美源伯根 (ABC) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the AmerisourceBergen earnings call.

(Operator Instructions)

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

Now I will turn the conference over to Ms. Barbara Brungess.

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

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

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 filing, 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 phone 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.

I'm pleased to report that AmerisourceBergen Associates once again delivered strong performance in our third fiscal quarter of 2015.

As we reported this morning in our press release, our revenues increased 13% to $34.2 billion, and our adjusted earnings per share were up 19% to $1.2 billion -- [$1.26] and we generated an exceptional $1.1 billion in free cash flow.

Our results were driven by solid performance across all of our core businesses and include a full-quarter impact from NWR Veterinary Supply which is performing better than expected.

The progress we have made in strengthening our existing platforms and investing in new ones demonstrate our commitments to providing our customers and suppliers with market-leading solutions that enable us to collaboratively address the challenges of the fast-changing landscape.

We constantly seek to expand our knowledge, reach and partnerships, in an effort to drive innovation in both human and animal healthcare services.

The quality of our offerings, our seamless execution and our disciplined capital management gives us the flexibility to grow our business in ways that help ensure we'll generate long-term value for our manufacturers and healthcare provider customers, our stakeholders, and our other stakeholders for many years to come.

Our excellent performance through the first nine months of fiscal 2015 sets us up very well to meet our objectives for the full year.

As expected, we have begun to face some headwinds in the second half of fiscal 2015, and we are beginning to anniversary many of the significant benefits of our long-term strategic relationship with Walgreens Boots Alliance.

However, organic growth rates remain strong, specialty is growing faster than our overall markets and I feel our excellent portfolio of leading pharmaceutical services companies positions us extremely well to continue to take advantage of the opportunities across the entire pharmaceutical supply channel.

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

Holding on the exceptional momentum we had in the first half of our year, our performance in the third quarter was very solid.

Strong revenue and gross profit growth drove excellent adjusted earnings per share growth and continuing improvement in working capital terms 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 good quarter with revenues up 9%, even as we continued to anniversary the onboarding of the Walgreens business.

Solid organic growth and strong brand drug pricing contributed to ABDC's revenue growth.

While generic drug inflation has slowed meaningfully, generic sales are strong across all of ABDC's customer segments.

We are very pleased that our Good Neighbor Pharmacy, chains, health systems and ultimate (inaudible) customers all performed well in the quarter.

Next week we'll be hosting our annual trade show for our independent pharmacy customers in Las Vegas and we're looking forward to presenting our enhanced offerings and new programs to this important customer segment.

I have never been more excited about the opportunities that exist for ABC to partner with pharmacists to impact the delivery of healthcare in the US.

We have invested in several new initiatives that will enable us to offer independent pharmacies a set of enhanced capabilities that will support their efforts to improve patient care and to receive fair and accurate payments from payers with a new level of transparency.

We are proud to be the advocate for community pharmacies that increasingly provide some of the most important catch points to ensure patients have access to medications and to other aspects of care, and you will be hearing more about how we'll further empower the efforts and evolve our GNP network over the next few weeks.

We're also very active with regulators and legislators, both independently and through our trade associations to expertly advise and inform those important constituents on pertinent issues for our industry and our customers.

We continue to be very pleased with the progress we have made in our long-term strategic relationship with Walgreens Boots Alliance.

This unique industry-changing relationship has been both strategically and operationally important to ABC.

Significantly as a customer, we continue to enjoy above-market growth from WBA this quarter.

While we have almost fully anniversaried the onboarding of the distribution business, we are not finished growing the relationship and we are well-focused on exploring additional ways to create new value points through WBAD and other shared opportunities.

As our retail business has grown substantially over the last two years, we have always had strong performance in our health systems (inaudible) segments.

During the quarter we were very pleased to receive the Acute Distributor of the Year and the Mark McKenna Supplier of the Year Award for Novation, which has been our valued partner for many years.

I believe this recognition from Novation in a year of tremendous change for AmerisourceBergen highlights the tireless efforts our associates make every day to ensure that all of our customers are well-served.

AmerisourceBergen's Specialty Group had impressive results in the quarter, with a number of different factors driving strong sales.

Setting aside the impact of some previously reported manufacturing-posed changes on certain oncology products which moved some revenues from drug company into specialty, ABSG revenues were up 13%.

Our physician distribution business, ASD, and our community oncology businesses all performed very well in the quarter.

While reimbursement issues with ASP [drive] [specific], the market leadership and credibility of the specialty company and [their leaders] enjoyed is a continual source of pride and differentiation for AmerisourceBergen.

I've worked with many of these leaders and associates for, in some cases, two decades, and they are always passionate, constantly innovative, and importantly remain very customer centered.

Their performance this year has been especially strong and positions us well to continue to thrive and be the leader in the specialty arena.

Four decades we have spent thoughtfully developing our portfolio of specialty offerings, and building up the capabilities and expertise necessary to handle complex, products and services, have enabled us to play a leading role in dealing with products of special needs.

Our capabilities extend well beyond sophisticated logistics and into the distinct requirements with specific disease states and unique classes of products.

