美源伯根 (ABC) 2011 Q1 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 this 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 and good morning everyone.

Welcome to AmerisourceBergen's earnings conference call covering our first quarter of fiscal 2011.

I am Barbara Brungess, Vice President of Corporate and Investor Relations.

Joining me today are Dave Yost, AmerisourceBergen Chief Executive Officer, Steve Collis, President and Chief Operating 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 2010.

Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call.

This call cannot be rebroadcast without the expressed 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 to begin our comments.

Good morning and thank you for joining us.

As you know from our press release this morning, ABC got off to a great start on our fiscal year that began October 1, 2010, with strong first-quarter results featuring record revenue of just under $20 billion, record low operating expense-to-revenue ratio, operating margin expansion, and EPS of $0.57, up 10% over the December quarter of last year.

That double-digit EPS increase is particularly noteworthy when you recall that, in our December quarter last year, our EPS was up a phenomenal 44% over the year before, which was on top of a 12% increase the year before that -- the point being that we continue to post good numbers on top of good numbers.

This is our sixth consecutive year that we expect to increase our operating margin, and this quarter was the 13th consecutive quarter that we've increased our operating margin quarterly on a year-over-year basis.

During the last two quarters, we delivered that operating margin improvement at the same time that we incurred significant duplicate information technology expenses due to our transition to a new ERP system in the drug company.

We continue to do a good job controlling our receivables and assets, all of which resulted in a great quarter.

On January 27, we received a credit rating upgrade to A minus from S&P, reflecting our financial strength and forecast.

The Cliff Notes are lots to like about ABC and the industry we operate in, and more good things to come.

As I think all of you know, Steve Collis was named President and Chief Operating Officer of ABC in November, and he will provide some color on operations for the quarter, and Mike DiCandilo will provide financial insights as usual.

Before I turn the floor over to them, I will provide some thoughts on the industry.

The industry continues to be vibrant and resilient with new generic introductions providing incremental opportunities to the solid growth fundamentals of organic growth and cost leverage.

Our focus continues to be on specialty distribution in generics, and this quarter and last year both were strong.

Again this quarter, our two growth drivers overlapped as we had strong generic contribution in specialty, though not as strong as last year.

Projected industry growth rates for the year of 3% to 5% seem in the right ZIP code to us.

I would continue to describe the industry pricing environment as competitive but stable, with few $1 billion accounts changing wholesalers historically and none recently in this $210 billion or so US market.

We did not see any legislative efforts in Washington currently that change our outlook for the year.

We expect A&P to be published sometime after the rules are established, and we do not anticipate A&P implementation to substantially impact our business.

With our strong cash flow and cash balance, let me reconfirm our often-stated 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 services would have great appeal to us.

We would be very comfortable in the $200 million to $300 million range, but would readily consider something larger if it made good, strategic sense.

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

Absent acquisition opportunities, which would increase shareholder value, we will continue to consider increasing our stock buybacks as we did last year.

We have solid momentum after the first quarter of our fiscal year and continue to be very excited about our prospects going forward.

Before I turn the floor over to Steve, I want to reiterate my investor day message that this is a great time to be invested in the wholesale drug space, particularly ABC.

We continue to be comfortable with our FY '11 guidance, delivering strong EPS growth on top of a 31% increase in EPS that we delivered in FY '10.

In our FY '12, we expect to experience the benefits of the largest retail branded generic product conversion in history starting in our first fiscal quarter.

In FY '13, we expect to experience the benefits of our new ERP system and the elimination of running dual IT systems as well as carryover benefit from generic introductions late in FY '12.

FY '14 should benefit from the $32 million or so uninsured patients entering the healthcare system with pent up demand for pharmaceutical products.

FY '14 and '15 should be good years for generic introductions.

So lots to like about ABC in the years to come, as well as this year.

That ABC circle of life just keeps getting better.

Here is Steve Collis, ABC's President and Chief Operating Officer.

Thank you Dave.

Good morning everyone.

I'm very pleased to speak to you this morning about the performance within our four business units in our first fiscal quarter.

Before I get to the specifics, I'd like to share some observations I've made since I became President and Chief Operating Officer in November, and what they may mean for us as we go forward.

For my many years of running ABSG and in my almost two years running ABDC, I feel I now have the opportunity to take a look at our operations from a different and more holistic perspective.

We have a wealth of expertise in all of our business units and are in an excellent position to bring the combined strength and cultures of our businesses together in a way that will differentiate us and drive tremendous value to our customers and in turn to our shareholders.

Since being appointed COO last year, I have focused on four things -- firstly, driving innovation for pharmaceutical manufacturers and healthcare providers; secondly, increasing customer and supplier value; thirdly, expanding our business in targeted markets; fourth, continuing to optimize operating efficiency.

I am very confident that we will be able to execute on all of these objectives because our entire organization is aligned on our ability to capitalize on our strengths and to explore new areas where we can apply our expertise to the new demands of healthcare in America.

