Cardinal Health, Inc.
Q4 2014 Earnings Call Transcript

Published: 4 Aug 2014

[Operator:]

Good day. And welcome to the Cardinal Health Fourth Quarter Fiscal Year 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sally Curley, Senior Vice President of Investor Relations. Please go ahead.

[Sally Curley:]

Thank you, Tina, and welcome to Cardinal Health's fourth quarter fiscal 2014 earnings and fiscal 2015 guidance call. Today, we will be making forward-looking statements. The matters addressed in these statements are subject to risk and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to the SEC filings and the forward-looking statements slide at the beginning of the presentation, found on the Investor page of our website for a description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about these measures is included at the end of the slides. Our press release and details about upcoming events can be found on the IR section of our website at cardinalhealth.com. So please make sure to visit the site often for updated information. Now I'd like to turn the call over to our Chairman and CEO, Mr. George Barrett. George?

[George Barrett:]

Thanks, Sally. And thank you everyone for joining us this morning. Fiscal 2014 was an enormously important year for Cardinal Health. Our organization exceeded our financial goals for the year, along multiple dimensions

[Jeff Henderson:]

Thanks, George, and good morning everyone. And by the way I'm counting on Derek Jeter farewell tour, okay. But thank you for the comments. I'm happy reporting a solid finish to an important transition year. This morning I will begin by highlighting key financial trends and drivers of our fourth quarter results and then make a few comments on our full year performance. I will provide additional detail on our fiscal 2015 guidance, including some of our key expectations and underlying assumptions. You can refer to the slide presentation posted on our website as a guide to this discussion. Let's start with consolidated results for the quarter. As we indicated during our third quarter call, achieving the upper end of our non-GAAP EPS guidance range would really depend on two items

[Operator:]

Thank you. (Operator Instructions). At this time, we'll take our first question from Ross Muken, ISI Group.

[Ross Muken:]

So on the generic inflation front, it seems just in general it's something that is incrementally hard to forecast just because of some of these one-off portfolio that you've talked about. In terms of getting the buying organization kind of amenable to may be trying to pre-buy where there is opportunities or where you see in a certain category, how do you foresee sort of your ability to kind of change the way you've been doing business to basically try to capture more of this? Or -- so basically, what I'm asking is, it's hard to forecast but if you could see it in a category it's obviously quite profitable. I guess, if I doesn't go into the guidance because it's tough to predict. But how are you sort of working with everyone to kind of make sure you are able to modify this? And then, how does that also change the way and then you deal with CVS on things like this?

[George Barrett:]

Ross, this is George, good morning, and thanks for the question so little hard to answer this. Partly as I said during my prepared comments, we are literally just this past month beginning negotiations. Let's start with some basics. You're right it is difficult to model price increases. We have talked a little bit about this in the past, which is -- well, it's difficult to sort of model the products. We think about the environment and what are the conditions like. And so as we start thinking about our year, well we can't model each product necessarily perfectly. We start thinking about how -- what are the conditions that lead to this, whether or not that is intense regulatory environment or various market disruption. Here's what I would say, we have an incredibly sophisticated team and I would say now team put together, when we look at Red Oak to evaluate the market and to build into our modeling all the assumptions around price and price increases. I think we've done a recently good job of doing that. We do what we can and we build that into our forecast. So if you look at our FY 2015 guidance it includes some assumptions about way products go through and how they are priced. But again, it's really hard for me to say too much about this and that we're just beginning these discussions with manufactures. But I will say that I couldn't be more excited about the quality and the know-how and the experience of the teams that have been put together to do this kind of work.

[Ross Muken:]

All right, George that was a much better answer than my question was. May be just turning to the Medical side of things that you guys have been pushing more on the preferred product side obviously with AccessClosure that gets deeper into cardio, you have done stuff in ortho. I think wound care make sense in a market. I mean, what's the response you're getting incrementally if you guys continue to move forward with the strategy? And where are you seeing the most openness and where are you seeing sort of the most pushback at the hospital level?

