美源伯根 (ABC) 2010 Q3 法說會逐字稿

Welcome and thank you for standing by.

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

(Operator Instructions) Today's conference is being recorded.

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

Now I will turn the meeting over to Mr.

Michael Kilpatric.

Sir, you may begin.

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

I'm Mike Kilpatric, Vice President and Corporate Investor Relations, and joining me today are David Yost, AmeriSourceBergen President and CEO, and Michael 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 expectation.

For a discussion of some key risk factors, we refer to our SEC filing including our 10K report for fiscal 2009.

Also, AmeriSourceBergen assumes no obligation to update 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.

And here is Dave Yost, AmeriSourceBergen 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 third fiscal quarter that ended in June 2010 in a series of strong quarter.

We are well on our way to delivering an outstanding year that ends September 30, 2010, and this is on top of our last year fiscal 17% EPS increase and ahead of the 16% compound annual growth rate we delivered over the last eight years.

There's lots to like about this quarter and our long term performance.

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

Revenues were a record $19.6 billion, increasing well over $1 billion from the June quarter last year and up 6.6%.

Gross profit again increased in double digits.

Total operating expenses were down 10 basis points as a percent to revenue versus last year equal to the historic low of the first two fiscal quarters operating expense ratio.

Operating margin was up an outstanding 28 basis points this quarter.

Diluted EPS were $0.57 on a GAAP basis, up a robust 36% over last year, and up 24% excluding special items.

That's on top of the 20% increase we reported last June.

Big increases on top of big increases.

We did a good job of controlling our receivables and inventory and had over $1 billion in cash on June 30, 2010.

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

Though we usually do not mention external recognition I'm going to make an exception this quarter due to the extraordinary nature of three noteworthy items.

First, our largest customer recognized us with their VIP award for value, innovation, and performance at their first ever Supplier Award Banquet.

At ABC, customer recognition is the most important, and recognition from our largest customer is very meaningful.

Second, Bloomberg business week, in the June 21, 2010 issue, included ABC in their annual list of the fifty best performing companies in the S&P 500 based on total shareholder return for the last five years.

Bloomberg business week reported ABC's five year return as 115%.

And Fortune Magazine, in their May 5, 2010 issue, ranked ABC as number twenty-two in total shareholder return for the period of 1999 to 2009 with an annual rate of return of 22% over that ten year period.

Our associates and I take great pride in the factors that only twenty-one companies on the fortune 500 outperformed ABC for the last ten years.

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

First, pharmaceutical industry revenue growth.

The IMS forecast of 3% to 5% for calendar 2010, seems to be in the right zip code to us.

Second, manufacturer pricing environment.

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

We currently expect brand name price increases to be similar to the 8% to 9% range we experienced last year.

It is important to note two milestone regarding fee for service.

One, we signed a fee for service agreement with Glaxo this quarter, so now essentially all of our brand name, pharmaceutical business is operating under some type of fee for service.

And two, we renewed our fee for service contracts with the three brand name manufacturers that recently completed mega-mergers.

Both these events demonstrate the value that the national wholesalers bring to our manufactured partners under our prime vendor relationships with our dispensing customers.

Not only do we make a wide array of product available to our dispensing customers on a daily, just-in-time basis, providing inventory to control to both manufacturer and dispensing customers, capturing valuable realtime data in the process, but among other things, we provide pharmaceutical supply channels security, and we manage the credit and receivable function for the manufacturer for literally tens of thousands of customers.

We think these recent fee for service agreements lay to rest any question about the value the national wholesalers bring to manufacturers.

Third, 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 for the next twelve months or so, and few billion dollar pieces of business changing hands historically.

Now a closer look at ABC.

Among the big news at ABC this quarter would be the fact that we went live with the first phase of our business transformation process that includes the eventual total conversion to SAP among other things.

We expect to beginning the next phase of business transformation at our first fiscal quarter of FY 2011, and we'll continue through a phase approach.

When completed, our [BT] implementation will provide us with insight, flexibility and operating efficiency which will differentiate our offer to our current and potential customers and meet or exceed their information technology needs for years to come.

It is important to note that during the phase-in period of business transformation, we will be operating two systems.

Both SAP and our legacy IT systems, putting some pressure on cost containment efforts.

The very good news, is that when completed in FY 2013, we will get relief from the dual system expenses and have a state of the art ERP system.

Our investment in business transformation is an important investment in our future just like our investment in new distribution centers several years ago that are now helping to drive down our operating costs.

Another item of note would be the status of our inventory of oxaliplatin generic eloxatin.

We have a policy against providing insight into specific item inventories, but are making an exception in this case due to the size and unusual circumstances around the product and its impact.

To refresh your memory, oxaliplatin cannot be sold by the generic manufacturers after June 30, 2010 until reintroduction in August 2012.

Wholesalers can continue to sell through any inventory that was on hand as of June 30, 2010.

We currently estimate that given our level -- our expected level of demand we will have sufficient oxaliplatin inventory to meet the needs of our oncologist customers at least through the first half of our fiscal 2011 that begins October 1, 2010.

The two primary growth drivers at ABC generics especially were very much in evidence again this quarter.

Sometimes, of course, the two drivers overlap as they did with this quarter with oxaliplatin and our specialty business.

The wide diversity of our customer base with only one customer representing more than 10% of our business with the next largest dropping down in the 5% range, enhances our generic growth driver where the vast majority of our customers look to us for at least some of their generics.

Our generic was very strong with double digit increases over last year easily outpacing our 6.6% revenue growth.

Our traditional drug company, ABDC, had a revenue increase of 8% reflecting the strength of the market, the strong growth of our largest customers, as well as the strength of our programs and total service offerings.

We have now anniversaried most of the new business that accounted for the double digit review growth of the last few quarters.

