美源伯根 (ABC) 2010 Q4 法說會逐字稿

Welcome, and thank you for standing by.

All participants are on a listen only mode until the question and answer session of today's conference.

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

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

Now I would like to turn the call over to your host for today, Ms.

Barbara Brungess.

Ma'am, you may begin.

Thank you, Amy, and good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our fourth quarter and fiscal 2010 year end.

I am Barbara Brungess, Vice President Corporate and Investor Relations, and joining me today are Dave Yost, AmerisourceBergen's President and Chief Executive Officer, and Mike DiCandilo, Executive Vice President and Chief Financial Officer.

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 conference call cannot be rebroadcast without the expression permission of the company.

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

Now here is Dave Yost, AmerisourceBergen's President and CEO, to begin our comments.

Good morning, and thank you for joining us.

As you probably know from our press release this morning, ABC had a strong fourth fiscal quarter ended in September that completed a record fiscal year that was extraordinary by almost any standard.

Mike will drill down on the details, but let me note the fiscal year highlights.

Revenues increased over 8% to $78 billion.

Gross margin increased by 11%, while expenses increased 3%, driving operating margins up for the fifth consecutive year this year, by a strong 19 basis points.

We crossed the $1 billion threshold of pretax earnings for the first time.

EPS was up a whopping 28%, excluding litigation benefits.

We generated over $1 billion of cash in the year, and we did all this while we invested in our future, by beginning the implementation of business transformation.

Our SAP-enhanced ERP system that when completed will meet the future needs of our customers and suppliers for years to come.

This year's performance was delivered on top of last year's 17% increase in EPS.

Our compounded EPS growth since the company was created in 2001 is also 17%.

The strong performance in our September quarter is based on the momentum we carry into our new fiscal year that began October 1.

Our fourth quarter, ending in September, was a strong quarter in a series of strong quarters.

Revenues increased $1 billion, and over 5%, to 19.7 billion.

Gross profit increased over 10%, as we continued to benefit from our generic programs in both our growth company and specialty group.

Our DSOs were down one day versus last year to 17 days.

We are reporting a lot of strong performance metrics this quarter and year, and our DSO performance is one of the most powerful, because it speaks volumes about the strength of our customer base and the satisfaction of our customers with our total service and program package.

So, lots to like about the year and the quarter and a series of strong quarters and fiscal years.

The sound byte for ABC would be great performance in a resilient industry, with positive momentum going into FY 2011, driven by a solid customer mix, featuring generics and specialty.

Before I address some company specifics, a few industry insights.

First, US pharmaceutical industry revenue growth.

The IMS forecast of 3% to 5% for calendar 2010 and 2011 seems to be in the right zip code to us.

Next, 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 a few pieces of business this size changing wholesalers historically.

We continue to spend significant time and effort in Washington, looking after the interests of our customers and shareholders and like all of you, will be closely watching today's election results.

Now we'll get a closer look at ABC.

Among the big news items at ABC this quarter is that we went live with what we refer to as "Build One" of our Business Transformation process that includes an eventual total conversion to SAP among other things.

Build One includes our back office functions for the drug company and corporate.

We expect to begin the next phase of business transformation, which we call "Build Two," in the spring.

And this will entail converting each of the drug company distribution centers to the new system one by one.

When completed, our BT implementation will provide us with insights, 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 system, putting some pressure on cost containment efforts.

The very good news is that when completed, 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 is now helping to drive down our operating costs.

Another noteworthy news item for the company is that our drug company's Good Neighbor Pharmacy, our franchise-like retail program of over 3700 independent and regional chain customers, received the highest ranking in customer satisfaction for chain store pharmacies by JD Power and Associates.

The fact that Good Neighbor Pharmacy is recognized as a chain is a powerful statement of the role of independent in the health channel and noteworthy that two other networks of independent pharmacies ranked higher than the national warehousing chains.

The GNP recognition is strong testimony that ABC is doing business with the right customers and providing them with the right tools.

Then with the drug company, the drug company has now anniversaried all the significant new business captured over the last year that accounted in part for a 10% revenue increase in FY 2010.

The revenue growth of 6% in the drug company this quarter includes about 1% from a large customer that began with us a year ago August.

The drug company had a very strong generic quarter again, with generics outpacing total revenue growth by a large margin.

Our specialty group continues to set the standard of specialty distribution within the industry, with over $16 billion of annual revenue.

About half of that in oncology products to oncologists, where we are rolling out our new suite of clinical and commercial solutions to oncologists called Nucleus.

Our Nucleus solution is the most comprehensive commercial and clinical program in the market and features, among other elements, a new fully integrated dispensing cabinet.

While the top line in oncology supply has been negatively impacted by generics, most notably Oxaliplatin, generic for Eloxatin, the bottom line has been very positively impacted.

Though, we are usually uncomfortable talking about specific item inventory levels, we have made an exception with Oxaliplatin due to the magnitude of its impact.

And as noted and consistent with our remarks last quarter, we currently have enough Oxaliplatin on hand to meet the expected demand of our customers through March 2011.

That is, through our second fiscal quarter of FY 2011.

