AmerisourceBergen Corporation
Q1 2020 Earnings Call Transcript

Published: 30 Jan 2020

[Operator:]

Good morning, and welcome to the First Quarter 2020 AmerisourceBergen Earnings Conference Call. At participants will be in a listen-only mode. I would now like to turn the conference over to Bennett Murphy, Senior Vice President of Investor Relations. Please go ahead.

[Bennett Murphy:]

Thank you. Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen’s fiscal 2020 first quarter results. I am Bennett Murphy, Senior Vice President of Investor Relations. And joining me today are Steve Collis, Chairman, President and CEO, and Jim Cleary, Executive Vice President and CFO.

[Steve Collis:]

Thank you, Bennett, and good morning to everyone on today’s call. Today, I am pleased to discuss AmerisourceBergen’s strong fiscal 2020 first quarter results. We delivered solid performance across both the Pharmaceutical Distribution and Global Commercialization Services & Animal Health groups, each delivering year-over-year growth in the first quarter. Revenues were up 5% to $48 billion for the quarter, and our adjusted diluted EPS was $1.76 for the first quarter, an increase of 10% compared to the previous fiscal year period. Before we provide more details on our first quarter results, I want to take a few moments to discuss the ongoing opioid litigation and the decision to exit the PharMEDium business. AmerisourceBergen and the other parties continue the complex of working towards a global resolution of the opioid litigation, while also continuing to prepare for upcoming trials. We are hopeful that the necessary parties understand and see the merits of the global framework as a practical path for global resolution. As we engage in discussions related to the global framework and continue to litigate, we are unable to comment deeply on these matters at this time. AmerisourceBergen remains committed to transparency and providing shareholders with updates as we are able.

[Jim Cleary:]

Thanks, Steve, and good morning everyone. My remarks today will focus primarily on our adjusted non-GAAP financial results. Growth rates and comparisons are made against the prior year December quarter, unless otherwise noted. For a discussion of our GAAP results, please refer to our earnings release.

[Operator:]

Thank you. We will now begin the question-and-answer session. The first question will come from Robert Jones of Goldman Sachs.

[Robert Jones:]

Great. Thanks for the question. I guess just to focus on the pharma segment guidance change and PharMEDium, I guess, Steve first, maybe could you talk a little bit about whether or not there was a sale process around PharMEDium, any discussions maybe with the FDA about the ramifications or potential ramifications from exiting this business just on thinking about the largest compounding pharmacy business out there? And then you gave a lot of detail Jim around the change in the pharma segment guidance as far as the impact in the quarter and the balance of the year from PharMEDium. I guess maybe just to take a step back, did any of your other assumptions change outside of the PharMEDium math you provided as far as thinking about 2Q through 4Q?

[Steve Collis:]

Yes, Bob, I’ll start with the PharMEDium question. Obviously a disappointing day for ABC, but I think that Jim’s script was excellent. And by the way, I apologize to everyone. I think the quality of the sound was not quite what we would hope and we’ll endeavor to do better next time. But I think Jim’s comments were excellent. You can see from the financial disclosures, we’ve displayed a lot of perseverance with this business. And it’s just that I think the 503B changes have made it very difficult to scale the business and get to the sort of consistent quality that we, AmerisourceBergen, would like to deliver to our customers. And we’ve continued to experience ongoing regulatory challenges and challenges with the remediation program we’ve put in place. We announced on this call that our New Jersey facility recently had a close. And so, we really went into this year with an attitude of wanting to protect our profits for our shareholders and other stakeholders. And we had a lot of I think perseverance with this business. And I think that we’ve reached this decision and we think that given – where the business is it would be very difficult to enter into a sales process. We have certainly been in close communication with the FDA. Throughout the consent decree negotiation and the consent decree implementation, we think that we’ve approached this as a good stakeholder. We certainly regard regulators as a stakeholder. And we will work collaboratively and transparently with them and professionally with them through the closure. Jim, you want to answer the second part of the question?

