AmerisourceBergen Corporation

Good day and welcome to the Amerisource Bergen Q4 FY20 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. Again, that is star then one. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to 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 2020 fourth quarter and full year results. I am Bennett Murphy, Senior Vice President, Investor Relations. And joining me today are Steve Collis, Chairman, President, and CEO, and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these financial measures to GAAP are provided in today's press release and are also available on our website at investors.amazonsbergen.com. We've also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted, non-gap basis, including but not limited to EPS, operating income, and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent Form 10-K. Mayor Schiffberger assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the express permission of the company. You have an opportunity to ask questions after today's remarks by management. We ask that you limit your question to one per participant in order for us to get to as many participants as possible within the hour. With that, I will turn the call over to Steve. Thank you, Dennis, and good morning to everyone on the call.

Today we will be discussing AmerisourceBergen's strong performance in fiscal 2020 and our expectations for fiscal 2021. Importantly, we would like to start by first of all acknowledging the exceptional efforts of our associates to support our customers and help them navigate the challenges stemming from the COVID-19 pandemic. In fiscal 2020, we once again delivered strong performance to enlarge our continued ability to innovate and execute, and the inherent resilience of our business. Driven by our purpose and guiding principles, our associates stepped up whenever we challenged to address the unprecedented circumstances facing our industry. Thanks to them, we've been able to meet stakeholder needs while enabling the continuity and stability of the supply chain. and demonstrating the vital nature of our role in the health system as an invisible platform for pharmaceutical innovation and access. When the COVID-19 pandemic first emerged, we put the health, safety, and well-being of our associates and customers first. We implemented enhanced team protocols and supported associates by providing additional paid time off for associates needing to quarantine or care for family members. bonuses for frontline associates, and backup dependent care. We also shifted all suitable roles to remote work. Feedback from our associates on these measures have been overwhelmingly positive. More than 90% of associates surveyed say communication, collaboration, and creativity and innovation have remained the same or better. We also understood and appreciated our opportunity to deliver on our purpose and be part of the solution, given our central role in the supply chain. In addition to our normal supply apportionment process, our teams have ensured that critical medications are allocated on a prioritized basis to facilitate patient access. On the pharmaceutical distribution side, our ability to provide real-time data and analytics has helped facilitate actionable channel solutions and awareness for commercial and government stakeholders. At World Korea, our team has been helping manufacturer partners navigate the complexity of moving materials across the globe with limited global air traffic, while also enabling innovation with clinical trials in at-home settings. We believe the strength of AmerisourceBergen's diverse portfolio, combined with our dynamic operating agility, have demonstrated our business's resilience and our longstanding commitment to robust business continuity planning and investment. Our stakeholders now have an even greater appreciation for our vital role in the supply chain and in the healthcare system overall. I'm especially proud of the inspiration and diligent efforts of our associates, We have supported our customers with increased collaboration and innovative solutions, ensuring that they are able to meet patient needs, even as they adapted to the new environment. I would now like to comment on some of the recent developments regarding the potential global framework for opioid litigation resolution. We have made significant progress in the fourth quarter towards reaching a potential settlement to resolve opioid lawsuits. As a result, the company determined it was appropriate to accrue for this potential settlement based on a framework that we think is workable for all the relative parties. Advanced discussions are ongoing, and we are not able to comment deeply on the matter at this time. We take comfort from our belief that settlement funds will be used in support of initiatives to combat the opioid epidemic, including treatment, rehabilitation, mental health, and other important efforts. As you all know, we have been consistent in stating our desire to be a part of the solution to address the enormity of the opioid challenge. We always have and will continue to take our role in the supply chain seriously and continue to work diligently and alongside our industry partners and government and state agencies to combat drug diversions. We will also continue to support real solutions to help address the crisis in the communities we serve, work in, and call home. Just to reiterate, we believe that this is an important step towards resolution, which would allow our business and our people to focus on performing our vital role in the healthcare system, which has been clearly on display during the COVID-19 pandemic. Looking ahead, Amerisource Bergen enters fiscal 2021 with strong momentum as our key differentiators continue to provide a platform for value creation for all our stakeholders. First, we have the best customer base in the industry with a balanced portfolio of key active customers across all the segments in which we operate. With our diverse and extensive customer base, Amerisource Bergen is well positioned to support patient access wherever a prescription is needed. Today, I would like to highlight our Good Neighbor Pharmacy network of independent pharmacies. In September, we held our first virtual ThoughtSpot, our annual Good Neighbor Pharmacy conference and trade show. Through our ThoughtSpot, I was inspired by the unwavering commitment that our GST pharmacies have maintained with their patients and communities. They have gone above and