As most of you know, I have been with AmerisourceBergen for 17 years.

You all know that both Dave and Mike have very long tenures with ABC.

Longevity is really a distinguishing characteristic of ABC management.

Most of the key folks that have helped me found and grow ABSG are still with the Company.

That same kind of longevity is indeed found in the drug company, in our Consulting Services group, and in our Packaging group.

Across the board, these business leaders have intimate knowledge of the marketplace, close relationships with customers and suppliers, and perhaps, most importantly, they have their fingers on the pulse of change.

They have been successful because they are dedicated to ABC, and they are dedicated to our customers' success.

So we have a deep and broad bench of forward-looking leaders in all of our businesses working hard every day to deliver excellent programs and services to our customers and suppliers.

At AmerisourceBergen, we believe we have the best overall value proposition for the marketplace.

I regularly call on customers, and I can confidently say we are an example to an independent pharmacy owner that, if he or she signs up with ABC, we will help his or her business do better than it is doing today.

When I call on a hospital, I'm thrilled to show them how we can help drive better medication management within the hospital and provide tools to improve drug cost recovery, both of which impact a hospital's bottom line.

When I visit with a physician customer served by our Specialty Group, I can say with confidence that we will provide that physician the commercial and clinical tools that he or she needs to improve the efficiency of the management of their practice, and we will help enable them to have successful interactions with payors.

When we combine the insight we gain from servicing the entire spectrum of healthcare providers with the expertise we have in our Consulting Services in our Packaging groups, we really have an unmatched suite of solutions and scalable pharmaceutical manufacturers.

From custom packaging to commercialization services, comparative effectiveness studies, patient adherence programs, reimbursement consulting and more, we believe we offer the most comprehensive and cost-effective solutions for manufacturers available in the market today.

In addition to the outstanding programs and services that we bring to the market, as Dave mentioned, the key drivers of profitability growth for ABC remain generics and specialty.

We believe that, with the mix of business in our drug company, our large footprint in specialty, and the opportunities for generics in the specialty space, we are uniquely positioned to continue to benefit from the new generic introductions and growth in the specialty market in the years ahead.

Turning now to the performance of the individual business units, I'll start with our drug company.

With revenue growth of 5%, the drug company was the driving force in our topline growth in the quarter.

Drug company performance in the quarter was driven by Institutional segment and was aided by above-market growth in certain of our large customers.

ABDC has a tremendous breadth of customers and we expect to continue to benefit from above-market growth of some of our key strategic customers.

We continue to expect our Longs contract to contribute through the June quarter.

While we are hopeful that we could retain some of their business going forward, we do not have any contributions from Longs, including our assumptions for our fourth fiscal quarter.

Our pro-generic solution program again had above-market low double-digit growth in the quarter, as generics continue to be a key driver of profitability for both ABC and our customers.

We continue to make good progress expanding the penetration of our proprietary generics offering across all of our business segments and driving compliance among customers on the program.

It is worth repeating that we believe our customer mix in the drug company, coupled with our strong generic sourcing commercial programs, positions us very well for the generic opportunities that lie ahead in 2012 and beyond.

Turning now to the Specialty Group, as expected, the Specialty group's revenue was down 4%, due primarily to the loss of an $800 million contract we discontinued in our 3PL business in September.

We also saw a decline in ESA sales in the dialysis space ahead of the shift to the bonding method of reimbursement, as we had expected.

Overall, the Specialty market continues to be strong, and we are competing as effectively as ever and maintaining our market share in the oncology space as our nuclear solutions offering continues to gain traction in physician practices.

Nuclear solutions is an integrated suite of practices -- of practice tools designed to boost the efficiency, cost effectiveness and compliance with new protocols within community oncology practices.

The mid-November launch of gemcitabine has gone as planned, and we continue to believe we have enough Oxaliplatin inventory to serve our customers through the March quarter.

We are still waiting on the launch of docetaxel, which we expect will be launched by the end of our fiscal second quarter.

Overall, Specialty generics continue to be a tremendous opportunity for us to drive value for our manufacturers and for our physician customers.

Moving on to our other business units, our Consulting Services unit turned in a record topline performance in the quarter as the impact of healthcare reform has driven demand for the expertise and service we provide like never before.

By breaking out the Consulting Services unit from the Specialty group, we expect to make excellent progress in extending our service offerings beyond specialty manufacturers and see increased opportunities in the large branded pharma space as well as synergies with core drug company customers.

At the end of December, we had approximately 2000 people in our Consulting group, just to remind you of the scale of those operations.

Finally, our Packaging group had a solid quarter.

They added some new business and they now serve all 15 of the top-branded pharmaceutical manufacturers.

Most notably, they expanded their clinical trial service offering which had previously been based primarily in Europe into the US, giving manufacturers greater flexibility and a complete solution to their clinical trial packaging and other needs.

In addition, we launched a liquid packaging facility at Anderson Packaging, meaningfully expanding the capabilities beyond dry oral solids and powders.