[Jim Cleary:]

Yes, sure. Bob, the second part of the question, my understanding had to do with guidance impact in other than PharMEDium, which I really went into a lot of detail on in the call, what were the other things that impacted guidance, particularly as it relates to our Pharmaceutical Distribution business. And as I’ve said during my prepared remarks, if you look at our increase in guidance, the exit of PharMEDium business represents slightly less than half of the guidance increase. And so if you look at the $0.20 increase in guidance at the top end of the range, the exit of PharMEDium represents slightly less than half the guidance increase, the benefit of excluding those losses in Q2 through Q4. And so that means that the rest of the business is performing quite well and we are seeing really good performance in the core pharma distribution business. As we’ve talked about, we’re seeing a lot of strength in specialty distribution. In particular, our specialty physician services business, we’re seeing good volume growth in the pharma distribution business. We’re seeing 5% volume growth that’s due to of course our balanced portfolio of customers. And so we really feel good about our Q1 performance and the impact that’s happening on our full year guidance. And of course it relates to our pharma distribution business you asked about, but also good volumes and good performance in our Global Commercialization Services & Animal Health business, which at 10% revenue growth in the quarter. And so that positively impacts our fiscal year guidance also, Bob.

[Robert Jones:]

Great. Appreciate all the comments.

[Operator:]

The next question will come from Eric Percher of Nephron Research.

[Eric Percher:]

Thank you. Continuing with PharMEDium, I know over the last two years it’s been pretty clear that hospitals don’t particularly want to be in this business. And at one point this was an effort to expand the hospital relationship. As you shutter it, do you see any impact on the other business that you have focused on the hospital and particularly with respect to the specialty business, how do you help ensure that those relationships don’t sour and impact specialty?

[Steve Collis:]

Yes. Hi, Eric. Obviously, of course, we thought about associates and our customers, and we – unfortunately since the closure of Memphis, we’ve never really been able to deliver the consistent customer experience that an AmerisourceBergen company would like to have. And there’s a lot of reasons for it. And in the six years since the passage of the 503B legislation, I think there was a really strong expectation to move to a very high CGMP standard immediately. And as you pointed out correctly, we were by far the largest. So I think, having that leadership position, there were very high expectations put on us. And I think we really along with some talented associates, dedicated associates, and some new leadership team, and some new outside experts, we really did a tremendous effort to meet the high bar. But there’s a lot of – we do – there’s a lot of powder products in the marketplace. It’s hard to read scale. And there’s tremendous consequences if something doesn’t go – if something goes badly, like at least as far as the FDA expectations too. So for ABC, which we have our purpose, we have our stakeholder value set. We just made the decision that this is not a business that really fits into our portfolio. Our customers have been understanding, I think somewhat disappointed, but I think it reflects the reality of where we are with regulators, where we are with the powder products in this market, where we are with economics in the overall health system. And again, we don’t want to be in a business where we can’t provide a very reliable exceptional efficient service. So I think that’s about all we can say there.

[Eric Percher:]

Thank you.

[Operator:]

The next question will come from Lisa Gill with JPMorgan.

[Lisa Gill:]

Good morning. Thank you for taking my question. Steve, how are you thinking about IPI pricing? Clearly, specialty is a sweet spot for ABC, but there’s a lot of talk about changes around reimbursement, and I’m just curious how you’re thinking about that. Do you think anything will change here in your fiscal 2020? What are your conversations with the actual providers in the marketplace that a community-based physician? Just any color you can help us to understand how you’re thinking about this would be helpful.

[Steve Collis:]

I’d say this is a number two concern in specialty. Our number one concern is physician reimbursement and making sure that those community sites can continue to serve patients in the community setting. Manufacturers are obviously another key stakeholder, but they’re large, they’re sophisticated. And I think that there’ll be some very legitimate conversations. And in fact, often, when these conversations start, actions change in the marketplace in anticipation of those changes. And I think you’d see some changes, you’ve seen very moderate inflation. In fact, on the Part B products, there’s always been moderate inflation because of the ASP reimbursement. So if there is international reference pricing as we discussed in January, so I hope that it will be a thoughtful transition that it’ll give manufacturers time to adjust. I think that a lot of the noise is not actually factual. The price differentials are not quite as high as one would have you believe. And sometimes people tend to say pickup prices and there are a lot of things that go behind our wholesale acquisition cost and ASP with commercial payers that aren’t always recognized. And one thing as well, with governments and single payer systems, the price gets negotiated up front and then there’s no changes. So that’s one of the nuances that are different in the U.S. system. So, complex topic, you can hear that even at the CFO level, I’m very engaged in this, very passionate about it. I saw the Head of our Government Affairs officers today. We’re talking about it. Barry Fortner, who heads up our Physician Services business, is in Washington. Constantly, our business ION, as you can imagine, is very involved with practice management. So we are going to be a part of the discussion and we look forward to participating in any changes and hope that they are sensible and logical in the context of Part B reimbursement.

