Cencora, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Q1 fiscal 2019 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given to you at that time. Should you require offline assistance with an operator during the call, you may press a star then zero. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your Vice President of Investor Relations, Mr. Bennett Murphy. Please go ahead.

Thank you. Good morning, and thank you all for joining us for this conference call to discuss the AmerisourceBergen Fiscal 2019 First Quarter Financial Results. I am Bennett Murphy, Vice President of Investor Relations for AmerisourceBergen, and joining me today are Steve Collis, Chairman, President, and CEO, and Jim Cleary, Executive Vice President and CFO of On today's call, we will also be discussing non-GAAP financial measures, which we use to assess the underlying performance of our business. The GAAP to non-GAAP reconciliation provided in today's press release are also available on our website. During this conference call, we will also make forward-looking statements about our business and financial expectations on an adjusted non-GAAP 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. A marriage with Bergen assumes no obligation to update any forward-looking statements or information, and this call cannot be rebroadcast without the express permission of the company. We remind you that there are uncertainties and risks that could cause our future actual results to differ materially from our current expectations. For discussion of key risk factors and other cautionary statements and assumptions, we refer you to our SEC filings, including our most recent Form 10-K and to today's press release. I'd also like to remind you that we have posted a slide presentation to accompany this morning's press release. You can find it on our website, www.investor.amherst.bergen.com. You'll have an opportunity to ask questions after today's remarks by management. We do ask that you limit your questions to one per participant in order for us to get through as many participants and inquiries as we can within the hour. With that, I'll turn the call over to Steve. Steve?

