AmerisourceBergen Corporation
Q3 2019 Earnings Call Transcript

Published: 1 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the AmerisourceBergen Third Quarter Earnings Conference Call. At this time all participants are in a listen only mode, later we will conduct a question and answer session. . I would like to now turn the conference over to our host, Mr. Bennett Murphy. 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 2019 third quarter financial results. I'm Bennett Murphy, Vice President, 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'm pleased to discuss AmerisourceBergen's continued strong performance in the third quarter of fiscal 2019. The critical role we play in the US healthcare systems and how we continue advancing our people, culture and strategy to position AmerisourceBergen for long-term growth. First, our fiscal 2019 third quarter financial performance. Revenues increased a solid 5% to $45.2 billion for the quarter, and our adjusted diluted EPS was $1.76, an increase of 14% compared to the previous fiscal year period. We are extremely pleased with the continued overall strong performance by both the Pharmaceutical Distribution and Global Commercialization Services & Animal Health groups. This quarter's results reflect solid execution, continued strong specialty product sales, growth of some of our largest customers and the overall strength across our businesses. The Pharmaceutical Distribution Services segment grew operating income quite well as our distribution business continues to work diligently to serve our manufacturer and provide our customers more efficiently and effectively. First, our innovative services and solutions continue to provide our partners with access to a state-of-the-art distribution network and best-in-class customer experience offerings, enabling them to provide a more integrated seamless and personalized experience for their patients, while enhancing their ability to maximize business performance. Next, we are leveraging our expertise, capabilities and actionable insights to identify and execute new opportunities that create shared value for all stakeholders. Finally, our specialty distribution and practice management services are supporting market access to complex pharmaceuticals and enabling community-based providers to run their practices more efficiently, while ensuring patients have access to vital pharmaceuticals, when and where they need them.

[Jim Cleary:]

Thanks, Steve. stated. Growth rates and comparisons are made against the prior-year June quarter. For a detailed discussion of our GAAP results, please refer to our earnings release. As we closed in on the end of our fiscal year, we are extremely proud of the performance of our associates to deliver strong operating results. The execution and efficiency across our businesses is clearly benefiting our results as we continue to work diligently to be the partner of choice, both upstream and down. Turning now to discuss our third quarter results. I will provide commentary in two main areas this morning. First, I will detail our adjusted quarterly consolidated results and our segment performance. Second, I will cover the upward revision to our fiscal 2019 adjusted EPS guidance. Moving now to our third quarter results. We had strong performance for revenue growth, expense management, operating income growth, operating margin, EPS and cash flow. We finished the quarter with adjusted diluted EPS of $1.76, an increase of 14% primarily due to higher operating income, a lower share count and lower net interest expense. Our consolidated revenue was $45.2 billion, up 5%, primarily driven by solid revenue growth in both the Pharmaceutical Distribution Services segment and our Global Commercialization Services & Animal Health group. Gross profit increased 5% or $58 million to $1.2 billion. Operating expenses increased 3.7% to $723 million. We had solid overall expense management this quarter as we continue to focus on effectively managing operating expenses throughout the business and have been able to move faster than originally anticipated to capture synergies related to our fiscal 2018 acquisition of HD Smith.

[Operator:]

Our first question comes from the line of Glen Santangelo from the company of Guggenheim. Your line is open. Please go ahead sir.

[Glen Santangelo:]

Thanks and good morning. Thanks for taking the question. Steve -- I just wanted to talk about the margin experience this quarter, clearly had strong margins in both segments, and Jim I appreciate the detail, but I was wondering if you can unpack those margins a little bit, maybe give us a better sense for what really drove the strength in each of the segments, so to help us better assess maybe the sustainability of some of those trends as we look to the balance of the year and into fiscal '20? And then I have a follow-up. Thanks.

[Steve Collis:]

Glen, I'd like to answer the question, but Jim Cleary is literally jumping off his seat to answer. So I'm going to give our CFO the opportunity.