[George Barrett:]

I think in general, we are seeing a tremendous responsiveness. And I would say it's pretty consistently across the board at this point. Again, hospital systems are really facing different kinds of changes, including reimbursement models that look different. And so they're looking carefully not just about how they squeeze cost but how they change behaviors. This is really a behavior change where they begin to think about forcing more standardization on the commodity types of products that are in their medical service category, excuse me medical products category. And I think our conversations have been really encouraging. I've been involved in some of those myself. Yes, we've said along this is sort of a mid-term driver because this is a change of behavior. But we are really excited about the response and we are excited about the build-out of our program not just with the step-in interventional cardiology but little bit of the growth of the platform that we guided in, in ortho and our movement into wound care. So we are really excited about it and we are getting a very positive response. But again, it's I would say more a little bit of a mid-term driver as we think about the way this will ramp.

[Operator:]

Our next question from Lisa Gill with JP Morgan.

[Lisa Gill:]

Thanks very much. And good morning. George, kind of start with this quarter and just may be if we can talk about the revenue growth. Revenue growth is coming in substantially better than our expectation. Could you speak anything on the specialty side, some of your competitors called out Hep C or do you think we're seeing the beginning stages of the Affordable Care Act?

[George Barrett:]

Hi. Good morning Lisa. It's interesting question. We'll start with the Hep C first. I would say that the Hep C products did have some impact on revenues, although I would say was not that meaningful and a less effect on margins. So I wouldn't say it was a major driver of our business. What we are seeing I think -- first of all, again the balance of our portfolio of customers is improving. We are getting great response. We have seen some important growth in our strategic accounts meaning, I think we're identifying the right customers who really are positioned to compete in a changing environment. So I think in general, when I look at execution, we managed it pretty rigorously. We are executing on our things that we're supposed to be doing with our customers and I just think in general we've seen good performance on a revenue basis across the business. Specialty again, you mentioned specifically, just a reminder the two FC drugs are going really primarily through traditional distribution channel so they are unique drugs obviously in many ways. They are drug patient populations with very special needs. But these are solids and are moving through the traditional drug channel rather than with specialty. Our specialty growth is really not been about that; it's been about organic growth, picking up new accounts, and adding to our service package.

[Lisa Gill:]

And then my second question would just be med-surg Canada. Jeff called this out specifically as an area -- or you've called that out as an area that didn't meet your expectations. Can you just go into a little more detail as to what's going on in that market right now? Is it a reimbursement issue? How do we think about med-surg in Canada?

[George Barrett:]

I'm going to let Jeff touch on it.

[Jeff Henderson:]

Lisa, I'll take it. This is my home country. We have seen some pressures in the hospital market in Canada and primarily related to reimbursement pressures on hospitals due to government funding changes. So there have been generally low utilization and pressures on pricing over the past 6 to 12 months. And as George said, we are taking the necessary steps to address those performance shortfalls, both organizationally from a portfolio standpoint and from a cost standpoint and we're being very encouraged given strength of our Canadian business over the medium-term we will see that business get back on the right track.

[Operator:]

And our next question from Eric Percher of Barclays.

[Eric Percher:]

Thank you. A question on capital allocation. Appreciate the detail around repurchase and IT investment. So as you think back over the last year with investments in specialty and med-surg, do you think we're seeing a natural balance? I know you have more cash that you can put to use than just what you're generating. Where do you think the opportunities are?

[George Barrett:]

Well, Eric good morning we have identified a number of areas that we've been public about that are high priority areas for us and obviously we're doing everything we can in every one of those strategic areas to improve our strategic positioning and to be in a position to win. Where we can deploy capital against them we will. So we've done some obviously major work in generic this year, specialty has been a target, our consumables and physician preference item area has been an area of priority for us. Obviously we look at diversified customer base; the home continues to be an area of real interest for us you think about again the continuum of care. And then, of course China has been our main priority in terms of our international expansion because we've seen so much opportunity. We will continue to look globally to see whether or not the opportunities that really enhance our long-term positioning. Jeff, if you want to add anything to it.