[Lisa Gill:]

Is it still anticipated that there’ll be under some kind of competitive acquisition program? And so if that’s the case, do you see maybe potential incremental opportunity for ABC? So I understand what you’re saying around, the pricing dynamic is already starting to change. And so, maybe we don’t see a huge impact to pricing, but is there a potential for you to either gain or potentially lose some amount of market share around a competitive acquisition program?

[Steve Collis:]

I feel like we’re going back to the 90s with the Medicare modernization. At the time, I think there was great anticipation that ABC with our suite of businesses, we would participate, and actually it was in 2000s, of course, the Bush administration. And there was no economically feasible way for us to participate. And I tell you, we brought in people especially to evaluate being a cap provider, mainly to ensure that our customers would be able to carry on participating. And it was just – it was impossible to make the numbers work. We don’t believe it’s very efficient. We’ve seen so called white bagging and brown bagging programs, try to be implemented by different payers, more on the commercial side, and they just haven’t worked. And the original cap program didn’t work. So there’s potential wastage with these programs. We believe that the current system works very well with oncologists having the financial responsibility for the preparation the infusions. And we will carry on assisting with that. If it were to be a new top of the reimbursement and there was differentiated reimbursement or some sort of encouragement to move more towards the cap program, we would look to work with what are some very large much more aggregated community oncologists. We would look to work with them to provide solutions to payers and regulators.

[Lisa Gill:]

Okay, great. Thank you for the color. I appreciate it.

[Operator:]

The next question will come from Glen Santangelo of Guggenheim.

[Glen Santangelo:]

Yes, thanks for the questions. Jim, I just want to follow-up on the guidance question. I appreciate all the detail. You seem to suggest that over the next three quarters there’ll be about a $35 million tailwind from eliminating the losses from PharMEDium, which I understand the EPS impact. But if we could just look at it from an operating income perspective, that $35 million seems to be about a 2% tailwind, which seems like it would fully explain the change in your guidance from low to mid single, up to mid single? I’m just trying to understand, is there – has anything changed with respect to your assumptions around the core distribution business because I just want to try to reconcile that versus the much stronger than expected first quarter, which seemed to incorporate a bigger than expected loss from PharMEDium. So if you could just sort of reconcile those, that’d be great.

[Jim Cleary:]

Yes. And so I will cover that. And you’re right, we indicated that PharMEDium is a $35 million tailwind year-over-year versus last year. And so that’s kind of the benefit that we’ll see year-over-year compared to last year. And as we look at guidance, as I said before, taking PharMEDium out of the last three quarters, it’s about half the increase to guidance. And we are seeing strength throughout the businesses. Of course, guidance is a range, so going from a low- to mid-single digits, PharMEDium is a big part of that. But we’re also seeing strength throughout the businesses that’s impacting our guidance increase also. And it’s pretty broad based. We’ve talked about specialty physician services, but we’re seeing strength throughout the business. One thing that I’ll mention, as you talked about the first quarter, during the first quarter one thing we’ve benefited from is low growth and operating expenses. Our operating expenses grew 2% during the first quarter and that included some year-over-year benefits, which we don’t expect to continue through the rest of the year. And so that was a favorable experience on that debt expense, favorable experience on our internal health care cost due to the benefit design change in calendar year 2019, that we were still benefiting from year-over-year. And then also the operational synergies related to consolidating the HD Smith distribution centers, and so that’s kind of one thing which benefited the first quarter which doesn’t continue for the rest of the year. And then we said, the second quarter, we’re expecting the growth in the second quarter, the EPS growth to be at the lower end of 6% to 10% EPS growth range, because last year we had particularly favorable operating expense experience in the second quarter, which we aren’t expecting to repeat in the second quarter of this year. And so I think that gives you some additional color there Glen.

[Glen Santangelo:]

Yes, that’s all really helpful. And Steve, I just wanted to follow-up with you with 1 quick question on the balance sheet. As of this quarter, you have about $900 million in net debt. Based on your free cash flow assumptions, you’re going to be cash – have positive cash on the balance sheet here in the next two to three quarters. And so I’m just kind of wondering with PharMEDium now in the rearview mirror, has any – have your thoughts changed at all with respect to the balance sheet or capital deployment priorities? And how should we think about that going forward?