Thank you, Ben, and good morning to everyone on today's call. I am pleased to discuss AmeriSource Bergen's solid first quarter fiscal 29 performance, our role in the supply chain, both new value creation opportunities and ongoing responsibilities, and finally, our company's strong position for long-term growth and shareholder value creation. First, our quarterly financial performance. Revenues were up an impressive 12% to $45.4 billion for the quarter. and our adjusted diluted EPS was $1.60 for the first quarter, an increase of 3% compared to the previous fiscal year period. As we lacked the last significant quarterly contribution from Pharmadium, it is important to highlight the strong results from our core pharmaceutical distribution businesses. The continued execution by these businesses that are supporting growth of our customers and delivering strong performance in the specialty distribution along with shared buybacks and tax reform, have helped offset the headwind caused by Farmadium over these past four quarters. We are extremely proud of the strong start for fiscal 2019 and recognize that this success would not have been possible without the hard work of our dedicated associates. I personally want to thank our 21,000 associates who every day are driving this performance and maintaining a high impact culture that unlocks expertise and facilitates collaboration with our customers, partners, and fellow colleagues. As I mentioned, the pharmaceutical distribution segment executed extremely well despite the ongoing challenges at Pharmadium. The segment's double-digit year-over-year revenue growth reflects several key successes. First, our relentless focus on execution in the evolving and dynamic marketplace. Deepening relationships with our partners, providing the solutions they need and enabling patient access to pharmaceuticals wherever and whenever they need them. Next, our market-leading specialty distribution franchise of oncology and physician-administered products continues to perform exceptionally well. Our deep expertise in specialty distribution and comprehensive offering of services and solutions built over the last several decades continues to empower community-based providers to best service their patients while enhancing their ability to maximize business performance. Finally, we have had great success growing volumes with existing customers. We believe that our portfolio of fast-growing customers is a key differentiator, and we are continuously seeking new ways to unlock value for our partners. With regard to Formelium, We are disappointed with where we are, but are actively working to resolve the challenges. First, we have continued to communicate with regulators regarding potential resolutions. As those discussions continue, we are in the midst of conducting a comprehensive strategic and financial review of the Farmadium business. Our approach is both thoughtful and decisive. In fact, We have already engaged with a new CGMP expert consulting firm to support remediation efforts and enhancements across the entire Pharmadium business. In addition, we have begun a workforce reorganization to appropriately position the business to execute once remediation is complete. Jim will provide more details in his comments. However, I want to reiterate that Pharmadium's focus remains on patient safety and delivering the safest and highest quality products. The strategic and financial review of the business will be all-encompassing and could result in further investments, other business optimization activities, or even a potential sale of the business. Amerisource Bergen will ensure that decisions made from this review consider both the needs of our medium customers and what is best for Amerisource Bergen and its shareholders. It is important to take a step back and appreciate the overall strength of AmerisourceBergen's core pharmaceutical distribution businesses, which has helped to offset the financial headwind from our medium during the same period. I'm extremely proud of our core distribution teams' outstanding performance and want to personally recognize their operational excellence, best-in-class expertise, tenacity, and relentless focus on customer experience. AmerisourceBergen is executing, innovating, and supporting customer growth, and we continue to find new ways to expand upon our robust and pharmaceutical-centered value proposition to create additional value for our customers and partners. Specific to manufacturers, our value proposition includes services that support enhanced access for pharmaceutical commercialization and companion and production animal health products through our global commercialization services and Animal Health Group, reported as other. As a group during the first quarter, these businesses achieved high single-digit year-over-year revenue growth, led by the standout performance of World Korea. As a leader in global specialty logistics, World Korea continues to achieve double-digit growth by delivering high-tax logistics services and enhancing the customer experience with new offerings and technology improvements. Beyond World Courier, two of our other specialty commercialization services businesses serving customers outside the U.S., operations in both Brazil and Canada, hosted solid performances. The focus of these businesses on delivering differentiated services is showing promising results. This call in particular, AmerisourceBergen Consulting Services, benefited from strong performances in our Canadian operations. while also making good progress at Lash Group. Turning back to Lash, customer launches onto the game-changing Fusion platform continue to advance. Lash has also successfully extended key customer relationships, providing a stable and growing base of customer partnerships that position the business well for the long term. Finally, MWI expanded its relationship with our key animal health anchor customer, Adding to its corporate account, customer base demonstrating another example of our ability to deepen relationships with strategic partners throughout Amerisource Bergen. As an enabler of access and creative efficiencies, Amerisource Bergen plays an important role in supply chain, unlocking value for our partners and customers and delivering on our purpose to create healthier futures. Amerisource Bergen delivers complex logistics and financial services, driving cost efficiency within the healthcare supply chain and expanding patient access to vital pharmaceuticals. Our focus on innovation and efficiency, together with scale, security, and capital we provide, enable us to facilitate a broad range of functions that are crucial to multiple players within the ever-evolving U.S. healthcare supply chain. Over the past few months, there have been discussions in the U.S. regarding limitations around the ability of patients to realize the benefits of net prices for pharmaceuticals that are negotiated on their behalf. Amerisource Bergen is at its core a healthcare solutions provider. As we look into the future, we believe there could be an opportunity for Amerisource Bergen and the distribution industry as a whole to help facilitate this possible solution for patient access to pharmaceuticals at the negotiated net prices. Let me explain. The U.S. pharmaceutical distribution industry possesses the fundamental tools and relationships to possibly facilitate patient access to discounted or net price pharmaceuticals at the pharmacy counter, given our unique positioning in the supply chain as a physical link between manufacturers and pharmacies and ultimately patients. In fact, AmerisourceBergen and our peers have a long history of managing net price adjudication in health systems and alternate care settings. Every day, AmerisourceBergen provides the financial services to health systems and manufacturers that allows for patient or provider access to pharmaceuticals at the negotiated net prices based on their agreements with manufacturers, and we execute hundreds of millions of these transactions annually. Given the strength of our business strategy and ability to be a driver of all solutions, AmerisourceBergen believes similar processes could be utilized for adjudicating negotiated discounts in other settings, most notably retail pharmacy. Certainly, this added service for the healthcare system would require time and investment. However, we are confident in both our value proposition and the industry's ability to work together with policymakers and commercial partners to further enable access and create additional efficiencies within the supply chain. This opportunity demonstrates one of the many ways a Marisource program can employ our unique strengths and abilities to increase efficiency and create additional value for manufacturers, payers, the US healthcare systems, and most importantly, patients. At AmerisourceBergen, we believe our responsibility to create healthier futures extends to social issues, such as engaging and mobilizing to help address the opioid epidemic, a crisis that is facing all of us in the healthcare industry and in our country. Amerisource Bergen's role in the supply chain is one of a logistics provider and distributor. We are responsible for getting FDA approved drugs from pharmaceutical manufacturers to DEA and state registered pharmacies that dispense them based on prescriptions by licensed healthcare providers. Notably, as a logistics provider and distributor, we do not have access to patient information and we are not qualified to interfere with the very personal clinical decisions made between patients and their physicians. We take our role in the supply chain very seriously. We have adhered to all monitoring and reporting requirements and provided daily reports to the DEA of all controlled substances shipped to our customers, including opioid-based medications. We proactively stop suspicious orders using algorithms and data analytics tools to identify orders of interest and to stop shipment of suspicious orders. We partner with our good neighbor pharmacy network, Walgreens, and others on safe drug disposal programs. On the philanthropic side, the Marisol Spurgeon Foundation works closely with other foundations and organizations to educate patients and support programs to help combat the crisis. Finally, Marisol Spurgeon remains engaged Our board, our management team, and all our 21,000 associates know that the opioid epidemic is a top priority that we must work collectively to address. We are continuing to work to combat the crisis while defending ourselves against litigation and being responsible stewards of shareholders' capital. In closing, Amerisource Bergen provides connectivity for stakeholders throughout the healthcare system, and whether the themes are efficiency, effective use of data, transparency, new ways to support value-based care, or the widening role of specialty medicines and precision medicine, AmerisourceBergen is well positioned to continue playing an integral role in helping our partners in what is certain to be an exciting future. We have a clearly defined strategic focus on the U.S. pharmaceutical market, where we continue to see growth, strong patient demographics, significant value capture from increased pharmaceutical utilization, and a focus on delivering the best patient care. Healthcare is a critical, integral part of the economy, and pharmaceuticals clearly represent the most efficient form of patient care. Amerisource Bergen is a trusted partner that helps enable success of our stakeholders, both large and small, to deliver care in what is a complex healthcare market. We are intensely focused on the problems or opportunities our customers have in their business and respond by modifying, enhancing or investing in our offerings to meet the different needs of manufacturers and providers. We remain confident in our ability to execute, evolve and transform our business to meet the needs of our customers, drive value for our stakeholders and ultimately serve patients. More than ever, we are united in our responsibility to create healthier futures. Now I will turn the call over to Jim for a more in-depth discussion of our quarterly financial results and our financial guidance updates for fiscal 2019. Jim?