[Jim Cleary:]

All right, thanks. Thanks, Steve. Yeah, Glen, we feel very good about the quarter, and one of the things we feel good about is, as you brought up in your question, the margin performance in the quarter and starts kind of general, then I'll get into the details of it. First of all, one thing driving our margins, it's our strong value proposition, and we feel like we offer very high quality services and logistics, financing, safety, security and we offer them very efficiently, so we feel we're very fairly compensated for those services and have a strong value proposition. If we kind of look at the overall business, revenue is up 5%, gross profit up 5%, operating expenses up 3.7%, and operating income 6.8%, so we actually had a 2 basis point improvement in operating margin. And looking at Pharma Distribution, and I'll get a little bit more into the details here. Revenue up 4.7%, operating income up 4.9%, so 1 basis point improvement in operating margin in Pharma Distribution and that was really driven by very strong performance in specialty, in particular, our specialty physicians, services business and of course all the wraparound practice management services that we offer, benefit our margins, and was driven by really strong performance with health systems and we had good generic penetration with customers and our health systems business unit, and so that was a benefit also. And then I'll also call out expense management benefited us also, and we got to, kind of, a run rate of HD Smith synergies sooner than anticipated. So all those things really contributed strong across -- across the Board performance and Pharma Distribution caused us that 1 basis point improvement in operating margin in Pharma Distribution and there's also actually a 1 basis point improvement in gross margin also in Pharma Distribution. And in Global Commercialization Services & Animal Health, we had very good performance on revenue and operating income, and very strong improvement in operating margin, and really operating margin is a relevant metric to look at in that business, because really kind of business mix between the different business units can really impact gross margin and our other segment. So very strong revenue, operating margin in Global Commercialization Services & Animal Health. We talked about the very good performance in animal health in the quarter. We also had very solid performance in World Courier, which has been operating at a very high level for quite some time and good performance in our Consulting business and we called out the Canadian business during our prepared remarks. So I'd say those businesses are very well positioned in their respective markets and taking advantage of opportunities which really kind of drove the operating margin improvement in the Other segment. With regard to Q4, you had asked about Q4 and kind of the good operating performance, very solid operating performance is built into our guidance increase that you'll see, and so we are expecting very solid operating performance in Q4. We probably won't have some of the G&A benefits, particularly, kind of, we don't expect to see our internal health benefit costs, we don't expect that to repeat in Q4. We probably won't have the same benefit in interest expense in Q4, but of course that doesn't impact the margins of our business. And you asked also about the 2020. We are in the midst of our planning process for 2020 and that process is going quite well and we will provide 2020 guidance when we announce our year-end results.

[Glen Santangelo:]

Thank you so much for the detail. Steve, maybe I'll just ask you one quick follow-up on the specialty business. It clearly seems to be a big driver for you and others, and given all the regulatory proposals that are out there that seem to be targeting the higher prices of these specialty drugs. One question that sort of keeps coming up to us is, can any of these proposals impact the supply chain? Are there any, in particular, that you're paying attention to? How do you sort of reconcile that as it relates to your business? Thanks and I'll stop there.

[Steve Collis:]

Yeah. Thank you. I'm really very proud of our continued strong performance in our specialty businesses. We really have a unique portfolio of market leading companies there. Of course, we don't own any practices, but really create a lot of practice management services. Our oncology business is, of course, our business data. Our Besse Medical business also had a really strong results with much more therapies and being administered in Part D offsetting outside of oncology, including urology, ophthalmology and even orthopedics responding to do some work there. So it's just so much innovation occurring in these settings, in fact, many of the new therapies, the immuno-oncology drugs already additive to existing product utilization trends. So and we have just a great portfolio of customers. Our customers are often to have aggregate of this. So we retaining our strong relationships with them and we have even announced some key resignings, but there are also some of the consolidators as it's a difficult environment in oncology for smaller practices, Q2, to be self-sustaining. So it is trendy for the larger practices and we tend to have a strong enduring long-term relationships with a lot of those customers. But you know, our team has been in place for a long time. We've had some really good at generation top changes there that have brought in some leader that have been around a long time, but have fresh visions for the Company. Our relationships with pharma in these areas is very strong. I just couldn't be prouder and more confident in the way we positioned in these position specialty distribution businesses. So there have been just a terrific performance in fiscal year '19, but even in the proceeding years as well.

[Glen Santangelo:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Eric Percher of Nephron Research. Your line is open.