As I conclude my remarks, I want to reiterate that we are achieving very solid performance on top of an outstanding year of growth in our fiscal 2010.

I am exceptionally pleased with our operating results to date.

We are meeting our objectives, and we are on track to perform well for the year.

With that, I turn it over to Mike for the detailed financials.

Thanks Steve.

Good morning everyone.

Lots to like about the quarter and an excellent start to fiscal 2011.

Before getting into the quarterly details, I just wanted to take a minute to thank all of our associates in business transformation, finance, and elsewhere who worked very hard to make our back-office go-live a success, and who enabled us to report our results on our new ERP system for the first time this quarter.

It's an important milestone for our company, and we look forward to expanding our capabilities with the new system, and we remain on track to begin to implement our customer facing modules later this fiscal year.

So let's turn to the quarter which, as Dave and Steve both indicated, was extremely solid and above expectations despite some very tough comparisons to the prior year.

Starting with the top line, our revenue of $19.9 billion increased by just under 3% and was right in line with our expectations.

This growth was driven by the drug company which increased its top line and above market 5%, driven by certain of its largest customers, primarily on the institutional side.

We continue to forecast drug company revenue growth to be between 3% and 5% for the full year.

Specialty group revenue was down almost 4%, as expected, due to the discontinued $800 million 3PL contract that we mentioned last quarter.

This account loss will continue to impact our Specialty revenue growth rates the rest of the year and our full-year forecast of flat to a 5% revenue decline for Specialty remains unchanged.

While our Packaging and Consulting group revenues are very small compared to our consolidated revenues with each of them representing less than 0.5% of total revenue, both exceeded plan with record revenues being achieved by our Consulting group.

Moving to gross profit where our performance this quarter is especially notable because of the extremely tough comparisons to last year's results.

Gross profit of $580 million in the quarter increased 3%, and gross margin of 2.92% increased 1 basis point compared to the prior-year period.

The quarterly increase in gross profit was driven by revenue growth, especially generic revenue growth, which was in the low double digits once again.

Additionally, we performed very well under our fee-for-service contracts with our suppliers, and we were also helped in the quarter by an unusual $12 million benefit related to the Duane Reade business, which I'll explain in a moment.

All of these positive gross profit factors in the quarter were offset in part by normal competitive pressures and a $20 million reduction in gross profit contribution from large specialty generics.

The combination of carryover Oxaliplatin product in the November launch of gemcitabine contributed about $0.06 to the current December quarter, compared to the $0.10 benefit provided by Oxaliplatin in last year's first fiscal quarter.

Looking forward, despite the delay in the introduction of docetaxel, we continue to expect the impact of the three large specialty generics in fiscal '11 to meet or slightly exceed the $0.25 benefit we received from Oxaliplatin in fiscal '10.

Turning back to the Duane Reade benefit, as a reminder, this relationship predated the 2001 Amerisource and Bergen merger, and from its inception, the contract had a consignment inventory component which is unusual for ABC.

This inventory was carried on our balance sheet at a substantial discount to its contractual value due to our concerns about its recoverability at the time of the merger.

In the December quarter, we received full value for this inventory, resulting in a $12 million gain.

The end result is a nice benefit to the first quarter, but not a continuing factor going forward.

Our LIFO charge in the quarter was $9.9 million, compared to $7.8 million last year, reflecting a quarter-over-quarter decline in generic price deflation.

We were very pleased with our expense control this quarter as operating expenses of $303 million were up less than 1%, which is really impressive performance when you factor in the significant increase in IT costs as a result of our back-office go-live.

This greater than $10 million increase in IT costs during the quarter was offset in part by ongoing productivity improvements, a $4 million reduction in bad debt expense, and a similar size reduction in incentive compensation costs.

As a percentage of revenue, operating expenses were a record low 153 basis points in the quarter, down 3 basis points from last year.

The combination of that expense margin reduction and the uptick in our gross margin led to operating margin expansion of 3 basis points, and total quarterly operating income of $277 million grew a solid 6% over last year.

Below operating income, net interest expense in the quarter of $19 million increased 11% over the first quarter of fiscal '10, which had only a one-half quarter impact from our prior-year November bond issuance.

Additionally, below the operating income line, we realized a $1.7 million net benefit in other income, primarily due to a payment received in excess of the amount accrued from a note relating to a past business disposition.

Our effective tax rate in the quarter was 38.1%, compared to 38.2% last year.

We continue to expect an annualized effective rate closer to 38.4%.

Our diluted EPS in the quarter of $0.57 increased by $0.05 or just under 10% compared to last year, and exceeded our 6% increase in net income due to the 4% reduction in average diluted shares outstanding.

The share reduction primarily resulted from our share repurchase program, net of stock option exercises over the past 12 months, and the dilutive effect of stock options.

Average diluted shares in the quarter were $280.7 million.

Now let's turn to our balance sheet and cash flows, which were in line with our normal December trends.