Thanks, Steve, and good morning, everyone. My remarks today will focus only on our adjusted non-GAAP financial results. Growth rates and comparisons are made against the prior year December quarter unless otherwise noted. For a discussion of our GAAP results, please refer to our earnings release. As Steve mentioned, we had a solid quarter with impressive performance in our core distribution businesses, helping to offset the continued headwind from our Parmedium business. As a reminder, the December quarter last fiscal year had a significant contribution from Parmedium, which we now allow. and the comparisons beginning with the March 2019 quarter will get easier if it relates to that business. While there is some complexity in our quarter-over-quarter comparisons due to the consolidation of Brazil, both pro-pharma and specialty joint venture, which I will help normalize for throughout my remarks, the results this quarter came in largely as expected, with adjusted EPS slightly better due to some of the items that I'll discuss later. I will provide commentary in two main areas this morning. First, I will detail our adjusted quarterly consolidated and segment performance. Second, I will cover our revised fiscal 2019 guidance reflecting our updated expectations for our medium. Turning now to our first quarter results, we finished the quarter with adjusted diluted EPS of $1.60 an increase of 3%, primarily due to lower income tax expense and a lower share count. Also, the current quarter benefited from a couple pennies of one-time corporate items that are expected to reverse in the March quarter, namely a reduction in deferred comp plan liability caused by the December downturn in the broad equity markets. Our consolidated revenue was $45.4 billion, up an impressive 12%, primarily driven by strong revenue growth in the pharmaceutical distribution services segment. Gross profit increased 8%, or $90 million, to $1.2 billion. Excluding the impact of consolidating Brazil, gross profit would have increased 3%, or $35 million. Consolidated operating expenses increased 17% to $731 million. Excluding Brazil, operating expenses would have been up 9%. And if we were to back out H.D. Smith, the increase would have only been 5%, which includes an increase in bad debt expense that contributed about 2% of the 5% increase. As the year progresses, the year-over-year comparisons will normalize since we acquired H.D. Smith and began consolidating Brazil both in January 2018. We are tracking right in line with our expectations for full-year consolidated operating expense growth in the mid-single digits, albeit likely at the high end of that range due to our inclusion of consolidating Brazil in guidance. Consolidated operating income was $472 million, down 3%, with our operating margin down 17 basis points. As we had previously communicated, the December quarter was expected to be a headwind for operating income due to the significant contribution from Farmedium in the first quarter of fiscal 2018. If you were to exclude the negative year-over-year impact from Farmedium, and the positive year-over-year impact from H.D. Smith in Brazil, AmerisourceBergen's adjusted operating income would have been up mid-single digits in the December quarter. In the next three quarters of fiscal 2019, the year-over-year comparison should not be distorted as it was in the December quarter, given the meaningfully lower contribution from Parmedium in the last three quarters of fiscal 2018, and the laughing of both the H.D. Smith acquisition and the Brazil consolidation. Net interest expense increased 18% to $42 million. Excluding Brazil, the net increase was 7% due primarily to debt issued last year to fund the H.D. Smith acquisition, which we will begin to laugh in the March quarter. Moving now to income taxes, Our adjusted income tax rate was 20% and reflects primarily the lower U.S. corporate income tax rates resulting from tax reform and a discrete state income tax benefit. The prior year quarter tax rate of 24% did not fully reflect the benefit from tax reform. Our diluted share count decreased 3% to 214 million shares. In the December quarter, we decided to opportunistically repurchase shares earlier in the fiscal year than originally anticipated, buying back $226 million of our shares in the quarter. We exited the quarter with $900 million remaining on the share repurchase authorization that the Board approved in November 2018. Regarding free cash flow and cash balance, In the December quarter, we had free cash flow of $400 million, which was primarily due to our net income as the change in our net working capital balances were relatively small. If you were to adjust for the gain from anti-trust settlements, adjusted free cash flow was $313 million in the quarter. We're off to a good start and continue to expect adjusted free cash flow to finish in the range of $1.4 billion to $1.6 billion. We ended the quarter with $2.5 billion in cash, of which $550 million was held offshore, and the majority was US-denominated cash. In the quarter, we repatriated $350 million of cash held offshore for general corporate purposes. This completes the review of our consolidated results. Now I will cover our segment results. Beginning with pharmaceutical distribution services, Segment revenue was $44 billion, up 12%. As mentioned earlier, the segment continues to benefit from the growth of our customers, and especially our largest customer, Walgreens, and continued strength in specialty distribution, particularly in oncology. Businesses throughout the segment continue to work diligently, thoughtfully, and collaboratively to support our strategic partners. segment operating income decreased about 4% to $373 million. As previously disclosed, the December quarter was expected to be meaningfully impacted by the headwind from Pharmadium, considering the significant contribution Pharmadium made in the previous fiscal year compared to a loss at Pharmadium this quarter. As Steve mentioned, we're in the midst of conducting a strategic and financial review of the Pharmadium business, Customer demand for sterile to sterile compounded products remains strong. However, the path to achieving full regulatory compliance with the updated 503 standards has certainly taken longer than initially estimated, and we expect that our ongoing discussions with regulators will likely result in entry into a consent decree. Recognizing the shifting regulatory landscape in the current economics of the business, the management team has been evaluating FarmMedium's current allocation of resources and making decisions to appropriately position FarmMedium to execute. As Steve mentioned, the initial phase of the strategic and financial review led to the redeployment of capital from the workforce to remediation efforts. For fiscal 2019 guidance purposes, we have removed any contribution from the Memphis facility. This downside scenario was factored into the original guidance. Therefore, the lower end of our adjusted EPS guidance range remains unchanged at $6.65. However, we are lowering the top end of our adjusted EPS guidance range to $6.85 from $6.95 to reflect the updated view on the fiscal 2019 outlook of our medium. As we continue to move forward on this path toward resolution at Pharmadium, we remain committed to taking the right steps to consider both the needs of Pharmadium customers and what is best for MerisourceBergen and its shareholders. Taking a step back, our core