AmerisourceBergen Corporation

And welcome to Amerisource Bergen's second quarter fiscal year 2021 earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's conference, please signal for a conference specialist by pressing the star key followed by zero. After today's event, there will be an opportunity to ask questions. Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Bennett Murphy, Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2021 second quarter results. I am Bennett Murphy, Senior Vice President, Investor Relations. Joining me today are Steve Collins, Chairman and President, CEO, and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures, Reconciliations of these measures to GAAP are provided in today's press release and are also available on our website at investor.american.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we made four living statements about our business and financial expectations on an adjusted non-GAAP basis, including but not limited to EPS, operating income, and income tax. Four living 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. The management of this program assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the express permission of the company. You will have an opportunity to ask questions after today's remarks by management. We ask that you limit your questions to one per participant in order for us to get to as many participants as possible within the hour. With that, I'll turn the call over to Steve.

Thank you, Ben, and good morning to everyone joining us today. It's hard to believe that one year ago on this call, I addressed for the first time how Marisol Spurgeon was responding to the global COVID-19 pandemic. There were many uncertainties then about how COVID-19 would impact our lives, our families, and our communities. Guided by our purpose of being united in our responsibility to create healthier futures, Marisol Spurgeon acted decisively to protect and support our associates, maintain business continuity, and help our customers navigate increased complexity. Our people and businesses prove resilience, and the pharmaceutical distribution industry demonstrated its vital role as a key pillar in the healthcare system. I remain incredibly proud and inspired by the way our associates and teams have adapted and innovated to support our partners' needs and facilitate patient access. Powered by our talent and culture, and enabled by robust infrastructure and technology, AmerisourceBergen is providing value-added, data-driven solutions to empower our partners with channel awareness and solutions. Importantly, our differentiated capabilities enable us to continue to support pharmaceutical innovation and the pandemic response, both in the US and increasingly abroad. This work is important for our people, our community, and our partners, and embodies our purpose while creating value for all our stakeholders. Turning now to our quarterly financial results. As we announced earlier this morning, Amerisource Bergen delivered year-over-year growth for the second quarter of fiscal 2021. Revenues were $49 billion, representing growth of 4% from the same period last year, and our adjusted EPS grew 5% year-over-year. These results were driven by our strong customer relationships, leadership and specialty, innovative services and solutions, and our purpose-driven culture that unites us in our responsibility to create healthier futures. One way that we are living our purpose is our leading role in providing COVID-19 In the U.S., we continue to distribute the antiviral and antibody therapies to some health systems across the country. Through our work with the Strategic National Stockpile, we are supporting government preparedness for current and future potential pharmaceutical needs. Members of our Food Data Pharmacy Network are providing vaccine access in their communities as we facilitate their participation in the Federal Retail Pharmacy Program. Their efforts are especially important in the nationwide inoculation movement because their role as highly trusted medical professionals in their communities enables them to quickly, efficiently, and equitably serve local hard-to-reach priority populations. Outside the United States, we continue to play an active role in global vaccination efforts. In Canada, for example, our NMR business is working in partnerships to distribute the COVID-19 vaccine on behalf of the Canadian government. As I mentioned earlier, the Merisource movement is focused on providing value-added services and innovative customer-centric solutions, and that focus has only been amplified throughout the COVID-19 pandemic. Our associates are facilitating an efficient and resilient supply chain to ensure patients have access to the critical medications they need. In our support of pharmaceutical innovation, we are providing key commercialization and distribution solutions for our partners to help them adapt to the current dynamic environment. We are leveraging our leadership in special distribution and services to further enhance our differentiated value proposition for our partners. This includes expanding our robust suite of specialty capabilities and