The combination of services and expertise we offer helps both manufacturers and healthcare providers manage the opportunities and challenges of this most dynamic segment of the market.

Whether we are dealing with a new brand of chemical or biologic product, a generic version of a mature therapy or a promising growth area such as biosimilars, AmerisourceBergen has the expertise required to help ensure product success across the entire life cycle of a drug, as health reform and other economic realities bring even more focus on the specialty product segments.

AmerisourceBergen is best-positioned to help our partners maximize the benefits of advanced specialty products.

Regarding biosimilars specifically, we continue to believe that their introduction to the US market will give us a tremendous opportunity to further develop our -- demonstrate our strength in these areas.

But we are not certain on the timing of specific product launches.

While we remain excited about the opportunity to demonstrate the value it can bring to this new type of product, the majority of the benefits from biosimilars are still likely a ways off.

Of course our collaborative efforts are no longer confined to the US.

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

Both our BluePoint private label program and ABC Switzerland are progressing well and are demonstrative of the innovative services and solutions we will continue to develop in the years ahead.

In addition, we are pleased with the progress we have made with our specialty joint venture in Brazil.

In the US, we continue to add new manufacturer's job programs, running through our national distribution center in Columbus.

Wholesalers have never been more important to the pharmaceutical supply channel.

As we move through a wave of customer and supplier consolidations and the healthcare landscape continues to evolve at a rapid pace, there's great opportunity for our industry and for AmerisourceBergen in particular to demonstrate the full value we can provide.

Let's turn now to the other segments.

As I mentioned earlier, this was the first time we had a full quarter of MWI in our results and we are very pleased with their performance.

We have made excellent progress on the integration and on the identification of synergies.

I'm very confident that MWI will continue to deliver excellent performance and will make important contributions to the value we provide to the pharmaceutical supply channel as we expand our efforts into animal health.

We continue to believe we acquired a first-class company and organization with MWI.

Jim Cleary and his team are the acknowledged leaders in this field and are enthusiastic about the way they can further enhance the offering with expanded opportunity under the ABC umbrella.

Their willingness to embrace and implement new ideas and their commitment to both outstanding execution and customer service bodes well for the future of their business and the role that they will play as part of ABC.

Our Manufactured Services businesses also had a solid June quarter.

Our expertise in developing patient access and [adherence] program, and the experience we bring to bear in the regulatory, compliance, and policy areas is a differentiator today.

Our increasingly global reach in our Manufactured Services businesses further expand our value proposition to manufacturers as we look to expand our ability to offer fully tailored global clinical and consulting solutions for virtually any specialty product launched in the developed world.

It is a great time to be in the pharmaceutical services industry in both the human and animal health segments.

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.

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

In addition, the increasing global demands for protein 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 fourth quarter of 2015, we again expect the strong trends in overall market growth to continue, while trends in certain specific areas will moderate.

Tim will provide more detail.

But given these trends and our performance in the June quarter, we are narrowing our guidance range for adjusted earnings per share for the full fiscal year to $4.92 to $4.97, which represents outstanding growth of 24% to 25% over last year.

As we look further ahead to fiscal 2016, it's too early to give detailed guidance, but we can see a path to earnings per share growth in the low teens.

We are still working through our in-depth planning process, but there are a few headwinds and tailwinds that we think you should bear in mind as you think about our growth rates for fiscal 2016.

First, the tailwinds.

Continued solid organic revenue growth and brand drug inflation.

Secondly, better generic launches and five incremental months benefits from MWI acquisition.

The headwinds are significant impact from DOD contract repricing in the first half of the year.

Other customer renewals anticipated in fiscal 2016 include Kaiser late in the fiscal year and declining contribution from generic inflation.

There are a few additional assumptions to contemplate as you think about fiscal 2016.

We assume no dilution from warrant exercises because we have the 2016 warrant 100% hedged.

We expect to repurchase $300 million in shares under our normal program.

No contribution from M&A is planned in 2016, and no meaningful contribution from biosimilars in 2016.

We remain hopeful that biosimilars are a great opportunity for ABC, particularly for the physician-administered products.

It's too difficult to predict the timing of any launches at this time.

However, the underlying fundamentals of our business remain strong.

I want to reiterate that these are preliminary thoughts and that we'll give our detailed guidance when we report our fourth quarter in the fall.

Before I turn it over to Tim, I want to commend our ABC associates for delivering stellar performance through nine months of fiscal 2015.

Over the last few years we have challenged our people to develop our talent in new leadership areas, both with our existing associates and by recruiting high-quality individuals externally in order to ensure that we can grow our business by remaining the partner of choice in the pharmaceutical supply channel.

The value creation we generate is the result of flawless execution, creative thinking and the courage to implement bold new ideas.

Our associates share my conviction that we make vital contributions to the health and well-being of humans and animals and by selling in that role, we can continue to provide excellent returns to our shareholders and other 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 third fiscal quarter and the June 30, 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 segments P&L performance.

I will also cover a few consolidated cash flow highlights.

