Cencora, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the ABC earnings call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during today's call, please press star, then zero. As a reminder, today's call is being recorded. Now, I turn the conference over to your host, Jim Cleary. Please go ahead.

Thank you. Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen's Fiscal 19 Second Quarter Financial Results. I am Ben Murphy, Vice President, Investor Relations, and joining me today are Steve Collis, Chairman, President, and CEO, and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release and are also available on our website at investor.america.com. We've also posted a slide presentation to accompany today's press release. on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted, non-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. For discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K. Mayor Swersbergen assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the express permission of the company. If you 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 will turn the call over to Steve. Steve?

Thank you, Bennett, and good morning to everyone on today's call. I'm pleased to talk about AmerisourceBergen's continued strong performance in the second quarter of fiscal 2019. On this call, I will highlight how our business remains well positioned for the long-term growth and how AmerisourceBergen unites with stakeholders across the healthcare supply chain as a solutions provider and good corporate citizen. First, our fiscal 2019 second quarter financial performance. Revenues were up a solid 6% to $43.3 billion for the quarter, and our adjusted diluted EPS was $2.11 for the second quarter, an increase of 9% compared to the previous fiscal year period. We are extremely pleased with our performance in the second quarter, which was driven by solid growth in customer volumes, double-digit specialty distribution growth, and overall strong execution across both the pharmaceutical distribution and global commercialization services and animal health groups. I first want to thank our 21,000 associates who are really driving our performance. I couldn't be more proud of their dedication, solution-oriented mindset, focus, and passion for our customers and partners, and I consider it a privilege to work alongside them every day. Our teams are executing well across our robust portfolio of businesses as we continue to enhance the experience and value that we provide for our customers and partners in the industry. Our pharmaceutical distribution services team, notably in specialty physician services and health systems, continue to deepen their customer relationships and seek new ways to unlock value for our partners while enabling patient access to pharmaceuticals. Finally, we are proud of how our global commercialization services and animal health group continues to execute, grow, and deliver differentiated services for pharmaceutical manufacturers and veterinarians. Next, an update on our comprehensive strategic and financial review for FarmMedium. As part of this process, we determined that the best way to maximize the value of the business was to close Pharmelium's smallest and least automated facility and consolidate production into the business's remaining two open facilities to service customers more efficiently and effectively. We believe this decision should optimize the business more appropriately for the long term while ensuring that Pharmelium's focus remains on patient safety and delivering the safest and highest quality products. In addition, As you may recall, we engaged a CGMP expert consulting firm to help us with our review of this business unit. After taking into consideration Pharmadium's enhanced quality assurance and quality control procedures and independent evaluations from our CGMP consulting firm and the business unit's new president, we have determined that it will be difficult for Pharmadium's overall volumes to return to previous levels in the next few years. In addition to our internal review, we have continued discussions with regulators, and based on discussions to date, we expect to enter into a consent decree in the June quarter. Subject to the successful completion of third party orders, we anticipate that a consent decree will allow commercial distribution to continue at the two open compounding facilities. Additionally, we expect that a consent decree would specify requirements that must be satisfied prior to resumption of commercial operations at the Memphis facility. Based on these updates, Jim will provide more details in his comments regarding Farmedium's financial outlook. Despite this challenge, and as evidenced by this quarter's results, Amerisource Bergen continues to execute and deliver strong growth and performance. Our differentiated strategy and investments have positioned us to continue delivering long-term sustainable growth in fiscal 2019 and beyond. At the core of our strategy, remains a clearly defined pharmaceutical-centric focus. AmerisourceBergen continues to benefit from growth in the U.S. pharmaceutical market, which was driven by strong patient demographics and prescription utilization trends, as well as pharmaceutical innovation across brand, specialty, and biosimilars. In fact, the specialty market is experiencing significant growth as an increasing number of breakthrough medicines continue to improve the current standards of care. Our undisputed leadership position in specialty distribution and services places AmerisourceBergen at the forefront of this rapidly growing market segment. While we report distribution and commercialization services in separate segments, together they represent our extensive footprint and comprehensive portfolio and specialty that we have built through decades of significant organic and inorganic strategic investments. Our expertise and capabilities empower us to support the complex solutions needed in both specialty distribution and pre and post commercialization services. Specialty distribution, which includes oncology and physician-administered products, continued its double-digit growth in the second fiscal