pharmaceutical distribution businesses continue to perform quite well. We had strong revenue growth throughout the group, and we continue to achieve double-digit growth in specialty enabling access to life-changing specialty products, while our ION Solutions Group continues to provide key resources and expertise to community-based oncology practices. As I said earlier for the consolidated results, the same is true for the segment results. Operating income would have been up in the mid-single digits in the December quarter, backing out both the negative impact from Farmedium and the positive impact from H.D. Smith in Brazil. I will now turn to the other segment, businesses that focus on global commercialization services and animal health, including World Courier, AmerisourceBergen Consulting, and MWI. In the quarter, total revenue was $1.7 billion, up 8%, primarily due to the consolidation of the specialty joint venture in Brazil and growth at both World Courier and Consulting's Canadian operations. MWI's revenue was flat this quarter, negatively impacted by the manufacturer's switch to agency from buy-sell, which we now begin to laugh, as well as delayed cattle movements and the exiting of a smaller business line. From an operating income standpoint, this group had operating income of $99 million, down about 1%. World Courier continued its strong operating income growth in the quarter, However, and as expected, the group did have lower contributions from both MWI and LASH. MWI experienced pressure relating to rebates, with some of the rebate dollars recognized earlier in its strong fourth quarter fiscal 2018, which had normalized by the fourth quarter fiscal 2019. MWI's operating income growth rate is expected to improve going forward with the continued strengthening of its customer relationships and commercial partnerships. Finally, our consulting business was down here over the years. Lash continues the implementation of Fusion. During the quarter, we made progress both in launching manufactured clients on this new technology platform and in new business development. The feedback on Fusion continues to be positive and we continue to believe it is a long-term value driver for the business. Overall, we continue to expect high single-digit operating income growth from the commercialization services and animal health group in fiscal 2019. This completes the review of our segment results, so I will now turn to our fiscal 2019 guidance. Regarding revenue, we continue to expect growth in the mid-single-digit percent range. Revenue growth will normalize throughout the year to the mid-single-digit range As we anniversary, incremental business added in fiscal 2018 through our relationship with our largest customer, as well as the Brazil consolidation and the H.D. Smith acquisition. Regarding operating expenses, we continue to expect operating expenses to grow in the mid-single-digit percent range. While operating expenses are likely to finish towards the higher end of that range due to the consolidation of Brazil, We remain diligent in managing our expenses and leveraging our infrastructure, particularly as we realize additional operational synergies for Macy Smith. Now I will turn to operating income. We now expect to grow operating income in the low single-digit percent range to reflect the impact of revised expectations at farm medium, which I will cover as I discuss the revised guidance from a segment standpoint. We now expect the operating income in the pharmaceutical distribution services segment to grow in the low single-digit percent range. As I said earlier, we are now removing any contribution from Memphis. We are certainly disappointed by where we are with Pharmedium, but we are extremely proud of the execution from businesses throughout AmerisourceBergen, particularly in core pharmaceutical distribution. which are helping to offset the anticipated loss from farmedium in fiscal 2019. Excluding farmedium, this segment is performing well with strong core fundamentals as we continue to benefit from our execution, market-leading specialty distribution, and solid growth in full-line distribution, which is continuing to benefit from our successful contract rebalancing over the last few years. Turning now to global commercialization services and animal health, we continue to expect operating income to grow in the high single-digit percent range, driven by the continued strong performance of World Courier, ongoing initiatives and expected improvements at MWI, and continued progress within consulting. Moving below the operating income line to the tax rate, we continue to expect our full-year adjusted tax rate to be in the range of 21 to 22 percent which more closely represents our normalized estimated tax rate. Regarding share repurchases, given the level of share repurchases in the December quarter, we now expect to finish the year around 215 million weighted average shares outstanding. Regarding adjusted EPS, as I said earlier, we are narrowing our range to $6.65 to $6.85. lowering the top end due to our evaluation of business expectations of our medium, which reflects the assumption that this Memphis facility will not reopen in fiscal 2019. Turning back to our guidance range overall, there are many variables that go into our guidance range, including how well our business units execute, how well we are able to manage operating expenses, the efficiency and timeliness in capturing the H.P. Smith synergies, And of course, trends in brand and generic pricing and mix. An additional key driver where we finish in the range will be execution at Parmedium. How successful we are at remediation, operational effectiveness, financial efficiency, and other strategic initiatives that we have underway at the business. Turning now to cash flow. We continue to expect adjusted free cash flow for fiscal 2019 be between $1.4 billion and $1.6 billion. Lastly, we are not making any changes to our working assumptions around pharmaceutical pricing for the full fiscal year. Broadly speaking, both brand and generic pricing are trending relatively in line with our original expectations for the year. Certainly, we are early in our fiscal year and we anticipate that there will be some more brand activity later in the year. Regarding our fiscal second quarter adjusted EPS expectations, while we do not provide quarterly guidance, I will note that our second quarter adjusted EPS is likely to be relatively flat compared to the previous year period due to lower compensation in the quarter from brand manufacturers compared to last year, the headwinds from Pharmedium, albeit much smaller than the one in the December quarter, and due to some one-time items that I mentioned earlier. In closing, AmerisourceBergen businesses continue to perform well. The contribution and execution in core drug distribution businesses is impressive and continues to help offset the financial impact of challenges at our medium business. Core distribution fundamentals remain strong. We have key anchor customers growing well across the enterprise. We are the leader in the fast-growing markets for specialty distribution and services, and we continue to maintain a strong balance sheet. Amerisource Bergen's value proposition to its partners is undeniable, and we are well-positioned to create long-term value for all our stakeholders. Thank you for your interest in Amerisource Bergen. Now here's Bennett to start our Q&A. Operator, we will now take our first question.