The second topic, I will briefly recap our warrant hedging progress to date.

And my third topic, I'll wrap up with comments about guidance for fiscal year 2015 and also provide some preliminary thoughts on fiscal 2016.

So with that we can begin our Q3 review.

Revenues increased $3.9 billion to $34.2 billion, up 13%.

On an overall basis, sales to Walgreens stores accounted for roughly 50% of our revenue dollar increase.

As a reminder, this is now our third quarter of having this key customer's business, meeting all their brand and generic volumes for the entire quarter.

Consequently a majority of their growth continues to be related to year-over-year business ramping.

Additionally MWI contributed roughly 20% of our overall revenue dollar growth.

The quarter's adjusted gross profit increased $184 million, or 22%, to just over $1 billion.

About 70% of the dollar growth came from our other segment, primarily as a results of adding a full quarter of MWI's result.

The remaining dollar growth was from our pharmaceutical distribution segment, driven primarily by revenue growth.

Operating expenses, our total adjusted operating expenses increased about $122 million, or 28%, to approximately $551 million, consistent with a change in gross profit dollars that I just covered.

The other segment drove about 70% of the dollar growth, again, primarily due to MWI.

Operating income, our adjusted operating income was $455 million, up about $62 million, for a very strong 16% growth rate.

Our adjusted operating margin was 1.33%, up three basis points due to adding MWI, as they have a higher margin profile than our core drug businesses.

Moving below the operating income line, interest expense net was about $28 million and roughly half of the quarterly expense was related to the MWI acquisition financing.

Income taxes, our adjusted income tax rate was 35.3% for the current quarter, down from the prior year.

We continue to realize the decrease in our tax rate due to income growth in our international businesses.

Additionally this quarter we realized about a 40 basis point improvement in our tax rate related to the filing of our 2014 tax return and recognizing a favorable tax provision to return adjustment.

For the full year we now expect our tax rate to be between 36% and 36.5%.

For the quarter, our adjusted diluted EPS increased 19% to $1.20, driven by organic operating income growth, the addition of MWI, and the benefit of a lower consolidated tax rate.

Our adjusted diluted share count at 231.3 million shares, was essentially flat to last year's quarter.

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

Total segment revenues were about $32.8 billion, up 10%.

As mentioned earlier by Steve, Drug Company had growth in revenues of 9%, driven by two items.

The first item, market growth continues to be good, driven by volume and strong pricing, especially in the brand drug side.

I should note that sales of Hepatitis C drugs did not contribute meaningfully to the overall revenue growth in our Drug Company.

And the second item, we haven't anniversaried the full implementation of the Walgreens contract yet, but we continue to realize a revenue benefit here also.

In terms of mix, Drug Company's total generic revenues increased year over year just over 20% in dollars.

Most of the increased is the result of servicing Walgreens fully this quarter, while last year in the June 2014 quarter we were servicing about 70% of their locations for brands and generics.

Our Specialty Business Group had an overall revenue increase of 22%, similar to the past two quarters; adjusting for the shift in certain oncology revenues from our Drug Company to our Specialty Business, our Specialty Business grew an impressive 13% from higher volumes, a good pricing environment, and new brand drug introduction.

Specialty's growth came primarily through sales of oncology and ophthalmology drugs from our large businesses, ASD, Oncology Supply and Besse Medical.

This is the fourth quarter in a row with solid revenue growth in Oncology Supply, our business that focuses on serving community oncologists.

These sales growth percentages for 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 $746 million, up about 8%.

We saw a very good gross profit growth in our Specialty business, due to higher revenue growth.

Our Drug Company had solid gross profit growth from higher revenues but as discussed in the past, these contributions were negatively impacted by two items.

One, the start of the Department of Defense contract that we renewed at a margin in line with market.

And two, we had fewer generic drug price increases in the quarter, and our total dollar contribution from generic inflation was down somewhat sequentially for the March quarter and meaningfully compared to last year's quarter.

Segment operating expenses were $368 million and were up about 11%.

This increase is primarily related to payroll, delivery costs, depreciation and IT costs to support the segment's large volume growth and operational complexity.

Additionally, we continue to ramp our national distribution center in Ohio and our Switzerland business.

Both are performing well, but are not yet fully optimized.

Finally, operating expense also includes the additional incentive-compensation accruals related to the strong year-to-date performance of the two business groups in this segment.

Segment operating income was $378 million, up about 5%.

Our Specialty Business Group had good growth this quarter, offset by lower growth in our core drug business due to the items I just highlighted.

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

In the quarter, total segment revenues were $1.5 billion, up significantly due to the addition of MWI.

On a comparable basis, so excluding MWI, the revenue growth would have been as a percentage in the mid-teens with a majority of the revenue growth coming from our TheraCom distribution business and the remainder from our core consulting business, including Canada.

MWI had a very good revenue quarter.

As a result, some strong companion animal revenues.

On a comparable basis to last year, the consolidated revenues increased in the high single digits as a percentage, as a result of increased volumes, new product introductions and a solid pricing environment.