beyond with their entrepreneurial spirit and adapted to the pandemic environment with innovations such as leveraging social media to engage with their patients, making and distributing hand sanitizers to all supply guests, and adapting to enable drive-through prescriptions. We share this purpose-driven mindset of our GMP qualities and will continue to support all of our customers by understanding their needs, delivering a seamless experience, and deepening our relationship with them. Second, We continue to build on AmerisourceBurn's unparalleled leading specialty franchise. Enhanced by the value-added services we provide, our specialty physician services business has the strongest portfolio of service and customer relationships in the industry. Our position in the market enables us to capitalize on emerging trends, such as the rise of biosimilars, where we saw better-than-expected adoption and growth this year. and which has become a meaningful and growing part of our business. A recent IQVIA report focused on biosimilars highlighted these strong utilization trends, expected overall growth for biosimilars, and the corresponding savings that they will create for the healthcare system. The growth of biosimilars is a long-term driver for Amerisource's building, as we are able to provide valuable commercialization services upstream to manufacturers and support access downstream to community-based providers. Specialty has been an important driver of Marisol Bergen's growth over the last few years, and in fiscal 2021, we are focused on furthering our value proposition and supporting our specialty physician customer base by continuing to invest in technology, innovation, and data and analytics solutions. Our ability to continuously innovate is our third differentiator. We embrace advanced technologies to enable real-time communication and transparency for our partners. Our sourcing and distribution teams integrate their commercial expertise with our data and analytics capabilities to provide actionable channel insights to our provider and manufacturer partners and government stakeholders. Earlier this week, Amerisource Bergen was selected by the Department of Health and Human Services to store, manage, and distribute pharmaceuticals for the Strategic National Stockpile. We take great pride in being chosen to support the government in their planned pharmaceutical stockpile activity. AmerisourceBergen is a trusted data provider in the pharmaceutical supply chain, with stakeholders across the health system used to enable data-driven solutions to new and existing challenges. We also continue to build upon our partnerships to become even more efficient and to serve our customers with greater speed, efficiency, and data capabilities. Having an innovative mindset means that not only do we seek creative ways to solve problems, but also that we are decisive and nimble to apply our capabilities. During the pandemic, for example, we quickly launched telehealth tools with various workflow platforms and other technology solutions, helping providers across our customer spectrum, from specialty physician services to MWI Animal Health, adapt to the new environment. AmeriSource will remain solutions-oriented and committed to providing value-added innovations and services so that our customers can take advantage of the opportunities available in this rapidly evolving market. Finally, turning to our fourth differentiator, we have a history of successful corporate stewardship. On the financial side, we have maintained our thoughtful and strategic approach to capital deployment with a focus on value creation and maintaining financial strength. This fiscal year, we invested $370 million in the business through capital expenditures while at the same time returning more than $760 million shareholders through dividends and sharing purchases. On the PTO community side, we are guided by our purpose. We engage our associates, operate in a sustainable and responsible manner, and support healthy and resilient communities where we live and work. We are making positive improvements for the environment and in our communities. In the last year, we have reduced greenhouse gas emissions by more than 5%. Earlier, I mentioned associate satisfaction with our COVID response. We've also seen a marked improvement in engagement on topics of personal importance, such as diversity and inclusion. Membership in our employee resource groups, for example, has increased by more than 40% year over year. In addition, inspired by our recent conversations with associates around social injustice and racial inequity, We have exciting plans for more diversity and inclusion initiatives in the coming year. Just this week, we appointed a new Chief Diversity and Inclusion Officer, and we look forward to working with him to continue our progress and focus in this important area. There is value generated by the power of difference, and we believe that fostering an environment that embraces diversity, inclusion, and addressing unconscious bias advances our purpose and our culture. making us an even better Amerisource program. As we enter fiscal 2021, the evolving healthcare landscape continues to offer opportunities for Amerisource programs to leverage our strengths and capitalize on our unique position in the market. We are focused on several key objectives. Supporting growth across the enterprise by enhancing our marketing specialty portfolio of innovative customer-centric services and solutions. deepening our strong strategic partnerships. Furthering our execution excellence by reinforcing our ability to deliver best-in-class service and efficiency. Three, continuing to strengthen our fellowship experience with a concerted effort to advance our talent and culture. And fourth, evolving our technology and communications to further the interoperability of our businesses and to become an even more unified AmeriSource firm. Most of all, we remained purpose-driven and well-positioned to create significant stakeholder value. Our businesses and teams rose to the challenges of the year and went above and beyond to deliver support and results for our customers and their patients. Thank you to our associates for their dedication, inspirational efforts, and execution, and for remaining united in our responsibility to create healthier futures Now I will turn the call over to Jim for more in-depth review of our fourth quarter and fiscal 2020 results and to provide fiscal 2021 guidance. Jim?