ASD, our blood plasma, nephrology and vaccine distributor, had another strong quarter, benefiting from the early shipment of flu vaccine this quarter, as did Besse Medical.

ICS, our third party logistics provider, also had a strong quarter.

ICS discontinued serving US oncology on a third party logistics contract that moved to direct manufactured distribution, effective two months ago in September.

While having a minimum impact on the bottom line in the specialty group and ABC, annual revenues will be impacted by about $800 million, beginning October 1.

It is important to remember this third party logistics company loss, when evaluating our year-over-year specialty group revenues.

And to remember that the lost revenues have not occurred at our main stream distribution business of oncology supply, ASD, and Besse medical, and do not represent a loss of market share.

It is important to note that only one customer does more than 10% of our total revenue and after that one customer, the next largest is in the 5% range of total revenues.

Our current revenues reflect the strength of our diversified customer base.

But before I address our guidance for FY 2011, let me recap FY 2010.

A very strong year, following a series of strong years, reflecting growth that continues to be characteristic of ABC.

EPS up 28%, not including the gain from litigation, driven by generics and specialty.

Operating margin expansion, with cash generation outpacing after-tax earnings.

For the past nine years, that is the entire history of AmerisourceBergen, our compound EPS growth rate is 17%, is 20% for the last five years, and 24% for the last three years.

With our strong cash position, let me reiterate our position on acquisitions.

Although none are contemplated in our 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 to us and we look to stay within our area of core competency.

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

Now, a look at FY 2011.

We expect to grow our revenues with the market in the 2% to 4% range.

We expect operating margin to increase in the low to mid single digit basis point range.

We expect to continue our share repurchase program in the $400 million range.

All the above we expect will drive our EPS to $2.31 to $2.41, a 7% to 12% increase on top of the extraordinary 28% increase of FY 2010, excluding litigation gains.

So the dead net is the strong performance continues.

Beyond FY 2011, I would offer the following perspective with the caveat that is very preliminary.

Our FY 2012 will feature the largest brand name to generic conversion in the history of the drug company.

Beginning in November 2011, our first fiscal 2012 quarter, when Lipitor and Zyprexa are expected to go generic.

The specialty group will have tough comparisons due to generics, including introductions that occurred in FY 2010 and FY 2011, but on balance, we look for FY 2012 to be another good year.

Our FY 2013 will feature the carry-over of the FY 2012 generic conversions in the drug company.

Several of which will occur in our fourth, or September quarter, and the beginning of the benefit from the completion of our Business Transformation program, when duplicate IT costs should be eliminated.

Our FY 2014 will feature positive impacts from BT and the entrance of some 32 million or so, maybe even as many as 40 million uninsured, into the healthcare system as part of healthcare reform legislation.

It is our opinion that these uninsured will enter the market with a high demand for pharmaceutical services, which of course is the most efficient element of healthcare.

The new demand created by these newly insured will be a great boost to our FY 2014 and carry into our FY 2015, both years of which we expect to have solid generic introductions as well.

We are hopeful that somewhere along the way, the billions of dollars of research being expended annually by big pharma will yield some exciting new products, and of course at risk launches can occur without warning.

The take-away here is that demand for the products we distribute is strong well into the future and the ABC circle of life is as relevant today as it was a decade ago.

We are comfortable with our 15% long-term EPS growth goal, particularly given our track record of 17% for the last nine years, under conditions that could easily be described as challenging.

But the 15% goal for a specific year needs to be mitigated following extraordinary years, like the 28% increase year just before.

I continue to be very excited about the future role of the pharmaceutical distribution industry and the role that ABC will play in that industry, with our drivers of specialty products and generics.

I can tell you with experience approaching four decades in the industry, our best years are yet to come.

Here's Mike.

Thanks, Dave, and good morning everyone.

We had a great ending to what was already an incredible year with 14% EPS growth in the fourth quarter, despite a tough comparison to our prior year fourth quarter, which grew EPS by 22%.

Before I review our quarterly results followed by some more commentary on next year's guidance, I would like to take a few minutes to reflect on our full year fiscal 2010 performance and compare that performance to or original expectations for the year.

As a reminder, our long term financial model is based on revenue growth, operating margin expansion, and significant cash generation, and we exceeded all of our original fiscal 2010 financial targets, in these areas.

Our original revenue growth guidance for fiscal 2010 was an above market 5% to 7%, factoring in the significant new customers we added in fiscal 2009 and we finished the year well above that range, with full year revenue growth of 8.6%.

We expanded operating margins by a robust 19 basis points, far exceeding our original assumption of flat to low single digit basis points operating margin expansion.

This original assumption reflected head winds from a significant customer repricing in the fourth quarter of fiscal 2009, as well as incremental ERP spending in fiscal 2010.

While both of these occurred, our actual performance benefited significantly from the at-risk launch of Oxaliplatin in the specialty group.

And stronger than expected buy-side performance from both brand name and generic pharmaceuticals, as well as stellar productivity gains in expense control in the drug company.

From a historical perspective, our annual operating income exceeded $1 billion for the first time.

