美源伯根 (ABC) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AmerisourceBergen second-quarter earnings conference call.

(Operator Instructions)

Also as a reminder today's teleconference is being recorded.

At this time I will turn the conference call over to your host Ms. Barbara Brungess.

Please go ahead.

Thank you.

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

I am Barbara Brungess, Vice President of Corporate and Investor Relations, 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 quarter in our press release AmerisourceBergen associates delivered outstanding financial results in our second quarter of fiscal 2015.

Our revenues increased 15% to $32.7 billion.

Our adjusted diluted earnings per share were up over 36% to $1.45 while we generated a very strong $700 million in operating cash flow.

In addition to the excellent financial and operating performance we also made important progress against our strategic objectives as we close the acquisition of MWI Veterinary Supply and we extended our contract with our large PBM customer for an additional year.

The strength of our core business combined with our disciplined capital management gives us the flexibility to continue to expand our knowledge, reach and partnership as we broaden our provider and manufacturer service offerings to a new market segment and continue to drive innovation across the pharmaceutical supply channel.

We have had an exceptional first half of fiscal 2015 and we are very well-positioned to meet our increased expectations for the full-year.

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

Building on the momentum we had coming out of our first quarter our performance in the second quarter was very robust.

Strong revenue growth combined with operating leverage drove exceptional adjusted earnings per share growth and continuing improvement in working capital led to very strong cash flow.

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

AmerisourceBergen Drug Corporation had a very strong quarter with revenues up 15% even as we continue to anniversary the Walgreens brand business and some of the generic business.

Good organic growth rates overcame the rolloff of some old business and sales of the new hepatitis C drugs also contributed to ABDC's revenue growth.

Overall drug pricing trends remain 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 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 help ensure our customers participate in the provision of the full spectrum of pharmaceutical care.

This footprint is of tremendous strategic and technical value both for those launching new products and for those providing daily care to patients.

To have a trusted partner who has a key role in improving patient access to pharmaceuticals is critical in a healthcare system that is rapidly evolving with each passing day.

Having a partner who works collaboratively to maximize efficiency and reach is essential in a market with increasing demand and decreasing resources.

Our long-term strategic relationship with Walgreens Boots Alliance is progressing very well.

Sales of brand and generic products to Walgreens and stores are growing faster than expected and we are very pleased with the economic contributions from the sourcing JV.

Our relationship evolves along with the markets we both serve and we are continuously working collaboratively to enhance the value we bring to manufacturers and the programs and services we bring to our customers.

On the international front in our drug distribution business our BluePoint private label program is performing well and we achieved an important milestone this quarter as we launched our first generic injectable product under the BluePoint label.

Activities in ABC Switzerland are well underway and are beginning to contribute value to both ABC and to the manufacturers we serve.

ABC Switzerland functions as an intermediary for all types of pharmaceutical manufacturers, managing strategic relationships and fostering specific new value-added activities.

It provides enhanced data analytics and market intelligence to assist manufacturers with their supply chain effectiveness and serves as a platform to manage and grow PRxO Generics, our proprietary generics formulary and other global generic programs.

Moreover, the location and time zone of ABC Switzerland facilitates coordination and activity with our partners at WBAD.

We are very pleased with the progress we have made as we have expanded our international presence while improving the services we offer our partners.

In the US we continue to ramp activity at our national distribution center in Columbus.

We have more than doubled the volume going through the facility during the March quarter and we will continue to add additional manufacturers to its programs over the remainder of the fiscal year.

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

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

Setting aside the impact of some manufacturing proposed changes on certain oncology products which moved some revenues from drug company to specialty, ABSG revenues were up 16%.

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

Our community oncology business performed well in the March quarter due to a mix of new business, some brand oncology product price increases and an overall increase in volume.

While reimbursement issues persist we are very pleased that the community oncology market stabilized which we believe is a great benefit for overall cancer care.

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

I have often noted that our individual business units increasingly become less distinct from one another while focusing their efforts on collaboratively meeting the needs of suppliers and customers.

Our leadership team is focused on achieving enterprise-wide solutions that will impact our customers and enhance our competitive position.

Nowhere is this more evident than in the specialty area where the unique combination of services and expertise we offer helps manufacturers and healthcare providers manage the opportunity and challenges of this dynamic segment of the market.

We have spent literally decades carefully developing our portfolio of specialty offerings and building up the capabilities necessary to handle complex products for special needs.

We extend well beyond sophisticated logistics and into the distinct requirements for specific disease states and unique classes of products.

We adeptly meet the needs of physicians, clinics and health systems and we have pioneered the development of commercialization and reimbursement consulting services and patient access and adherence programs.

All of the work we have done and investments we have made in our facilities, our people and our technology has been done in an effort to collaboratively meet the needs of biotech innovators, establish pharmaceutical companies and the physician and other providers who administer these life-changing therapies which positively impacts the lives of the patients we all ultimately serve.

