美源伯根 (ABC) 2011 Q4 法說會逐字稿

Welcome to the AmeriSourceBergen 2011 fourth quarter earnings conference call.

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

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Barbara Brungess.

Please go ahead.

Good morning, everyone and welcome to AmeriSourceBergen's earnings conference call covering our 2011 fourth quarter and fiscal year-end.

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

Joining me today are Steve Collis, AmeriSourceBergen's President and Chief Executive Officer and Mike DiCandilo, Executive Vice President and Chief Financial Officer.

During the conference call today we will make some forward-looking statements about our business prospects and financial expectations.

We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations.

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

Thank you, Barbara, and good morning, everyone.

I am very pleased to report that AmeriSourceBergen delivered very strong performance in the final quarter of our fiscal 2011, bringing to a close a year in which we grew our earnings per share 14%, an especially notable achievement given that we delivered 31% growth last year.

In fact, I believe that it is appropriate to say that we have delivered exceptional performance over the course of our first decade as AmeriSourceBergen.

Since the merger in 2001, we have grown our earnings per share at a compound annual growth rate of 17%, improved our balance sheets and credit ratings, provided excellent value and innovative services to customers and suppliers and outstanding opportunities to our associates and delivered tremendous value to our shareholders.

As I look ahead into our next decade, I believe we are very well positioned to take advantage of the opportunities in the marketplace and I have no doubt that our best years are still ahead of us.

Mike will give the details on our financials, but I want to note some of the operating highlights.

For our fiscal year 2011 our revenues were up 3%, our gross profits were up almost 8% and we had record operating income of $1.2 billion.

We increased our operating margin for the sixth consecutive year.

We generated $1 billion in free cash flow, closed 2 acquisitions and announced and now closed a third, increased our dividend twice and more than doubled our share repurchase goals.

We continue to benefit from our 2 primary growth drivers, generics and specialty, and we continue to strengthen the programs and services we have in place to support those growth areas.

I commend our associates for once again delivering stellar performance on virtually every metric and for giving us good momentum as we head into our fiscal 2012.

Before I turn to the performance of our individual business units, I want to share a few insights about our industry.

AmeriSourceBergen is fortunate to be part of an industry that is vibrant, growing and resilient in the face of economic challenges.

Our industry delivers tremendous value to both Pharmaceutical manufacturers and healthcare providers alike while safeguarding the Pharmaceutical supply channel and increasing the overall efficiency of the healthcare marketplace.

For example, a new study recently released by Booz & Company demonstrates that wholesalers take $41.6 billion in costs out of the process of getting drug therapies from the manufacturer to the patient.

Demographics continue to help drive organic growth and while year-over-year sales growth rates across the industry will be moderated due to the unprecedented number of brand products converting to generics in 2012, the conversions represent a significant opportunity not only for AmeriSourceBergen, but also for our customers and, of course, for patients who will have greater access to lower cost generic prescription drugs.

As efforts continue to curb the rising cost of healthcare while maintaining a high standard of care, few tools are as powerful as generic drugs.

The pricing environment in our industry remains competitive but stable.

Most of the large customer contracts that have changed hands in the last year have done so as a result of an acquisition.

Manufactures continue to recognize the value distributors bring to the channel and the benefits that fee-for-service has brought to the marketplace.

AmeriSourceBergen continues to maintain a presence in Washington in an effort to look after the interests of our customers and shareholders and to participate in discussions regarding healthcare reform and other initiatives.

As I turn now to the performance of our individual business units, I want to reiterate 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.

The outstanding results that our associates have delivered in fiscal 2011 are an indication of the focus and creativity they bring to work every day and that gives me great confidence that we will meet both the challenges and opportunities that lie ahead.

Turning now to our business units, AmeriSourceBergen Drug Corporation had a strong quarter and a strong year, particularly noteworthy is that performance was achieved while continuing the implementation of our SAP enterprise level platform.

Drug Company's revenues were up 6% in the quarter with solid performance across all customer segments and strong growth in Alternate Site in particular.

Importantly, we have converted 2 distribution centers on to SAP, the process is moving forward very smoothly and we will continue to convert our distribution centers to SAP over the course of 2012.

Where the conversions have been completed our customers have responded favorably to Passport, the new customer facing order entry system and the new capabilities it provides.

During the September quarter we continued to invest in our Energize program which as I mentioned last quarter is designed to maximize sales force productivity, improve customer compliance and drive efficiency by taking full advantage of our new SAP platform and ensure that we take advantage of the generic conversions in the years ahead.

These efforts have further focused our sales force and we have good momentum going into the new year.

In our fiscal 2012 we will be making additional investments in our Canadian operations where we have had significant new business wins.

We are very pleased with our leading position in Pharmaceutical distribution to independent pharmacies and our leading role in Specialty distribution and related services in the Canadian market.

