AmerisourceBergen Corporation
Q4 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the AmerisourceBergen Earnings Call. During today's conference phone lines are in a listen-only mode. We will have an opportunity for a question-and-answer session. And as a reminder today's conference call is being recorded. At this time I'll turn the conference over to our first speaker, Barbara Brungess. Please go ahead.

[Barbara A. Brungess:]

Thank you, Nick. Good morning, everyone. And thank you for joining us on this conference call to discuss AmerisourceBergen's 2016 fourth quarter and fiscal year-end results. I am Barbara Brungess, Vice President, Corporate and Investor Relations for AmerisourceBergen. And joining me today are Steve Collis, Chairman, President and CEO of AmerisourceBergen and Tim Guttman, Executive Vice President and CFO of AmerisourceBergen. During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations, including without limitation; revenue, operating margin and taxes. Forward-looking statements are based on management's current expectations, and are subject to uncertainty and change in circumstances. We remind you there are many uncertainties and risks that could cause our actual results to differ materially from our current expectations. For a discussion of some key risk factors and other cautionary statements, we refer you to our SEC filings, including our Form 10-K for fiscal 2015, as well as our Quarterly and other filings with the SEC. We will also be discussing non-GAAP financial measures, which we use to assess the underlying performance of our business. The GAAP to non-GAAP reconciliations are provided in today's press release as well as on our website. AmerisourceBergen assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates, and this call cannot be rebroadcast without the express permission of the company. Those connected by phone will have an opportunity to ask questions after our opening remarks. We have a lot of material to cover this morning, so we might be slightly longer than normal but we will leave ample time for questions. Now here is Steve Collis.

[Steven H. Collis:]

Thanks, Barbara, and good morning, everyone. Before I begin my comments on AmerisourceBergen's performance, I would like to start by directly addressing some of the recent comments regarding competition in the pharmaceutical distribution market. It is true that customers and manufacturers are acquiring more value today than ever before, but that is to be expected in a healthcare landscape where both healthcare providers and pharmaceutical manufacturers are facing increasing cost pressures and constant demand to demonstrate the value of the products and services we provide. Our manufacturing provider customers expect exceptional service levels and innovative solutions, and have the good fortune of being able to choose between three extremely competent and high-quality wholesalers. While we each differentiate ourselves in specific ways, we are all very tied to our core supply chain businesses, with our own unique mixes of services, segment orientations and key customers, all of which will invariably lead to some differences in growth rates in spite of our sharing a common macro environment. While it is true that we have said we expect our revenue growth to exceed the overall market growth rate, that growth is driven by our outstanding mix of customers, many of who are expected to grow faster than the market, and by our footprint in specialty, which also grows faster than the overall market. These two elements provide the organic growth that is the primary driver of our business. We take the selection and development of our customers very seriously, as we believe those relationships are the foundation upon which our business is raised (4

[Tim G. Guttman:]