From an operating income standpoint, we had a significant increase of $44 million, to a total operating income of $77 million.

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

In terms of MWI, we are pleased with our overall operating margin, as a result of higher companion animal revenues and we are tracking right on schedule in terms of integrating the business and capturing synergies.

Finally we are also very pleased with both Consulting and World Courier, who had solid income growth in the June quarter as a result of better-than-expected revenues.

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 decreased to $2.4 billion as of June 30.

This decrease in value is due primarily to the 6% decrease in the ABC share price from March 31 to June 30.

This decrease in the ABC share price also drove a GAAP P&L credit of $15 million for the quarter.

LIFO, this quarter we recorded an expense of $159 million.

Our full-year LIFO estimate is now revised at $602 million.

This represents an increase of $254 million versus the prior year.

The increase is due primarily to an expected higher annualized [brand] inflation rates, now estimated to be in the mid-teens.

And also a slightly higher inventory balance due to overall business growth.

This wraps up our P&L review.

Let me switch and cover cash and capital deployment.

This quarter we had excellent free cash flow, nearly $1.1 billion, a record quarter for ADT.

As I highlighted earlier, a significant increase in generic revenues the last two quarters and the benefits of scale helped to drive our improved working capital metrics.

We ended the quarter with cash of $2.6 billion, which is very good, considering we paid down $250 million on our term loan.

We also repurchased about $112 million of stock under our regular share repurchase program, bringing our year-to-date total under this program to $260 million.

We also continue to make steady progress under our special share repurchase program.

As you remember, this program is designed to cover our [Warrant] hedging.

This quarter we purchased 1.2 million shares for about $133 million.

We also exercised half of the call options that we executed back in March, 2015, meaning we purchased 3 million shares for $287 million.

This quarter we included a table in this morning's earnings release that covers our Warrant hedging progress.

I'd ask that you refer to the table for the details on our coverage.

We are pleased that we are now 100% hedged against our 2016 Warrant, meaning to our investors that we'll avoid adjusted EPS dilution upon the first Warrant exercise.

As we go forward, we expect to deploy the appropriate capital to remain 100% hedged.

Offsetting the remaining potential Warrant dilution on the 2017 Warrant remains a top priority as we thoughtfully consider our capital deployment.

Let's move to our third and final topic this morning, our guidance.

I'm first going to provide updated guidance for fiscal 2015 in a few key areas.

Adjusted EPS, we expect our fiscal 2015 adjusted EPS to be in a range of $4.92 to $4.97, which reflects growth of 24% to 25% to last year's adjusted EPS.

Share repurchases.

Our guidance for regular share repurchases increases to $300 million for the full year.

And wrapping up with free cash flow, we now expect to be in the $3 billion range for the full year, driven primarily by our much-improved generic revenue mix.

Let me switch and provide a few additional details to follow up on Steve?s commentary on fiscal 2016.

One, based on trends, including activity in July to date, we continue to see a slowdown in generic drug price inflation as a result of fewer drugs having price increases, in addition to generic price increases being more modest in comparison to recent history.

Consequently, we have changed our view in this area and we are now expecting that the associated income contribution in fiscal 2016 will be lower.

Two, our working assumption is that operating income and adjusted EPS growth will be higher in the second half of fiscal 2016, given that we still have significant Department of Defense contract headwind the first two quarters of fiscal 2016.

Also these first two quarters we'll have a tougher comparable related to generic price appreciation.

Three, our free cash flow is benefiting in fiscal 2015 due to the one-time ramping of the Walgreens generic business which also gives us significant scale.

We expect to see some moderation in the cash flow area in fiscal 2016.

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

We are in the home stretch of fiscal 2015 and we are very pleased with the progress we've made to date.

We'll provide specific fiscal 2016 guidance on our fourth-quarter earnings call in late October.

Thank you for your interest in ABC.

Now here is Barbara to start our Q and A.

Thank you, Tim.

We'll now open the call to questions.

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

Please go ahead, Paul.

[Operator Instructions]

Our first question is from Glen Santangelo, Credit Suisse.

Go ahead.

Thanks and good morning.

Tim, appreciate all the guidance that you just kind of gave on the cash flow.

My first question was really around your free cash flow guidance.

Now it's $2.8 billion to $3.2 billion, and looking at last quarter's press release, it was only $2 billion to $2.3 billion.

Could you give us a sense for what changed in the last 90 days?

And maybe when you think about your new cash flow expectations, could you give us a sense for maybe how much might be a one-time working capital benefit so we can think about more normalized or help us model more normalized cash flow in fiscal 2016?

Yes, Glen.

Cash flow has been super this year.

It's gone up.

I would say that we've been pleasantly surprised by just the mix in higher generics, again last quarter and into this quarter, there's always a little bit of lag on cash flow with the way we pay invoices.

We have done really well managing inventory levels through the summer.

That certainly has helped us.

It's been a good story for ABC.

In terms of next year, we'll have a moderation.

We did have a one-time benefit this year, earlier in the year on reducing inventory, but I think at this point, still a lot of moving parts and we're saying for 2016 we'll still see a moderation.