[Jeff Henderson:]

From a external standpoint with respect to shareholder return obviously we remain very committed to our dividend as demonstrated by our Board's recent decision to increase the dividend by a further 13% heading into this year. And as we said, consistently for the past several years, we will look at share repo opportunistically and from a flexible standpoint to look for opportunities to buy back shares and enhance shareholder returns again as we did in 2014 and as we have modeled for 2015 as well.

[Eric Percher:]

And as you think about specialty, it feels like you've tried to stay away from the lower-margin areas and build the services piece. Do you feel like there's more to be built there? Or do the acquisitions you made this year position you to grow organically?

[George Barrett:]

Well I think there is more opportunity there. Again if you think about what's happening in the Pharmaceutical side and the R&D side and the need both of these unique patient population, the physicians who are serving them in biopharmaceutical companies, I think there is a real opportunity there, and so we will continue to look organically how we build out our programs. We've got some really exciting work that we can do on the technology side internally. But if we see something externally that adds to our positioning we're certainly going to be open to it.

[Operator:]

And our next question from Charles Rhyee from Cowen and Company.

[Charles Rhyee:]

Thanks, guys. George, Jeff, just moving back to Medical for a second, we always talk about Canada. What about on the alternate side? You talked about the small physician practice needing some work. Can you talk about; is this an issue of scale? Is this an area where you think you need to invest more, maybe build more assets here? May be talk about that area.

[George Barrett:]

Good morning, Charles thanks. So I think when we talk about the small physician office obviously we started from a small base, so certainly scale has helped. But I would also say this -- that our physical operational footprint, if you look at the way we are designed over many years, so really more tuned to larger type customers. So we've had to do some repositioning of our facilities and that sort of touch points with those smaller accounts. It's just a little bit of more like a -- almost like a B2C than a B2B business. So I think we have to just do some thinking about how we position respectively both to touch them in a simple way and to serve them on our platform and so we've been looking at various ways to enhance that capability and that's the position there. Generally going back to the beginning of your question, our Medical business actually is performing well. I mean, if you look at this in a low utilization environment and you take as a discrete factor that Jeff just described, our core business is doing well. Our strategic accounts are growing. We grow our consumables. We've significantly expanded our footprint on position preference in AssuraMed, achieved the numbers that we said that they would achieve in terms of accretion. So I'm feeling pretty optimistic about the way we're position in that business and we'll just wrestle through some of those smaller challenges.

[Charles Rhyee:]

Okay that's great. If I recall, though, when you acquired AssuraMed last year, what, a year and a half ago, that was one of the things you talked about, them bringing you sort of some expertise in small picking and packing that could help your physician business. Has that not yet translated or is that still your -- are we then closer to it?

[George Barrett:]

Yes, that's a great observation. I should have pointed it out. I think it has been helpful but I would also say this, we've had some real opportunity directly in the home estate. And so as we've looked at this past year most of our efforts would be AssuraMed or Cardinal At Home -- I managed somehow to bury the lead, as they say, before defining our new branding. Our Cardinal At Home actually has more significant opportunity directly in that business and that's really where we've devoted most of our energy.

[Operator:]

We'll take our next question from Robert Jones with Goldman Sachs.

[Robert Jones:]

Thanks for the questions. Just a couple on the assumptions around guidance. One, I thought my understanding here was that there would be more brand to generic conversions in fiscal 2015 versus fiscal 2014. So just trying to understand the assumption a little bit better about less contribution from new generic launches.

[Jeff Henderson:]

Hey, Bob, this is Jeff. Yes, what I said was that the benefit that accrued to us from new generic launches in 2015 we expect it to be slightly less than 2014. Whether the actual amount of branded dollars that those generic are not increased or decreased is a different question? What we look at -- when we look at each launch on a case-by-case basis and look at whether it's exclusive or not and the timing et cetera, the net result in our forecast is a slight decrease in the contributions from new generic launches. Now obviously like every year there is a certain amount of estimates and educated guesswork that goes on and inevitably the year turns out a little bit different than we expected. And frankly the last couple of years turned out more positive than we expected. So we'll continue to assess this as the year goes on but based on our best information right now we think the benefit to us is a slight decrease.