AmeriSourceBergen Specialty group had another very strong year with unprecedented performance in Specialty Generics and solid performance across all Specialty businesses.

While contributions from Specialty Generics will moderate in 2012, we remain very well positioned to benefit from future Specialty product launches.

In September we acquired IntrinsiQ, a leading provider of informatic solutions that help community oncologists make treatment decisions for their patients.

IntrinsiQ is now part of Specialty groups ION Solutions.

The combination of IntrinsiQ software applications and ION Solutions existing oncology technology platform will enhance the Company's proprietary data offerings to both physicians and manufacturers.

The addition of IntrinsiQ is indicative of our continued commitment to community oncology and a good example of how we intend to continue to strengthen our market leading offerings in Specialty.

During the fourth quarter we combined our Consulting and Packaging businesses into one operating unit called AmeriSourceBergen Consulting Services which we believe will expand the opportunities for both businesses, particularly since both provide market leading consultative services to Pharmaceutical manufacturers.

The Consulting and Contract Packaging businesses have solid results in the quarter and we have already identified synergy opportunities from within the businesses that should help continue to strengthen their performance going forward.

In addition, we have recently made 2 acquisitions to continue to expand our market leading offerings in Consulting services beyond Specialty products.

Premier Source, a small Pharmaceutical Consulting Company that expands our service offerings in the fast growing areas of molecular diagnostics and emerging biotech and TheraCom which closed today and meaningfully expands our offerings in reimbursement consulting on products that are covered by the pharmacy benefit.

These additions to the Consulting group and the addition of IntrinsiQ to the Specialty group, a combined investment of $300 million strengthen our positions in the market where we are already a leader with services that clearly differentiate us from our peers and strengthen our relationship with manufacturers and providers.

For example, the combination of Lash Group and TheraCom will give us more than 3,000 associates focused on supporting patient access, adherence and reimbursement with differentiated capabilities to support products under both the medical and pharmacy benefit.

Given the strength of our balance sheet and our desire to grow our business, we continue to look for acquisitions that meet the criteria we've had in place for quite some time.

They should increase our value offering to existing customers both up and down the channels.

They should be within our established core competency and they should increase shareholder value.

While we have not contemplated any further contribution from acquisitions in our guidance, we continue to be receptive to acquisitions and we continue to be interested in opportunities in Pharmaceutical and Specialty Distribution and Services as well as Consulting and Packaging Services.

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

Looking ahead, the future looks very bright.

Mike will detail the guidance in more detail, but the key take aways in our fiscal 2012 we expect to achieve earnings per share in the range of $2.74 to $2.84, an increase of 8% to 12% over fiscal 2011.

While we have a difficult comparison to overcome in 2012, our long term EPS growth objective continues to be to grow at 15%.

Looking further ahead to 2013, we should have a carryover from some of the launches that occur late in our fiscal 2012 including the relaunch of oxaliplatin and we should begin to benefit from the completion of our SAP implementation.

In fiscal 2014 we should begin to see the 30 million to 40 million uninsured patients enter the healthcare market driving demand for Pharmaceuticals that should carry over into 2015 and beyond.

In addition, 2014 and 2015 are expected to be good years for generic conversions and, of course, there's a chance that Biosimilars may also come to market in that timeframe.

Finally, I am very confident in our business and in our future because demand is strong for the products we distribute and the services we provide.

We play an essential role in the Pharmaceutical supply chain.

We've positioned ourselves well to benefit from generic and Specialty products and we have continued to invest in opportunities we see in our future.

I believe our focus and our exceptional and innovative associates set us apart in our industry.

As I stated earlier, our best days are still ahead of us.

Here is Mike.

Thanks, Steve, and thank all of you for joining us today.

We had a solid finish to what has been a tremendous year in a series of tremendous years for AmeriSourceBergen and we are very pleased with our fiscal 2011 results.

Before I get into the quarterly numbers and my comments on our fiscal 2012 guidance, I would like to take a few minutes to review our full year fiscal 2011 performance and compare that performance to our original expectations for fiscal 2011 which we gave to you last November.

Our revenue growth guidance for fiscal 2011 was 2% to 4% and we finished solidly in the middle of that range.

We expanded operating margins by 8 basis points exceeding our original guidance of low to mid-single digit basis points expansion.

Much of that upside reflects our outstanding performance in the Specialty Generics area and we overcame significant headwinds from maintaining duplicate IT systems as well as some fourth quarter charges that were not anticipated.

Our free cash flow of $1 billion for the year far exceeded our original guidance of free cash flow of $625 million to $700 million.

With strong working capital management including a significant year-over-year improvement in the Specialty group working capital and certain deferred tax benefits providing most of our upside.

The stronger than expected cash generation allowed us the flexibility to up-size our share repurchases to $841 million, well above our original $400 million guidance.