[Steve Collis:]

No. We’ve had a very consistent capital deployment strategy. I think last year, we returned in fiscal year 2019, we returned $1 billion to shareholders of which was approximately 30% dividend, 70% share buybacks. And that’s approximate numbers. And we like our financial flexibility. So our first option is to invest in the business. And we’re bullish about projects like Fusion for example. And we talked about the strong growth of the World Courier, which in part is because of the Nova and the Cocoon investments. So those are good investment. And in couple of years ago, we were making tremendous investments with ABC order and the distribution network. So those are very good examples of core business in investments. We remain interested in that. We are, of course, our replenishment center in Ohio is a good example of another core investment that we are doing. So that’s the first priority. We then – we’d look at the right sort of acquisitions. Unfortunately, it’s been really a sellers market. And the quality of – I think if we found really the right asset and the management team was convinced that we had a company with a leadership position with right sort of a fit for our customers and the patients and physicians that we support. I think we could be talking to paying a lot – significantly more than our multiple because we understand that, that’s probably – it’s what’s required in this market. But we really haven’t seen the sort of asset that motivates us. It’s about two years ago since we acquired HD Smith. It was close to $1 billion that worked out really, really well. There’s not really opportunities on the regional side, so we just haven’t seen a great opportunities. I think where we interested is in the commercialization services, our expansion of the MWR business. That could be something we’re very interested in. We’ve made a couple more investments in our Brazil and Canadian businesses, where we have solid presences, management teams that we can invest behind. So those are things, and then of course we’ll continue to be very thoughtful where we increased our dividend we announced this morning. So you’ll continue see us be very thoughtful about returns to shareholders. So I hope that makes sense.

[Glen Santangelo:]

Thank you very much.

[Operator:]

The next question will come from Charles Rhyee of Cowen.

[Charles Rhyee:]

Yes. Hey, thanks for taking a question. Steve, I think early on you talked about biosimilars and sort of the growth there. If you look at the data – if we look at the data last year, we did see a big starting to really see a big uptick in sort of adoption, particularly when you look at something like Neulasta or Neupogen. Are you – how much are you monitoring here sort of the shift to, particularly with the biosimilar insulin, is that an opportunity for you guys, because that looks like will be interchangeable. And then if you have any thoughts on – when you expect other biologics to become interchangeable and would that create a market for biosimilars that mimic more of the traditional generics market and perhaps bring more purchasing power back towards the supply chain side?

[Steve Collis:]

Charles, thanks. Just in general though, the biosimilar numbers are encouraging. I think we talked about at the end of fiscal 2019, just how the growth exceed our expectations. But I would say that trend continues. The numbers are still small, but ABC has we think an important place to play in adoption of biosimilars with the market presence we have in particularly in oncology and other specialty markets. Diabetes is a very important market for our good neighbor pharmacy customers because those sort of complex chronic conditions are exactly what we think community pharmacies very well set up to play a role in. So definitely, we’d be interested. I think one of the ways that I’m really proud of ABC has developed is on our sourcing side. We have – I’d say over the last decade or so since I moved up here, we really invest a lot of resources there. We have very proficient people on the manufacturing side that really are working, I think very competently and positioning as well for the long-term to be the key player in biosimilar adoption, particularly on the injectable and infusible side. So we like what we seeing and it’s something that we monitor very, very closely and also staying close to as you would expect. We regard it as one of the key opportunities that ABC has for the next couple of years. So Thanks. Thanks for the question.

[Operator:]

The next question will come from at Ricky Goldwasser with Morgan Stanley.

[Ricky Goldwasser:]

Yes. Hi. Good morning. So one guidance question and one just follow-up on PharMEDium. So on the PharMEDium side, if we think about PharMEDium from a pro forma basis, and we just kind of like exclude the losses that you incurred from them last year. What would be the pro forma EBIT growth for the Pharmaceutical Distribution segment? So that’s on them? And then secondly, if we think about kind of like your guidance for the remainder of the year, it seems that the top line guidance seems to be skewed toward an acceleration 2Q to 4Q, if you think about the midpoint from what you reported in the first quarter. So where are you seeing that incremental growth coming from? Is it additional volume coming from existing customers? I noted last quarter we talked about the potential of gaining more business from Cigna? Or anything else that you’re seeing in the marketplace, maybe on the specialty side, that you can provide color on that drives the acceleration for the rest of the year.