[Robert Jones:]

And I guess the follow-up, just around the assumptions, again, would be around the assumption around slight generic deflation. I would think your average price per generic would be higher in 2015 relative to 2014, just again, if I think about all the attractive anticipated launches in 2015. I guess I'm just trying to better understand if the expectation for slight generic deflation is on your total book or is this more a comment on a like-for-like generic basis year over year?

[George Barrett:]

Its like-for-like generic, Bob. The way we calculate generic deflation is we look at all the generics we had on our book prior year and look at their expected prices as a portfolio for the next year. So it actually does not include generics that launch over the course of the year, so it's a like-for-like analysis.

[Operator:]

We'll take our next question from Glen Santangelo with Credit Suisse.

[Jeff Bailin:]

Good morning. It's actually Jeff Bailin in for Glen. Thanks for taking the questions. So I know China's been a nice growth driver for you guys, and the company has employed some pretty rigorous standards looking at other international markets. But as you consider the evolving marketplace, and with your competitors currently in both Europe and Brazil, do either of those markets screen incrementally more interesting than in the past right now?

[George Barrett:]

Yes, so -- good morning, Jeff. This is George speaking. I would say this; we have for many years actually looked around the international environment to see where there are opportunities for us to bring our value into the system. And we've continued to look at Europe, Brazil, has always been in our sights we've mentioned that, obviously China has been a priority for us. We'll continue to evaluate whether or not we think that there is opportunity and value for our shareholders in deploying capital into those markets. To this date we've continued to evaluate and we've made decision based on what we see as the opportunity to create value, sustainable competitive advantage, and value creation for our shareholders. So we'll continue to look at many markets. The fact that a competitor makes a move in one market is not our driver of strategy. Our driver of strategy will be what we do to compete effectively and create value for all of our shareholders.

[Jeff Bailin:]

I appreciate that color. Just a follow-up on the sourcing JV with CVS. I know it's obviously in the early months of that relationship, but anything you can comment on how your conversations with your other customers have proceeded in terms of any that might not buy generics from today perhaps being incrementally more interested in being involved on their generic sourcing with Cardinal?

[George Barrett:]

Yes, so Jeff I'll give you a bit of a generalized answer because I have to, it's a tricky area. But I would say that we have substantially through the joint venture Red Oak enhanced our scale and ultimately it's about being in the most competitive position possible. I think the market is probably going through its own changes, various players in the market as they look at their own ability to compete and compete effectively in this market. I think this may create some opportunities for us as companies look and see what their own capability looks like and whether or not they need to rethink their own model. And so I don't think it will be unusual to expect that those kinds of compensations are going on in this market and I think we're extremely well positioned, should our customer base or some of the customer base rethink the way their models work.

[Operator:]

And our next question from Ricky Goldwasser, Morgan Stanley.

[Ricky Goldwasser:]

Hi. Good morning. First question, just some clarification on the progression of fiscal year 2015 guidance. So I know, Jeff, you said that the joint venture will have an impact on 1Q 2015 in terms of the timing of contribution of benefit versus payment. But just to clarify, do you expect the joint venture to be dilutive to your first fiscal 2015 quarter or will you be able to offset the $25 million payment by the benefit from better sourcing?

[Jeff Henderson:]

Thanks for that question Ricky. First of all I don't expect that we will expense the full amount of the $25.6 million payment in Q1. As I indicated in the call and it's a bit of a selleeb. But we will begin expensing that on a monthly basis, once substantial benefits, the material benefits begin to be realized. I think the more important part of your question though is whether we expect net benefits in Q1, and I would say yes we do, but I would say that not to any meaningful extent. But I do expect the benefit to slightly outweigh any expense that we will incur in Q1.

[Ricky Goldwasser:]

Okay. That's helpful. And then, secondly, just back to the topic of generic price inflation, you talked in your prepared remarks about net inflation being in low-single-digits. Your competitors, as well, are check as opposed to high-single-digits in the quarter. I know you also talked about your generic basket and your portfolio. But -- so can you just explain to us why would your basket be different versus your competitors', assuming that you're seeing inflation on retail drugs, which I assume you have got like similar share within the retail market as your two other competitors?