Thanks, Steve. Good morning, everyone, and thank you for joining us today. I would ask that you refer to our earnings release for a complete discussion of our GAAP results and reconciliation to our adjusted results. Consistent with past quarters, my remarks will focus only on our non-GAAP adjusted financial results. As Steve mentioned, it was a challenging year in our industry and for ABC with the changing pharmaceutical pricing dynamics that we continue to work through. Overall, we did not finish exactly where we thought we would at the beginning of the year, but we successfully navigated a tough environment. There's a lot to like about our fiscal 2016. Let me spend a minute and cover a few key highlights. Most noteworthy would be the Drug company's successful acquisition and integration of PharMEDium. We are very pleased with the results the business has delivered and we are also pleased with the new talent and skill sets the PharMEDium employees bring to ABC. The second item, our ABSG specialty business had a very impressive year with revenues passing $28 billion and they achieved record operating income. And finally, we exit the fiscal year with an improved balance sheet, and importantly, we successfully mitigated all of the potential dilution from the shares issued to Walgreens as a result of the warrant exercises. It's great to have the warrants officially behind us. This will simplify our reporting going forward. This morning I will cover three topics. First, I will recap fourth quarter consolidated and segment performance. Next, I'll spend a few minutes on our full-year performance, and I will wrap up covering our fiscal 2017 expectations. Let's begin our Q4 review. Our revenues increased roughly $2 billion to $37.6 billion, up 6%. Operating income, our adjusted operating income was $464 million, up $7 million or 2%. We certainly benefited from our operating expenses being down by 3%. We've made a concerted effort through various cost initiatives to reduce expenses throughout ABC. This offset our gross profit being down in both dollars and percentage. Moving below the operating income line, income taxes. Our adjusted income tax rate was 31.4% for the current quarter, down from the prior year. I should highlight that our quarterly tax expense included a slight year-to-date adjustment to bring our full-year tax rate to 32.5%. This rate is just below the tax rate we had previously guided to as a result of slightly higher international income and favorable discrete tax adjustments we made closing out our fiscal year. For the quarter, our adjusted diluted EPS increased 12% to $1.30. Let me highlight, we finished fiscal year 2016 with 220 million outstanding common shares. Please remember that the 220 million outstanding shares is before the dilutive impact from share-based compensation. When combined, this number is used to calculate our diluted earnings per share going forward. Next, let me cover our segment results, starting with Pharmaceutical Distribution. Total segment revenues were $36 billion, up 6%. Our Drug company had solid revenue growth of 5%. I should highlight that we continue to lap very strong hepatitis C revenues from the prior year, and this created a headwind in the current quarter of roughly 1.5%. ABSG, which is our specialty business, had revenue growth of just over 15%. The business has now anniversaried the addition of a 3PL customer that had been enhancing revenue growth over the last year. Consistent with past quarters, we continue to see especially strong revenue growth from the sale of oncology drugs growing in the high teens as a percentage. Lastly, I should highlight that this quarter was another record revenue quarter for our ABSG business. Moving to gross profit, the segment's gross profit was $785 million, down just about 1%. We saw solid gross profit dollar growth in our Specialty business due to higher revenues. Our Drug company's gross profit was down versus last year, even with the addition of PharMEDium. We had the impact from two contract renewals with anchor customers, Kaiser, which took effect on July 1, and also CPA, our largest independent buying group customer. There is strategic importance in signing these large, fast-growing customers to longer-term contracts. However, in the 12 months following the resigning, the change in economics to bring the contract to the appropriate market price can be a meaningful headwind. Also, during the current quarter, we had a lower contribution from drug price inflation. These were the primary reasons for the decrease in gross profit dollars in our Drug company business. Segment operating expenses were $391 million, and were down versus the prior year by 3% or about $14 million. Both the Drug company and ABSG continue to closely manage their cost structures to ensure they are spending in the right areas. On a comparable basis to last year, so excluding the impact from PharMEDium, the segment's OpEx would have been down nearly 7%. Adjusted segment operating income was $394 million, which is up 1%. Solid performance by our Specialty Group was offset by the expected lower contribution from the Drug company. We can now move to our Other segment, which includes MWI, our patient services consulting business, and World Courier. In the quarter, total segment revenues were $1.6 billion, up about 5%. Both our consulting and World Courier businesses had solid revenue growth in the quarter. Our MWI business was a little lower in terms of revenue growth this quarter due to a combination of two things; an impact from foreign currency from their UK business, and an impact also from some expected seasonality in their U.S. business. Let me point out we continue to be very pleased with the U.S. companion animal side of the business, which had growth of nearly 6%. From an operating income standpoint, this segment had operating income of $70 million, up 4%. The growth is after year-end compensation incentive true-ups in all three businesses. Additionally, our consulting business is deep into their new ERP system implementation. Certain expenses that can't be capitalized negatively impacted the segment. These two items essentially reduced the growth rate by slightly more than half this quarter. This completes our review of the September quarter. I'd like to now cover just a few fiscal year 2016 financial metrics. Revenue, our full-year growth was a very good 8%. Our largest customer, Walgreens, represented just under 30% of our total ABC revenues. ABSG, our specialty business, finished the year at $28.5 billion, with revenue growth of 17%. Just an outstanding year for this business. Our adjusted operating income increased 7% to just over $2 billion. EPS, our full-year adjusted diluted EPS was $5.62, up 14%, due primarily to our operating income growth mostly from our ABSG business and also having MWI for a full fiscal year. Our Drug company had a challenging year, with the negative impacts from contract renewals and industry drug pricing headwinds, but the benefit from PharMEDium helped to offset these items. Free cash flow, we had a terrific finish to our fiscal year. We ended at $2.7 billion in free cash flow. Our fourth quarter was much better than previously anticipated due to higher revenues and certain one-time working capital benefits at ABSG, as well as a greater than expected positive impact from ending our year on a Friday, which is our best cash receipts day. Now, let's turn to fiscal 2017 expectations. Before I start working through specific guidance items, I will make some overarching comments. Importantly, we have not included any impact to our P&L and cash flow from our largest customer, Walgreens, successfully completing their acquisition of Rite Aid. In light of the current pharmaceutical market dynamics, I want to comment on three