Our specialty group, ABSG, was up 3% with a run rate over $16 billion dollars annually with about half of the revenues in oncology products to oncologists.

We serviced the largest number of community oncology practices in the industry by far.

And significantly most of the largest and most innovative.

I recently met with several of our largest practices and continue to be thoroughly impressed with the patient accessibility and focus on quality care they provide.

ASD, our blood plasma, nephrology, and vaccine distributor and ICS, our third party logistics company, has strong revenues in the quarter as did our consulting businesses, [Lassen-Extendo].

Our packaging business also had strong revenues in the quarter.

Our total Company double digit gross profit increased this quarter reflected our attractive customer mix and generics.

We continue to benefit from the at-risk launch of oxaliplatin generic eloxatin as I noted earlier.

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

This quarter the total cost of running ABC was about equal to last year in spite of a 6% increase in revenue and the associates at ABC drove total operating cost as percent to revenue down 10 basis points versus last year equaling our historic best performance in this metric.

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

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

We continue to do an excellent job controlling our inventory while maintaining very high service levels.

Operating margin expansion has continued to be a key focus of this management team which delivered an impressive 28 basis points increase in operating margin this quarter versus last year.

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

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

Although none our contemplated in guidance, we are 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 would have appealed us to and we look to stay within our area of core competency.

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

So when you add up all the elements we had a great quarter and a great fiscal year to date and have reflected our optimism by increasing the guidance for EPS and revenue for fiscal year 2010, which Mike will detail.

Before I turn the floor over to Mike for some added color, let me give you my very early thoughts on FY 2011, which we will being October 1, 2010, since we continue to get questions about the current year contribution of oxaliplatin and our ability to grow our business next year with this comparison.

We are still in our very detailed bottoms-up planning process, but here are our preliminary thoughts.

The $0.05 per share benefit from special items we enjoyed this quarter will not be repeated next year.

The oxaliplatin benefit enjoyed in FY 2010 will not be repeated in total, but the combination of inventory carry-over of the oxaliplatin product combined with the benefit of two other specialty generic introductions could provide a similar benefit in total to the FY 2010 benefit we receive from received from the at-risk launch of oxaliplatin.

In addition we now expect not to renew the contract with Duane Reade ending December 31, 2010, will represents approximately $500 million of annual revenue.

The head of special items and assuming the specialty generic offset, at this preliminary stage we see EPS for FY 2011 increasing in the 7% to 11% range over the midpoint of our increased FY 2010 guidance.

We continue to be very comfortable with long term EPS growth goal of 15%.

Looking past FY 2011, our FY 2012, which begins October 1, 2011, will include the largest brand to generic product conversion in industry history that is expected to begin November 2011.

For FY 2013, we expect to beginning to experience the benefits of our business transformation and the elimination of running dual IT systems.

FY 2014 benefit entering from the 30 million or so uninsured patients entering the healthcare system with pent up demand for pharmaceutical products, the most efficient element of the healthcare system.

So, both the next year and next several years will be strong.

With ABC's position in generics and specialty, and with our diverse customer base and cost structure, I have never been more enthusiastic about the role of our Company within an industry with the future that has never been brighter.

Here's Mike.

Thank you Dave and good morning everyone.

Another great quarter and a superb nine months leading to increased EPS guidance once again, with our new forecasted range for fiscal 2010 of $2.16 to $2.20, representing an increase of 28% to 30% over EPS from continuing operations of $1.69 a year ago.

Our third quarter performance was driven by above market revenue growth, benefits from new and recent generic launches, a robust price increase environment, and continued costs in working capital discipline.

These are all familiar themes with generics providing most of the upside against our expectations in the quarter.

In addition to our continued strong operational performance, favorable litigation results contributed $0.05 per share to the quarter enhancing our GAAP results.

$0.04 of these litigation benefits are included in gross profit and the other penny is included in operating expenses within the facility consolidations line.

I will give more detail on these items within my income statement review and will summarize our increased EPS guidance at the end of my comments.

Now let's start with the walk down the income statement.

Our record $19.6 billion of revenue in the third quarter increased 6.6% over last year and was above market growth.

The drug company grew 8% helped by the strong growth of its largest customers as well as a 1% contribution from a large new customer added last August.

The specialty group grew 3% driven once again by ASD, our blood plasma and nephrology distributor, and ICS our third party logistics company.

The specialty group has grown 5% for the nine months ended June 2010 which is in line with our 5% to 7% guidance for specialty growth for the year.

Generics in this space have moderated top line growth but have certainly enhanced our overall profitability.

With our stronger than expected revenue growth for ABC as a whole, we now expect top line growth for fiscal 2010 to exceed our previous 7% to 8% forecast and assume full year revenue growth to be between 8% and 9%.

This range implies fourth quarter revenue growth in line with market growth of 3% to 5%.

Our gross profit in the June quarter grew in double digits for the third consecutive quarter increasing 13% over last June.

4% of this growth was from a $19 million legal settlement we received from a pharmaceutical manufacturer related to anti-trust litigation as disclosed as a subsequent event in our March 10Q.

Double digit generic revenue growth including the impact of several new and recent launches also contributed significantly to gross profit in the quarter.

Oxaliplatin, once again, provided a large amount of that generic benefit contributing $25 million, or $0.05 of benefit to the quarter.

This was in line with last quarter's contribution and better than we expected.

As Dave mentioned, despite the settlement between the brand and generic suppliers that prohibits those generic manufacturers from selling oxaliplatin after June 30, wholesalers can continue to sell the product they had on hand at the end of June, and we expect to have product available for sale to oncologist at least through the first half of our fiscal 2011.

I will note however, that with the 34% in reduction in averaged selling price, or ASP, that became effective July 1, 2010 for this product, we anticipate a decline in our selling price which will reduce our gross profit per unit going forward.

