AmerisourceBergen's CEO Hosts Annual Investor Day Meeting (Transcript)

AmerisourceBergen Corporation (NYSE:ABC)

December 12, 2012 12:30 pm ET

Executives

Barbara A. Brungess - Vice President of Corporate & Investor Relations

Steven H. Collis - Chief Executive Officer, President, Director and Chairman of Executive Committee

David W. Neu - Senior Vice President and President of Amerisourcebergen Drug Corporation

James D. Frary - Senior Vice President and President of AmerisourceBergen Specialty Distribution & Services

Peyton R. Howell - Senior Vice President and President of Global Sourcing & Manufacturer Relations

Tim G. Guttman - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

John W. Ransom - Raymond James & Associates, Inc., Research Division

Lisa C. Gill - JP Morgan Chase & Co, Research Division

George Hill - Citigroup Inc, Research Division

Barbara A. Brungess

Good afternoon, everyone. We'll get started. I'd like to welcome everybody to our Investor Day for our fiscal 2013. I'm Barbara Brungess, Vice President of Corporate and Investor Relations for AmerisourceBergen. And during the meeting and webcast today, we will make some forward-looking statements.

Could you advance the slide, please? So we remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations. For a discussion of some key risk factors, we refer you to the forward-looking statement in our slide deck, and also to our SEC filings, including our 10-K report for our fiscal 2012.

AmerisourceBergen assumes no obligation to update the matters discussed in this presentation, and this webcast cannot be rebroadcast without the expressed permission of the company.

Now it's my pleasure to introduce Steve Collis, President and CEO of AmerisourceBergen.

Steven H. Collis

Good afternoon, all. Thank you for coming. I hope you like our new cozy headquarters, and I promise, we're not going to bring Clint Eastwood up here. So no one needs to be concerned about that.

Welcome. Today, I'd like to particularly welcome one shareholder, my wife, Toni, who's never been here before and she's at the back. So good to have her here.

I, of course, have just recently completed my first fiscal year as President and Chief Executive. I think we've had a phenomenal year. When I was elected to be CEO, our Board was very clear in instructions to me, keep up the great reputation of AmerisourceBergen, the great governance that we have, the wonderful relationship we have with all our constituents and really focus on our growth strategy and build your team up. And I think we've done a phenomenal job. I couldn't be more proud of the year we had in 2012, and especially how well the team is working together. Of course, we were preparing this morning and I'll just go right to the bottom and just talk about Tim Guttman in the CFO role. And we were all remarking that it was like Tim had been doing this job for many years already. Of course, Tim had been our Controller, really trusted by the management team and really stood out in the selection process. But he is one of the newer members of the executive management team and really for the first time, will be hosting the Investor Day as our Chief Financial Officer. So Tim is doing a great job.

Dave Neu has recently celebrated 30 years with the company. He is a phenomenal leader, one of the most communicative people I've seen. He'll be speaking after me and you'll see that Dave's passion and knowledge of the drug company is second to none. And just truly a privilege to work with Dave.

James Frary will be speaking today, representing our Specialty Group. I think I've told you all the story about James before. He was doing a large consulting project for several years right after the AmerisourceBergen merger. And he came to my predecessor and said, "Dave, I really don't want to leave the company." We put him in to run one of the regions. And really when I was moving up to Philadelphia to run the drug company, James really came to mind as the person who should succeed me at the Specialty Group. And he's done a great job growing those businesses and managing through some very tough comps in 2012. And you'll see James certainly brings a lot to the table at our Specialty Group.

Here, the person who's been a lot in the news lately, is my longtime colleague, Peyton Howell, and good friend. Peyton, really, I met in the late '90s, when the former Bergen acquired the Lash Group. Peyton has had many roles within AmerisourceBergen. I think people don't sometimes recognize how, not only does she know our services and specialty business well, but really has a great insight into our value proposition to manufacturers, our economics, our relationship with key provider customers and just a great understanding of their product lifecycle, where AmerisourceBergen tries to impact all along the different stages of their product lifecycle. So we announced recently Peyton's promotion to President of Global Sourcing and Manufacturer Relations. We've had enthusiastic reaction to that from the industry. And about 800 internal e-mails congratulating Peyton. She's very well-liked and respected within the company. So that's the team.

We also recently welcomed one of your own into our ranks. And so far there haven't been any major surprises. But Larry Marsh joined just recently as our head of Global Strategy and New Market Development. Someone just asked me the question, "Well, if you have a hammer, does it have to nail all the time?" And I guess that was a question like, "Does Larry have to do acquisitions to be successful?" Absolutely not. He's here for a variety of purposes. Larry is really -- helps us with Enterprise Risk Management. He's got a great understanding of health system. He understands reform very well. He's got a good view on accountable care organizations. So Larry has already been here 1 month and is providing a lot of value. So, also he asks us tough questions so we wanted to get him out of the way, so better hire him, so.

That's who your speakers will be today. I think again, I do got a couple of questions. I was here -- I was out here earlier. I got a couple of questions. And it really bears repeating what a privileged position we have within the channel. "If you want to play health-care reform," someone was asking me, "is AmerisourceBergen a great way to play it?" Absolutely. We are really going to be benefited by new patient accruals, by new drive launches. If you want to be in the health system market, we've got a great presence here. Community pharmacy, community oncology, all these interesting areas.

And in all of it, we are central to the data exchange, to the product management, to the financial management, to all these different constituencies, we touch them every day, and it's a great position to be. And I think our industry and our company in particular has benefited terrifically from this value proposition that we have and from the central role that we have. So we like that role. I think one of the things you should recognize about AmerisourceBergen and give us credit for is that we know what that role is. We're not trying to extend it in some goofy way. We're very thoughtful about it. Any time we extend it, you'll see that there's a very clear logic consistency and purpose to that. So we like our value proposition. We like being central to the supply chain. We like these key relationships we have with all the value participants in this channel. And you'll see us continuing to enhance that position.

