美源伯根 (ABC) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the AmerisourceBergen earnings conference call.

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

I'd now like to turn the conference over to your host, Mr. Tim Guttman.

Please go ahead.

Hello.

Actually this is Barbara Brungess.

Good morning, everyone, and welcome to AmerisourceBergen's conference call covering our first quarter of fiscal 2015.

I'm the Vice President of Corporate Investor Relations for AmerisourceBergen, and joining me today are Steve Collis, AmerisourceBergen President and CEO, and Tim Guttman, Executive 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 2014 and other filings.

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.

Thanks, Barbara, and good morning, everyone.

As we reported this morning in our press release, AmerisourceBergen associates delivered excellent financial results in our first quarter of fiscal 2015.

Our revenues increased 15% to $33.6 billion; our adjusted diluted earnings per share were up over 42% to $1.14, while we generated a very strong $900 million in operating cash flow.

One of the most gratifying aspects of this quarter's results is that it was driven by a strong performance from virtually every one of our businesses.

The strength of these core business positions and offerings, combined with our disciplined capital management, gives us the flexibility to continue to expand our knowledge, reach, and partnership as we make plans to broaden our provider and manufacturer service offerings to a new market segment.

Earlier in January, we signed a definitive agreement to acquire MWI Veterinary Supply, a premier animal health distributor, for $2.5 billion in cash.

We commenced this tender offer for all outstanding shares of MWI on January 26, and we expect to close the transaction during the March quarter.

As I said when we first announced the deal, ABC has delivered significant growth and shareholder value by staying focused on the pharmaceutical supply chain, where we have developed unparalleled knowledge and expertise, and by bringing a collaborative philosophy to all of our relationships.

Jim Cleary and his team at MWI will be ideal partners with whom to build on that foundation and extend our reach into the growing global animal health sector.

MWI is already well respected for their great success since the company was founded in 1976 and went public in 2005.

But we believe that by combining MWI's legacy of success and innovation with ABC's relevant experience in manufacturer and provider services and our global reach, we will create a compelling opportunity to launch the next generation of superior animal health products and services.

I am very excited about the future contributions that Jim and his team will make to AmerisourceBergen and about the potential for growth that we see ahead.

Let's turn now to the performance of AmerisourceBergen in the December quarter.

Overall, we are off to a strong start in fiscal 2015, and we have set ourselves up well to meet our strategic and updated financial objectives for the full year.

Following on the momentum as we had as we exited fiscal 2014, our performance in the first quarter was very robust.

Strong revenue growth combined with operating leverage drove exceptional adjusted earnings per share growth, and a significant improvement in working capital led to stellar cash flow, especially for a December quarter.

Tim will provide further details, but I want to call out some highlights from our business units.

Last quarter I noted that our individual business units continuously became less distinct from one another by focusing their efforts on collaboratively meeting the needs of suppliers and customers.

Our ability to achieve comprehensive enterprisewide solutions is particularly valuable in a fast-changing market and is a key driver of our results.

Many of these solutions are, of course, in the specialty area, where the unique combination of services and expertise we offer helps manufacturers and customers manage the challenges of the fast-growing area of the market.

Just as specialty products now permeate nearly every segment of our business, discussions about opportunities within the specialty realm are top of mind for virtually all of our customers.

We believe we are the best positioned to maximize the benefits of advanced specialty products for manufacturers, healthcare providers, and the patients they serve.

AmerisourceBergen Drug Corporation had a strong quarter, with revenues up 15% even as we anniversaried the first full quarter of the Walgreens brand business.

Overall market growth trends remain quite good, and a strong flu season was clearly helpful to our overall retail and vaccine sales numbers.

The December quarter was the first full quarter we've had all of the brand and generic business from Walgreens, and we are very pleased to have the distribution contract fully implemented.

Good organic growth overcame the roll-off of some old business, and sales of the new hepatitis C drug class also contributed to ABDC's revenue growth.

Overall, drug pricing trends remain quite favorable, and generic sales are strong across all of ABDC's customer segments.

We are very pleased that our independent pharmacy chains, health systems, and alternate site customers all performed well in the quarter.

Our Good Neighbor Pharmacy customers are benefiting from favorable market conditions as well as some ABC-specific programs, including those that improve independent retail pharmacies' access to specialty products such as the new hepatitis C drugs and other therapies.

Our diverse customer base helps us ensure the widest patient access possible to both sophisticated new therapies as well as long-established products.

And our extensive manufacturer relationships ensures our customers participate in the provision of the full spectrum of pharmaceutical care.

During the quarter we continued to reap the benefits of our long-term strategic relationship with Walgreens Boots Alliance in both the distribution to Walgreens stores and the contribution from the sourcing joint venture.

We are very pleased with the progress the JV has made to date, and going forward we will work collaboratively to ensure the value we bring to manufacturers and the programs and services we bring to our customers.

In addition, we have made significant progress in our BluePoint private label program and ramping up the activities in ABC Switzerland.

All of these activities are demonstrative of the value that wholesalers bring to the supply chain and of the specific innovations AmerisourceBergen brings to the table.

During the quarter, we officially opened our national distribution center in Columbus.

This state-of-the-art facility helps drive logistics and inventory management efficiency for both ABC and our manufacturer partners.