Accordingly, we are only expecting a benefit of approximately $0.03 in our fourth fiscal quarter from [Ox Valley].

In addition to oxaliplatin, there were a number of other generic launches in the quarter which provided an incremental $0.02 to $0.03 cents over our normal couple of pennies per quarter expectation for new launches.

I also mentioned in my opening comments that there were significant manufacturer price increases in the quarter, and while much of this impact on the brand name side was mitigated by our fee for service agreements, there were a number of increases particularly on the generic side that provided benefits to the quarter.

That manufacturer price activity also drove an increase in our LIFO charge in the quarter.

This charge for the quarter was $11 million compared to a $4 million charge last year, reflecting both strong brand name price inflation and year-over-year reduction in generic price deflation.

For the nine months ended June 30, 2010 our charge was $30 million compared to $21 million in the similar period last year.

Our current expectation is for our annual LIFO charge to be in the low $30 million range.

As usual, we will perform our annual LIFO calculation at the end of September, and as in the past, there can be some adjustments as a result of that snapshot.

Moving to operating expenses, total expense dollars in the quarter were flat compared to last June.

Keep in mind that last year's quarter included an $8.9 million impairment charge for one of our subsidiaries.

In the current quarter we benefited from a $4.4 million reversal of a legal accrual as a result of a favorable court decision related to ongoing employment litigation with a former Bergen Brunswig executive.

Offsetting that positive item, bad debt expense in the quarter increased by approximately $6 million over last year primarily related to certain position customers in the specialty group.

While we continue to expect operating expenses to increase 1% to 3% for the year, looking ahead to the fourth quarter and consistent with the last few years, we expect a significant sequential expense dollar increase between our third and fourth quarters.

Historically, this has been due to the timing of certain customer promotional activity, such as our annual customer trade shows.

In addition this year as a result of going live in July with the first phase of our ERP enabled business transformation project, we are now maintaining duplicate information technology infrastructures and will continue to do so for the remainder of the transition period for the move from our legacy system to SAP.

The incremental IT cost to maintain dual systems is expected to be approximately $10 million per quarter with approximately half of that relating to the start of depreciation for the new system.

Our future saving will really start to accrue at the end of the transition period starting in fiscal 2013 when we retire our legacy system and no longer have duplicate infrastructure costs or the project cost related to the ERP implementation.

Moving to operating income, EBIT of $282 million in the quarter increased a robust 32% over last year 21% excluding the favorable litigation items.

Operating margin expanded by an impressive 28 basis points in the quarter and for the nine months are up 23 basis points well above our expectations.

As we have mentioned consistently throughout the year, we expect a tough fourth quarter comparison due to the benefit we received in the prior year fourth quarter from a LIFO increase and from generic introductions, specifically oxaliplatin.

In addition, with our higher expense levels expected in this year's fourth quarter, I would expect relatively flat operating margins in the fourth quarter compared to the prior year.

We have increased our operating margin expansion expectation for the full year to the mid to high teens basis point range, and keep in mind that our operating margin expansion expectation when we began the year was in the flat to low single digit basis point range.

Moving below the operating income line, net interest expense of $18 million was up 22% as expected due to our bond offering earlier in the year.

Our effective income tax rate was 38.1% in the quarter compared to 36.8% in last year's June quarter, which benefited from certain adjustments.

Our diluted EPS of $0.57 in the quarter increased by 36% compared to last year's EPS from continuing operations, and was above our 30% growth in income from continuing operations due to a 5% reduction in averaged diluted share outstanding.

The reduction in shares was primarily due to our continuing share repurchase program net of option exercises.

Excluding our $0.05 litigation benefit, diluted EPS of $0.52 was up $0.10 or 24% compared to the June 2009 quarter.

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

We generated $213 million of cash from operations in the quarter bringing our nine month total to $559 million compared to $430 million for the first nine months of last year and we remain on track to hit our full year targets.

We had $44 million of capital expenditures in the quarter and $132 million for the nine months, and currently expect between $165 million and $175 million for the year, an increase over prior estimates primarily due to the timing of certain business transformation expenditures.

From the working capital standpoint average inventory on hand during the quarter were 24 days, consistent with the prior year.

Receivables management continues to be a focus as average DSOs in the quarter were 17.2 days, down almost a day from the prior year.

Averaged DPOs were up one day mainly due to the timing of purchases.

From a share repurchase perspective, we purchased $95 million of our stock in the quarter bringing our nine month total to $350 million, meeting our initial guidance for the full year, and accordingly we are increasing our fiscal 2010 share repurchase guidance to $450 million.

At June 30, we have $218 million remaining on our current share repurchase authorization.

Our gross debt to total debt in equity ratio at the end of June 2010 is 32% in line with our target 30% to 35% ratio, and we continue to have more than $1 billion of cash on our balance sheet which continues to provide us with great financial flexibility.

Now let's turn it our updated fiscal 2010 guidance.

We are increasing and narrowing our diluted EPS guidance from a range of $2.01 to $2.10 to a new range of $2.16 to $2.20.

This new range represents a 28% to 30% increase over 2009 EPS from continuing operations which, as a reminder, were with strong 17%.

This new range, as always, is on a GAAP basis and includes the $0.05 benefit we received from litigation items in the third quarter.

Our updated guidance implies a diluted EPS range of $0.44 to $0.48 in the fourth quarter.

As a reminder, the major differences between our fourth quarter EPS range and our third quarter diluted EPS of $0.57 are the non-recurrence of the $0.05 of litigation benefits we received in the third quarter, increased operating expense expectations in Q4 of $0.03 to $0.04 versus Q3, and a net reduction of $0.02 to $0.03 in buy-side profits as declines in the benefit from oxaliplatin and price increases should offset the benefit from new generic introductions in the quarter.