Can you advance, please? So here's -- earlier, I was talking about the product lifecycle. It's really often regarded industry conferences and we see presentations from others. We started talking about this slide over a decade, well over a decade ago as we start to help manufacturers commercialize products. And we've kept on finding more ways to add different elements of AmerisourceBergen into this product lifecycle. And probably the best example I can give you is the most recent addition of world courier, which got us into the global clinical trial logistics and is a great feeder.

But if you look throughout development prelaunch, launch, high-growth and even market maturity with our generic strategy, AmerisourceBergen is trying to add value throughout each of those different stages. And I think we've been very successful at that and thoughtful about it. So when we approached our presentation piece today, we value you spending 3 hours with us, we thought, how do we show you what our different influences, what our different levels are throughout this different product lifecycle? And I think that's what you will see as a theme for today. So wherever we are in the product lifecycle, AmerisourceBergen will try enhance our value, enhance our customers' value and then really have a compelling proposition to each of those different constituents along the way. And that's what you should expect from us.

Now I'll pick out another one, provider credit. We manage probably on a monthly basis, about 50,000 ship-to points. And each one of those, we've got a different credit relationship, we gear our credit relationship to the particular needs of that provider. We also have to manage, of course, the accounts payable with the manufacturers. So we've got different constituents there. We've got foreign manufacturers who don't understand the U.S. market. And all of this we do very efficiently, very seamlessly and we just execute terrifically.

We have, of course, in the last 60 days implemented the new parts of the ESI contract. And again, people like myself that are out there every day and Tim Guttman, our CFO, and Barbara when we meet with you, and Investors, and we meet with new accounts, we just have got tremendous confidence in our ability to execute. Because we have a history of execution and we just do a great job when it comes to the blocking and tackling. And I think the industry does give us a lot of credit for that.

So here's the result that affects our shareholders. You've all seen this chart many, many times, the 16% compound annual growth rate. Some stage, we'll get to the point in our development where we can take 2005 out of there. But it really has been remarkable performance since the merger. And we've actually accelerated growth up to 17% in the last 5 years.

And our guidance for this year, of course, is in the 11% to 14% range. It has been helped by our balance sheet, but we're very proud of our performance. We think we managed 2012 particularly well, given the specialty generic comps that we had. And we used the all-solid generic cliff year. I'm hesitant to use the world cliff in the current context. But we used the generic cliff year to really keep that profitability going, keeping that great performance and came up with 10% EPS growth. So just very, very proud, not only of the organizational things we accomplished, the acquisitions we did, but also very robust financial performance in fiscal '12, given some tough comps.

So what does our outlook look like? How are we going to be doing in the next few years. We're excited about the industry. We did well, of course, in 2012 with the loss of some top line, mainly because of brand-to-generic conversions. We'll see some modest growth in the industry this year. But if you look forward, and these are the IMS forecasts, you should see some really strong trends around employment, around demographics, expansion of coverage, new brand launches that will help us -- help the industry overall growth and you'll see some nice upticks in the industry growth rates in '14, '15 and '16.

Of course, we are mindful of the economic circumstances we're in. There will be focus on cost. But again, we are confident in the value we provide. We deliver value to our customers. I think the customers understand that and we've been very successful in all sorts of environments. So we think we managed through DEA issues, safety concerns, anything that might happen with the manufacturing environment. We've managed through all these different circumstances very well and you've seen how consistently we've performed. And if you look at our performance in 2008 in the crisis, we -- it has really been -- it was, again, one of our best years. So we're confident that whatever the circumstances, AmerisourceBergen will prosper and will do well.

So why are we well positioned to prosper? We're in a stable industry with a growing market. We have a leading position. I think one of the things that is probably not as well understood is how diverse our customer portfolio is. We have -- we're probably very well known for specialty and community pharmacy. But we have other very many good constituencies. For example, even within our specialty group, James will highlight some of our other non-oncology businesses that are performing very well. Dave Neu is going to talking to you about how strong our health system business is. And Peyton will highlight for you how strong our services business is. Consistent, solid financial performance, I think I've covered that. The leading positions in fast-growing areas. So we're in the right areas, the services areas, the specialty drugs. Anyone that's going to launch a specialty drug that is physician administered, they will come and talk to us. We are acknowledged as a thought leader and as an innovator in that area.

Our operational excellence. You've seen how we've been able to leverage revenues, bring our expenses down. We've made the right investments, not only in SAP, but in our distribution network. And we have been, as I said, focused on the continuum of pharmaceutical care. So let me just touch a bit more on each of those points.

We're going to be -- we believe in the future. We will carry on delivering innovation. That's a lot what our team is focusing on. Again, Larry's role is not just focused on external and on capital deployment, it's really focused on enhancing the relationships with both providers and manufacturers. We have increasing relationships with payers. This is becoming a much more important aspect of our business, whether you're talking about community pharmacy or specialty, we have to be talking more about payers, thinking about who's going to be presented with that bill, be it government or private. Efficiency from operational excellence, and then our cash generation has been very, very significant. And you saw, I think, just excellent redeployment in 2012 through both acquisitions and leveraging our balance sheet. And then we're going to be growing by expanding on our strengths, and I'll talk about that.