Whether we are dealing with a new branded chemical or biological product, a generic version of a mature therapy or a promising growth area such as biosimilars AmerisourceBergen has the unique expertise and the right portfolio required to help ensure the widest market for a product, the greatest patient access and the most thorough supportive services all conducted in an extremely efficient manner that generates tremendous value for all stakeholders.

As consolidation and the economic realities of health reform drive even more focus on the specialty products segment I've never felt more confident that AmerisourceBergen is the best physician partner for our various stakeholders to maximize the benefits of advanced specialty products.

Now let me say a few words about biosimilars specifically which are understandably generating a great deal of attention.

We believe that the introduction of biosimilars to US markets will give us a tremendous opportunity to further demonstrate our strengths in these areas.

While we cannot be certain of the timing of biosimilar introductions and many other questions still remain regarding the pricing of products, the degree of substitutability and the specific mechanisms of reimbursement, we are looking forward to working with our partners to ensure that patients will be the ultimate beneficiary of the introduction of biosimilars, will have the widest access possible to these products.

The majority of the benefits from biosimilars are still likely a ways off but we are excited about the opportunity to demonstrate the value we can bring to this new category of products.

As we look ahead we are thrilled to extend the distribution and specialty expertise we have accumulated into the animal health space.

As I mentioned earlier we closed the MWI transaction in late February and we are pleased to officially welcome Jim Cleary, Mary Pat Thompson, and the rest of the MWI team to AmerisourceBergen.

Jim is now a member of my executive leader team and the integration is off to a terrific start.

Our results in this quarter include about one month of MWI's results which were ahead of our expectations.

We remain quite confident that MWI will continue to deliver excellent performance and that we will meet our targets for synergy capture as planned.

MWI's results are now reported under our other segments along with our consulting business and World Courier.

Coincidently today marks the third year anniversary since we closed our World Courier transaction.

World Courier has helped us think globally and we have together exceeded so many of the integration and strategic goals we laid out in our business case.

Congratulations to all the associates at World Courier on the third anniversary of joining AmerisourceBergen.

All the manufacturer services business together had a solid March quarter.

The expertise we bring to bear in the regulatory compliance and quality areas, our increasingly global reach and our experience in developing patient access and adherence program is a differentiator for AmerisourceBergen today and an opportunity for growth in the future particularly as biosimilars begin to come to market.

It is a great 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 combination of a pipeline full of innovative products and expanding access to healthcare drives meaningful improvement in patients lives and growth opportunities across the pharmaceutical supply channel.

As we have previously discussed, many of these same growth trends hold true for the animal health market as well.

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

As Americans age pet ownership is increasing and pets themselves are living longer thanks to improvements in pharmaceutical care and advanced procedures that enhance the lives of pets.

In addition the increasing global demand for food drives the production side of the market and creates opportunities to extend the expertise MWI has garnered in the US into developing global markets.

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

Our year-over-year comparisons are much more difficult in the next two quarters while our underlying business trends remain strong.

For example as we progress through the remainder of the year we will gradually begin to fully anniversary the benefits from the Walgreens generic business and the contributions from the sourcing joint venture.

In addition we need a substantial amount of generic inflation in the next two quarters just to match what we experienced in the prior year.

Brand inflation has been quite strong in the first two quarters of fiscal 2015 and we have seen some brand price increases on specialty products that likely won't recur in the second half of the year.

While we were pleased to see the first version of generic Nexium launch in the March quarter there remains only one generic supplier so the economic value of the product for ABC is not optimal.

Given these trends our performance in the March quarter and the addition of MWI we have raised our guidance for the remainder of the year.

Tim will provide greater detail but in summary and on a consolidated basis we now expect revenue growth in the range of 12% to 13%, adjusted diluted earnings per share from continuing operations growth in the range of 22% to 25% and free cash flow generation in the range of $2 billion to $2.3 billion.

As we reported in or press release this morning our Board has authorized a new $1 billion special share repurchase program designed to further offset the potential dilution from the future exercise of the warrants that were issued to Walgreens Boots Alliance.

As we approach the exercise dates on these warrants we will continue to evaluate our efforts to offset the dilutive impact of exercise and explore a variety of approaches to offset the dilutive impact of exercises -- I beg your pardon, and explore a variety of approaches to achieve our desired outcome including through possible M&A.

In addition to activity under the special program we continue to expect to repurchase $200 million under our normal repurchase program.

I'm very pleased with the outstanding financial and operating performance we achieved across our entire business in the first half of fiscal 2015.

While there are many moving parts in the remainder of the year I am confident that we will meet our financial and operational objectives for the year.

As I said last quarter, generating strong business results requires more than meeting financial and operating goals.

True value creation results from stellar execution, innovative thinking and the bold implementation of new ideas.