This and other investments we have made and continue to make in our infrastructure enable us to meaningfully enhance our services and strengthen our ability to grow our business over the long term.

ABSG also had impressive results in the quarter, with a number of different factors driving strong sales.

Setting aside the impact of some manufacturer-imposed changes on certain oncology products, which moved to some revenues from Drug Company to Specialty, ABSG's revenues were up 17%.

Our physician distribution business performed very well, and ASG was particularly strong in the December quarter.

Given my long history with our community oncology business and our confidence in our offerings in this area, it is especially gratifying to report that our community oncology business grew ahead of expectations in the December quarter.

This was due to a mix of new business, some earlier than expected price increases, and an overall increase in volume.

While reimbursement issues persist and sales of practices to health systems continue, although at a slower rate, we are hopefully seeing stabilization on the community oncology market, which is of great benefit for overall cancer care.

Oncology treatments will continue to be provided across various healthcare venues, and we are very well positioned to ensure that our customers remain in the forefront of the evolution of cancer care.

Our manufacturer services businesses also had a strong quarter, with both Consulting Services and World Courier performing very well.

The unrivaled service offerings in this area are of keen interest to both our manufacturer and provider customers and a key driver of value, as the cost and complexity of medication therapies increase.

The expertise we bring to bear in the regulatory, compliance, and policy area, along with our experience in developing patient access and adherence programs, is a clear differentiator today and an opportunity for growth in the future, particularly as biosimilars begin to come to market.

Our knowledge base, combined with the immense scale of our distribution businesses and our increasingly global reach, make us the ideal partner for those who want to be in the position to lead the next evolutionary change in healthcare.

As I've said many times, it is an exciting time to be in the pharmaceutical services industry.

Organic growth rates in the US pharmaceutical market are being driven by better economic conditions, health reform initiatives, successful launches of new brand products, and population demographics.

The R&D pipeline is full of innovative products that hold the potential to make great strides across many disease states.

The combination of advanced therapeutic medicine and expanding access to healthcare drives growth opportunities and, more importantly, meaningfully improves patient lives.

Many of these same growth trends hold true for the animal health market as well.

As Americans age, pet ownership is increasing and pets themselves are living longer.

Advances in veterinary medicine have improved the quality of life of companion animals and given pet owners far more choices in maintaining pet health.

In addition, increasingly global demand for protein drives demand from the production side of the market.

We have received overwhelmingly positive feedback regarding the transaction.

We firmly believe that MWI is a premier distributor in these two areas of business focus, and we are very excited to add animal health to our portfolio of services.

Looking ahead to the remainder of fiscal 2015, we expect the strong trends in overall market growth to continue, while trends in certain specific areas will moderate.

Generic inflation was strong in the December quarter, but it has been modest so far in January.

We also had some brand price increases in December that we had been expecting to see January, particularly in specialty.

As a result, we expect that the contribution from generic inflation will be flat in the remaining quarters versus last year and that brand inflation will remain strong.

While we were pleased to see the first version of generic Nexium approved by the FDA, there remains a lack of clarity regarding the timing of the launch of the product into the marketplace and the extent to which there will be competition between manufacturers of the generic.

Given these trends in our performance in the December quarter, we have raised our guidance for the remainder of the year in a few key areas.

Tim will provide greater detail.

But in summary, on a consolidated basis we now expect revenue growth in the range of 10% to 11%; adjusted diluted earnings per share from continuing operations growth in the range of 12% to 15%; free cash flow generation in the range of $1.8 billion to $2 billion.

As a result of cash being used in part to fund the MWI transaction, we have reduced the amount of share repurchases we expect to complete in fiscal 2015 and our regular share repurchase program to $200 million, but we will complete $400 million of repurchases under the special program as we have previously discussed.

Another noteworthy event for AmerisourceBergen was the January 16 announcement that Ornella Barra had joined our Board.

Ornella is one of the most experienced wholesale executives in our global industry.

Ornella is a pharmacist by profession and has long championed the role of global community pharmacy through the well-regarded Alphega network of pharmacies.

Ms. Barra currently serves as Executive Vice President of Walgreens Boots Alliance and President and Chief Executive Officer of Global Wholesale and International Retail.

We look forward to Ornella's participation on our Board.

One final word about the December quarter before I hand over to Tim.

I am very pleased with our outstanding financial and operational performance we achieved across our entire business.

There are many moving parts in the remainder of fiscal 2015, but I am confident that we will meet our objectives for the year.

Meeting our financial and operational goals is only one dimension of success, however.

It is a combination of unmatched execution and bold, innovative thinking that really drives long-term value, so I constantly challenge our associates to exceed our customers' expectations while creatively looking forward to the future.

The strength of our core business gives us a powerful platform upon which to build, and that gives me great confidence that we will continue to make new and vital contributions to the marketplace and thereby continue to provide excellent returns to our shareholders.

Now here is Tim.

Thanks, Steve, and good morning, everyone.

As Steve mentioned, we're off to an excellent start for fiscal 2015.

Consistent with past quarters, my remarks this morning will focus on our adjusted results.

Please note that all financial comparisons are the first quarter ended December 2014 compared to the same period of the prior fiscal year unless otherwise noted.

I have two main topics to cover this morning.

First I will recap first-quarter consolidated and segment performance; and second, I will cover our revised fiscal 2015 expectations.