On top of our strong operating performance, we once again demonstrated very disciplined working capital management, highlighted by a year-over-year decline in accounts receivable balances, despite the robust sales increases.

Resulting in free cash flow of $924 million for fiscal 2010, far exceeding our original estimate of free cash flow in a range of $500 million to $575 million.

That strong free cash flow allowed us to accelerate certain internal projects, raise our dividend by 33%, and expand our share repurchase program, where we bought from $470 million of our shares compared to our original $350 million guidance.

All of these factors combined to drive our GAAP diluted earnings per share to $2.22, a 31% increase over diluted EPS from continuing operations in fiscal 2009, and well above our original EPS guidance range for the year of $1.82 to $1.92.

Excluding the special benefits we received from litigation gains, fiscal 2010 diluted EPS would have been $2.16, a 28% increase over fiscal 2009.

Also, very importantly, we strengthened our already strong balance sheet during the year, received a ratings upgrade, won awards for customer service, and implemented the first phase of our ERP-enabled business transformation project.

Truly, an exceptional all-around year for ABC, and we thank all of our associates who continue to deliver a superior level of customer service every day.

Now, moving to our quarterly results, and starting with our top line.

Revenue increased by 5.3%, with almost 1% of that increase attributed to a large alternate site customer we added in August of 2009.

The drug company increased its top line by 6%.

Benefited by that new customer, as well as by the above market growth of certain of the drug companies' largest customers.

The speciality group grew 4% in the quarter, once again driven by ASD, our nephrology and blood plasma distributor, and ICS, our third party logistics company.

As Dave mentioned during the quarter, ICS has discontinued a large 3PL contract that has moved to direct manufacturer distribution.

The loss of this $800 million a year contract will impact specialty revenue growth by about 5% in fiscal 2011 and overall ABC revenue growth by about 1%, but importantly, will only have a minimal net earnings impact.

Gross profit increased by 10% in the quarter.

The fourth consecutive quarter in which we achieve double-digit growth.

The growth in gross profit this quarter is particularly impressive as we have now anniversaried the August 2009 Oxaliplatin launch, as well as the 2009 new customer additions.

Oxaliplatin gross profit contributed $0.04 to the current quarter earnings, exceeding our expectation of $0.03, and was down sequentially and from our prior year quarter levels as anticipated.

Accordingly, most of the quarterly gross profit growth has come from the drug company, where double-digit generic sales growth, including the impact of new launches, and performance under branded fee for service agreements, more than offset normal competitive pressures on margins.

Our LIFO charge in the quarter was $400,000 compared to a credit of $5.7 million last year, and for the year, our LIFO charge was $30 million compared to a charge of $15 million last year.

Moving to operating expenses, I mentioned last quarter that expenses would increase significantly, sequentially, between the third and fourth quarters and that has occurred as expected.

Part of that fourth quarter increase, as discussed last quarter, was the commencement in the quarter of duplicate IT infrastructure costs, as a result of our go live with the first phase of our ERP implementation.

We will continue to incur approximately $10 million of duplicate IT costs per quarter, as we fully transition away from our legacy system, which is expected to occur by the end of fiscal 2012.

Also contributing to the expense increase in the quarter, we wrote off about $7 million of software costs and incurred $2.5 million of intangible asset impairments.

In addition, we incurred quarterly increases in incentive compensation, as well as bad debt expense, which while still higher than average, was down sequentially from last quarter.

Our double-digit growth in gross profit led to an impressive 11% increase in operating profit.

And our operating margin of 126 basis points in the quarter increased by six basis points over the prior year period.

For the year, once again, our operating margin of 142 basis points increased by an outstanding 19 bps.

Moving below operating income, net interest expense of $18 million in the quarter increased 21%, consistent with prior quarterly trends due to our bond offering earlier in the fiscal year.

Our effective income tax rate of 38% in the quarter was in line with last year's rate.

Our diluted EPS in the quarter of $0.50 increased by $0.06, or 14% from a year ago.

Our EPS growth exceeded our 8.5 % increase in net income due to the reduction in average diluted shares outstanding, primarily as a result of our share repurchase program over the last 12 months.

Average diluted outstanding shares in the quarter were just under 284 million, down 4% from last year.

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

Cash generated from operations in the September quarter was an extremely strong $549 million, bringing our full year cash flow from operations to $1.1 billion.

Our free cash flow, which we define as operating cash flow, less capital expenditures, was $924 million for the year.

Well above our increased guidance of $525 million to $600 million, primarily due to better than expected working capital management and the year end timing of payments to manufacturers.

Inventory days on hand averaged 25 days during fiscal 2010, consistent with last year, an average DSO for the year of 17.3 days, was down almost a full day compared to 2009.

EPO's were up on average by about half day, reflecting product mix shifts to more generics and timing.

Our gross debt, total debt, and capital ratio at the end of September was 31.3%, within our target range of 30% to 35%.

We bought $120 million of our shares during the quarter, bringing our full year share repurchases to $470 million.

And our board authorized a new $500 million share buyback program in September, and as of the end of our fiscal year, we have $598 million remaining under board authorized repurchase programs.