[Eric Percher:]

Thank you. And given that you raised the opioid topic, maybe a question there. I want to ask you to comment on the ongoing litigation. But as we scratch the surface of the ARCOS data. It appears that diversion activity looks very different maybe along the blue highway in other areas of the country. And I'd love to get your perspective on whether that is the case, and anything you can share relative to how you view your position? And then relative to the report, that's coming, maybe part two of the question, how do you balance the need to improve your own operations without handing ammunition to the plaintiffs?

[Steve Collis:]

Well, first of all that data was through 2012. I've just finished my 8th year as CEO and that was my first year as CEO. And also in 2013, the market shifted a lot with us taking over the Walgreens distribution and we took over all the distribution that we point to that as a key -- the key change in the market for us, as we took over both brand generics and even controlled substances. So you know, last night -- I'll tell you a personal story quickly. We had an event for our foundation and one of the foundation charity needs support, it is a company called Eluna that helps with the victims of the crisis as children and provide summer camps for them and we met a few of the cases. This crisis is one that affects our society. It's one that, you know as an employer we take very seriously. It's one that as a supply chain leader we take very seriously. I think you understand our role and I read your report Eric with a lot of interest. So we work collaboratively to stop suspicious orders. I feel proud of the work we've done. We revamped our program in 2007. We've reported all our suspicious orders and we reported control substances on a daily basis, as well as the reporting, which is not quite on a daily basis, but is in regular intervals. We've tried to work with, collaborate with the DEA, and all government-sponsored agencies. We feel like we've discharged our responsibility very excitedly and very ardently in the absence of clear information. So the data was interesting. I don't think it's appropriate for me to get into one state, there's not a, you know, we've really looked at this on a distribution center basis, and again, we feel that ABC has acted really extremely responsibly with really one hand tied behind our back. So I think that's what I say. Jim, would you like to add anything?

[Jim Cleary:]

I think that covers it really well, Steve. Thanks.

[Eric Percher:]

Is the goal of the upcoming report to help you identify other areas or to make clear both actions of the past?

[Steve Collis:]

Yeah, you know so we are pleased -- it's been the first positive benefit and we like transparency. We have no problems with transparency. Our Board has had tremendous oversight. We will be coming out in the next few weeks the report from the Board on our own supply chain. The risk that we have as a leading distributor in the pharmaceutical supply chain, really talking about our strong compliance program, our corporate integrity programs. We have, of course, really upped our game on this, even more, I'd say that continued quality improvement really applies here. One great example is, you know so much more about the customers that we bring on to service, and I don't want to sound arrogant in any way, but I would say that it's a privilege to be in AmerisourceBergen customer. You'll be treated with respect, you will be treated with fairness and we will do our best to service and give you the fairest pricing we can. So what we expect from you is very good ethics and very good monitoring of the prescriptions that you're in a much better position to manage than we are. So that's just one example I could say. We have been very, very scrupulous about what customers we bring on to service particularly in areas of risk, you know pharmacy that service et cetera. So I think we really covered this topics. Thanks Eric.

[Eric Percher:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Robert Jones of Goldman Sachs. Your line is open.

[Robert Jones:]

Great. Thanks for the questions. I guess, just to go back to some of the growth drivers that you highlighted in the quarter, both you and your competitor who reported last night referenced growth from the largest customers as helping out in the current quarter. It doesn't really seem like we've seen an inflection in the same-store prescription growth at the large retail customers. So just trying to get a better sense of where that growth is really coming from. Is it really more the health systems and from specialty, and if it is those channels, Steve, I'm just curious what is driving the growth there and is it in fact sustainable?