Thanks, Steve, and good morning, everyone. For Mayor Forsberg, fiscal 2020 was a year of resilience made possible by the diligent execution of associates across our organization and enhanced by the exceptional performance they delivered across our businesses. embodying our purpose, our associates adapted and innovated to meet the needs of our customers and their patients. Our team strengthened our relationships with partners both upstream and down, focusing on providing transparency and solutions at a time they needed it most. AmerisourceBergen's long history of internal investment helped support this important work and enabled us to establish robust business continuity plans, which utilized our efficient and modernized distribution network and our strong IT infrastructure. I take great pride in being part of such a purpose-driven company and have been humbled by the results that our teams have delivered. Before I delve into these results, please note that my remarks today will focus on our adjusted non-GAAP financial results and less otherwise stated. Growth rates and comparisons are made against the prior year period. For discussion of our GAAP results, please refer to our earnings release, which was published earlier today. Moving now to our fourth quarter results. We finished the quarter with adjusted diluted EPS of $1.89, an increase of 17%, primarily due to higher operating income. Our consolidated revenue was $49.2 billion, up 8%, driven by solid revenue growth in both the pharmaceutical distribution services segment and other, which includes our global commercialization services and animal health group of businesses. Growth profit increased 6% to $1.3 billion, driven by growth profit growth in each operating segment, resulting from higher revenue. Consolidated operating income was $530 million, up $74 million, or 16%, driven by the performance of both the pharmaceutical distribution services segment and our global commercialization services and animal health group. Moving now to income taxes, our income tax rate was 21.7% due to an unfavorable discrete item, up from 19.6% in the prior year quarter, which included a favorable discrete item. Our adjusted diluted share count decreased by 3.3 million shares, or 2%, to 206.4 million shares, driven by opportunistic share repurchases earlier in the fiscal year, notably when the share price came under pressure with the market in the month of March. For the year, we repurchased $420 million of our shares. In fiscal 2020, as Steve mentioned, Amerisource Bergen returned over $760 million to shareholders through share buybacks and dividends. And this morning, we also announced that the company's board of directors approved a dividend increase of 5%. This completes the review of our consolidated results. Now I'll cover our segment results. Beginning with pharmaceutical distribution services, segment revenue was $47 billion of 8%. The segment continues to benefit from strong specialty product sales, including growth in specialty physician services, as well as overall customer growth, particularly with some of our larger customers. Fourth quarter revenue growth benefited from an easier comparison to the prior year quarter. In the fourth quarter of fiscal 2019, our large mail order pharmacy customer had already seen volume from one of their large health plans roll off, and we had not yet onboarded the customer's post-merger incremental volume. Normalizing for the comparison, revenue growth would still have been at the upper end of the mid-single-digit range. Segment operating income increased about 15% to $426 million. As a reminder, the segment's operating income had an $18 million tailwind due to the exit of the farm medium business. In addition, as we called out back in May, we established an incremental bad debt reserve in the March quarter related to the onset of COVID-19. the incremental reserve was not related to any specific customers, but due to a point-in-time analysis of potential receivables risk. As a result of the continued financial resilience of our customers, we determined that it was appropriate to reverse a significant portion of this bad debt reserve. If you were to back out the tailwind from the farmedium exit and the benefit from the bad debt reversal, segment operating income growth, and the quarter would have been more in line with segment revenue growth. I will now turn to the other segment, which includes businesses that focus on global commercialization services and animal health, including World Courier, Amerisource, Bergen Consulting, and MWI Animal Health. In the quarter, total revenue was $2 billion, up 11%, primarily due to growth at MWI and World Courier, but also reflecting growth across the group. MWI revenue grew 8%, driven by double digit growth in the companion animal business, as well as growth in the production animal business. The global commercialization services group, which includes World Courier and AmerisourceBergen consulting businesses, had revenue growth in the mid-teens. The other segment had operating income of $105 million, an increase of 20%. World Courier continued its exceptional performance in the quarter. This completes the review of our segment results for the quarter. Before I turn to our full-year fiscal 2020 results, I want to take a moment to discuss our expense accrual in connection with opioid lawsuits. In the fourth quarter, we recorded a GAAP pre-tax charge of $6.6 billion, which is excluded from our adjusted non-GAAP results. The company is in advanced discussions, which are ongoing, to reach a global settlement to resolve cases currently filed and that could be filed in the future by states, counties, municipalities, and other governmental entities covered by the settlement. The decision to record the charge is due to the significant progress made during the fourth fiscal quarter toward reaching a potential settlement and our determination that a loss is now probable and the amount is reasonably estimable. The global settlement remains subject to contingencies that could impact whether the parties ultimately decide to move forward. Due to the ongoing work towards settlement, we are unable to comment further on these matters at this time. Now I will turn to our four-year fiscal 2020 performance. Our consolidated revenue is $189.9 billion, up 6%, driven by growth across our broad portfolio of businesses, particularly in specialty physician services, and also for our largest customers, Walgreens and Express Scripts. Consolidated operating income grew 7% for the year to $2.2 billion, while our operating margin increased two basis points. As it relates to operating expenses, we did