We also increased our dividend twice during the year and we strengthened our market leadership in Specialty and Consulting Services through the acquisitions Steve detailed.

In addition, we were able to accelerate internal investments in select growth areas which we will continue in fiscal 2012.

All of these factors combined to drive our GAAP diluted earnings per share to $2.54, a 14% increase over our GAAP EPS from fiscal 2010 and we far exceeded our original EPS guidance for fiscal 2011 of $2.31 to $2.41.

In addition to our strong results, we strengthened our already strong balance sheet during the year and received upgrades from all 3 rating agencies.

Won awards once again for customer service and successfully implemented our new ERP system across our back office and followed that up with the successful rollout of our new customer facing solution.

Truly a superb all around year for ABC, leaving us well positioned for future growth and we thank all of our associates who continue to exceed our customers' expectations every day.

Now let's move to our September quarterly results which have a few usual items that I will detail mostly impacting operating expenses and offset in part by a lower effective tax rate in the quarter.

Starting with our top line, revenues of $20.4 billion grew 3.5% in the quarter driven by the Drug Company which was up over 6% and the Specialty group was down 5%.

This is the last quarter the Specialty group top line will be impacted by the prior year discontinuance of a large customer contract in our 3PL business.

The Drug Company growth was driven by some of its largest customers as well as growth in selected markets.

Gross profit of $618 million once again grew faster than revenue and was driven by a strong performance under both our brand and generic manufacture incentive programs and Specialty Generics which together more than offset normal competitive pressures.

Two of our highlighted Specialty Generic products, docetaxel and gemcitabine contributed approximately $0.09 of earnings to the September quarter slightly above our $0.06 to $0.07 expectations, and for the for the full year including oxaliplatin the Big 3 Specialty products contributed $0.48 of earnings compared to the $0.25 contributed by oxaliplatin alone in fiscal 2010.

In the fourth quarter we had a very small LIFO credit of less than $100,000 and for the full year our LIFO charge was $35 million compared to $30 million in fiscal 2010.

On a GAAP basis, operating expenses were up almost $30 million or 8.6% in the September quarter due to a number of discreet items.

The largest of these items was our $16 million qui tam settlement which we announced last week.

In addition, we incurred $4.4 million of employee severance related to the Drug Company's Energize program.

As Steve mentioned, this program encompasses a number of initiatives to maximize sales force productivity, improve customer contractual compliance and drive efficiency.

We do not expect any further severance costs related to this program.

We also incurred $3.2 million of deal transaction costs in connection with our acquisitions.

And finally we incurred an intangible asset impairment of $6.5 million in the quarter related to our Imedex physician education business.

This small business has been hampered by cutbacks in Pharmaceutical supplier support for continuing education programs.

Combined these discreet items represent the entire $30 million operating expense increase in the quarter or approximately $0.07 of earnings.

Going forward we do not expect these items to burden our future expense run rate.

As a result of the $30 million of discreet expense items in the quarter, operating income of $244 million was down 2% compared to our prior year fourth quarter which as a reminder was adversely impacted by the write-off of $7 million of software costs and $2.5 million of intangible asset impairments.

Keep in mind that even with these fourth quarter expense items, full year fiscal 2011 operating income of $1.2 billion increased 9% over fiscal 2010 and our operating margin of 150 basis points increased by a significant 8 basis point year-over-year.

This represents our sixth consecutive year of significant operating margin expansion.

Moving below operating income, we had a small gain from a recovery on amounts due from a prior asset disposition reflected in other income and net interest expense of $19.9 million in the quarter increased 10% over last year due to less capitalized interest from our ERP project as well as reduced interest income.

Our tax rate in the September quarter was 35%, down significantly from the 38% rate in last year's fourth quarter.

The effective rate decline in the quarter is primarily due to adjustments made relating to state deferred income taxes resulting in approximately an $8 million or $0.03 benefit to the quarter.

We continue to expect our ongoing effective tax rate to be in the 38.4% range.

Our GAAP diluted EPS in the fourth quarter of $0.54 increased 8% compared to last year's $0.50 and exceeded net income growth due to the net 4% reduction in average outstanding diluted shares primarily due to our ongoing share repurchase programs including substantial repurchases in the September quarter.

Excluding the $0.07 adverse impact of the discreet expense items and the $0.03 benefit from the tax rate adjustment, our EPS for the quarter would have been $0.58.

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

We generated $360 million of cash from operations in the quarter bringing our full year total to just under $1.2 billion compared to $1.1 billion of cash from operations last year.

Capital expenditures were $40 million in the September quarter and $168 million for the year.

Free cash flow which we defined as cash from operations less CapEx was $1 billion, far above our original guidance of $625 million to $700 million.

The increase over our original expectation was due to a significant reduction in working capital at our Specialty group and a more than $100 million increase in deferred taxes with a large portion of that increase due to bonus depreciation related to our business transformation spend.

