美源伯根 (ABC) 2011 Q3 法說會逐字稿

Welcome and thank you for standing by.

(Operator Instructions)

I would like to remind everyone that today's conference is being recorded.

If anyone has any objections, you may disconnect at this time.

Now I will turn the meeting over to Ms.

Barbara Brungess.

Ma'am, you may begin.

Thank you.

Good morning, everyone and welcome to AmeriSourceBergen earnings conference call, covering our third quarter of fiscal 2011.

I am Barbara Brungess, Vice President of Corporate and Investor Relations; and joining me today are Steve Collis, AmeriSourceBergen 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 2010.

Also, AmeriSourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be rebroadcast without the express permission of the company.

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

Now here is Steve Collis to begin our comments.

Good morning, everyone, and thank you for joining us.

This is my first quarterly earnings call as President and CEO of AmeriSourceBergen, and I'm very pleased to start off my career as CEO by reporting such outstanding results.

We continue to deliver very strong performance on top of exceptional performance in the prior year; and as we enter our fourth quarter, we are well on our way to achieving very good results for our fiscal year that ends on September 30.

Our revenues were over $20 billion in the quarter, the first time we eclipsed that mark, and an increase of $0.5 billion over last year.

Once again, we reported a double-digit increase in gross profit that was driven by specialty generics, and helped operated earnings growth 12.5% in the quarter.

Our operating expenses increased 9.8% in the quarter as we continue to invest in our future, both through our SAP implementation and through other internal projects designed to help drive long term efficiency -- the most significant of which we call Energize.

I'll talk about Energize later in my comments, and Mike will detail the financials, but I want to assure you that we remain vigilant on costs while focused on growing our business.

Our operating margin was up an outstanding 13 basis points this quarter; and our diluted earnings per share was $0.66, which is a 16% increase on top of what was a 36% increase last year, on a GAAP basis.

We continue to do an excellent job managing working capital, and we had $2 billion in cash on hand the end of June giving us tremendous financial flexibility.

This excellent performance continues to demonstrate the strength of our 2 growth drivers, generics and specialty, and positions us well to take advantage of the opportunities that lie ahead in 2012 and beyond.

Before I discuss some additional specifics about our Company, I'd like to make a few comments about the state of our industry.

Our industry is vibrant and growing.

It remains competitive but stable with solid organic growth and favorable demographics.

Brand and price appreciation remain strong, while mitigated by fee for service agreements.

We are just a few months away from the largest wave of brand-to-generic conversions in history.

As an industry, we continue to demonstrate that we provide an essential service, an immense value to pharmaceutical manufacturers and healthcare providers alike; taking costs out of the pharmaceutical supply channel, and delivering products safely, efficiently, and just in time.

In addition, we provide significant credit and inventory management services that reduce risk and working capital throughout the supply channel; and we provide valuable data regarding supply and demand in the market place.

As the new CEO, I can't think of an industry that I'm more proud to be a part of; and I'm increasingly excited about AmeriSourceBergen's position and prospects within our industry.

As I turn now to the performance of our individual business units, I want to once again highlight the areas I've been focusing on to drive shareholder value.

First, collaborating to drive innovation for providers and manufacturers; second, increasing customer and supplier value; third, expanding our business in targeted markets; and fourth, maximizing operating efficiency through cross-Company collaboration.

Lastly, our Senior Management team is focused on continuing to drive the high performance culture that has historically distinguished ABC.

Our associates always rise to meet any challenge or opportunity we put in front of them, and I believe these excellent results are in no small way a reflection of the outstanding contributions they make every day.

Focusing on these key areas has enabled us to continue to deliver value to all of our stake, holders and will position us well to take full advantage of the opportunities that lie ahead.

One example of collaborating to drive innovation is the work we are doing educating our retailers and increasing their ability to understand and manage the need of specialty manufacturers.

Our vast experience with independents and in the specialty space gives us a unique ability to help our customers navigate this increasingly important market, and to provide the tools they need to expand their offerings to patients.

We call this our Specialty Pharmacy Network, or SPN.

In the June quarter, we had solid performance across all of our business units.

Revenues in our drug company were up 4%, in line with expectations, with particularly strong performance in our alternate side segments and among our independents.

During the quarter, we began the process of expanding our Amityville, Long Island distribution center in order to better serve the expanding New York market and our growing share in that market.

One of the key items of note during the quarter for ABDC is that we converted our first distribution center onto our new SAP platform.

The conversion is only a few weeks old, and we still have some works to do; but considering the magnitude of this implementation, I'm very pleased with the progress we have made.

This was a major milestone for our company and I'd like to thank the many associates who have worked hard to ensure the success of the implementation, and our customers who have been enthusiastic about helping us manage the process change in a conversion of this scope entails.

This important investment in our future is similar to the investments we made in our distribution centers following the merger, and will position us well for long term success.

In addition to our investment in systems, we've invested in our Energize program, which is designed to ensure that we maximize the opportunities provided by the SAP enterprise level platform, and by the generic conversions in the years ahead.