From a full year fiscal 2010 assumption standpoint we now expect revenue growth to be 8% to 9%, operating margin -- operating margin expansion to be in the mid to high teens basis point range, free cash flow to remain in the $525 million to $600 million range, and share repurchases to increase to approximately $450 million.

Keep in mind that Dave's preliminary comments on fiscal 2011 EPS growth are based on a $2.13 base EPS for fiscal 2010, which is the $2.18 midpoint of our GAAP range less the $0.05 of litigation benefits we received in fiscal 2010.

As always, we will give our detailed guidance in early November on our fiscal year-end earnings call where we would expect to have much greater clarity on all of our fiscal 2011 assumptions including the specialty generic opportunities.

So again, a lot to like about the third quarter, the nine months, and our outlook for the full year.

We continue to benefit from our market positioning and specialty in generics and from the incredible work ethic and dedication of our associates who continue to provide superior services to both our external and internal customers.

The future continues to be very bright for AmeriSourceBergen.

Now here's Mike Kilpatric for Q&A.

Thank you, Mike.

We will now open the call to questions.

I will ask you to limit yourself to one question until all have had an opportunity, and then if there's time we can ask -- you can ask additional questions.

Go ahead Cory.

Thank you.

At this time, we are ready to begin the question-and-answer session.

(Operator Instructions) Laurence Marsh of Barclays Capital, you may ask your question.

Okay.

Good morning, everyone.

Thank you.

A good quarter.

The question I had really just a clarification on the guidance, Dave and Mike, so 232 at the midpoint off the 213 in that range of 7% to 11%, you mentioned I think you're including some contribution first half from oxaliplatin.

I think you also mentioned you're assuming some contribution from the potential launch of taxotere gemzar.

How are you handicapping that given where we are in that process?

And then how do we think of the seasonality of the results, especially given the loss of Duane Reade starting in January?

You know Larry, I want to be careful here.

We're not odds makers, you know, and we don't really have any insight into the patent laws.

But our best guess at this point is that the [gemsidadine], the hydrochloride, and the [doxotaxol] will be a first quarter event.

That's what we're looking at right now.

Okay, so obviously some contribution, I don't leverage too much.

I guess along those lines just maybe clarify a little bit, if you could, the revenue contributions from specialty.

This quarter up 3%, I know you had sort of targeted 5% to 7%, is that just a higher than expected impact from generics?

And how do you think about the ESA volumes in oncology that you're seeing?

I'll start out.

I mean, nine months lie with -- we're pretty much in a line with our guidance of where we said we would be.

I think you hit it.

The big issue is probably the generics -- or the big issue is the generics, in the specialty which is impacting our top line, but you know, having very attractive impact on our bottom line.

And there's going to be more of that of course going forward.

I would say the other issue is that there's just been a lack of blockbuster drugs introduced in that space.

And that's probably the biggest issue.

I think another important take away here is that we are maintaining our market share and we think it represents market softness not individual to us.

Mike (inaudible) have a little bit about ESAs?

Yes, the ESAs, Larry, continue to be a small drag as they relate to oncology.

They were down about 12% over the prior year quarter but have stabilized sequentially really being flat.

And just as a reminder, they're less than 1.5% of our total revenues today, so we don't expect them to be a big drag as we go forward.

And also, just going back to your previous question, you had asked about seasonality as far as next year and I think, first off, it's too early for us to comment on, on seasonality or quarter by quarter impact, and as reminder we only give guidance for the full year as well.

okay, thank you.

Thanks Larry.

Next question please.

Robert Jones of Goldman Sachs, you may ask your question.

Thanks a lot.

Yes, so talked about some things that you're contemplating as far as specific drug.

I know you guys get into this too much, but we saw the approval of generic lovenox on Friday.

I was just wondering how that's contemplated in both the fiscal 2010 and then as we look into the preliminary guidance you gave for next year how that's contemplated in that number as well.

Sure.

Robert this is Mike.

We are happy to see a generic introduction.

That's going to be a significant contributor.

I think that contribution is going to be much greater in 2011 than in 2010.

Right now, there's only one generic supplier that's been approved.

And often when there's only one supplier it acts more like a brand name drug than it does like a generic until more manufacturers come into play, which we would expect to happen, and again may be that's in the fiscal 2012 -- or excuse me, fiscal 2011.

I think the other thing that's important to note about lovenox is it is mostly sold to our institutional pharmacy customers.

And as a result a very small percentage will actually go through our pro-generic program where we get our, our highest profit margin.

A lot of that product is going to be sold through third party GPO, GPO contract so the, the overall margin percentage is less than what I I've seen some people estimated at this point.

However, I think this is a product that is going to maintain a fairly high generic price in relation to the brand price because of its difficulty to manufacture and again I think it's going to provide a nice impact in fiscal 2011.

It's contemplated in our guidance and it really helps levelize the generic contribution between the two years.

No, that's helpful.

And I guess, just as a more broader follow up, there's been a lot of back and forth and confusion (inaudible) in the marketplace.

But I was just wondering if you guys could just discuss and tell us how you would characterized the generic launch schedule, say over the next twelve months relative to what we've seen over the past 12 months?

Yes, again, I think it's very important to realize that it differs for all of the wholesalers because we all have different fiscal years and it differs for other people in the industry as well.

And I think as we look are early on at fiscal 2011 we see the impact from generic launches whether they occurred in fiscal 2010 and are rolling into fiscal 2011, or just new launches in 2011, I think we look at the impact as being very comparable to what we have had in fiscal 2010.

And as reminder fiscal 2010 is better than what we expect at the the beginning of the year with a couple of at risk launches that have contributed significantly and a couple of launches that exclusivity where our original thought would be that, that there was no exclusivity involved.

