美源伯根 (ABC) 2010 Q2 法說會逐字稿

Welcome, and thank you for standing by.

At this time, all participants are in a listen-only mode.

After the presentation we will conduct a question-and-answer session.

(Operator Instructions).

Today conference is being recorded.

If you have any objections, you may disconnect at this time.

Now I would like to turn the call over to Mr.

Michael Kilpatric.

Sir, you may begin.

Good morning, everybody, and welcome to AmerisourceBergen's conference call covering the fiscal 2010 second quarter.

I am Mike Kilpatric, Vice President of Corporate and Investor Relations, and joining me today are David Yost, AmeriSourceBergen President and Chief Executive Officer, and Mike DiCandilo, Executive Vice President and CFO.

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 2009.

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 remarks.

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

Good morning.

And thank you for joining us.

As you probably know from our press release this morning, ABC delivered a very strong second quarter that ended in March, resulting in a very strong first half of our fiscal year that began October 1, 2009.

This outstanding first-half performance follows our last fiscal year's 17% increase in EPS, and is ahead of the 16% compounded annual growth rate we delivered over the last eight years.

There is lots to like about this quarter.

Mike will drill down on the details, but here are the highlights.

Revenues once again, crossed the $19 billion mark, up a robust 11.5% year-over-year, an instant replay of last quarter.

Gross profit also increased in double digits again.

Expenses were down as a percent of revenue versus last year, driving operating margin of 18 basis points this quarter.

Diluted EPS were $0.63 on a GAAP basis, up a robust 34% over last year.

And that's on top of the 17% increase last March.

We did a good job of controlling our receivables and inventory, and had over $1 billion in cash on March 31.

The quarter reflected the theme of consistent growth that continues to be characteristic of ABC.

Our two primary growth drivers, generics and specialty, continue to be key elements of our performance, and position us well for the future.

Before I address some of the Company specifics, a few words on the industry.

First, health care reform.

Health care reform is now the law of the land, though the real work is just beginning as the regulations are written.

Though the details remain to be seen, we think our industry and Company have fared very well.

Though eventually filling the prescription doughnut hole, and providing RX coverage for tens of millions of the uninsured will not have an immediate impact, the long term benefit for our industry and ABC is very positive.

Eventually, establishing a regulatory framework for biosimilars could ultimately be as beneficial to our specialty business as generics are to our traditional wholesale business.

Our Lash and extended consulting business with their cadre of Pharm D's, Ph.D's, and reimbursement counselors now has the greatest potential for work they have ever had.

The Medicare generic pricing formula for our retail customers, though not as robust as we would have liked, was ultimately the preferred Senate version instead of the House version, and featured a better definition of cost.

Our pharmaceutical manufacturer partners clearly emerged as part of the solution to the issues facing health care, a dramatic reversal of their positioning the last time health care reform was addressed.

So taken in total, we're pleased with the long-term impact health care reform will have on our business.

It reinforces our long-term confidence in our industry and our Company, and further validates our two primary growth drivers, specialty and generics.

Second, pharmaceutical industry revenue growth.

The IMS forecast of 3% to 5% for calendar 2010, seemed to be in the right zip code to us, and is reflected in our strong revenue growth this quarter.

Third, manufacturer pricing environment.

Fee for service of course, mitigates much of the impact to wholesalers from brand name manufacturer price increases.

As previously stated, we expect brand name price increases to be down from the 8% to 9% range we experienced the last two years, and that continues to be the case.

With our guesstimate currently above our original expectation of 5% to 6%.

Fourth, competitive pricing environment within our industry.

I would continue to describe the environment as competitive, but stable.

With few billion dollar pieces of business in play in the next 12 months or so, and few billion dollar pieces of business changing wholesalers historically.

Now a closer look at ABC.

Our robust 11.5% revenue increase of $2 billion to over $19 billion reflected the strength of the overall market, strong growth in our larger customers, and new business, particularly in our drug company, where both the retail and industrial segments delivered double digit revenue growth.

New business, largely from two group purchasing organizations, one retail and one institutional, contributed over 4% of the total revenue growth and has now largely anniversaried.

So it should be no surprise that revenue growth for the second half of the year will more closely reflect the market growth.

Our discussions with CVS regarding the former Longs business and Walgreen regarding the Duane Reade business are ongoing.

Our current contracts on both accounts carry well into FY 2011 at a minimum, and could be extended past our current contracts.

We have a great relationship with both CVS and Walgreens, and the former Duane Reade leadership team, most of which is remaining in place.

In discussing revenues it is important to note the wide diversity of our customer base with only one customer representing more than 10% of our business, and the next largest in the 5% range.

In addition, all but our largest customer look to us for at least some of their generics.

In drug, our good neighbor pharmacy franchise life program for independents and regional chains retailers now numbers about 3,700 stores.

We have over 5,000 stores participating in G&P provider network providing access to third party payors.

Our specialty group continues to have a $16 billion annual run rate, with about half of the revenues in oncology products to oncologists.