The Energize program is a combination of initiatives to maximize sales force productivity, improve customer compliance, and drive efficiency by linking our IT capabilities more effectively with our operations.

ABSG, our specialty group, delivered stellar performance, particularly in our oncology business.

The most important driver of our high performance in the June quarter was once again the performance of the 3 key specialty generics -- Oxaliplatin, Gemcitabine and Docetaxel.

We don't like to discuss individual products, but these 3 have continued to make extraordinary contributions to our results.

Mike will detail the specifics, but the net result is that all 3 products performed better than expected in the June quarter.

It is important to note, however, that we have sold out of Oxaliplatin, and it will not be commercially available again until August of 2012.

It is also important to note that, over time, the proper contributions from Gemcitabine and Docetaxel will moderate as more manufacturers enter the market and reimbursement rates decline.

Our consulting group continues to gain traction and performed well in the quarter.

We broke this unit out from ABSG at the beginning of this year to give it more exposure to the entire company, and are more convinced than ever that it was the right thing to do.

With all of the dynamic changes in healthcare, driven by reform initiatives and cost pressures, the contributions our [fore] leaders and our consulting group have made have been invaluable.

The level of expertise we can bring to conversations with manufacturers is unmatched, and is a key differentiator for AmeriSourceBergen in the complex marketplace we face today.

Our packaging group had a very strong quarter as it continues to develop new lines of business, particularly in the specialty and clinical trial space.

The business continues to have good momentum, having signed a record number of contracts in the month of June.

Given the strong balance sheet we reported today, I want to reiterate our position on acquisitions.

Our criteria for acquisitions are as follows -- They should increase our value offering to existing customers, both up and down the channel; it should be within our established core competency; and they should increase shareholder value.

While we have not contemplated any contributions from acquisitions in our guidance, we are receptive to acquisitions and have spent over $1 billion in acquisitions since the formation of ABC.

We continue to be interested in opportunities in pharmaceutical and specialty distribution and services, as well as consulting and packaging services.

And while we historically have been very comfortable in the $200 million to $300 million range we will consider something larger if it made good strategic sense and will deliver value to our company and our shareholders.

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

As we have said and demonstrated before, in the event that we do not find acquisitions that increase shareholder value, we will consider returning money to shareholders either through increased share repurchases or dividends.

As I wrap things up I want to comment on some news about our largest customer that broke last week; and then give you my early -- very early -- thoughts on our fiscal 2012.

As many of you know, Medco announced that they would be merging with Express Scripts.

We have a long standing and excellent working relationship with Medco, and we have a solid contract that extends through March of 2013.

We were recently named Medco supplier of year for the second year in a row, and we will continue to serve Medco with the outstanding service they expect from ABC.

As a combination of the 2 PBM businesses evolves, we will of course make every effort to extend our relationship well into the future.

We have previously disclosed that Medco currently accounts for 18% of our revenues, virtually all of which is for sale of branded drugs.

As you would expect for a customer of this size with limited distribution points, its pricing is very competitive.

Therefore, it only contributes about 5% to our earnings.

Now, turning to next year -- as we have previously discussed, the extraordinary performance of the 3 key specialty generics this year has created a headwind for us next year; particularly in light of the fact that Oxaliplatin is not expected to make any further contributions to our results until late in the fourth quarter of our fiscal 2012, and we expect the contributions from Gemcitabine and Docetaxel to moderate next year.

We do, however, expect an extraordinary contribution from all solid generics in our drug company to help offset that headwind.

Thirdly, it will be very difficult to meet our long term EPS growth target of 15% next year, given our high performance this year; but we do see a pathway to solid growth and could see growth in the 7% to 10% range.

We have not yet computed our planning process for next year, and we will give our formal guidance for fiscal 2012 as usual, in early November.

Looking ahead even further in fiscal 2013, we expect to see a bigger contribution from specialty generics, and we will begin to experience some of the benefits of our new ERP system.

We also expect that some of the benefits from oral solid generics converting late in fiscal 2012 will carry over into fiscal 2013.

Fiscal year 2014 should benefit from the approximately 30 million or so uninsured patients entering the healthcare system with pent up demand for pharmaceutical products.

In our early look at our fiscal years 2014 and 2015 indicate good years for generic introductions, potentially including biosimilars.

Last week I attended our NHCE, or retail trade show, in Las Vegas.

It gave me an excellent opportunity to converse with many of our customers and suppliers, both large and small.

I was reminded again about how important our role is to our customers, and indeed how strong our franchise is.

My job is to ensure that we carry on building and enhancing those valued relationships.

Thanks for your time, and I hope I've been able to effectively communicate to all of you my excitement about the bright future for ABC.

Now here is Mike.

Thank you, Steve, and good morning everyone.

As Yogi Berra once said, it's deja vu all over again.

Our tremendous performance in our third fiscal quarter follows the same theme as our second quarter, with solid performance across all of our business units, enhanced by extraordinary performance in our oncology franchise, leading to GAAP EPS growth of 16%.