With that, we can begin our Q1 review.

Revenues were $33.6 billion, up 15%.

Our Pharmaceutical Distribution segment continued to drive our revenue growth due to our diverse customer mix and positive trends in the industry.

As a reminder, this marks the first quarter that we had the Walgreens generic volume for all stores for the entire quarter.

On an overall basis, Walgreens accounted for slightly over half of our 15% revenue growth.

The quarter's adjusted gross profit increased 24% to $896 million.

The growth was due to the performance in our Pharmaceutical Distribution segment, driven primarily by better than expected revenue growth on both brand and generics.

Also, we continue to benefit from the strong manufacturer pricing environment.

Operating expenses.

Our total adjusted operating expenses increased 15% to $461 million.

The expense increase correlated with a large revenue increase in our Pharmaceutical Distribution segment.

Consistent with past quarters, the increase in expenses were primarily related to distribution center labor expense, delivery costs, and depreciation of capital assets to support the business ramp.

Operating income.

Our adjusted operating income was $436 million, up about $113 million or a very strong 35% growth rate.

Our adjusted operating margin was 1.30%, up 19 basis points.

Moving below the operating income line, interest expense net was about $15 million, down about 19% due primarily to the refinancing of debt which we completed last year.

Income taxes.

Our adjusted income tax rate was 37.9% for the current quarter, down some from the prior year.

Looking out for the full year, we still expect our tax rate to be about 37%, driven by growth in our international businesses.

For the quarter, our adjusted diluted EPS from continuing operations increased nearly 43% to $1.14, driven by exceptionally strong organic operating income growth.

Our adjusted diluted share count was 229 million shares, down roughly 3%.

This finishes our review of ABC consolidated results.

Let's move forward and discuss our segment results, starting with Pharmaceutical Distribution.

Total segment revenues were about $33 billion, up 15%.

As mentioned earlier by Steve, Drug Company led the way with a 15% revenue increase.

Our revenue growth in our core drug business was driven by four items.

One, as I mentioned earlier, we reached full delivery of all generic drugs to all Walgreens locations for the full quarter.

Two, our sales to Walgreens exceeded our expectations, especially generics.

Three, we continue to see the revenue benefits from the uptake in hepatitis C drugs.

These drugs accounted for roughly one-third of the Drug Company's total revenue growth.

Then finally, four, overall market growth driven by volume and strong pricing.

Our Specialty business grew at an overall revenue increase of about 26%.

As widely reported, two manufacturers shifted certain infused oncology drugs from full-line distribution to specialty distribution.

Excluding this shift, our Specialty business still grew an impressive 17%, with growth coming from oral oncology, plasma, and ophthalmology.

We also had very good growth in our community oncology business, driven by positive pricing trends and some new business.

Finally, our ICS third-party logistics business also had a very good revenue growth due to new business wins and volume growth with existing manufacturer customers.

The sales growth percentages for the Drug Company and Specialty that I just provided are before intrasegment eliminations, consistent with how we have reported these growth rates in past quarters.

Moving to gross profit, the segment's gross profit was $752 million, up $158 million or about 27%.

Drug Company was the driver of the majority of the segment gross profit increase as a result of their high revenue growth.

And in both Drug and Specialty, we experienced better than expected brand and generic price appreciation.

The segment did see better than expected gross profit from a late flu season and also the continued growth of our private label program, BluePoint.

Operating expenses were $362 million and were up about 18%.

As I mentioned previously, the expense increase was primarily due to supporting the segment's significant volume growth.

As an example, our Drug Company shipped roughly 2 times the number of units this quarter compared to last year as a result of being fully ramped now with Walgreens generic volume, growth in the Walgreens business, and growth from our other customer accounts.

Segment operating income was $390 million and up about 36%, driven by the outstanding performance of the Drug Company.

As Steve highlighted, we're also extremely pleased with our Specialty business and the fast start they had, with an operating income growth rate in the mid-teens, driven by several positive trends in our business portfolio.

We can now move to our Other segment, which includes Consulting Services and World Courier.

In the quarter, segment revenues increased $92 million or about 15% to $696 million.

Roughly 60% of the segment's revenue dollar growth came from TheraCom, our distribution business within Consulting.

We did experience a very good growth rate in our core Consulting business, in the teens, due to the start of several new manufacturer programs and organic growth in existing programs.

World Courier also had solid revenue growth.

However, their revenue growth was somewhat dampened by foreign currency exchange rates.

From an operating income standpoint, this segment had operating income of $45 million, reflecting growth of 26%.

Consulting and World Courier each contributed about equally to the income growth.

Consulting contributed primarily through top-line growth.

World Courier contributed through a combination of top-line growth and expense management.

This completes our segment review.

Let me switch and quickly cover our two large GAAP items: warrants and LIFO.

Warrants.

The fair value of the warrants increased about $600 million to approximately $1.7 billion as of December 31, correlated to the increase in the ABC share price for the same period.

This resulted in a total expense of $371 million for the quarter.

About 80% of this expense is the retroactive adjustment needed to properly report expense through the eight quarters we've had the warrants outstanding.

LIFO.

This quarter we recorded an expense of $144 million, which represents about 25% of our full-year estimate.

Our full-year LIFO expense was estimated using two key assumptions: one, price inflation remains at the same level for both branded generics as what we experienced last year; and two, we are forecasting a higher inventory balance at year-end due to overall business growth versus our previous year-end.