quarter as we continue to create value for our customers. This part of the US healthcare market is growing well as patient utilization of these life-altering medications continues to increase. The efficiency of the distribution channels we enable, combined with key services and solutions we provide our physician practice customers, are core reasons why AmerisourceBergen remains the preferred partner of choice. Vesey Medical extends AmerisourceBergen's reach and relationship to over 65,000 non-oncology community physician sites, accelerating access to the products, insights, technology, and guidance needed to elevate their practice, performance, and patient experience. On the commercialization side, we continue to increase the depth and span of our manufactured services, making ourselves the essential partner for the global pharmaceutical industry. For example, World Courier, the most trusted specialty logistics partner in the world, offers high-quality and innovative services which provide the customized support and flexibility that manufacturers value for clinical trial logistics and commercial services, such as those needed in cell and gene therapy. WorldCareer continues to move innovation forward through recent technology and packaging advancements like Nova and Cocoon, which deliver increased efficiencies and enhanced experience for their customers, empower their sustained growth, and demand for their services. In the years ahead, the strong pipeline of innovative and complex specialty products and increasing number of buyers from the city and the market should further increase demand for the innovative distribution and commercialization services that we provide for our partners. Amerisource Bourbon applies the same innovative mindset towards all opportunities or issues that arise across this dynamic and exciting healthcare landscape. Our ongoing investment in state-of-the-art services and solutions continues to differentiate our business and enable new value creation opportunities for our partners, customers, and the entire healthcare supply chain. Likewise, our focus on driving data connectivity throughout all our offerings further distinguishes our ability to meet the evolving needs of our stakeholders and solidifies Marisol Spurgeon's position as a trusted data company in our industry that stakeholders depend upon to help them deliver care and improve efficiency at scale. As an industry, AmerisourceBergen and its peers create a secure, nationwide supply chain that produces reliable, accessible, and transparent data and analytics that consistently deliver value for our stakeholders. For example, manufacturers value and trust data generated by AmerisourceBergen, which enables them to proactively manage their daily service and inventory levels. On the other end of the supply chain, Our unique set of analytics tools empower the 4,600 pharmacies in our elevated provider network with solutions that help pharmacies maximize profitability, improve operational effectiveness, and enhance patient care. We take great pride in our responsibility as a trusted data source and our role as a solutions provider in the supply chain. With this solutions-oriented approach in mind, we continue to believe there's a facilitation role that we can play if the US healthcare system shifts to one where patients need to access discounted pharmaceutical prices in the pharmacy at the point of sale. Given our fundamental tools and trusted relationships, we believe AmerisourceBergen and its pharmaceutical distribution peers would be best positioned to support the transition. Existing capabilities and proven experience managing and maintaining complex contract administration and chargeback systems today provide the necessary building blocks to operationalize a chargeback system to handle point of sale discounts in the pharmacy. Pharmaceutical distributors existing relationships both on fairness and trust with their pharmacy customers and manufacturer partners positioned distributors to approach this potential reform with solutions that are fair, efficient, and transparent. With support and industry alignment, AmerisourceBergen is ready to play a role in pursuing a distributor-facilitated model. This unique opportunity would further embody AmerisourceBergen's purpose of being united in our responsibility to create healthier futures. In fact, our purpose is the driving force behind everything we do. As a company, AmerisourceBergen recognizes the importance of strong corporate citizenship as a cornerstone to long-term shareholder value creation. We are especially excited by the continued progress and development detailed within this year's Corporate Citizenship Report, which follows externally accepted standards for sustainability reporting and is our most comprehensive report to date. Here are a few highlights. First, we have invested in two solar energy projects located at our distribution centers and introduced several packaging innovation solutions that help reduce waste and energy usage in our efforts to improve the sustainability of our operations. In addition to help enhance our inclusive culture, where our associates respect and support one another, we launched the Connect with Respect campaign and supported colleagues impacted by hurricanes and wildfires through our Associates Assistance Fund. Finally, the Amerisource Bergen Foundation, an independent, not-for-profit charitable giving organization continues to invest in health-related causes that help increase healthcare access for human and animal populations and ensure prescription drug safety. As a distributor of pharmaceutical products, AmerisourceBergen manages the transportation of medication, including controlled substances from manufacturers to licensed providers. We take our role in the supply chain seriously and work to combat opioid abuse by ensuring safe and secure distribution, maintaining operational integrity, advocating for the highest regulatory standards and community outreach. All of this in addition to reporting all controlled substance orders to the DEA and holding suspicious orders. Amerisource Bergen and the Amerisource Bergen Foundation are committed to making