[George Barrett:]

Good question Ricky. First of all I do not know exactly how our competitors calculate generic inflation or deflation. As I said to Bob earlier on though we calculate it based on a like-for-like analysis of drugs that existed last year versus the price of those drugs this year, looking at the entire portfolio weighted for the volume that we have. Now again it's possible they calculate it slightly differently it's also possible that our mix of business is different. We tend to have less mail order for example than our competitors may. We may carry slightly different levels in inventory et cetera. So I can't speak for our competitors. But as I said I think low-single-digits actually describes what we saw during the quarter.

[Jeff Henderson:]

Ricky, I will just add it would be hard to actually explain a reason that there is really any difference. This probably has to do a calculation. However one company calculates versus another but the market is a market. So I'm not sure there's really a difference.

[Operator:]

And our next question from David Larsen with Leerink Partners.

[David Larsen:]

Hi. Can you talk about your ability to ship products to large doc offices on hospital campuses versus the smaller doc offices in the community setting, and progress you're making in shipping to alternate sites of care? Thanks.

[George Barrett:]

Yes, so I'll start again. I think our ability to certain general across the system David is very strong. It's probably the most challenging for us historically when we deal with very, very small practices, just in that the number of skews that they might order, the way they order, and sort of tick tack operations or not that weren't quite as designed for those. But our ability to serve across for the channel is really high. We got recognized again this year by Gartner as the number one supply chain company in healthcare. This has been an area of real strength and fluency for us across the board but there are some little gaps where I think we need to do something differently or bad and we will continue to do that.

[David Larsen:]

Okay. So, when you approach an IDN you can ship products to all their doc offices across all their sites of care, pretty much?

[George Barrett:]

Yes, we did an IDN, we're able to make a very comprehensive offer and that's important for our strategy.

[Operator:]

And our next question from John Kreger with William Blair.

[John Kreger:]

Hi, thanks very much. A follow-up question on Medical. Can you talk about your preferred product pipeline? I think you said you launched about 500 in fiscal 2014. What would your expectation be for 2015?

[George Barrett:]

We have not at this point shared publically where we are in terms of our internal target. But I do not think it would be unrealistic to expect a similar number. We are aggressively going after that. And so I would say it won't be surprising if we were in the same kind of range.

[John Kreger:]

Great. Thanks. And, Jeff, I believe you mentioned, as you talked about the sourcing venture, that there could be an added milestone starting in 2016. Can you just talk a bit more about that? What metrics would trigger that? Should we assume that that's an annual payment or more of a quarterly true-up?

[Jeff Henderson:]

Yes, I don't want to go into a lot of detail there. But first of all the fixed payment, the $1 billion in total basically stays intact versus what we've discussed earlier. But as we went through the formation of this joint venture, looked at the long-term nature of the deal, looked at the desire it creates coming instead of going forward, we did agree that again achieving certain milestones and I won't go into specifically what those are, but should be a key certain milestones that would be additional payments that will be made on any quarterly basis after achieving those milestones. That's probably all the detail I want to get into at this point, John.

[Operator:]

And our next question from Greg Bolan with Sterne Agee.

[Greg Bolan:]

Hey thanks for taking the questions. Just on the Medical segment operating margin, I understand Canada was one source of the weakness, the other maybe a little bit weaker performance on the ambulatory side. But just as we think about FY 2015, and we think about the margins that you guys put up this quarter, it sounds like you guys possibly have done some restructuring in Canada, made some pretty decent changes. What, as we think about kind of the trajectory of Medical segment operating income should we be kind of thinking about throughout fiscal 2015? Is it kind of -- just may be this is a low point and just off of that point may be kind of an ascending trajectory? Or is it going to be somewhat spotty? How should we be thinking about Medical?

[Jeff Henderson:]

Yes, Greg, good question. Thank you. First of all just to clarify the two biggest negative drivers in Q4 were Canada as you referenced, and incentive compensation, that the amount that was pushed down to the segment based on overall corporate performance was higher than last year. Now George also indicated some disappointment with our performance in the small physician's office but from a qualitative standpoint that was not one of the bigger drivers in the quarter.