So first of all, on the innovation side. One of the things that I've really worked on since moving up to Philadelphia, becoming President of the drug company and then Chief Operating Officer, now CEO, is really working on the whole portfolio. How do we look at this continuum of health care? How do we look at that physician that might migrate into a health system? Or how do we look at that manufacturer that was a generic manufacturer but now has become your branded manufacturer, vice versa? How do we work with all these different constituents? And we believe that we have, with our portfolio, a great approach and some unique solutions. I think all of you know that I'm pretty easygoing, but actually got a bit riled up when somebody asked me a question about "one of your competitors in specialty has said that you are a significant competitor to them." In many ways, we have invented the specialty market and I think it's kind of ironic that one of our competitors is saying -- I don't like to comment on competitors, but saying we find them one of our key competitors and this was just a remarkable comment to me because I think many of these areas, when it comes to services, when it comes to provider relations, when it comes to oncology presence, when it comes to manufacturer launch support, AmerisourceBergen has truly been an innovator, and we've developed some of the solutions that helped define the industry. So I would say that we have proven to be an innovator and we're not backing off. We'll carry on being an innovator. We've got a lot of thoughts in the last few months about our TheraCom acquisition and World Courier. Then we also did some smaller acquisitions, Premier Source and IntrinsiQ, that have kept showing that AmerisourceBergen will invest in the areas where we provide value. So you will not find us backing off on investing in any of our key areas where we have innovation and strength. The operational excellence, I tell you people like me, it's easy for us to take this for granted. But whether it comes to implementing SAP, taking on a new customer, dealing with a new contracting issue, AmerisourceBergen executes flawlessly. This is something that we are all very proud of. You can take it for granted, but it's just remarkable. We really live up to what we say. And I think that we get credibility, a lot of credibility and a lot of recognition as a truly great operating company within the different constituencies that we serve. And we believe we have opportunity for margin expansion. Our margins are very reasonable. We think that over time, due to mix, due to the investments we make and that those margins should improve. We're not quite getting there in fiscal 2013. We've had 7 years of operating margin expansion. Tim will go through that. But we think that in the long run, our operating margin as part of our key goals is to keep on expanding that.

So our cash generation, this has been a remarkable characteristic of fiscal year 2012. We generated $1.3 billion in cash flow from operations and we used that, I think, very, very effectively. $800 million in acquisitions, paid down $400 million in debt, repurchased $1.2 billion of our stock, which was almost a record, and increased our dividend by 62%, which has been generally very well received by stockholders. So I think we've had excellent stewardship. We really highlighted that with an exclamation point in 2012 and, again, another part of a very strong year that we had overall in 2012.

So we're going to carry on growing, as I said, by expanding our strengths. We like our positions in areas like community oncology, community pharmacy. We're going to talk more about our hospital business. And again, our whole manufacturer footprint we think is truly innovative and something that we're going to have an opportunity to start looking at through our World Courier platform across the international markets. So let me just -- let me talk a bit about that.

World Courier. I've been asked many times, has this acquisition met all your requirements? And it absolutely has. We're thrilled with how it's worked out. When we do go visit foreign markets, we are really impressed with the quality of the people, the quality of the facilities they have, their systems, their competitive positioning, their passion for the business. Sometimes you acquire a company and you get surprises. We really have only had pleasant surprises. They have transitioned very well into a public company environment. They have an extensive network of global assets and they tend to have that as an owned asset. So they really try to control as much of the experience as possible. They have their own transportation in the larger markets, their own transportation vehicles. They have their own facilities, their own FDA requirements, their own equivalents in the EEC, for example, of getting those export licenses. They do really remarkable things. We think that they are a really high-quality company. This is the type of acquisition that AmerisourceBergen would like to focus on in the future, differentiated, very strong, strong people, strong systems, strong competitive position. And it's just interesting because whenever we go, and we are looking at opportunities to expand our international platform, it's really good to have someone who's employed by AmerisourceBergen that understands the local health care environment. This is probably one of the intangible assets that we picked up here. So we have people that, for example, really understand the Brazilian or the Chilean health system or the Mexican health system. We really have this wonderful network in all the important health care markets, and that's been another nice addition that this acquisition has brought us.

So we think that this international platform is going to become increasingly important to AmerisourceBergen. It has been a significant change for us. But going back to what I said about our operational excellence, I think we've managed this very, very well financially and operationally. Just think about it on April 30, we were doing business in 3 currencies. And on May 1, we were doing businesses in I think 16 major currencies. So there's been a big change for us. But, again, I think we've managed it very well. We like the network and the footprint that it gives us. And we believe that this is going to be a great platform for us to expand internationally, particularly in our high-growth and differentiated specialty and services businesses. So, again, a lot to like about the World Courier platform.

Just as I wrap up here, part of the reason that we're not going to have operating margin growth in fiscal year '13 is really some of the changes in U.S. drug distribution. But again, excellent performance in '12 with the brand oral solid launches, the generic oral solid launches, very strong performance, great cash flow metrics and working capital metrics in the drug company, very stable industry with lots of key relationships with prized customers. You've seen us really retain a lot of customers without any fuss or bother because they recognize the value we provide, our very consistent performance.

And one of the things that I really do just love about the drug company, there's always -- there's so much scale there. There's so many deliveries we're doing every day. There's so many opportunities to do projects that really move the needles. This is a well-over $60 billion business. And you just pick up a couple of basis points there, which Dave and his team try to do every year. It's really remarkable what the impact can be because it's such a large business and so well run. And we've got just wonderful people in each of those 26 distribution centers that you see throughout the map there. We've got terrific people that are committed to their customers, committed to the company and I believe are the best-in-class in this industry.

So with that, that's a great way for me to segue to bringing up Dave Neu. As I said, Dave is -- had 30 years with the company this year. So it's a good time for him to be in front of all of you in New York doing what he loves, which is talking about how proud he is of the drug company and the performance that he's had.