data and analytic solutions to further solidify our position as a partner of choice and an essential pillar supporting pharmaceutical innovation and access. Just in five weeks, we are able to leverage the full breadth of AmerisourceBurgers capabilities, including our logistical expertise and efficient execution, to be a solution provider for public and private partners. Working with the U.S. government and our manufacturer partner, we were able to facilitate the transportation of antiviral therapies to India. I am both honored and humbled that we were able to live our purpose in this time of need around the world. This answer could not have been possible without our World Courier business, a key global specialty logistics Korea continues to support innovation of manufacturers as they navigate logistical complexes. The importance of World Korea's expertise has never been clearer in over the past year as our partners shifted to perform more clinical trials at patient homes through our industry-leading direct-to-patient capabilities given the challenges of interfacing with patients in a traditional clinical setting. WorldCare's unparalleled logistical services, combined with partnerships that enable a broad network of field-based services, have proven invaluable in keeping clinical trials moving forward. Our teams have been adaptable and creative, and they provide solutions to facilitate better outcomes for the communities and patients that our partners serve. Our MWI animal health business also continued its strong thanks to its strong manufacturer and provider relationships as well as its ability to facilitate better health for both companion and production animals. To support the continued growth of the MWI business and further our operational efficiency, we recently opened a new state-of-the-art animal health distribution center in the U.S. This new facility bolsters our animal health distribution network and enhances our service capabilities for veterinarians and other animal health care providers nationwide. Amerisource Bergen's continued ability to provide differentiated values to our customers and partners and deliver on our purpose of being united in our responsibility to create healthier futures is enhanced by our ability to execute on our core growth strategies. First, we remain focused on our customers One of our core differentiators is our portfolio of key active customers across each segment of our business. This customer base enables us to lead with market leaders and facilitate patient access wherever a prescription is needed. We intend to continue to strengthen our key customer relationships and enhance our customer-centric solutions globally. Second, we will continue to build upon our leadership in sessions, We have the strongest portfolio of customer relationships and value-added services in the industry, which enables us to advance and benefit from pharmaceutical innovation, enhancing our capabilities and specialty to support both our upstream partners and downstream customers to make an important area of focus for Marisol's program. Third, we continue to focus on delivering best into our service and developing innovative approaches to best service our customers. By embracing advanced technology data analytics, we provide solution-oriented and value-added innovations that enable all our customers to grow. This ties into our first growth strategies, because when our customers grow, we grow. We seek to enable positive prescription pharmaceutical outcomes globally by facilitating market access and supporting pharmaceutical innovation. By providing value-added services that facilitate commercialization as well as integrated solutions to facilitate patient access on top of our unparalleled scale and expertise, we are able to get therapies to both small and large patient populations. This approach enables partnerships that unlock product potential and move health forward. Our assumptions remain key to our success and our focus on diversity, equity, and inclusion, as well as investments in our people and culture, have long been pivotal in advancing these growth strategies and positioning Marisol's program for long-term success. Our strategy and culture are foundational to reinforce which focuses on putting people first and ensuring the continued financial health of our businesses while creating long-term value for all our stakeholders. To ensure that the value we create is sustainable, we are embedding ESG principles into our culture, businesses, and processes, making sustainability core to our overall growth strategy. Our environmental strategy focuses on adapting to a changing climate, and advancing a resilient and responsible supply chain. We are leveraging our infrastructure and technology to create an efficient and secure pharmaceutical supply chain that also allows us to reduce waste, lower our global carbon footprint, and prepare for unexpected events. For example, we collaborate with our partners and customers to create packaging and transportation efficiency that result in significant process, cost, and environmental improvements. We also understand our climate-related physical risks and have