I constantly challenge our associates to exceed our customers' expectations by partnering with them to find creative new ways to meet current and future challenges.

The tremendous strength of our now expanded core business gives us a powerful platform upon which to build and to make vital contributions to the health and well-being of hundreds of thousands of human and animal customers and by so doing continue to provide excellent returns to our stakeholders.

Now here is Tim.

Thanks Steve and good morning everyone.

Consistent with past quarters my remarks will focus primarily on our adjusted results.

Let me point out that all financial comparisons are for our second fiscal quarter ended March 2015 compared to the same period of the prior fiscal year unless otherwise noted.

I have three topics to cover this morning.

First I will recap consolidated and segment P&L performance.

I will also cover our consolidated cash flow highlights.

As Steve mentioned this is our first period that our results include MWI which essentially means one month of their activity.

The second topic, I will spend a few minutes covering our warrant hedging progress to date.

And the last topic I will cover our revised fiscal 2015 expectations.

So with that we can begin our Q2 review.

Revenues were $32.7 billion, up nearly 15%.

On an overall basis Walgreens accounted for just under half of that revenue growth.

This is our second quarter of having all of this business, meeting their brand and generic volumes for the entire quarter so a majority of this customer growth is due to the year over year ramping of the business.

I should highlight that the addition of MWI contributed about 1% to our overall growth rate.

The quarter's adjusted gross profit increased 25% to just over $1 billion.

The strong growth was due to the performance in our pharmaceutical distribution segment driven primarily by better than expected revenue growth, especially generics.

Operating expenses, our total adjusted operating expenses increased about 18% to approximately $490 million.

Excluding MWI our operating expense growth would have been 11% and roughly 2% of this growth was related to the compensation accruals needed due to our year-to-date performance versus our internal plan.

Consistent with past quarters the remaining expense growth relates to higher overall business volume and IT expenses.

Operating income, our adjusted operating income was $553 million, up about $136 million or a very strong 33% growth rate.

Our adjusted operating margin was 1.69%, up 23 basis points.

Moving below the operating income line interest expense net was about $21 million and included $5.5 million of interest and fees associated with the MWI financing for roughly five weeks in the quarter.

Income taxes, our adjusted income tax rate was 35.7% for the current quarter, down from the prior year.

Growth in World Courier, BluePoint private label and now our Switzerland manufacturers services business is causing a change in our US to international income mix and is consequently lowering our consolidated tax rate.

For the full-year we expect our tax rate to be between 36% and 37%.

For the quarter our adjusted EPS from continuing operations increased nearly 37% to $1.45 driven by exceptionally strong organic operating income growth.

Our adjusted diluted share count was about 230.4 million shares, down just under 2%.

Let's move forward and discuss our segment results starting with pharmaceutical distribution.

Total segment revenues were $31.8 billion, up 14%.

As mentioned earlier by Steve, drug company led the way with a 13% revenue increase.

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

Market growth, one market growth continues to be good driven by volume, strong pricing and the hepatitis C drugs; two, our sales to our largest customer exceeded our expectations; and three, as mentioned before we haven't anniversaried the full implementation of the Walgreens contract yet so we continue to realize this revenue benefit.

In terms of mix drug company's total generic revenues increased nearly 50% year over year in dollars.

Our specialty business group had an overall revenue increase of about 25% and similar to last quarter adjusting for the shift in certain oncology revenues on a comparable basis our specialty business grew at an impressive 16% with growth coming from oral oncology, plasma and ophthalmology.

We continue to see solid growth in our community oncology business with a percentage growth rate in the high single digits.

And finally our ICS third-party logistics business also had very good revenue growth contributing about one-third of the 16% comparable growth rate due to new business wins and increased volumes.

The sales growth percentages for the drug company and specialty that I just provided, our before intrasegment eliminations consistent with how we've reported these growth rates in past quarters.

Moving to gross profit, the segment's gross profit was $849 million, up about 22%.

Drug company was the driver of the majority of the segment gross profit increase as a result to their high revenue growth and as I've called out especially due to higher generic revenues.

In terms of total segment price appreciation we ended the quarter higher than we expected in terms of dollar contribution.

We were better than expected in the contribution from brand inflation and this more than offset being slightly lower on the benefit from generic inflation.

Operating expenses were $361 million and were up about 12%.

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

OpEx also includes the additional incentive compensation accruals, primarily related to strong performance of the two businesses in this segment.

Segment operating income was $489 million and up about 31% driven by the outstanding performance of the drug company.

As Steve highlighted we're also extremely pleased with our specialty business with an operating income growth rate in the high teens driven by several positive trends in our business portfolio.

We can now move to our other segment which includes consulting services, World Courier and beginning this quarter MWI.

In the quarter total segment revenues were $986 million, up 72%.

Excluding the impact of MWI the revenue growth would have been slightly less than 20% with most of this coming from our consulting business and specifically the TheraCom distribution business.