Thanks for your attention. I'll be back with you in a little bit.

David W. Neu

Okay, thank you. This is the new and improved clicker? Okay. Good afternoon to everybody. This is -- Steve, thank you for the kind remarks. This is my second time in front of many of you in the room. Last year, I was the guy who was coming up on 30 years. And now this year, I'm finishing 30 years. I think every time I'm up in front of the group, it's about 30 years. I'm really glad when 30 is over and I'm on to 31. But it really is -- been an extraordinary ride. And the drug company is something I'm very, very proud of. And I wanted to give you a sense of not only the industry and kind of how we're feeling about some of the fundamentals, but how the drug company is positioned to take advantage of some of that.

This has been a learning year for me. I transitioned into the Chairman role for HDMA, which is our industry association this year, and enjoyed some of the follies in Washington. I had not had a lot of exposure to that. I started Vice Chairman last year. And it's -- there's been kind of a mixed set of challenges and opportunities in Washington. But I think what has been very apparent to me is it's reaffirmed a lot of my confidence about the industry and specifically ABDC and kind of where we fall within that. And we do have some issues that are in front of us, national uniform pedigree. We've got some track and trace issues that we're working through, reimbursement. But I think in the grand scheme of things, I think that the position in the supply chain continuum is one that's critical for health care to be optimized. And I think we've got an interesting value prop. I want to talk to you a little bit about that today.

Just a quick snapshot on the company, and I'm not going to spend a lot of time because you all have pretty good understanding of this. But a $65 billion business unit with the drug company portion of total ABC. We have 26 distribution centers in the U.S., 11 up in Canada. That's been a growth area for us. We'll talk a little bit about that here when we get deeper into this. But I think one of the core callouts is the diverse customer base. We've talked a lot in the past about our focus on independence and specialty. I think we're going to give you some additional context today about some of the other segments and the strength of those segments and our relative position in relationship to our competitors.

You'll hear a lot today about our manufacturer relationships from James and Peyton. And the value that's provided to the customer is specifically tied to building a relationship that's more than buy and sell with the supplier partners. And I think we've taken some real ground in that over the last 12 to 24 months and doing some new things, not only for GNP, for some of the other channels. Tim is going to talk about the working capital characteristics and get into a little bit more detail. But just very strong performance on all the fundamentals. DSO, DPO, inventory ownership. The team really did just a fantastic job again delivering on those metrics this year.

So I think the theme here for '12 is that margins have been up, both on gross margin, as well as on the operating margin side. And I think the piece of this that I think was a standout is that we continue to drive down expenses, not just as part of the SAP that's starting to flow through, but also a lot of the efficiency initiatives in the company. And I think what's happening is that there's an orientation about rewiring the organization, rewiring the company, if you will, around some of the new investments. And this is going deep into the company and we'll talk about that when we get into SAP here in a little bit.

Margins, or revenue, rather, was down 3% because of the branded generic conversion and the loss of Longs. But strong year on operating income growth and the drug company was a big part of our year. And great news at the end of the year with retaining and expanding our largest customer, with ESI. Very validating for the team, to say the least.

We've talked about the incremental pieces of some of the investments we've made over the years that as a rollup is over $1 billion in capital invested in the Drug Corporation as part of setting ourself up for the future. And we've gone through the DC consolidation processes. We got past the merger. We continue to look at that. There's been a lot of improvements made on the automation and workflow side in those DCs. SAP has been the next natural part of that. But if you think about really the theme here, I think part of the overall supply chain value prop, for a moment, is managing the supply chain risk really end to end. It's not just about safety in the supply chain. It's very much about what we do for the manufacturer community, not only on the data side, but specifically on managing the risk, on the cash management side, with the receivable, with our customers. That is a core focus. It's one of the reasons, one of the primary reasons that you see the kind of capital results that we continue to report on a yearly basis.

This is probably just a snapshot of something that everyone knows and just kind of taking the chevrons from left to right, about more patients driving more revenue. But I think the theme here is that the need for productivity improvement in the industry and within our organization is top of mind. We have an organization, a culture of improving that, that is really a daily priority. We're going to talk a little bit about SAP. I want to just give you a sense of one of the larger ones here. And I think before I just talk about kind of where we are in the process, I just want to add, I think, a very important part of the culture of ABC that has something to do with the results. This is beyond just an IT initiative. I think we're very, very proud of the implementation and deployment of SAP broadly across the company. I mean, if you step back and you look at the master data management component, which was so core as the engine in July of 2010, that was rebuilt, put into place and that was really the fundamental for the beginning of SAP to be successful. We've ended the back-office migration, which is a bit of a flip-the-switch process in each of these areas because you're turning on a new environment in AR and AP and some of the financial management reporting components. So that was really the foundation. And that went without a hitch. And it was extremely important that, that was in place before we started the deployments.

So as you're all very aware, we started down the deployment path with each DC coming up. We've now fully deployed over 20 DCs, and we'll be done by the end of the March quarter here in 2013. And what's happened is that, that orientation, that thinking, has moved deep beyond IT into the operating portion of the company. It's a very, very powerful force. We'll move from March 2013, when we finish our last DC to the final transition, over that 6 months to 1 operating platform, which is where we really start accelerating into some of those efficiencies as we get to the end of 2013. So just a fantastic job by not only operations and IT but really, a lot of business leads throughout the organization.

Just going to talk about the value prop for our 2 channels. We consolidated multiple subsegments into 2 channels in the sales and marketing group. And for some of you, you may be seeing this for the first time. But we started, at the beginning of 2012, taking a look at each of our channels. And if you look in the right, each of those customer constituencies had made a decision to consolidate alt care and retail into one new channel called retail community and specialty. And then, the second channel now is hospital. And the rationale for that was, we believe that there was a blurring that was happening in alt care and retail, not only with the specialty business but with a lot of the requirements for expertise as a lot of these subspecialties we're moving into retail and vice versa. And there was a blurring of the lines. So we created community and retail, that CSP model that we'll talk about deeper in a minute.