a robust business continuity plan in place to ensure we can continue to deliver life-saving medications. On the social side, our strategy is centered around corporate responsibility and focused on investing in our people and communities to inspire team members and foster healthy communities. We continue now, as we have throughout the pandemic, to ensure we protect and assist our associates and their families with enhanced power, additional bonuses, physical and mental health resources, and child care and independent care benefits extended paid parental leave. For our frontline associates, we implemented additional important measures, such as enhanced cleaning protocols, social distancing protections, and providing them with PPE. For the long term, we advanced our talent and culture by investing in the development of our people. One of these investments is a new leadership competency model and developing programs supported by world-class learning technology underpinned by our purpose and guiding principles the program focuses our leaders on creating an energized diverse and inclusive workplace leveraging collaboration to create and realize new opportunities innovating and executing action-based to rapidly adapt to our dynamic landscape. To help all our associates unlock their full potential and empower them to reach their career goals, we've also launched a new enterprise learning model that offers a modern, intuitive, and tailored learning experience that is also consistent with what we expect and develop in our leaders. By aligning our people strategy with our business strategy, we create value now and for the long term. Another way we inspire key members is through promoting diversity, equity, and inclusion, and ensuring that their collective voices and perspectives are heard. DE&I remains a key focus of our investments in our workplace culture, and we encourage our associates, To further our community impact, we have elevated and strengthened our focus on supplier diversity with a collaborative, data-driven, and thoughtful approach to ensure the diversity of our supplier partners and the alignment of this function with our broader ESG efforts. Additionally, a marital service empowers our associates to participate in and meet conversations that help shape the future they want to see. For example, our associates are passionate about social justice, and the Marisol Spurgeon Foundation has elevated their impact by matching donations at a two-to-one ratio for organizations focused on diversity, I am proud that the Foundation has taken these steps because I personally believe that equality is a fundamental right and that it is important to support social justice. Health equity has also been raised over the past year as one of the many social issues facing our society. And here I want to highlight the work that our Good Neighbour Pharmacy and Elevate Provider Network members are doing to foster healthy communities. As transplant health providers with well-established relationships in their communities, they promote health equity on a daily basis and play a major role in ensuring positive outcomes locally. Their critical work advances the national COVID-19 vaccination effort to reach all parts of the country's populations quickly and efficiently. Secondly, the Marisol Spurgeon Foundation recently made a donation to the Boys and Girls Club of America to support COVID-19 vaccine education and awareness in an effort to remove barriers to vital healthcare access and improve the health of our communities. We are grateful and proud to have the opportunity to support healthy communities across the U.S. by partnering with nonprofits and independent pharmacies. Finally, the governance element of our of transparency, ethics, and integrity, which informs everything that we do and which ensures the highest standards of governance. Our commitment to do the right thing is core to Marisol Spurgeon's purpose and principles. By advancing environmental, social, and governance initiatives, Marisol Spurgeon aims to create healthier futures around the world. This is not only the right thing to do, but it also enables us to further enhance the value we create for all AmerisourceBurden stakeholders. In closing, we remain confident in our ability to provide differentiated value to our stakeholders, leverage our leadership in special distribution, capitalize on our innovative mindset, and benefit from our focus Looking ahead, we have strong confidence in our business and our focus on closing the acquisition of Alliance Healthcare, which will extend our distribution capabilities into key markets and further strengthen our global platform of manufacturing service. We look forward to building upon our strong talent base with the onboarding of the Lyme Health team, including their fantastic management team, and we are excited to begin the next evolution of enhancing our ability to provide innovative and global healthcare solutions. We are well positioned to create long-term stakeholder value and remain united in our responsibility to create healthier futures. Now I will turn the call over to Jim for a more in-depth review of our results. Jim?