These assumptions are driving the large expected full-year LIFO expense.

We will, of course, update our assumptions moving forward each quarter.

This wraps up our P&L review.

I'd like to now cover working capital and cash flow items.

This quarter we had terrific free cash flow, $840 million.

We are clearly benefiting from the growth in our generic drug volumes, which have much better payable terms.

Specifically, our DPO or days payable to suppliers improved nearly six days from last year.

Again, this reflects a larger mix of our business being generics.

Our free cash flow also benefited from a one-time reduction in inventory of about $150 million from the closing of our old Florida distribution center.

The next area I'd like to cover is share buybacks.

During the quarter, our regular share buybacks were $132 million.

We ended the quarter with $443 million available on our regular share repurchase authorization.

We also purchased the same dollar amount under our special share repurchase program.

As a reminder, these shares are specifically designated to offset expected dilution from the warrants and are not included in our adjusted share count.

We ended the quarter with $266 million available on our special share authorization.

During the quarter, we also took steps to improve our warrant hedging position.

We partnered with a bank to increase the ceilings specifically on our 2016 cap calls, given the increase in our share price.

As a result, we incurred a liability of about $78 million through December 31.

We finished the program in mid-January at a total cost $100 million.

As a reminder, there is no P&L impact in connection with our hedging program.

Now let's turn to our revised fiscal 2015 expectations.

My initial guidance comments that I will cover this morning exclude the impact from the MWI transaction, so you have a better comparable to the guidance we provided back in late October.

At the very and I will make a few comments about the impact to guidance with MWI included.

Revenues.

Based on positive trends in our business and the industry, we now expect consolidated revenue growth in the 10% to 11% range.

Gross profit.

Let me comment on two specific items within gross profit.

The first will be generic price appreciation.

As I mentioned earlier, generic price inflation was better than expected in our first quarter.

While the trend in the past several quarters is for manufacturers to raise prices in the first month of the quarter, so far in January we haven't seen much activity in this area.

Therefore, at nearly four months into our fiscal year, we are not changing our full-year assumption.

We are confident that our annual expectation will be met, which is flat dollars compared to last year.

The second item is generic drug launches.

There has been recent news about generic Nexium entering the market.

At this point there are still many open questions about the launch, including when product will be available, how quickly the FDA will approve other manufacturers who have filed ANDAs, the timing of those launches, the ability of manufacturers to produce enough product to cover the large market, and the impact of potential court actions.

At this point, we do not expect the launch of generic Nexium to be as beneficial as we originally expected.

Therefore, we have lowered our assumption for the gross profit contribution from this item, especially in the second half of the year.

Operating income.

For fiscal 2015, we expect our year-over-year dollar growth to be 9% to 11%, driven by our first-quarter performance and higher anticipated full-year revenue growth.

However, the change in our generic Nexium contribution assumption that I just called out is a partial offset to income growth.

Operating margin.

We now expect our operating margin to be relatively flat in fiscal 2015.

This is due primarily to higher brand drug revenues, including the continued growth in hepatitis C drugs.

Adjusted EPS.

We now expect our fiscal 2015 adjusted EPS to be in the range of $4.45 to $4.55, which reflects growth of 12% to 15% from last year's adjusted EPS.

Importantly, as you think about our EPS quarterly progression, we now expect that our combined adjusted EPS in the first half of the fiscal year will be slightly greater than the combined adjusted EPS in our second half.

Share repurchases.

Our revised guidance for regular share repurchases is $200 million for the full year, down from previous guidance due to cash that will be used in conjunction with the MWI closing.

We remain committed to $400 million in special share repurchases for the full year.

Switching to our free cash flow guidance, with better growth in generic revenues and generics having significantly better working capital metrics, we now expect our full-year free cash flow to be in the range of $1.8 billion to $2 billion.

As I highlighted, assuming that we successfully close the MWI transaction in the March quarter, we will provide more detailed guidance on our April earnings call.

For today's call, we will reiterate that MWI will add an incremental $0.08 to our adjusted EPS, spread evenly between our June and September quarters.

This means that our guidance range including the contribution from MWI will be $4.53 to $4.63.

So in summary, one quarter doesn't make a year.

We have a long way to go, but we are off to a great start.

Our commitment is that we will continue to work hard servicing our customers.

We will deploy capital properly, and we will make the right decisions to grow our business for the long run.

As always, we greatly appreciate your interest in ABC.

Now here's Barbara to start our 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 we can accommodate as many callers as possible during the time available.

Operator, please go ahead.

(Operator Instructions) Eric Coldwell, Robert W. Baird.

Thanks; just a quick one.

Very strong quarter; congrats on the performance.

I am interested in particular in the comments on the two manufacturers shifting the specialty oncology drugs from broad drug distribution into the Specialty segment.

One, what was the driver of that?

Two, did you get an incremental opportunity as that shift in distribution practice moved to your Specialty Group?

And three, what was the impact, if any, on economics?

Thanks very much.

I'll start out and let Tim follow up.

This was not driven by ABC; it was driven by a manufacturer quality change.

Of course, oncology products have got a high value, economic value, but also of course value to the patients, and many manufacturers I think like a single distribution point because it gives them very clear insight into inventory levels, etc., inventory turns, patient access issues.