Keep in mind as I have often mentioned with $300 million of sales per business day, our working capital can be very volatile and timing at quarter or year-end can have a big impact on our periodic cash flow results.

From a working capital management perspective average inventory days on hand during fiscal 2011 were 25, consistent with fiscal 2010.

Average days sales outstanding of 17 were also similar to last year as were days payable outstanding.

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

We bought back $440 million of our shares during the quarter and $841 million of our shares for the full year.

This amount far exceeds our revised guidance of $598 million for the year and is consistent with our philosophy of up-sizing returns to shareholders if we have not otherwise deployed our capital and market conditions permit.

We also spent $45 million on our 2 completed acquisitions in fiscal 2011 and today completed our $250 million TheraCom acquisition.

Our cash balance of $1.8 billion at the end of September continues to leave us with great financial flexibility as we move forward.

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

Our fiscal 2012 guidance for diluted earnings per share is a range of $2.74 to $2.84, an increase of 8% to 12% over fiscal 2011 EPS of $2.54.

The assumptions behind this guidance include flat to moderate revenue growth, operating margin expansion in the high single digit to low double-digit basis points range and free cash flow in the $700 million to $800 million range which is in line with our long term goal of free cash flow approximating net income.

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

It also assumes that the TheraCom acquisition will be financed with long term debt as a result of the anticipated debt offering and less capitalized interest in fiscal 2012, net interest expense could be as much as 20% higher than in fiscal 2011.

In addition, as mentioned earlier, we expect our effective income tax rate to be in the 38.4% range.

Capital expenditures should decline to the $150 million range with less ERP spend but more capital focused on our Canadian and New York City expansions.

Our EPS guidance is higher than the early look we gave last quarter primarily due to the benefit from our incremental share repurchases above expectations in the September 2011 quarter.

Now let me drill down on our revenue and margin assumptions.

We expect the Drug Company revenue to be flat to down slightly from fiscal 2011 reflecting very modest market growth due to the large number of branded generic conversions expected in fiscal 2012 and the headwind from the long CVS contract which concluded in September of 2011.

On the Specialty side we expect growth to be in the 5% range as we have now anniversaried the 3PL customer loss.

Importantly, we expect high single digit to low double-digit basis point operating margin expansion in fiscal 2012 largely driven by the more than 30 generic launches expected in the Drug Company which will provide a substantial offset to the $0.33 to $0.34 headwind we have from the expected year-over-year decline from the Big 3 Specialty Generics in 2012.

A good way to think about the operating margin expansion is that new world solid generic launches in 2012 will largely offset the Specialty Generic headwinds with the EBIT growth coming from increases in customer generic compliance in the Drug Company, solid growth in the Specialty group excluding the generic impact and significant growth in our smallest segment, AmeriSourceBergen Consulting Services, where we have the benefit of acquisitions on top of expected double-digit organic growth.

The Consulting group is expected to contribute more than 5% of our operating income in fiscal 2012.

The operating margin expansion expected in fiscal 2012 should be driven by gross margin expansion.

Operating expenses are expected to grow in the 3% range largely due to our 3 acquisitions.

As a reminder, we do not give quarterly guidance, but I will say that directionally our toughest comparisons to fiscal 2011 will be in the second and third quarters which had the greatest benefit from Specialty Generics last year and the fourth quarter should be a very strong quarter as we have very favorable expense comparisons.

In conclusion, I know that our prepared comments today were longer than usual due to all of the moving parts.

So thanks for your attention and let me finish by reiterating that we had a solid quarter, an excellent year and a series of excellent years and have provided strong guidance for fiscal 2012.

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

Brad, please go ahead with the questions.

(Operator Instructions) Robert Jones, Goldman Sachs.

Just wanted to start on Lipitor.

It looks like Watson was out this morning saying they believe Pfizer could actually retain up to as much as 40% market share with the brand in the first 180 days.

I'm assuming or maybe you can weigh in on this that a lot of that would be mail, so obviously not affecting the retail channel, but I was just curious if maybe you could share with us a little bit around your assumptions regarding the Lipitor launch and where you see the brand playing out with that generic launch.

Bob, thank you very much.

It's a good question.

We certainly -- we think your assumption is correct that this will primarily affect the mail channel.

As a reminder, we do not sell Generics to our largest PBM customer, but we don't comment on specific products.

There will be over 30 generic launches next year in our fiscal year and Lipitor is obviously the most prominent one from an overall Pharmaceutical market segment, but not maybe perhaps overstated the significance to AmeriSourceBergen in particular.

Mike, any comments?

No, our base assumption, Bob, continues to be that there will be 2 Generics out at the end of November and it will continue to be a successful launch for us, but again either minor delays or modest upside is not going to have a big impact on AmeriSourceBergen's 2012 results.