We service the largest number of oncology practices in the industry by a large margin.

And significantly, most of the largest are the most innovative.

ASD, our vaccine, nephrology, and blood plasma distributor, and ICS, our third party logistics company, had strong revenues in the quarter, as did our consulting businesses Lash and [Extenda].

Our double digit gross profit increase this quarter reflected our attractive customer mix and generics.

We continue to benefit from the at-risk launch of oxaliplatin, generic Eloxatin, and that benefit will continue through our second half, though at a lesser amount.

Oxaliplatin is a good example of our two growth drivers of specialty and generics coming together with a strong generic contribution in the specialty space.

We have noted on frequent occasions that we like the specialty space because many new products will enter the market through that channel, and specialty products frequently provide an opportunity for expanded value-added services.

The specialty channel can also provide generic opportunities, as demonstrated by oxaliplatin where our large market position in this space proved very beneficial to both manufacturers and dispensers.

Within oncology, we currently anticipate generic introduction of Gemzar and Taxotere in November, and arimidex in December 2010, the first quarter of our fiscal 2011.

Loss control continues to be an important part of the culture of ABC and our CE2 customer efficiency cost effective program is an important part of that culture.

This quarter, the associates of ABC drove total operating costs down 20 basis points versus last year, and at 156 basis points as a percent of revenue, equal the historic record low of this metric achieved last quarter.

Our total operating costs in dollars this quarter were below last year in spite of 11.5% or almost $2 billion increase in revenues, demonstrating dramatic cost discipline and our ability to leverage our existing infrastructure.

At ABC, controlling costs is part of our DNA, and having cost discipline is always an added advantage.

It is important to note that we delivered outstanding cost control at the same time we continue significant expenditures on business transformation, our new SAP-based ERP system.

Our BT program is on schedule, and on budget, and will position us extremely well to meet the future demands of our customers.

We are currently in test on several elements of BT, and expect to begin implementing back office functions of BT later this fiscal year.

Along with controlling expenses, our associates continue to do an outstanding job controlling our inventory and receivables, driving our DSO this quarter to 17 days.

Our receivables performance is a key indicator of the strength of our customer base, and that we're delivering value to our customers.

Operating margin expansion has continued to be a key focus of this management team.

In each of the last four fiscal years, we have increased our operating margin by 5 to 8 basis points, and of course a basis point on $75 billion is a significant $7.5 million or $0.015 a share.

This quarter and this half continued our trend, and this fiscal year, we expect to increase our operating margin again, this time in the high single or low double digit basis points.

Given our strong balance sheet, let me reiterate our position on acquisitions.

Although none are contemplated in our guidance, we're receptive to acquisitions and have spent over $1 billion in the last eight years on acquisitions.

An acquisition in our basic business of pharmaceutical distribution or related business like Bellco would have appeal to us, and we would look to stay within our area of core competency.

We are in an excellent position for acquisitions, both financially and organizationally.

And when you add up all the elements, we had a great quarter and a great first half of our fiscal year, and have reflected our optimism with increasing the guidance for EPS for fiscal 2010.

Before I turn the floor over to Mike for some added color, let me reiterate my enthusiasm for our industry and our Company.

We have a tough comparison for our second half, but this management team has a history of delivering EPS growth in many different environments.

In just the last three years, the EPS increase has been 20%, 14% and 17%.

Our new guidance of $2.01 to $2.10 per share represents a 19% to 24% increase over last year.

With our strong presence in generics and specialty, we are extremely well placed in the industry.

We have a demonstrated track record of controlling costs and increasing operating margin.

Health care reform has enhanced our long-term prospects.

It is very early to opine about FY 2011, but with our positioning in generics and specialty, I am very excited about our prospects for FY 2011 and beyond.

Here is Mike.

Thank you, Dave, and good morning, everyone.

It is very exciting once again to report quarterly results that have a tremendous amount of positive factors.

Our results which include double digit revenue and gross profit increases, expense reduction, working capital discipline, and strong cash flow, all leading to greater than 30% EPS growth, are simply outstanding.

They reflect incredible efforts by our associates, unparalleled customer service, and continued exceptional operational execution.

And the good news is that our strong positioning in the growth areas of the market, generics and specialty, should continue to provide us with strong opportunities for growth in the foreseeable future.

Certainly, we will have tougher comparisons to the prior year, in the second half of fiscal 2010, as we anniversary some of our significant customer wins in new generic product introductions.

Despite these tougher comparisons, our new guidance reflects 19% to 24% EPS growth for the year.

I will detail that new guidance at the end of my remarks.

While we are extremely pleased with our second quarter results, I would like to remind everyone that from a quarterly earnings perspective, the March quarter has traditionally been our strongest quarter and this year is no exception.

Despite a number of moving parts, a substantial portion of the sequential increase in our EPS from the December quarter to the March quarter, relates to benefits from manufacturer price increases during the March quarter.

