美源伯根 (ABC) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the ABC earnings call.

For the conference, all participants are in a listen-only mode.

There will be an opportunity for your questions.

Instructions will be given at that time.

(Operator Instructions)

As a reminder, today's call is being recorded.

I will now turn the conference over to Miss Barbara Brungess.

Please go ahead.

Thank you, John.

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our first quarter fiscal year 2013 results.

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

And joining me today are Steve Collis, AmerisourceBergen President and CEO; and Tim Guttman, Senior Vice President and CFO.

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

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

For a discussion of some key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2012.

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 pleased to report that AmerisourceBergen delivered strong, solid results in the first quarter of our fiscal year 2013.

Our revenues were up 6% to $21.5 billion and earnings per share were up 13% to $0.69.

Our financial results were in line with our expectations and position us well to meet our objectives for the remainder of the year.

Importantly, the acquisitions we made last year contributed meaningfully to our results in the quarter, expanding our positions in the fastest growing segments of the market and further strengthening our foundation for sustainable growth.

AmerisourceBergen plays a significant role in an essential sector of the health care economy and is an important contributor to a growing and vibrant pharmaceutical industry.

As I discussed at our Investor Day last month, we continue to expect that demographic trends and healthcare reform initiatives will expand coverage to the uninsured and should drive organic growth in our industry over the next several years.

In addition, launches of new pharmaceuticals, as well as expanded indications for existing drugs, should further contribute to improving pharmaceutical sales trends.

At the same time, cost efficiencies are expected by both government and private payers and AmerisourceBergen's role in driving efficiency and innovation in the pharmaceutical supply chain is becoming ever more important.

With our diverse customer mix, we are fortunate to work with many participants in the healthcare market.

We deal with both large and small provider and manufacturer customers and believe we offer a compelling value proposition for all our chosen customer segments.

Our portfolio positions us to benefit in unique ways from health reform initiatives as organic industry growth drives demand across all our businesses.

For example, our manufacturer services business helps lifesaving new therapies come to market quicker and more efficiently and helps ensure that patients have complete understanding of their reimbursement options, including manufacturer resources that may be available to them.

As our provider and retail customers face the challenge of both cost pressures and increased demand, our goal is for AmerisourceBergen to be seen as an increasingly important resource in making their healthcare practice and businesses run as efficiently as possible without sacrificing excellence in patient care.

Historically, we have taken a very customer-centric approach to adding and developing our business lines.

Simply put, we want to provide services that will be valued and paid for by our customer base.

This guiding principle has been the driver of our long-term success and has helped direct our internal and external investments.

As the healthcare industry faces great change and complexities in the future, AmerisourceBergen will continue to use our key strengths to drive growth by delivering important and innovative value to our customers.

While we face some headwinds in fiscal 2013, the resilience of our business and the investments we have made over the last several quarters give me confidence in the future prospects for our business and in our ability to meet our financial and business goals for fiscal year 2013.

Furthermore, with the addition of the World Courier business and increasingly global mindset of some of our manufacturer partners, we see opportunities to expand some of our fastest growing lines of business into certain international markets.

Turning now to our business units, the pharmaceutical distribution segment had strong revenue growth but gross and operating margins were challenged by difficult year over year comparisons, particularly with respect to generics, and by changing customer mix in AmerisourceBergen Drug Corporation.

Operating income was down slightly in the quarter, but in line with expectations.

The drug company had strong revenue growth in the quarter, up 5% as we successfully implemented our new contract with our largest customer.

We are very pleased to be the channel partner to one of the leading US healthcare companies and we look forward to growing with them for many years to come.

In addition, we continue to see very good performance in our hospital customer base.

This targeted programs and services we deliver to hospitals have helped us solidify our market share in that segment over the last several years and, excluding government facilities, we believe we are now the market leader in pharmaceutical distribution to hospitals.

On the retail side, revenues were down year over year due to the loss of a food and drug combination group purchasing organization.

However, our 4,700 member strong Good Neighbor Pharmacy network continues to play a key role in helping our independent customers remain competitive in the marketplace.

I believe that independent retail pharmacies play an increasingly important role in the healthcare landscape today.

Patients prefer choice when determining where to fill their prescriptions and the retail pharmacists in our network are among the most easily accessible healthcare professionals in their communities and very adept at fulfilling unique patient needs.

Our SAP implementation continues to run smoothly, with 22 distribution center conversions complete and only three remaining to be done in the March quarter of fiscal 2013.

We made a significant investment in SAP and our associates have spent countless hours working to ensure a successful transition.

We take a great deal of pride in what we have been able to accomplish so far and while we still have some work ahead, including the decommissioning of our old system, we have already begun to reap some benefits from our new enterprise system.

Our Canadian distribution operations have faced some difficulties implementing a large new retail contract in a market that is undergoing significant reimbursement challenges, particularly with respect to generics.

We are disappointed with Drug Canada's performance and we have several initiatives underway to improve results in Canada but it will take some time.