Thanks, Steve, and good morning, everyone. As Steve mentioned, it's hard to believe that over a year has passed since we've publicly addressed the COVID-19 pandemic and AmerisourceBergen's response. Reflecting on the past year, I have been moved by the diligence our teams have shown in supporting our partners during these complex times. Our associates have lived our purpose of being united in our responsibility to create healthier futures, and they are the foundation of our continued performance. I am appreciative of the hard work of our associates over the past year, and I'm proud that AmerisourceBergen continues to focus on cultivating and advancing our talent and culture. While the pandemic presented new challenges, our long-term commitment to investing in our businesses allowed us to successfully manage through them and to demonstrate the strength and resilience of our business model. As I said on the call this time last year, we have been able to leverage significant internal resources and capabilities to meet the evolving needs of our upstream and downstream partners. As we sit here today with our eyes on the future, Amerisource Bergen is continuing to invest internally in our businesses and talent to ensure that Amerisource Bergen is not only delivering strong results this fiscal year, but will continue to do so over the long term for differentiated value from our innovative services and solutions. Turning now to discuss our second quarter results, I will review our adjusted quarterly consolidated results, our segment performance, and the updated elements of our fiscal 2021 guidance, including the increase to our UPS guidance. I will note that this updated financial guidance still does not include any contribution from the proposed Alliance Healthcare acquisition announced in January 2021. My remarks today will focus on our adjusted, non-GAAP financial results unless otherwise stated. Growth rates and comparisons are made against the prior year March quarter. For a detailed discussion of our GAAP results, please refer to our earnings release. We finished the quarter with adjusted delineated UPS of $2.53, an increase of 5%, primarily due to solid operating income growth across our businesses. To reflect our continued strong performance, we are raising the bottom end of our whole fiscal year EPS guidance, bringing it to a range of $8.45 to $8.60, up from a range of $8.40 to $8.60. Our consolidated revenue was $49.2 billion, up 4%, driven by revenue growth in both the pharmaceutical distribution services segment and other, which includes our global commercialization services and animal health group of businesses. Consolidated gross profit increased 7% to $1.5 billion, driven by increases in gross profit in each operating segment. In the quarter, gross profit margin increased nine basis points from the prior year quarter. This gross margin improvement is due to continued growth in the sale of specialty products, including COVID-19 therapies, and growth in some of our higher margin businesses, such as World Courier and MWI Animal Health. Regarding consolidated operating expenses, operating expenses grew 8% year over year due to a number of payroll-related costs to operate in the current environment and investments and internal initiatives being made throughout fiscal 2021 with a focus on continuing to differentiate our value proposition for future growth. We are narrowing our operating expense guidance for the year from growth in the mid to high single-digit range to growth in the high single digits. As a reminder, last year, the second half of fiscal 2020 benefited from an objects tailwind from lower corporate administrative costs, notably lower travel and lower healthcare expenses. Turning now to consolidated operating income, our operating income was $707 million, up 5% compared to the prior year quarter. This increase was driven by the increased gross profit in both the pharmaceutical distribution services segment and our global commercialization and animal health businesses, which I will discuss in more detail when I review segment level performance. Operating income margin grew two basis points to 1.44% as a result of the continued strong performance by our higher-marking businesses. Net interest expense was $35 million roughly last year over year. During this quarter, we issued $2.5 billion of new debt ahead of closing the Alliance Healthcare acquisition. The new debt is comprised of approximately $1.5 billion of senior notes due 2023, which have a coupon of 0.737%, and $1 billion of senior notes due 2031, which have a coupon of 2.7%. Though we do not side to interest expense, I will note that due to the interest and fees associated with the debt raise, net interest expense will likely be up roughly 15% for the full fiscal year. Our updated fiscal 2021 adjusted EPS guidance includes this incremental interest expense, but does not include Alliance Healthcare operating income, which of course would be included in our future consolidated P&L after the transaction closes. Moving now to our effective income tax rate for the second quarter, our tax rate was 21.9% up from 21.5% in the second quarter of fiscal 2020. Our diluted share count was 207.3 million shares, roughly flat compared to last year's share count. We now expect our average share count for the fiscal year to be approximately 207 to 208 million shares, up from approximately 207 million shares. The revised guidance range requests the impact of dilution from Stockholm and does not reflect the share count impact of the 2 million shares that we will deliver at the close of the Alliance healthcare transaction. As you begin to revisit your model, I will remind you that when we announced the alliance acquisition, we noted that we would immediately begin a period of deleveraging following the transaction close. Accordingly, in lieu of share repurchases, we are committed to paying down over $2 billion in total debt over the next two years to ensure Amerisource Bergen maintains its strong investment grade credit ratings. Turning now to adjusted free cash flow. Our adjusted free cash flow year to date was $298 million, keeping us on track with our adjusted free cash flow guidance of approximately $1.5 billion for the fiscal year. Regarding our cash balance, we ended the quarter with $6.6 billion in cash, including approximately $2.5 billion of proceeds from the issuance of the senior notes that I've just discussed. This completes the review of our consolidated results. Now I'll turn to our segment results. First, regarding the pharmaceutical distribution services segment, it is important to keep in context the environment last year in the month of March, Last year, we experienced increased pharmaceutical demand as many of our customers increased their purchases at the onset of COVID-19, resulting in higher revenue and gross profit. This elevated level of sales in the prior year period does have an impact on year-over-year growth