Certainly our fee for service agreements have mitigated much of our quarterly earnings variability from manufacturer price increases.

However, the 10% or so of our brand name business that is still subject to the timing and magnitude of manufacturer price increases continues to benefit the March quarter, more than any other, and as usual, will normalize in the second half of our fiscal year.

Now turning to the income statement, which I will walk down starting with the top line.

Our revenues increased 11.5% in the quarter, driven by 13% drug company growth and 5% specialty group growth.

Our significant customer contracts that we added last year, primarily in March and April, contributed about 4.5% and 5.5% of our total growth and drug company growth respectively.

The majority of this new business has now annualized, and we expect market growth in the second half of fiscal 2010, from these customers.

The remainder of the drug company growth was driven by the growth of some of our largest customers, as well as overall market growth.

The specialty group grew 5% driven by ASC and ICS.

Our service and consulting companies also grew at a robust pace.

While we continue to expect that our revenue growth will be in the 7% to 8% range for the year, and in line with market growth of 3% to 5% in the second half of the year, the continued strong growth rates of our largest customers could easily drive us to the higher end of our range.

Our gross profit in the March quarter grew in double digits for the second consecutive quarter, increasing 11% over the prior year as a result of our top line growth, including robust generics growth.

As I mentioned last quarter, we expected to receive a substantial positive impact from recent generic launches in the March quarter, though reduced from the first quarter benefit, and that is exactly what happened.

Generic launches contributed $0.08 to our quarterly earnings, below the first quarter impact but well above the couple of pennies we consider normal in any quarter.

A significant amount of this benefit continued to be from oxaliplatin, which as a result of a settlement between its generic manufacturers and the brand manufacturer can no longer be sold by the generic manufacturers after June 30.

However, generic product already in the channel at that date can continue to be sold, and with our existing inventory levels in the specialty group, we expect to have product available in the market place at least through our fiscal year-end.

And that benefit is now reflected in our increased EPS guidance.

One other note on gross profit in the quarter, we did benefit by approximately $12 million from an annual rebate true-up with a generic supplier.

On a percentage basis, gross margin declined two basis points as the contributions from the greater than 20% generic revenue growth and recent generic launches largely offset the impact of our largest customers growing faster than the overall market, and normal competitive pressures.

Our lifo charge in the quarter was $10.7 million compared to $11.6 million last year.

For the six months, the charge was $18.5 million compared to $16.5 million a year-ago.

Moving to operating expenses.

We continue to enjoy significant operating leverage, especially in the drug company, as expenses declined despite the double digit increase in revenue.

Expenses as a percentage of revenue declined 20 basis points as productivity in our distribution centers continues to improve, and our CE2 philosophy of customer efficiency and cost effectiveness resulted in ongoing savings.

As we move through the second half of the year, we will see some sequential expense dollar increases as expected, due to the timing of our annual compensation cycle, and increased expenses related to our ERP enabled business transformation program.

For the year, we continue to expect operating expense increases in the 1% to 3% range.

As a result of reducing expenses while growing revenue in the double digits, operating margin in the quarter increased by an impressive 18 basis points over last year.

In the second half of the year we would expect our operating margin expansion to moderate, due to a reduced benefit from generic introductions, the growth of our larger customers and tougher prior year comparisons.

But with our strong performance in the first half, we now expect our full-year operating margin expansion to be in the high single digit to low double digit basis point range, well above our original expectations for fiscal 2010.

Below operating income, net interest expense of $19.3 million increased 33% over the prior year, reflecting the full quarter impact of our November bond offering, net of the related revolver pay down, as well as lower rates earned on our invested cash balances.

We continue to expect our full year net interest expense to be approximately $20 million higher than it was in fiscal 2009.

Our effective tax rate in the quarter was 37.9%, below our anticipated effective rate for the year of 38.4%, primarily due to the impact of completing certain Federal tax audits.

Our record quarterly diluted EPS of $0.63 grew by 34% compared to last year.

The EPS increase exceeded our 26% growth in net income due to a 6% reduction in average outstanding diluted shares compared to last year's quarter, primarily due to the impact of our share repurchase programs over the last year.

Now let's turn to our cash flows and the balance sheet where we continue to demonstrate excellent performance.

We generated $388 million of cash from operations in the quarter, bringing our six-month total to $346 million, compared to $32 million for the first six months of last year.

We had $45 million of capital expenditures in the quarter, and $88 million for the six months, and continue to expect to spend in the $140 million range for the year.

We could be slightly higher depending on the timing of certain expenditures related to our business transformation program.

From a statistical standpoint, average inventory days on hand during the quarter were 25 days.

Down one day sequentially as expected from our calendar year-end seasonal peak, and we were also down a day from the prior year.

Receivables management continues to be a focus, and we had outstanding performance once again, as average DSOs in the quarter were 17.2 days, down a day from a year ago.

Average DPOs were up about a half day due to the timing of quarter-end purchase activity.