But correct, the generic efficiency rate which we call the generic conversion rate will probably be more moderate for this product than it has traditionally been for other large branded conversions.

Got it.

That's helpful and then just on generic price deflation, obviously it's been a little bit of a tailwind this past year.

I know you mentioned it being competitive but consistent currently.

Can you maybe just talk a little bit about what you're factoring in around generic price deflation in the new guidance?

Yes, Bob.

Certainly there's been really generic price inflation particularly on the mature products in the marketplace and that's provided us somewhat of a benefit this year.

I would characterize it as about 2% of our overall gross profit and I think as we look to next year, we would expect a similar benefit.

Certainly the overall deflation rate is also impacted by Generics after their 6-month exclusivity period is over as what happened this quarter with a couple of the prominent launches going off exclusivity in the June quarter which affected the overall growth rate in this quarter and obviously there's going to be some of that impact next year as well.

Great.

And then just one last one, I'm not expecting there's an update here but just curious maybe when there would be.

What's your expectation around having better visibility into the Medco-Express merger and the related fallout or potential fallout from that merger?

Thanks.

We really have no further insights.

Our focus continues to be on doing a great job on servicing Medco every day which we've done for many, many years and that's really all we can control.

So we focus on what we can control and we are hopeful that we'll carry on given the high level of service that Medco has come to expect from us.

So that's really all we can do every day, Bob.

Yes.

Keep in mind, Bob that our contract does go through at least March of 2013.

So it's really not impacting our fiscal 2012 guidance at all.

Larry Marsh, Barclays Capital.

Congrats on the special additions, especially TheraCom.

It's been a nice growth company for a number of years.

Really my question surrounds your differentiation in Specialty.

This business continues to be a real important -- a very important driver for you.

You clearly have big scale in parts of that market.

So I want to get you to reflect how should we think of some of the current DC discussion, potential reimbursement changes off of ASP and then how do we think about visibility of margins with the reintroduction of oxaliplatin in August of 2012 given certain product categories where we've seen an increased presence of other distribution competitors?

So how do we think of visibility there?

Thanks.

Yes.

Well, thank you, Larry, great question as usual.

I think I've got all your different parts here.

Let me try and go through and mark it.

If I leave anything out that was a pretty good multi-tasking there, Larry.

We do have a tremendous go in our Specialty group and, of course, what distinguishes us is really the distribution business and then if you add in the capabilities of AmeriSourceBergen Consulting Services, we really believe we have a truly unique platform and what I think we can start saying as well is making a few relatively small acquisitions in Canada we've been able to extend that leadership into the Canadian market.

We've done very well there.

DC, the question CEOs often get what keeps you up awake at night and that's why we spend a lot of time in DC.

We have full-time representation there.

We want to be at the table discussing these issues.

I think we're perceived to be a very honest broker for our customers, a honest representation of their plight, but there are significant austerity measures being thought about and we want to help our customers advocate for fair reimbursement.

ASP is one that we've been watching for many, many years.

The reason we got involved in Washington was because of ASP and the fact that and MMA, they really did not include some of our fees in their calculation and we were able to get some of that corrected, as you know.

So again ASP, we're not billing Medicare Part B.

We don't get directly affected by SAP, but it's important to us that the community oncology channel and any physicians that dispense injectable drugs have fair and adequate reimbursement and that's really what we're advocating for.

The margins in Specialty, of course, there's been some very good trends for us which you've noted in some of your writings and which we've talked about in 2010 and 2011.

Oxy we expect to come back in 2000 -- in August of 2012.

It's not going to be an at-risk launch, so there will be differences to what has occurred in the past few years.

We're not going to be able to buy several hundred million dollars of inventory.

There would be no business purpose for to us do that.

So it's going to be very different, but I think I've got all your questions and I see Mike's -- I've got all Larry's questions, Mike?

Yes.

I think you hit it well.

Nobody ever accused me of being succinct, so I appreciate that and I guess a quick follow-up, Steve, it seems like you're also suggesting that under the right circumstances you'd be willing to be a bit more assertive in looking at acquisitions as you think about growing your business over the next several years.

Is that the right way to frame what you said and do you think that the environment is such that you are going to be able to hopefully successfully use the strengths of your balance sheet to expand through additional acquisitions of some size?

Larry, I think we've really been when Dave was here as well -- we've been active in overseas markets.

We serve on the International Wholesaler Federation, a board which I've taken over.

It's very interesting.

We're mindful of trends, I mean.

We just -- we recognize all the great virtues.

This is a market that we have here in the US.

I think it's very likely that at some stage like some of our competitors, but for our own reasons we would go into overseas markets and especially services in the area, of course, that we've demonstrated tremendous strength in, in the US and now in Canada.