And then on the hospital side, took what had been a very strong health systems environment and expanded the team here to have increased frequency in high touch. And the focus has been on, always, on distribution services. But the core here on financial management information and data components and the sales and marketing structure had us redesign the sales team top to bottom. We did that in a year where we had the biggest win that we've had on the customer side, really, since the merger. It was a real testament to, I think, the result. And what happened is you have 2 fundamental channels now. We've increased touch to the customer by 40%, and we started to utilize some additional tools to help improve that.

One of the things that Steve alluded to was just the comment about health systems. And one of the facts that has not been called out before, and I think it's very, very important about our health systems and IDN environment is that if you back out the VA, we're #1 in market share in the hospital -- in the hospital channel in the industry right now. And we have done that over a period of years by driving quality care solutions, market growth and cost control. And I'm going to just give you a brief snapshot, in a minute, to give you a sense of what those things are about and how they've been sold in. And how we've ended up with that kind of market position here at the end of 2012.

Let's start first with community retail, which is the first of the 2 channels. I think that the theme here for both retail and health systems is helping the customers improve their profitability in P&L, and growing is part of that strategy. In the retail side, there's really been 3 areas of focus, and we supported this with some organizational design elements. On the retail side, stabilizing the core, maximizing profitability of those locations and growing the customer base has been the time now of focus for the new sales organization, to kind of reorient in their new roles. We have business coaches that focus on improving the P&L for the retailers and have tangible results to demonstrate as opposed to just selling in programs and services. On the profitability side, we have specific front-end solutions that we've moved in to help improve sales per linear foot in some of the margins on the front end, in particular, for GNP. And then, patient care services to help them grow their revenue and the customer base, in particular, how to get them more involved to participate in some of that.

At the bottom, on the retail side, is a couple of things that we've added to help them do that. We've actually launched a data tool, a dashboard, that takes the pharmacy system data and gives them a report out on the results on a store-by-store basis every month. Has been very powerful and very well-received tool. And we've partnered with certain select vendors, pharmacy system vendors is part of that relationship and we have those feeds every month. And so our business coaches go into the stores and they talk -- whether it's an independent or alt care, and they talk about overall performance and help them build a plan for improving that over the long term.

Some of the examples are on Good Neighbor Pharmacy. We have over 3,000 of the 3,400 stores now participating on the expanded programs. And it's really showing how Good Neighbor Pharmacy is growing faster than our independent customer bases on revenue now. We've taken some of the pieces that we put in test out on the West Coast. An example of that is Burt's Pharmacy, which was our original test site about 18 months ago. And we're now rolling some of those programs out around the country and refreshing many of the stores. GNP has been recognized as a 2-time J.D. Powers winner. And I think what you'll be seeing is a lot of these stores starting to look -- with much more common visibility and optics to the consumer and many more programs on the clinical side to help drive their P&L.

One of the core programs, and we've talked a little bit about it, is the Good Neighbor Pharmacy provider network. And the provider network is essential to gaining access for the managed care plans for the independent and some regional chains. We're fighting right now between -- somewhere between third and fourth place and it goes back and forth a little bit month-to-month. But we're in the top 4 provider networks in the country that are helping drive that access, as well as providing financial tools, like Central Pay and some other things, for the independents in those regional chains. We've got over 4,700 members that are participating right now and extremely important positioning tool for some of the health care growth that's anticipated in '14 and '15.

On the health systems side, there's been 3 areas, kind of consistent with the way that we've approached the retail market. But a little bit different depth here about how we've gone about driving value for acute care customers and the IDN component in health systems. We focused on quality care, market growth and cost control, but we've really done that through 3 business units that are within the drug company. And then, just to share a little bit about those, you may have had some visibility to these in the past. American Health Packaging is the largest provider of unit dose to the health systems environment today. That unit dose offering is used broadly with our customer base. They've got unit of use and some other innovative options that have really put them, not only at the top of the share list in their category, but also had given us great access for drug distribution customers.

PHS is our consulting group. And PHS -- between PHS and American Health Packaging, we're actually invested in over 50% of our customers in some type of solution, consulting arrangement or packaging deal as part of the overall drug distribution agreement. And then on to the ABTG side, our Technology Group, has multiple offerings in both retail and health systems. They've got dispensing automation both at the pharmacy level as well as products for central fill. And between these 3 companies, these are growing faster than the core business, both on revenue and operating income and, really, a big part of why we've been able to get ourself positioned in the type of share in the health systems market, top to bottom.

I think just to, maybe, wrap on a very important topic, we spent a lot of time on it last year. Steve mentioned a little bit about generics, and Tim is going to talk about this in depth here at the back end of today. But 2012 and 2013 are very different years. 2013 is, obviously, a bit of a dip on the new product launches. But I think what's really important here is the annuity and the sustainability of what the generic piece means as part of our overall customer's performance and our profitability. We're going to move to 2014 to an environment, I think, it's the #2 year in generic launches over the last 10. And what's happened in '12 and '13, we had, in 2012, over 35 launches, very successful primary launches, probably had over 50 in total, but 35 primary launches. And a lot of the core of the generic program that was prepared for '12 is now really starting to show up in the results as we get ready for '13 and moving into a big year in '14. So our First to Shelf placement program, we've added 30% more customers to that, customized packaging solutions and started inside sales across multiple segments. So there's a lot of confidence in the relative positioning of not just the generic offering, but what that means in terms of the total value prop for independent specialty and health systems. We've actually seen some expansion in the health systems side, with certain customers now participating in the generic offering to supplement some of the things that they've been doing on a direct basis.