a difference in our communities. and providing communities across the country resources to combat the epidemic of opioid misuse. Together, our 21,000 associates, board of directors and partners will continue to further our efforts, collectively working to boost our reach and improve across our communities and the supply chain to create a healthier future for all. In closing, Amerisource Bergen is well positioned to continue creating shareholder value and delivering long-term sustainable growth. We are proud of our ability to execute, evolve, and transform our business to meet the needs of our partners, drive value for our stakeholders, and ultimately serve patients. We won't be complacent. We're making investments in our people, solutions, and infrastructure. and focusing on the problems or opportunities that our customers have in their business. Amerisource Bergen is committed to being a thought leader that drives solutions, enables access, and creates additional efficiency. We have the utmost confidence that our differentiated strategy will create sustained long-term value for our stakeholders. More than ever, we are united in our responsibility to create a healthier future And as always, we appreciate Marisol Spurkin. Now I'll turn the call over to Jim for a more in-depth discussion of our quality financial results and our upward revision to fiscal 2019 EPS guidance. 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 March quarter, unless otherwise noted. For a discussion of our GAAP results, please refer to our earnings release. As we have reached the halfway point of our fiscal year, we are extremely proud of the execution throughout Amerisource Bergen to deliver strong results. Our continued strong performance is especially impressive given that this quarter still has a notable year-over-year headwind from far medium. Looking ahead, we expect to last any notable headwinds beginning in the June quarter. Before I discuss our results this morning, I want to first take a moment to discuss the GAAP asset impairment charge that we have taken for far medium. Based on the current analysis of the business, we now expect that BarMedium will have lower volumes due to the implementation of enhanced QAQC procedures and the continued closure of Memphis. This conclusion was reached in accordance with the evaluations of BarMedium's new president and our CGMD consulting firm. As part of the comprehensive strategic and financial review, we updated our long-term outlook at quarter end. We continue to see that there is a demand for compounded sterile preparations, but given the estimated production limitations over the next few years, we determined that the estimated undiscounted future cash flows indicate that the assets should have a lower carrying value. We used a variety of scenarios with probability weightings to make this determination. We subsequently performed a fair value test using discounted cash flows to determine the asset impairment amount of $570 million. After a consent decree is finalized, our medium expects to have further clarity on the remediation requirements to reopen Memphis and maintain the other facilities in operation, as well as the overall production ramp pace expectations. As a reminder, farmedium is expected to be a headwind of about 3% in fiscal 2019. And this represents an adjusted operating income loss of about $50 million for fiscal 2019. For comparison purposes, farmedium had only a small operating income profit in fiscal 2018, down from a significant operating income profit in fiscal 2017. Turning now to discuss our second quarter results and the continued strong execution by Amerisource Bergen. I will provide commentary in two main areas this morning. First, I'll detail our adjusted quarterly consolidated and segment performance. Second, I'll cover the upward revision to our fiscal 2019 EPS guidance. Moving now to our second quarter results. We finished the quarter with adjusted diluted EPS of $2.11 an increase of 9%, primarily due to higher operating income, lower net interest expense, and a lower share count. I will note that there were some positive general and administrative expense items that hit in the second quarter and had been expected to be realized later in the year. Our consolidated revenue was $43.3 billion, up 6%. primarily driven by strong revenue growth in the pharmaceutical distribution services segment. Growth profit increased 3 percent, or $40 million, to $1.3 billion. Consolidated operating expenses increased 1.5 percent to $702 million. As a reminder, in the second quarter of fiscal 2018, there were some true-ups related to the accounting for recognizing farmedium's remediation costs which impacted both cost of goods sold and operating expenses. Normalizing for those adjustments last year, our gross profit this quarter would have increased 3.8% while our operating expenses would have increased 2.6%. These items net out and have no impact on the operating income comparison. As it relates to operating expenses this quarter, We have solid overall expense management as we continue to be focused on effectively managing operating expenses throughout the business. Additionally, the positive general and administrative expense items that are referred to earlier represent roughly five pennies of EPS in the quarter. Expense management is so important in the healthcare industry, and it's especially impressive that our teams were able to execute on expense management while delivering strong customer service and continuing to ensure safe, secure, and efficient patient access to care. Consolidated operating income was $617 million, up 5%, with our operating margin essentially flat. As we had previously highlighted, we expect the March quarter to mark the last significant headwind for operating income related to pharmedium. That headwind was offset this quarter by strong results from our consolidated businesses in Brazil, which we expect to normalize in the third quarter. If you were to exclude both our medium and consolidated Brazil, our consolidated operating income growth would still have been 5% held by the lower than expected operating expenses in the quarter, as I discussed