So that could be a venue for us and we obviously are of the size that we can look at those sort of opportunities, but they have to meet our criteria and our biggest criteria is long term shareholder growth and return on invested capital.

Eric Coldwell, Baird.

I just wanted to get some clarification on the acquisitions and where their placement will be in the model.

Am I right to assume that IntrinsiQ is in Specialty group, Premier Source in Consulting group and TheraCom, might that be split across those 2 segments?

Could you help us with TheraCom?

TheraCom will be in the Consulting group as well, Eric, and your first 2 were correct.

Okay.

So all of TheraCom is in Consulting but does it not also have a large distribution program?

It does.

It's a very specialized distribution that is tied in very closely to the programs that we offer to the manufacturers.

So we think it's beneficial to keep those 2 together in that group.

Okay, then just one follow-on.

TheraCom came with a $50 million tax benefit, yet you're calling firm tax at the consistent 38.4%.

Technically is the TheraCom tax carry-forward is that related specifically to that unit?

Is there no way to structure it where it could benefit the division or the firm overall?

Yes.

I mean there are losses, Eric, that we'll be able to take over a pretty long period of time.

So the benefit in any one year is not going to have a significant amount on our rate, but as we get income from that acquisition over time we'll be able to combine that with ABC and take advantage of some of those deductions.

As you know, there are some restrictions on how much you can benefit each year.

Right, right.

But over time we think we'll get that entire $50 million benefit that we've laid out.

Tom Gallucci, Lazard Capital Markets.

Two questions, if I could.

First, Mike, just wondering about how you view the impact of Generics on working capital.

You mentioned earlier sort of free cash flow similar to net income.

Do you expect that you could see some boost over time as there's more Generics on the market?

Yes, Tom, I certainly do think we can and I think we have.

I think over time we have benefited a bit from the increase in Generics.

Keep in mind the dollars of Generics are still relatively small to the overall spend and the dollars of the brand name products really still do dominate our working capital, but I think it continues to be a positive trend for us.

I think we're very happy with the way we managed our working capital this year, which I think presented us a great upside in our fiscal 2011 cash flow results.

I mentioned some of that's from taxes.

Some of that's from Specialty.

But that working capital management has been very prominent in our thinking and is why we continue to expect in the future that our free cash flow is going to approximate our net income and give us lots of cash to deploy in a number of different areas.

Okay, good.

And then just because it's been a big effort for the Company I think, Steve, maybe it was in your prepared remarks you mentioned that where the SAP system has gone into place there have been some good feedback from customers.

Can you just give us a little bit more maybe feet on the street sort of perspective on the types of things that maybe the customers can see or do now that they couldn't do before?

Yes.

Thanks, Tom.

Appreciate you bringing it up.

We're very proud of how well this has gone.

We started out our fiscal year 2011 really doing the back of this implementation and now have done a couple of DCs and each one is getting progressively easier.

The customers that have started using our Passport system really like I think the much more updated interface that they have, the fact that they get realtime information, informatics is speed enhanced and it's a more up to date system and it's totally integrated with all the ABC functionality.

So I think we just getting very, very good feedback and it's been a huge project for ABC and it's just very good to see it going so well and the customers appreciating all the hard work and planning that has gone into this enormous effort.

Glenn Santangelo, Credit Suisse.

Yes, Steve if I could maybe just ask a follow-up question regarding the acquisitions.

It seems like this quarter you spent roughly around $300 million in acquisitions and it kind of sounds like you're comfortable potentially even doing bigger acquisitions and potentially even comfortable doing something in the international arena.

When I kind of compare that to your predecessor Dave Yost probably didn't spend $1 billion in the previous 10 years on acquisitions and so it feels like a little bit of a trend change for the Company.

I'm just kind of curious.

Could you maybe give us a little bit of a better sense for maybe the areas that are of focus for you both domestically and internationally?

Yes.

Glenn thank you.

ABCs long term growth strategy has always contemplated doing acquisitions.

That add value to our business and meet our criteria and we've made actually over 20 acquisitions since the merger.

I served on the Executive Management Committee and was on the Steering Committee for the merger and really discussed almost every opportunity with Dave and Mike in particular.

So it may seem that we're being more aggressive, but just actually there have been opportunities that have met our criteria and that we've been able to take advantage of particularly in the last couple of months and that really makes sense for our business.

I think that just having closed TheraCom today we look at the universe of competitors that are available and we'd identified TheraCom but never ever thought it would be for sale because it was kept within a very large public company and just great synergy and benefit that this came up for sale.

In international arena I think my comments are that we're very pleased with how well we've progressed in Canada buying 2 relatively small companies, putting them together, giving them the great benefits of being linked up to ABC and our capabilities and making a very significant investment up there which have now resulted in us having a very strong leadership position not only in the states, but now in Canada.

So that I think is a good illustrative example of where ABC can add value.