We used $99 million of cash in operations compared to usage of $42 million in the prior-year quarter.

Normal seasonal increases in inventories and payables timing offset continued impressive receivable performance.

Capital expenditures were $50 million in the quarter compared to $43 million last year and, in addition to our ERP spend, reflected some discretionary buyouts on leased equipment and certain technology investments in the Specialty group.

We continue to expect to spend in the $150 million range for the year, but based on our early pace, maybe somewhat higher.

Despite the normal seasonal slow start for the year, we continue to expect free cash flow to be in the $625 million to $700 million range for fiscal '11.

Average inventory days on hand during the quarter were 25 days, down 1 day from last year.

Average DSOs were consistent at 17 days.

Average DPOs were down 1 day, mostly due to timing.

Our gross debt to total debt and capital ratio at the end of December was 32%, in line with our target range of 30% to 35%.

We bought $185 million of our shares during the quarter and are ahead of the pace needed to hit our $400 million target.

As of the end of December, we have $413 million remaining under our Board-authorized repurchase program.

Our cash balance of $1.4 billion at the end of December leaves us with great financial flexibility as we look forward.

While we are very encouraged by our strong first quarter, keep in mind we have a lot of our year left.

Our full year fiscal 2011 diluted EPS guidance remains unchanged at a range of $2.31 to $2.41 per share.

Supporting assumptions for our EPS guidance of 2% to 4% revenue growth, low to mid single-digit basis point operating margin expansion, free cash flow in the range of $625 million to $700 million, and share repurchases in the $400 million range also remained unchanged.

Once again, we are very pleased with our start to our fiscal year, and we continue to be very excited about our positioning in the marketplace and our prospects for the rest of fiscal 2011 and beyond.

Now, I'm going to turn it back to Barbara Brungess, our Vice President of Corporate and Investor Relations, for Q&A.

Thank you Mike.

We will now open the call to questions.

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

Please go ahead, operator.

(Operator Instructions).

Robert Jones, Goldman Sachs.

Thanks for the questions.

There has obviously been a lot made of a few specialty generics, and I guess rightfully so.

But I was wondering if you guys could give us a better sense of the performance of the underlying ABDC business, particularly as it relates to small-molecule generics.

Specifically, I was hoping you could maybe touch on what you are seeing out there in terms of pricing and market share among the retail independents.

I'll start off on that.

Steve Collis.

Thanks for the question.

Overall, we saw growth in our proprietary program in the mid teens.

We believe that we are growing our generics above the market.

We really focus on compliance within our independent customer base.

We feel very comfortable in our position and ability to execute in this area.

I think Mike may have some additional comments.

Yes, Bob, from an appreciation standpoint, I think you hit it right on the head.

There are few generics because of different situations of availability in the marketplace that did rise significantly in price and provided us a small boost to the quarter.

It's certainly something we don't build into our forecast going forward because it's hard to predict if those type of events will continue in the future.

But it did have a boost.

Again, I would say it was a small number of items having a disproportionate benefit.

That's helpful.

I guess just my follow-up would be around the guidance, obviously a lot of focus on the timing of the generic Taxotere launch.

I guess could you maybe share with us at what point the guidance would come under pressure if we don't see a launch of generic Taxotere, or is the current range able to sustain not having generic Taxotere on the market?

This is Mike.

I think our assumption and our guidance is that Taxotere will launch by the end of March.

Certainly, we've got a $0.10 range, and that will cover any delays from there.

But you start getting into past June into our -- late in our fourth quarter, that could have some impact on where we would fall in the range.

Thanks for the questions.

Larry Marsh, Barclays Capital.

Thanks and good morning.

Steve, thanks for your comments.

Dave, thanks for your circle of life.

It wouldn't be a complete call without it.

So, let me see if I can reflect a little bit maybe (inaudible) Bob's question and then I'll have a follow-up.

The question is it seems like, so far, in Specialty maybe a little bit of delay in docetaxel, but probably a better margin opportunity with Oxi.

It sounds like the ESAs are about in line with your expectations.

As you think into the next two to three years in that pipeline, is there any other product categories that you think are going to be particularly good opportunities as you leverage your footprint, or do we think of this year and last year as kind of unusually large Specialty margin years because of the particular products you guys have called out repeatedly?

This year is a tough comparison.

But remember, in FY '12, Oxi comes back.

So we know how that story played out and that played out very, very well.

So when we get out to '12, we will have some more contribution from Specialty, but I think it speaks to the balance.

The big generics start up for us in 10,000 -- or FY '10 and '11, then the specialty, then in our '12, which starts in November, just a few months from now, we get the real retail impact.

As that starts to fade a little bit, we come back with some more Specialty.

So I think the fact that we've got the strong footprints in both retail and specialty will suit us very well as we go forward out to '12, '13, '14 and beyond.

A quick follow-up then on that point, Dave.

You're communicating good growth in pro-generics.

Tony talked about it at Analyst Day.

Your peers talk about good growth in their preferred sourcing programs.