rate comparisons for the quarter. This year, pharmaceutical distribution services segment revenue was $47.1 billion, up 3% for the quarter, driven by increased sales of specialty products, including COVID-19 therapies. The growth rate may have been negatively impacted by there being two less business days in the current year, March quarter, compared to the prior year period. Sigmund operating income increased about 5% to $589 million, with operating income margin up one basis point to 1.25%. We saw continued solid performance related to sales of specialty products, including COVID-19 therapies, and for our ion solutions business, which continues to be a differentiator. As a reminder, the vast debt reserve that we reversed in the fourth quarter of fiscal 2020 was originally recorded in the second quarter. The reserve and subsequent reversal both happened in fiscal 2020, therefore resulting in a tailwind to the current quarter operating income growth and will be a headwind to operating income growth in the fourth quarter, but will have no impact when comparing to full fiscal 2020. 2021 with fiscal 2020. Now I will turn to other, which includes businesses that focus on global commercialization services and animal health, including World Courier, Amerisource, Bergen Consulting, and MWI. In the quarter, total revenue was $2.1 billion, up 12%, driven by growth across the three operating segments, particularly for World Courier. Operating income for the group was up 14% to $123 million, primarily due to the continued growth and performance of World Courier and MWI. World Courier's direct-to-patient capabilities differentiate the business and have gained meaningful traction in the market as clinical trials have begun utilizing the in-home setting. Additionally, our traditional commercial offerings and industry expertise at World Courier continue to be valued by manufacturer partners, resulting in higher volumes and weight in a time when global logistics continue to be complex. MWI has maintained its strong growth trajectory, particularly in the companion animal market, where pet ownership has been on the rise and pet parents are paying closer attention to their pet's health. Our investments across our businesses, including a new animal health distribution center and in data analytics technologies, have allowed us to remain a best-in-class provider and offer innovative services and solutions to our partners. As a result of exceptional performance in strong business fundamentals and other, we are raising our operating income guidance for the group from mid to high single-digit growth to low double-digit growth for the fiscal year. I will note that this new guidance range of low double-digit growth implies a two-year compound annual growth rate for the group in the high single digits. helped by the continued performance of World Courier and MWI. Turning now to touch on the third quarter to provide some color and reminders that you look at your models. Given the continued strong performance across our business and the favorable comparison to last year, we expect revenue and gross profit to be strong and the operating expense growth rate to remain elevated. Below the operating income line, we expect DPS to be up only slightly in the third quarter due to three main factors. First, higher tax rate year-over-year as we lack discrete items in the third quarter of fiscal 2020. Second, higher interest expense due to the debt raise. And third, higher share pounds. With sharing purchases on hold as a result of the Alliance Healthcare transaction debt, we expect ShareCount to continue to move up to this dot com. At this point in the year, we are happy to have been able to raise our EPS guidance again, driven by the strong performance we are seeing across our business. The new EPS range represents growth of 7% to 9% versus 2020, and is clearly driven by a strong operating income growth expected in both the pharmaceutical distribution services segment and in our global commercialization services and animal health group. Before I include my prepared remarks this morning, I will provide a brief update on the Alliance Healthcare Transactions. We continue to make progress toward closing the transaction and continue to have valuable discussions with the leadership and teams at Alliance in preparation for closing. We remain on track to close the acquisition by the end of our fiscal year with the possibility of closing in our fiscal third quarter. As a reminder, we expect the acquisition to generate high teams percent increase into adjusted EPS in the first 12 months post-close. This acquisition is an important strategic and financial step into the future as it will enhance our scale and margin profile after pre-cash flow generation and build on our global pharmaceutical manufacturer service and distribution capabilities. Amerisource Bergen is well-positioned to create long-term value for our commercial partners through our key differentiators of strong customer relationships, leadership and specialty, and our commitment to innovation. We are also continuing to build on our corporate stewardship initiatives to ensure the value we create benefits all of our stakeholders. As an executive co-sponsor of our ESG Council, I am excited by this quarter's release of our fifth annual Global Sustainability and Corporate Responsibility Report, which aligns with global sustainability frameworks, including STASI, GRI, and the UN Sustainable Development Goals. For the first time, the report also aligns with TTFD and the World Economic Forum frameworks and is presented on its own sustainability microsite. As a member of the Statistic Standards Advisory Group, AmerisourceBergen's leading ESG reporting approach is featured as a case study in a recent workshop. I encourage everyone to visit the micro site and look forward to continuing to provide updates on our growth to ESG. I would be remiss if I did not also take a moment to highlight an important recent acknowledgement that CEO Steve Collison and Merisource Bergen received. In April, the Anti-Defamation League Philadelphia presented the Americanism Award to Steve and to Meritorious Bourbon for commitment to fighting hate locally, across the country, and the world. This award is valued recognition of Steve and to Meritorious Bourbon living our purpose. In closing, Amerisource Program remains committed to running our business with an eye to the future and will continue investing in our businesses, people, and communities to serve all our stakeholders. We are building on our strengths, enhancing our differentiation in the marketplace, and positioning our business for long-term growth and value creation, driven by our purpose of being united in our responsibility to create healthier futures. Thank you for your interest in Amerisource Bergen. Now I'll turn the call over to the operator to start our Q&A. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Glenn Santangelo with Guggenheim.