key working assumptions. First, let's start with brand drug pricing. During fiscal 2016, our brand inflation rate finished right at 10%. We did see some further moderation from the 10% during September and it has continued through October. So as we think about fiscal 2017, we have reduced our assumption for brand inflation to a range of 7% to 9%. Lowering this range translates to a gross profit headwind to our fiscal 2017 growth targets. The next period where we traditionally see a high level of announcement activity will be during the month of January. Consequently, we have a period of time before we know how we are tracking against this assumption. Next, generic drug pricing. We continue to expect a contribution from a modest level of price increases, but overall, our generic drug basket is expected to deflate in the 7% to 9% range during fiscal 2017. This rate is consistent with what we experienced the second half of fiscal 2016, and importantly, recent trends in the market indicate that the generic deflation rate has not improved, unfortunately. In fiscal 2017, the generic deflation rate will be a gross profit headwind for the entire fiscal year, as opposed to just a partial year in fiscal 2016. And finally, we expect the contribution from generic drug launches to be relatively flat year-to-year. We can now transition to our specific guidance metrics for fiscal 2017. Revenues, we expect consolidated ABC revenue growth in the range of 6.5% to 8%. While the decrease in the rate of brand drug inflation will weigh on our Drug company's revenue growth, we expect our ABSG specialty business to grow slightly above 10%. In the Other segment, we expect revenues to grow between 7% and 8%. Consolidated gross profit, we don't provide specific guidance on gross profit, but to repeat previous commentary, our Drug company business will have a significant gross profit headwind from two key customer contract renewals, CPA through the first two quarters of fiscal 2017, and Kaiser through the first three quarters of fiscal 2017. Consolidated operating expenses, we expect a growth rate in this area of roughly 6% to 7% in fiscal 2017. On past calls, we have noted that we are incurring incremental operating expenses related to strategic systems and technology we are implementing across the organization. Since these systems are all fairly significant in size and scope, most will be implemented while running parallel with existing systems. Let me also point out that our Drug company is underway with a large capital project that will both upgrade and also expand capacity in their distribution center network, due in part to our expectation that eventually we will serve the Rite Aid stores on behalf of Walgreens. We are currently building seven new distribution centers. Two of these are incremental to the network, while the remaining five are relocations to larger, more modern facilities. As a reference point, the five relocations, so the DCs that are being replaced, averaged 32 years in service life. Most of the associated dollars spent will be capitalized; however, this is also the same situation where we expect to incur duplicate expenses as we operate both the new and old distribution centers for a period of time. These IT systems and infrastructure investments support our growth, improve the customer experience, and ultimately increase our operating efficiency. However, there is a negative impact to our fiscal 2017 operating expense growth rate of a couple of percentage points. Consolidated adjusted operating income, we expect ABC operating income dollars to be in the range of down slightly to up 4%. This is driven by our Drug company having EBIT that is flat to down slightly on a year-over-year basis. We do expect good organic growth in our ABSG business, but not enough to offset the lower growth in the Drug company from the gross profit headwinds I called out previously. We expect the Other segment to grow EBIT in the high single-digit percentage range. Switching to operating margin, we expect consolidated margin to be down 5 basis points to 10 basis points, due primarily to mix of business, so large customers growing faster, and the impact from our large contract renewals. Tax rate, our guidance assumes a full-year adjusted tax rate in the range of 33%. Share repurchases, our guidance assumes modest share buybacks, enough to offset the dilutive impact from equity incentives. We are pleased that we are able to announce this morning in our earnings release our new $1 billion share authorization. We now have capacity of about $1.1 billion. As always, we will look to be thoughtful with our capital deployment, depending on our cash flow, competing uses of cash and market conditions. Adjusted EPS, over the last few months, unpredictability around pharmaceutical pricing has increased; therefore, we are lowering our expected fiscal 2017 EPS growth rate, and also widening the range until such time that we have more clarity on these pharmaceutical pricing dynamics, both brand inflation and the rate of generic drug deflation. Consequently, we expect our fiscal 2017 adjusted EPS to be in the range of $5.63 to $5.88. The growth rate range is now flat to up 5% over our fiscal year 2016 adjusted EPS of $5.62. Also, please note that we have not included any financial impact from the implementation of Medicare Part B demonstration project in our adjusted EPS guidance. It's quite possible the Part B demo project will be delayed, altered, or even litigated. Let me cover our adjusted EPS quarterly progression, given the two large headwinds I called out previously, the two key contract renewals, and moderating brand drug price inflation. We expect that our Q1 2017 adjusted EPS will be several cents below our actual results from Q1 2016. We also expect Q2 to be relatively flat to last year's results. We expect to return to growth in the second half of the fiscal year as we cycle through these headwinds and have easier comparables. Switching to cash flow. First, CapEx is expected to be slightly higher in fiscal 2017 when compared to fiscal 2016. It's likely we will reach $500 million due to the heavy capital investment underway funding both the new IT systems and distribution centers. Debt repayments, we do have a $600 million note that will mature in May 2017. The proceeds from this note were used to partially fund the repurchases of shares under our special share program. Now that the warrants are completed, it's our intent to repay this note at maturity. Free cash flow, we now expect our free cash flow in fiscal 2017 to be at or slightly above our adjusted net income. The expected year-over-year decrease in free cash flow is primarily due to the following discrete items; one, the cash-timing benefit we received from ending the year on a Friday. This benefit won't repeat. We estimate this impact to be roughly $500 million. Two, the continued investment in working capital with Walgreens, and three, certain one-time working capital improvements at our ABSG business that won't repeat in fiscal 2017. As I wrap up, I know that both Steve and my comments were especially long this morning, due to covering several important topics, including guidance. So thank you for your attention. I would like to personally thank the ABC team for all the efforts made this year, delivering solid results in a challenging time for the industry. We are excited about starting the new fiscal year, but the challenging times are still with us. With our outstanding customer portfolio, our ability to execute and our financial resources, we are confident we will be able to continually adapt to working in a dynamic environment, and most importantly, delivering compelling, long-term shareholder value. We appreciate your interest in ABC. Now here is Barbara to start our Q&A.