But I don't think we really want to quantify it yet, still trying to finish up our planning process.

Ok, that's fine.

Maybe if I could ask one follow-up on your initial fiscal 2016 commentary.

It seems like you have only included $300 million of capital deployment.

And I'm guessing that's in the share repo to offset some anticipated dilution.

At this point, if you don't buy anything or buy back more of your stock, you will be net cash flow positive, and I don't think you are going to do that.

Is it just really a question of you are not sure how you are going to deploy the capital?

But I'm assuming that's going to be a reasonable part of the growth over the next 12 to 18 months?

Yes.

I'll start, Glen, and Steve can certainly jump in.

We have tremendous financial flexibility.

We're in good position here.

We started off in our guidance with a number that is close to this year.

And I think our investors know that we're very prudent and thoughtful.

If we have opportunity to deploy capital and buy back shares at a good price, we will, assuming we don't have other value-creation ideas out there like M&A.

So certainly smart M&A comes first, but given the opportunity, we'll look at share repurchases.

We don't have anything that we planned for as I said in my prepared comments, but we are very active and certainly if we can find another MWI type business or a World Courier or TheraCom, which are the three acquisitions we have made in the last couple of years that are great strategic and operational benefit to our Company.

And also a very strong culture.

If you look back -- I was just reflecting on this in my remarks, when I prepared my remarks, Oncology Supply, it's almost 20 years ago since we bought it, and that was $7 million.

It's pretty remarkable.

And then two years after that it was ION, Lash, Besse -- we started ASD, RCS, and we've also acquired Xcenda.

It's not only the contributions from those businesses, it's the contribution from the people that we brought in.

Now we see this with some of the people we brought in from World Courier and MWI as well, which is a larger organization.

It?s bringing in the right mix of culture, people that can associate with the core business, that's really a key that differentiates AmerisourceBergen.

Because we're a great home for people that want to stay with the organization and grow their business.

I think that's one of the things that we are very thoughtful of along with the attributes of the business.

It's an active time in M&A and we certainly participate extensively.

Yes, and I just wanted to remind everyone, we're still trying to balance right between -- we still have hedging, we still have about two years to go, maybe on that second Warrant, most likely in March of 2017.

So we have to balance purchasing shares to offset that potentially and also the regular share program.

So still trying to walk the line and be opportunistic in both areas.

Thanks for the comments.

Thanks, Glen.

Next question, please.

Robert Willoughby, Bank of America Merrill Lynch.

Thanks, Steve and Tim, can you give us a sense on MWI, maybe what portion of the growth that you are pointing to was more from the industry and what may have been share gains?

And, Tim, you also mentioned pricing.

Is that across the board, a strategy by you to raise pricing or is that just simply passing on to the manufacturer bumps in the latest period?

Bob, this is Tim.

It's definitely the latter.

It's a good pricing from manufacturers that we're able to pass through and that there's a benefit just like on the drug side.

Steve, I don?t know --?

We're particularly strong in the companion animal segment and we think a lot of that is demographics.

There's a couple of new products.

Some of the themes that we talked about for ABC are definitely true for MWI.

Their private label programs are strong, their generic growth is very strong.

And we have had a little bit below expected on the production side but we have a very strong offering there.

There's some changes in the market.

We still have some integration work going on on prior acquisitions that MWI completed which will drive some SG&A benefit.

So, you know, we could not be more thrilled with how things are going.

The group has just fitted in tremendously to ABC and is a great illustration of what I said about how important the culture is on acquisitions we make, particularly the large ones like MWI.

So, just to be clear on the companion side, you are then really just kind of growing with the industry or are you pulling share from anybody there?

I think it might just be 1% or 2%.

I think the market is just growing.

When we did the acquisition, we modeled global growth around 8%.

The data is not quite as good as we have on the human side, but it's good enough.

And certainly I don't think we have picked up massive market share, I think it's a very healthy, growing market.

Okay.

Thank you.

Thanks, Bob.

The next question, please.

Ricky Goldwasser, Morgan Stanley.

Go ahead.

Hi.

Good morning.

So just kind of like a couple of questions here.

First of all, on generic inflation, can you just give us a little bit more color, as you look at the type of drugs and how they be behaved.

Drugs that went up in price last year, did they go up in price again or did they deflate some?

And the increases that you saw this quarter, do they represent increases from new drugs that you have not seen pricing action on before?

So that was question one.

And then the second part of my question is around just kind of like organic top-line growth that you're seeing on the distribution segment.

I know you said it -- kind of like about half of the growth is coming from Walgreens.

But there's also kind of like PharMerica and Fred's, so how should we factor a lot of moving parts?

So how should we think about like just a top-line growth that we can think about as a go-forward run rate?

We give a range of earnings for the year because generic price increases have been particularly quarterly sensitive and even may vary between us and our competitors.

One thing we point out is we have not seen mega increases in any one product, very large increases, but definitely moderated a lot quarter-over-quarter, between second and third quarter.