Excluding the $0.05 benefit to last year's June quarter from litigation gains, quarterly EPS would have increased 27%.

In addition to our operating results, we took a very big step in our business transformation program.

Our credit ratings were upgraded by Moody's, and we increased our dividend once again.

We are well positioned after 9 months to meet or exceed all of the business and financial goals we set for ourselves at the beginning of the fiscal year.

I will detail the impressive contribution to the quarter from the big 3 specialty generics, as well as their impact on our increased EPS guidance for fiscal '11, and the challenges we will have in fiscal '12 as their profit contribution moderates.

Now let's turn to our June quarter results starting with the top line.

Revenue of $20.2 billion in the quarter exceeded the $20 billion mark for the first time, and increased 3% in total.

Drug company revenues were up 4% in the quarter, and specialty revenues were down 2% in the quarter; consistent with our guidance for these business units.

Drug company growth was driven by alternate site and independent customer growth.

Specialty top line growth continues to be impacted by the prior year loss of a large 3PL customer, the change in reimbursement methodology in the dialysis business, and generics -- which have moderated our top line growth but continue to be a gross profit driver.

Gross profit of $654 million in the June quarter increased a robust 11%, and would have been up even more if not for the $18 million reduction in litigation gains from the prior year quarter.

A good portion of that gross profit increase year over year came from the sales of the 3 large specialty generics, which together contributed $0.17 of EPS to the current quarter, compared to $0.05 in last June's quarter, from these drugs.

As expected, we sold our remaining Oxaliplatin inventory in the June quarter, which contributed $0.08 of the $0.17 EPS contribution; with Docetaxel and Gemcitabine together contributing the other $0.09.

These 3 drugs have now contributed $0.39 to earnings in the first 9 months of fiscal '11, and we expect another $0.06 or $0.07 contribution in 4Q.

Overall, generic growth was also strong in the drug company, which grew generic revenue in double digits once again this quarter.

Before I leave gross profit, our LIFO charge for the June quarter was $11 million, consistent with last year for the 9 months ended June 30.

Our LIFO charge was $35 million, compared to the $30 million for the same period last year.

Turning to expenses, our operating expenses of $336 million were up a higher than normal 10%, or $30 million in the current quarter, compared to last June.

As we expected, $10 million of this increase came from the costs of maintaining duplicate IT platforms.

An additional $15 million of this increase came from the following -- consulting expenses related to our Energize program, and acceleration in pension expense due to executive retirements; and increases in incentive compensation -- none of which are expected to continue at the rate they impacted this quarter.

Also, as a reminder, prior year operating expenses were reduced by $4 million, due to the reversal of a litigation accrual.

On a year-to-date basis, operating expenses have increased 6%; and we would expect that growth rate to moderate in the fourth quarter.

As a result of our strong gross profit growth in the June quarter, operating income increased 12.5%, despite the headwind from the $23 million of litigation gains included in last year's third quarter operating income.

Operating margins increased by an impressive 13 basis points, to 157 basis points in the June quarter; and are also up 13 basis points on a year-to-date basis.

With our increased EPS guidance, operating margin expansion is now expected to be in the low double-digit basis point range for fiscal 2011.

This will be our sixth consecutive year of significant operating margin expansion.

Below the operating income line, net interest expense of $19 million was up 4% in the quarter.

Our effective tax rate in the June quarter was 38.2%, compared to 38.1% last year; and while we continue to expect our normal annualized rate to be 38.4%, we expect that we will be slightly below that rate in fiscal '11.

Our diluted EPS in the quarter of $0.66 increased by $0.09, or 16% compared to last year's June quarter; and again excluding the $0.05 benefit from litigation gains last year, would have been up $0.14 or 27%.

Our 16% EPS growth exceeded the 13% increase in net income, due to the 3% reduction in average diluted shares outstanding from our share repurchase program, net of stock option exercises over the last 12 months.

Average diluted shares in the quarter were $279 million, and common shares outstanding at the end of June were $272 million.

Now let's turn to our balance sheet and cash flows, which were very strong once again in the June quarter.

We generated $231 million of cash from operations in the quarter; bringing our year-to-date total to $808 million, compared to $559 million last year.

Capital expenditures were $34 million in the quarter, and $127 million for the 9 months; and we continue to expect a full year spend of approximately $175 million.

With free cash flow already at $680 million through 9 months, we expect that we will exceed the high end of our $625 million to $700 million range for the year.

Part of the rise in our cash flow expectations reflects the benefit of a significant increase in deferred taxes, resulting from bonus depreciation related to our business transformation spend.

This benefit is expected to be approximately $60 million for the current fiscal year.

Also, as I mentioned frequently, our working capital can be very volatile, and timing at quarter end can have a big impact on our quarter to quarter cash flow results.

From a quarterly standpoint, average inventory days on hand were 24 days, consistent with last June.

Average DSOs of 17 were also similar to last year, as were average days payable outstanding.