[Barbara A. Brungess:]

Thanks, Tim. We'll now open the call to questions. This morning we ask that you limit yourself to one question so we can accommodate as many people as possible. Nick, would you please go ahead with the questions.

[Operator:]

Certainly. And our first question today will come from the line of Robert Willoughby with Credit Suisse. Please go ahead. Robert Willoughby - Credit Suisse Securities (USA) LLC (Broker) Thank you. Do you anticipate any changes in the scope of the Express Scripts contract? Or will that simply be business as usual? And then, quickly, how – if the Rite Aid deal were to close today, how quickly could you layer on those revenues?

[Steven H. Collis:]

Thanks, Bob, for the question. Yeah, firstly on Express Scripts, we don't – we're subject to negotiation. We've always tried to do more. We haven't really been successful. There's a new CEO there who we actually worked with when he was at Accredo. So we are always optimistic, but there's not going to be a big headwind from the renewal of this contract because at the moment, it's primarily brand, and we have been very successful in improving the overall scope of relationships in almost all of our contract renewals so one would hope that this would be the same. And then the second part of the question?

[Tim G. Guttman:]

Rite Aid, I mean...

[Steven H. Collis:]

Oh, the Rite Aid. Go ahead.

[Tim G. Guttman:]

No, I would just say, I mean, I think our Drug company is excellent at execution. They're very good and onboarding customers. Certainly, that's a little premature, I mean, they – certainly, Walgreens has to get through FTC, but again, I think we would work hard and diligently to onboard as quickly as possible if they were successful.

[Steven H. Collis:]

Yeah. I just would add that – thanks, Tim – that WBA needs to honor its existing contract agreements, but it's not like we're not aware of what could occur again. We have been very planful. So thanks for the question, Bob.

[Barbara A. Brungess:]

Next question please.

[Operator:]

That will come from the line of Robert Jones with Goldman Sachs.

[Robert Patrick Jones:]

Thanks for the question. Steve, I appreciate your comments on how there are differences between the three wholesalers' mix of customers, but I think many of us have operated under the assumption that the market's very efficient, just given the consolidated nature of the wholesale channel. So just trying to get a little bit more comfort around how more severe pricing commentary from your peers – seemingly more severe pricing commentary from your peers, wouldn't eventually be a reality for everyone in the industry?

[Steven H. Collis:]

Yeah, I mean, we've got a lot of, we think, heavy lifting on our contracts behind us. We talk about – six months ago, I think we discussed this and we reflected in guidance, which we took very seriously. Of course, since then, the inflation rate in brands and deflation rate in generics has changed, but let me talk about it this way. I mean, my comments on – are I think very appropriate for AmerisourceBergen. I can't talk about the others, but we would say that the market is competitive but rational. It's always been that way. The environment is probably more challenging, and I think that's a function of customer consolidation. You've got a lot going on the M&A side with key provider customers coming together, key manufacturers coming together. Everyone is facing cost and efficiency challenges. And I would say our customers are more consolidated, more informed and have always been very sophisticated and quite adept at demanding value from us. And I think our industry has been responsive, and maybe we just haven't had as many tailwinds as we usually have, but I think the environment is essentially the same as it's been from a competitive perspective for many, many years. And we pointed in my script towards working within our customer base. So, I think that's a key point for us, and getting more compliance from those relationships. Tim, you want to add anything?