Importantly, our Canadian specialty business continues to perform well, as it works closely with our US specialty companies and key manufacturers to implement successful joint programs in Canada.

Collaboration with AmerisourceBergen has been the key to our ability to continue to drive innovative solutions.

As specialty products become more important, and their usage is more widespread throughout the healthcare spectrum, it is essential that we capitalize on the strengths and expertise we have throughout our business.

For example, as the oncology market evolves, we are taking concrete steps to ensure that we are meeting the changing needs of cancer care providers.

Whether care is administered in the hospital or in a community practice setting, we want to make certain that our customers have access to our market-leading oncology programs and services.

In light of this trend, we recently launched our oncology service line, which simplifies oncology purchasing and financial management for varying sites of care.

In addition, we continue to support oral oncolytic products through innovative offerings that are now an essential part of the commercialization strategy for oral cancer products.

As the oncology market changes, AmerisourceBergen continues to remain the leader in providing world-class solutions for our customers and streamlined pathways to help get lifesaving therapies to patients.

AmerisourceBergen Specialty Group had very strong revenues in the quarter, up 10%, with particularly strong performance in third-party logistics, blood products, vaccine, and physician office distribution businesses.

Oncology is the cornerstone of ABSG, but we are also an instrumental part of the commercialization strategy for any physician-administered product launched into the marketplace.

In addition, our Specialty Group collaborates with our consulting businesses to help ensure patients have access to products by utilizing the full capabilities of our physician networks as well as our reimbursement and patient support program expertise.

The scale and breadth of our specialty business and the services that support it make it a true differentiator for AmerisourceBergen.

Our expertise is what we believe will help make us a world leader as specialty markets get established outside the US.

Turning now to our manufacturer services businesses.

AmerisourceBergen Consulting Services delivered a strong quarter with both TheraCom and the legacy businesses performing well as demand for their services continues to increase.

Our market-leading position in manufacturer support programs and our proven expertise in both specialty and primary care products differentiate our business and provides tremendous value to manufacturers.

Our unique expertise in demonstrating product value, maximizing patient access, and improving adherence are unmatched and, more importantly, essential to the success of new products and the sustainability of more mature products.

We continue to make progress in the integration of World Courier and we believe they will meet their financial and operational objectives for the year.

In addition, we continue to be very excited about the opportunities we see to build on the strength of manufacturer relationships we have in the US and expand into other markets.

I want to take a moment to personally thank Wayne Heyland, who will be retiring as President of World Courier.

Over his 30 years with the company, Wayne and his team built a business that is the global leader in clinical trial logistics.

We also very much appreciate Wayne's efforts to ensure World Courier made a smooth transition to becoming part of AmerisourceBergen.

We congratulate Wayne on his career and wish him all the best in his retirement.

Looking ahead, the results we have had our first quarter have positioned us well to meet our objectives for the full fiscal year.

We have a difficult comparison to overcome in 2013, but we continue to expect earnings per share to be in the range $3.06 to $3.16, an increase of 11% to 14% over fiscal 2012.

Looking further ahead, we expect to see organic growth improve as the 30 million to 40 million uninsured patient begin to enter the healthcare market, driving demand for pharmaceuticals.

In addition, generic conversions improve over the next years and, of course, there is a chance that biosimilars may come to market in that timeframe.

Of course, we remain open to future acquisitions, particularly in the specialty and consulting areas, but no further acquisitions are contemplated in our guidance.

Before I turn it over to Tim for a detailed look at the financials, I want to reiterate the confidence that I have in our business and in our future because demand is strong for the products we distribute and the services we provide.

As I stated earlier, we play an essential role in the pharmaceutical supply channel and we've positioned ourselves well to benefit from the fastest growing areas of the market.

Importantly, we have continued to invest in our existing businesses and in opportunities we see for sustainable growth in our future.

Here is Tim.

Thanks, Steve, and good morning everyone.

I'm pleased to report a solid first quarter fiscal 2013.

We are tracking well to our expectations for the full year.

The highlights this quarter -- very good topline growth at the Drug company as we onboarded our new PBM customer; low double-digit generic revenue growth also at the Drug company; above-market revenue growth at both Specialty and Consulting; and progress integrating World Courier.

Let's start our review of first-quarter results.

Revenues were $21.5 billion, up nearly 6% compared to last year's quarter.

Drug company revenues were up by 5% and Specialty revenues were up a very strong 10%.

Our revenues were also helped by World Courier, our second full quarter of reporting their results.

Gross profit was approximately $672 million in the quarter, up 15% from last December with a gross margin of 3.13%.

Our World Courier acquisition contributed roughly $70 million of that increase in the current quarter.

Our gross profit also benefited from approximately $12 million due to three anti-trust litigation settlements.

Let's move to operating expenses.

This quarter, operating expenses were $385 million, up about 27%.

This amount includes $65 million related to the operating cost of World Courier.

Excluding these expenses, our comparable operating expenses would have been $320 million, an increase of about $17 million or a change of roughly of 6%.