From a share repurchase perspective, we purchased $111 million of our stock in the quarter, bringing our six-month total to $255 million, well ahead of the pace necessary to meet our guidance of $350 million of share repurchases for the year.

We ended March with more than $1 billion of cash on our balance sheet, and as we have said consistently, our first priority from a cash deployment perspective is to grow our business.

As we have historically demonstrated, to the extent we do not deploy capital for that purpose, and we remain on target to meet our cash flow goals, and certainly depending on overall market conditions we could exceed our current year share repurchase targets.

Now turning to our updated fiscal 2010 guidance.

We have raised our diluted earnings per share guidance by $0.12 to a range of $2.01 to $2.10, which represents a 19% to 24% increase over 2009 EPS from continuing operations, which as a reminder grew a strong 17%.

As we have consistently reinforced since giving our original guidance for the year in November, we expected our first half of the year to grow significantly faster than the second half, due to the positive impact of our new business and generic launch timing in the first half and tougher comparisons to the second half of last year, and none of that has changed.

The new EPS range continues to reflect an annual revenue growth assumption of 7% to 8% for the year.

The most significant change to our assumptions is the increase in our operating margin expansion to the high single digit to low double digit basis point range, from the low to mid single digit range.

This reflects both our strong second quarter performance, as well as the expectation that we will receive some continuing benefit from oxaliplatin in the second half of our fiscal year.

We have also raised our free cash flow expectation to a range of $525 million to $600 million for the year.

Our share repurchase expectation remains unchanged at $350 million.

So, again, a fantastic quarter, and an incredible six months where we have taken advantage of our strong market positioning, executed extremely well, while continuing to build for the future, and that future looks very bright for AmerisourceBergen.

Now here's Mike Kilpatric for Q&A.

Thank you, Mike.

We will now open the call to questions.

I would ask you to limit yourself to a question and a follow-up, so that everyone has an opportunity before we get to additional questions.

Go ahead, Rosie.

Thank you.

(Operator Instructions).

Our first question comes from Lawrence Marsh of Barclays Capital.

Thanks, and good morning, everyone.

David, I said last quarter was one for the ages, I think this one is in the same zip code.

Thanks, we appreciate it.

So, I'd encourage you to keep it up, make it a habit, congratulations.

My question is really this.

You have communicated over the years a baseline earnings growth target of 15%.

You have compounded at 16%.

Obviously you already addressed you're facing a very difficult challenge or comp in fiscal 2011 because of the big generic numbers this year.

Now while I know you're not giving guidance this early, I guess my question, what gives you confidence that you could still be in the same kind of earnings growth baseline range for next year or would you be in the mindset of trying to back out the positive contribution from oxaliplatin as you come up with a baseline earnings growth rate for next year.

I will say, it is too early for FY 2011 but I will tell you there are several things we look to, we think are very positive for FY 2011.

I mentioned on the call that there is a chance that we're going to have Gemzar and taxotere, arimidex, (technical difficulty- coming in we're going to have some generic introductions on the drug side as well.

We expect to continue to do a good job of controlling our expenses as we have in the past.

We will not have some of the head winds in FY 2011 that we had in FY 2010.

So, we're very excited about our future here, and want to be careful we don't, we look at the entire year and not a quarter at a time.

Sure, and I guess a follow up, just to make sure I heard it correctly, was there any change in terms of either the Longs or Duane Reade contract that would give you confidence of volumes now well into fiscal 2011.

And I guess if not, any more elaboration on when you think we might get resolution of those contracts.

The Longs contract, Larry, is volume based, and the volume is down a little bit, so that stretched out the time a little longer, so that's one of the reasons why we're seeing Longs go out a little longer.

I would say, clearly by the end of the summer, not later, for sure, than when we give our FY 2011 guidance I think we will have a pretty good handle on where we stand with those businesses.

But as I mentioned in the call, we have an excellent relationship with both of those companies, and so we look forward to discussing it with them.

Great, thanks so much.

Thank you.

Next call, operator?

Our next question comes from Eric Coldwell of RW Baird.

Hi, guys, thanks very much.

The specialty group growth of 5%, I am hoping you can possibly quantify for us the impact of generic mix shift in the segment, and any other contributors to the 5% growth versus your expectations.

Thanks so much.

Hey, Eric, this is Mike.

As we said at the beginning of the year, our expected growth rate for the specialty group was in the 5% to 7% range, and they were right in that territory.

Generics, we expected them to have a couple percentage point impact on the overall growth rate, and that is really what they had this quarter.

Also in there is a slight decline in ESA's year-over-year, where they were down 7% in total, but a little bit greater than that in the specialty group.

And when I am talking ESA's, I am really referring to the ESA's used in oncology.

So we are happy with the growth rate and the performance, although, as you know, the generics impacted or moderated the top line growth.

They certainly contributed strongly to the bottom line.

Hey, Mike.