[Tim G. Guttman:]

Yeah, I would just say, Bob, that we feel like we've been very disciplined, responsible. We've met expectations of our customers, the anchor customers, CPA. But I think the important thing is, when we do meet a market price we get a long-term contract, and we think that is critical. And typically, the new contracts that we're signing have a specialty drug component or flexibility. So that's the exchange, securing the customers to a long-term contract, where there's mutual advantages to both ABC and the customer.

[Barbara A. Brungess:]

Thanks. Nick, could we go to the next question, please.

[Operator:]

Certainly, we'll go to the line of Steven Valiquette with Bank of America Merrill Lynch.

[Steven J. Valiquette:]

Thanks. Good morning, Steve and Tim. So, there has been some mixed views on how much the earning sensitivity may be for drug distributors related to brand inflation. So, I guess just with your change in your view from what was 10% to 12% previously to 7% and 9%, is there maybe just any way to give a little more color on how much of a role that plays within your shift in the EPS growth from – Looks like about 4% to 6%, to 0% to 4% for fiscal 2017? Without getting too granular, just wondering is that a big part or a small part? Just any more color would be helpful. Thanks.

[Steven H. Collis:]

I'll let Tim comment, but I just would say, most of the growth has come from the specialty drugs, most of the unit growth, but they tend to be very expensive products, of course, not that many units. And then, there has been a relatively high rate, at least in 2015 of brand price appreciation, which was in the mid-teens. But, we saw it ramp down very significantly and current trends would indicate even a further step down. We do think that an overall industry growth rate is very helpful to growing our top line and our bottom line. But we're confident we can grow in this 6% to 9% range that we expect. We said 7% to 9%, but I'm just saying within 1% or 2%. If it comes a lot below that, we think that that will create some challenges that we will address, but we don't think that that's possible in the next 12 months. Tim, would you agree to that, anything to add?

[Tim G. Guttman:]

Yeah, Steve. Thanks. No, I'd just add something very quickly. I would say – Steve, good morning, and I would say that most of the change in our guidance is related to that brand pricing change, but there's also a small part related to generic. The deflation rate, we guided to 7% to 9% deflation rate, we're probably on – a little bit over that 9% right now. So, as we enter fiscal year 2017, we're starting on the high side, not quite 10%. But, so that's really the two things. Primarily brand and to a lesser extent the generic side.

[Steven H. Collis:]

Thanks, Steve.

[Barbara A. Brungess:]

Thanks. Nick, can we go to the next question please.

[Operator:]

Thank you. That would come from Garen Sarafian with Citi Research.

[Garen Sarafian:]

Good morning, Steve and Tim. I wanted to get back to the competitive landscape that's been such a big part of the conversation lately. First, just to be clear, are you maintaining the same pricing structure and strategy for your independents on a like-for-like basis? And secondly, you provided some commentary in the beginning, Steve, but you guys have always prided yourselves on having solid pricing data analytic capabilities. So any insights from the analytic work that you have done to sort of help us reconcile on what the various distributors are saying? Thank you.

[Steven H. Collis:]

I would say that the consolidation, although they don't acquire them, our independents are largely characterized – almost all of our independents now belong to buying groups. I came into the Drug company in 2009 and that's really been more and more pronounced. And in specialty, the wholesalers usually owned or were very involved in at least in oncology with our buying groups, and the same is true of say, Besse Medical. So, this is a function of the market, and for the most part we have very productive relationships with those buying groups, but they are consolidating. I think we have close relationships with our key buying groups. That's gotten really dug in. CPA is a very good example. So, as far as your specific question on pricing, generics has probably reached its peak. We saw some contracts where we were getting high-teens generic compliance. And that's probably just not going to last, because the industry's changed. So we've been, as we said, very thoughtful about specialty pricing, and how that's going to change over, say, a nine-year contract that we have with CPA. You have to be cognizant of that, you have to be thoughtful of that, because ABC is always thinking about the long-term and what does that nine year contract look like. And just because in the last nine years contracts have invariably improved, it doesn't mean that the economics are going to change in the same ways. And that's why we said we're going to make money in different ways. We think biosimilars are going to be very important, new therapies, and that's a lot how we're thinking about things. I'll quickly make a comment on your analytics, and then it's an important question. So, I'll let Tim also comment. But, as the groups consolidate, I think they get more sophisticated. There's a lot of generic products out there. We manage thousands and thousands of contracts. But to the independent practice, we would say that 2,000 are very important, very critical, and that they're very aware of the pricing. I think we also have a responsibility here to have balanced pricing to our independent customers. They have a tough time with managed care contracts and making sure that every prescription that they dispense is profitable. And we are sensitive to those discussions or, in terms of being responsive to make sure that they are relevant and competitive in the marketplace as well. So those are the sort of discussions that we think are important. But they're not new. They've been going on for a long time. Any comments?