[Steve Collis:]

Yes. And so we’re seeing broad-based growth across the business, seeing particularly strong growth in specialty distribution, but really broad-based growth in many parts of the business. We have called out the Cigna volume being added to express scripts, which is we indicated that, that is approximately 1/4 of our revenue growth. And while it’s inherently lower margin business, it is positive for growing revenue and operating income dollars. But we’re seeing growth in several businesses. And as you noted, we’re seeing particularly good growth in our Global Commercialization Services and Animal Health business. And then you asked about growth, if we exclude PharMEDium. And I think we’ve provided, Ricky really good detail on that in our prepared remarks that, that does the impact on PharMEDium. If we’re looking year-over-year is $55 million adjusted operating loss last year and this year, in our adjusted results will be $20 million adjusted operating loss. And so if we look year-over-year, it is a $35 million tailwind to the business. But we are seeing excluding that good growth throughout our various businesses, in particular, our specialty distribution business, but throughout the business.

[Operator:]

The next question will come from Steven Valiquette of Barclays.

[Steven Valiquette:]

Thanks. Good morning guys. So just a question on the financial hurdle on the sale versus the shutdown decision for PharMEDium. And I guess, in my mind, I feel like any asset that was arguably worth $2.6 billion in the marketplace only four years ago will still have some value today, maybe their in the hands of a private equity or another strategic buyer. So I’m guessing that the private transaction value of PharMEDium today is probably net $0. What I want to just sort of dig into quickly here is just, generally speaking, should we conclude that the cash tax benefits of $500 million to $600 million that ABC is receiving from shutting it down, does that outweigh the benefits of any after-tax proceeds you might have received in a sale transaction? Or would you have gotten or received those cash tax benefits, even in a low price sales transaction? I’m just trying to better understand what was the financial hurdle on the sale versus shutdown decision that was probably something well above $0. So I just want to understand that a little bit better.

[Jim Cleary:]

We felt that the business was not saleable due to the ongoing regulatory challenges, continued operational issues, continued challenges to achieving the remediation timetable, which was extending and the continued financial burden of running the business. And so due to that, we made the decision to shut the business down. It’s the most appropriate path forward for AmerisourceBergen and our shareholders. As you’ve noted, we do have a cash tax benefit of $500 million to $600 million that we’ll recognize between fiscal year 2020 and fiscal year 2022. That will benefit our GAAP P&L. It will not benefit our adjusted P&L, but there will be a benefit to cash flow over that time period.

[Operator:]

The next question will come from George Hill of Deutsche Bank.

[George Hill:]

Good morning guys and I appreciate you taking the question. I’ve got a quick follow-up kind of on the balance sheet outlook. And Steve or Jim, I guess, can you talk about whether or not you guys feel the need to kind of war chest cash in anticipation of an opioid settlement? Or do you guys feel like you have continued flexibility to put money to work in the opioid settlement that we – I guess, people expect to occur at some point is kind of in – on bucket, so to speak?

[Steve Collis:]

No. As I’ve said, our priorities for capital deployment are – I detailed them. We don’t feel the need to war chest at all because if you look at the framework that was announced, it was an 18-year settlement. So I think that’s in anticipation of the sort of long-term characteristics of the industry for not only us but our peers and our competitors as well. So that’s – again, that the proposed framework, but that’s the sort of framework that we’d be interested in. So it’s a sort of – have really played it out over the long term, which also has the benefit of providing consistent support for patient services that we think will be needed to transition population health management for this crisis. So in a way, if you want to call it that. So no. It’s not – we don’t feel the need at all. It is a lot of cash in absolute terms. In relative terms, it’s relative to a couple of hundred million dollars a day in sales. It’s not that much, and some of it is out the country. And it is a tremendous seasonality in our business as well. So we like being in a strong cash position. But again, we are mindful of fair returns to our shareholders and the internal and external opportunities that we make in the marketplace. So with that, I think we are going to close this first quarter call, and we appreciate your interest in AmerisourceBergen. I must say that this is probably the most difficult decision that we have made since I became CEO almost nine years ago, and the management team has really tried to persevere with this business, but it’s – and it’s been a very difficult decision. And we are, of course, especially conscious of the impact on our customers and our associates who we are committed to treating with the utmost respect and transparency and dignity. So – but I think it’s incumbent on us to talk about the key strengths and the key differentiators of AmerisourceBergen, which remain unchanged commercially, we have extremely strong customer relationships, partnerships and leadership in key markets and services. Culturally, we are a purpose-driven organization that feels you’re not in our responsibility to create healthier futures. And AmerisourceBergen, I can assure you, is focused on creating long-term growth and value for all its stakeholders. And again, we thank you for your time and attention this morning. Have a good day. Bye.

[Operator:]

Thank you. The conference has now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines. Have a great day.