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

We bought back $145 million of our shares during the quarter, and now have bought back $400 million of our shares through 9 months.

As I mentioned last quarter, we expect to purchase $598 million of our shares in fiscal '11, which represents the entire amount we had remaining on our board share repurchase authorization as we entered fiscal '11.

In addition, we announced a 15% increase in our dividend in May, our second dividend increase in this fiscal year, and we have had dividend increases for 6 consecutive years.

Our cash balance of $2 billion at the end of June continues to leave us with great financial flexibility as we look forward.

Now moving to guidance -- reflecting our strong third quarter performance, and the fact that we have only 3 months left in our fiscal year, we are raising and narrowing our diluted EPS guidance for fiscal 2011, to a range of $2.52 to $2.56, from our previous range of $2.41 to $2.49 per share.

This increased guidance continues to reflect revenue growth of 2% to 4%; reflects increased operating margin expansion, which is now expected to be in the low double-digit basis point range; reflects free cash flow that should now exceed the high end of our $625 million to $700 million range; and share repurchase expectations remain at $598 million.

Before I conclude let me give a little more detail around Steve's comments regarding fiscal '12.

I want to make it clear, that by no means are we reducing our dollar EPS targets for fiscal '12, but are simply reflecting that our outperformance in fiscal '11 has given us a higher-based starting point.

Our revised EPS guidance for fiscal 2011 now reflects 14% to 15% growth over fiscal 2010, which as a reminder, grew 31% over fiscal 2009.

Our original guidance for fiscal 2011 called for 4% to 9% EPS growth; and we have far exceeded those targets due to the performance of the 3 big specialty generics.

These 3 products are now expected to contribute $0.45 to $0.46 to EPS in fiscal '11, compared to our original expectation of $0.25-plus EPS contribution.

Next year with Oxaliplatin not returning to the market until August 2012, and the moderation we expect from Docetaxel and Gemcitabine as more suppliers enter the market and reimbursement declines, we expect only a $0.10 to $0.15 benefit from these 3 generics.

Obviously, we expect a strong offset from the oral solid generic wave, starting early in our fiscal '12; and with that offset we see a pathway to solid EPS growth that could be in the range of 7% to 10% for fiscal '12.

Keep in mind, we are in a very dynamic healthcare environment, and we will continue to refine our expectations throughout the remainder of our fiscal '12 planning process; and we'll give you full details, as usual, in November.

So to summarize, our updated fiscal 2011 guidance range now reflects GAAP EPS growth of between 14% and 15%, a significant increase over our original GAAP guidance of 4% to 9%.

We expect solid growth in fiscal '12, as our continued strong presence and specialty and generics continues to be our growth driver.

We have made great strides in our internal initiatives.

We have been energized by the enthusiasm of our provider and supplier customers, who attended our national healthcare conference and exhibition last week; and we continue to have the most talented and dedicated associates in the industry.

The future continues to look very bright for AmeriSourceBergen.

Now, here's Barbara for Q & A.

Thank you, Mike.

We will now open the call to questions.

We ask that you please limit yourselves to 1 question and a brief follow-up so we can accommodate as many callers as possible within the hour.

Please go ahead, Operator.

Thank you.

(Operator Instructions)

Your first question comes from Larry Marsh, Barclays Capital.

Your line is open.

Thanks, good morning.

Steve, officially welcome as CEO.

I know as you said you started out with great results.

I know you will continue to be successful at ABC, so congrats on the quarter.

Really just wanted to reflect on your general thoughts on the marketplace at this sort of preliminary stage for next year.

As I think you and Mike talked about, kind of a midpoint of the mid-270s for next year as a starting point for, you know, thinking of expectations for fiscal '12.

How are you thinking of the macro environment, I guess, as you look out the next year?

Is it kind of as you're seeing today?

Are you anticipating any incremental improvement around pricing apart from obviously the benefit of oral solids or are you assuming some incremental, you know, same store margin pressure?

And then I had a quick follow-up around Medco.

Thanks.

Well, you know, Larry, thanks.

I remember 5 quarters ago when you called it a quarter for the ages.

I appreciate your compliment and I'm enjoying the new role and appreciate the good wishes.

We obviously had better than expected results from injectables and you should remember that Oxaliplatin was really a unique situation and the other 2 we benefited from the 6 months exclusivity period and limited manufacturers and higher ASPs which can, you know, be reduced very, very quickly.

So, you know, we have some of those dynamics going on with the oral solids next year.

So, our 2 key growth drivers are specialty and generics.

I think we executed very well in all those areas.

You saw tremendous contribution above expectations from on the specialty injectable side, you know, with the 3 big drugs and I think you'll see us execute very well in the oral solid area mix and we are looking forward to that.

I think our customers are looking forward to that and you'll see great performance from us.

Mike, anything to add?

No.

Certainly, Larry, revenue growth in the higher industry is going to be a lit bit moderated because of the generic trend and much of the operating income growth is going to come from operating margin expansion.

I think that's the general dynamic that we expect to see and we have been planning for, for some time and has incorporated into, you know, those early thoughts.