[Tim G. Guttman:]

No, Steve, I think that's well said. We gather intel, we do a lot of data analytics. And we just – we always want to make sure we have the appropriate price to our customer. And we really can't comment on trying to reconcile our situation to the other wholesalers. I think Steve mentioned, we've gone through the heavy lifting of contract renewals and we feel like we're getting past that. So, I think that is probably our comment on that question, Garen.

[Steven H. Collis:]

Thanks, Garen. Next question, please?

[Operator:]

Okay, that will come from Ricky Goldwasser with Morgan Stanley.

[Steven H. Collis:]

Hi, Ricky.

[Ricky R. Goldwasser:]

Yeah, hi. Good morning and thank you for all the comments. I have a quick follow-up here. So, first of all, just to confirm, does guidance assume any new share gains from independent groups beyond what you already have gained year-to-date? That's first. And then my second question is if you can just give us a little bit more color on the branded inflation. I know in past quarter, I think, you mentioned that I think, now only 10% of your contracts with manufacturers are tied to or contingent on inflation. Can you maybe give us some more color on what percent of EBIT is tied to these agreements? Thank you.

[Steven H. Collis:]

Our growth rate in independents – when we talked about it, I mean, we're talking about really growing by 1% or 2%, which is really just making sure we get our fair share of wallet with our contracted customers. We feel that we have mutual respect with the customers and we've given them we think fair pricing contracts and in return we should get all their generic compliance. And there has been some, you can call it interlopers in the market, where they come and maybe even slice off some brand products and that makes the generic compliance look better. We're saying to our independent customers, we want all your business. We're contracting with you. And that's where we've been focused. And those, I think, are very legitimate and bilateral discussions that we should have. And I think that's where we've made progress. As far as what the amount of brand contracts that are covered by fee-for-service, essentially all of our contracts are covered by fee-for-service. There are some where there's an outcome that could vary depending on the rate of inflation that they experience in their own portfolio. We are moving quickly to close that, as the market changes. So, we are in those discussions. We don't think that that reflects the current market, or the sort of bilateral mutually respectful agreements that we should have with our large branded manufacturers. So, those discussions are ongoing right now. Peyton Howell and her team are on it, and I think we're making progress there. But still more work to be done there for sure. Tim, anything to add?

[Tim G. Guttman:]

Yeah, we'll be consistent with what we said in the past. Typically, we've said that about 10% of our gross profit dollars are under those contracts that are – Steve talked about kind of the non-traditional, the type that are – have an element of price appreciation, and Steve mentioned we're working hard to reduce that number. So I think...

[Barbara A. Brungess:]

Okay. All right. Thanks, Ricky.

[Steven H. Collis:]

Thanks, Ricky.

[Tim G. Guttman:]

Thanks, Ricky. Next question.

[Operator:]

The line of Eric Percher with Barclays.

[Eric Percher:]

Thanks. I think I'll follow the same line, but maybe a few items that were implicit, let's make explicit. So one item you mentioned that you look to gain share back with the lost buying group from 2015, was that effort limited in scale to APCI (55

[Steven H. Collis:]