About 60% of that increase is due to a higher cost structure in our Canadian drug distribution business to support a higher revenue base.

We are working aggressively on a number of initiatives to reduce costs if that business.

¶ Operating income of $287 million in the quarter increased about 2%.

Our operating margin was 1.34%, down 5 basis points compared to last December quarter.

As we discussed at Investor Day, we expect our operating income growth to be stronger in the second half of the year.

Our generic comparisons get somewhat easier and we start to realize benefits from a number of our internal initiatives, including steps we're taking to optimize field operations and our corporate organization.

Moving below the operating income line, interest expense of approximately $19 million in the December quarter decreased 17% compared to last year as a result of paying down debt back in September 2012.

Moving to income taxes.

Our effective income tax rate in the current quarter was 39.6%.

As discussed last quarter, we continue to have operating losses in our Canadian drug distribution business and, as a result, are no longer able to record a foreign tax benefit.

Our GAAP diluted earnings per share from continuing operations in the current December quarter was $0.69, an increase of $0.08, or 13%, over the same quarter last year.

Our EPS benefited from the 10% reduction in our average diluted shares outstanding versus the prior year.

At December 31, 2012, we had about 230 million shares outstanding.

Let's spend a few minutes discussing our segment results for the December quarter.

Starting with pharmaceutical distribution, total revenues were $21.1 billion, up by about 5% versus the same quarter last year.

The increase was due to two primary drivers.

One, onboarding our PBM customer, and two, significantly above-market growth in our non-oncology specialty businesses.

Our strong topline growth for both brand and generics offset a sizable quarter over quarter headwind from blockbuster brand drugs converting to lower price generics.

Pharmaceutical distribution gross profit increased about $7 million when comparing the first quarter 2013 to the same quarter last year, and our gross profit margin decreased 9 basis points to 2.65%.

The $12 million of anti-trust income is included in this segment's gross profit.

Excluding the anti-trust income, the segment gross profit decreased due primarily to the headwind from the decreased margin on our large PBM contract.

Although we had a headwind in the Drug company from a low number of generic launches, our overall generic revenue growth helped to mostly offset this headwind amount.

The segment's operating expenses increased approximately $13 million or 5%.

The majority of the increase is due to our Canadian drug distribution business, and as I mentioned earlier, we continue to review their cost structure.

Pharmaceutical distribution operating income decreased 2% to $269 million in the first quarter 2013.

The core Drug US business was flat while the Canadian distribution business continued to incur operating losses.

Our Specialty business was down slightly due to the impact of lower contributions from oncology generic drugs offset, in part, by the solid growth in our Besse, ASD, and ICS businesses.

Moving to the Other reporting segment.

As a reminder, this segment is comprises of Consulting Services and World Courier.

Segment revenues increased over $200 million, the majority of which came from World Courier.

During the quarter, we incurred about $4 million of amortization expense related to acquired intangibles in connection with World Courier and TheraCom acquisitions.

Operating income increased $11 million from the same quarter last year.

The increase is related to contributions from both Consulting and World Courier.

Switching gears, I'd like to comment on our AndersonBrecon business that we previously announced we're selling.

The process continues to move through due diligence.

We expect to close in a timely manner.

The business had very good financial performance in the current quarter.

We continue to make the right capital investments in the business to ensure their financial success.

Now let's turn to our balance sheet and cash flows.

Capital expenditures were $57 million for the current quarter and included the purchase of our Sacramento distribution center.

We now own all of our large Greenfield DCs, which are considered strategic assets.

In the current quarter, we used about $300 million of cash.

Historically, our first quarter of the year is our most challenging quarter from a cash generation standpoint.

Impacts to this quarter were -- one, we had our seasonal inventory build; two, our PBM customer had their new level of AR established, and this AR balance is the result of higher purchases and also less favorable terms than our previous PBM contract; and three, slightly lower cash collections due to the timing of how the last day of December fell this year.

Our cash balance of about $400 million at December 31 is low by historical standards.

However, as we cycle through our seasonally high inventory balance and we generate operating cash flow throughout the remainder of the year, our cash balance will return to a more normalized amount.

During the current quarter, we bought back about $285 million of shares.

We are confident of our continued ability to generate cash and we took advantage of market conditions to purchase additional shares.

We have about $560 million remaining on our current share repurchase authorization.

Our philosophy has consistently been to upsize returns to shareholders if we haven't otherwise deployed our capital and when market conditions permit.

Now let's turn to fiscal 2013 guidance.

EPS.

Our GAAP diluted EPS from continuing operations remains unchanged at a range of $3.06 to $3.16.

Even though Q2 is our highest EPS contributor for the year, we continue to guide that our second half of the fiscal year will be stronger than the first half in terms of total EPS contribution.

Our assumptions behind this guidance also remain relatively unchanged.

Revenue growth in the 6% to 9% range, our operating margin will decrease in the high single, low double-digit basis point range and free cash flow in the range of $750 million to $850 million, which includes CapEx of $180 million.