Okay, thank you.

And then just on Medco, specifically, you call that, you know, the nature of the relationship is such you feel like a strong relationship certainly and it contributes roughly 5% of earnings.

So, just to clarify that a bit when you think of that is that 5% of kind of the earnings stream in calendar 2012 or is it really 5% of trailing earnings or somewhere in the middle?

Larry, it's really 5% at our current run rate.

At the current run rate that you were just speaking of.

All right.

Thank you.

It's just important to note that Medco only buys branded drugs from us, so.

All right.

Very good, thanks.

All right.

Thank you, Larry.

Next question, please?

Your next question comes from Tom Gallucci with Lazard.

Your line is open.

Thanks.

Good morning, just following up on, sort of, the early outlook for next year.

Where are you in the planning process or the budgeting process at this stage?

Is it done or you're just in the early stages of it, and what have you factored in for buybacks or cash utilization in that range that you offered?

Tom, we're very early in the process.

We're actually starting to visit our distribution regions and then our business units in the month of August to have our formal planning presentations and will continue to analyze information for some time.

So, I think it's early.

I think at this point, you know, I really don't want to get into detail of each of the, you know, key components of EPS growth, which really the revenue growth which I think the whole industry is going to moderate some.

We certainly expect operating margin expansion and we certainly expect that we'll deploy our capital to contribute to that EPS growth.

At this point, I don't want to drill down on each factor as they can change by the time we give guidance in early November.

Okay.

And then just following up, Steve, I think you have highlighted on this call and in the past sort of how you've broken out that consulting business out of the specialty group.

Can you talk about maybe the leverage that you're seeing or how you're making an impact on the sort of traditional drug distribution side of the business with your capabilities on the specialty side?

Yes.

I this it definitely is a trend towards real world evidence and we think we are 1 of the participants in the forefront of that.

People want to know what's going on realtime post launch.

We participate very strongly in rims programs through our specialty and consulting business and increasing in the drug company as well.

We have field-based reimbursement expertise, as well as program management expertise.

So, you know, what's been 1 of the promising trends is more drug approvals in this last couple of quarters and we've participated vigorously in that and a lot of these drugs are in the main drug wholesale business as well and will be becoming pore complex.

There's a lot more oral cancer drugs.

So, you know, I think again looking at AmeriSourceBergen as an integrated company taking advantage of all of our capabilities is really a lot of the work that I started as COO and will be continuing as CEO.

Thank you.

Thanks, Tom.

Next question, please.

Your next question comes from Robert Jones, Goldman Sachs and company.

Sir, your line is open.

Thanks.

I guess wanted to confirm 1 thing.

Are you guys sure there's no more Eloxatine left?

You sure you checked everywhere?

Yes, we have 2 bottles in Mike's office on his wall and we made sure they actually didn't have real solution in it because we wanted to sell it.

(laughter)

That's good.

On the gross margin you're obviously quite a bit better in the quarter.

Mike, could you maybe just parse out for us how much of that was from specialty, specifically Eloxatin versus the rest of the business?

Yes.

As I mentioned, Bob, the 3 generics contributed $0.17 of EPS contribution.

You know, you do the math there and it's a little bit over $70 million compared to the $0.05 benefit or roughly $25 million bucks they contributed last year.

So, you know, we did have about a $50 million or so increase, so year-over-year contribution from those drugs.

Got it.

That's helpful.

And then, Steve, you mentioned, you know, the growing importance of the New York metro area.

I was hoping just 2 quick points there, could you touch on maybe some of the market share shifts that you've been seeing in the retail independents in that area?

And the follow-up just more broadly, as we think about some of these very important upcoming launches are there special measures you guys are taking or plan on taking to ensure compliance with the retail independent customers around specific drugs?

Well, in our drug network we have 27 distribution centers and our Amityville distribution center has got a growth rate in excess of any of the others and that's why we've expanded it.

We're looking at the run rate we have with certain customers and our current run rate is very robust in that market.

So, I can't talk specifically what others are doing, but we are doing well, if not better than expected with growth rates and 30% to 40% of the current run rates.

So, we're excited about the opportunities we have there as we pointed out on the last call and, you know, we'll continue to execute against that.

On the second part of the question, you know, there's no doubt that we expect a dynamic generic market next year, a lot of focus is on programs like first to shelf to make sure we get the products to our customers right away.

We look at the generic efficiency component, which is really how quickly do products convert and I think the bar keeps getting lifted and AmeriSourceBergen wants to help our customers participate in that.

So, those are the sort of things we're looking at.

I mentioned the energize program.

We are using the energize program and we did spend, you know, as you know a lot of money this quarter looking specifically at compliance and how can we do better.

1 of the key tools that we have is our insight program which helps measure compliance and helps benchmark our independent pharmacies against other like pharmacies and we are encouraged adoption and utilization rate for programs like that.

That's helpful.

Thanks.

Thank you, Bob.

Next question, please.

Your next question comes from Robert Willoughby, Bank of America, Merrill Lynch.