earlier. Net interest expense decreased $5 million to $43 million due to an increase in interest income. Given strong tax flow year to date and the better than expected interest income, we now expect our net interest expense to be lower than originally anticipated. Moving now to income taxes, our adjusted income tax rate was 21.5%, up slightly from the prior year, quarter due primarily to some relatively small discrete items. As a reminder, the prior year quarter tax rate did reflect the benefit from tax reform. Our diluted share count decreased 4% to 213 million shares. In the quarter, we purchased approximately $100 million of our shares and now have roughly $800 million remaining on the November 2018 share repurchase authorization. Year to date, we have now repurchased $325 million of shares, bringing our total share repurchases in the last four quarters to over $900 million. Regarding free cash flow and cash balance, year to date, we had adjusted free cash flow of $803 million, putting us right on track with our guidance for the full year adjusted free cash flow of between $1.4 billion to $1.6 billion. although the timing of free cash flow was earlier in the year than expected. We ended the quarter with $2.9 billion in cash, of which $520 million was held offshore, and the majority was U.S.-denominated cash. This completes the review of our consolidated results. Now I'll cover our segment results, beginning with pharmaceutical distribution services. Segment revenue was $42 billion, up 6%. The segment continues to benefit from growth of some of its largest customers, continued strong growth in specialty distribution, and overall market growth. Segment operating income increased about 6% to $517 million. As discussed earlier, the March quarter had a headwind from far medium. but was offset by the favorability related to Brazil. Normalizing for both of these impacts, segment operating income still would have increased 6%. Our core pharmaceutical distribution businesses continue to execute extremely well, growing volumes with our customers while effectively managing operating expenses. Our teams are working with partners both upstream and downstream to deepen existing relationships and deliver outstanding services and solutions, all while working diligently to operate the most efficient distribution network. I'll now turn to the other segment, which includes 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 5%, primarily due to growth at Consulting's Canadian operations and World Courier. Consulting's Canadian operations or NMR has had solid growth as it continues to deliver innovative solutions to specialty manufacturers while improving product access and increasing supply chain efficiency in the Canadian market. World Courier has strong revenue growth as demand for their high-touch global specialty logistics continues to be strong. MWI's revenue was up 2% limited by severe winter conditions impacting customers on the production animal side of the business. From an operating income standpoint, this group had operating income of $100 million, up 3%. World Courier continued its strong momentum with strong volume in weight growth trends. The group's operating income growth rate is increasing as expected as we continue to drive cost efficiencies across the group and we anticipate solid growth at MWI in the back half of the year. While fiscal 2019 continues to be a transition year for LASH, we are excited for the long-term outlook of the business as we have had notable success in winning new business in addition to having key anchor manufacturer relationships renewed or adding programs. The fusion platform continues to be a differentiator for LASH's service offering and positions the business well for the long term. This completes the review of our segment results, so now I'll turn to our fiscal 2019 guidance. As we said in this morning's press release, We are raising our fiscal 2019 adjusted EPS guidance to a range of $6.70 to $6.90, up from $6.65 to $6.85 as our businesses continue to execute at a high level despite the headwind from far medium. The only other guidance item we are updating this morning is a minor change to our expectation for weighted diluted shares outstanding for the year. Given the buyback so far this year, we are lowering our expectation for weighted shares outstanding to approximately 214 million shares down from our previous expectation of approximately 215 million shares for the year. Lastly, we are not making any changes to our working assumptions around pharmaceutical pricing for the full fiscal year. Broadly speaking, after the first half of the year, both brand and generic pricing are trending relatively in line with our original expectations for the year. But I'll note that it's still relatively early in our fiscal year. Turning back to our guidance range overall, factors that move us within our range include business unit performance, operating expense management, brand and generic pricing and mix, results from farmedium, and HC Smith synergy capture. Based on how we are evaluating these factors today, we are less likely to be at the bottom of our range. Regarding the expected cadence for our adjusted EPS for the rest of the year, While we do not provide quarterly guidance, I will note that certain expense items referenced earlier were initially expected to benefit the third quarter, but actually benefited the March quarter. Keep that in mind as you adjust your quarterly models for the rest of the year to align with our updated full-year guidance. In closing, we are extremely proud of the execution throughout Amerisource Bergen to deliver continued strong results. AmerisourceBergen has spent decades evolving to become the enterprise we are today, having built a robust portfolio of businesses and capabilities, attracting and developing talent, and fostering key customer relationships, all while maintaining strong financial discipline and investing internally and externally to ensure we are offering our partners unparalleled value and efficiency. Thank you for your interest in Amerisource Bergen. Now here's Bennett to start our Q&A. Operator, we're ready for our first question.