And, finally, we have increased our share repurchase expectation to $400 million in fiscal 2013.

Let me finish by reiterating.

We're pleased with our results for the quarter and we're off to a solid start for the year.

Thank you for your time today and your continued interest in ABC.

Now here is Barbara for Q&A.

Thank you, Tim.

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.

Please go ahead, John.

Thank you.

(Operator Instructions)

Tom Gallucci, Lazard Capital Markets

Thanks for all the details.

Just first on the Specialty side, you mentioned it was a very good quarter.

It was better than we were looking for.

Can you talk about some of the drivers there besides specific business lines?

Maybe, are you taking market share or are there newer products that are driving that?

There is a couple of things, Tom.

Thanks for the question.

We are doing a lot of specialized manufacturer programs to support, say, oral cancer and a few products like that, that are growing above market.

And sometimes those are very limited access programs with just one or two participants.

So we benefit as those products really grow and expand.

And we've always really invested in our non-oncology businesses in Specialty.

And certainly you're seeing ASD blood plasma vaccine business doing well.

ICS, our third party logistics and specialized manufacturer support services, distribution services companies do very well, as well as our oral oncology programs.

So just again it's a very strong portfolio.

And we benefited from that unique portfolio that we have there.

Also, I would point out, very strong performance for our Besse division, particularly in the ophthalmology area where we have probably even a higher market share than we have in oncology.

Right.

Right.

Okay and then just on the follow-up there, obviously you reiterated the EPS guidance.

Just wondering how you are thinking about the moving parts at this point.

In the quarter you got the benefit of the settlement.

You are going to have the share repurchases are a little higher on the other side and the tax rates a little higher.

What are you thinking about as the key variables and just your thoughts on guidance in general at this point?

Yes.

Tom, thanks.

Yes, it's early in the year.

We're -- got a long runway to go here.

A lot of moving parts.

A lot can happen in terms of the pricing environment, price inflation, we have to work through and see how that turns out for the remainder of the year.

We kept our guidance.

We want to get a few more months certainly under our feet here.

The other thing, too, is we got a couple of generic launches coming up.

One in Specialty that are both important to our year.

Generic launches are dynamic.

You never know if they are going to launch on time.

So again I would just say that it's early and, as we work through the year, we continuously look at our guidance.

Okay.

Thank you.

Bob Willoughby, Bank of America Merrill Lynch.

Good morning.

Just looking at the first quarter experience where the cash flow from operations was down and the CapEx a bit higher, dividends higher, your free cash flow guidance for the year then suggests a much more dramatic ramp than we were looking for.

You obviously didn't raise EPS guidance.

So is it simply all inventory balances that will drive this?

Or is there a change to the Express Scripts receivable that you mentioned?

No, Bob.

This is Tim.

No, we established that base for Express Scripts.

I would say, again, that first quarter is a pretty high inventory balance.

We will see that come down.

Typically the change in inventory between quarters 1 and 2 can be $600 million, $700 million.

And by the time we get to the end of the year, we think, well, we have focus on some internal initiatives here and we think we can really get that inventory balance down by the end of the year.

Thank you.

Glen Santangelo, Credit Suisse.

Steve, in your prepared remarks, you seem to suggest that the acquisitions contributed meaningfully to your results.

Could you maybe give us a sense for how World Courier Group, in particular, maybe TheraCom, are performing relative to your expectations?

When you did those deals, you laid out some specific accretion estimates for World Courier Group of $0.06 to $0.10.

Are we in that ballpark or are we doing a little bit better or worse?

Well, first of all, we are getting used to their reporting.

Again it's just one quarter.

We-- really that $0.06 to $0.10 guidance was for the whole year.

And we are very comfortable.

I tell you the World Courier has added a lot to ABC, certainly as we consider the international platform.

We have really been surprised at the quality of their people.

We have got a really good opportunity to -- on the business development side to look at that strong offering we have with the ICS and ASD businesses in the US.

So we are very pleased.

We think they also have some unique opportunities in the marketplace because of some of their competitive environment.

So it's meeting expectations.

We've had a bit of focus on getting them used to being part of AmerisourceBergen public accounting and the cash flow requirements and the cash flow reporting that we have.

But now we definitely are looking forward to a strong resumption of business development and we are bullish on the business.

TheraCom, that was really an excellent addition into our Consulting Services business.

We are expecting about $0.05 to $0.06 accretion from that, and that's right on track.

TheraCom is actually, it's a little bit harder to identify because it's so integrated now into the core [lash] operations.

And as you would expect, we had similar positions there and similar systems.

So there is a much deeper integration there.

So -- but I tell you that the leaders of our Consulting business couldn't be more thrilled to have this.

And it's also really helped us with program management.

We have a very strong type of operations now in Pittsburgh and just outside DC, so it's just.

Both of them have really strengthened our business.

Tim, anything you want to add on the financial side or--?