MWI had a very good revenue month primarily as a result of its companion animal business.

Positive trends in the industry including new innovative drugs and increased visits to vet practices are driving high companion animal revenue growth.

During the period production animal revenues were up modestly impacted primarily by cattle feedlot placement being down year over year.

From an operating income standpoint this segment had operating income of $64 million, reflecting growth of 47%.

The segment's growth benefited from having MWI included in the quarterly results.

Let me highlight from a margin standpoint MWI's margin was better this period versus what they've had historically due to having a better mix of companion animal revenue.

This completes our segment review.

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

Warrants, the fair value of the warrants increased significantly to $2.7 billion as of March 31.

This increase in value is correlated to the 26% increase in the ABC share price during the March quarter.

Our GAAP warrant expense was $753 million for the quarter and roughly 75% of this expense representing a cumulative adjustment as the accounting rules require ABC to record expense as if the $2.7 billion fair value was the fair value back on day one of warrant issuance.

LIFO this quarter we recorded in expense of $151 million.

This means on a year-to-date basis we have recorded about half of our full-year estimate of $586 million which is slightly greater than our estimate for the first fiscal quarter.

This wraps up our P&L review.

Let me switch and cover cash.

This quarter we again had very good free cash flow, $690 million.

As I highlighted earlier a significant increase in generic revenues, about 50% year over year, continued to drive improved working capital metrics.

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

We ended the quarter with cash of $2.3 billion which is very good considering we partially funded the MWI acquisition and also continued with our warrant hedging activities.

As I mentioned in my opening comments I'd like to spend a few minutes covering our second topic, warrant hedging.

As we talk to investors we are receiving a number of warrant questions especially now that the first opportunity for Walgreens Boots Alliance to exercise is less than a year away March 2016.

As a reminder the 2016 and 2017 warrants each represent an option to buy approximately 23 million shares.

ABC will receive roughly $1.2 billion in proceeds at the time of each exercise.

To date we have used three strategies to offset the expected warrant dilution.

The first strategy, we entered into the original cap call that can be exercised by ABC in 2016 and 2017.

We plan to use 60% of the warrant proceeds to fund the exercise of these cap calls.

The second strategy we have repurchased 5.1 million shares to date under our special share repurchase program.

The third strategy in the March 2015 quarter we purchased call options for 6 million shares for $80 million.

We have the right to exercise the option during designated time periods between April 2015 and the end of October 2015.

Funding these exercises will require the use of capital of approximately $570 million.

The average strike price of the call options is $95.

Let me switch gears and address warrant coverage.

First the 2016 warrants.

At March 31 and based on our closing share price on that date which was $113.67 the cap calls covered 46% of the expected dilution.

Adding the 1.51 million shares already repurchased we become about 70% hedged on the 2016 warrants.

Now looking forward and assuming we successfully exercise the call options representing 6 million shares we move to 95% hedged.

For the 2017 warrants again at March 31 and based on our closing share price on that date, the cap calls covered 42% of the expected dilution.

We have not completed any other share repurchases or hedging activities related to the 2017 warrants yet.

To enable our investors to better track our coverage as our share price changes I'd like to highlight that for every $5 increase from our March 31 closing share price our total hedging coverage on each warrant will decrease by about 2%.

Likewise if our share price decreases by $5 our total coverage will increase by about 2% on each warrant.

As a reminder, premiums paid for call options are not expensed in our P&L.

They directly impact our equity account and shares specifically earmarked for hedging are not included in our adjusted share count for ETFs purposes.

We will net these shares into the adjusted share count when the new shares are issued at the time of warrant exercise.

So to summarize this section, ABC remains committed to offsetting expected dilution in our adjusted ETFs from the warrant exercises.

We will continue to be thoughtful about capital deployment including repurchasing shares and other hedging activities as well as looking for other means to fill the EPS gap from the warrant dilution including strategic M&A.

Let's move to our third and final topic this morning, our revised fiscal 2015 expectations.

My guidance comments will now include MWI.

Revenues, based on positive trends in our business and also the industry we now expect consolidated revenue growth in the 12% to 13% range.

MWI is expected to account for about 2% of this growth.

Operating income.

For fiscal 2015 we expect our year-over-year dollar growth to be in the range of 19% to 21% driven by our first-half performance, stronger full-year revenues, especially generics, and adding MWI.

Operating margin.

We now expect that our operating margin will be up 8 to 10 basis points due to the performance of our business and mix with MWI having a higher margin than our drug and specialty businesses.

Our adjusted diluted share count for the full-year is expected to be down just under 1% due to exercises under employee stock compensation plans and reduced share buybacks.

In fact, we expect our Q3 and Q4 adjusted share count to be higher on a year-over-year basis.

Adjusted EPS.