I know it is not -- that you have such a broad portfolio that individual products don't always have a major impact on total results, but Baxter is out today with fairly negative news and a forecast on the plasma market.

You guys are probably the largest plasma distributor.

Could you talk about what you're seeing in that area, and what kind of an impact that might be having?

Well, Eric, I will chime in.

We do our plasma distribution within our company called ASD.

And as you will recall in my prepared remarks, I called out ASD as having very strong revenue performance this quarter.

I think it is important to put in perspective our plasma business, [rough jets] is a $1 billion business.

So, it is a relatively small part of our total business, but I will tell you it is doing fine and it is one of our growth drivers going forward.

Thanks very much.

Thanks, Eric.

Next question, Rosie?

Our next question comes from Tom Gallucci of Lazard Capital Markets.

Good morning, thanks for all the detail.

Sort of piggybacking a little bit on Larry's question, is there a way for you to frame the relative opportunity as you're thinking about it of some of the generics we have seen late last year early this year versus the few that you called out, Dave, that you could expect later this year?

Well, Tom, I don't think we want to get into sizing some of the fiscal 2011 opportunities.

I mean, certainly, there is not one individually as large as oxaliplatin, but certainly you start adding up the cumulative value of a lot of the introductions and particularly the first two that Dave mentioned, Gemzar and taxotere in specialty.

We think there is going to be significant opportunity from new introductions in 2011.

The other thing I would just throw out, Tom, is the fact that oxaliplatin was an at-risk launch.

We didn't see that one coming before it hit.

So it -- my only point in calling out some of these new products that might be coming our way in FY 2011 is to put in perspective that when you're dealing with our business, you have got a lot of products so you're not really tied to one specific product.

I think the key take away of the oxaliplatin issue is the opportunities in specialty.

We have got a very, very strong position in specialty, and we also have got a very strong position in generics.

And this is a great case where they came together.

I think you're going to see more of that.

One of the issues of health care reform, is what happens with the whole issue, of biosimilars.

There are some pretty big estimates out there, on what some of the biosimilar opportunities are, in 2011, 2012, 2013, in the multibillion dollar ranges.

We think our positioning here in specialty with the biosimilars coming is a really, really strong case and that was one of the points I was trying to make with the introductions we see in the relative short term.

Okay, just a follow-up on the acquisition environment.

Obviously, you're open to doing deals in the core business.

Can you discuss how the pipeline looks maybe now versus six months ago or the level of activity you see out there.

Tom, it really hasn't changed very much.

We continue to be very active.

We have several people who are, in that environment all the time, looking around.

But we really haven't seen any increase in activity, we predicted earlier in this year before the fiscal year started that we might see some activity, as the value of the wholesalers traded up.

Sometimes people who are in that space but not public companies look at that valuation and say, well, gee maybe now is a good time to sell.

We really haven't seen that yet.

But, we can respond very, very quickly.

We've got a great cash position, we have a great, credit position, great organization.

Through response.

So if something comes up we could respond very quickly.

Thanks, next call, operator?

Mr.

Bob Jones of Goldman Sachs.

Just a specific follow-up on guidance, just so I am clear.

You can actually continue to sell generic [oxaliplatin] beyond the June 30 settlement timing?

That's correct.

The generic manufacturers can not sell it after June 30 but the product that is in the channel as of June 30 can be sold through by us.

And what is the shelf-life on that product?

I think close to two years.

Thanks that is helpful.

One broader question.

It seems the near term impact health care reform on pharma has been maybe a little higher than originally anticipated particularly on the Medicaid rebate side.

Can you talk about how if at all, this impacts ABC and then maybe what the implications could be for the broader supply chain?

Thanks.

The issue of the rebates go directly from the manufacturer to the government.

So, it really does not affect us at all.

We're really immune from that that impact.

But, as I said, the long term, impact of health care reform we think is very, very strong, for our company and for our industry as well and I think it is particularly note worthy that big pharma is clearly in all pharmaceutical manufacturers are really viewed as part of the solution to some of the issues regarding health care.

So, even though the rebates are affecting the manufacturers in the short term, and they do not affect us in the long term, I think the whole industry is going to be a lot stronger.

Next question please Rosie.

Mr.

Ricky Goldwasser from Morgan Stanley, your line is now open.

Yes, hi.

Good morning and congratulations for a very strong quarter.

Thank you.

I had a couple of questions.

The first one was on Longs just to clarify that the existing contract which you're saying now will go through fiscal year 2011, does include generic purchasing.

And the second block was on the IVIG question, and Dave, I mean, you said you expect IVIG to continue and be a growth driver for you in the future.

Can you just comment what you're seeing on the pull through demand from your end market?

First of all, Ricky, I did not mean to say or imply that the Longs contract would take us through FY 2011.

I said it would go into FY 2011.

It is a volume based contract.

We're not sure exactly how long it goes and as it gets close to its end of course we would hope to be able to negotiate and perhaps keep it even longer, past our current terms.