Thank you. And once again, ladies and gentlemen, if you do wish to ask a question, please press star 1 at this time. Our first question will come from the line of Glenn Santiago from Guggenheim Securities. Please go ahead.

Oh, yeah, thanks for taking my question. Steven, Jim, I just wanted to sort of follow up on the gross margins within the core distribution business. I mean, you've given us some color about, you know, the Brazilian piece and Farmedia maybe, you know, offsetting what happened in Brazil. The gross margin came in a little bit better than what we were looking for, and I was wondering if you could help us unpack what's going on there so we can help us better assess the sustainability of that trend. And then I'll just get my follow-up out of the way. The biggest question we're getting from investors is about the reimbursement pressures at retail pharmacies and how that may be impacting the independent pharmacy channel and what that could mean for wholesaler economics over the intermediate and longer term. So any thoughts on those two issues would be helpful.

Yeah, Glenn, thanks for the questions. This is Jim, and I'll answer the first question, and then Steve will take the second question. So regarding margins, you know, as I talk about the quarter, I'll focus on operating margin. And let me kind of take a step back and first say from a big-picture standpoint that That, you know, we feel confident that our value proposition is high and we are in a fair margin and our margins are clearly justified by the services we provide, you know, including logistics and access and efficiency and financing and security and, you know, now kind of getting into the quarter. In our distribution business, you asked about, you know, revenues were up 6% and Operating margin was up 6%. And as you noted, if we adjust out the headwind from far medium and the tailwind that we had this particular quarter from Brazil, operating income and distribution was still up 6%. And I'd call out a couple of things. And there was good performance across many business units, but one in particular that I'll call out is growth in specialty distribution. which there are added services that we provide, wraparound services that we provide, in particular to physicians. And that really benefited us during the quarter and plays out in our operating margin and operating income growth. And the other thing I'll call out during the quarter is just really good performance on expense management. We had very nice performance there in the quarter. One thing I will call out, though, as I said in my prepared remarks, there were about five pennies during the quarter of general and administrative expense benefits that we received during the quarter that we had expected to receive over the balance of the year. And so that did help us in the quarter. But overall, we're really pleased with our performance and really pleased with our operating income growth. and our operating margin. And then, of course, one thing that will benefit us on that front in future quarters is we've really lapped the tough bar medium comparisons, and the comparisons don't have the notable headwinds going forward. We don't expect them to have the notable headwinds going forward that we have in past quarters.

Yeah. Thanks, Glenn. And on the second question, really around reimbursement pressure, You know, our customers, it really depends a lot, it's informed a lot by your contracting strategy. So particularly if you're in narrow networks, you know, I know when we do the Elevate work, for example, it's really important that we take into account the manageability of contract rates that we adopt for Elevate. And, you know, we have a lot of discussions with our independent base that we contract on behalf of for that. There is a lot of talk, I think you're referencing, can independents survive in this environment? No, we've seen independents' market share remain fairly consistent, I think because of the differentiated service they provide, the communities that they're in, their role as a local healthcare petitioner, very accessible. I think they work very hard, and there's a continuity of service there that I think a lot of patients are very fond of. And then I think ourselves, our industry has been very helpful to the overall growth and survivability of the independent pharmacists. And they have other key partners like buying groups, but the services we offer them, including analytics, technology, professional services, sourcing services, are very critical to their survival. We think that they do differentiate them, and we in particular think that being a good neighbor pharmacy and elevate member differentiates you further within that important subject. Thank you. Next question.

Thank you. Our next question then will come from Robert Jones from Goldman Sachs. Please go ahead.

Thanks for the questions. I guess just to pick up on the first question for you, Jim, even if I account for that five cents of the positive G&A that you highlighted, it still seems like you know, based on your original expectations for this quarter to be flat to last quarter, you know, obviously came in much better. It seems like the implied back half is lower than what you guys would have been anticipating before the results today. So I'm just curious if there's any other dynamics at play there that you could share. And then just Steve, my followup would be, you know, you've mentioned now a few times about ABC and the wholesalers being a facilitator of the flow of funds in a potential, uh, point of sale discount world. Um, so just wanted to get a sense from you, you know, now that we're a quarter later, uh, you know, what are you hearing out of DC and, and how significant of a revenue and profit stream could this be for, uh, for ABC and the group? Thanks.

Okay. And, um, thanks. And I will, you know, again, answer the first question and then, uh, Steve will, um, answer the second question regarding, um, what we are seeing over the balance of the year. And of course, it's still relatively early in the year. And we've increased our guidance range, of course, to 670 to 690. And as we look at the balance of the year, the factors that move us within the range are business unit performance, operating expense management, brand and generic pricing results from Farmedium and H.D. Smith SynergyCapture. Probably the ones that are a little bit less under our control would of course be the brand and generic pricing and to some extent the results from Farmedium given the negotiation of the consent decree. But as I said during the prepared remarks, based on how we're evaluating all those factors today, we're less likely to be at the bottom of our range. And then one other thing I'll just call out that I think is important to consider, when we did our guidance at the beginning of the year, the low end of our range was $6.65. And I think it's important to remember that we indicated that what would move us to the low end of that range was the downside scenario at our medium of not reopening Memphis. And that is the current expectation And so we've been able to overcome that and increase our guidance range, you know, due to strong execution across numerous Amerisource bargain businesses. But, you know, again, I'll, you know, comment that it is still pretty early in the fiscal year.