[Steve Collis:]

We saw solid growth in our US businesses and one differentiator from AmerisourceBergen is we are very indexed to the US pharmaceutical business. Our customers are doing interesting things. They are doing acquisition, they're in the forefront of a lot of the change in retail. Obviously, independents are having a tougher comp with reimbursement headwinds, but again, there is nothing new to that. This is a challenge that has been evident for a long time and I think with the guidance of Elevate, some of our pharmacies have made a decision not to participate in narrow networks and have looked at what they can afford with a strong analytics programs that we have had looked and what can they afford to participate. And I think they are in a better position to understand that data and with the strong sourcing programs we have had and the strong reimbursement access with Elevate, we think that we said our independent pharmacies to know very well what's going on. The largest customers, of course, like our largest customer, WBA, they understand the market well, they have their own resources, you know sort of areas and we are happy with the growth from their customer segment. One thing I would just point to is the portfolio of customers that we have at ABC. Clearly, and now this is a trend for several years, we have over performed relative to our sales growth in specialty. And at specialty in the Part D setting, but it's also specialty drugs in the core drug distribution business, where there is so much innovation going on, and we saw much of the manufacturers R&D is going. And when I listen to these debates last night, I wonder when one is going to make the point that this is one of the great American manufacturing industries and we are so proud to be a part of this and we see these wonderful new drugs coming out and there is just so many, I mean, 50 biotech companies went public last year. So we just think we're very well positioned and we are a seeing benefit of this innovation. Jim, anything on any specific segments? Health systems is strong as you pointed out?

[Jim Cleary:]

Yeah, I think -- Steve, as you were saying, what really benefits us is that the broad portfolio of customers, the key anchor customers, independent pharmacies, health systems, physician offices, mail order, veterinary practices in that broad portfolio. And I think, in particular, this quarter, while we benefited really in many, many areas, a couple of things to really call out as we have is specialty and physician practices and health systems. Although that can -- while those businesses should be strong over a longer period of time, different parts of our businesses will benefit us from time to time. So having that broad portfolio is a real strength.

[Steve Collis:]

Yeah, and I'd say of course with the 15% earnings growth year-over-year quarter is outstanding as well. So we were really proud of our performance in some of our smaller higher growth, higher margin businesses as well.

[Robert Jones:]

And then if I could just sneak in one follow-up for Jim. You referenced this better than expected healthcare benefit a few times in the SG&A line. Just curious, what exactly was that and if you could you give us any sense on the size of it? That would be helpful.

[Jim Cleary:]

Yeah, and we actually talked about that and had a similar benefit last quarter, the fiscal second quarter. And so our internal health benefit expenses were better than anticipated and it's really kind of due to a couple of things, one is lower claims experience, and the second is a change and benefit design that we're getting at the beginning of the year. And so that's benefited us the last couple of quarters and it was a couple of pennies in the most recent quarter.

[Robert Jones:]

Great, thank you.

[Operator:]

Thank you. And our next question comes from the line of Charles Rhyee with Cowen. Your line is open.

[Charles Rhyee:]

Yeah. Hey, thanks for taking the question guys. I wanted to go back a little bit about Part D, a little bit more. I know you touched on it briefly earlier. Obviously, the Senate Finance Committee Bill, I think, Steve, last quarter you talked about your thought that obviously your oncology clients kind of look at the Medicare plan is being sort of a difficult space here. Looking at the Senate Finance Bill proposed, do you think that help solve it with sort of -- moving to sort of this inflation cap and making a sort of a fixed fee for physicians. Obviously a move away from the IPI which seem sort of unworkable. I just wanted to get your thoughts on what you're seeing with, sort of, the proposed bills as they stand now, and do you think that's a more workable solution for you and your clients?

[Steve Collis:]

Yeah, you know, a lot of the work we do indeed see other than around supply chain integrity and trade quality and safety acts, those sort of things. It is really advocacy for our customers and the leader of our oncology business us this weekend. We are going to be very active in areas that affect our customers, of course, our biosimilars interest and a sustainable overall brand pricing environment is of course good for us. We also are big on patient access. Our Lash business is probably one of the best-known patient access businesses as we work to get patients access with many of these life-changing products as we can. So we think we're very informed on this issue. I'd say we bought the Lash Group in 1998, ever since then, we had a really humbling experience of the MMA where our fees were included in ASP. And I think not only ABC, but our industry and our trade associations are really on this. We get that we have to be involved in the political process. You know the political process is pretty dynamic at the moment. I think that might be an understatement. We saw last month and rebate rules changed very drastically and very suddenly. So I think, Charles, our best course is actually to stay the course to be very involved with our customers, work with organizations like we work with for example, immuno-oncology association in oncology and we really try advocate a fair reimbursement and strong access for the patients that we feel we ultimately represent so that they can get setting in a -- that they can get setting that are most accessible and most comfortable for them and even we believe most affordable. So that's really where we are working very strongly. Jim, it's an important question there. Anything you want to add?