Is there any way to compare and contrast yours versus your peers?

Is the message really that we are hearing that the supply chain companies are taking share from go-direct or other sources in the marketplace, since we are all seeing big growth numbers from you guys?

First of all, I do think it's tough.

I do think it's tough to compare them.

I think you have to look at the individual source programs and how they were year-over-year and what's in that base going forward, and probably best to compare individual companies.

I'm a little uncomfortable; I don't know exactly what's all in their programs.

But I do think it speaks -- I think the growth in all of our programs speaks to the additional penetration we are getting with our customers, and expanded into other classes of trade.

We are now moving into hospitals, into alternate site, into regional chains, and the like.

So I think it's a very good barometer on how well the industry is doing and the value that the wholesalers in general bring to their customers.

So generics have turned out to be a great boom for the industry.

I think it really -- again, it speaks just to the value we are bringing to our customers.

Very good, thanks.

Robert Willoughby, Bank of America Merrill Lynch.

Hi, this is Erin Wilson in for Bob today.

Can you cite your ongoing expenditures on internal technology initiatives, and when does that taper off?

Would there be any other expenses that could offset that in an expected decline in (inaudible)?

Yes, our project CapEx is included in our $150 million guidance and should be roughly half of that total spender.

So this year, it has tailed off some from last year as we move through the initial programming phases to the implication phases that are much more geared to expense than capitalization.

I think the key point we like to make about the IT expense is with our go-live at the beginning of -- starting in July and with our second phase at the beginning of October, our run rate for IT expense, because of running both our legacy system and our ERP system during the transition period through 2012, our run rate is going to be about $40 million higher per year than it was in fiscal '10 and really starting in the fourth quarter of fiscal '10, so there's about a $30 million impact this year.

As we get to next year, the comparison is really flat between the two years.

When we finish at the end of '12, we should get that benefit falling into fiscal '13.

Okay, great.

Thanks.

Lisa Gill, JPMorgan.

Thanks very much and good morning.

Dave, some of your competitors have talked about price stability on the generic side.

I'm just wondering what your take is on it, and what that does for your margin over time and how we should think about how to generics will impact you specifically over the next several years as we continue to see this price stability.

I think this priced ability is a good call out, Lisa, and we are clearly seeing that.

I mentioned in my prepared remarks we are not seeing huge -- first of all, there are not a lot of huge accounts and we have not seen a lot of big account movements.

So I think the price stability in generics is a good call out.

I think that really speaks well to our prospects going forward.

Part of the reason that I think we see that price stability is that, with a large market basket of items, we have rough justice 7000 or so items in ours, you really begin to compete on a value basis.

You're not exactly comparing the exact same market basket and the exact same manufacturers even if you've got the same products.

So it really provides us an ability to differentiate our offer in terms of value, and we are seeing less price competition in that.

The other thing that is great about generics is it gives our customers the ability to also have a very attractive margin at retail.

So it's a total win-win, and the stability is a great call out.

If I could just add to that, I'll tell you there is no -- the metric on the compliance and the performance of our accounts with the expected generic targets is something that we pay incredible attention to.

We are very aware that we have great reporting tools.

We have great -- for example, our in-stock program in the retail accounts is something that gives us a lot of insight into what's going on in our practices, in our pharmacies.

These are very, very important metrics when Dave and I look at how we judge how the team is performing and how our sales force is performing.

Very helpful.

Then just a follow-up on your comment on read Duane Reade and the contract on a consignment basis.

Will that have any impact as far as cash flow or inventory levels if you were carrying the inventory for them?

Then secondly, Dave or Mike, should we be thinking that contract was more profitable or was the profitability similar even though it was a consignment type of relationship?

Yes, it's a good call out.

Our working capital will fall because that's an extra element we had with that contract that, as I mentioned, we really did not have with any other contract.

So it's a nice little boost to our cash flow.

When we had the contract it was an attractive contract for us because we supplied a full range of products, including generics.

So it was nice when we had it, but it's gone, and we've moved on.

Yes, as we've said, it was factored in our guidance to come out at the end of December, so no change to our guidance.

Great, I appreciate it.

Thanks.

Glen Santangelo, Credit Suisse.

Thanks for taking the question.

Just two quick ones -- Steve, I wanted to ask first a quick question on the specialty drugs.

I hate to keep beating this horse, but it's obviously important.

Could you just kind of refresh sort of your expectations for Eloxatin?

I think you kind of suggested you're only going to have it through the first half of the fiscal year.

Mike, I think you guys called it out at about $0.03 to $0.04 contribution on a per-quarter basis.

Is there anything going on with respect to the pricing or reimbursement or inventory that would've changed those assumptions?

I'll start off first with the market.

We do expect to have inventory through this quarter.

As you know, the ASP has risen pretty considerably in the last few months, and we don't necessarily (inaudible) ASP but it is an important metric for our customers and we are of course always very mindful of our customers' profitability.

I'll let Mike answer the guidance part.