Your line is open.

Steve or Mike, can you not accelerate the ERP implementation given so many earnings upside to your plan this year or have you done that or is it just not possible?

Well, Bob, our goal is to -- first off we're very happy with our rollout in June and our third location.

It has gone very well and we're very, very pleased.

You know, we are going to continue those implementations.

Our next 1 is in September and then we'll follow very quickly with, you know, many others and, you know, expect to complete those implementations around the end of fiscal '12 or so.

And I'll tell you, they're big events for us, Bob, and they take a lot of planning and a lot of careful thought and a lot of interaction with our customers.

So, we're in no hurry, you know, to rush through that process.

We'll do it in a very methodical way and with the care and execution that you would expect, you know, from us.

So, very pleased with the results, but, you know, we'll continue along at the pace that we had indicated.

Okay.

And on the Medco, what do you do with them that you might consider so proprietary that it could be a barrier to that relationship switching?

Well, I think the only thing that you would point to is the extraordinary service that we give to Medco and our focus throughout this next couple of quarters will be really on maintaining that excellent standard.

And there's no reason that we should do anything different and we've had the account for a long time.

We were really proud to be named the VIP supplier 2 years in a row.

I think that just points to the closeness of the relationship.

Medco is a growing specialty component, so we do a good job there as well.

We have a solid contract as we said, so mid 2013 and we expect to earn our place at the table to carry on enhancing and preserving that relationship.

Is there any major software or expense commitment to supporting that relationship -- that would disappear?

No, no.

No.

There's not any costs, Bob, that are special that we wouldn't be able to take out very quickly.

Okay.

Thank you.

Thank you, Bob, next question, please.

Your next question comes from Lisa Gill, JPMorgan.

Your line is open.

Thanks very much.

Good morning, just a quick follow-up on Medco.

I think you made the comment, Steve, that it's primarily branded today.

Can you maybe just talk about is there any opportunity at all as we start to move into this next big generic wave for them to buy any generics from you or should we only think of generic sales going to the independent markets that are buying generics today?

Well, they don't only go to the independents.

We do a very good business with the regional drug, we've got an increasing hospital generic business that is 1 of the key differentiators for us.

And we've got a really strong other mail order business and skilled nursing facilities, long term care facilities, for example, which of course are really key target areas for us.

If you look at 1 of the key tenants that I have increasing share targeted markets, 1 of the key goals that we have at the drug company is to increase generic share in all the markets that I've mentioned.

You know, as far as opportunities I wouldn't close the door to it but it's a very different type of generic trend that you see with companies like those.

So, we haven't been successful, you know, working on those areas and -- but not to say that we don't keep talking about that and that there isn't that possibility in the future.

As they move towards the generic wave then and the margin on this business being so much lower than everything else that should bring up the overall margin of your business, right?

That's 1 way to think about it.

And secondly, when you think about generic penetration in all the different customer segments that you talked about, can you maybe just talk about where you are today?

Are you at 70% to 80% penetration?

Can you maybe get to 95% or are you at 90% and you think you can get to 95%?

How much delta is still left out in the marketplace for you to capture that incremental share?

Lisa, this is Mike.

First off, I do agree with your thoughts that margins would go up as you lose some of the lower margin business through this generic conversion era.

Secondly, I think how I would characterize it is that we're at different stages with different parts of our business.

Our retail business, I think we continue to think we're, you know, slightly north of 80% or so and our goal is to continue to creep that up and continue to improve compliance.

I think the good news is over the last couple years we've been moving in that direction as our generic growth has exceeded the overall market growth.

So, we are making some strides there.

We've had a particular focus as Steve mentioned on things like some of our alternate site customers.

We've gone to great lengths to customize some of our generic programs for the subsectors within the alternate site business and have continued to increase our share there.

I think you're probably more in the 50% to 60% penetration range for some of those accounts and that's an area that continues to be a great opportunity for us and, you know, I would characterize the hospital space, you know.

It's a little bit more limited on the oral solid side from the hospital space, but we've always distributed the oral solid generics to the hospitals.

But many in the past often that was through their own contracts or GPO contracts we've been able to convert more of that to our proprietary pro generics contract and have been very successful with that.

So, I think that's more of the trend that you'll see in the hospital area going forward, but, I'll leave that with there continues to be great tunes for us not to just capture the new product but to increase our penetration with our existing customers.

And just as a quick followup, is that contemplated in this initial outlook that you have in the 7% to 10% range or is it just looking at the conversion of what drugs will be losing patent protection as we go into next year?

No.

Increased compliance is 1 of our key goals.

Okay, great.

I appreciate the comment.

It always has been.

Okay.

Thanks, Lisa.

Next question, please.

Your next question comes from Glen Santangelo Credit Suisse.

Your line is open.

Oh yes, thanks a lot.

Mike and Steve, I just want to make sure I have some of these numbers correct that you gave last quarter and this quarter.