Our cash balance at the end of September exceeded $1.6 billion, leaving us with great financial flexibility, as we enter fiscal 2011.

Now let's turn to our guidance for the coming year.

Our fiscal 2011 guidance for diluted earnings per share is a range of $2.31 to $2.41, an increase of 7% to 12% over our fiscal 2010 diluted EPS of $2.16, which excludes our $0.05 benefit from fiscal 2010 litigation gains.

The assumptions behind this guidance include revenue growth of 2% to 4%, operating margin expansion in the low to mid single-digit basis point range, and free cash flow in the $625 million to $700 million range, which is in line with our long-term goal of free cash flow approximating net income.

Our guidance assumes share repurchases of approximately $400 million, depending, of course, on market conditions.

We would also expect net interest expense to be up to 20% higher in fiscal 2011, as we anticipate fee increases upon renewals of our liquidity facilities and less capitalized interests, now that we are live with our ERP platform.

In addition, we expect our effective income tax rate to be in the 38.4% range, above the 38% we experienced in fiscal 2010, which benefited from certain adjustments, primarily from tax audits.

We should also see our capital expenditures decline from the $185 million level back to the $150 million range.

To drill down a little more on our revenue and margin assumptions, we expect the drug company to grow with overall market growth, which we believe is in the 3% to 5% range.

As we stated last quarter, this assumes the transfer of the Duane Reade business at the end of our first quarter and the expiration of the volume based long CVS contract at the end of our third fiscal quarter.

On the specialty side, we expect revenue growth to be flat to slightly down, reflecting the 5% impact from the third party logistics customer I mentioned earlier that is now going direct.

In addition, we expect some top line moderation from new generics.

Importantly, however, we should have significant operating margin expansion in specialty, despite tough comparables, as we expect the impact from generic Gemzar and Taxotere, along with the continued availability of Oxaliplatin for at least half of the year, to more than offset the contribution we received from Oxaliplatin in fiscal 2010.

That contribution was approximately $0.25 of earnings.

Within the drug company, we expect relatively flat operating margins, as positive product mix trends should offset the incremental IT expenses discussed earlier.

It's important to note that even with the incremental IT expenses, total operating expense growth for ABC as a whole should be less than revenue growth, as we expect continued productivity gains in our distribution network.

The packaging group, while very small to ABC, is less than 0.5% of total revenue, is expected to grow earnings in double digits on top of the 30% earnings growth they experienced in fiscal 2010.

As a reminder, we generally do not give quarterly guidance due to the inherent variability in our business on a quarterly basis.

However, remember that our fiscal 2010 first quarter EPS was up a phenomenal 44%, due to an unusually large benefit from generic introductions, most notably Oxaliplatin.

Accordingly, looking forward to fiscal 2011, the December quarter is expected to be our toughest quarterly comparison even with the planned mid-November launch of the two new specialty generic products, which we believe will have a limited impact on our first fiscal quarter results, as our customers transition from their brand agreements.

Taking all of this into account, we would expect our first fiscal quarter results to be in line with those from last December.

I know that we've covered a lot of information, but let me summarize by once again reiterating that we had a solid quarter, which finished an incredible year, with over 30% EPS growth, and our momentum going into fiscal 2011 remains very strong and despite tough comparisons to fiscal 2010, especially in the first quarter, we expect a solid year once again.

Now, let me turn it over to Barbara Brungess, our new Vice President of Corporate Investor and Investor Relations for Q&A.

Thank you, Mike.

We'll now open the call to questions.

We ask that you please limit yourself to one question and a brief follow-up so we may accommodate as many as possible within the hour.

Please go ahead, Amy.

(Operator Instructions) Our first question comes from Larry Marsh with Barclays Capital.

You may ask your question.

Thanks, and good morning, everyone.

Dave, I'm impressed, you're already talking about fiscal '15.

So that's good visibility in my book, man.

So my question, a follow-up, so you're communicating tougher comps in specialty next year.

You already gave us guidance a little bit for this year.

I assume that's because of the oncology comps.

I want to make sure, if there any more details you would point us to as we try to model next year and the year after would be great.

I guess my follow-up, given what McKesson announced yesterday, in addition, just a view of how you look at the M&A opportunity today, versus six months ago.

Is it better or worse?

I know you talked about it a little bit.

And would you be disappointed if you didn't complete something here in the next six to 12 months?

Thanks.

Larry, let me start off with the M&A.

We were glad to see McKesson's endorsement of the space because we think that the speciality space is a great place to be.

You know, we're optimistic that there may be some, some more activity in M&A over the next 12 months or so, particularly if the tax laws change and the like.

So we would, we would hope to have some opportunities.

You know, as we mentioned in our prepared remarks, we've got good cash.

We've got a lot of financial flexibility, got a lot of depth in our management team so we can take on an acquisition of some -- with some size, very comfortably.

In terms of specialty, Mike, do you want--

Well, sure, Larry.

As I said in fiscal '10, we were benefited by approximately $0.25 due to the oxaliplatin launch, and then in fiscal '11, we expect to build on that with the carry-over of oxy, as well as the introduction of the two new generic products.