Again important to note that the really most people like to talk about the Lipitor and Zyprexa and so forth that start out in November 2011.

That's our fiscal 2012.

So Mike's point about when the fiscal year starts here make a big difference on generic introductions.

But, for our fiscal 2012, I mean it's going to be unprecedented in terms of brands and generic conversions.

Thanks for the question.

Next question please.

Tom Gallucci of Lazard Capital, you may ask your question.

Thanks.

Just a couple of housekeeping items first on the guidance.

Mike, can you just clarify?

So how much were you expect oxaliplatin to be sort of for the full fiscal 2010 just to make sure we understand that, that framework that you offered there?

Sure, I mentioned it was $0.05 this quarter time--

Right.

-- and we expect about $0.03 next quarter.

Right.

And that's after contributing close to $0.14 in the first half.

Okay good.

And then how are you thinking -- you mentioned Duane Reade.

How are you thinking about Longs for fiscal 2011?

Well, you know at this point, Tom, we're expecting the contract, which is volume base contract, to pretty much run through at least through our, our third fiscal quarter and that's, that's our current thought.

We'll have some more guidance on that as we give you our detailed guidance for FY 2011.

Okay, and then, Dave, you talk about acquisitions and being sort of open to them certainly the balance sheet can handle them.

If you, if you could put odds on it, I mean, would you expect to do a deal in sort of the next six to twelve months?

Or is it just sort of a general awareness that you're interested if there's the right thing, but you really have no visibility in doing them or not at this stage?

Well, you know there's nothing out there right now, Tom, that is available that we're, that we're looking at.

But, you know, that can change in one telephone call.

And we're certainly open it.

And our most recent one, which is our largest one, has been -- worked out very, very well for us.

So, we are, we are very, very open to anything in our core competency, but nothing on the horizon at the moment.

Okay, finally, what's the blackout period of a buyback around earnings?

Our black out period around earnings?

Thursday.

I think two days after today.

Okay thank you guys.

Thank you.

Next question please.

Robert Willoughby of Bank of America Merrill Lynch, you may ask your question.

Yes, just a quick one as it related to the, the tentative range you threw out there for fiscal 2011.

I -- are we assuming the normal amount of share repurchases something in line with what you did this year?

Yes, I think no material differences, Bob, than what our capital deployment has been in 2010.

Obviously we'll refine that a little bit next quarter when we talk, but I think that's a fair assumption.

That's great, thank you.

Thanks.

Next question please.

Glen Santangelo of Credit Suisse, you may ask your question.

Yes guys, just a quick follow up question on oxi.

If I'm kind of doing the math correctly, it kind of suggests you made about $0.22 this year from oxaliplatin and if you're expecting kind of $0.03 in the fourth quarter, Mike, is that a reasonable run rate to use for the first two quarters of fiscal 2011?

I think it is, Glen.

Certainly ASP can change.

It's a very complicated formula that sometimes surprises people, but assuming that, that stays in that range I think that's a fair assumption.

And so if we kind of back into that logic you kind of suggesting may be the incremental contribution from both gemzar and taxotere combine is only about $0.15, which seem as little bit small to me particularly given the revenues on those two combined drugs would make it a fair amount bigger than eloxatin.

Now, I understand there's a kind of pricing implications and all that which would impact the margins.

But, am I correct in saying that aloxetine in and of itself is, is significantly bigger than gemzar and taxotere combined?

Well right now, you know, right now, Glen, that, that's our estimates here.

As we've said often, one of the things that made oxaliplatin so attractive was that is was an at-risk launch.

And, you know, we took advantage of that launch very early on and had a lot of products available in the marketplace.

I think it caught some people from surprise.

Certainly, these next two launches aren't going to keep anybody -- or are not going to catch anybody by surprise.

And you know there may be some more manufacturers involved early on at least with one of the products and then there were with oxaliplatin.

So right now that's our best guess.

A lot of things can happen between now and November when we give our updates.

But I think that's, that's where we are right now.

Okay, and just one follow up on the lovenox question, it appears that this drug could be on exclusivity for a fair amount of time, and within your initial fiscal 2011 guidance have you assumes that lovenox is on exclusivity for the full year fiscal 2011?

We would expect that there would be some competition in 2011.

Okay, all right.

Thanks very much for the comments.

Thanks.

Next question please, Cory.

John Ransom of Raymond James, you may ask your question.

Hi.

Just a couple.

Could -- did you give a ending share count?

I may have missed that.

I did not John.

But the ending share count, basic, before any dilution is $281.2 million.

Okay thanks.

And, secondly, just a bigger picture question, I mean, we're certainly seeing more pressure on the retail customers that you have.

Are -- is that materializing any way in some your pricing discussions on your renewals?

I will tell you, John, I mean I -- we're not seeing anything dramatically different.

You know it's always been a competitive, competitive industry.

But we're not seeing anything really out of line as we look at our total -- as we look at the total Company.

There's some pockets where there are some elements, but nothing total-- overall.

Our Good Neighbor Pharmacy continues to march forward signing up people and there's a half a dozen or so retail customers I stayed pretty close to just to kind of monitor how things are going.

Tends to be somewhat anecdotal, but they're businesses are, they're doing fine.

What do you think they're doing to offset things like AMP and AWP and MedicAid and what have you?

How are they able to keep their margins afloat?

They're moving in new and creative and innovative things, John.

There's a lot of DME work going on, there's a lot of medication therapy management initiatives started.

We've got a very strong private label program that helps them.

we've got a strong coaching program that is helping them run their businesses.

The generics that are entering their business provide them with great opportunities to enhance their margins.

So, the guys who are -- the retailers out there who are creative, are finding some pretty good niches.