[George Barrett:]

Getting to the root of your question by going forward, we do expect overtime to continue to drive margin expansion within the Medical segments and obviously segment profit growth as well. However that won't necessarily be consistent every quarter. And in terms of the profile next year I expect most of the beneficial improvement will be back loaded for the second two quarters of the year. First half of the year, will be largely about continuing to invest in our strategic priority, particularly our physician preference items to ensure that we're reaching critical math in those of areas and I expect to begin seeing the fruits of those labors as we get into the second half of the year and beyond.

[Greg Bolan:]

That's great, thanks. And then, I'm sorry if I missed this, but just the CapEx guidance for fiscal 2015 obviously going higher. Can you just remind me what's driving that, please?

[George Barrett:]

Yes, a number of things. First of all we're going to continue to invest to improve and expand our information systems within the Pharmaceutical segment that's number one. Number two we are increasing capacity both for -- some of our physicians, I'm sorry our preferred product manufacturing and for our 3PL capacity and capabilities. And, fourthly, we're going to continue to invest to expand our geographic presence in China. Those are some of the major items I would generally characterize as though as investments in IT and investments in our key strategic priorities including the ones I just mentioned.

[Operator:]

And our next question from George Hill, Deutsche Bank.

[George Hill:]

Good morning, Jeff and George and thanks for taking the question. And I'll say, Jeff, I look forward to grabbing a blue or a Canadian at some point during the farewell tour. Just maybe I missed this point already, but I actually thought your fiscal 2015 was going to be a better generics launch year than your fiscal 2014, given some of the drugs that have been pushed out and what the calendar looks like for your fiscal 2015. Is there any more color you can give us on why fiscal 2015 isn't an improvement from the launch calendar perspective, or kind of maybe what you're seeing that we're not seeing?

[Jeff Henderson:]

So first of all I would not describe it as a major drop-off, like the clients in terms of the expected impact. Obviously depends on what assumptions you make for some of the larger launches. For example, the Nexium launch, still a big question mark right, regarding when and how it's going to get launched. And so depending on what you assume for that that can have a fairly material impact on the overall assumptions for the year. So it really comes down to our assumptions for each of the individual major launches and obviously we could be wrong. We tend to model these things relatively conservatively.

[George Hill:]

Okay. And then maybe just a follow-up -- on the incremental payments that would get made as part of Red Oak, I would imagine that that would assume that you guys are going to deliver earnings performance above and beyond the original agreement if you guys are required to make incremental payments to CVS. And then I might even ask with that, kind of why renegotiate the deal that way? I thought part of the deal was that you guys were making the $100 million payment such that you could enjoy some more of the upside. What led to CVS having the ability to call back some of the upside?

[George Barrett:]

Yes, George the lift I think in general we've -- as we got through the process and more information, more data, and the teams got together, we felt it was appropriate to make a number of adaptations. Again this is a long-term deal. And we want to make sure that it reflects the direct value equation for both parties. So we did make some modifications that under certain circumstances and certain milestones are achieved we make some additional payment. This we feel very positive about this and the final terms of our agreement and the strength of the relationship and economics that will flow from it. I guess, I would leave it at that.

[Operator:]

And our next question from Steve Valiquette, UBS.

[Steven Valiquette:]

Thanks, good morning. Just a few extra quick ones here on the Medical segment. And I guess first for the AccessClosure deal, which closed in mid May, did that provide a positive EBIT contribution or an EBIT loss in the quarter just from the deal mechanics? And will that deal still hopefully be slightly accretive in fiscal 2015?

[Jeff Henderson:]

Yes. Hi, Steve, Jeff. It was effectively neutral to our Q4 given that we're still just ramping it up and continuing to invest to expand our capabilities there. And, yes, our assessment of it being slightly accretive in FY 2015 has not changed. If anything or even more enthusiastic about the potential of that portfolio can bring to us in the future.

[George Barrett:]

Yes, the Mynx product line is really one we're excited about it. And so, as Jeff said, we're feeling pretty enthusiastic about the way this is unfolding.