So there are various benefits.

Essentially, the manufacturers that we are talking about are working with many participants in the supply channel.

And we'll end up -- with our very big share of the health systems market, which is certainly around the mid-30s%, we'll end up servicing many of our own customers internally.

As far as economics go, I don't think we like to comment on economics for individual contracts.

But Tim, I'll let you also respond to Eric's question.

Yes, morning, Eric.

Yes, I would say that we were notified by two manufacturers.

They wanted better control of the product in the supply chain.

Again this product was going to health systems, continues to primarily go to health systems; and really no change in the economics.

Ricky Goldwasser, Morgan Stanley.

Yes, hi.

Good morning and congratulations on an amazing quarter.

Can you help us understand the dynamics in the hep C a little bit better?

I know you talked about the fact that there was a sequential improvement in the volume contribution that you saw.

Maybe if you can give us some color on what percent of top-line growth in the quarter is coming from hep C; and then how do you think about the contribution from hep C for the remainder of the year?

Are you agnostic between the two manufacturers, Gilead and AbbVie?

Just how do you think about the market, given that obviously the last 12 months have been very strong for you on that front?

Yes, hi, Ricky; it's Tim.

I'll start.

Hep C definitely contributed to our top line.

I think I called out in our segment for Drug Company, drug grew about 15%; hep C was about 5%.

I would say that we also saw growth sequentially between last quarter and this quarter.

The other comment I would make is -- remember that really last year in fiscal year we really saw hep C come out the second half of our year.

So we still have this quarter and the next quarter where we will get a bigger benefit compared to last year for that hep C impact, and then it will start to anniversary.

Yes, Ricky, you know, we've had a number of questions from investors on this.

Just the way that manufacturers contract with PBMs and payers doesn't really affect our economics at all.

It doesn't go through the chargeback system.

It's really a quarterly rebate mechanism.

So obviously we provide datas to different parties that might measure who is dispensing what, but we're not really affected by the economics.

The economics on the bio side between the various manufacturers are pretty similar, probably within a few basis points of each other.

So really we are agnostic.

But again it's just a great boon to our customers.

There's been a strong participation by community pharmacy.

ABC is very strong in the alternate care segment where a lot of these products are being dispensed, and patients are accessing the medication.

So it's been a great trend for our whole industry and we couldn't be more proud of our role in helping eliminate what is a serious healthcare issue.

So it's been a great product for everybody.

Great set of products, I should say.

Then just one follow-up.

Obviously, you've reported very strong gross margin year-over-year trends and also on the operating margin.

So can you just comment?

Are you starting to see a benefit from joint-venture economics spilling to the rest of your core book?

Well, I think we've had -- it's almost -- I guess this quarter in March it will be two years since we made our announcement.

And we do think it's been -- it was a historic announcement specifically for ABC, but indeed for our whole industry, and it's really enabled us to collaborate.

And frankly, just having Walgreens as a customer and having that anchor tenant has been just a good benefit to ABC.

It improves our scale.

And what we've tried to do --and we're very, very serious about this -- is we really want the relationship to benefit all of our customers.

And I think we're seeing that: that all of our customers will have just more inventory available.

Our transportation logistics, for example, have greatly improved because we just -- we are getting out more orders, so that benefits all of our customers.

We certainly have the system scale and the operational scale to manage this contract and take excellent care of all of our customers.

So it's been a great benefit.

On the manufacturer's side, I think, obviously, there have been a lot of changes in the industry, but overall, I think everyone's doing very well.

Some of the goals that we identified, which is about having longer-term strategic relationships with the group in Bern, on the WBAD side have done a fantastic job, and we are doing very well.

And as is the whole industry doing well.

Thank you.

Robert Willoughby, Bank of America.

Hey, Steve.

One of your customers has hinted at its ability to manage the oncology cost trend.

How does this affect you?

Are you a partner in this effort, or indifferent to the effort, or are you monitoring the effort?

Thanks, Bob.

Great question.

Appreciate your comments.

We are very involved with the physician administration of oncology drugs.

We still have strong market share there.

It's a business that I noted how particularly personally proud I was to see the growth in this quarter, and we hope it will continue.

It did surprise us; it was a bit stronger than we expected as both Tim and I pointed out.

So what we do in community oncology is try -- help our customers really have the data tools and have the contracting tools so that they can have really good relationships with payers and other interested parties like PBMs.

So everyone really understands how the treatment is being conducted, that it's being conducted at the highest of standards.

I don't think that anything that our customers are doing or the way we're contracting with manufacturers is adversarial to their position.

I think it's really all about excellent customer and patient care.

And we ride in the forefront of that with our ION and oncology supply business.

Okay, thank you.

Robert Jones, Goldman Sachs.

Thanks for the questions.

Just wanted to try to put this quarter a little bit more in context relative to the rest of the year, both on the revenue and on the EBIT outlook side.

It does look like, obviously, we're calling for a deceleration in top-line growth; and if I look at EBIT growth, it looks like you guys grew about 35% in the quarter.

I know you raised the growth for the year to 9% to 11%, but still obviously implying a fairly big deceleration.

Could you maybe just, in big buckets, help us understand how you see the year playing out?

What are the specific areas that we should anticipate to slow down, both on the top line and then also within the EBIT contribution?

Yes.