experience a favorable impact from lower than expected corporate administrative costs, which resulted in a modest expense growth for the year. Pharmaceutical distribution segment operating income grew 8%, and global commercialization services in animal health had operating income growth of 5%. From a segment perspective, we saw growth across our businesses and pharmaceutical distribution. This segment continues to benefit from our strategic relationships in each customer segment and strong performance in specialty physician services where innovation and demographics continue to be organic growth drivers. In addition, we had a notable contribution from biosimilar utilization in fiscal 2020, as we saw a better than expected update of biosimilars, particularly in oncology. In other, World Courier continues to differentiate itself with key solutions in a complex world for global specialty logistics. Our manufacturer partners are leveraging our capabilities to enable at-home clinical trials and support treatment accessibility through World Courier. The investment we have made over the last few years has positioned our World Courier business to offer best-in-class solutions for our manufacturer customers, along with the expertise and capabilities needed to help navigate an increasingly complex environment for global specialty logistics. The adjusted effective tax rate for fiscal 2020 was 20.8% and was relatively consistent to 20.6% in the prior fiscal year. Turning now to EPS, our full-year adjusted diluted EPS grew 11% to $7.90, primarily due to the resilience and outstanding execution throughout our businesses that enabled us to deliver strong operating income growth. Our EPS also benefited from lower net interest expense and a lower share count, with share count down by 2%. Adjusted free cash flow for the year was $1.9 billion, higher than expected, primarily due to timing of customer and supplier payments. The timing benefit helps fiscal 2020 adjusted free cash flow and results in slightly lower adjusted free cash flow expectations for fiscal 2021, which we expect to be $1.5 billion. Again, I am proud of the ways our associates and teams have executed and adapted to deliver strong fiscal 2020 results. As we enter fiscal 2021, we have strong momentum and visibility to continue our growth trajectory in both of our operating segments. Before detailing our guidance, I will note that our working assumption for pharmaceutical pricing in fiscal 2021 is that brand inflation and generic deflation rates will each be similar to what was experienced in fiscal 2020. Turning now to discuss our fiscal 2021 financial guidance. As a reminder, we do not provide forward-looking guidance on a GAAP basis, so all of the following metrics are provided on an adjusted non-GAAP basis. Starting with revenue, we expect consolidated revenue growth in the mid single-digit percent range. Next, operating expenses, we expect consolidated operating expenses to grow in the mid single-digit percent range. We do not expect the same level of favorability from lower corporate administrative costs in fiscal 2020 to repeat. Understanding the importance of expense management, we will certainly be thoughtful in trying to have operating expense growth in the lower part of that mid-single-digit percent range. However, in fiscal 2021, we will continue to be diligent in protecting our associates and thoughtful in how we utilize continued remote work for our associates that are not on the front line. Regarding operating income, we expect for operating income to grow in the mid-single-digit percent range, with mid-single-digit percent growth expected for both of our operating segments. In pharmaceutical distribution services, we continue to capitalize on our leadership in specialty distribution, particularly specialty physician services, and benefit from our key anchor customer relationships across pharmaceutical distribution. As it relates to the impact from exiting Farm Medium, we will experience a $20 million operating income tailwind in the first quarter of fiscal 2021, as we left the last quarter in our financials prior to the Farm Medium exit. Moving now to Other. The Global Commercialization Services and Animal Health Group is expected to continue its positive trajectory in fiscal 2021, supported by continued execution from MWI, World Courier, and our businesses within consulting, as the businesses continue supporting our commercial partners in successfully traversing the COVID-19 landscape. Turning now to our consolidated tax rate expectation, our guidance assumes a full year adjusted tax rate of approximately 21 to 22%. Regarding share count, as a reminder, we do not include unidentified capital allocation in our guidance. Our fiscal 2021 guidance assumes that we finish the year between 206 and 207 million weighted average shares outstanding. As a result of these expectations, we are guiding our fiscal 2021 adjusted EPS to be in the range of $8.20 to $8.45, reflecting growth of 4% to 7%. Finally, turning to capital expenditures and cash flow expectations. First, CapEx is expected to be about $400 million. We have many projects in place, and there's no one project driving our capital expenditure. Rather, they have a shared focus on supporting growth, increasing efficiency, or enhancing our commercial and compliance capabilities. Amerisource Bergen's balanced approach to capital deployment, which prioritizes internal investment, is an important commercial and financial differentiator for us. Now for adjusted free cash flow, we expect our adjusted free cash flow for fiscal 2021 to be approximately $1.5 billion. As I mentioned earlier, the timing benefit that helped fiscal 2020 cash flow to be higher than expected has an offsetting impact on fiscal 2021. In closing, we have seen firsthand this year how valuable AmerisourceBergen's purpose-driven talent and culture are to delivering differentiated value to all our stakeholders. Drawn upon our adaptability, resilience, openness, and dedication as professionals, we continue to deliver for all our partners and come together as individuals to embrace our differences. I'm confident that we are furthering our talent and culture as we become an even more unified Amerisource Bergen. The fundamentals of our business remain strong as we continue to benefit from our pharmaceutical-centric strategy, key partnerships, and leadership in specialty. Amerisource Bergen is well positioned to continue to create long-term shareholder value and deliver on our purpose of being united in our responsibility to create healthier futures. Now I will turn the call back over to Steve for some final remarks. Steve?