Yeah, well, thanks for the question. And, you know, one thing also I'd say, I'm not sure everything that I, you know, we work very hard on balancing our portfolio to make sure that all the products are profitable. And we've talked a lot about that. And, you know, we've been talking about that for years. And I think that, you know, it's paid some fruit. We're not where we'd like to be entirely. But, you know, we obviously had an effort, just to be very frank, to make sure that generics and generics with the deflation were not a growing, robust part of our portfolio as they had been in the past, that this was not as much of a headwind. And I think you've seen some of that play out. Just on the question about distributors and adjudication, Yeah, great question. I'm really proud of the team. I mean, the way we brainstormed, you talk about the work that gets done between information resources. To give you a glimpse into the inner workings of the company, the work that was done here before we could put out the release, between information resources, our digital people, and our core business operations to elevate people. I think it's really amongst the finest thinking that we've done in a long time, just to think about the future, look at the problems, and be proactive about putting a solution out there. Having said that, it still is not a clear picture. There needs to be tremendous cooperation amongst so many of the industry stakeholders. I do think that sometimes people forget that not all products are heavily rebated. We're talking about a category of products which is fairly large and have specific characterizations around how they get prescribed and how patients utilize them and how they get dispensed and how manufacturers have negotiated with PBMs and other insurance parties, so I think that's important, but we are positive about our role. I think we've been quite confident, intellectually confident to state that we can perform the service. It's analogous to some other services we provide but is more complex because we'd have to take a data feed from payers and claims. So we stand ready to do that work. We need help and we need alignment that the wholesalers are the right party to do that. We have a strong faith, the confidence that we can do that because we are an honest neutral party and we do this in the institutional setting you know, very frequently. So it's not that big of a stretch for us. And, you know, we have these strong relationships that we can leverage. And, you know, I think that over time, I've been saying for a long time that it's inevitable that companies like AmerisourceBergen will have a stronger payer-facing relationship in terms of the services we provide to payers. So maybe that's part of the evolution of the market, and we look forward to playing that role.

Thanks, Steve.

Thank you. Our next question then will come from the line of Ross Mugen from Evercore ISI. Please go ahead.

Good morning, guys. So maybe just sticking on sort of the independent theme, you know, obviously your partner in WeBad talked about less generic procurement savings this year in a maybe slightly tougher environment. Obviously, less generic deflation is also good for you guys. But just in terms of your independent customers, you know, we've heard More anecdotally and after seeing some of the numbers from NCPA, given some of the issues with DIR fees and other things, the independent base is seeking better generic procurement and sourcing than what they've had. Obviously, those two things go against each other in terms of what the environment is and what they need. you know, in the guise of keeping this important customer base kind of healthy, I guess, how do you kind of balance what you can kind of provide to them, maybe incremental services, maybe they need you more than they did in the past versus sort of that push and pull of what the generic market is offering today?

Yeah, you know, it's a good question. You know, WeBat is now six years old. I mean, just to remind everyone, in 2013, we joined an alliance that had already been created between Walgreens and Alliance Boots at that time. And, you know, we think that it's been very successful. In fact, you know, historically, it narrowed the gap tremendously between how independents could source generics versus how chains can. And I think if you look back, that really dovetails very well into the theme that I talked about, about how important wholesalers have been for the overall survival of independence. We look at these statistics very carefully and there's a juxtaposition, if you want to say, between what our generic profitability is and what our compliance rates are, and we've talked about that. You know, we are as obsessed with compliance rates and our independence feel that we're giving them a fair deal as we are with maintaining our profitability in this important segment of the business. So that is something that we're very aware of. It's not something that's new to us. There's always been this balance. But, you know, we are confident in the value proposition that we provide to Good Neighbor Pharmacy and to all of our customers. And we're aware, you know, reimbursement pressure and other things healthcare policy pressures, or it's nothing, it's not new to us. We have been engaging in these discussions and have been proactive more and more in those discussions with our key customers, as well as with suppliers, so that we can help be really planful about managing through changes. The DIR fees, you referenced those, those were a surprise. About three years ago when I went to our Vegas trade show, I was really surprised at the intensity of the independent base about that. And, you know, we've really tried to help, and I think people are in a much, pharmacies are in a much better position now to understand what the exposure to DIR fees could be and to manage that, you know, accordingly. So we feel that, you know, some of those things have not necessarily, in my opinion, been fair, but we've been able to help our base manage through that. So thank you. Next question.

Thank you. Our next question will come from the line of Steven Valiquette from Barclays. Please go ahead.

Great. Thanks. Good morning, guys. So, just a question here around generic pricing. Obviously, it's pretty topical right now. You know, thinking back about four or five years ago when drug distributors really captured a lot of earnings upside from generics, there were a lot of generics that were, you know, going up in price pretty materially, you know, a lot of list price increases. In the current environment, the trend seems to be a little bit more of generic prices stabilizing you know, not really going down anymore. We're really not a lot of generics going up in price, at least based on the data that we're looking at. So just curious maybe if you are able to discuss that at a high level, how important that is when thinking about, you know, the potential for distributors to, you know, capture incremental profits in the current environment. Thanks.

Yeah, so regarding generics, you know, what we're seeing is that The deflation is generally in the range of our original expectations. So when we look at it overall, we see it's generally in the range of our original expectations. And as we said at the beginning of the year, as long as it stabilizes and is in that range, we won't call out a particular percentage on a quarterly basis. you know, hopeful that the commentary from manufacturers on portfolio optimization leads to further stabilization, where, you know, optimistic over a period of time that the market returns to historic levels of, you know, mid single digits in terms of deflation. And then, you know, on supply constraints, we are, you know, seeing some volume impacts but that's just kind of one of the things that we've been seeing in the market and relatively small.