So just to summarize here a little bit for 2013 and beyond, it has been, it will be a bit of a tough year in 2013 in terms of the number of launches. But tremendous amount of operating efficiency initiatives underneath that to make sure we're optimizing what's there and then getting ready for a significant rebound as we get into 2014. I think you'll see, as I mentioned earlier, us to derive benefits from SAP as we get into the back end of the year and start accelerating into next year. And I think what it's done in terms of infrastructure improvement, beyond just the fundamental SAP investment, has really been noteworthy. And then, a focus on improving our performance in Canada this year and making sure that we optimize some of the investments that we've made up there.

So I think just to wrap up, I think the company has made some important investments across the board. I think we're feeling that the organic industry growth is strong as we get into '14 and beyond. And we're set up for, I think, delivering some substantial results based on some of the fundamentals that I went through today.

Thank you very much.

I'd like to take a minute and introduce James Frary. Steve already made a couple of comments here about James. James worked for me for about 6 weeks when he was in the region, did a fantastic job as he was moving through multiple roles, and was asked to go and run Specialty and has done just a fantastic job down in Dallas, leading that team. And James is going to talk about the Specialty Group and some of the innovative things that we're doing.

So James?

James D. Frary

Thanks, Dave. I didn't want you to get the wrong impression that I only worked at ABC for 6 weeks before going over to Specialty Group. But I appreciate that, Dave. I think I did have the privilege of being a consultant to ABC. I think we shared in the past couple of years with you, for -- it was about 4 years before I joined, and I was in the drug company for 3 years, running the East region. And just, really, worked with Dave on a number of projects as a consultant and saw his leadership in the drug company and the impact that he had on the culture there has really just made a real difference for me, I think, in terms of getting out of the consultant environment and really feeling like I was part of something and a culture that really cared about what we did. I think it was truly special in the drug company and it was exciting to become part of the company. For me, that was a big part of my motivation for joining ABC. And I had the privilege of moving onto Specialty Group 2.5 years ago. And following in Steve Collis's footsteps, which is no small task. In the specialty industry today, Steve is really very well known and respected for, really, as he said, creating the Specialty Distribution and related services businesses, the business model in Specialty. And just has been a fantastic experience for me, as well. The same type of culture that I loved in the Drug company, we share that in the Specialty Group. It's shared in Consulting Services. You truly have an organization here from kind of suite to the street that is passionate about what we do, that is committed to our mission to help our customers to improve patient's lives. And I think really does make a difference in terms of people's motivation to come to work every day and do a great job. So it's been a real privilege for me.

And in addition to that, I think, as I kick off my presentation, last year we shared for those who are new, our industry group, HDMA did a study of the role of the distributor in the supply chain and the value that we create, and initially did a study on the traditional pharmacy wholesale channel and did analysis if you were to replace the wholesale distributors with the same number of frequency of shipments and so forth, it would cost manufacturers 15% of their sales volume to replace wholesalers. So a pretty significant amount of tangible value just through order consolidation, pick, pack and ship that the traditional wholesalers add. That similar number is true, the recent study for the specialty distributors with A.D. Little that had 13% of the cost, especially drugs, which is really amazing. When you think about the high unit price of specialty drugs, the tangible value in order consolidation and what we do every day and physical logistics could deliver that type of benefit to the supply chain. And really, I think, it speaks to the second reason why I'm so excited about ABC. The sustainable real value creation that we generate for the supply chain, I think does make a very sustainable business model. In addition, you have huge challenges, upstream and downstream, that we're well positioned to help solve. And Steve teed it up very well. I think they've -- we've done a fantastic job over the last 15 years of solving those problems for manufacturers and commercializing their products, and we've done a great job of working with provider customers to help solve their problems around cost and quality and how to improve the patient experience. So just a great place to be.

I'll walk you through a little bit of the Specialty Group. I'm really proud to share some highlights for you. And in addition to being at a great business, I think we're also fortunate to be a market leader in Specialty Distribution. And just a couple of key highlights, I think, everybody knows about our oncology franchise and the depth and breadth of our solutions in oncology, with 4,500 oncologists, over 3,200 practices around the United States. Clearly, the market leader in oncology and community oncology in the U.S. that makes us differentiated from the rest of the players. Number 1 share, truly, in most other physician specialties that you can think of, from ophthalmology, urology, through most physician specialties, we're clearly leading those markets.

Also the dialysis market, we're a significant majority player of that space as well. So really across all the specialties. We have deep knowledge; we have broad capabilities; we have 35,000 active customers, which is amazing if you think about the complexity of our business and our systems that support that. We're the #1 distributor of blood derivatives in the United States in terms of hospital, specialty pharmacy, et cetera. So just a significant footprint in the Specialty Group that positions us very well.

So just to highlight, it really is a group of businesses that work very well collaboratively together. So it gives you a sense of our decentralized structure, we empower our associates to make decisions to innovate, to be entrepreneurial. I think that really has helped to drive our growth. But we connect them very well with a very efficient infrastructure, a very efficient IT platform that delivers flexibility and scale in a customized way. So just to kind of go through this in sort of a counterclockwise order.

ASD Healthcare is our blood products, dialysis and vaccines distributor, with a really significant presence in that space and really connects the manufacturer through to the providers with innovative solutions and technology that help them with inventory control, with patient management and other outcomes. Besse Medical and Oncology Supply are really our 2 physician distribution companies. Besse Medical is all of the non-oncology physician specialty. So as I mentioned, ophthalmology, urology rheumatology, primary care vaccines, et cetera. And in most of those spaces, Besse is the clear market leader, extremely high degree of discipline and service to those customers and ability to help manufacturers commercialize products to those infusers who tend to use a smaller portfolio of products.