Yeah, I'll make a quick comment on each of those three. We did lose a buying group customer. It was a customer where a lot of the members were GNP members and a lot of them chose to stay with us. But I don't want to get too much into specifics. It's not that overall material. I think it's always interesting, lose a relationship with a – and I think it's a shared relationship, between a buying group and a wholesaler. So that's why that having long-term contracts is extremely important, so that we can work together on what – the collaborative approach that I referred to in my script. So I think actually that last year is a pretty good example of that and it probably wasn't good for the buying group, wasn't good for ABC, but not – it's one of those things that happened. I wouldn't say that that pointed to some acute level of competition or anything, or any of this drama that we've heard about a price war. So the incremental share that we've had in independents is very – I think, we just are making sure that we're holding ground with those new contracts we've signed. And we did work to try – keep some of those former buying group customers that had switched to a new wholesaler. We did work to keep them with ABC, but kept that in line with overall market, because again, people talk to each other. It's an efficient market, so we want to make sure that anything we do is responsible and balanced. And then the telemarketers, I would say are struggling a bit, because I think ourselves and our peer companies are looking at that compliance factor and have better tools to manage that. And there's not the growth that you had from so many new product launches. And I talked about our First to Shelf program. So if we had any gap where we weren't getting product out upon a patent expiration fast enough, we're covering that. So we're saying to our customers, no need for you to order from a telemarketer. We're going to get that product to you first. And that's one of the examples, Eric, of an enhancement we've made to our business. I think, Tim, I've covered everything. So we'll probably move on to the next question.

[Tim G. Guttman:]

Yeah.

[Barbara A. Brungess:]

Thanks. Next question please, Nick.

[Operator:]

That's from the line of Lisa Gill with JPMorgan.

[Lisa Christine Gill:]

Thanks very much. Good morning. I just want to go back, Steve, to your comment where you talked about different pricing strategy for specialty, and you have new long-term contracts now in place with a number of your customers. My understanding is that historically, it was a branded bucket, that specialty was included in a generic bucket, and now trying to break out specialty. Can you talk about what the new pricing strategy looks like? And am I correct in thinking that when it was in the branded budget, you were discounting that, similar to branded where maybe it's WAC minus 3%? And what could the new economics look like in the new separation of specialty?

[Steven H. Collis:]

Yeah, Lisa, I mean, I'd say essentially you're accurate on my commenting on the WAC minus 3%, but you're essentially accurate. I mean, we had such a good surge in generic compliance and generic rates that maybe our industry was not as thoughtful about this as we should. And then we had that really fall off and specialty products increase so much, which are very expensive. And there is an argument with the manufacturer, there's a lot of different elements when we look at the fee-for-service contracts, but when the unit prices are so high, it is a discussion about what the market-based fee-for-service is. We happen to think that there actually should be some headroom there because of the value of the services that we provide, which in difficult time, gets even more, we think, valuable and even more important to those manufacturers. So we worked hard. I think we called out this trend and we're working hard, and we'll continue to work hard to make sure that those specialty products that are such an important weighting mix within the portfolio of services that we provide, that those products are popular, and that there's a recognition that you're not going to get as high a fee-for-service. So it should be a differentiated brand markdown, to respond directly to your question.

[Barbara A. Brungess:]

Thanks, Lisa. Next question please.

[Operator:]

Thank you. That comes from the line of Eric Coldwell with Robert W. Baird.

[Eric W. Coldwell:]

Thanks very much, and a whole lot of mine have been covered, but I was hoping we could just get a data point that I think a lot of people have recently scrambled for, which is could Amerisource provide an update on the number of independent pharmacies that you work with, and maybe where that is today versus the past? And perhaps provide some definition around how you would include an independent GPO in that count. Just trying to get a sense on where independents are as a percent of your total revenue, or number of stores, or some additional metrics. Thank you.

[Steven H. Collis:]

We have a very tiered system. We haven't picked up a lot of new customers. It's essentially flat. Sometimes – we can't speak for what our buying group customers go to get new members. And they sometimes fold in smaller groups, but we're essentially flat. We think our market share might be – it depends on the different data points you use, but it's maybe stable to up 50 basis points. So we're not seeing anything really significant, except – the only big thing that happened to us in independents is that we were fairly successful in retaining some of the members of the buying group that we lost last year, and most importantly, we signed a long-term contract with CPA that is our largest buying group customer, and that we think is a leader in innovation and service. So, Tim, anything else?

[Tim G. Guttman:]

No, I just go back to what we've said in the past, that our first focus is to – we're just big believers in prime vendor. That's the foundation. We want to do more with existing customers. That's our focus, to make sure there's no leakage and we get more of that wallet. That's the first focus, get closer and have a win-win for existing customers.

[Steven H. Collis:]

Yeah, one thing I would talk about is the tier within GNP. We're trying to get a lot of our members into the highest tier, where they have a lot of the compliance tools, the integration tools, the tracking tools that we would expect, so that we can have that sort of really comprehensive relationship that we would want with them. So that's really our focus is to make those relationships tighter. But thanks for the question, Eric.

[Barbara A. Brungess:]

Thanks, Eric. Next question please.

[Operator:]

And it comes from the line of Charles Rhyee with Cowen & Company.