Yes, Glen, I think the way to look at it is we probably are getting a little bit bigger -- we expect to get a little bit bigger benefit from Oxaliplatin in the March quarter than we did at the beginning of the year with the ASP increase.

It's nice offset to the delay in the introduction of Taxotere, generic Taxotere.

So, it's a big reason why, for the year, we have kept the guidance similar to the $0.25 benefit we got last year with a little bit of upside over that.

Maybe Dave, if I could just ask you a follow-up question on A&P, you brought it up in your prepared remarks as something that can be introduced potentially this year.

You sort of suggested that it will not substantially impact your business.

Is that kind of implying that it could have a minimal impact?

I'm kind of curious, from your perspective, in what way would that impact your business?

Because all the companies across all of the industries are sort of saying A&P doesn't impact them, and I'm trying to figure out then who does it impact?

I thank you've got to drill down on what the magnitude of what we're talking about.

For us, it's a piece of a piece of a piece.

So when it gets down to the individual retailer, it could possibly have an impact, but we actually don't even think it is going to have a big impact there because we think that many of the states are already operating well below the FUL limit.

So we don't think is going to have a big impact, and we will have to wait and see.

It's been much delayed, but we will just have to wait and see, but the big issue is that it's a relatively small piece of our total business.

So bottom line for you though is it would theoretically be a derivative impact on you, it's really a function if your customers get squeezed or not.

That's exactly right.

Again, for many of our customers, it's piece of their business.

It's not (multiple speakers) no cases at all in that business.

So it ends up getting diluted down.

But (multiple speakers) is good.

Okay thanks.

Tom Gallucci, Lazard capital Bank Markets.

Good morning.

This is Andrea Alfonso calling in for Tom Gallucci.

Thanks for taking my questions.

First, in your prepared remarks, you referenced normal competitive pressures as partially offsetting the benefits and diverse profit line.

Could you maybe describe what you're seeing there?

Has anything changed recently?

Absolutely nothing has changed recently.

That's what I trying to point out.

For some of the people who have followed the industry for a long time, there have been times when there have been unusual competitive pressures.

I wanted to point out that is not existent today.

I don't want to make it sound like it's a walk in the park, and I don't want to make it sound like we don't have skirmishes from time to time on an isolated basis with accounts.

But the point I wanted to make out that overall we are seeing the market to be very stable, competitive but very stable.

Great, thanks.

As a follow-up question, it looks like branded price inflation was off to a good start at the beginning of the year.

Could you maybe detail what your expectations are there for fiscal Q2?

This is Mike.

Last year, our brand name inflation was over 8%, pretty robust.

It's been in that range for the last couple of years.

Our expectation this year was we were going to see some moderation probably down to the 6% or so range.

So far, I agree with your observations.

It's been very strong, and if it continues at the same pace, we could be at the same level we were last year.

Just to refresh everybody's memory, fee-for-service offsets most of the impact to us, but it is an interesting statistic that a lot of people watch for sure.

Thanks very much.

Eric Coldwell, Robert W.

Baird.

Thank you.

Good morning.

Dave, for the last few quarters, it's kind of stood out to me that you've been pretty vocal about your interest in doing M&A if opportunities arise.

Then in Steve's prepared comments, he mentioned that the Company is at a point now where it could consider new growth areas, new avenues.

I realize it's difficult to identify specific things, especially if you are in discussion, but can you give us some heads-up on new areas that might be interesting to you, what kind of adjacencies in your business you think could provide a good platform for growth perhaps through M&A?

I appreciate the call.

We didn't know if you were maybe so snowed in we wouldn't hear from you.

so I hope you're getting out from under it there.

The reason we call it out is I just want to our listeners to know that we really are very interested in M&A and we are buying our stock back because we haven't found any M&A acquisitions, any targets that we really like.

But that is not our first priority.

Our first priority is to grow our business.

One way to grow our business is with M&A that are accretive to us and could contribute to shareholder value.

The areas that I think would have most appeal to us is something in the distribution and in the specialty or in our traditional wholesale drug business, add on businesses into our specialty business, though there are no holes we think we have in our offering [as] something and packaging business.

But again, things that would be attributed to our core competency -- not moving far afield from where we are today.

The reason it's important to call that out is, as we talk about our growth goal of growing our EPS at 15% over the long term, we think we can do that without M&A.

So M&A would be attractive to us.

So we just want to keep reminding people that we are interested in it and even though there hasn't been much activity on that front, the last big acquisition we had was in 2008 when we bought Bellco Drug outside of New York.

I could just add I didn't necessarily -- when I said innovate and expanding service, I didn't necessarily mean acquisitions.

We have tremendous opportunities within our organic business to implement new programs and services.

I referenced the Packaging business, for example, where we have expanded beyond the core business that we did for branded manufacturers, and getting into clinical trials.

For example, on our services side our business, we continue to offer new services.

In the hospital area, there's opportunities to move beyond the traditional 340-B and supply-chain type consulting work we do.