Oncology Supply, obviously, oncology practices with a much bigger portfolio of products in a full suite of solutions, technology, to help them drive their inventory costs down with a very sophisticated technology that's integrated with EMR and practice schedulers for patients to help them think through the order replenishment. Just delivering great value in oncology and very well known for high-service levels in the industry.

IntrinsiQ is a company we just acquired as part of ION Solutions. It's our solutions business for physicians. So we have distribution and the related solutions that those customers need to grow their businesses, to make their practice more efficient, to contract effectively with manufacturers, et cetera. And IntrinsiQ is a key part of that technology offering that we provide practices with a tool called IntelliDose, which is an order-writing chemotherapy dosing tool that practices use. It's very important for patient management and a key part of our offering in oncology.

U.S. Bioservices is a specialty pharmacy that's primarily focused on manufacturer services. So assistance programs and things like that, as well as servicing our physician customers for oral and self-injected products that they might be prescribing but not infusing in their practice. U.S. Bio provides a very efficient easy portal for them to administer those prescriptions and monitor patient compliance adherence and integrate that into the patient's total care.

Last but not least is ICS. It's our outsourced logistics 3PL business. So for small biotechs, companies with a single product or with a small portfolio of products that choose not to invest in that commercial infrastructure, ICS really provides that infrastructure for the manufacturer. They're an extension of the manufacturer in 3PL logistics sort of pre-wholesale into the wholesale distributors in the marketplace. Clearly, the market leader in specialty 3PL, by far, over 2/3 of the market for our products that are flowing through 3PL and ICS, and a sterling reputation for quality, consistency, transparency with manufacturers. So you have a stable of really impressive businesses that are market leaders in Specialty, very deep experience in the management team and in their leadership teams below there. And just a fantastic group to work with.

So in terms of the outlook for Specialty, it's no secret, the pipeline is rich. Specialty is forecasted to outpace traditional drug growth in the next 5 years. And so this, sort of, highlights a couple of points. First of all, oncology is a significant portion of the pipeline, which is great for us in our position in the marketplace. We think we're very well positioned to help commercialize those products and help our provider customers successfully access them.

But in addition, there are a number of other therapeutic classes with very rich pipelines and Specialty products. And again, the breadth of our portfolio, beyond just oncology, positions us very well to help with those products. In addition, you have targeted therapies, you have orphan drug and rare diseases here and products that really require the robust suite of services that we wrap around our core distribution business, from services within the Specialty group, services within Consulting Services. We're really well positioned to help those manufacturers with those very difficult to commercialize products. So I think we're in great shape and, again, just a very attractive growth outlook for Specialty across the board.

In addition, yes, we're looking forward to a biosimilar environment, anticipating how our portfolio will line up against that. And we feel it lines up very, very well. So biosimilar products are effectively going to be sort of quasi-branded products, multi-sourced products, but not perfectly substitutable. And so it really does rely on a lot of the services we provide the branded products today. And in fact, it relies on them almost in the best examples that we can think of. In addition, it's not only all of the bio similar companies who are going to need access to that portfolio, but also the innovator companies that we've already been working with. So it positions us very well for things like market analysis and access strategies, the manufacturers access through our Consulting Services business. Specialty Distribution and all of the related services and administration that we provide, contract administration and so forth. Compliance and persistency programs and REMS programs wrapped around those biosimilar products. So we think we're very well positioned for biosimilars and we are certainly looking forward to commercializing those products.

So it's no secret that there are a lot of pressures in health care and the physician community and private practice is, no question, a part of that mix. And so it's well-known -- reimbursement pressures are something we advocate on behalf of our customers every day in D.C. We spend a lot of time on these topics. Sequestration and so forth, we think, are huge concerns. And no question, we've seen hospitals acquiring practices. Traditionally, we've talked about those being smaller practices and we tend to have a higher market share of large practices, which is absolutely true. And our customers are growing; they are acquiring other practices. But those small practices, practice with a low mix of commercial insured patients are clearly at risk. And so our goal is to help bring solutions that increase total value for the practices that help them grow their business successfully. And it ranges in a number of different settings here. And really, first, at the practice level, helping think through what can make that practice most successful, most effective, help them grow. And so clearly, pricing and inventory, one of the best pricing available, the best contracts, the best inventory, help them manage that inventory very well and deliver value in our core business, deliver high service levels, which we do every day.

In addition, we want to bring great technology solutions to them to help connect the workflow in their practice, to help make sure they're maximizing their revenues, maximizing their margins. And we also want to help them with payer initiatives that they are engaging upon and thinking through how they can contract effectively with payers.

But beyond that practice level, where we've been very effective, we've really started to leverage our network, and the ION Solutions membership in oncology in particular as a starting point for forging larger relationships, cooperative relationships in the communities that they operate in. So, helping bring several practices together in the community to form cooperative relationships and quality initiatives that they can establish standards with payers and contract for value-based payment within certain communities. And that's been a very successful initiative of ours.

But lastly, it's really the industry. We've got a much broader footprint than just community oncology. And so the ability to connect those practices or those community of practices with other specialty providers who impact cancer care, with hospitals and other providers in their area and, really, across the country, is a great opportunity for us that we've been working on. And really, there are a few key areas here, clinical integration is clearly one of the most important areas for care coordination with hospitals and other providers. I'll talk about that in just a minute.