In terms of the -- the IVIG market Ricky we're a little uncomfortable drilling down on individual products.

There are several manufacturers in that area, again, our blood [plasma] business, continues to be a good business.

Continues to do just fine and, we look for, ASP which includes several product categories to be a growth driver for us as we go forward.

Just a clarification to your first -- or additional information on your first question.

The Longs contract continues to include generics.

Okay, thank you.

Thanks, Ricky.

Next question, please.

Helene Wolk of Sanford Bernstein, your line is now open.

Good morning.

Thanks for taking the question.

I wanted to ask about the impact of the Pfizer transition.

If you could remind us what played out in the first quarter, first calendar quarter and what is expected in terms of the go-forward for the rest of the fiscal year.

Well, sure, Helene.

This is Mike.

Pfizer's fee for service agreement with us began on January 1.

As a result, we will see a pretty level impact from Pfizer as we go forward.

Historically, most of what we got from Pfizer was in the March and the June quarters, so, we did historically have a contribution in the March quarter, which, offset pretty well with the compensation we're getting from fee for service.

We don't expect a really material impact from the change in either our March or June quarters so, we do expect to get a little pickup in September, and December.

But, again, it is not really material to any one quarter, and the earlier indications are it is working very well for both parties.

We talk frequently about the diversity of our customer base.

This might be a good time to call out the diversity of our supplier base as well, where we have no one manufacturer that does more than 10% of our revenues.

So, our revenues are really spread over a wide, manufacturer base and I think it is an important concept when evaluating the risk in our business.

Great and any impact in terms of the balance sheet what we're seeing in DSOs or anything that is worth calling out or material?

No, I think it is, a continuation of the discipline that we have, the focus we have on our receivables, our -- the strength of our opinion -- receivables, the strength of our customer base and the diversity of that customer base I think really helps us and, not only are the DSOs down but when you look year-to-year, our significant past-due receivables are down very, very significantly.

And I think the better service you give to the customer, the more willing their pay and the less dispute you have and I think it is a reflection of all of that.

I was thinking specifically around the inventory and the Pfizer transition, any change in the March balance that we should be aware of or contribution there?

The Pfizer transition -- the previous Pfizer agreement, although not on a fee for service basis, had a very strong inventory management component.

So, there is not a big impact on working capital from the new Pfizer agreement.

One last question if I can indulge, just regarding the sort of growth that you achieved in the drug distribution business, relative to what we're seeing at least in initial IMS data, any sense of whether that is a -- sort of explaining the difference around stocking, destocking or any other explanation, or help that you can give us or insight?

No, I mean, I will let Dave comment as well but, we were up 13% in the quarter as we said, in the drug company, and in the drug company 5.5% of that came from new business.

And in addition to market growth, the biggest driver of growth in the quarter was the strength of our largest customers, which grew faster than the market.

Yes, the only thing I would add is you just have to be a little careful quarter-by-quarter.

When we look at the year we look at the broad -- the whole year.

We don't provide quarterly guidance and that is one of the reasons.

You get some fluctuations from one quarter to the other.

You have got to be a little about jumping on top of it and thinking it is a trend.

Next question, please.

Rosie?

Our next question comes from John Ransom of Raymond James.

Hi, good morning.

Hey, John.

This is for Mike.

What do you think the second biggest driver of the upside this year was?

I assume oxaliplatin was number one but what would say number 2 is?

Well, I think number 2 is the fact that our revenue growth was higher than we expected, John.

I think, we started out the year with a 5% to 7%, revenue growth assumption and, now we have raised that to 7% to 8%.

As I said, it could easily be at the top end of that range.

So I think the revenue growth, the generic component that came with that revenue growth, and the fact that we have handled it with fairly flat expenses, showing the leverage we have in our business, so I think that is the second driver above.

Great.

Secondly you mentioned kind of quickly, there was a $12 million true-up in the quarter.

Could you expand on that and -- should we think about that as a one-timer or that is a true-up that maybe represents profit that should have been earned over multiple quarters that just happened to be recognized in one quarter.

Yes, I think the latter, John.

It's not unusual for us to have true-ups, particularly with generic suppliers over rebates, and in this particular case we have an annual rebate component of our agreement, and because of numerous acquisitions and numerous new product introductions, there was some confusion over what was and what wasn't included and we wrapped that up in March.

You booked the profit though in the March quarter.

There were a couple of cents, maybe $0.02 that maybe you weren't thinking about that we wouldn't have been thinking about that was tied to this rebate?

Yes.

John, again, that just speaks to, why we don't give quarterly guidance.

Again, we look at a whole year, and you can get some fluctuations from time to time in an individual quarter.

Sure, just two other quick things -- we're certainly seeing the retail pharmacies suffer more pharmacy gross margin pressure from Macking and from Medicaid.

How that is being reflected in how they are dealing with you and what are you hearing from that standpoint?

Well, I mean, we're trying to work very closely with them, John.

One of the great strengths we bring them is our strong generic program.