And we have seen that also for the fourth quarter.

So our outlook has moderated a bit.

Tim, do you want to just add any --?

Yes, I would say, Ricky, on the revenue question, we did call out that drug had a 9% revenue growth and clearly maybe fall apart, about half of that is Walgreens.

But, again, there are -- to your point, there are moving parts.

We probably lost a percent or so on PharMerica as a headwind, and you also had Abilify, which is a very large brand drug that converted during the quarter as a little bit of a headwind.

Those moving parts, we thought so if we are 4% plus, is still pretty good considering a couple of the headwinds out there.

When we think about the EBIT growth, I think the distribution EBIT growth was about 5%, so is this kind of like a reflection off the WBA business representing half of the book and once you've kind of like anniversaried that, we should see EBIT growth mirroring the top line?

Well, you know, in Pharmaceutical Distribution, the mix of Specialty business and growth -- it really tracks very well.

Our larger customers are probably growing a lot faster than the overall market.

So you've got lots of different mix issues, but overall, as you pointed out, a solid operating income growth of about 5% in Pharmaceutical Distribution.

Yes, again a little bit lower because of some of the headwinds that we called out, the generic price appreciation being lower, the Department of Defense, the Drug Company also pulled forward a couple of contracts and renewed them early, pulled them in from 2016 into 2015 to get that book of business secured.

We still feel pretty good about the growth rate and op income in that segment going into 2016.

Thank you.

The questions is from Robert Jones of Goldman Sachs.

Thanks for the questions.

Actually I just wanted to ask on guidance for fiscal 2016 and the potential swing factors, especially relative to the last two years.

You guys have beat your initial guidance the last couple of years by an average of about 10%, obviously in large part because of Walgreens and the related benefits.

I'm just curious, as you think about fiscal 2016, are there big swing factors that you see out there that could drive that potential kind of upside that we have seen you guys put forth the last two fiscal years relative to initial guidance?

Bob, thanks for the question.

I guess if we had Sovaldi out there, maybe it's the new cholesterol drug, so from what we understand about how there would be excess in the [marketplace], it doesn't look like they will start out right away in the multi-billion dollar drugs.

If it's an at-risk biosimilar launch and a physician-administered product, certainly the first biosimilar that we expect to come to market is not a big enough product to really cause a couple of [same speeds].

No, we've got a lot of -- some of the lower-hanging fruits out of our businesses, like, say, World Courier, in particular, where after the first year we had some opportunities to really restructure the business and add some opportunities there.

We continue to work on [WBAD] opportunities and I think one of the things we do is just intuitively think of it as a static model.

We meet constantly with our counterparts at WBAD and we have the group in Berlin, they exchange a lot of ideas, and I think that's definitely an opportunity.

And we continue to be very optimistic about our global growth prospects.

We had a little bit of a rough start in Brazil, particularly on the currency side, but the specialty JV is doing well.

Our thesis that we can add value to a company that has some presence in specialty distribution in Brazil was a market that we chose to really invest behind.

It's definitely, we think, bearing fruits and we helping the JV get more access to manufacturer's products, which is, frankly, more of a product problem than you'd realize.

We take for granted here that [ASC] and (inaudible) in Oncology Supply that have access to all the manufacturer's portfolio in a chosen segment.

That's not been the case here.

So we've worked hard there and we've been successful at that.

And getting the people right is different.

We are learning a lot and those will be opportunities for us.

I think, so revenue growth beyond what we expect, early renewals on some customers at rates may be better than we expected.

But nothing beyond that that I can think of.

I'm really portraying to you anything I can think of.

Tim?

No, I would echo, Bob, what Steve said.

And, again, we've been very fortunate.

We've worked hard and we've beaten the initial numbers we put out.

But we also had this unique and extraordinary business relationship with Walgreens, lots of variables, moving parts, timing, so that added some complexity and that all worked out.

It worked out really well, better than we ever expected, and of course, generic price appreciation externally was a big factor on helping us too.

You create your own destiny here.

We are working hard and I think some of the items that Steve mentioned, we're optimistic that they will come to fruition and help us out.

That's helpful.

Tim, if I could ask one clarification question on the comment you made around generic inflation.

I'm just trying to get a sense of are you still assuming an inflationary environment in fiscal 2016?

And, if so, just any order of magnitude relative to what we've experienced this past year would be helpful.

Yes.

Good question.

Yes, we definitely are assuming an inflationary environment.

We still expect to have a contribution from generic price increases.

We're just saying it's going to moderate and just in pure dollars be less, so it will be a little bit of a headwind for us in 2016.

Thanks so much.

Thanks, Bob.

Next question, please.

Garen Sarafian, Citigroup.

Go ahead.

Good morning.

Just to clarify some of the other responses that you've made.

The commentary of low double-digit growth rate for fiscal 2016, does not include biosimilar -- meaningful contribution from biosimilars?

And also it does include a meaningful slowdown in generic inflation, correct?

That would be true.

But meaningful -- again, we haven't really started yet.

We just started doing corporate reviews of plan and we are doing the business units in the next few weeks.

