10 basis points.

That's a really big deal for us.

If I had to focus on one thing it is obviously a multifaceted issue, if I had to focus on one thing I would focus on our expense control.

Do you think you have more room to go there?

Yeah, I do.

We continue to have opportunities there, Glenn and I think -- the CE2 program which we have launched, I will tell you, it is not just rhetoric.

It is not just a program.

It is an operating philosophy and I do think we can do better and will do better I hope.

Mike and I are going to be out next week as we look at our FY09 plans and the whole issue of expenses will be a key focus for us.

Okay.

Thanks a lot, Dave.

You bet.

Thanks.

Thank you everybody for joining us on the call today.

Now, I would like to turn it over to Dave Yost for final remarks.

I would just to close by thanking you for joining us and just to reiterate that we continue to focus on executing on the basics at AmerisourceBergen and increasing our profitable revenues, controlling our costs and managing our receivables and our inventory.

Good performance this quarter.

We had strong revenues.

We controlled our expenses.

We expanded our operating margin.

Generated good cash.

Robust EPS increase.

I think all of that demonstrates our strength and resiliency.

We look forward to sharing with you our full fiscal year results which we will do on October 30th.

Thank you very much.