We have a proprietary generic program called Pro Gen.

We think we bring them the best generic profit opportunities that are available in the market place.

Every bit as good as the competition they are dealing with with the big box chains and the like.

So, we're working very closely with them.

We have got a coaching program.

We're working with them now to help them run their businesses better.

We have a big private label program.

A promotional program and the like.

So we're trying to work very closely with them.

I will also tell you, John, as long as I have been in this business which is --

A long time.

A really long time!

Long time!

people been talking about the demise of the independents.

I've got to tell you, they are resilient and they keep popping back with unique kinds of programs, durable medical equipment and vaccine programs and the like, so they continue to hold their own and do fine.

Next caller please.

Our next question comes from Celeste Santangelo of Banc of America.

Robert Willoughby sitting in for Celeste.

I don't think I'll ever get comfortable with that name as part of my franchise.

Glad you identified yourself because we are really going to have trouble with the voice there.

You don't want to comment on the chain business, the Longs and the Duane Reade relationships as yet, but can you give us any general rule of thumb, what kind of working capital those chains tie up on a day-to-day basis for you?

Would we see any meaningful improvement or deterioration in your inventory turns as a result of some lost business there potentially?

This is Mike, Bob.

No big impact.

Longs is a fairly durable retailer and a fairly normal profile, and again keep in mind that Duane Reade is about $500 million a year worth of business and is a very small part of our business, less than 1%.

You would not see any meaningful impact on the working capital side.

Okay.

Any kind of rule of thumb, though, as a percent of revenues what inventory might be bare minimum that you have to keep to support those or just not -- not anything you'd break out?

Yes, again, I wouldn't give anything specifically.

I mean, keep in mind in total in our company, our networking capital as a percentage of revenue is about 1% here.

So, not -- the receivable in the inventory obviously goes away, so does the payable associated with it so there is not a big net impact.

And the profile Bob is not dramatically different.

They are using the same kind of products and the same manufacturers and the like that are basic retail in the businesses.

Okay.

Thank you.

Thanks, Bob.

Next question, please.

Lisa Gill from JPMorgan, your line is now open.

Thank you, good morning.

Good morning Lisa.

I was wondering, Dave, if you could just follow-up on your comment around generic purchasing.

I think you said that all of your customers buy some of their generics from Amerisource.

Is there any way you could quantify that for us, to say it is x percentage and we think it could be y just to try to frame what the opportunity is around the generic market in the next couple of years?

Lisa, what I said is all but our largest customers buy at least some of their generics from us.

It is a metric we track very closely, by customer.

I think the key take-away here is we think we have some upside.

I think we have done a better job of capturing our total generic spend, from our customers.

But, we clearly have some upside.

Yes, Lisa.

One way we have tried to give some guidance on that is, we think probably the biggest penetration particularly in our pro generics program has been in the retail sector where we think we're capturing north of 80% of the available generic spend in that area and, that continues to come up as our compliance increases.

Where we have put a lot of focus on and where we have had a lot of success recently has been in the alternate site market, where the product portfolios are a little bit more customized at times, and a little bit more specialized.

We spend last time customizing our pro generics program, for the off site customers and, I think we're probably 50 to 60% penetrated there, so we have got more room to go.

On the hospital side, historically, we have always supplied the hospitals a very large percentage of the -- of their generics, but a lot of that has been through hospital GPO contracts and I think going back to last August, when we made our agreement with Novation for us to supply oral solid generics to their hospitals under our program, the percentage that has come from our program versus the percentage of generics coming from hospital GPO contracts has continued to rise, and I think continues to represent a good opportunity for us going forward.

So that kind of gives you a little bit of a segment by segment view.

One other follow-up.

When we think about the overall pharmaceutical market growth have you had a chance to look at the $250 that will start to fill the doughnut hole by the manufacturers and what the potential impact would be for the drug wholesalers?

Lisa, we haven't really spent a lot of time looking at that.

I think it is going to be pretty small.

I don't think it will have much of an impact.

It is going to be phased out through, when the doughnut holes start to kick in which tends to be all over the place depending upon individual patients.

So I got to tell you, I don't think the $250 is going to be a big issue.

But I got to tell you as you get out into the later years, when that doughnut hole is 50%, filled up by the brand name manufacturers and we get these uninsured people, coming in literally, by the millions, as much as 18 million, 19 million, I think that is going to have a heck of an impact.

That is one of the reasons as we look out past FY 2011 into 2012 and 2013, I tell you, the metrics on this building get really good.

You have got all the uninsured, you've got an increased demand there.

You've got increased demand from generics and the whole biosimilars, which is a little bit of a wild card.

As far out as we can see I got to tell you we continue to be very optimistic about this industry and our role in it.

Okay, great, I appreciate the comments.

Next caller please?

Glen Santangelo from Credit Suisse, your line is now open.

Hey, Dave.

I just wanted to follow up one more time on oxaliplatin.