Thank you, Jim. Before we open the call up for questions, I would like to share my reflections on a year that has made a lasting impact on our lives. 2020 has been a year of uncertainty and challenge for communities across the globe. During this time, AmerisourceBurton has put the needs of our associates, our customers, and our communities first. From planning safe ways to work, to ensuring the delivery of life-saving medication and to enabling nonprofits to bring relief to communities from California to Lebanon. Through our purpose, scale and expertise, we have ensured that our partners have had the connectivity, capability and data they have needed to think, plan and act effectively. As we worked to ensure that patient needs were met across our footprint, we recognized that we were only able to do so cause of the resilience of our business, which has been reinforced by our focus on pharmaceuticals, our diverse portfolio of customers and businesses, our differentiated customer experience, and our leadership in specialty. As I've said for the last few months, I've never been prouder to be a part of a Marisol service. I've been humbled by the conviction, dedication, inspirational efforts, and professional execution carried out by our associates. Their teamwork and passion have truly enabled us to deliver on our purpose of being united in our responsibility to create healthier futures. I remain incredibly proud of the work that our associates are undertaking across all areas of our business. This concludes our prepared remarks for today. Now I will turn the call over to our operator to begin the Q&A session. Operator? Operator?

Speakers, your line is now open. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-turn phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Operator, our first question, please.

Our first question will come from Robert Jones with Goldman Sachs. Please go ahead.

Great. Thanks for taking the questions. I guess maybe just to start on guidance in the pharma segment, you know, you're calling for mid-single-digit epic growth there. I wanted to just get a little bit more on your thoughts around the underlying assumptions versus some of the more one-time items, specifically thinking about things like lapping pharma, which you mentioned, and then obviously additional COVID costs from this year that might not recur. at the same level, at least for next year. And then I guess to the upside, I know, Steve, you continue to talk about the growing opportunity with biosimilars. I was hoping maybe you could also touch on what, if anything, is considered in that opportunity for fiscal 21.

Sure. Well, Bob, this is Jim, and I'll start with some of your questions you asked on guidance and then turn it over to Steve for your final part of the question. So fiscal year 21 financial guidance, I mean, it reflects strong growth across multiple businesses, building upon the momentum from the strong fiscal year 20, despite the COVID-19 challenges. And as you know, We're guiding to mid-single-digit revenue growth and mid-single-digit operating income growth, and that mid-single-digit operating income growth is both in pharma distribution segments and in other, and adjusted diluted EPS guidance in the range of 820 to 845, and keeping in mind there that we don't include unidentified capital allocation in our guidance. So in terms of pharmaceutical distribution, And some of the things that are driving it, you know, we continue to benefit from our pharmaceutical-centric positioning, particularly from our leadership in specialty where we're seeing biosimilars continuing to contribute meaningfully. We're expecting pharmaceutical utilization trends generally consistent with the experience we had in fiscal year 20. We're assuming that brand inflation and generic deflation levels that they're in line with what we saw in fiscal year 20. We will have a tailwind in the first quarter of fiscal year 21 from the exit of our medium, and so that will be a benefit of $20 million in operating income tailwind comparing the first quarter of 21 with the first quarter of 20. And then, you know, we continue to remain disciplined on expense management. We were strongly encouraged by our OpEx performance in fiscal year 20 and, you know, continue to remain focused on expense management. We're unlikely to have the same level of favorability related to some of the corporate and administrative expenses in fiscal year 21 that we had in fiscal year 20. Like our internal health care expenses would be an example of that. But, you know, we continue to expect to perform well on the OpEx front. And so if we look also kind of at quarterly cadence. I would say that the first quarter will be a bit stronger because we have the tailwind compared to first quarter fiscal year 20 related to farm medium. And then the second quarter will be a little bit tougher because we're comparing to the second quarter fiscal year 20, where in March we had elevated sales with the onset of COVID-19.

Hi, thanks for the question. Yeah, we've seen encouraging usage of biosimilars and the biosimilars market is continued to expect to materially increase by 2025. You know, most importantly, we see potentially increased molecule demand by two to four percent, indicating increased patient accessibility as supportive care and other products become more, you know, affordable, and especially with some of the co-pay inequities that we've tried to highlight elsewhere. So, you know, of course, for ABC, the Part B products are the most impactful. But I think, you know, biosimilars are a key trend for us. They're important for our customers. important for the patients that we all ultimately serve. And, you know, the pricing is remaining intact to the, you know, the commercialization business that we are so in favor of performing for ABC are able to still be in play and access an adhering solution. So, you know, very positive trend for ABC, we believe. Next question, please. Sorry, Bob. Please go ahead, Bob.

No, no, I was just going to say to one other item, you know, I saw that Amerisource Bergen was selected by HHS for this Strategic National Stockpile Initiative. I was just wondering if you could comment on what, if anything, is included in guidance around that new contract.