I guess at the end of the day, are you seeing a consistent relationship right now between the buy side generic pricing trend versus the sell side generic pricing trend? That's really, I think, what's critical at the end of the day.

Yeah, we have been tracking that, and in terms of that spread, We've seen that spread as relatively constant.

Okay, perfect. Okay, thanks. Thank you. Our next question then will come from Lisa Gill from JP Morgan. Please go ahead.

Good morning. Steve, I'm wondering if maybe you could just talk a little bit about the impact around potential changes on Medicare Part B. You talked about your specialty business and growth there, but do you see incremental opportunities if we start to see changes around reimbursement on the Part B side? Or do you see any risk to your specialty business?

You know, the specialty business is doing really well at the moment from, you know, key product innovation on the manufacturer side. And, you know, if you look at our colleagues reporting, our manufacturer colleagues reporting, you know, so much, you know, the growth that you're seeing in some of the larger pharma companies is around oncology. And we have this Incredible franchisee and in fact, I've had some customer wins within that segment a lot of our customers Which we've always talked about all the consolidators that are the acquirers. So we've seen you know some important, you know micro trends pertinent to AmerisourceBergen that Jim referenced within our specialty distribution business and it's hard to exactly gauge our market share because of you know the data but good data, but we think that our distribution market check could have gone up a bit there. I think invariably it has because of the growth of our customer base. As far as the actual Part B goes, we don't think the reimbursement's really fair right now. I think a lot of the oncologists I've talked to really rely on their commercial base. We hope that there could be some changes that could be beneficial, maybe more around fees, and there's some skepticism about the sustainability of those fees, but really, Lisa, there's nothing that is new that we are overly concerned about as far as Part B. I think, you know, what is a positive is that particularly commercial payers and hopefully Medicare understand the important role that community oncologists play with patients. And the other trend we're seeing is that you know, more Part B drugs in important areas like ophthalmology, urology, et cetera. That is another positive trend, and that's why we highlighted the strength and access of our basic medical business. So, you know, hopefully that answers your question, and we'll take the next, okay?

That's helpful. And then just as a follow-up, Jim, when we think about the $800 million that's left in the share repurchase, You've only brought the share count down by roughly a million shares. How do we think about that playing out throughout the rest of this year?

Yeah, and so as a reminder, we don't include unidentified capital allocation in guidance. You know, as we said during the call earlier, We've done $900 million worth of share repurchasing over the past four quarters, and we'll continue to look at opportunistic share repurchases as part of our capital allocation. But, you know, as I said before, we don't include unidentified capital allocation in the guidance. Great. Thank you.

And our next question will come from one of Kevin Calendo from UBS. Please go ahead.

Hi. Thanks for taking my call. I want to change it up a little bit and talk about the animal health business. You mentioned the weather had a negative impact on the NWI and the production side, and Zoetis this morning called out a miss in their U.S. livestock business, partially caused by the timing of distribution or distributor purchases. Is there... Any of these delays could be pushed into the next quarter, meaning there could be a little bit of a make-up. Can you talk a little bit about the dynamics of what's going on on the production side for NWI?

Yeah, and as I said during my prepared remarks, MWI grew 2% during the quarter impact. I said that that was limited because of the severe winter weather, and so companion animals grew faster than production animals. during the quarter. Those of you that follow the animal health business or follow some of the weather in the Midwest during the second fiscal quarter, it really did have an impact on production, animal business. I'd have to say to answer your question, some of that is lost and then some of that will kind of flow into the next quarter. I would have to just make an overall comment that, you know, sometimes weather impacts that business. It happens from time to time. But overall, you know, over the long term, we view it as a, you know, very positive, very healthy long-term business.

On the companion side, I know it's only been a quarter, but have you seen any impact yet from the Covetris merger and the merger of the Shine and Vets First Choice businesses in the marketplace yet?

Yeah, you know, Shine and Covetris are good competitors. We have good competitors in that market, and they are one of them. We'll just continue to focus on our areas of strength. We're particularly strong in corporate accounts. We're particularly strong in our operating efficiency in that business. We have really good value-added services and technologies both in the production animal market and in the companion animal market. a strong sales force, so we'll continue to focus on our strengths and building the business. But I'm sure that Coveteras will continue to be, as they have been, a strong and good competitor.

Is there any plans to try to grow out your own platform, similar to the Vets First Choice, the VetSource platform?

Yeah, we are a shareholder of VetSource. And, you know, we've been very happy with our interest in that business and partnering with them. And then we have, you know, other kind of value-added technologies like LITVM, for instance, that we have internally.

Operator, next question, please.

Thank you. Our next question will come from the line of Charlie's Rye from Cohen. Please go ahead.

Hi, it's James on for Charles, actually. So World Courier seems to be continuing to perform well. If I recall correctly, it was noted previously that you expect operating profit growth there to grow at or in excess of 20% in fiscal 19. Can you give some color on what's driving that level of growth? Has growth year to date been in line with that expectation? And is that sustainable over the longer term beyond fiscal 19?