We now expect our fiscal 2015 adjusted EPS to be in the range of $4.85 to $4.95 which reflects growth of 22% to 25% from last year's adjusted EPS.

As we have said on prior investor calls, even though the second half of the year will include the contribution from MWI we have a very tough EPS comparable due to strong generic price appreciation last year.

We also begin to anniversary the Walgreens contribution and our renewed contract with the Department of Defense starts with revised market pricing.

Share repurchases, our guidance for regular share repurchases remains at $200 million for the full-year.

Switching to our free cash flow guidance, due to the combination of strong generic revenue growth and generics having positive working capital metrics we now expect our full-year free cash flow to be in the range of $2 billion to $2.3 billion.

I would like to make one final comment about share repurchases and our share count.

Historically we've committed to deploying $400 million to $500 million for share repurchases in a given year subject to market conditions and other uses of cash like M&A.

When we had a much lower share price we are able to both offset employee stock option exercises and reduce our overall share count.

As a reference point our employee stock exercises can be roughly 2% of our outstanding shares in a given year.

Going forward due to our current share price we will be challenged to just keep our adjusted share count flat while deploying the same approximate dollars.

As I wrap up I want to thank you for your time and attention this morning.

I've covered several key areas and I hope you found this information helpful.

At the halfway point of our fiscal year we are executing very well.

We are working to integrate our new business, MWI, and we are thrilled with the progress to date and we remain committed to making the right long-term investment to continue to grow our earnings.

Thank you for your interest in ABC.

And 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.

Tony, please go ahead with our first question.

(Operator Instructions) Robert Willoughby, Bank of America Merrill Lynch.

Thanks.

Steve, it looks like you've re-upped the contract, the PBM contract for another year.

Just curious was that just a pickup of a one-year option associated with it and why not a longer-term extension there?

Well, the option was at Express' option and we believe we have a good relationship.

We believe it's constantly improving and we are confident that there will be more opportunities to carry on strengthening the relationship in the future.

Anything Tim?

No, we look forward to working with them over the next several months and getting something deeper and longer term.

You're right, Steve.

Okay, thank you.

Glen Santangelo, Credit Suisse.

Yes, thanks and good morning.

Tim I appreciate all the details on the warrant hedging strategy.

I just want to make sure I understand this correctly.

It kind of sounds like that for the 16 warrants you almost feel like you're fully hedged at this point so we shouldn't expect any dilution.

But for 2017 it kind of sounds like with the original cap call you're probably about 40% hedged, so if I'm doing the math correctly as it stands right now at the existing stock price maybe you're looking at mid-single-digit dilution in 2017 if you do nothing else at this point.

Is that a fair assessment?

Well I would say, Glen that you're right.

We've made we're really pleased with the progress we've made on 2016.

We feel like we're in the home stretch here on 2016 and we'll make some further progress.

That's one of our key areas for cash deployment to take care of that.

2017 we have a gap and we'll take a look at that.

I stand by the comments I made and Steve makes that we're committed to closing that EPS gap and we have a ways to go.

And so Steve maybe if I can just follow-up on closing that EPS gap, it sounds like one of the strategies you suggested you might use is M&A.

Given that you're only a month into the MWI deal where do you feel like you are from an integration standpoint?

Do you feel like the Company is at a point where it can actually deploy more capital towards M&A at this point?

Well we have very good cash flow, Glen and certainly I think we've been very thoughtful of M&A.

If you look at the other sector and you see the three signature acquisitions that we've made since I became CEO I think all of them have really differentiated us from a service perspective but also from a financial and margin perspective.

The MWI franchise is really awesome and there's opportunities for regional consolidation, opportunities for international expansion, opportunities to add more value-added services to their provider segment.

So it is quite an intriguing opportunity to add to that franchise with more capital deployment.

I also think we did a very thorough due diligence but you know it's the first public company I've been involved in acquiring and there's a lot of information.

But it's just an incredible franchise and we're very, very pleased to have this within ABC and I think the manufacturers are pleased to have our partnering as we look towards further expanding the model both internationally and domestically.

Okay, thanks for the comments.

Garen Sarafian, Citi Research.

Good morning guys.

Just a broader level question.

So if you look at the recent headlines and also comments from this morning consolidation among manufacturers and branded price inflation continued to be key trends.

So how do you as part of WBAD contemplate these trends and had you remained more independent so to speak you would not have been able to benefit from?

Is there any sort of structural change when it comes to the branded manufacturers versus and also on the consolidation front advantages you now have that you would not have had?

Well on the branded we don't do that through WBAD.

So we have opportunities for enhanced services when it comes to areas like specialty, data, Good Neighbor Pharmacy and Alphega that is an opportunity we haven't branded.

But certainly on the contractual side it's really around all our solid generics.

And we believe that we have the most global approach.