No.

I think we're tracking well.

We are real pleased with the progress we are making.

We said on the World Courier, we said that the base business is doing well.

It's going to be a little bit slower for business development ramp up, which we guided to when we did the acquisition.

But they are on track and, again, we think there are some opportunities to take some market share hopefully, later as we progress.

So we're very optimistic.

Steve, maybe if I could just ask you one quick follow-up.

There is obviously a couple big RFPs in the marketplace right now.

And I am curious.

Are you bidding on all those opportunities or are you seeing in the marketplace that would make you cautious at all with respect to pricing or any commentary around the competitive landscape?

We just -- again, we just reported revenues of $21.5 billion.

So we definitely are a big Company.

And we really do like to serve large and small customers.

So we think we are of the size and scale that we definitely -- anyone that is interested in supply chain should speak to AmerisourceBergen and we should speak to them.

But we're always going to bid responsibly on contracts, as you know.

That's what you should have come to expect from us.

We certainly consider the customer growth.

We consider the positioning within our portfolio.

We consider cash flow very importantly.

So all of these are what we consider when we bid.

And honestly we're seeing a very stable but competitive contracting process.

And we start to probably talk a little bit earlier to customers, our own customers in the renewal contract cycle.

But other than that I would say everything is pretty much steady as she goes.

Okay.

Thank you.

Bob Jones, Goldman Sachs.

Thanks so much.

So just on the Canadian business, looks like reimbursement in Canada has been challenged for some time.

It sounds like you're seeing some increased expenses against lower sales.

And looks like you're still operating at a loss there.

I was wondering just what steps specifically you could take to start to turn things around there?

And then is there any timeline we should be thinking about around the Canadian business?

Bob, thanks very much.

We got a little bit surprised, among other things, particularly by the generic reimbursement.

So when we started off, when we started really bidding on this large contract and looking at expanding into a national footprint there, which is expensive, and relatively small populations in the middle of the country, we probably got really surprised by how quickly the reimbursement changed.

We went from 50% of brand to 25% to 20%.

And then that really spread throughout the country probably even a lot quicker than we expected.

When we implemented the contract, some of the mix surprised us.

But we have worked through that.

We are taking a lot of expense out.

Obviously, we have discussions with our customers going on as well, making sure that we adopt to the new realities of the marketplace, which are both scale and reimbursement related.

And we've got some of our best people in the US, our President of the Drug company, Dave Neu has got some of his key people looking at what we can do there in terms of automation, et cetera.

So it's something that has been a surprise to us on the negative side.

But we are working through appropriately.

And as I pointed to in our remarks, very strong performance in our Specialty business.

We brought two really small businesses and we're really thrilled that, not only the collaboration with the US, but their positions on some stand-alone programs in Canada, particularly opportunities in the managed care area [theater].

So we are really pleased about our progress in Specialty there.

And that really proves that our international thesis, that we can really be a leader in Specialty, is very valid.

Anything to add, Tim?

Yes.

I would just say, we've made progress already this quarter compared to last year.

So we are working hard to take costs out and look at other ways to automate.

And again, a lot of it is labor costs that we have to focus on.

And it was probably $0.02 of headwind but we think we will make progress the second half of the year.

Great and Tim, if I could just ask a follow-up question to you on capital deployment.

It looks like you guys bought back about $284 million worth of stock this quarter.

Understanding it's a seasonably challenging quarter from a cash generation perspective.

But you ended the quarter with $400 million on the balance sheet.

I'm just curious how aggressive you feel you can be near term on share repos and is there a minimal cash balance that you target maintaining?

Yes, we always like to be around $500 million.

So we dipped a little bit under that, Bob.

But we'll -- again we have to cycle through.

We have a high inventory balance.

We cycle through that in the March quarter, between March and June that comes down.

So we'll just evaluate our cash as we go.

And also how that looks and how the market and our share price looks before we decide to deploy for any more share repurchases.

Great.

Thanks for the questions.

Steve Valiquette, UBS.

Thanks.

Just a quick question on D&A.

That was up over 30% year-over-year.

And presumably a lot of that's intangible asset amortization tied to recent acquisitions.

So I'm curious, have you guys given any further thought to maybe switching to reporting cash EPS as pretty much all your peers are doing now?

Yes.

Steve, I'll address that.

Today we talked about the impact on intangibles, World Courier and TheraCom.

And I highlighted the number was $4 million.

It's -- we also have depreciation from the World Courier acquisition coming in this year.

We talk about it.

We consider it.

But at this point we feel like if we disclose and give enough information, that it's not necessary yet to switch over.

Okay.

All right.

Thanks.

Lisa Gill, JPMorgan.

Thanks very much and good morning.

Steve, when you talked about the oncology market, you talked about the evolution, changing needs of the physicians, changing needs around reimbursement.

Can you maybe just give us some thoughts as you think about the future of the oncology market and what that has the potential to do to your margin structure?