Okay.

Maybe if I could just ask one quick follow-up question on Lipitor.

It seems like clearly in your base case assumption are a 2-player market assuming Ranbaxy launches by the end of the month, but am I correct to assume that if they don't launch by the end of this month that maybe your assumptions will have to change?

Could that be a material event if we don't see Ranbaxy in the market on time?

Yes, Glen.

This is Mike.

I think as I mentioned earlier, I don't think it will be a material event.

We expect to be out in the market regardless.

I think if they don't come out possibly the pricing is a little bit higher in the marketplace and there's a little bit of an advantage to us, but like I said, whether there's a slight upside or slight downside to that particular launch, it's one of over 30 launches we have and I don't think a significant delay is going to have a big impact on our numbers in fiscal 2012.

Lisa Gill, JPMorgan.

I just had a couple of follow-up questions.

Steve, I think in your prepared remarks you talked about build-out in the New York market.

Can you maybe just talk about where you're taking some of that market share from and where you see some of the opportunities?

Thanks, Lisa, that's an easier question than you asked me in January, but we've identified the New York market as the Premier independent market.

Obviously it's close to where we are, so probably gets -- the people are running our east region, they're getting a disproportionate amount of attention from senior management, but with the acquisition of [Ken Ray] we definitely have had an uptick in interest there.

The market's really shown an interest in looking at different options and we've been very active and we've had above market growth there and we've invested further in the market by updating our Amityville facility.

So this is a market that's always had great interest to us and we bought Bellco a couple years ago and that's gone well for us and we'll continue to invest in that marketplace and really hope to continue to gain market share.

Okay.

And then just my second follow-up question is just around Generics.

As we think about 2012, can you remind us what your generic conversion rate is of existing customers?

I know that by not having some of the national chains you don't lose the branded, but how should we be thinking about that?

Is it in the high 90%s?

Is it -- what's the rate of conversion when we think about the generic market?

I think the industry has said that it's in the low 90%s and that rate keeps going up, but I think it's very difficult for to us identify that for our customers.

Mike?

I think the great thing, Lisa, as you pointed out about our customer base is that other than our large PBM customer all of our customers buy Generics from us and particularly in the retail space we've got a very, very high penetration rate with our pro-Generics offering and we continue for that -- we expect that to continue going forward.

As you know, we've made inroads with world solids in the hospital area.

We're getting a large majority of that spend as we always have and I think the opportunity area for us continues to be in the Alternate Site segment which again is a very varied segment includes things such as long term care pharmacies and in that area we've been really focusing our efforts and have been really expanding our market share and that's been our fastest growing space.

So I think we're solid all around and I think we'll capture a large share of the generic conversions with our customer base.

Just as a clarity, in the past if I remember correctly didn't you talk about maybe an 85% rate of conversion of a branded drug where they then buy the generic from AmeriSourceBergen?

Is that the right number or --

Well above 80% for our retail sector I think is the comment we've made historically and we continue to push that up and we continue as both Steve and I mentioned on our comments focusing on generic compliance with our customers.

I think we have been successful.

Our generic growth rates have exceeded the market rates for the last couple years and we expect to do that again in fiscal 2012.

It's one of the Number 1 metrics that we look at every day and it's a big part of our Energize program and we are very, very attuned to this and we expect our customers to live up to their contract requirements and that's what we incent our sales force on, et cetera.

John Ransom, Raymond James.

Just a couple of questions.

On the oncology business obviously your 2 big competitors have made acquisitions and they're talking a little bit about picking up some share.

Do you have any look into your oncology market share and have you seen any customer attrition that would be notable?

There is some change in the market with Cardinal coming in.

I mean they announced 2 customer acquisitions, but we actually have many of the large independent oncology practices in the country and nothing has changed in terms of what we perceive our market share to be.

Everything has been pretty much according to plan in terms of our sales performance and we -- again, we're very confident of our offering.

I think an acquisition like IntrinsiQ really cements an already solid position, adds to the innovation, brings us closer to our customers and again provides unique solutions and insight to the manufacturers.

So it's not like as a market leader here with greater than 50% share in this very attractive market that we just resting on our laurels.

We are sort of living by the old Andy Grove motto - only the paranoid survive and we are absolutely focused on this market.

We carry on investing in it.

It's obviously a very personal passion of mine.

I know so many of our customers there and you'll see AmeriSourceBergen continue to have a very strong presence in oncology and other Specialty physician markets.

Great.

And just a question for Mike.

Looking at the contribution of Gemzar and Taxotere I think McKesson called out that, that contribution would drop sequentially.

Can you provide any kind of quantification as to what the September quarter looks like compared to the December quarter for those 2 imported drugs

I think that's a right assumption, John.

I really don't want to get into each quarter of 2012, but certainly I think the early part of the year will be more attractive than the later part of the year.