If you look at all the different portfolios of business that are resident in WBAD there really are a unique collection of assets and at the time I think we maintained very strongly that it was very hard for others to match these portfolio of assets and I think that has become even more so since as time has evolved.

So I was just at our NACDS convention, met with all the global heads and US heads of just about every big generic company and I believe we're very well-positioned.

Certainly generic price increases are something that has added a little bit of upside to our performance as is variability from quarter to quarter which we try to point out to the best of our ability given that we want you to have full understanding of our financials.

We've got a big headwind in the next two quarters.

But the challenge with our customers, all of them and particularly I keep talking here about the PRxO Gen customers is to get those reimbursement tables changed quicker.

And that's what we really are focused on through Good Neighbor Pharmacy Provider Network and other resources that AmerisourceBergen has.

And I think certainly the larger customers like WBA have their own resources around this area but we are always working constructively to face the market together.

Got it.

And then just a quick follow-up, you made some comments regarding inflation required to meet last year's rates.

So what are your current branded and generic inflation assumptions in the updated guidance that you've given?

I can start, Steve.

We remain the same on our guidance as we have been.

We're still at flat in terms of dollar contribution for the year.

Sequentially I'd like to point out sequentially we were down some between our first fiscal quarter and second.

And I think the comment was we would need to see a little bit of an uptick for the second half of the year to get to our expectations.

And again the point is last year, if you remember last June and September quarters we had very strong price appreciation on the generic side as a comparable year over year.

And then on the brand side, we were about 10% to 11% where we were last year, consistent with IMS data.

So we did see some good mix in the last quarter, particularly around specialty products where we have disproportionate marketshare.

That's helpful.

Thank you very much.

Ricky Goldwasser, Morgan Stanley.

Yes, hi.

Good afternoon, I guess by now.

I have a couple of follow-up questions.

First of all in your prepared remarks, I think you spoke about the contribution from Walgreens.

It has come in a little bit better than you expected.

Can you just quantify for us, is this that Walgreens is sending you more business that they were holding back before, or is Walgreens just growing faster?

No, no it's purely their core growth rate.

We essentially do all of their pharmaceutical distribution to their stores.

And if you look at our customers as a mutual fund of US healthcare, we were missing that chain piece.

And it's been very, very productive for us to have a large chain retailer.

I've been with the combined companies now for over 20 years and we never ever had a big chain customer that was buying their store business from us.

We had others we had, of course, within the various companies, but we've never had a big chain customer.

I think it's been very, very helpful.

It has helped with the capacity and scale issues that we have in our distribution centers, and we certainly are having to make more investments to keep up with the pace with our largest customer.

Of course, our PBM customer is a huge driver, somewhere in the high teens as well, of our revenues.

So our customers are doing well and they are benefiting from healthcare reform and they are benefiting from utilization and innovation on the product side, and that's especially evident at our larger customers.

Okay.

And then one follow-up on the comment, Tim, that you made on the generic inflation.

I think you said brand inflation came in above your expectation; generic came in a little bit below your expectation.

Can you just help us quantify that, what are you seeing in terms of generic inflation?

Obviously, that's been a big theme for last year or so.

And any thoughts of how to think about the going-forward contribution?

I would say that on the brand side, again, it was better than expected.

And I would say especially in the our specialty business, and that is tough to predict when and if it will come.

So that helped to offset, more than offset a little bit generics being down.

I don't think we want to get into trying to size that at this point but we continue to see generic, I don't think we've seen any changes, we continue to see generic inflation and it's built into our guidance.

I think we talked about we have a tough comp compared to last year.

So I think that's probably the comments.

I don't know, Steve, do you have anything --

No.

So from a guidance perspective you really didn't make any changes to your guidance assumption?

Is it --

Well I'm glad you mentioned that.

That's true.

It's included in our guidance and that's why we still have a $0.10 range in our guidance in case generic inflation moderates the second half of the year.

To some degree we would move further down in the range.

So it's all factored in.

Okay, great for clarifying.

Thank you.

Robert Jones, Goldman Sachs.

Thanks, Steve and Tim.

Just I guess on the guidance obviously nice raise midway through the year.

Even after adjusting for what I think MWI will contribute from this point forward, clearly you're not calling for the items that drove the significant upside in 1Q and 2Q to continue in the back half.

Slightly better back half than the previous guidance but nothing to the order of magnitude that we've seen in the first half of the year.

And I understand the headwinds that we knew about coming into the year that are in the back half.

I guess I'm just curious if maybe you could talk a little bit more about what specifically is driving the amount of upside that we've seen?

And then I guess related to that, why isn't that expected to continue even relative to the headwinds we knew about coming in?

Why isn't that expected to continue throughout the balance of the year?

I'll start.

We called it out but I'll gladly talk about it again.

The first half of the year we've done really well in terms of just revenue growth and also especially on the generic side and brand price inflation.