[Jim Cleary:]

No, I think that covers it. Great, Steve.

[Steve Collis:]

I think Jim said a lot in the first question...

[Charles Rhyee:]

Yeah certainly. And if I missed it earlier, can you just let me know, did you say when the auditing process is expect to be completed for PharMEDium?

[Steve Collis:]

Jim's going to take that.

[Jim Cleary:]

Yeah -- and so the audits of our two open facilities are in progress and that's progressing well. And so it's kind of -- we have previously stated we are continuing operations at two of our facilities and we're also continuing our comprehensive, strategic and financial review of PharMEDium. It's too early to speculate on future decisions, but of course we will take into account the needs of PharMEDium customers and what's best for AmerisourceBergen shareholders and we'll provide updates during our next call. And I will also say that PharMEDium was not headwind during the third quarter as we stated. In fact, it was a very slight tailwind in the third quarter, a smaller operating loss. And again, we don't expect it to be a headwind in the fourth quarter.

[Charles Rhyee:]

But there is no set end date yet for the audit itself, it's just sort of like an ongoing process at the moment?

[Jim Cleary:]

Charles, we expect that -- we expect that we will have the process completed this month.

[Charles Rhyee:]

Okay.

[Steve Collis:]

Yeah, yeah. And I do feel good that I want it on the first of the month, because these things just inevitably take longer than you expect, but we expect it to wrap it up this month.

[Charles Rhyee:]

Great. Thanks a lot guys.

[Operator:]

Thank you. And our next question comes from the line of Steven Valiquette of Barclays. Your line is open.

[Steven Valiquette:]

Thanks. Good morning everybody. So if we look at the new first-time generic launches so far in calendar 2019, it's actually been a pretty decent wave of exclusive launches, particularly in products that may see more limited number of suppliers for quite some time. So I'm just curious if you're able to discuss how much of that contribution from new generics is tracking relative to your expectations so far in calendar '19? Thanks.

[Steve Collis:]

You know -- I can't say that we've seen a specific trade and I think we've talked over the last few years that this was when I started CEO, this was the number one metric we looked at. It was actually our first thing we looked at in the plan was what the pipeline is. And you know, as we've talked and explained many times, I think our competitor have had similar discussions that the market has changed. The generic market, I think it's dynamic. We saw big announcement at the beginning of the week, and you know there is a trend for authorized generics which we think will be affected by transparency and if there's anything on the rebate rules. But nothing really particular that we can talk about on new product launches, but the generic market is stable and really where we expected it to be and remains an important contributor to us for our profitability and our customers' profitability.

[Operator:]

Thank you. And our next question comes from the line of Lisa Gill with JP Morgan. Your line is open.

[Lisa Gill:]

Thanks very much. Good morning. Steve, just given the strong cash flow, not just in this quarter, but for the year. If I think back to a couple of years ago, you talked about potential strategic acquisitions in the areas of manufacturing services. Just can you give us any update as to how you look at that component of the market would be my question. And then just on the follow-up side, as you think about pricing for both branded and generic, just curious how the quarter trended versus your expectations and you brought up the potential merger, what do you think that could do around your buying group?

[Steve Collis:]