Ladies and gentlemen, if you would like to ask a question, please press star then 1 on your touchtone phone. You'll hear a tone indicating that you've been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, we do ask that you pick up the handset before pressing the numbers to avoid any echoing. So once again, if you have a question, please press star one at this time. And our first question comes from the line of Michael Cherney with Bank of America. Your line is open. Please go ahead.

Good morning, and thanks for all the colors so far. I want to start or at least ask my question on farmedium and thinking about what this means to the total core. Jim, you mentioned kind of mid-single-digit I guess you'd call it organic EBIT growth in the quarter. As you think about the rest of the year, with H.D. Smith still having some syringes but obviously lapping, in that low single-digit growth for the year, how do you think about what core should be? And then relative to the 200 to 300 basis points that you had talked about, farmedium creating as a headwind for pharma EBIT growth for the year, by my math, I think you're already there for the year. So how do you think about the headwind – specifically at the low end of the range for far-medium going forward?

Sure. We had talked when we first provided guidance at the beginning of the year that operating income growth would be low to mid single digits, and now we're indicating low single digits, and really the difference is taking out the upside scenario at far-medium And so we are seeing strong performance, as we talked about, in the core businesses and kind of that mid-single-digit growth in the core businesses. And so as you think about Parmedium the rest of the year and the impact, there was a significant headwind in the December quarter that we talked about today. And then there'll be a much smaller headwind in the March quarter from Parmedium. And then it's basically flat. Q3 and Q4 versus last year. And so the farmedium headwind, you know, on a total basis represents about a 2% to 3% headwind in operating income for fiscal year 19, which is really the difference between the mid-single-digit operating income growth and now the low-single-digit operating income growth.