Do you think that there is opportunities for margins to be better, or do you think that this is going to be something that will put pressure on your margins as we see this evolution in the oncology market?

Well, clearly our margins are better in the Specialty business.

That is a fact.

But we've got some unique opportunities here.

And what led to this project is we are looking at our strength in our health system or hospital business and we were looking at how much oncology are we doing in the hospital business and it was really very significant.

And then we look at the growth of some of these direct programs we are doing in our ASD and ICS business and some of the strength we have in our oral oncology programs both in Specialty, as what is in our Consulting Services business where we do a lot of reimbursement support, adherence programs, clinical programs, and even helping with pricing as we look at issues like comparative effectiveness.

So oncology really drives all of ABC's portfolio.

When I took over as COO that's one of the key themes that we were looking at is irrespective of site of care, using all the scale and breadth and expertise of AmerisourceBergen.

So this is very consistent with that theme.

What we've here most recently done is made it easier for community practices that are transitioning to a hospital setting or into a larger network to be able to access best-in-class pricing, being compliant with all the manufacturer pricing policies, a class of trade issues that might arise.

But also giving the manufacturer some of those data elements that they want.

And even, we have had a lot of hospital group purchasing organizations say, we want some sort of an affiliation with your ION business where we can offer a lot of those key service items that our physicians, oncologists are used to from organizations ION.

So all these things are coming together and it's a terrific opportunity for us to display some of the unique capabilities we have and create differentiation and value-add for our customers both on the manufacturer and provider side.

But from a financial perspective, do you think that that will enhance your margins?

Will they pay for data?

Will they pay for these other services over time?

And therefore, clearly we know Specialty is already better than Drug distribution.

But can you see an increase in opportunity or do you think that it's going to be a market share gain where you need to gain market share because there is pressure on overall margins on the oncology business?

How should we think about that going forward?

Just a quick response to that.

I tell you, if we don't keep oncology being special and cancer treatment being special, then we won't have a chance to create that differentiated margin.

So really important for us to do that.

It's also important for us to, create that stickiness with the customer.

So we have got an opportunity to enhance our margins via some of these in the hospital business, via some of these value-added services.

And again in my comments I made, I talked about, we really think a lot about the value-add and getting paid for that.

And nothing could be truer than extending a lot of these really high value services to the hospital system and including getting some additional fees from manufacturers.

So we think there is a chance to improve the margins in the hospital system particularly as oncology becomes a broader part of that.

And let's try keep oncology a specialty practice.

Great.

And then just as a follow-up to Tim, we talked about guidance.

I just want two clarifications, if you could help us.

The first would be around the litigation settlements.

Were those contemplated when you gave us the original guidance and will we see any additional litigation settlements this year?

And then secondly, around the share repurchase and the increase in share repurchase, should we think of that also being incorporated in the guidance and should we be thinking that you will be buying back shares with free cash flows equally throughout the rest of the year?

How should we think about those two things in the guidance number?

Thank you.

Sure, Lisa.

Yes, the litigation, that's an area that -- some of those take several years to play out and get the cash.

We just happened to get three in the door.

A couple came in right near the end of the year.

So they are really not contemplated in the guidance when they -- and we are a cash basis -- so when they arrive, we recognize them.

There is another one that may come at the end of the year.

There is some discussion about another one that could be a little bit larger, maybe September/October time period.

But again, until you get -- until they arrive, you just never know.

Your other question was just about share repurchases.

Really, it's hard to say.

We gave our guidance for $400 million for the year.

A lot of it just depends on timing, market conditions, when those will come during the year.

We'll evaluate as we go and really no commitments whether it's quarters 2, 3, or 4. It's just we tend to be opportunistic.

Thanks.

Ricky Goldwasser, Morgan Stanley.

Yes.

Good morning.

If you can just help us a little bit with how we think about the progression of the model.

So when we think about distribution margins, obviously there are two key factors this year that are pressuring margin, -- the addition of the Express business and then the generic comps.

So when we think about the year-over-year change in distribution margin in this quarter can you quantify for us what percent is from Express versus from the generic comps?

Yes.

Ricky, we are not that specific in terms of the change in the margin.

We are pretty pleased with the margin this quarter.

That margin compression, we'll see a little bit more.

Q2 is a tough quarter with the generic comps.

Last year was a pretty good quarter when you had Lipitor and Zyprexa the full quarter.

And I'll just say that in terms of margin, it gets better a little bit better when we're into in three and four.

Okay.

But sequentially there shouldn't be really any change in the impact that Express will have on your business?

Is that a fair statement?

Yes, that's a fair statement.

Okay.

And then on the operating expense line, you mentioned same store was up 6% due to the higher cost structure in Canada.

What should it be on a normalized basis?

And when we think about the model, when do you expect to return to those normalized levels?

Well, I -- we -- as you know, Ricky, we really pride ourselves on managing expenses.

So a normalized model, if we're up 2%, 2.5%, that's what we hold ourselves to in terms of a standard.