They have a lot more service than generally a lot of their chain or large box competitors, so they are clearly holding their own and doing just fine.

Okay, and then the other thing that we are seeing, there's been a little bit of consolidation back on the generic manufacturers side, maybe pushing toward the mainstream players, a little bit away from some of the emerging Asian players.

Have you seen any, any effect from that?

Are you seeing that at all in your sourcing?

We really haven't, John.

I mean, it , it -- you know the one thing about the larger, the generic manufacturers that allows them to do at-risk launches when they've got a pretty strong balance sheet, so you know that can probably play into our favor.

Mike, you're pretty close to that

Yes, I know, I mean, we continue to have roughly one-hundred manufacturers on our pro-generic source program covering over 6000 SKUs.

So I think we've got plenty of flexibility within that manufacturer base of one or two consolidations not going to, not going to have a big impact on us.

Okay, and last question, do you think there will be any material effect on just your revenue metrics from dialysis bundling and some of the clinical concerns on the, just overuse of anemia EFAs?

Yes, John I, obviously some new guidelines came out yesterday and we haven't had a full opportunity to bed all of it, but all of it, but it appears to be very positive for the dialysis providers and not nearly the haircut that some were expecting.

So I think that's a very positive sign and I don't think we expect any material degradation to our revenue next year as a result of the proposed changes, or of the changes.

Okay, thanks a lot

You bet John.

Thanks.

Next question, Cory.

Lisa Gill of JPMorgan, you may ask your question.

Thanks very much and good morning.

Dave when you made some comments around a new fee for service agreement, I was just wondering are there any changes to what you've done historically?

That would be the first question.

And then, secondly, with bringing Glaxo now under fee for service, will there be impact to margins as we think about 2011?

Yes, Lisa, this is Mike.

I don't think there will be material change in profitability as a result of the agreements.

The good thing, obviously with somebody like Glaxo, is much more of that -- of our compensation is guaranteed and directly related to our services than subject to fluctuation and manufacturing pricing activity.

I think overall, we all work to simplify some of the agreements to make them work for both partners from an administrative standpoint.

But I think our goal, as we talked about at our Investor Day in December, was to get through this renewal process with the mega-mergers and make sure that, that the combined entities continue to recognize the value that we were providing them and maintain our economics, and I think that as we have now finished that process I can, I can say that has been accomplished.

Okay, great.

And then just one follow up.

You increased your bad debt reserve, Mike, in the quarter.

Are you seeing in anything specific within the drug retailers that , that you have concern or, was it just a basic review and that's the reason you brought the reserve

No, Lisa, most of that increase, as I think I may have eluded to in my comments, is in the, in the specialty group.

We had a couple of physician practices that went under during the quarter, which we had to write off as well as a couple others that had some issues with reimbursement that, because of that we thought it was appropriate to strengthen the reserves.

But I don't think, as I look at it, that there's any indication of a long term negative trend in that business.

Just as a reminder, our total bad debt expense on a annual basis particularly is typically in the $30 million range, which is in the 4 basis points to 5 basis points of, of revenues.

I think we've done an excellent job.

Our past dues on balance have come down the same way our overall DSO has come down.

So, we're, we're very confident that this is not indicative of any longer term trend.

Okay great, thank you.

Thanks Lisa.

Next question please.

Ricky Goldwasser of Morgan Stanley, you may ask your question.

Good morning.

Morning, Ricky.

I have a few follow up questions and some housekeeping.

So first of all can you give us the growth of for the bulk revenue and the customer mix for the quarter?

Yes, the bulk revenue was $238 million in the quarter down from $400 million some last quarter continuing that trend, as we transition more and more of that business particularly with our largest customer to servicing that from our existing inventories.

And from a mix stand point I think it's 31% retail and 69% institutional in the quarter.

Okay.

And then one follow up on, on lovenox, just to get a better sense.

I think you mentioned that fiscal year 2011 guidance assumes there's going to be some additional competition in, in, on lovenox.

So, from your perspective, are you thinking about an authorized generic, or additional generic (inaudible) competitor, because obviously that's going to have an impact on pricing in your ability to derive EPS?

I think it could be either one.

You know I hate to drill down too much on an individual product, and again, we're relying little bit of the assessment from our business people.

But we expect additional competition, and when there's competition, I think I that's going to be an enhance to our margin.

Little careful about talking about individual products here.

I mean, one of the things that makes our, makes our Company so attractive is the broad base offering we have and with any individual products you know we're a little uncomfortable getting too granular on them.

No, no, I understand.

So, maybe a general question just as we think about 180 and the impact on profitability.

Obviously in the past, you've stated when you see more than one competitor in the market places you see a benefit to your margin.

So, just to clarify, does an authorized generic would count -- in general count, as kind of that additional competition that you need to see in the market?

Yes.

Okay.

Great, thank you.

Thanks.

Next question.

Cory.

Steven Valiquette of UBS, you may ask your question.

Hi, thanks.

Two questions really on the guidance.

First on the fiscal 2010.

(Inaudible) there's really been no falloff in EPS from September -- or end of September quarter from the June quarter.

Obviously you mention generic eloxatin as a unique situation for this year.

Is there anything else hang this year to drive that fiscal decline inherent in the guidance?

Or is it almost entirely generic eloxatin?

You know again, I would start -- if you started with the $0.57 and you knock out $0.05 --

Right, well, aside form that part.

-- related to the litigation, I think other than oxaliplatin the big thing is I expect step up in expenses of $0.03 to $0.04 between the, between the third quarter and fourth quarter as I mentioned in my comments.

A big part of that is the fact that we're going to step up our IT cost from the maintaining duplicate systems as a result of our go-live with the first phase of our SAP project.