I would say that the second half we're going to slow down in terms of generic revenues, especially in our largest customer.

We also anniversary the contribution from the procurement JV.

And I think, Bob, one of the bigger things is just really deal with the Department of Defense contract.

It was a significant reduction.

It kicks in here in May so it impacts us partly in three and more so in September quarter.

And when we gave guidance originally at the beginning of the year we always thought that generic Nexium would help buffer some of that the second half of the year and we just don't see that as a big contributing item.

Okay, and that's changed I guess then from the original point of view on the back half?

Yes, absolutely.

There hasn't been a number two generic company manufacturer enter the market.

We don't know when and if that will happen.

It being single source the revenues are fine from that item from that generic but clearly the margin and the economics just don't contribute that significantly.

Got it.

I guess just a follow-up on the really impressive gross margin performance in the quarter, maybe can you give us a sense I know you've touched on this across the board but maybe a little bit more specifically can you give us a sense of how much of the margin expansion came from within specialty and if you are willing to go there?

Maybe what pieces of specialty are really helping push that margin higher?

I don't think we want to get into specifics between the core drug business and specialty.

Again I would say primarily drug but clearly specialty did well across the entire portfolio.

All their businesses had a pretty good quarter, had good growth and as Steve mentioned especially our ASD business.

Yes I mean we did all the business reviews, honestly all of our businesses did very well.

It was across the board really excellent performance and we've made the capital deployment in higher margin areas.

So we've tried to focus on the areas that offset those larger customers that are growing at above the market.

And we have two or three of them we've really talked about.

But community oncology we had a really good quarter, our best quarter we've had in a long time.

That's a higher margin segment for us because we have both the ION as well as the community oncology distribution business.

So I was at an ION meeting Friday and we had about 500 folks there.

It was a very positive environment.

I think people have gotten used to the diminished reimbursement and I think the payers are being very constructive in their discussions.

So the mix of business and the practices are good and by that I mean the mix between Medicare and private and there are some good trends for them to partner with and take advantage of.

I think organizations like ION and Oncology Supply have been extremely helpful to the survival of community oncology in these tough times.

Got it.

I appreciate the comments.

Thanks.

George Hill, Deutsche Bank.

Good morning guys.

I'm going to go on a little bit of a fishing exercise right here.

You guys detailed how generic dollar growth in the quarter was about 50%.

Can you talk about what generic profit growth looked like and maybe some of the puts and takes around that?

Tim we had --

No, I called out 50% to give people an idea of not only the impressive growth in our Drug Companies but also a good mix of our business.

But I don't think we want to go -- George, I appreciate the question but clearly generics are more profitable but we're not going to get into that level of detail.

Fair enough.

Then maybe just as we think about tax rate on a go-forward basis how should we think about how low the tax rate can go as the business shifts and how much of that will be driven just by mix shift and how much of that will be driven by proactive strategies?

I would say George that good question and the best word I can say is the tax rate is durable, so again we called out it's not one-time items.

We would expect it's a partial year, it's a partial year this year so we will see some incremental benefit to our tax rate next year as we have a full-year.

And but that's probably it unless we further change our mix of business or come up with some type of new initiative or idea.

Okay, that's helpful.

Thank you.

I mean AmerisourceBergen Switzerland is a platform.

I think it's helped coordinate with WBAD but it's also a new interface mechanism.

As I pointed out I think we gave extensive comments on that and there's a lot of innovation in that group.

I've just spent the weekend with them meeting with some of our key suppliers.

So we do think there could be opportunity there to carry on doing more services abroad.

BluePoint is a great driver for our business.

It's been well received in the marketplace.

So the mix of business I think is looking favorable in terms of international businesses.

And also World Courier if you look at corporate, World Courier is a good driver for us with above market growth prospects.

And I think we're starting to make some good progress there on really looking at those ICS orphan drug distribution opportunities, we've got a couple of new facilities that we've introduced particularly in Asia.

So I think again the investments we've made, the business emphasis, the people it's quite an extraordinary time at AmerisourceBergen.

Great, thanks, Steve.

Lisa Gill, JPMorgan.

Thank you.

I just had a couple of follow-up questions.

Tim, can you give us any color on when the new renewal pricing will go into effect for the Express Scripts relationship?

If I remember correctly I thought that the contract ran through October of 2015 but will that impact the next two quarters?

Lisa, let me clarify that.

The contract was really -- it was through September 30 of 2015.

We just extended it for a year under the same terms and conditions.

So no impact whatsoever to our Q3, Q4 this year.

Okay, great.

And then Steve when I look at the specialty business I think you called out that you saw some shift from distribution to pharmacy.

Can you just give us a little more color as to what's happening there and why you're seeing the shift from distribution the pharmacy and then can you just remind us if the margins are better when you see that shift?

No, I said that was a manufacturer mandated programs and they still dropship programs that are being built by our drug company essentially but coordinated through ASD Healthcare.