Okay. So I'll take the first one and then Jim do the second one. So thanks for the question, Lisa. We are very active. It's important, I think it's something we spend a lot of Board time with, it's something we spend a lot of management time with, and we're active. If you look at my management team, so many of our team comes from acquisitions, including Bob, who really has head both the pharma distribution and other sector reporting team now. Bob was really the founder of Xcenda. So we need really -- the benefit of acquisitions is not only the portfolio effect and the acceleration of different services that we have and leasing of those services or the gaining of new technologies, say that, if we'd acquired a company that was really good in the areas that we're investing in the Fushion, we could have accelerated that process for example. So I think, we just -- we are really well experienced in these areas and we want to be behind companies that add new services and new offerings that we don't have. So with businesses like World Courier and Lash and we have very high standards. And you know the markets really and I think we'd be trying to grow those businesses organically. So that's a good example of, do we need to do acquisitions or are we going with internal investment? We have been a lot of -- you've seen us invest $300 million to $400 million approximately every year, a lot of that is in technology to making us easy to do business with, let's say, helping our customers understand the environments better. We had the trade show last week and our digital offerings for our independent pharmacies, for example, were very well received. So these are areas where we see more fruitful in our results for our shareholders than investing in small companies that sometimes are trading up to 15 to low 20s EBITDA. So we are financially driven as well. Our Board really holds us to stand and the management holds us also to stand. We're seeing these acquisitions be accretive within a reasonable timeframe. So we brought in Leslie Donato and we think Leslie is going to do a great job and she knows the market, she's been a customer in her previous roles. She understands our commercialization businesses. Certainly Jim, our CFO, has done a lot of M&A, but also some very interesting JVs and partnerships, who had made more things to partner with the right company. So I think we are focused on this area, but it has to be at the right price and it has to be a company that is going to give us really an accelerant in our portfolio for new market share. We did HD Smith model a long ago and I think that's a good example of executing on our core business also as we almost complete all the synergy capture by the end of this fiscal year. Jim, please answer the second question.

[Jim Cleary:]

Yes, sure. And the second question is I believe were on brand inflation and generic deflation, I'll get into those. But, you are right. Our cash flow is very strong, and of course, we've done over $500 million of share repurchases this fiscal year and also we have been investing a lot in our manufacturer services business like Fusion and Lash, NOVA and World Courier. But with regard to the inflation and deflation question that you would ask, in branded inflation, yes, directionally as expected year-to-date we had set mid-single digits in our fiscal year '19 guidance, directionally as expected. And as you know, 95% of our branded buy side margin is fee for service. So it's really kind of the other 5% that relies on price increases from manufacturers for our economics. And also in generic deflation, generally in the range of original expectations that we had put out at the beginning of the year and kind of generally in range of those original expectations.

[Bennett Murphy:]

And operator, we have time for one more question.

[Operator:]

Perfect. And our last question comes from the line of Ricky Goldwasser of Morgan Stanley. Your line is open.

[Ricky Goldwasser:]

Great, thank you. Good morning. So my question is about a strategic partnership with OneOncology. How is it structured? Do you share the profits and as part of this, do you have an opportunity to introduce formularies? And do you see any clear -- any other opportunities to form similar relationships with other providers?

[Steve Collis:]

Yes. We have -- certainly we announced OneOncology. It's really a partnership with ION and which is a practice management and contracting division. And certainly, again, some of these oncology groups become bigger. Our relationship with them is always interesting. I think they have sort of practice that's going to challenge us to keep on adding new contracting services, a new level of value to them as they really expand into various states. We have, -- Ricky OneOncology is new, we have two or three other customers that of -- that are in the practice aggregation business and that we are contracting with and other customers that are very strong in the region. So this is two of the three founding practices were -- not to get too granular, but two of three founding practices on OneOncology were existing customers. And I think when you go to a new business and this is sort of situation that we've seen in many of our other sector. So we actively participated, and I think we're very proud that AmerisourceBergen was chosen to be the prime vendor in the services provider for that customer. Thank you for the question. So with that, we're going to wrap up our third quarter call. And I just want to say that I think that this year has been a year of tremendous execution for our business, both on the Pharma Distribution and on the Other sector. Our corporate staff is working very well. We're responding to situations that arise, be it reimbursement or the challenges of opioid process as one ABC. I think you're seeing an intention to get the PharMEDium issues resolved and behind us. So I just think this has been really nine months of solid execution. And as we look at the long-term, I just would point you to the key drivers that have made AmerisourceBergen successful, which is our focus on the supply channel, our really strong deployment of capital and cash flow, whether it be an internal program, acquisitions or business expansion, internal investments and really just the management team that knows how to keep those well placed customers and work with them to ensure that they are successful in the marketplace and in turn AmerisourceBergen is successful. So thank you for your time today. And this has been a pleasure having this hour with you with such good results to share. Thank you.

[Operator:]

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.