And we'll get a better read on how we feel about generic price increases after we see what some of the trends in this fourth quarter are, which helps us understand what Q1 and Q2 could look like -- so --.

Yes, Steve, just so I could jump in, we did say -- and I guess we should be very clear here, we said no meaningful contribution from biosimilars and just a declining contribution from generic inflation.

Yes.

(inaudible)

Got it.

Okay.

And then just switching gears a little bit.

I think you are having your Good Neighbor Pharmacy trade show again in a couple weeks.

As you compete against your peers for independents, could you talk a little bit more about how you are improving your programs to gain more independents and maybe the key messages that you are trying to get out to the independents so that you can stay ahead?

Yes, it's a great question.

This is an area -- I think our industry as a whole has been -- the best rate that community pharmacy has, and some of the programs and services that we offer really do enable them to compete in a more challenging industry.

But also with opportunities, say, you know, with 82% of the scripts being generics, put some of the Specialty products like the new class of cholesterol drugs being in community.

So they are definitely going to be opportunities for them to access patients.

We also are working very hard on the regulatory front, but we've done a lot of work and we have Bob Mauch as leader of our Drug Company who really comes from an analytics and consultative background.

And we're doing a lot of work to try and understand exactly what our customers value.

And what they want help with is reimbursement, making sure they get everything they are entitled to, the merchandising front.

Our family works with a Good Neighbor Pharmacy here in the area in Philadelphia, we live -- and I was actually there yesterday because we did transformation there.

And I'll tell you, I was talking to a Medicare patient and she was saying -- she was saying, this is the guy who brought the people in -- these are the guys brought the people in to help make the store look like it does, and she just about gave me a hug and said thank you.

It just looks fantastic.

The pharmacist said to me, I really know how to take care of my patients, I know how to run the back end of the store, I'm not a merchandiser.

I don't do the front end of the store that well and you guys have helped make it look very professional, very bright, organized it.

For example, they never had a card section before.

So we had the whole -- American Greeting Cards is coming in, they've got a whole section there, and you can really like -- and they have it -- we never had a sign poster before if it was anniversaries or it was birthday.

So all that is there now.

And we did that all for the pharmacy.

So just a very pragmatic illustration of the sort of things that we do and our industry does, and it's very, very value creating and hopefully engenders a lot of loyalty from our customers.

And then we have the tools.

He also recently for example [the inside] was showing me what that has meant to his practice as he's able to track how scripts are managed from a 30- day to a 90-day script (inaudible).

So very, very interesting.

And last week I was in DC and one of things that (inaudible), as I've said this to you before on these calls -- [The reason they] thank us for being a good advocate for our customers and helping share their issues.

They said no other companies, large companies come in here and talk about their customers as much as you do.

I think we try very hard.

I think our customers appreciate it.

Our [attendance] next week will be up 15%, so we're looking forward to -- actually it will be a very significant increase in the level of services and offerings that we have with Dave Neu taking full time over the Good Neighbor pharmacy position, I think you're going to see a whole lot of innovation and new ideas and new services, what we call the next level of Good Neighbor Pharmacy services.

Thanks for the question.

We're excited, as you can tell.

I probably took too long to answer that question, but I'm very excited about what we're going to be doing in this area.

Great.

Thank you.

The next question, please.

Lisa Gill, JPMorgan.

Good morning, everyone.

Steven, in your prepared comments you talked about consolidation and the impact on the industry.

Can you maybe just give more color as to how you are thinking about it?

Were you talking about specifically generic manufacturers that are potentially consolidating and what that will mean for the industry?

Or were you talking about the managed care consolidation and the impact on the industry?

Yes.

Thanks, Lisa, it?s a great question.

And our Board asks this question a lot, and last month, Barbara and Tim and I were in London and we got a lot of these questions because we were right there at the time when, of course, the managed care consolidation.

So I think, first of all, consolidation in a way gives us a simplified number of parties to talk to and work on programs.

There is no doubt that we're in the midst post, the Affordable Care Act implementation of significant change in our industry.

And it's important for large companies like AmerisourceBergen to participate and again give that voice to the smaller customers.

And we think about oncologists, we think about independent long-term care providers.

We think about community pharmacists, et cetera.

And then we think about also working within trade associations in our more -- our larger customers, like our PBM customer and our large-chain customer to make sure their issues get voiced.

In short, I think the scale and efficiency that we continue to provide will always need to be ratcheted out.

That's not a surprise to us.

That's what we've done for decades.

The services that we provide need to be more thoughtful and provide new efficiencies for the customer.

That's why comments about the talent that we have, a knowledge of the market and the role of the wholesalers that we made are, I think, all very pertinent.

Just one thing that I think is worth mentioning, a lot of what goes on with rebating and contracting on pharmacy items, it's post our billing.

So it happens on the backend side, often negotiations between PBM and manufacturers directly, that don't impact our economics directly.

But accept that we are all in the same ecosystem and that ultimately this has an impact on prescription and pharmaceutical supplies chain care.