So it's going to take a little bit of time that we talked about of cycling through some of the initiatives we have with Canada here, so it is going to be a little bit higher this year.

But hopefully that will be, as we get -- as we pass this year and get into '14, we will see some more expense benefit.

Okay.

Thanks.

John Ransom, Raymond James.

Could you tell us in general terms what percent of your book has been rework over the last 12 months?

And is that a higher rate than normal and is that contributing at all to some of the margin comps in addition to some of the other stuff we talked about?

Well we have got the big one, with our large PBM customer that we sized.

We don't have a lot of contract renewal coming up this year, as you know.

As I said to one of the earlier questions, John, we are busy.

We obviously always try to renew customers early where we think it makes sense.

But the one thing I would point to is we had a good contract with a large food and drug chain account that we've lost that has somewhat affected our margins.

So, Tim, anything else you'd point to?

Yes, I would point out that again we have always talked recently in the last few months just about generic launches.

2013 is one of the lowest years over a 10 or 11-year period.

So between the Express Scripts new contract and the loss of the other customer Steve mentioned and just low generic launches, that really puts a lot of pressure on our margin.

But again, as we said at Investor Day, as we cycle through '13 we are pretty bullish on increasing that margin and growing it in '14 and beyond.

And just to -- let's push a little bit further into this Express Scripts contract, years two and three in a large contract like that, that's all branded and a low service level, how does the margin compare in two and three?

I know it gets a lot better on a contract where you are doing generics.

But on a pure branded contract like that, is there a material difference in margin as you go through it, or is this where we will be?

It would largely depend on the buy side.

It depends on the price increase environment.

There might be some modest upside.

A couple of basis points, at best.

It's a very big contract.

And obviously, as you would expect, the large customers, John, as you know very well, get the best margin.

But we do hope to do more strategic initiatives with our largest customer, so.

Well, it just -- it looks to me like the margin on that contract and then the VA contract at McKesson, the margins are so skinny year one.

You just wonder, there has to be some other reasons why some of these contracts are being priced where they are because it just looks like they are very marginally profitable.

So there must be some benefits in purchasing scale or other things that you can't see just looking at the contract in isolation.

I don't know if that's a question or conclusion?

Yes.

You're clearly making less money on the combo contract than you were making on stand-alone with ESRX.

So that implies the margin went down by more than 50%.

And so that's complicating things somewhat.

I know it's in your guidance and you are growing, but--.

It's a larger contract -- we were uniquely positioned to serve it and it's probably operational easier than a lot of other large contracts.

So you may think of that.

And it drives a lot of efficiency.

And Tim talked about Sacramento, for example, and the strategic -- we regard our Greenfield as strategic assets.

And honestly, a lot of them are really set up around key mail-order sites for their customers.

So a lot of reasons we strategically wanted to keep the account.

But we've talked enough about that particular contract.

So appreciate it, John.

Okay.

Thank you.

David Larsen, Leerink Swann.

Can you talk about the SAP implementation progress?

One of your large competitors was going through a similar type of thing and they mentioned there were a couple of delays in their situation.

It sounds like things are going pretty smoothly for you.

And then also with the Express Medco contract, did that all come on at the beginning of the quarter, like right at the start or was it phased in throughout the quarter?

And are they using -- or are they on the SAP platform or is there more migrations to occur there?

Thanks.

The Express contract definitely started October 1 and we hit the ground running.

We took it almost in whole.

And we had a lot of their business already.

We had -- because of the former Medco's mail order business.

So we increased the contract by 30% to 35%.

That's a fair comment, right Tim?

Yes.

So and we did use -- the way we process orders into and it shouldn't be always confused with external, the way the customers order from us, which is through many different mechanisms.

Often if they own ERP systems and the own EDI systems.

So the majority, of course, of the PBM business is now being serviced by distribution centers that are on the SAP platform.

And then just remind me about your other question?

So from the technology perspective, it's -- the Express Medco contract is fully integrated.

SAP is running smoothly.

And then just one other piece.

Did I hear that you said the Specialty operating income, did you mention that that declined on a year-over-year basis or not?

Well, I -- hello, David, this is Tim.

I mentioned that it declined slightly.

And again I pointed to oncology generic drugs being down slightly this year versus last year.

Even though we had Oxy come back.

It didn't offset the other two -- Gemcitabine and Docetaxel.

Okay.

That was it.

Thanks very much.

Charles Rhyee, Cowen and Company.

Thanks for taking the question here.

Most my questions have been asked.

Just maybe going back, then, Tim, to the guidance on free cash flow guidelines, here.

Obviously, your peer -- the peer that lost the Express portion of the contract noted that there is a cash flow impact to their balance sheet.

Does that -- should we think that that should be a benefit to your cash flow?

Maybe not this year but as we think about next year when this contract is ramped up given that is a more simple contract?

Does it benefit working capital for you?

No, it doesn't.

Actually -- and again that's part of the reason why our free cash flow is down a little bit in this quarter, it's just ramping up.