Mike, if I heard you correctly last quarter, you seemed to suggest that the specialty contribution was $0.35 to $0.40 in fiscal '11 and that was going to $0.10 to $0.15 next year.

So we had a $0.25 hole to fill.

Now, you're kind of telling us that hole is $0.35 given the increased specialty contribution that you're currently seeing.

And if I heard you correctly you seem to say that the oral solid generics were going to fill that $0.25 hole.

Now you're saying they're going to fill the $0.35 hole, as well?

Well, Glen, first off I think I said $0.36 to $0.40 last quarter for the specialty just to clarify that and $0.10 to $0.15 for next year, and you're correct that was a $0.25 hole this year -- or this quarter, excuse me.

I'm now saying $0.45 to $0.46 down to $0.10 to $0.15 and that's a $0.35 hole, and as I said last quarter, the generics are going to give us substantial offset to that.

But, obviously, the gap is a little bit higher and that's going to be a little bit of a drag on our growth rate which is why we're talking about a pathway to 7% to 10% versus our normal long term targets of 15% or so.

So our thoughts about next year from an internal target for dollar EPS really haven't changed at all.

The only thing that's changed is this year has gone up and we now expect 14% to 15% EPS growth for fiscal '11, which is pretty outstanding when you consider we had a 3% headwind from litigation gains that we had last year that offsets that and some of the investments we had to make in our IT infrastructure for maintaining the dual system.

So, simply we've had a bigger year this year.

It makes our starting point for next year higher and we continue to look at a solid year in fiscal '12.

So, Mike, that's what I was driving at.

So last quarter when you said you expected I think you said you expected fiscal '12 to be kind of a normal growth year for AmeriSourceBergen.

Now it seems like lower, but basically as you look out to fiscal '12 nothing's changed on your assumption front related to these oral solid generics that are coming.

It's basically all you're saying is your base year changed.

That's exactly right, Glen.

Okay, all right.

Thanks so much.

Well, said.

You could have put that in a script for us.

Thanks, Glen.

Next question, please.

Your next question comes from Steven Valiquette, UBS.

Your line is open.

Hi, thanks.

On Medco, sounds like everybody should probably assume at a minimum that the existing contract will hold up through March, '13.

Is that correct?

There's no change of control type of provision on their side where that could potentially end early?

We believe that's correct.

That's correct, Steve.

Okay.

It's definitely a date certain contract.

It's not a volume based like the Longs contract you had previously.

Is that correct?

No.

It's a good question but it is a date certain contract.

Got it.

Okay, thanks.

Thanks, Steve.

Next question, please.

Your next question comes from Helene Wolk, Sanford Bernstein.

Your line is open.

Thank you and good morning.

Couple of questions.

First starting with the pricing environment and/or your pricing expectations.

Can you give us a little bit of a sense for what you're expecting particularly on the specialty generic side that you called out and then just more generally if you're seeing anything change in the generic environment more generally.

What I think, you know, manufacturers are deploying different tactics prior to patent expirations both in injectables and oral solids and that impacts us.

So, we never know for sure where the ASPs are going to come out.

You know, I think we've shown an ability to manage this very effectively, but you should note that once more manufacturers enter, the price will drop pretty steadily over success of quarters is what we've seen.

Keep in mind Oxaliplatin was a little bit different because it was an [Akaris] launch and there were never more than a handful of manufacturers that came into the space, you know.

So, that was a little bit of a unique experience with specialty injectables.

I hope that answers you.

Anything else, Mike?

Yes.

I'd say on the oral solid side we still see scattered price increases, Helene, that had modest impact to the quarter, you know, from an overall inflation or deflation rate.

You probably had a little deflation this quarter because you had a couple big products such as generic Aricept and generic Effexor that had significant drops in price as they've gone through their 6 month exclusivity periods.

Great.

And then just can you provide an update on what is the current trend in the dialysis business particularly around the ESA question?

Well, the banding bid has had a modest effect.

ESAs in total are less than 3% of our sales approximately.

About 4%.

So, we've seen decline year-over-year in about the low double digits, 10% to 15% range for the ESA products.

Great, thank you.

And that's both on oncology and the dialysis side, by the way.

All right.

Thank you, Helene.

Next question, please.

Your next question comes from George Hill, Citigroup.

Your line is open.

Hey, guys, thanks for taking the question.

It's just a point of clarification, Steve.

Is it your assumption that after March 2013 the Medco business goes away?

No, we don't have that assumption at all.

You would expect that we would participate vigorously in whatever happens here.

We would participate vigorously, and we think that we've done a great job and we would -- in the successful company we would expect to be considered very strongly.

Okay.

I don't know if you're prepared to talk about, it but we look at what's going on in fiscal 2012 with the loss of the profit contribution of the generic cancer drugs as we go.

That should be offset by the small molecule oral solids that come through and provide the growth that year.

Is it too early to start thinking about fiscal 2013 when you start to see multi-source introduction of a lot of those oral solids where we typically see the AWBP fall pretty precipitously once the multi-sources are introduced.