So there are distribution contracts and the economics are really comparable.

These were manufacturers looking to use more of the specialty model on the inventory side with a centralized location.

So it's not going through a pharmacy program.

Okay great.

But how do I think about the margin profile as we move forward if we see other incremental opportunities and do you see incremental opportunities like this to work with the manufacturers in this regard?

We tried to be very consultative with the manufacturers.

I think overall the customers prefer it to come with their regular drug delivery.

There are certain products you look at the legacy of ASD.

It started off of course with blood plasma products.

We do a lot of work in through vaccine, both our ASD and Besse divisions and there is now some specialty products where there is unique data requirements for the manufacturers, might have a REMS program or some area like that.

And they would like ASP-impacted products, sometimes it makes more sense to go through the specialty distribution as opposed to through broad line wholesale.

But we try to be very consultative and thoughtful about both approaches and including taking the customers' perspective but manufacturers have views on especially the larger manufacturers on how this product should be distributed throughout the supply chain.

So we have all the tools so whatever the requirements are.

Okay great.

That's helpful.

And congratulations on the nice quarter.

Eric Percher, Barclays.

Thank you.

A question on BluePoint.

I know you mentioned you had your first injectable product this quarter.

As you think about the strategy you've taken there we've heard two different strategies of late, one within the US market focused on very low value products, another in the European market focused on partnering with manufacturers.

How do you feel your BluePoint strategy fits among the spectrum?

I don't know about low value but I think it's maturer products.

And certainly where there's quite a few participants in the market there has to be those sort of conditions prevalent for us to do a private label program.

And it's really done in conjunction with the manufacturers.

And I don't think it's that dissimilar than the European model but I'm not an expert on that.

So I would say it's fairly similar circumstances in order to do a private label program.

And I'm surprised given the commentary on tax do you feel that you're pretty early in Blue Point and that could be a pretty large expansion opportunity?

I would think that would help drive the tax rate down over time beyond what you have today.

Well again that's one of the three components that I called out, it's grown and increased quickly over the last couple of years.

If it continues to grow it will help that mix.

So I guess the short answer is it could, yes, it could help drive it could help influence our tax rate.

And do you feel that you're still very early in BluePoint's development?

I think we still have a ways to go.

It's an area that we continue to focus on.

Yes and we like to partner with WBAD and the success of Almus, so we think there's some opportunities there and now that WBA is together we really are starting to focus on that.

And I think AmerisourceBergen Swissco, Switzerland I should say is of course going to be very constructive for that.

Thank you.

Steven Valiquette, UBS.

All right, thanks.

Good afternoon Steve and Tim.

So really for me just a couple of quick ones on the back half comps.

The DoD renewal announcement that occurred back in mid-November but can you remind us again when that pricing goes into effect?

I think Lisa hit on the Express so we're good on that one.

But then the other thing for the back half would be could we theoretically substitute generic Abilify launch for generic Nexium as a guidance component for the back half?

Or do you not want to count that one yet just given that Abilify is an at-risk launch?

We're curious to hear your thoughts on that one, too, thanks.

Hey, Steve, it's Tim.

I will start.

The DoD will impact us two months in the June quarter, May and June, and then will impact us for the entire September quarter.

So we will have that, and again as we talked about it is a significant reduction to market but it is, the offset to that is it's a long-term contract with a growing very good customer.

The generic -- your second question on generic Abilify it's not in our guidance.

We haven't contemplated -- it's too new.

And that's I guess the easy way to say that's a TBD.

We'll have to wait to see how that works and in terms of uptake in the market and also the margin and how many also as we come to market manufacturers.

Okay, great.

Thanks.

And also congrats on these awesome results.

Thanks.

Thanks, Steve.

Now before we go Steve would like to make some final comments.

Well, thank you Barbara and we are now concluding one of the most memorable quarters in ABC's history.

I've actually been very active this quarter throughout the ABC universe as we've had many customer and internal meetings.

I am tremendously proud of the engagement and passion of the ABC associates.

This is true throughout our Company including our international assets.

And we highlighted the third anniversary of our acquisition here in the clinical trial space so we could not be more thrilled of our overall portfolio.

I just want to give a special welcome to MWI which is our largest acquisition to date where we continue to be thrilled about the quality of the service, the customer base and the people that literally continue to delight us.

So thank you for your attention and interest in ABC.

Thanks, Steve.

And I'd just like to highlight our upcoming conference activity before we go.

We will be attending the Deutsche Bank Healthcare Conference in Boston on May 6, the Bank of America Healthcare Conference in Los Angeles on May 11, the UBS Healthcare Conference in New York on May 18 and the Goldman Sachs Healthcare Conference in Rancho Palos Verdes on June 9.

So thank you for joining us today.

And with that I will turn it back to the operator.

Thank you very much.

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