In addition if you look back historically, you'll see that we've had had historic step ups between Q3 and Q4 related to a lot of sales promotional activity particularly the fact that we run our customer trade shows in the fourth quarter and there's some significant expenses around running those programs.

Okay.

They're really -- the expenses are, are really the items in addition to a net decrease in the buy (inaudible).

Okay, so that may answer the second question as well which is kind of looking into fiscal 2011, I think somebody else mentioned this too, but if you look at share buyback contribution, I mean that alone has driven, call it 7% to 11% type in growth in EPS just from share buybacks alone over the past 3 years, 4 years.

So I would think that if you normally have some top line growth and some call it the 3 to 5 dips of operating margin expansion, kind of inherent, I'm guessing the extra IT you probably have less margin expansion next year and that would be sort of, would reconcile the difference between what we're talking about in terms of EPS growth drivers for next year.

Does that make sense?

Yes, Steve, I think your share buyback sounds little bit high to me.

I mean, this year, we've had about a 5% -- as we did in the third quarter -- about a 5% benefit, and you know that gets a little bit harder because we're still seeing some benefits from the shares we bought back last year when the entire market was depressed and obviously with the share prices up this year we can spend the same amount of dollars next year and not get the same benefit.

So I think you'll see a little bit of a -- you could have a reduced benefit even if we share -- we spend the same dollars from a share repurchase perspective, but yes, we've got a little bit harder expense comparison as we Dave and I both said in our prepared remarks, it doesn't mean our goal is not to continue to reduce expenses elsewhere.

We'll continue to do that.

Okay.

All right.

Thanks.

Thanks Steve.

Next question please.

Charles Rhyee of Oppenheimer, you may ask your question.

Yes, thanks for taking the question.

One follow up on the, on the operating expenses, Mike.

You kind of said it was going to be $10 million a quarter starting here in the fiscal fourth quarter and split 50/50 between SG&A depreciation.

Did I hear that right?

That's correct.

And you said it's probably going to run through fiscal 2012, or you said it ends in fiscal 2013?

I didn't catch that.

Yes, I think you will continue to have that as we transition our customers from our existing flat form to SAP.

Most of that should be done sometime in fiscal 2012, which means we'll, we'll recognize the full benefit of not having that, those duplicate costs in 2013 and we also won't have the project costs.

So it's kind of, kind of a double benefit once we get off of the old system and disconnect it.

How much of the project cost are uneven?

Yes, the project cost are -- I gave some guidance at the beginning of the year that they'd roughly be in the $30 million to $40 million range from an expense standpoint.

And I think that will be fairly consistent year-over-year between 2010 and 2011.

The big benefit next year is our capital spend should come down dramatically from the $165 million to $175 million range I have this year.

As we start implementation of the new system, a lot of development cost will go away and I think you'll see a significantly lower CapEx spend next year.

Okay.

Perfect.

And then my follow up question relates sort of back to the environment for independence, and Dave, you mentioned lot of the other things your clients are trying to do to improve their margins, but sort of as a relates to E&P itself, it obviously the market's trying to figure out how that will be priced relative to generics.

When you talk manufacturing partners do you get a sense on -- do you have any sense on where that pricing is starting to fall out?

We really don't yet, Charles.

It's still in flux, we're working on it, we got (inaudible) task force and reaching out to a lot of different manufacturers and getting different insights from different manufacturers.

So it's still in process, I would say, when we give you our guidance for FY 2011 with our detail guidance in our next earnings call I think we'll have a lot better handle on it than the early part of November.

Great thanks a lot

Next question please.

Richard Close of Jefferies and Company, you may ask your question

Yes, just really quick.

Obviously the oxaliplatin has been a strong contributor for this year, but when you look back at our beginning years guidance where have you guys outperformed?

I think in the past you've talked a little bit about other generic launches being a little bit more than originally anticipated and if you could give us the total for the year?

Yes, we'll start out right at the top, Richard.

I mean, our revenues are running a little stronger than we thought they would and that's what resulted in the increased guidance of our revenues going from 8% to 9% versus where we started in the year.

We've done a good job on our expenses and we continue to do a good job leveraging the business, which is one of the great drivers of this business.

The oxaliplatin turned out to be better than we thought.

Earlier in the year we thought even in the last quarter, we thought the pricing, the ASP would be little different than what it turned out.

So those are three big one that come to mind.

Mike?

No, I think you hit them Dave.

I think it's important to note we started the year with some significant headwinds from a customer repricing and expected refinancing which occurred, which kept us to that 8% to 14% we are now sitting on a year that's 28% to 30% over last year.

And as I mentioned in my comments last year was a strong 17% over the prior year.

So, we certainly did get a benefit from oxi, but I think it's very important to realize that we had a very, very strong year above our long term growth rate even without it.

Right.

Good, good perspective.

Okay so, on the quarter I think you said $0.02 to $0.03 over a couple of pennies, usually from new launches.

That's the right number for the third quarter?

Yes.

Okay what was it for the second and first quarter?

Did you give specifics on that previously?

I did.

I think most of the excess in the first two quarters was due to oxaliplatin.

Okay.

In addition to oxaliplatin was my point this quarter that you had Hyzaar and Cozaar and --

Yes.

-- you had a little bit of exclusivity during the quarter from Flowmax which wasn't necessarily expected.

So between the two of those you provide -- they provided a good part of that upside.

Okay great thanks.

We'll take one more question, Cory, and then we'll end the call.

Helene Wolk of Sanford Bernstein, you may ask your question.

Hi, thank you for taking the question.

Just a quick follow up on the 2011 generic out look.

I know you had mentioned a number of drugs that possibly are introduced in the first quarter.

And I guess we all have differing expectations around each of those drugs.