What I'm trying to understand is -- Can you give us a little bit of a better sense for maybe how many manufacturers are selling the product today because, it is clear that you won't be able to buy a generic version of it after June 30, but I'm trying to get a better sense for maybe, how many manufacturers are out there, how much supply could be out there, what kind of impact that has maybe had on pricing, because given the shelf-life, I mean, there is obviously a scenario where you could have product well into fiscal 2011 if I am thinking about that correctly.

Well, first of all, Glen, I think there are six manufacturers or, several doses and some people take more of a role than others.

How much product is out there is to be seen.

I mean, we don't know yet.

There is a formula on how much manufacturers can sell.

Is it conceivable that our specialty group will have product to drag in in FY 2011, yes it is.

I think it remains to be seen.

I think we will get a better handle on that, in the next few weeks, and I clearly by the time we announce our call in July, we will be able to quantify that.

But it is a little bit of a moving target right now.

We also don't know, what is going to happen with the oxaliplatin pricing, which could have somewhat of an impact on demand.

So you would envision ultimately that pricing after June 30 is going to change obviously, but, but by my calculations this one drug could be 7% or 8% or 9% of your total earnings this year.

I am trying to kind of size that up and compare it to potentially Gemzar and taxotere as I think about the magnitude of what the specialty opportunity could be.

We're working on that, too, but it depends on what happens with those two -- it depends upon what happens with oxaliplatin, and so -- there is a little bit of unknowns at this point, but again I want to make sure everybody understands my enthusiasm for FY 2011, I think we're going to continue to have good opportunities in FY 2011.

Okay thank you.

Next caller please.

Richard Close of Jefferies and Company.

Your line is now open.

Really quick here, on the specialty side, maybe if you can talk about the trends you're seeing in the areas of consultant packaging and things along those lines and the opportunities on a go-forward basis.

We've got a couple of different issues.

I will let Mike talk a little bit about the packaging.

In the case of the consulting and it is a relatively small part of our business but I will tell you I think there are opportunities that exist right now the best they have ever been.

Mike and I were just with a group of folks from [Extenda] and Lash companies.

They are in what they would describe as a target-rich environment at the moment.

We think we have some great upside on the consulting business.

The thing that is nice about the consulting business is not only the fact it is a lot higher gross margin than our distribution business as you would expect but it also provides us some entrees into businesses, so it introduces us to manufacturers who are bringing new products to the market and the like.

Really good space for us to be in and is a really integral part of our go-to-market strategy.

Mike, you want to --

We didn't talk much about the packaging group.

As a reminder it is less than 0.5% of our total revs but the group performed very well in the quarter.

Both revenues and operating income were up in the double digits.

They did have a fairly easy comparison to last year as you remember last year , because of some FDA delays, we didn't have some of the new product growth we expected but -- I think the group has rebounded, the performance has been strong, and it continues to be an important part of our

All right.

Thank you very much.

Thank you.

We will take one more call.

Rosie.

Mr.

Steven Valiquette from UBS.

A couple of questions here, a little bit on the technical side.

If they are too technical we can take them off line.

The first one is as far as taxotere competitors they are likely to be approved as 505 B2 branded NDA products as opposed to straight substitutable generics.

I am wondering if that still presents you with the same higher than average profit opportunity, given the dynamics of the oncology distribution market similar to oxaliplatin or has changed things a little bit.

That's question number one.

Was that a multiple choice or true and false.

Just kidding.

I think it is a little early to opine on taxotere.

One of the issues that has a big influence on the pricing is the number of manufacturers involved and the ability for them to get raw material.

So I got to tell you, six months out, it is really -- it is really pretty early for us to opine on taxotere, and even when it will come to the market and not only what the impacts will be when it shows.

Okay, that's fair.

The other question you kind of touched on this already but let me ask it a slightly different way.

We have seen with some of these brand generic sell events, that the manufacturers on the generic side will actually dump a year's worth of inventory into the channel right before they are supposed to come off the market.

You saw that with generic Oxycontin and generic Pulmacort previously, and a few others.

Really the question I guess then, in those situations, do you bleed that inventory out over a year?

Recognize those profits over a year?

Or do you in those cases sell all that extra inventory right away, and then the customers hold on to that for a year?

I'm trying to get a sense of when that profit gets recognized from the wholesaler level.

To the extent we have inventory on hand, we would sell it in the normal course and would not have a situation where it is dumped all up front.

Okay, got it.

Okay thanks.

Thank you very much.

And thank everyone for being on the call today.

I would like to turn it over to Dave Yost, CEO for some final comments.

I want to thank everybody again for joining us and for your interest in AmerisourceBergen.

We continue to be very excited about our industry and our opportunities within that industry.

Our two primary growth drivers, generics and specialty, we think continue to position us very, very well for the future both in the short term and the long term and we look forward to sharing our third fiscal quarter results with you in the latter part of July.

Thank you very, very much.

Thank you, operator.

That concludes the call.

Thank you for joining today's conference call.

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