Oh, yeah, thanks. Good morning. And congrats. And thank you for taking my question. Stephen, Jim, I'm guessing you've heard by now, but early in the starting season, we've received varied reports from different companies with respect to changes in generic pricing. Could you maybe comment on what you've been seeing in your generics business, both in terms of pricing, and the supply chain, any notable changes worth calling out? And thanks in advance. Hello?

Generic pricing are trending relatively in line with our original expectations for the year. With regard to generic deflation we asked about, overall deflation rates are relatively in line with the last couple of years. There are currently a few price-specific pockets of pressure, but overall the rate is still relatively in line with our expectations for the year. Supply and demand dynamics remain balanced. And for the balance of the year, we expect overall deflation to be generally consistent with year-to-date. And then on the generic sell side, I'm glad that market continues to be competitive but stable with no significant update.

Thank you for the question. The next question comes from Eric Coldwell with Baird.

Okay. Thanks very much. And unfortunately, I joined a little bit late, but I thought I heard you mention something about two less selling days. I was hoping to get a little more specificity on that, what that was in relation to. And, you know, a selling day in distribution is obviously a tremendous amount of money if that's what that was in relation to. So I'm just curious if that was one of the factors in the revenue update versus the street, which was a bit higher.

Yeah, let me comment on that. Those of us who have been in distribution for a long time, which includes about everyone on the call, have been exposed to it. Selling days are a this quarter for AmerisourceBergen versus the same quarter last year. One was simply due to the calendar. The other was due to the fact that this year we did not operate our distribution centers on MLK Day, which we felt was important. And so that was why we had the second last selling day during this quarter. And so selling days do probably have some impact on the revenue during the quarter. But I would say overall, you know, we feel quite good about the revenue growth during the quarter. We're comping against the quarter last year where there was a real uptick in revenue during the month of March during the onset of the pandemic. And so we were, you know, pleased with the revenue growth during the quarter and that we were comping against the high revenue growth quarter last year. And then also, I think most importantly, that we're keeping our revenue growth guidance the same, which is strong in the high single 50% range for the fiscal year.

The next question comes from Lisa Gill with J.P. Morgan.

Good morning, and thank you for taking my question. Jim, I just want to go back to your comments around the higher interest cost, tax rate, and share count. So by my math, it looks like those three things combined would be somewhere in the neighborhood of close to $0.10. Am I doing the math correctly when we think about the fact that You know, you raised your numbers today, but brought the lower end up by five cents. If everything else were equal, would there have been another incremental upside to your numbers and the guidance?

Yeah, thank you very much for the question. And, you know, obviously we don't do quarterly guidance, but we felt it was important to give that color. And what we indicated is that we're expecting for our adjusted EPS to be up only slightly during the third quarter. And I think really the key thing is we're expecting We're expecting revenues to continue to be strong, GPs to continue to be strong, and we're expecting very solid operating income growth. So it's really the below-the-line items that are driving it. The higher tax rate year-over-year because we had a discrete tax item that benefited the third quarter of last year. We have the higher interest expense during the third quarter because we've done the alliance acquisition financing before closing the acquisitions. So we have the interest expense related to it in our guidance, but of course we won't have the alliance operating income in our guidance until we close the deal. And then we have a slightly higher share count also. And so, yes, those are the kind of things that are driving what I said in the third quarter. But I think, you know, kind of the key thing is that from an operating standpoint, you In our guidance, we expect the business to continue to perform well, and we have operating income guidance overall for the business in the high single-digit percent growth range.

The next question comes from Robert Jones with Goldman Sachs.

Thanks for the question. I guess, Jim, maybe just to follow up on that, you know, you talked about 3Q EPS being up slightly. Just to be clear, is that mostly below the line that would maybe have that EPS growth looking a little bit more subdued? And then last quarter, you called out the COVID treatment benefit in the quarter. Specifically, I was wondering if you'd be willing to share that specific contribution for this quarter as well.

Thank you. Yeah, so there were two things there. I'll address both of those. The first one was the detail that we did on the third quarter. Yes, all of those, all the things that caused adjusted EPS to be only slightly in the quarter, they are below the line, as I just went through. And, you know, we are expecting, you know, solid sales and operating income growth, and our operating income guidance once again for the year is five single-digit percent growth. And on the COVID treatment benefit during the quarter, it was roughly – half as large and half as impactful in our second quarter as it was during the first quarter of our fiscal year. And so while it still had a positive impact, it was only about half as much during the second quarter, and we do expect it to continue to decline over the balance of the fiscal year.

The next question comes from Ricky Goldwasser with Morgan Stanley.

Yeah, hi. Good morning. I wanted to focus on the pharma segment. You reported about 3.5% revenue growth and 4.5% operating income growth. So as prescriptions pick up to a more normalized level, should we see more leverage flowing to the bottom line? And along these lines, what are you seeing in terms of utilization trends in April, in early in May. Thank you.

Yeah, with regard to utilization, broadly speaking, our sales have been resilient across our businesses during the pandemic. We've, you know, begun to last the onset of the COVID-19 pandemic, of course. You know, there's been a lot of external noise around cost, gold, and blue, which isn't a significant driver of our business, but that being said, moving forward, The script data will compare against a past year that had very low cold, cough, and flu season. There's been some lower preventative and diagnostic physician activity, but we're optimistic now. as we look to the current situation and balance of the year that with vaccines and lower incidence of COVID-19 in many parts of the country, people will be scheduling these diagnostic procedures and getting referrals to physicians to treat conditions.

The next question comes from Eric Percher with Nefron Research.

Thank you. Your comment on supporting pharma innovation and commercialization struck a chord, and I'm thinking that relative to bringing specialty customers upstream and World Courier having an expanded role, is it time to consider the value proposition of working with the CRO a little bit more intently than it was worth a couple years ago and Even if not a large-scale combination, are there areas in oncology or regulatory affairs that could fit well with the business?