Certainly at this point we would expect somewhat of a drop in new introductions between '11 and '12 in the specialty group, but the timing couldn't be better because it's the year in which we've got the biggest impact from generic introductions on the drug side.

So I think the point we're trying to make is balancing those two out.

I think it's going to be a net positive and we should be headed towards a good year in fiscal '12.

And Larry, while I try to give some insight what we see beyond '11, when we get out '12, '13, '14, even on to '15, we think our earnings opportunities are very strong here.

Very helpful, thanks.

The next question is from Bob Jones with Goldman Sachs.

Thanks for the questions.

Just a follow-up on the proposed acquisition of US oncology.

I was just wondering if you could talk a little bit more about how that may affect the competitive landscape and then maybe just for our own background, maybe compare and contrast how the ABC offering differs from the US oncology offering.

Well, first of all, thanks for the question.

First of all, we don't think the landscape changes very much as far as our customers are concerned.

All of our customers have had an opportunity for sometime, for years, to do business with US oncology and have elected not to do so.

So, we don't think it's any downside, at all to us.

I guess I'm most comfortable talking about the offering that we have, rather than what some of our competitors have.

And what we've got is a very flexible system that provides a wide array of programs in both clinical and commercial applications for the oncologists, which allows them, we think, to compete most effectively against any other programs that are out there.

I mean, I would tell you that over the years, we've established and maintained, a clear market leading position.

There are some estimates, floating around that have us over 50% of over some items in the market.

So, we would say our model is pretty tried and true here.

We continue to enhance it.

And as I mentioned, our new Nucleus roll out -- we're very excited about that, includes a new cabinet, which we think the market's going to be very receptive to.

So, we're very happy with our, with our program.

We don't think there's any big pieces that we're lacking or the like.

And the fact that we've been able to maintain our strong leadership in that market we think would enhance that or would endorse that.

That's helpful.

I guess my quick follow-up would just be operating margins were again strong.

Generics clearly a big contributor there.

Given that this was your fiscal 4Q, could you maybe just touch on any year end rebates, particularly on the generic side relative to your expectations in the quarter?

Thanks.

Yes, certainly, Bob, as you said, the generic landscape was very favorable in the fourth quarter.

We benefited from double-digit revenue growth.

As I said, our growth was in the 14% range and we were in double digits every quarter this year.

And one of the things that helps you do is achieve different tiers of rebates, particularly with our year end being some annual rebates, we did very well in that area and that's one of the contributors to our excess actual results over what was anticipated.

Thanks.

Next question, please?

Our next question is from Glen Santangelo with Credit Suisse.

-- questions.

I was kind of curious about in the past you kind of gave us, you gave us the exact contribution from Eloxatin in fiscal '10.

I think on last quarter's call, you sort of suggested that the two-quarter contribution in fiscal '11 from oxy combined with Gemzar and Taxotere would probably offset that fiscal '10 contribution from Eloxatin.

Do you still believe that to be the case given what you maybe know now about pricing, et cetera?

I think we expect it Glen, to be slightly better.

I think we obviously had a little bit more information today.

We've seen how oxy's pricing has held up following the change in ASP, from the beginning of last July, where ASP was down over 30%.

And based upon that, the fact that the market price held up we did a little bit better in our fourth quarter with oxy; we thought it would be down to about a 3% contribution.

As I mentioned, it was $0.04.

And we expect that range to continue for the next couple quarters and then in combination with the atmosphere solidifying some amongst the other generic introductions, I think we're confident that we should have a slight increase over the contribution we received in fiscal '10 for oxy.

It's important to note that both gemcitabine and docetaxel have not hit the market yet.

They are due soon, but they haven't hit yet.

Okay.

And, Mike, maybe if I could just ask you a follow-up question on the SAP transformation.

Could you just give us all a sense for maybe how much you're expensing related to that transformation versus capitalizing so we can get maybe a sense of the run rate of the expenses being incurred this year and maybe next year and to give us a sense for what maybe goes away in fiscal '13?

Yes, Glen, I want to be very careful here.

It's a segregation of project expenses from the costs of manning duplicate IT systems for the two year period, and from an expense standpoint, we expect to have project expenses in the $30 million to $40 million range in fiscal '11, and that's very much consistent with fiscal '10.

Total spending, however, I would expect to be down in 2011.

2010 was really our peak year for capital spending, where we in total spent over, over $120 million, including the expense.

I would expect total spend in '11 to drop down probably to the $80 million to $90 million range, which again, includes that $30 million to $40 million of expense.

And then, just to distinguish that from the duplicate IT infrastructure costs, that's simply the costs of having two systems live essentially for the next two fiscal years, 2011 and 2012, and in total, that's going to be about $10 million a quarter of duplicate costs that should go away as we enter fiscal '13.

So we should have both the duplicate costs that go away, as well as the project expenses and as Dave said, he left with a very state of the art system that's going to serve us and our customers very well.

Okay.

I appreciate that.

And Dave, maybe if I could just ask one last question.

On your multiyear outlook, I think you made some initial comments about the first quarter of fiscal '12.

I just want to be clear.