So -- just last comment, and then maybe, Tim, because it is a big question.

On the generic side, we've been through just massive mergers.

You look at all the work that Allergan's done and others and how Teva has grown over the years and Mylan and a company like [Teragon], we are confident that the value that we provide to generic manufacturers will sustain through any combinations.

And that is also true for brand manufacturers and hybrid models as well.

If I could -- I'm sorry, Tim, I was just going to actually ask you, on a follow-up around that, that when you think about inflation, how much visibility do you have into the future?

So as you're thinking about 2016 right now, are you just looking at the trends of here is what we're seeing now and this is what we know best in the market, so we're going to conservatively say in 2016 we expect that trend to continue?

Or do you have any kind of visibility based on your relationships with the manufacturers that you have an idea of what potentially price inflation could be, six, nine months from now, which would actually impact 2016?

Lisa, interesting question.

It's clearly the fact that we're looking at trends.

Trends over the last 90 to 120 days our -- Peyton Howell?s group, they track the drugs and changes.

But we do not have any visibility into the forward thinking of manufacturers and we're -- like everybody else, we're kind of notified the night before.

So again, our thinking is based on what we're seeing and projecting that out.

That's helpful.

Thank you.

Given that we're approaching the top of the hour, operator, we'll take one more question.

That will go to Eric Percher with Barclays.

Go ahead.

This is the second quarter that you have called out brand inflation and the number for LIFO is quite a bit higher than I expected.

It's been hard to [flush] out what is going on with brand inflation, given the hep C elements.

How long do you believe that we have seen -- or an expansion of brand inflation?

And are you seeing it both in the specialty book as well as the traditional products?

Steve, I'll start and certainly you can jump in.

Brand inflation is -- I called out that our LIFO is pretty significant and, again, that's driven off that brand inflation, because we just carry so much brand inflation -- brand inventory.

But it's -- I called out, Eric, that it's in the mid-teens and that's up over the last few years.

We used to be kind of 10% to 12%.

At least for the inventory that we carry for our customers and our mix, it may be different for others, but at least for our inventory, we're kind of in the mid-teens.

And I really can't comment on how long that will last or kind of go forward.

I just know what we have experienced.

Our LIFO is based off of our drug company and their inventory, our specialty businesses, not on LIFO.

So they don't factor into that.

But they have also -- as an aside, they have also seen some -- some price increases on the brand side in that business as well.

Those ASP drugs, they tend to be smaller and maybe more frequent.

That increase is there, but it's harder in ASP environment to take a double-digit price increase because your customers would be underwater.

But it's also just newer therapies coming in and comparable therapies that have been in the market for a while, looking at their price opportunity.

So nothing really that different than maybe a little bit stronger than we had expected.

So please tell me that we're still looking at the GAAP numbers, Eric, so.

I appreciate that.

One last one before the next train.

(laughter)

On generic inflation, so I understand the elements that you have walked us through.

We have seen tremendous growth in the ProGen book, 20% this quarter, 50% last.

We've seen Walgreens come in and buying a lot of -- or you're now distributing a lot of generics.

So I would expect that even on even lower inflation, you have now got a larger book to see benefits on.

Is that not the case?

No, we did our monthly review for the Drug Company and we look at -- we don't just look at the revenues.

We look at units and we are very focused on this in our key area of how we value customers is around compliance with contracts.

So -- and honestly some of the customers that are most interesting to us, Post, Walgreens, World, are the ones where we have big generic opportunity.

So we are very focused on this.

Tim, I see you have an additional comment?

Yes, I would just say, Eric, remember that we do carry a fair amount of generic inventory, but as we've talked about in the past, generic price increases are on a relatively lower percentage of that inventory.

And you just never know how that is going to impact your inventory, which items are going to increase.

It's not across the entire portfolio where, with brand, it tends to be -- at some point during the year, it tends be across the portfolio.

On ProGen, we're very bullish about the value that we provide.

And, again, it's a very innovative model and Peyton and her team are focused on driving that everyday value and creating value for the suppliers along, too.

I think it's not all about pricing.

So it's about quality of supply.

And some of the recent generic launches we've been able to get our customers supply which has been very much appreciated by them.

I think that's wraps up, Eric, the last question.

Thank you.

I'll just end by saying that we're proud of the nine months that we reported for fiscal 2015.

These are definitely stellar numbers that our associates have produced.

So let me just wrap up by saying that passion, innovation and partnership drive everything we do at AmerisourceBergen.

Our work is centered on being strategically relevant, economically competitive and easy to do business with.

We believe our relationships with our customers and suppliers are excellent and we do not take them for granted.

Rather our goal is to tirelessly look for continuous improvements in our offering to our customers to enhance patient access and adherence.

We appreciate your time this morning and hope you have found this information useful.

Thanks very much.

Thank you, Steve.

And before we go, I would like to highlight that we'll be attending the Robert W. Baird Healthcare Conference in New York on September 10 and also the Morgan Stanley Healthcare Conference in New York on September 16th.

Thank you for joining us today and with that I'll turn it back to the operator.

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