Yeah, hi, Eric. So, you know, we've really got broadly interested in commercialization services and helping with particularly specialty positions with market challenges, which would include patient accruals and helping find those patients that, you know, post-pandemic, we expect that there will be a result. of innovation in clinical trials. Obviously, the FDA, from our understanding, has been very focused on the pandemic and getting those therapies approved. So we always do stand willing to serve, but we feel like our portfolio is very adequately positioned, and we don't have any specific needs or holds right now, and have had a history of working with our physician customers on you know analytics and data mining so uh we feel like uh we well positioned but uh it's important to keep in mind uh the benefits that could come from using community oncologists in particular in clinical trials so very important the next question comes from charles rai with kallen oh yeah thanks for taking the question james i wanted to talk about a follow-up with the um

Question from Lisa when you talked about the puts and takes on the rest of the guidance here and with some of the offsets. I think you talked about a higher expense related to the alliance financing, et cetera. But, you know, given that in the other segment you raised the guidance there, WorldCareer seems to be doing, you know, quite well here. You know, can you talk a little bit more about the trends that you're seeing here and in the rest of fiscal 21? I guess with Royal Courier, you built this great infrastructure. Have you guys thought about adding more capabilities to support pharma manufacturers in the clinical trial process itself? Can you see yourself adding more different capabilities besides maybe the logistics piece? Thanks.

Yeah, sure. And so I think the first part of your question was about, you know, kind of some of the moving pieces and guidance in general, and then second part more specifically on World Courier. And, you know, I think kind of the key thing is that we are seeing, you know, positive trends across our businesses, particularly in our higher margin businesses. We're also seeing just really strong execution across our businesses, both in pharmaceutical distribution and in the commercialization and animal health businesses. And so some of these positive trends we're seeing, of course, in continued very good performance in specialty physician services. We're seeing strong performance also in health systems. And then, as you called out, we're seeing strong growth in both the World Courier business and the MWI businesses, and we expect to see positive trends there in those businesses for the rest of the year. Beyond these overall positive trends, there are a number of moving pieces that we talked about in the prepared remarks and on this call. We're beginning to lap some significant year-over-year growth rates related to biosimilar utilization. The operating income from biosimilars will continue to grow, but probably not at the same percentage growth rates that we saw as utilization was really increasing during the last three quarters of last year and the first quarter of this fiscal year. Our guidance, as I said, does assume that COVID therapy sales will be lower in the second half than they were in the first half. And, you know, of course, you know, we're very proud of what we're doing there and And it is good that we do feel that, of course, utilization of COVID therapies we do feel will be lower in the second half. And then we're, you know, lapping part of the fiscal year. We had very low expense growth at the back half of last year. In the back half of last year, we had less than 1% operating expense growth. So we're lapping that operating expense growth. We also, you know, have a six-month of interest associated with the Alliance Health Care program. And so those are some of the things that are impacting our guidance. But overall, you know, we feel very good about the positive trends and execution across our businesses. And Steve, is there anything that you'd like to add there?

I just would say, you know, that we've owned World Career for eight years or so now, and I think it's continuing. surprised at the management team and our board, how resilient and innovative they are. You know, we talked a lot about clinical trials at home. But we keep on finding new ways for this business to be importantly relevant to our stakeholders. You know, an example we can give you is just what occurred this week with India. where, you know, we were able to facilitate a shipment of an important anti-infected product for India, really using the capabilities of World Korea, because it is such a high-capability, highly-targeted initiative. that we continue to find uses for. I also do believe that, you know, part of our synergy thesis is looking at the combination of World Korea and Alliance Healthcare in different markets. Just having more of a footprint, more presence, I do believe that that, of course, is going to be another strong additive characteristic for World Korea's, you know, opportunities in the future. Next question, please.

The next question is from Steven Veliquette with Barclays.

Thanks. Good morning, guys. Hey, Jim, it seemed that the first 10 or 15 seconds of your answer on the first generic pricing question might have been cut off a little bit. I did hear you mention the pockets of pressure on generic pricing on the buy side. I guess I was just curious whether or not the dynamics in relation to that are such that those, quote-unquote, pockets will defer. or is that just more of a permanent reduction in your guidance range? The other quick question, just given the COVID surge in India, is there any early signal at all from generic suppliers in India that there could be disruption to supply of generics to the U.S.? Is there something on your radar screen, or are you not really worried about that? Thank you.

Yeah, what I'll do is I'll handle the first part of that, and then Steve will take the second part of that. And obviously it's a really important question, and you indicated that I cut out during part of the question, so let me kind of go through the answer again, because obviously it is such an important topic. So while we don't have specific guidance metrics, broadly speaking, both brand and generic pricing are trending relatively in line with our original expectations for the year. Overall, the deflation rates are relatively in line with the last couple years regarding generic deflation. And as I said, and as you know, there have been a few product-specific pockets of pressure, but overall the rate is still relatively in line with our expectations for the year. Supply and demand dynamics remain balanced. And to balance the year, we expect overall inflation to be generally consistent with year-to-date. And with that, I'll turn it over to Steve.