Were you sort of suggesting that Lipitor and Zyprexa would somewhat offset the contribution from Gemzar and Taxotere in this fiscal first quarter?

I was just a little bit unclear as to what you were trying to say there.

Well, I was trying to call out, Glen, I appreciate the call for clarification, is that when people talk about '11 and '12, sometimes get mixed up with our fiscal years, which starts October first.

So our fiscal '12 will include the two large introductions in calendar 2011.

And that's what I was just trying to call out, that our fiscal starts October first, so when you think about, our 2012, it's got a couple of big introductions early in the year, early in our fiscal year.

Okay, all right.

That's helpful.

Thanks so much.

Next question, please?

Our next question is from Ricky Goldwasser with Morgan Stanley.

Good morning.

Hi, Ricky.

Hi, Ricky.

Had a few follow-up questions here.

First of all, on the generic gross, obviously you said it had outpaced revenue growth, but can you give us some details on the magnitude of the increase that you've seen for your generic book?

Yes, Ricky.

I mentioned double digits, and I think for the quarter, we were up 14%, which it obviously is in excess of our overall revenue growth of 5%, and certainly that reflects the market growth and some of the new introductions that occurred in the quarter, like Effexor as an example, and I'm not exactly sure where the market growth came out, probably high single digits, low double digits.

The fact that we grew a little bit faster than that reflects the fact that our compliance efforts continue to bear fruit and we continue to get more of our customers' wallet.

You also got to remember, Ricky, we're working off a pretty big base here, so those numbers are even more impressive dollars.

Okay, and then just follow-up on the guidance in the updated assumptions into guidance, have you changed any of the generic product assumptions embedded in the fiscal year '11 guidance compared to what you've provided on the second quarter call?

I think the only thing we've changed on our, on our last conference call is the fact that we now expect the three specialty products in '11 to slightly outpace the benefit we got in fiscal '10 from oxaliplatin

Okay, and just as a reminder, these three are --

Yes, the carry-over of oxaliplatin, Gemzar, generic Gemzar and Taxotere, which we expect to be introduced in mid-November.

Okay.

So based on the Concerta news from today on the launch of an authorized generic sometime in your fiscal year '11, would that be upside to current guidance?

Well, sure.

Our guidance always -- we always have a fairly small bucket in there for at risk launches, nothing material.

And certainly, Concerta is positive news for us and there's upside, but it's not something that would make us consider changing our range at all.

It fits right into our overall assumptions.

You got to remember also, it fits towards the back end of our fiscal year, too, so is going to have limited impact for our fiscal.

Would be a nice start for our '12.

Okay, thank you.

Next question, please?

Our next question is from Tom Gallucci with Lazard Capital Markets.

Good morning, and thanks, Dave, for sort of the longer-term perspective there.

I guess just coming back to something that you had mentioned, and there was a question about earlier, in terms of the acquisition environment, can you remind us of your thoughts towards the balance sheet, your overall capital structure strategy, what sort of leverage you're comfortable with, and when you talk about -- I think you might have said the word sizable deals.

What's a big deal, a small deal in your mind?

Well, Tom, maybe I'll just talk about capital structure a bit and Dave can add any commentary.

We have a number of goals, but the primary goal is to be an investment grade rated company, in the high BBB space to the low A space -- to do that, we think we need to have a total debt to total cap and debt ratio somewhere in the 30% to 35% range.

We're on the low end of that range at 31% right now, we think that's a very comfortable space for us.

If we saw an acquisition that would take us slightly above that and showed a path to returning to that range, we would certainly consider it and I think we have the resources, both cash on hand and borrowing capacity to do a fairly sizable acquisition.

Right.

We've talked about it in the past, Tom, that couple hundred million dollars is kind of our sweet spot.

That's where Bellco -- the range Bellco was in -- But I will tell you we can -- in the right company, the right space, we would, we would be comfortable with a billion dollar or so acquisition and I think we could handle that comfortably.

Okay, and then before, you mentioned compliance on the generic side.

Can you sort of frame maybe for us where are you in, in the level of compliance and how much room you sort of have to run there over time?

Well, we're not as high as we should be, Tom.

We've got more level to go.

We're beating all the salesmen on a regular basis to get them where they need to be.

We've got a big sales meeting coming up in a couple of weeks and it's one of our key issues.

And I think that the good news is we are definitely making very positive strides and that's why we're outpacing the market.

We're tracking generic compliance customer by customer, customer segment by customer segment.

We're making some good end roads outside traditional areas, including our alternate site, in hospitals-- but we have some opportunity in front of us and runway and that's all upside for us.

I mean, we think we got some more opportunities to continue to grow faster than the market is growing in terms of generics.

Okay, thank you.

You bet.

Next question, please?

Our next question is from Eric Coldwell with Robert W.

Baird.

Thanks, good morning.

I know that in the past, once you've completed fiscal years, you've been able to deliver the AmerisourceBergen specialty group operating margin for the full year.

Is that something we need to wait for to IR day, or is that something we could get to today?

Yes, I would prefer, Eric, to lay that out during the investor day.

I can say that we did layout a margin expectation at the beginning of the year of 170 to 180 basis points for the specialty group.