So, there's opportunities for internal investment that we continue to consider.

We're spending a lot of time on expanding our oncology portfolio, and that's requiring some small investment, but that's an investment we make every day of the week and we love doing that and we love to support the people that provide such value to our business and to our customers.

That's great.

Just as a follow-up, the conclusion or is -- or maybe the summary is while you might look to diversify within the supply chain, you're not looking to diversify outside of the supply chain or outside of your core offerings.

Is that fair?

That's exactly right.

You stated it very, very well.

Absolutely.

That's it.

Thanks so much.

David Larsen, Leerink Swann.

Nice quarter guys.

Thanks for taking the question.

Just with respect to generic Gemzar and generic Taxotere, can you maybe just talk about, relative to Oxaliplatin, how does it look like with respect to the number of suppliers in the market?

Is there a big difference there, or not really?

I think, first off, with Oxaliplatin right now, I mean there's no new product in the market.

So it's all the carryover from previously, but when it was out there, there were a couple, three or so suppliers.

I think, with these two products, it's -- we expect it to be fairly similar.

Okay.

Then just in terms of the expected margins on generic Taxotere and Gemzar, the sense that I get is the margin profile should be similar to Oxi.

Is that correct?

Oxi was a little unique in that it was at-risk launch when it came out in August.

So that carries some very unique characteristics with it.

It was the first really large generic in the oncology space.

So the Oxaliplatin was somewhat unique, so we would not expect follow-on introductions in that space to be quite as robust as Oxaliplatin was.

Okay, thank you.

Steven Valiquette, UBS.

Thanks.

You guys did a pretty good job controlling operating expenses this quarter, keeping it flattish despite the IT initiative.

Really just trying to get a little more color on the potential sustainability of that trend for the rest of the fiscal year.

Thanks.

We do do a very good job of controlling expenses.

We have a see too philosophy, which really implies increasing productivity and efficiency.

I think, in the COO role, one of the things we are doing is looking at taking the best-performing attributes of each of our different businesses, for example the efficiency we have within the drug company.

There really is always more room for improvement.

So, you should expect that we will have a continued emphasis on improving our operating margins, and we are going to manage that through our great portfolio of businesses and our great portfolio of customers and focusing on providing value to them and making sure that it meets the expected returns of our shareholders.

Okay.

One other quick one, just on the PharMerica contract that was renewed.

Any material changes to the dynamics in that contract that are worth mentioning?

No, not really.

We're very happy with the renewal of the contract.

We extended the terms.

We like PharMerica's position in the space.

They have done some acquisitions in the last quarter that we are very pleased about, that helped us.

One of them was an account that we've been trying to secure for a long time.

So, we are very happy with the relationship, and we hope to be their distributor for a long, long time.

Okay, thanks.

Helene Wolk, Sanford Bernstein.

Good morning and thank you.

Just a question on your comments about ESA use.

I think you had said it was within your expectation.

Can you tell us a couple of things, one of which is maybe some range of where your expectation was.

Then I guess secondly, are trends in the market stable at this point, or still declining, or what are you seeing in terms of the market movement?

This is Mike.

At the beginning of the year, we said our expectation is, with the new bundling reimbursement system, we would expect to see a decline in ESAs used for nephrology of roughly 10% to 15% for the year and expected most of that to start after January 1 when the new rules became effective.

I think what we expected to see and what we've seen a little bit this quarter is, in advance of that, some behavior has changed.

In the quarter, ESAs used in nephrology were down about 5%, most of that impacting the Specialty growth.

Great.

Then just a quick clarification about the $12 million from Duane Reade confinement -- was that anticipated and included in your guidance?

Yes.

We knew, when we didn't renew the contract, at some point we would get repaid.

We weren't sure exactly when.

Great, thank you.

Ricky Goldwasser, Morgan Stanley.

Good morning.

In the last week or so, there's a number of headlines around supply issues for generic injectables.

Can you walk us through what impact does that have on you, and were those generic injectables [low] through your businesses?

Does it go through the Specialty group, or through drug distribution?

Where it would fall, Ricky, is a function of where it is being administered.

If it's (technical difficulty) physician, it will be for our Specialty group.

If it was going through a hospital or a traditional drugstore, it would be through our drug company.

What was the first part of your question?

I think I missed it.

Just what is the impact on your -- I think in this case it would be on drug distribution from the supply shortage?

Because when we think about supply issues, usually pricing tends to go up, which should be a positive for you.

But if you could just walk us through those dynamics.

The issue in short with shortages is something we monitor very, very carefully.

It does impact us because it impacts our customers.

So the big issue is just making sure we are getting the right product to the right places, and working closely with the manufacturers on that.

But I can tell you that the shortage issue is something that our operating people are literally dealing with every day.

It is having an impact.

The shortage situation is one of the factors that leads to the price increases that are sporadic and sometimes significant on the generic side, Ricky.

Did we feel a benefit?

I think the answer is yes.