Yeah, no, so there's nothing specific in our guidance. You know, we can confirm that we've been selected to store, manage, and distribute strategic national stockpile pharmaceuticals. You know, and I think, you know, this is a further testament to that value that ABC provides, our deep commercial expertise. You know, and I think one of the areas that we've really been focusing on is our data and analytics capabilities. And we've talked a lot in my script in particular about innovative solutions that enables us to provide, you know, that provide unique solutions to government and commercial partners. So, you know, we believe that during this period we've become the invisible pillar of innovation. And, you know, this is a further example. I think many, many more stakeholders are aware of the capabilities of an Amerisource program than they were before. So I think this is extremely good evidence of that. So we're proud to receive this award.

Yeah, Bob, and I'll just add that the contract is in our numbers, but there's nothing specific to call out.

Okay, great. Thank you.

Next question, please, operator.

Our next question will come from Lisa Gill with J.P. Morgan. Please go ahead.

Thanks very much, and good morning. First, just to start and go back to your comments around biosimilars, Jim, I understand that the comments that Steve made and that this is positive, but is there any way for you to frame what the potential margin opportunity would be for a biosimilar versus a traditional branded drug that goes through your specialty business?

Yeah, let me start out there. And as we commented on, biosimilars is really one of the very positive things that's driving our strong results in our specialty physician services business. And we do see higher margin opportunities with biosimilars than we see with traditional brands. And that was one of the factors, for instance, we were quite pleased this year when we saw our operating margin kick up a couple basis points in biosimilars and biosimilars. You know, the adoption of biosimilars being stronger than we expected is one of the factors that caused our operating margin to tick up during the fiscal year.

But when we think about it, you know, if we were just to use traditional margin, is there a way to think, like, is this – one time more profitable, two times. I mean, just to kind of put this in reference, as we start to think about the number of biosimilars that will come to the market over the next few years, and I agree with you that I believe that this is a great opportunity, especially given the size of your specialty business and the manufacturing services that you have. I'm just trying to put this into context. I know you said that there is part of that in your 2021 guidance, but how do we think about that margin differential and the opportunity, not just for 2021, but over the next several years?

Yeah, we do think, you know, clearly with a positive factor in 20 will be a positive factor for us in 21 and in future years, the growth of biosimilars. We won't get specific on margin, but we'll say that the margin is, you know, higher than brand specialty and not as high as generic margin. But we do feel like it will be, you know, a continued growth driver for our businesses today.

And Lisa, you know, one final point, you know, community oncology practices, particularly we believe members of our ion GPO that have really shown an ability to partner with key manufacturers, have been early adopters in embracing biosimilars And if you look at the data on our larger practices adoption versus providers on a national level, it's favorable. So, you know, we believe that's further evidence of our being able to promote new and effective therapies.

Our next question will come from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yeah, hi. Good morning. Sorry. Good morning. So I have one question that really around CapEx and capital deployment. I think you increased your CapEx portfolio. guidance for this year. So what areas are you looking to spend on and how should we think about these areas as driving growth in the foreseeable future? And then clearly it sounds like you're getting closer to an opioid settlement and resolution of litigation that's occupied you for a few years now. So now you're freeing up kind of like that capacity. How are you thinking strategically about capital deployment in areas for potential expansions?

Sure. Let me start out there. So, yeah, we are expecting our capital expenditures to be a little bit higher in fiscal year 21 than fiscal year 20. They're about $370 million in fiscal year 20, and our guidance is about $400 million in fiscal year 21. And, you know, we've got many projects in place. There's no one project describing our CapEx projects. It's really a shared focus across supporting growth. So a lot of our CapEx is about supporting growth, increasing our efficiency, and then enhancing our commercial and compliance capabilities. And then in terms of capital deployment, our capital deployment strategies remain unchanged. Invest in the business, strategic M&A strategies. opportunistic share repurchase and maintaining a reasonable dividend. And one thing I think is really nice to point out is that our balanced approach to capital deployment has been a commercial and financial differentiator for us. We ended fiscal year 20 with a trailing three-year average adjusted return on invested capital of over 18%. And I think we are... well-positioned for capital deployment, ending fiscal year 20 with zero net debt.

Yeah, thanks, Jim. I just would add that, you know, for strategic accretive M&A, it's important that the targets, you know, must be actionable with appropriate returns. You know, Jim and Les are a controller who work very closely with our finance committee of our board, and, you know, you know, we evaluate all opportunities. But I'd say that overall, you know, we didn't do any M&A this year, but the Marisol's program continues to benefit from our strategy being pharmaceutical centric, particularly our strength in specialty. And we're always looking to build, you know, on our key strengths. So, you know, commercialization services, animal health, those are areas, you know, patient access, or in the special area, those are all key areas for us, Ricky.

Our next question will come from Glenn Santangelo with Guggenheim. Please go ahead.