Obviously with the success of oxaliplatin we came in well above that range.

As I mentioned in my comments, not only did we come above it this year, but next year we expect to continue that margin expansion in specialty, and I'll go into that detail by business unit at investor day in December.

We want a whole little pack of Erics so everybody will come join us for lunch, you know?

Dave, we'll be there.

But I guess my follow-on, and it was a nice segue from Mike.

If that margin approached 1.9% to 2%, wherever it was, based on your prepared commentary with the substantial expansion expected in fiscal '11, it looks to me as though you're probably targeting another operating margin expansion in the ball park of 30 or 40 bps give or take and obviously phenomenal.

But the question is, is that really driven by generics and productivity and efficiency and things of that ilk, or is it really driven by the fact that you've got this $800 million 3PL business coming off it at a very low earnings contribution, so it's really a mix shift or the symptom of that big 3PL piece of business coming out?

Certainly both contribute, Eric.

When you lose a large low margin piece of business, it certainly helps what's left on board.

And the fact that we had strong margin expansion in fiscal '10 gave us a tough comparable for '11.

So certainly we're encouraged by the fact that we expect another strong generic performance in '11, but as you said, mix certainly has an impact as well.

Okay, that's fair.

Thanks so much.

Look forward to seeing you next month.

Okay.

Thanks, Eric.

Next question, please?

Our next question is from Lisa Gill with JPMorgan.

Hi, thanks very much, and good morning.

Steve, I think that I've heard you in the past talk about why you don't believe the drug distribution business is a great LBO candidate.

More recently, we've heard, and obviously your competitor made a comment about this last week, but I'm just wondering if you could maybe just reiterate for us why having an investment grade rating is important for the company.

We think it's very important, Lisa, because of the large receivable we carry, for our manufacturing partners.

They really look to us to handle their entire book of business.

And you take all the brand name and generic as well, they've essentially got their entire book of business concentrated in three wholesalers.

And we think that if we were not investment grade, that would give them pause, and perhaps cause them to rethink their terms to us, both in terms of discounts and perhaps time that they would give us to pay our bills.

So we think it's very important going forward, and we would be comfortable in that arena.

Okay, great.

That's helpful.

And then just as my follow-up question, I think in your prepared comments you talked about the marketplace being rational and stable from a competitive standpoint.

The big contract that caused a lot of that concern was the [A] back several years ago when that changed hands and that will be coming up for renewal again.

Do you have any comments as far as what your thoughts are around a big contract like that and if you think the marketplace is different today than it was six years ago?

Well, it's a large contract, Lisa, and, we would, we would expect to bid on that.

We would expect others to bid on it as well, but I think that I would expect the business to be rational on that, reflecting all the ramifications of that business.

The business definitely has had historically some unique components associated with it, that has traditionally made it very attractive.

I would expect it to be a competitive bidding process.

One of the things that makes that somewhat unique is you don't have the ability to negotiate when the time's up.

It literally has to be bid by statute.

So, I would expect it to be a competitive environment and I would expect everybody to show up and I would expect everybody to be rational.

Okay, great.

I appreciate your comments.

You bet.

Next question, please?

Our next question is from Helene Wolk with Sanford Bernstein.

Good morning.

Just a couple of quick questions.

First, both of your competitors talked about some timing issues in the September quarter, one around branded price increases and the other around fee for service payments.

Any of those timing issues relevant in your September quarter?

Not any great items to point out, Helene.

Certainly the brand price appreciation in September was robust, as it was for some of our earlier quarters.

For the year, our brand price appreciation was north of, north of 8%.

We did not see any huge timing issues.

But it does bring up an important issue, Helene, and that is there that can be, there can be timing issues from quarter to quarter, depending upon when certain things occur.

That's why with the exception Mike's insight into our first fiscal quarter of next year, we're uncomfortable providing quarterly guidance.

Sure, appreciate that.

Just a second follow-up question.

Any guidance around what you're assuming around ESA use, particularly in the dialysis setting?

We think the ESA, Erythropoietin stimulating agents are probably off a little bit in their nephrology business -- I think there could clearly be an offset to that, in terms of IVIG and other products.

But I think it's important to put in perspective that that is about 3% of our business.

So you're talking about a percent of a percent here, so it gets to a pretty small impact to us totally.

Great, thank you.

Next question, please?

Our next question is from John Ransom with Raymond James.

Hi, good morning.

Good morning, John.

Just speaking a little bit more conceptually and broadly on your acquisition history and acquisition opportunity, I guess it's fair to say when you guys have run businesses outside your core competency, PharMerica, Bridge Medical, I can't say that the results have been spectacular.

And then on the other hand, it just -- it appears to me like there's a scarcity of goods supplied -- good meaty supply chain opportunities.

So how do you square that circle?

Well, you know, I will tell you, John.

You're actually being kind.

You're right.

We have not done very well outside our core competency and that's why this management team doesn't feel very comfortable going far afield and want to just focus on our core competency.

The way we've kind of squared it in the past is by simply returning money to our shareholders by buying our shares back and increasing our dividend.

And we only do that in the absence of having the opportunity to make acquisitions or invest within our own business.