Hey, Bob; it's Tim.

I would say, again, I would say that we raised our midpoint of our guidance about $0.07, so we're feeling good about the year.

There are still some moving parts and some complexity.

Clearly a big swing factor is generic inflation.

It's -- we have to determine; some of it seemed to be pulled forward into Q1, so we need a little bit more time to assess that for the balance of the year.

And I would say the other big swing factor for us, too, is just generic Nexium.

We were pretty encouraged that that was going to be a big positive.

It's such a big brand drug that we thought it was going to be a big positive the second half.

We do slow down a bit.

We start to anniversary more of that Walgreens business revenue the second half of the year; and also the WBAD contribution, we start to anniversary that the second half of the year.

That's why I think a little bit of my discussion of guidance we think will be a little bit heavier weighted to the first half than the second half.

Yes.

We also implement the new DoD contract, so the full change in the pricing there.

And we had a very strong Q3 and Q4 of our fiscal-year 2014 with generic price increases.

So the comps are a lot harder because we were -- again, we're never quite sure what quarters it's going to come in.

But we are confident in our full-year outlook.

Steve, that's a great point.

The last two years, to remind everybody, we've been heavily -- we were back-end loaded on generic price appreciation in the June to September quarters.

Again, got off to a good start in December; still need more time to assess how that's going to play out for the balance of the year and what quarters we get the benefit.

Makes sense.

Thanks so much.

Garen Sarafian, Citi Research.

Good morning, everyone.

Thanks for taking the questions.

First is on community oncology.

This business seems to be making a key shift.

So first, to better frame the significance, how big is this within overall oncology, which I thought was about one-third of Specialty?

Then second part of that question is you mentioned new business and uptick in volumes.

Can you just elaborate on both?

Where is this new business coming from?

And is this uptick in volume perhaps due to buying ahead of a price increase?

Or is this going to be more sustainable we can expect for the rest of the year?

Yes, again, we were -- it was slightly stronger than we expected.

We don't think it was really driven much by price increases or anything like that.

We did see volumes.

Clearly I think a lot of the practices that are going to sell have sold.

Although when we said that on our monthly business review -- is the trend of selling over?

They said: no.

Well, we still lost one or two customers, but it's not where it was.

So I think with the impacts of the ASP change and the sequestration, the markets probably stabilized.

Those who were going to sell or those who were going to merge with another larger practice in the area may have done that.

We didn't have an Investor Day in December, but our oncology business, it's -- we have the oncology supply and ION business, which is a big part of Specialty.

But yes, even within ASD for example, which is primarily known for distribution to hospitals, there's a big oncology segment because they do a lot of the oral oncology programs to ultimate care, mail order, specialty pharmacy.

So it's complex, but oncology permeates not only our Specialty business but more and more of our health systems distribution business and also our manufacturer services business.

So much of it in the reimbursement and patient programs business, even the World Courier clinical trials -- so much of it is oncology.

So we've always been proud of the oncology franchise AmerisourceBergen has.

And it's getting harder and harder to put it into discrete buckets.

It truly is a business that permeates the whole of AmerisourceBergen.

Tim, I don't know if you want to add anything to that.

Steve, I would just say that it was a pleasant surprise to have some good top-line growth and better than what we expected.

Combination of pricing trends in the market and volumes increasing with existing customers and a couple of wins.

So kind of equally across those three, translated to good growth in community oncology.

So we're thrilled.

Okay, fair enough.

A follow-up, maybe a bigger-picture question on selling generics.

Now that you are approaching two years into being a part of the purchasing alliance and more recently onboarding Walgreens generics business, that might be impacting -- or has impacted your volume pricing [tiers].

Do you now have the full lowest-cost generic pricing assumptions baked into your bid?

I guess in other words, with your new pricing, are you able to demonstrate savings on a per-unit basis to your entire book today?

Or is it still more of perhaps on an all-in basis, including carrying costs, warehousing, so on and so forth?

Actually I should just say, going back to the question before, we also in all of our retail customers we're doing more specialty, including oncology drugs.

But also we talked earlier about the hepatitis drugs.

So again I think the generic profile we have, it's worth mentioning we have our other generic portfolio where we service contracts on behalf of our customers.

And this is important business for us.

The largest player in that by far is Walgreens.

And then we have our PRO Gen formulary which contracts with WBAD.

But our goal there is to have competitive pricing every day but also make sure that there is continuity of supply.

Because again, if there are any products that our customers and ultimately their patients can't access, this is very debilitating to patient care.

So we focus both on price and on quality, and I think ABC does a great job.

I can tell you we're adding more and more resources into this kind of business intelligence area to make sure that we have the price and quality that our customers are demanding.

So I don't have a perfect answer for you.

I just will tell you that it always is of great fascination to me -- I think that's the right word -- how dynamic the generic business is.

The pricing ins and outs, changes, what goes on now with patents is becoming more and more obtuse.

Nexium is another great example of how difficult this has been to forecast.

So I just would say it's a very dynamic market.

I think our customers are giving us good adherence.

We are getting good compliance.

It can always be better.

We're not happy.

We'd like it to be even higher.

This is something that we pay attention to if not on a daily basis, virtually on a daily basis.

This is Tim's favorite area.

I think he's involved with the generic guys all the time.

So this is something that is of great fascination, and I think it's a very strong area for ABC.