Like Steve mentioned, they came on strong in Q1, ramped up to a pretty high level right away.

And of course with the terms, they -- we had to establish their AR balance.

So again that shouldn't -- the good news is that shouldn't be a big factor going forward.

It's a one-time impact and now it just changes based on growth.

But again that's behind us.

So we have to cycle through that.

But hopefully that answers your question.

That does.

Okay.

That's all I had.

Thanks.

George Hill, Citigroup.

Yes.

Thanks, guys.

Most of my questions have been answered.

Tim, just one more follow-up on the gross margin contribution, where you had said that in the Specialty segment gross profit contribution declined, we will call a smidgen in the quarter.

That means that the gross profit contribution from the [regular rate] Drug company was up just with gross margins off, let's call it, 30 bps or so.

Am I thinking about that conceptually right?

Well, for the segment, George, for pharmaceutical distribution we are pretty much flat with drug company US.

And again we are real pleased with that, right, because we had those three headwinds we called out.

So for them be flat with Express, generic launches, the loss of Topco, we were real pleased with that performance.

Canada impacted us slightly from a GP standpoint but mostly expense.

And then, finally, yes, Specialty was down a bit again because of the oncology generics.

And then maybe just one more quick follow-up housekeeping question.

On the Other segment, gross margins have continued to rise if you look back at it over the last five quarters.

Should we expect to see any seasonality to the Other segment or should we think of this gross profit contribution rate from the Other segment as a run rate going forward, maybe even with the opportunity for some improvement?

Yes.

I would hope that you would see some improvement, right?

Again, you're talking about the Other segment?

Yes.

Yes, there is some opportunity there as we expand business.

And clearly in that Other segment you have -- it's a people business.

So as you can leverage that infrastructure, you should be able to drop more through to the bottom line.

So I would think -- I would like to see both GP and operating margins expand.

Okay.

Appreciate the call.

Thank you.

Ross Muken, ISI Group.

Good morning, guys.

So I want to pick up where a few folks were talking about and something you mentioned, Steve, in the script.

We have been hearing a lot more back and forth between Teva and Amgen on NEUPOGEN and Neulasta.

How do you think of that as an opportunity with a November launch?

Obviously, it's a bit different sort of then a traditional biosimilar.

Is that something you guys see as something that could theoretically be a benefit to the business?

How are you looking at that opportunity?

AmerisourceBergen will be very strong on any physician-administered product -- whether it's oncology, ophthalmology, neurology.

Any physician-administered product will be very strong.

We don't comment specifically on individual products.

Obviously you're talking about oncology products, so you know our strength there.

We think that we have done very well obviously with the multisource generics, especially in the six months exclusivity.

So we -- wherever the market takes us we will be a strong beneficiary and a strong participant.

The question is maybe -- and again, less specific to maybe how it impacts your business, but how do you think about -- this is a very different launch, right?

Do you think this will tell somewhat of how people will think about the biosimilar opportunity for the business?

Or is cases like this where it's another brand coming to market that will be potentially substitutable?

Is that a bit more tricky to gauge?

The sense is do you feel like this will give any confidence to the future opportunity in biosimilars or is this a different event?

What we're learning about biosimilars is definitely more expensive to bring to market, much more complicated clinical pathway, it's definitely very different than an oral solid because there are biotech products.

And we think that when there is -- products get close to being launched, we will have a great opportunity to talk to manufacturers.

We think the pricing should stay up fairly close to the brand that the biosimilar will be similar.

There will be clinical differences between the respective products -- the incumbent brand and the new entrant.

And I think that they are going to need our full portfolio services to help commercialize the product.

So we see it as, frankly, so much more upside than any concern.

So we are very bullish and we look forward to a clear regulatory pathway for these products to be launched.

We think it will be a big upside for us and for our customers, frankly.

Great.

Thank you, guys.

Thanks, Ross.

And now Steve would like to make some final comments.

Thank you very much, everyone.

I appreciate your attention.

I know it's a busy day for you.

Just to reiterate, a key reason that I have confidence in our future is because I believe that AmerisourceBergen Associates really set apart.

Whatever the challenge is, whether it's a national -- natural disaster, implementing a new multi-billion dollar account, the new SAP system, which we have been so successful with, developing the new oncology service line, our associates work collaboratively across the whole organization to creatively tackle challenges and identify new opportunities to add value on a daily basis.

They share mine and my lead team's commitment to meeting our objectives for the year both in terms of the service we provide to customers and suppliers and in our financial performance and I'm honored to work beside them.

Thank you very much for your time today.

Thanks, Steve.

And before we go I would like to highlight our next two upcoming events.

We will be attending the Citibank Healthcare Conference in New York on February 25 and the Raymond James Institutional Investor Conference in Orlando on March 5. That concludes our call for the day and now I will turn it back to the operator.

Thank you.

Thank you.

And ladies and gentlemen, that does conclude your conference.

Thank you for your participation.

You may now disconnect.