Thanks for taking my question. Steve, I just wanted to also follow up on sort of the opioid litigation. You know, it's obviously an encouraging sign. And assuming you're correct and the number that you put in the press release that you reserve for the $5.5 billion after tax over 18 years, it's only about $300 million a year. And so when I think about that in the context of free cash flow of about $1.5 billion, how do you think about changes you may or may not have to make to your historical capital deployment strategy? And then, Jim, maybe my follow-up for you would be, is there anything you can do in this low interest rate environment to maybe get creative on how you fund or pay for a settlement, or do you just anticipate this may be something that you fund out of free cash flow? Thanks in advance.

Yeah, hi, Glenn. You know, again, I think Jim and I answered the last question pretty thoroughly. You know, we always contemplate it, and, you know, our first priority is, of course, always internal investments. And, you know, we did about $360, $370 million this year, and... We have always, you know, robust requirements from the business, which also gets well scrutinized. But essentially, they've been some of our best returns and, you know, the area of interoperability, et cetera. Those are very important for us. But, you know, as we look at different liquidity options, you know, as we look at the cash folding and the pre-cash flow, we'll really, you know, we'll keep on looking at being that preferred place for shareholders to invest. Jimmy has a comment as well.

Yes, Glenn. As I commented earlier, our capital deployment priorities remain unchanged. We're certainly cognizant of the potential settlement and the impact of the settlement as we consider capital deployment. But at the same time, it's really important that this doesn't change our strategic focus and the need to invest in our business and return capital to shareholders and And as everyone knows, the other important piece of running our business is remaining investment-grade, and that's something that we've been aware of and conscious of throughout the opioid discussions. Thank you. Next question, please.

Our next question will come from George Hill with George Beck. Please go ahead.

Good morning, guys. And, Steve, I'm going to ask kind of a characterization question first of all. where the fiscal 21 guidance, we talked about the very small moving puts and takes as opposed to any large moving puts and takes. It almost seems like what I would characterize as a normal year, going back to all the pricing concerns and everything that we've seen stretching back to 2015. I guess I'd ask, would you characterize it that way? And then my quick follow-up would be, as it relates to the 21 guidance, can you talk about how you're thinking about volumes relative to the pre-COVID baseline?

Yeah, you know, George, thank you. I mean, it's interesting that we're referring to the past, you know, 12 months with all the occurrences that we've had, not necessarily for a marital burden, but in our society as a normal year. But, you know, look, the resilience of our businesses were truly on display. We had, of course, the spike in March and in the, you know, the softish April and May. And if you go back to those times, the confusion that we had. So, you know, I think we've had also in 2009, we had the fiscal crisis, you know, and the worldwide recession. And our business was extremely recession-proof in those times as well. And, you know, payers keep paying, our customers keep on seeing their patients. And keep on really finding ways to access patients. So I think if you think about fiscal year 20, the resiliency overall, the way that some of our businesses that were a bit softer, including say even our production animal health businesses came back, those are all very important to us. and I think a good reason why we performed the way we did. If you look at fiscal year 21, we expect that overall providers will be able to navigate through any surge in the virus in patient loads very effectively. I think that we're much more aware of patient treatments as more effective therapies that are available and that have been, you know, improved for emergency utilization, even now one for FDA utilization. So, you know, we're quite optimistic about our providers' abilities to sustain and manage through any prolonged COVID crisis. And then, you know, some of the trends that we've talked about, we've talked about them a lot, including our portfolio of customers and the businesses we are in. the pharmaceutical-centric and our ability to do incredible business continuity planning, which should not be underestimated, I think positions us very well. Jim, I see you have a comment.

Yeah, and I think the last six months of fiscal year 20, well, all of fiscal year 20, but in particular the last six months of fiscal year 20, we really demonstrated the resilience of our businesses to operate in this environment. And so, you know, that gives us good confidence in our fiscal year 21 guidance as we look at, you know, mid-single-digit revenue growth guidance and mid-single-digit operating income guidance for fiscal year 21.

Next question, please, operator.

Our next question will come from Charles Reed with Callen. Please go ahead.

This is James for Charles. I just had a question on other. Performance in other was strong this quarter, adjusted up income up 21%, up 5% for the year, which is ahead of the fiscal 20 guidance despite COVID. Can you speak more on what drove the strong growth in the quarter and then some of the puts and takes heading into fiscal 21? Sure.

In the other segment, yeah, we did have a very strong quarter of operating income up 20%, and we did hit 5% operating income growth for the year, and we're guiding growth the next year to mid-single digits. And, you know, we saw some of the businesses and others be a little bit more impacted by COVID during our third fiscal quarter, but really come back nicely. in the fourth fiscal quarter. You know, really kind of a standout business in the other segment has been World Courier, as World Courier really has, you know, demonstrated the value of its service and global specialty logistics that manufacturers, you know, have really valued during this environment. And so that's been a standout and really carries strong momentum into the into next fiscal year. But we've really seen good performance during the quarter from other businesses also. We saw MWI with 8% revenue growth, including double-digit revenue growth in companion animal and a return to growth in production animal also during the fourth fiscal quarter. And we saw solid performance out of Lash and other businesses. So we think those businesses are very well positioned going into fiscal year 21.