Yeah, as far as, you know, the situation in India, obviously heartbreaking. Of course, you know, most of the media attention would be focused on the high. outbreak areas and we've seen this unfortunately play out in other areas. Let's just point to a few mitigating factors here. First of all, we believe that manufacturers have had some purpose continuity planning and the expectation that there could be outbreaks and they're prepared for this. So we don't expect any very large interruptions in the supply chain. to be transported as usual. The operations continue. China's currently functioning is also very important to supply at normal levels, which is especially important for raw materials. And, you know, Amerisource working throughout this crisis have worked very closely with our supply chain partners, and we've been able to come up with solutions in almost all situations. So we feel that we can get through it, but are very cognizant and empathetic with what's going on. And we were just tremendously proud as an organization about the work we were able to do just this week to get this very unique product into India. And we'll support that effort to get through our foundation and corporate grants as well.

Okay. All right. Thank you. The next question comes from Kevin Caliendo with UBS.

Great. Thanks for taking my call. You mentioned you're going to start to lapse some of the COVID therapies and also some of the biosimilar benefit. We're seeing biosimilar uptake continue to increase every month. So I'm wondering why that still wouldn't be a little bit of a tailwind for you guys. And if you could In any way, shape, or form, sort of size the benefit you've gotten from biosimilars. I know you've always sort of given us some heads up around the COVID therapy, but if we could also include biosimilars, that'd be really helpful as we think about modeling going forward.

Yeah, and so with regard to biosimilars, we absolutely believe in our guidance that they'll continue to grow the operating income dollars from biosimilars. So we do expect to have continued meaningful growth there. The point that we were making is that the growth percentage rate will not be as high as it was last year when biosimilar utilization was growing from a much smaller base. but we absolutely do expect the operating income dollars from biosimilars to continue to grow in our specialty business. And we haven't specifically sized the dollar figure, but it has been a meaningful contributor to both the dollar growth and the gross profit percentage improvement.

Yeah, we continue to see positive trends in biosimilars, including now in health systems. And we began to see significant utilization of biosimilars in the second quarter in health systems, but also in oncology, where in some therapies we've seen 40% utilization. So, very important. Important also, as we mentioned before, to create room for other innovative therapies to come up. And, you know, in other specialties, it hasn't been as prevalent. Adoption has not been quite as quick. But oncology, when it comes to community and when it comes to specialty and trials, tends to be on the cutting edge. So, you know, we believe that this trend will be led by oncology, but will continue into the other specialties as well. So, you know, we think bar simmers are and will continue to be very important for our future. With that, we have time for one more question, please.

The next question is from George Hill with Deutsche Bank.

Hey, good morning, guys, and thanks for sneaking me in. I guess, Jim, if I could just ask a follow-up kind of as it relates to volumes. I was wondering if you could talk about the outperformance of specialty versus kind of the regular way business in the quarter. You mentioned the two fewer days in the quarter, which I think explains a lot of the revenue numbers coming in a little bit below sheet expectations. But I'd kind of love to hear commentary around how things like oncology perform during the quarter.

Yeah, I'd be happy to address that. You know, we saw continued strong performance in our specialty physician services business, you know, in oncology supply and in other parts of the business, including our ION. GPO. We also saw, you know, very strong performance, as we noted, during the quarter during health systems. But I will say, if we look overall at the company, we have really strong performance and execution across many of our businesses. And focusing in on the revenue growth rate during the quarter, of course, once again, we were, you know, comping against quarter last year, where there was a real surge in business during the month of March, during the onset of COVID. So we were quite pleased by our performance during the March quarter and the trends that we're seeing for the balance of the year, which is included in our guidance.

Okay, I'm going to wrap up by just thanking everyone for their attention today. In preparing for this call, I was consulting with Bennett and his people, and they were telling me how many more companies you're all typically covering, so we really appreciate your attention. as we focus on a tremendous future ahead for Amerisource Bourbon. As we've said many times, never has our purpose been more clear during this pandemic than during this pandemic, and I'm incredibly proud of the role that our industry has played and we've played in that industry. We're very confident in our business and value proposition. We're looking forward in the months ahead to closing the alliance transaction, which is a key key um development in the marisol's bourbon history i'm looking forward to our 20-year anniversary coming up as late as fiscal year and to broadening our distribution and global footprint as we are united in our responsibility to create healthier futures thank you for your time today the conference is now concluded thank you for attending today's presentation and you may now disconnect