As I mentioned, those 2 products contributed about $0.09 in the September quarter and for the full year including the relaunch of oxaliplatin in August of 2012 we're expecting about $0.14 to $0.15 contributions from those 3 Big Generics in fiscal 2012 and again more front weighted

David Larsen, Leerink Swann, LLC.

Does the Express Scripts Cardinal contract come up for bid mid-next year and if so, are you guys going to bid on it?

We don't comment on individual RFPs especially ahead of them and we have not received any notification.

So probably -- but if any large contract came that up there was an RFP for, we'd certainly think we have the capabilities to and have demonstrated capabilities to perform under those contracts and we would certainly take a look at it.

Okay, great.

And then the revenue came in a bit higher than I was looking for.

Was there anything in particular going on there that was favorable in the quarter?

As we mentioned the Drug Company was up over 6% in the quarter and some of that driven by our larger customers and our diverse customer base, but really some widespread growth.

Steve mentioned a couple areas Canada and New York, that are growing very strong, particularly in the independent space and a lot of our larger customers are in the -- in what we refer to as the Alternate Care or Site space and those customers grew very, very well.

That was our fastest growth area.

Ricky Goldwasser, Morgan Stanley.

Just as a reminder, I might have missed it, what was your generic growth rate this quarter?

We were in the 7% range, Ricky.

Okay.

And where do you think the market was?

I think it was slightly below that.

Obviously this was a quarter as I mentioned earlier where a couple of the big launches during the year finished exclusivity back in June and there were no big launches.

So I think overall this has been the slowest quarter of market growth during our fiscal 2011.

Okay.

And with all the Generics that are kicking in for next year what are your assumptions for generic growth rate for fiscal year 2012?

It could be very substantial growth rate with all of the new products.

I mean particularly in our program we can have growth rates in excess of 20%.

Okay.

And then I think you mentioned that the Consulting group, it's expected to contribute about 5% off operating income in fiscal year 2012.

What percent of operating income did it represent in fiscal year 2011?

It was about 3%.

Okay.

And then lastly, just when I think about your fiscal year 2012 top line guidance and obviously you're expecting pretty robust top line growth given the product mix.

So can you just clarify for us what percent of your top line growth assumptions are from acquisition versus same store?

Our acquisition rates or growth rates will be in the $600 million to $700 million range.

That's some of the sales obviously from TheraCom have been recorded through us in particular.

So we're not 100% sure of exactly how much was through us and how that could be affected by inter-company eliminations, but these are not very big top line businesses but very significant from a growth line, growth perspective.

So that's sort of the range that we would expect.

TheraCom does some specialized products which are very much related to the programs that they do on the reimbursement side.

So we are going to account for them in the Consulting Services Division.

George Hill, Citigroup.

Steve or Mike, I don't know if you guys can boil it down to 1 number, but branded drug price increases were pretty strong in fiscal 2011.

Do you guys have a number that your assumption will be branded on price increases in 2012?

Yes.

George, you're correct.

I mean the branded price inflation was very strong in 2011.

I think obviously impacted by the large number of anticipated patent expirations and the activity around those drugs and where we had seen price inflation on brand in excess of 8% the prior 2 years we ended up the year well above 9% and as we look to 2012, we expect that to moderate some just because there's a number of those price increases related to products that are going to be off patent in fiscal 2012.

So we would expect a brand inflation rate in the 7% to 8% range in 2012.

Okay.

That's very helpful and then maybe just a quick follow-up.

You guys spoke a lot about Canada.

Maybe as we come to the end of the fiscal year could you size that business for us and then maybe tell us anecdotally expectations for 2012?

Yes.

I think that with some new contract wins we'd expect to actually be solid but 2 in the market, still quite a bit behind the Number 1, but we were about $2 billion.

We've had a very big customer win with a large independent co-op that we'll be implementing next year and we'll probably talk more about it in the next couple of quarters as we get into implementation, but it's a significant customer win for us given that it's such a small market in the space.

Thanks, George, and thank everyone for the questions and now Steve would like to make some final closing remarks.

Thank you, everyone.

That concludes our call for this morning.

As we have now officially ended fiscal year 2011, I would like on a personal basis to thank our associates, our customers, our suppliers and really my lead team for their support in my transition during this year.

I trust that our presentation this morning will convince all of you that the Pharmaceutical supply chain and services, the markets that ABC serves, is a great place to be an investor in.

Thank you for your attention.

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

On November 15, we'll be attending the Lazard healthcare conference in New York.

On December 14, we'll be holding our annual Investor Day also in New York.

On January 5, we'll be attending the Goldman Sachs CEOs unplugged conference in New York and finally on January 10, we'll be attending the JPMorgan healthcare conference in San Francisco.

Thank you all very much for joining us today.

Thank you, ladies and gentlemen.

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