It's probably one of the key areas of opportunity, but also where we've done very well with the partnership with Walgreens Boots Alliance.

Fair enough.

Congrats on a very good quarter.

Eric Percher, Barclays.

Thank you.

A question on the Walgreens relationship, now that you've got the volume on, you're seeing benefits, we've got Ornella on the Board.

I am curious to hear what the next set of initiatives look like.

I know it's been about a year since you rolled out the latest iteration of the Good Neighbor Pharmacy, and at that point you were talking about leveraging Walgreens' expertise.

I have to imagine that within Specialty, given their specialty pharmacy and the international reach, that must be of interest.

I'd also be interested on BluePoint and Almus, and whether there is any cross-pollination in the books of business?

Yes, thanks, Eric.

Your old [alumsiad] Larry's proud of the question.

We really are pleased that the Walgreens Boots Alliance merger is complete.

Obviously that was just done at the end of last month.

Since then we've had a good resumption of dialog with Walgreens Boots Alliance at the top level, because obviously they had a lot going on the last two or three quarters.

So we're very positive about the opportunities.

I think Ornella and I have served on IPW Board for many years together; she's extremely experienced.

Alphega has over 7,000 community pharmacy members, so -- our Good Neighbor Pharmacy is about 4,500.

We think that there is an opportunity on contracting.

We think the private-label, Almus, is something we are working hard on.

You would expect that we should have more clarity over the next couple of quarters.

But it's a great passion for Ornella; it's a great passion for ABC.

And we are really proud of how well BluePoint has done, and I think it's paved the way for a stronger private-label offering for the combined family of companies as we look at our market position.

So, Tim, anything you'd add?

No, I just think that probably first on the list is, as you mentioned, Steve, is looking at private label, getting another choice to our customer, a good generic product offering.

And I think that's probably where we'll focus over the next few months.

Are there specific areas?

I know early on, injectables was mentioned with BluePoint Labs.

So are there areas where BluePoint is going to be quite strong and you look to leverage Almus?

How do you see them working next to each other?

I think with US private-label products there's also -- we want to make sure that there is a need in the market for it.

I don't think the intention is ever that it's meant to be a comprehensive portfolio of products like a lot of our manufacturer partners have.

It's typically very mature products.

Injectables is an area of interest.

Obviously if you have institutional customers that's much more of an area of focus.

So we do see that the experience that we've gained from BluePoint and the sourcing in Ireland and the global relationships -- in fact our new AmerisourceBergen Bern, Switzerland, office.

And this is an area of great promise.

And also, Walgreens has a strong specialty presence, so we think -- and a health systems business.

So this is a natural area for us.

Other areas we could look at is the 3PL.

Tim highlighted earlier the success of ICS.

There certainly are comparable offerings on the lines wholesale side, which it seems like there could be a much stronger bond there and a much stronger offering, which we have worked on.

In fact, there's been a couple of manufacturers that we've made proposals to on joint servicing.

So we'll look forward to more of those type of opportunities.

Thank you.

Lisa Gill, JPMorgan.

Thank you.

Steve, I had a bigger-picture question.

You had mentioned earlier that the overall market growth has been stronger than expected.

Can you just give us an indication as to where you are seeing the US pharmaceutical market growth rates today?

I do think it just seems like there is some pickup from the economy.

I think just as people get covered more -- it's really, really hard to diagnose exactly.

But we've talked; I think just a couple weeks ago at your conference I said 1% to 2%, maybe it's 2% to 3% overall growth rate from pickup from Affordable Care as well as the economy.

Just greater coverage.

And then the hepatitis C drugs have been huge.

They probably added 3% to 4%.

And we don't see, at least based on the last quarter and the adoption of Olysio and the new therapies, we just don't see that backing off.

It's a very strong segment for us and our customers.

I met with one of our customers recently and they said to me -- I said: what can we do a better job?

They said: we need more credit for our stores because they are doing more and more hep C patients.

You get a couple of hep C patients and it totally changes the dynamic.

So the market is robust.

I think -- we do go mainly off the IMS forecast.

So -- I forget what exactly the latest forecast they have for this year is, but it's pretty healthy out there.

Frankly, Lisa, just not to change gears on you, but -- and we are very interested in development internationally, particularly in our Specialty franchise, and we are seeing some progress in Brazil with our specialty JV, although the problems in the Brazilian overall retail market and the economy are well noted.

But it's just -- one of the great things about MWI is how strong their US business is.

It's such a good mix there, and we see such strong trend in the US vet market.

So although we like the international development opportunities there, that's another thing we liked about MWI, is how strong they are leveraged to the US health market -- animal health market.

Then my second follow-up question, you mentioned biosimilars and the opportunities for AmerisourceBergen as it relates to biosimilars.

Can you talk about, Steve, what you would expect the relationships to look like?

Would you expect early type of partnerships signed with new biosimilars coming to market?

And what are the services that you think Amerisource will provide?

And do you anticipate that will have more limited type distribution?

Where you talked for example with oncology that the manufacturers really want to control the channel; would you expect it to be similar to that in biosimilars?

Yes, it's a great question and thank you for bringing this up.

We think that it's just going to be great for patients and physician choice.

We think that the pricing for biosimilars should be such that you're not going to have jailbreak-type events -- I think Tim referred to Nexium.