[Charles Rhyee:]

Yeah, thanks for the question. Steve, at the beginning, I apologize – I kind of missed a little bit – my phone was cutting in and out. But you were talking about these buying groups, and then – is it that you were saying that you were – you anniversaried sort of the new pricing that you're seeing in some of these long-term contracts, or was there still some more as you work with the actual members that that still has to filter through? Just to clarify. And then in terms of what you were just talking about in terms of your wallet share as a prime vendor, can you talk about how much that's changed over the last year or so, like kind of what kind of share of the wallet are you getting currently? And how much more room do you think there is for improvement? Thanks.

[Steven H. Collis:]

Well, I go back to our fiscal year 2016 planning process, and we looked at a small erosion that we'd experienced in the last few years in our GNP share of wallet. And we just – we said, okay – I mean, Tim and I sort of challenged Bob Mausch and our team. We said, listen, we're investing in Elevate, we're investing in business coaching, we're investing in First to Shelf. We've got our highest full (1

[Tim G. Guttman:]

No. I think, Steve, you said it well.

[Steven H. Collis:]

Okay.

[Tim G. Guttman:]

I think we can go to the next question. Thanks, Charles.

[Operator:]

Thank you. That will come from the line of Michael Cherny with UBS.

[Michael Cherny:]

Good afternoon, guys. So, I think all the pharma questions have been answered. Maybe a little bit on PharMEDium and some of the performance there. You said you'd been thrilled with the integration. Can you just talk a little bit about how you can use that as a potential leading source to drive incremental revenue, incremental customer bases. Has that introduced you to any other new customers that you didn't already know?

[Steven H. Collis:]

We can do better there. And in fact I was talking to one of our health systems VPs just this week. I feel we can do better there. It's about a year, and we've had some leadership changes there. I think we're very comfortable with the team. The focus at PharMEDium has really been on making sure that we maintain the high regulatory standards that FDA and others expect of us, and we're working very hard. And I think you'll see ABC and PharMEDium management team having the right orientation there. That's going to be very, very important to continue to lift the standards. So that's been a lot of the focus, and we've been through a lot of the integration. They have had some benefits from some new product launches. Their pricing there is definitely a different environment than the rest of the generic environment that we see. Their market share is very, very good. They work with 2,000 systems. And their biggest opportunity is really to just do more – a bigger share of wallet with their customers, but, their pricing is so differentiated than our overall health system GPO customers that we haven't really looked at integrated offerings. And probably shouldn't really, because it's not – you're sort of mixing apples and oranges. But we are always mindful of, absent the whole Wells Fargo mess, we're always mindful of cross-selling and looking for those synergies with customers. So, appreciate the question on PharMEDium. Thanks.

[Barbara A. Brungess:]

Nick, it looks like we have one more person in the queue, so let's take that last question, please.

[Operator:]

Great, we'll go to Greg Bolan with Avondale partners.

[Greg Bolan:]

Hey. Thanks, guys. Sorry. Hopefully I didn't miss this – a little late to the call. But, so, it sounds to me that the strategy towards the community pharmacy, independent pharmacy market really hasn't changed a whole lot. Sounds like – we know that obviously you guys have been trying to kind of steady your position there, reclaim market share over the past several years. And so I just wanted to kind of clarify that. And that's actually all I have. Thanks.

[Steven H. Collis:]

No, no, well said. I think we've given pretty exhaustive comment on it. I don't ever remember working so carefully on a script just to make sure that you get exactly that message, that ABC is being very thoughtful, very responsive or very planful reacting to an environment that's more challenging. And that's really our message for today. So we appreciate the question. Just – Barbara, I think I'll make my closing comments now. That was the last question.

[Steven H. Collis:]

So, thank you for your attention today. I know it's a really busy day. I'm shocked at the calendar. I'm just seeing all the other peer companies that are reporting today, so, I know it's been a very long session. But we wanted to share with you how strongly we feel about the responsibility we have as a leading participant in this segment and how strongly we feel that we're making the right decisions for all the stakeholders, including our investors and including our – the patients that we ultimately serve, the customers, the manufacturers we supply. And I'm confident that ABC is going to do very well. We're going to find the right areas to capitalize on the incredible capabilities that we have. So, thank you for your time and we'll speak to you in three months and see a lot of you at upcoming conferences. Much appreciated.

[Barbara A. Brungess:]

Thanks, Steven. With that, operator, that concludes our remarks and if you'd give the replay information, we'd appreciate it. Thank you.

[Operator:]

Absolutely. Today's conference call was recorded and will be available for replay beginning at 1