While you don't point to individual drugs, can you give us sort of a relative ranking in terms of importance of each of those drugs to you for 2011?

Helene I'm a little -- we're a little uncomfortable talking about individual products.

I think Mike commented upon the total FY2011 versus FY2010 and where we are, and then where we look for FY2012 given our fiscal year starts October 1, 2010.

Lot of -- the really big ones, the Lipitors, (inaudible) and the like which are expected to come in November of '11 will be in our fiscal 2012.

So I'd say those are the relative -- that's it sorts out relatively.

Yes, and again I think it's just important to keep in mind there are certain things from this year that roll into next year and that's all, that's all part of that consideration.

But I don't think we want to get into a item by item, detail analysis.

I don't think that helps us either, either competitively or -- and I know our manufacturers --

Sure.

-- wouldn't like us to talk about it as well.

The important point I think about the generics is just how well positioned we are with generics both in our specialty business and in our base business where all but our largest customers look to us for some of their generic needs.

And how well we have done as a Company over the years.

When I mentioned that we've been able to grow our operating margin in each of the last four years by 5 basis points to 8 basis point in each year.

I mean, a lot of that is being driven by the generics.

So the very positive impact that we've had on the generics and we talked about going back half dozen years or so we are now seeing -- come to fruition -- and it looks very bright as we look forward.

So our generic position, which we worked very hard to position ourselves in the marketplace to get advantage of that is one of the great drivers of our business.

That and specialty.

Great.

And just a question following up on that and an earlier question around the generic manufacturer environment.

Any changes that you're seeing either currently or on the horizon around supply availability, pricing and margin opportunity for you, not sort of the deflation cycle?

Anything that's changing around the relationship with generic manufacturers?

Certainly this year there's been some well known issues from a production standpoint and some raw material shortages, Helene.

And I think that's what resulted in certain generic manufacturers being in better positions than they thought they would be with certain products which has, which has led to increased pricing of those generics.

During the quarter we did get a benefit from generic price increases.

You know, we don't have, we don't have the same fee for service constraint that mitigates the price increases with generic manufacturers that we do have with the brand names.

Now saying that, do I think that's a long term trend in that industry.

I'm not sure that it is.

But I think what it shows that the generic manufacturers are going to actively manage their portfolios as more and more generics come on the market they're going to make decisions about which ones to produce, which ones not to produce, and certainly that can lead to some price activity.

But again, we like to keep in mind our philosophy.

We like to keep it spread around and even when there have been some of those shortages I think our broad base of one-hundred manufacturers has enabled us when there have been shortages to continue to provide great services to our customers.

Great appreciate it.

Thank you.

Given the fact that our remarks went a little longer, we will take one more call Cory.

Cory?

Garen Sarafian of Citigroup, you may ask your question.

Thank you for squeezing me in.

A couple of clarification questions with a follow up.

But one is, I might have missed this, but the guidance for fiscal 2011 that is 7% to 11% growth above the revised guidance that includes the $0.05 one-time fee?

That is the midpoint of the new guidance, $2.16 to $2.20.

The $2.18 which is the midpoint less the $0.05, so the base is $2.13.

Got it.

Perfect.

And then, regarding your business transformation timeline, I'm looking a the last timeline that I'd seen at the end last year.

But the program timeline, the deployment was -- it ended in 2011 so I'm wondering -- a little bit after midpoint 2011.

I'm wondering has the timeline changed?

Been postponed our pushed out a little bit?

Or is it just a -- I heard you say fiscal 2012, or am I just looking at outdated timeline?

I think we always intend to go somewhat in fiscal, fiscal 2012.

I think the key is it's going to take us a while to unhook our existing systems right at the point of the last conversion.

That period of time is probably going to take us into the end of 2012, so that 2013 will be first kind of clear year that we have where were only running on one system.

I think in 2012 you'll continue to have the existing system in play for part of it.

I've talk to a lot of CEOs who have been through this process.

There's one resounding theme, and that is do it right, not quick.

So we are -- it's more important do it right rather than accelerate a quarter or two.

So we're pretty much where we thought we would be.

Got it.

And then just lastly as a follow up to maybe another question to ask it a little bit differently.

On your balance sheet now your cash is at $1.3 billion and in prepared remarks you look at M&A opportunities and that's your first -- your cash deployment is your first priority.

But, looking externally, what's preventing you from further M&A opportunities?

Is it no attractive assets?

Is it the pricing's not reasonable, or anything else?

And at what points do you change the strategy to, to reduce the $1.3 billion to other purposes other than growing the business such as much greater share repos?

Thank you.

Well the first part is reasonable properties at reasonable prices.

So, we would not do any goofy acquisitions, just, just to log one.

So, we're continual -- we're continuing so look.

We've got a small group here that's constantly looking, but we just have not found the right properties at the right prices.

Mike, you want to comment?

Yes, I think just keep in mind from a deployment perspective that between our share repurchases and our dividends which we raised at least 33% each of the last five years, we're returning 100% or more of our free cash flow.

And as I mentioned that should not be great material differences between this year and next year, but we still have that, that leftover cash balance that we'll look to deploy in a manner that provides the greatest return for, for our shareholders.

I don't think we've put a deadline on that, that if we don't find an acquisition by x-point that means we are going to return it and I think we've done a pretty good job of, of managing that and making sure our shareholders have gotten the right returns.

Thank you.

Thank you, Garen.

And now Dave Yost would like to make some final comments.

This went on a little longer than normal, so we'll make this very quick.

I just again want to just thank you for joining us.

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

We have lots of positive momentum in our two growth drivers, which are specialty and generics and we look forward sharing our full fiscal 2010 results with you in early November.

Thank you very much.

That ends the call, Cory.

Thank you.

This concludes today's conference.

Thank you for your participation and you may disconnect at this time.