Okay, thanks.

Our next question comes from the line of Robert Jones with Goldman Sachs. Your line is open, sir.

Great. Thanks for the question. Steve, I just wanted to go back to your comments on helping patients gain access and managing, I think you were talking about net price adjudication. Just to get a little bit of a better understanding, how exactly would that work relative to the current system? What role is ABC going to play? Are you envisioning a world because of the change towards net pricing that some of the traditional services that might have been performed by others in the supply chain would potentially now be performed by the wholesalers?

Hi, Bob. Thanks for the question. We manage so many contracts, and we primarily manage them in the health systems and alternate site area, institutional settings. Our theory is that we could really manage a more representative net price through the contract system at the pharmacy counter. It's really as simple as that. There's a lot of investment that would be required as we load individual managed care contracts, but we think that that could be a simple remedy. The infrastructure exists, the resources, The expertise exists to do that. We hear about all the setbacks that are counted. Most recently, the insulin patients. We think that that would really help the image of the industry and the understanding and make it more comprehensive and explainable to various stakeholders. We are a healthcare logistics and solutions provider and we think that this would be entirely consistent with that role without taking away from the very important role that others do, including negotiating what that net price should be. That's not our role.

Got it. And I guess just one on the numbers, Steve, if I could go back to some of the comments around, you know, branded inflation. Obviously, we're living in a lower branded inflationary environment, you know, yet it looks like the results, ex farmedium and a few other of the moving pieces that you guys called out that the, you know, the core, you know, performed well, you know, grew, expected to grow low single digits. You know, is this the type of performance we should expect from in the current branded environment, or do you think there still needs to be kind of a change in the economic structure that exists between the wholesaler and the branded manufacturer?

We're happy with the quarter. I think that we drove some value from really strong revenue growth, growth primarily coming from wide segments, including our core customers. You know, we only have 5% of our contracts that are, you know, really subject to, you know, we look at the max, the amount that we earn from fee for service, and then the amount that we earn from brand inflation, and, you know, that number's been coming down for years. And, you know, it's another headwind that we have to deal with, but it's now at 5%. So, you know, it's not within the range of other headwinds that we could potentially face. And there is a legitimate discussion to be had, and, you know, You know, we often benefit from consolidation, you know, often from consolidation on the manufacturer side. You know, this is not, it's usually not a negative event for us because I think, you know, it's well understood that, you know, that the value we represent is fair. So sometimes we're having companies that are, you know, really strong, that are really good users of our commercialization services that are acquiring others or we have a stronger fee for service. agreement in place, and we were able to retain the elements of that. If we have a week of fee-for-service agreement with the acquirer, we also have done a good job of making the new enterprise aware of why our agreements are market-based and fair. Our group that negotiates these fee-for-service contracts is one of the unsung heroes of AmerisourceBergen and the industry. They do a really good job, and I think we have constructive discussions. around value and what do we represent in the channel. The services that are asked in the first part of your question, to me, are very exciting because it could represent a whole new fee-for-service element for us as we do that very real work of loading managed care contracts at the pharmacy level. So I think that could be an exciting new dimension for Amerisource Bergen.

Got it. Thanks for the question.

Our next question comes from the line of Steven Vallecat with Barclays. Please go ahead.

Steven Vallecat All right, great. Thanks. Good morning, Steve and Jim. So I guess for me, just back on the far-medium operations for a minute here, I'm sure you spent a lot of time probably exploring Plan B alternatives over the past six, 12 months. And I think for us, as we think about various Plan Bs, given what you know now about the Memphis situation, Just kind of thinking out loud, does it make sense to perhaps explore doing site transfers to other facilities? Does it make sense to look at third-party contract manufacturers or CMOs that you could work with to fill the gap? And also, are there maybe even other acquisitions you could make to just add manufacturing capacity for that business? I guess I'm just curious to hear more about this topic, how you're thinking about any sort of plan B that could potentially help the overall business. Thanks.

Yeah, sure, and as you can imagine, as you've commented on and we commented on in our comments today, we're in the midst of a strategic and financial review of the business. As we've indicated, we've engaged with a new CGMP consulting firm that we're working with. We did the workforce reorganization and putting more capital into the remediation. We'll be reviewing, and this review is comprehensive, and it could result in a number of things. It could result in further investments in the business. It could result in business optimization through a number of things, and could also result in a potential sale of the business, as Steve said. And so it's really too early to speculate on future decisions. But, you know, we obviously, you know, our future decisions will consider the important needs of our customers and will also consider the needs of Ameris Wurzburg and our shareholders.

Okay. And the timing and all that's probably open-ended, right? There's no date you've imposed on yourself to figure this out one way or the other. We should probably just assume maybe sometime by the end of calendar 19, we'll get some clarity on this one way or the other. Is that a good framework for now?