No, so James, we don't give that specific guidance for a business within our other sector, but we did have an outstanding year, a very high growth year in 2018 in World Career. When a business has two or three back-to-back very strong growth years, we were pleased with the plan they put together, and they continue to hit the internal milestones and And more importantly, provide very important services to their manufacturer partners. So we couldn't be happier with the business. It's an international business that's been a really strong success for us. And, you know, we have high confidence in the management there. We've made strong internal investments. You know, it's a complex business for us to run. It operates in 50 countries. And a lot of the value added ABC has done there, if you look back over a long time, has been in strengthening the internal controls, the financial, really helping them with how do you price contracts. So we think that, you know, it was always a good business. We've added a lot in terms of management. expanded the services and helped just manage and inform the business better. So I think it's a great case study within ABC for what is a successful acquisition.

Okay, great. And can you provide us with an update on LASH maybe, particularly the fusion implementation? How is LASH tracking towards a return to growth in fiscal 2020?

Yeah, so we're really pleased with the progress that Lash is making. From a financial standpoint, it's still a transition year for Lash, but they're doing really well in terms of new business development and new business wins and signing extensions and adding to programs with existing customers. And we really feel strongly about Fusion for the current and for the long term and the benefits that we'll have for LASH and for manufacturers and patients. Operator, next question, please.

Thank you. Our next question will come from the line of Ricky Goldwasser from Morgan Stanley. Please go ahead.

Yeah, hi. Good morning. So, Jim, the two-part question, but first, Jim, when we talk about the $0.05 benefit in the quarter from the lower operating expenses, should we think about this as a sustainable benefit that we can flow through our model going forward, or is just kind of like more of a one-time item? And then for Steve, I just wanted to revisit the WeBAD question. I mean, obviously, your largest customer and sourcing partner has highlighted some meaningful headwinds for them from a lower generic sourcing benefit. What are you seeing on your end? How are you mitigating it? I know you responded before that you're seeing the sell versus buy side spread being stable. Should we interpret that as you're actually getting better pricing from the sell side?

Yeah, I'll take the first part of that question. The 5 cents of G&A benefits during the quarter is really timing and it's things that we expected to happen throughout the balance of the fiscal year, particularly in the third quarter that ended up benefiting us in the second quarter.

Yeah, you know, on WeBad, I think we have a very, the relationship really works because of the strength of the data and the sources that we have between Walgreens, Alliance Foods, and Amerisource Bergen, and also has been further strengthened by, you know, key partners, especially Express Scripts, but also the institutional pharmacy partner, like Farmerica. So we, you know, we feel like it's really well positioned. You know, when we, you know, Ricky, we are painfully aware of generic deflation and and brand inflation and the growth of specialty. So when you look at, you know, the $160 billion in revenues and the planned profits, you know, the contemplation of a lower contribution from WeBad is certainly something we thought about in our fiscal year 90 planning and we'll continue to think about, you know. So the sourcing component is very important. We think the model's been very successful, of course, Others sort of copied it, but the original stakeholders that we have are very powerful, informed stakeholders and good partners to have. I hope I'm getting the times up here, so I'll turn it up to Bennett.

That's the last question we have time for, but I'll turn the call back over to Jim for some closing remarks.

Yeah, I'll just take a moment here, and then I'll turn it over to Steve for closing remarks. But I'm going to go off script just a bit and recognize Steve for just having celebrated his 25th year milestone as an Amerisource Bergen associate. And congratulations, Steve, and thanks for your leadership and for your 25 years of service to all Amerisource Bergen stakeholders.

Thank you, Jim. I hope at some stage people will think of me as a senior spokesperson, but I'm not ready for that yet. But, you know, honestly, as I said to you today, we had a fabulous quarter. We're proud of the results we had. But if I think about the requirements to do what Amerisource Bergen does, I'm more confident than ever in our value proposition. And the services that we provide continue to grow in scale, in quality, in magnitude. And that's really both upstream and downstream. I feel that they are critical to the health and outcomes and management of our key customers, whether they are in the pharmaceutical space, but also to facilitate patient access to care. So, you know, you mentioned 25 years, Jim, but really, since our merger in 2001, if you look at the company that we built, the key cultural aspects of people, the relationships that we've built, the differentiated services and solutions portfolio, the businesses that we've acquired, you know, and the strong financial flexibility we have, probably the most financial flexibility we've ever had in our future, I just feel very confident that we can successfully navigate the complexity of the U.S. healthcare system and deliver long-term shareholder value. So thank you for listening. I thought the quality of the questions today was excellent from our cell site community. I appreciate your interest in the Marisol's movement today. Thank you.

Thank you. Ladies and gentlemen, that will conclude our conference for today. Thank you for your participation. For using AT&T Executive Teleconference, you may now disconnect.