So you'd see a few really, really well-credentialed, well-capitalized manufacturers.

And again, these products are being successfully distributed, dispensed, in Europe.

So we are going to be working with companies that we're very used to working with, the top four or five global manufacturers.

They're used to buying services from AmerisourceBergen and from our type or class of trade.

And then a lot of the key products will be physician-administered products.

This is an area of strength for us.

We know how to work on the pricing issues, on the market acceptance issues, on the contracting issues, on the reimbursement issues.

This is -- I was out in Washington a couple of weeks ago; it's a question we're getting asked by regulators a lot more so.

We think that the pricing environment will be favorable for the type of services that AmerisourceBergen offers to manufacturers, and also that it will be of interest to our customers.

I think they will be interested in extending their options for patient care.

Of course, we also want to work with existing manufacturers.

So we think that overall neutrality and greater access and choice is always a benefit to the market.

John Ransom, Raymond James.

Hi, good morning.

Yes, you guys have been busy over the last five years, it comes to mind.

Would you mind just making sure that we grasp all this?

Just resetting your comments on Nexium and why you -- even though it's probably going to launch earlier, why you are less optimistic about the contribution.

Is it the fact that it's not exclusive?

Or is there something else that we might be missing there?

Thanks.

Yes, hey, John; it's Tim Thanks for the question.

It's an important one.

It's a significant brand drug and we had it factored into our plan as -- it was a fairly large contributor this year in 2015.

But you're absolutely right.

Economics are better when it's exclusive, and that was our working assumption when we built our plan and when we gave guidance earlier in the year.

As Steve mentioned, he used that phrase jailbreak.

There has been some recent news about one manufacturer potentially coming to market; but there seem to be several in the queue that may be right after them.

Usually history shows us, when there are several-to-many manufacturers, the margin falls a lot faster.

So that's why we called it out and it's a little bit of a headwind for us in the second half.

Also, we (multiple speakers) the news on Monday afternoon, so right as we were busy getting ready for this call, and we were doing our first rehearsal.

So the timing -- but I don't think we would have said anything different, because there is no definitive information out there.

Very important product for us, and also the brand sales are very important particularly to one of our largest customers.

So they'll have it impacting our brand sales as well.

Just one other -- I know how you guys (technical difficulty) talking about individual drugs.

So on that theme, could you just talk a little bit more specifically about -- we talked about biosimilars in particular.

But is the biosimilar for the anemia product, is that -- do you have that in your model as making any material contribution this year?

Or if so, how do you think about it -- not this year, I'm sorry.

But how do you think about the biosimilars for particularly your dialysis franchise and your oncology franchise?

Are those likely to be needle-movers, in your opinion?

Yes, you know, in oncology, we will probably have better economics again because of the services that we provide.

Dialysis we've got two extremely large -- two large customers that make a lot of the on-formulary decisions.

But we'd expect to work with them whatever their formulary choices are.

The first, Neupogen, the first biosimilar, it is a product that we distribute.

It's overall about a $1 billion product and probably ABC has more than a third share of that.

I'm not quite sure exactly how it falls into the community oncology business, but we do have fairly significant contributions expected from it, because we expect that there will be an interest from our physician customers.

But nothing needle-moving.

It's just not a big enough product.

Okay.

Thanks very much.

Thanks, John.

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

Ross Muken, Evercore.

Thanks, guys.

Just again on -- I just got a bunch of questions before in my inbox on the generic inflation assumption.

I think the challenge here is just that that timing aspect continues to be pretty difficult to predict.

But I guess as you made your commentary around the rest of the year, there is nothing in the way that you are seeing things from manufacturers changing; this is just a more a view that -- you had an assumption about what the year would look like.

We've already gotten off maybe a slightly better start, and so you're being conservative in assuming it flat-lines for the remainder.

Is there something maybe you're actually seeing in the market?

Or is it one of the specific comps?

We did have a very active, I think, calendar Q2 last year.

I'm just trying to put all of that in context.

Yes, Ross, thanks; it's Tim.

So, yes, we did get off to a good start in a quarter that's traditionally low.

But then we came to a little bit of a screeching halt here in January with not much activity; so we're a little concerned about what the March calendar will bear.

And again with some of that pull-forward into December, we don't know.

We just need more time to assess.

So I think we are still optimistic about the year in total, as what we've communicated in the past, the total contribution.

And I think we just need more time to assess.

I think that's fair.

That's all I had.

Thanks again, guys, and congrats on a great quarter.

Steve, do you have any closing comments?

Yes.

I just thank you for your attention and really great questions today.

That really wraps up our Q1 call.

This was certainly a quarter where all of our core themes of knowledge, reach, and partnership translated into strong strategic and financial performance.

We are very enthusiastic about our business, and we look forward to working hard to continue to enhance the value we provide to all of our stakeholders.

Thank you.

Thanks, Steve, and before we go I just want to highlight some conferences we will be attending.

We will be at the Leerink Healthcare Conference in New York on February 11; the RBC Healthcare Conference, also in New York on February 24; the Raymond James Institutional Investor Conference in Orlando on March 3; and the Barclays Healthcare Conference in Miami on March 12.

Thank you for your attention.

Now I'll turn it back to the operator.

Thank you, ladies and gentlemen.

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(Operator Instructions)

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