Yes, we're putting a lot of resources into this and doing an extensive review, but we're not putting a specific date on it.

Okay, got it. Okay, great. Thanks.

Our next question is from the line of Lisa Gill with JPMorgan. Your line is open.

Thanks very much. Good morning. I just wanted to follow up back on farmedium again. If we think about, Jim, the total contribution of farmedium today, I know you talked about it in the growth rate, but if you were to think about exiting this business, is there a way to quantify how much farmedium contributes to the business today? And then secondly, you talk a lot about remediation. I'm sure there's costs associated with that. So as we think about netting those out, and have you thought about what potentially Farm Medium could bring as far as what you could sell it for? You know, just trying to think about – because your core business looks so good right now. Just trying to think about if we backed all of that out, you know, what the potential for Amerisource would be.

Yeah, I think that – That, you know, you're absolutely right. I mean, the core business is performing very well. And I think the best way to look at Farmedium from a financial standpoint is the, you know, point that we're making that it's really the difference for AmerisourceBergen between mid-single-digit operating income growth and low-single-digit operating income growth. As we said, it was, you know, a significant headwind in the December quarter, will be a much smaller headwind in Q2 and flat versus last year in Q3 and Q4. And, you know, in total, it has, you know, approximately, you know, 2% to 3% impact on operating income over the course of the full year. And so I think that's the best way to think about the financial impact impact of spharm medium. As I said earlier, we're just really doing this extensive financial review and strategic review and investing in the remediation and that process is ongoing.

But just so I understand that correctly, everything that you talked about has to do with the Memphis facility and the headwind of that. The other roughly 60% of the business is still performing. So if you were to exit the business altogether, there would be potentially an incremental headwind from the operating profit that you have from the rest of Farm Medium. Am I thinking about that correctly?

Yeah. So Memphis is closed, as you know. So the other free facilities do not cover farmedium's fixed cost. And as the other three facilities, production levels are, you know, limited a bit as we're really implementing additional procedures and additional testing. But I think the key thing is to answer your question that the other three facilities don't cover farmedium's fixed costs. And so even with the other three facilities, it's a It is a headwind.

That's very helpful. Thank you.

Our next question comes from the line of Charles Rye with Cohen. Your line is open.

I know that a while back you guys talked about obviously you have remediation efforts going on in Memphis, but you were voluntarily making investments in the other facilities. Can you give us an update there? Are we done in those facilities as well? And at this point, is the issues with the FDA still solely in Memphis and the other facilities are, there's no issues there? Can you just give us a sense of what's going on on the other side? Because I know you had done more there on your own. Thanks.

Sure. We are continuing to make investments in the other facilities. We're investing in additional procedures and additional testing facilities. And so production levels are somewhat lower at the other three facilities.

But is there a timeline for when you expect those to be then finished so that we see sort of a normalization in the production on those facilities?

Sure. It's ongoing, in process, and we haven't given a specific timeline.

Just to end the farmadium discussion, we've always sized this as under 10% of Amerisource Bergen's profits at its peak. We've said that to you in the past. I think there's so many other important things to talk about with Amerisource Bergen and our performance and our segments. We've probably said as much as we want to say on farmadium. Clearly, we will be judged by the success of the remediation and our ability to get back in good stead with regulators. Those of you who are asking questions, we've probably done on this subject for the moment.

Until next time. I appreciate that. Thank you.

Our next question comes from the line of Aaron Wright with Credit Suisse. Your line is open.

Great, thanks. I won't ask on Farmedium. So you've successfully surrounded yourself and established strong relationships with larger customers that are supporting overall growth. But from a profit perspective and excluding Farmedium, I guess can you speak to that quarterly cadence, and do you think you have enhanced overall visibility on that core pharma segment profit growth over the next several quarters, just given clarity around whether it be drug pricing or the regulatory environment? Thanks.

Thanks for the question. We are very proud of the performance of our pharma distribution. I think our customers' growth and volume speak for themselves. The market is healthy. We have some trends that the next quarter is obviously generally our largest reporting earnings quarter, and we see no reason that that should discontinue. Brand inflation was Probably more or less where we expected it, you know, maybe a little bit softer than last year for sure. And, you know, we wouldn't be surprised if those trends continued given the political, you know, pressure that there is on brand prices. And, you know, I think the lack of understanding about the gross versus net price issue, which there was actually a good article published in the Wall Street Journal this week on that. So we feel good about that. On generic deflation, we heard a lot of pronouncements at the J.T. Morgan Conference about bad turning. It's still fairly high. Generic deflation is still mid to high single digits. We haven't called that out anymore because we've now had several years of that and we're talking about that as a trend. We're thriving in this environment. We're doing well. We're reporting good numbers. We have a stable customer base and we expect to be able to continue to report along the lines of what our guidance has been. We'll start work in the next couple of months on our fiscal year 20 plan and hope to be able to share those updates as we make progress with you. I think that answers your question. Jim, did you have anything different?