Is it too early to talk about the impact of that, and should we see a similar impact there, but of greater severity, like we're now seeing on the oncology side?

I'd say no, George.

The 1 thing you've got to keep in mind is our fiscal year is in September and when you talk about 2012, a lot of the introductions are actually in the second half of 2012, which will fall very nicely into our fiscal '13.

So, we don't expect to see a huge drop at all.

We think it's going to be much more steady than a peak and then a decline and on the specialty side you're actually going to see I think a couple new products come through in '13 that you'll see a bounce back there from fiscal '12 as well.

So, we expect fiscal '13 to be a very good year from a generic perspective.

You put that in combination with us finalizing our rollout of our BT program, you know, we're very excited about our prospects in '13.

Okay.

I appreciate the color.

Thank you.

And just going back to our original question, I think 1 thing is that this would be a very large enterprise and you should contemplate that it's not impossible to be several suppliers to it.

Thanks, Steve.

Thanks, George.

Next question, please.

Your next question comes from Ricky Goldwasser, Morgan Stanley.

Your line is open.

Yes, hi.

A couple follow-up questions on the specialty side.

So, first of all on Taxotere, is there a scenario where you might see a better EPS contribution in the September quarter than what you saw in June quarter?

When we look at the competitive landscape there's additional manufacturers, so your supply costs dropped into September quarter and when we look at the ASPs in July, they're almost unchanged from June quarter levels.

Yes, Ricky.

Our base assumption is that we had, you know, $0.09 from the 2 products.

I don't want on to get into breaking out each individual 1, but $0.09 from generic Taxotere and generic Temodar in the June quarter and we expect that to moderate in the 4th quarter overall to $0.06 or $0.07 and part of that is the increased -- we think there will be some additional suppliers and some additional competition.

ASP is 1 of the factors.

It's not the only factor affecting our thoughts.

Okay.

And then Steve, when you look at the product universe, are there any other specialty generics that are not scheduled that you think may go generic in fiscal year approximately '12 that are not factored into guidance?

We've seen that last year.

What are your expectations in next year when you just think about the pipeline and the discussions out in the market?

No.

There's really nothing that we're aware of at this stage.

I mean manufacturers could go to launch on the oral solid side and also on the injectable side, but it's not something that we contemplate.

Honestly, nothing that we are hearing about at all at the moment, so -- but, of course, we get Oxaliplatin back in August.

Yes, okay.

Thank you.

Thanks, Ricky.

I think in the interest of everyone's time we'll take 1 more question.

Operater?

Thank you.

Your last question comes from A.J.

Rice, Susquehanna Financial Group.

Your line is open.

Thanks.

Actually hopefully 2 questions here.

First of all, can you just give us any thoughts or update if there is any 1 on where we are with the bid process for the VA contract?

I guess those bids are in, but there was certainly some concern in light of the Medco announcement that maybe people would be more aggressive.

Is there any chance that people can change their bids?

And then when do you think you might hear on that?

And then I guess also can you give us any flavor if you look ahead to fiscal 2012, is that a year where you'd characterize there to be a lot of contracts, significant contracts, up for renewal or sort of less than maybe what we've seen in the last few years?

Well, I'll just talk about the VA.

There's no opportunity to reopen it.

We submitted what we believe is our best and final bid.

So, there should be no opportunity and this news is not contemplated when any of us submitted our bids.

You know, we expect to hear about the contract award.

The last time was, you know, 2003 and it was -- the announcement was right around New Year's Eve.

So, somewhere around that timetable, probably November to February would be -- February would be absolutely the latest that we could hear about who the award goes to and just remind me of your second question.

Just thinking in terms of major contracts like the VA and otherwise 2012 versus the last few years.

No.

We don't really have any large contracts coming up in 2012 and 1 thing that's, you know, we only have 1 account that's more than 5% of our revenues and, you know, what you contemplate AmeriSourceBergen's franchise, I think that, that's a really key differentiator for us.

All right, okay, great.

Thanks a lot.

Thanks, A.J.

and now Steve would like to make a few closing remarks.

Thank you, everyone.

We know it's a very busy earnings day.

I saw 66 of the 500 S&P 500 companies are reporting today.

So, we very much appreciate you spending time with us and we appreciate your attention.

I hope that these excellent results confirm our key theme as we have an outstanding franchise here at AmeriSourceBergen and we continue to execute very well against our key objectives while planning for our future.

We look forward to discussing our final quarter with you in early November and our final guidance for 2012.

Many thanks.

Thanks, Steve, and before we go I'd like to just highlight a few of our upcoming events.

On September 7, we'll be attending the Robert W.

Baird conference in New York.

On September 9, we'll be attending the Stifel Nicolaus conference in Boston and on September 13, we'll be attending the Morgan Stanley conference also in New York.

So thank you very much for joining us today.

For the replay information on today's conference if you would like to access the replay it is 888-568-0124 or the toll free number and for the toll number is 203-369-3459.

It will be available approximately 2 hours after the conclusion of the call today and again thank you for attending.

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