This quarter, we've had some of that benefit sporadically in the past.

Back in the days when heparin was in short supply is a good example of that.

Thank you.

George Hill, Citigroup.

Thanks for taking the question.

Dave, a question around the recent firming in generic drug pricing.

There seems to be a dynamic where there is an appropriate number of competitors where the prices kept it at a level that allows you guys to make a good margin.

Then as more competitors come to market, pricing of course gets driven down and that margin opportunity recedes.

I guess can you talk to us now about what is the level of competitors for supply in the generic market?

How durable do you see that situation being with the competitive level on your supply side?

Maybe a little color around what's the right number of suppliers, what's the wrong number of suppliers and how we should think about that?

We have -- the first thing is that it depends what type of launch it is.

In the first six months, typically we see a price closer to the brand, and then there is price deterioration from there.

It depends on the ease of manufacture.

I think there's a lot of people on the manufacturing side who can talk more about the pricing economics of generic manufacturers.

But Mike, you may have some comments on this as well.

Again, I think, broadly, the less competition, the better for us, the harder to make generic drugs sometimes and antibiotics, etc., and some of the liquids at times are the ones that are more volatile in a shortage type situation.

But for us, the breadth of the number of manufacturers, the ease se of manufacturing all contribute to how far that price decline is going to be.

I think one of the trends we've seen -- I think all the manufacturers are getting a bit smarter.

They are gearing up for the future, where the volume going through their facilities is increasing, so they've got to make certain portfolio decisions.

I think they are trying to maximize their portfolio and move away from lower-value opportunities to higher-value opportunities.

It's probably something we would be doing as well.

I think the basic premise that you had is right though, George.

What happens is product comes on the market.

There may be many manufacturers.

Then the prices drop, as Steve pointed out.

Then manufacturers fall away, as Mike talked about, and then the prices start creeping back up.

We think we are going to see a lot more rationalization.

As long as there is more than one manufacturer, it puts us in a very good position.

But we think we are going to see fewer manufacturers making individual products as we go forward.

We think that puts us in a pretty good spot.

Just one quick other comment, Dave, is our broad generic sourcing strategy is really very helpful in this regard.

We almost have like an intelligence group within our sourcing strategy that really looks at supply chain issues and really puts us and our customers in a good position.

Do you guys have any opportunities?

Because there's been some quality issues on the manufacture side of the market.

Is there ever a situation where you guys might look at a specific vendor and say -- where you can almost be self-selecting and say you're not necessarily a vendor that we have quality, can meet our supply demand.

Is there almost the opportunity for you to limit the amount of competitors there are by being selective in who you buy from, or is that just not a situation that materializes?

We're very careful about who we do business with.

The issue of quality is a very, very important one, and it is one that we stress with our customers.

We literally have people who go abroad to India and the like inspecting the suppliers we have, literally walking through the manufacturers.

We've got people on our staff that we think are qualified to opine those kind of issues.

The issue of quality is a key one for us, particularly in the multiple products.

So it's a good call.

We appreciate you bringing that up.

I appreciate the color, guys.

Thank you.

Thank you George.

I think we have time for one more question today.

A.J.

Rice, Susquehanna.

This is [Brandon Fazi] for A.J.

I just want to know your thoughts on the -- you talked about it on your investor day about $40 billion of generic drugs coming online in your fiscal year, given your timing from the September year.

How much do you think of that is exclusive and obviously the more profitable type of situation?

Brandon, there's a lot of drugs coming out.

There's virtually every scenario out there as far as exclusivity.

There are still some questions about the ability of certain suppliers to be able to come onboard.

I think the key for us is the biggest one and the biggest selling drug that's coming off, it comes in at the beginning of fiscal '12 and there is exclusivity there.

So we expect it to be a very large contributor to '12.

Again, I don't want to go down the list one by one, but there are a number of other exclusive opportunities in '12.

It's a good question.

There's a little science in trying to get our arms around it, but good call there.

With that, I'll turn it over to Dave for some closing remarks.

Thanks Barbara.

In summary, I guess I'd just like to say that we had a strong, a very clean quarter on top of an exceptionally strong December last year.

We continue to focus on our key drivers of generics and specialty.

We continue to be very, very excited about the industry and continue to be very, very excited about the role we play in it.

So we thank you for joining us and we look forward to sharing our second-quarter results with you in late April.

Barb, are you going to update?

Yes.

Before we go, I'll just highlight some of our upcoming events.

On February 8, we will be presenting at the UBS healthcare Conference in New York.

On February 17, we'll be holding our annual meeting of stockholders in Philadelphia.

On March 3, we will be attending the Citi Healthcare Conference in New York.

On March 6, we will be at the Raymond James Institutional Conference in Orlando.

Finally, on March 16, we will be presenting at the Barclays Healthcare Conference in Miami.

In addition, we tentatively expect to report our second quarter on or about April 29.

So thank you all very much for joining us today.

Thank you for participating in today's conference.

You may disconnect at this time.