Sure, Steve. Yes, that addresses it. What I'll add is that You know, with our guidance of operating income growth, now low single digits, and the difference between low single digits and mid-single digits is our medium headwind. And so, you know, we are seeing, as you say, good performance out of the core businesses. And in addition to the things Steve's talked about, you know, we're focusing on the H.D. Smith synergies, And we're seeing very strong performance in our specialty businesses.

Okay, great. And then if I could just ask, or I have to ask sort of a quick question on animal health. Could you provide the normalized growth, excluding agency by cell shifts? And Jim, I know you're familiar with the Mars business, but can you speak to your relationship with corporate accounts such as Banfield, VCA, and and others, as well as contracting term shifts from vendors potentially this year. Thanks.

Yeah, sure. So there are a couple questions there. If we were to look at growth without the shift from buy-sell to agency, there was growth in the companion animal business that kind of be that low single-digit or so growth in the companion animal business, a little bit – a little bit down in the production animal business because of delayed cattle movements, which probably, you know, catches up in, you know, like December, January, February, a lot of detail there. But I say that with regard to our expanded relationship with Mars, you know, I don't think that that should really come as a surprise. You know, we have a 20-plus year really strong relationship with Banfield and with Mars through that process. Banfield relationship. And we're just always focused with them on working together to find more ways to create value together commercially. And so we're very pleased to expand that relationship. But given the very long-term relationship, I don't think it should really come as a surprise. Next question, please.

Our next question comes from the line of Eric Percher with Nefron Research. Please go ahead.

Thank you. Maybe a gross margin question, and I'll start with if we look at the disclosures now required on brand increases in California, I imagine five or six years ago that would have created an opportunity to forward buy. Is that today effectively nonexistent because of the way the DSAs are structured, or does that Does that create any opportunity?

Eric, great question. You're right. Five or six years ago, that would have, and also even more so because five or six years ago, the increases were more profound. We have these very bilateral, transparent relationships on inventory levels with the overwhelming majority of our manufacturers. No, it doesn't. I think we did see some of this, and it was more around an indication of what would be happening around January, so that was helpful to us. But no real positive financial impact on that. We'll take one more question.

Thank you. Our next question comes from the line of Ricky Goldswanner with Morgan Stanley. Your line is open, sir.

Yeah, hi, good morning and thank you for taking my call. So I just wanted to ask clarification on guidance to make sure that we understand it. Should we assume that guidance in the March quarter that EPS is going to be or that EBIT is going to be down because there is still a headwind from medium and we do not have the year-over-year benefit from H.G. Smith, And then second half of the year, we should expect to see acceleration for medium is no longer a headwind. And if that's the case, I know, Jim, you said that you're assuming some additional branded drug price increases later on in the year. So are you basically assuming that we go back to kind of like more of a historical first trend? I know last year was An interesting year, 90% of price increases happened in the March quarter, but do you think that that was an anomaly and that we should go back to more of a normal trending this year?

Yeah, and so we, you know, aren't doing quarterly guidance, but as I, you know, indicated during the call, what we are saying is that the second quarter EPS is likely to be relatively flat versus the second quarter last year. And kind of some of the things that drive that in the second quarter are the much smaller headwind, but still a headwind from our medium. And then also there'll be a little bit lower compensation from brand manufacturers compared to last year during the second quarter. But I think also in your question, you were asking about branded inflation overall. And, you know, directionally, it's as expected. When we did guidance, we indicated mid-single digits in FY19, and that's still what we're expecting. And, of course, can't talk about this without, you know, going back and saying that, you know, 95% of our buy-side dollars are fee-for-service, so we're talking about this incremental 5% when we talk about this. And so, you know, January... is a little bit lighter than a prior year, but we're still saying mid-single digits in our FY19 guidance and feel good about that. Thank you, Steve.

Yes, everyone. Well, thank you. I certainly, Jim and myself and the rest of the management team We certainly take responsibility for Farmedium, which we're not trying to avoid any discussion. We just want it to be proportional. We recognize it's an overhang to our results. And we really also would appreciate you focusing on the overall strength throughout Amerisource Bergen's core businesses. For example, resumption to growth and profitability, strong profitability at Lash and other areas, including our international development. But our core business has scale, efficiency, valuable partnerships. We're a channel. We try to point out new areas where the channel could be of great value to our manufacturer partners and all stakeholders. Our leadership and specialty, which has been almost two decades now, continues to be strong and innovative. And finally, we have a very strong balance sheet. when we've been excellent stewards of shareholders' capital. So we leave you with the thought that Amerisource Bergen is well-positioned to continue to create shareholder value. And thank you for your time and attention today. Goodbye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconferencing Services. You may now disconnect.