[Steven Valiquette:]

Okay. One other quick one, just on Red Oak, even though the party's just getting started there. Can you remind us again of the just feasibility of other partners potentially joining into that JV? We've seen with some of the others ones in the industry that other parties have come on later which have enhanced those. I'm just curious, again, let's say, feasibility of that happening for Red Oak. Thanks.

[George Barrett:]

So Steve, we obviously, we have always the opportunity to expand our customer base bringing people into the venture itself is a different story. Today our joint venture is strictly between CVS Caremark and Cardinal Health. And we're thrilled about that relationship. But we always have the opportunity to again take advantage of the scale that we've achieved and sort of customers of every kind around the system.

[Operator:]

We will take our next question from Garen Sarafian, Citibank.

[Garen Sarafian:]

Good morning, guys, thanks for taking the questions. First, I want to follow-up on the JV questions. I understand things -- it sounds like things were fluid in terms of as you looked at the deal, and you guys made some adjustments. But I'm just wondering, does it continue to be a fluid kind of a situation where terms and payments might change one way or the other as you go through this year? Or is this sort of the final leg as you guys were finalizing the deal?

[George Barrett:]

Yes, I think we've -- thanks for the question, Garen and good morning. I think we've at this point finalized all the agreements that formed the venture. Obviously it's a fluid market. So we're always as a company as we sell products, we refine our market condition. But all the terms that are part of the joint venture agreement are now done and complete. Red Oak has formed, it has got leadership and talent and it's negotiating directly with manufactures today.

[Garen Sarafian:]

Got it. Great. And then just a follow-up on this fiscal year. Just on the distribution of EPS, I know you try to stay away from giving quarterly guidance but there seems to be first quarter some comments that it will be the most challenging through this year. With Red Oak coming on to the back half of the year, it looks like the slope may be a little bit steeper towards the back end. But when I look at your historical numbers, the back half really hasn't exceeded about 53%, 54% of your annual earnings. So do you expect this year to be higher than that? Or if you can just give us any sort of quarterly progression that would be really helpful. Thanks.

[George Barrett:]

Yes. Thanks. I'm not going to get into too much details because I don't want to get down to slippery slope to provide detail quarterly guidance. I will repeat what I said though, that we do expect Q1 to be the lightest. And just to clarify, what you said, we expect meaningful net benefit from the CVS JV to begin to materialize at the end of Q1, not towards the second half of the year, as you mentioned. But yes, Q1 should be the lightest. Beyond that, I would say the rest of the quarter's fair amount of consistency. We do have historical seasonality, which tends to make our Q3 larger than the other quarters. Over the last couple of years though that seasonality has continued to reduce as generics have taken up a bigger portion of the portfolio as less and less of our branded income come from contingent payments. And the branded price increases have tended to be spread more evenly throughout the year. That all said, I would expect our Q3 still would be the strongest quarter of the year, although probably less extreme that we might have seen two or three years ago.

[Operator:]

And we will take our final question from Robert Willoughby with Bank of America Merrill Lynch.

[Robert Willoughby:]

George, you had mentioned the possibility of expanding your relationship with CVS with Walgreens gone and the joint venture kind of up and running. Are any updates here in terms of any kind of meaningful relationship expansions?

[George Barrett:]

Good morning, Rob. Yes, just I would say again, I probably have to reiterate what I had said earlier. I think our relationship has probably never been stronger. We continue to explore ways to create value for one another. And I fully expect that to continue. So I can't provide any more specifics in that other than to say that working our way through the incredibly intricate details of getting to this go-live has only strengthened I think our relationship and we feel god about that. So it's probably as much as I can say.

[Sally Curley:]

Operator, I think this was our last question.

[Operator:]

Yes. That concludes the question-and-answer session. Mr. Barrett, at this time I'd like to turn the conference back over to you for additional or closing remarks.

[George Barrett:]

Great. Thanks very much. Listen, thank you to all for joining us today and giving us a chance to cover what was a really important and I think successful 2014. We look forward to our FY 2015 and seeing all of you soon. Thanks for dialing in.

[Operator:]

This does conclude today's conference. Thank you for your participation.