Our next question will come from Eric Percher with Mephron Research. Please go ahead.

Thank you. I want to return to the theme on pharmaceutical growth and maybe some of the seasonality. So I think we heard you loud and clear from medium in Q1. I would love to hear any thoughts you have on COVID impact as we get through the middle of the year, how meaningful that is. And then two other specifics. One would be generic pricing stable. Is that less of a benefit than it was when we were moving from higher deflation to lower deflation? And last of the three, in the independent pharmacy marketplace, there's been reports of you extending your largest customer there for a long contract. Did that have any negative in this year that might be unique relative to a normal year?

Yeah, let me start out there, Eric. So you asked about kind of seasonality and farm distribution as it relates to fiscal year 21. And, you know, again, I think what the second half of fiscal year 20 demonstrated was our resilience and our ability to perform well and have, you know, growth in the COVID environment. And so as we look to seasonality this upcoming year, you know, you've commented, we do have the tailwind, the $20 million tailwind in the first quarter from exit of farm medium. In the second quarter, we do have a little bit more of a tougher comp because as we commented before, we saw a sales spike in the month of March last year with the onset of COVID. So that creates a little bit tougher comp during the second quarter. But I think really kind of the key theme is just the resilience of the business. And of course, we track the volumes in all of our businesses very closely. And we've just seen strong resilience in fiscal year 20 that we would expect to continue in fiscal year 21 in this environment. And then on generic deflation, the question you asked on generic deflation. We saw generic deflation moderate, as we've commented, during fiscal year 20, and our expectation for fiscal year 21 is for generic deflation to be consistent with what we saw in fiscal year 20. And with regard to independence and what we see in independence, Steve, I'm not sure if you'd like to comment at all on...

Yeah, you know, I think you're talking about our largest buying group customer, and, you know, there's nothing to really comment on there. That's what we're managing through, and that's really around pricing and balancing that we have talked about with all customers. So, you know, nothing important to comment on there at all. Thank you.

Our next question will come from Stephen Valquette with Barclays. Please go ahead.

Great. Thanks. Morning, Stephen. Congratulations on these results. So the U.S. elections obviously are not quite concluded yet, as we all know. I'm just curious if you have any updated thoughts just on the outlook for drug price reform going forward. There will be some visibility on a split Congress, but maybe just within your overall FY21 guidance, do you make any sort of allocation for potential changes on either international pricing parity or other things, or does all that just get absorbed within the guidance range? Thanks.

You know, Steve, my 88-year-old father called me this morning and said, what's going on in Pennsylvania? Why can't you get your results? So I don't think that that was quite as direct as this comment. But, you know, on policy, I think we always go back to some of our key themes. You know, it's really important to remember that pharmaceuticals are the most efficient form of source of care. And that, you know, I think people sometimes forget this, not you, obviously, but that, you know, total health care spending, we actually are under 10% now in uh, overall, uh, increases have been pretty reasonable. So, uh, you know, I think those are the themes that we try to highlight. And, uh, of course, uh, if there were any changes that you referenced, like the international pricing, that those should be done thoughtfully and in a transit and a transition, uh, you know, sensitive way. Um, so, uh, you know, I think you, you've seen, uh, you know, the market, uh, rally yesterday on healthcare stocks. Um, and, uh, You know, I think we, AmerisourceBergen, we have a seat at the table. We're involved. We've really advanced in that area. You know, we often get seen as experts on a lot of these reimbursement and policy areas as it affects our customers. And, you know, that's a big part of our focus, right? We'll continue to advocate on behalf of community-based care. We'll continue to, you know, be a fair partner to pharma and bio and those sort of organizations. And, you know, we'll also look to make sure that anything that affects our industry is fairly legislated, like the pedigree rule is a good example of that, things like that. So, you know, we think it's important. And, you know, also Marisol's Bergen, of course, really benefits as a mutual fund of all pharmaceutical-based spending. So, you know, we well represent in all the segments, so you should just think about that. You know, I think, operator, we have time for no more questions. Okay. Our investor relations head is putting in any questions. So I'm going to just end up by saying we're excited to finally be in fiscal year 21. We focused on execution and growth in fiscal year 21, which we now just completed October. You know, most excitingly from a personal point of view, I remember when I joined the former Bergen Brunswick about 27 years ago that we were doing about $3 or $4 billion in sales and potentially investing This next year, this upcoming year, when we could celebrate the 20th anniversary, we will celebrate the 20th anniversary of Ameris Orsenberg emerging, we could record $200 billion in revenues, which would be quite a momentous achievement for a 20-year-old company. So just let me end by saying that we're excited about fiscal year 21. We'll also be opening new headquarters for our company, and we're hoping that we can celebrate together with our wonderful associates that have done such a great job throughout this year. We are well positioned to deliver growth and create stakeholder value as we are guided by our purpose of being united in our responsibility to create healthier futures. Thank you for your time today. I know it's been a busy morning.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.