So with capital projects and the like, but we will continue to not be tempted to go far afield.

We think the countryside is littered people who do one thing well and think they can do a lot of things well, so we're going to stay within our core competencies.

We go forward, and if we don't have -- if properties don't show up John, that we think are attractive, we'll do as we did this year, with a lack of acquisitions, and that is we'll buy our shares back and reexamine our dividend.

I'm kind of mad that you didn't send me any money, but that's fine.

Since you've got all that money laying around.

The other question I have is just conceptually on oncology, you guys have built a wonderful franchise there.

Clearly your two large competitors are making moves to try to chip away at that franchise -- P4 with Cardinal and then obviously US Oncology with McKesson.

How do you see the market share battle kind of playing out at the individual positions [offsets] over the next two or three years, relative to what you've had to face over the past two or three years?

Well, John, we've carved out a very significant market share here.

And we've done that, we've done that by focusing on the dispenser, the provider, the physician.

Our business is clearly, clearly focused on that position.

We think the other people moving into our -- that space is validation of the space.

I think it's good and I think they are going to have to come up with a strategy that's a little different than ours, if they expect it to be successful.

Look, any time you've got large market share as we do, you can expect people to kind of come after you and we've been having that experience the last couple of years, and we don't expect that to change going forward.

But again, we're very comfortable with the space we've got which is providing programs and services to that oncologist, the provider we think at the end of the day -- that person, that physician is going to decide what products are dispensed, and so we're totally aligned with him.

And, to the extent that he or she is successful going forward, we think we'll be successful.

But our alignment is clearly, clearly with the provider.

Okay, thank you.

You bet.

Amy, we have time for one more question, please.

Our last question comes from Garen Sarafian with Citi Investment Research.

Good morning and thanks for squeezing me in.

One of your clients earlier this morning on their earnings call stated that they believed biosimilars will enter the market in the next two to three years in one way or another, so can you just update us on your views of when you expect biosimilars to become available in the US?

And if you could just remind us of how biosimilars impact your specialty business.

Well, we would share the view there's a lot of talk about biosimilars and we would share the view that it's not -- it's clearly not a next year event.

It's out there two, three years or even longer.

We think it represents a great opportunity for us, because of the large market share we have in the specialty space.

And it may very well represent the same kind of opportunity for us that generics represented some years ago.

For those of you who followed the industry a long time, you may recall when generics came onto the market, there was a large -- thought it was going to be the death knell for the wholesaler and maybe the retailer and anyone who touched products.

And we know how that story ends.

In fact, we're living out the story right now.

It's a great story to participate in.

Generics have been very, very attractive to us.

We think the same thing will happen as biosimilars, or whatever they are called, enter the market and their large market share will benefit us.

Whatever happens with those products, they are certainly going to need the kinds of services and the distribution capability that we bring to the party and in fact, they may need it in an intensified fashion, right?

Because they may be unfamiliar with the market, so they may have a great appetite for the services that we provide, not only in our traditional specialty business, but also with people like Lash who have a very large reimbursement counseling business, our extended business, which helps with REMS-type evaluations and the like.

So it's one of the things that makes our business attractive and why we think that specialty space is so important for us to have a very large market share going forward because we do think there's a lot of opportunities coming down the road.

Got it, but it sounds like that your views haven't changed in the last few months from what you've heard from manufacturers.

They really have not changed.

Got it, and just as a quick follow-up, in your prepared remarks, I think I heard something about Longs expiring in your fiscal third quarter.

Can you just clarify that?

Because I thought there might be an opportunity to continue on the Hawaii business.

Can you just elaborate on that a little bit?

Yes, Garen, there still is some opportunity.

We're still in discussions with CVS.

Nothing's changed on that front.

All we're doing is communicating that if we're not able to extend the contract which built into our guidance is the fact that the contract will expire at the end of our third fiscal quarter.

So to put that in perspective, it's roughly, roughly a $2 billion a year contract historically.

So we've got about $1.5 billion or so built into our expectations for fiscal '11.

Great, thank you for that clarification.

Okay, thank you, everyone.

And now Dave would like to make some final comments.

We appreciate you joining us.

We realize it's been a very busy morning with other earnings releases as well.

So we appreciate your time.

We would just like to conclude by saying that we continue to be very excited about our industry and the role that AmerisourceBergen plays within that industry.

Got a lot of positive momentum with our two growth drivers, which are specialty and generics and we look forward to sharing with you our first quarter results.

Thank you very much.

Thanks, Dave, and before we go, I would just like to highlight our upcoming events.

On November 17, we'll be at the Lazard healthcare conference in New York.

On December 16, we will be holding our annual investor day, also in New York.

On January sixth, we'll be presenting at the Goldman Sachs CEO Unplugged Conference in New York.

And on January 11, we'll be attending the JPMorgan Healthcare Conference in San Francisco.

Finally, we look forward to speaking to you again when we report our first quarter fiscal '11 earnings in early February, a bit later than normal due to it being the first time we will close on our books on the new SAP system.

So thank you very much for joining us today.

Good-bye.

(Operator Instructions)