Site of care is also a very important issue, as hospitals and practices are looking at whether the factor should become part of the hospital or be kept separate, or really aligned in some other form or fashion. We've been thought leaders in that space and working with our customers on both sides to help them think through what's the most effective way to really maximize that care coordination, empower physicians and engage them in the process. So a whole suite of solutions that we've been working on that really promote practice growth, and we think are important in the environment that we're heading into. An example of that is the technology side. Steve referenced our commitment to continue to invest in innovation. And this is an area where our team has really been working overtime in terms of thinking through the full suite of services that our practice needs and, again, beyond that practice, how they can coordinate care in their communities and across the country. And so you can see here, I won't go through this in detail, but the full suite of technology offerings we provide. And I would just characterize for this as really a best-of-breed as opposed to a cookie-cutter approach that we've taken. Certain pieces of this continuum that we think are very important for us to control, obviously, inventory management is a core competency of ours. Our Nucleus Cabinet is the market-leading inventory cabinet in oncology, and provides connectivity with, as I mentioned, EMR's practice schedulers. So we know exactly what workload is going to be needed to be in that box for the same day of administration.

Other places where we've partnered with leading players in the space with software and interface that with our suite of solutions.

So really, a key part of what we're doing, and we think that there are great opportunities. We've started to extend this beyond oncology, into our other physician office spaces and adapt that as appropriate for the needs of those offices. So, just a great example here on the physician office side. In addition, in Specialty Distribution, to all classes of trade, so if you think about blood products into a hospital, or specialty products into a hospital into a specialty pharmacy or a treatment center. A great example of innovation is Cubixx, which is a slightly different inventory solution. It's RFID technology, consignment inventory for emergency situations and high-cost therapies and better managed inventories. So literally, our team manages inventory replenishment as those boxes are being pulled out and administered to patients. So really, a lot of innovation around inventory control, inventory management, as well as patient flow management. So we've taken that same technology in Cubixx, the RFID solution, and applied it into the patient home. So a hemophilia patient or a patient who needs therapy in their home, we have a My Cubixx in-home solution for them that really helps connect the providers with those patients and manage the dispensing on a daily basis.

The payer area is certainly another hot topic and top of mind. This is just a survey results from a series of payer conferences that Extenda holds and it just shows the high degree of interest in new initiatives engaging with physicians. Payers really want to manage this on their own. They want to work directly with physicians. They want to increase engagement. Pathways are top of mind. But really, we've seen payers recognize a couple of things: first, that, that engagement is really critical. Getting the physician involved and engaged, and incentivized the right way is important.

Second is the workflow is very important. So the practice needs a consistent workflow to manage a quality initiative. So it's important for payers to be aligned with a workflow that an individual practice can implement across their patient base. In addition, pathway is one important step on the way to quality care. It doesn't get you all the way there. There are a lot of other costs, in particular, hospitalizations, that are very important to tackle, and so our team has done a great job of developing a pathway solution in commercializing that, but it's really about going beyond that. I think an example of innovation in private practice is the medical home concept for oncology that Dr. John Sprandio's practice in Philadelphia really initiated. They're the only level-3 NCQA-certified patient center medical home for oncology in the United States, and required a significant investment in technology and change in workflow, change in behavior from the physicians to accomplish this. But you can see the impact it had on emergency room admissions for patients on in-patient admissions for those patients, and then length of stay for patients once they're in the hospital, a significant impact on the total cost and, obviously, an improvement in the quality of care when you're reducing the side effects and keeping patients out of the hospital. So Dr. Sprandio's been very well heralded, and a key part of our team in helping develop the solution, and think through now how can we connect that in the community, how can we connect that in the industry. And so a good example of that for ION Solutions is the Michigan Oncology Medical Home demonstration project we piloted with Priority Healthcare and a number of practices in Michigan continues to grow by the day, but really provide that same medical home concept around patient navigation, nurse triage, patient support, same-day admissions, side effect management, evidence-based care, and all of the other areas that are really critical to medical home in driving down waste and improving outcomes for patients.

So last, just to talk through and highlight our 3PL business. I mentioned ICS is the market leader in specialty 3PL. This is kind of pre-wholesale. They're an extension of the manufacturer and clearly the market leader. They run over 95 programs for specialty manufacturers throughout the United States, and have a sterling reputation for quality, consistency, transparency, great IT portals and great execution; 900 million transactions managed per year with a phenomenal IT platform; the only ISO-certified 3PL in health care. ICS has really made a difference for us, in particular, on its own, but also as part of our portfolio of services, really helping us to develop that deep relationship with these small biotech manufacturers as they're continuing to grow and accessing other services in our portfolio. It's been an incredible differentiator for us.

And Steve talked about World Courier. It's just amazing to have this company that really is a kind of close cousin of ICS. If you think about the capabilities of World Courier, and we've been out to visit their facilities in Asia and Latin America and Europe, an amazing culture that I think is very consistent with the culture I described at ABC across-the-board, but also in logistics, the same level of discipline that ICS. And effectively, if you think about ICS as a third-party logistics warehouse with pallet locations, here, you have the same thing in clinical trial, storage lockers. And, otherwise, very similar quality, consistency, sterling reputation in the industry, and we see an increasing opportunity, where our ICS customers are asking, could we provide that same level of service that we provide in the U.S. in other markets around the world for their product, where they're typically licensing out the commercialization to another large manufacturer. They'd love to capture that themselves.

In addition, commercial trial, customers of World Courier asking for can we help them once that product is commercialized so those patients in naïve populations, clinical trials around the world, can access that product once it becomes commercialized. So just a fantastic opportunity for us with the World Courier platform, and I think that's a theme you can think about more broadly for our Specialty Distribution and related services for our manufacturer services businesses, that manufacturers are global and they are looking for that level of expertise and discipline that we provide in the United States in other markets around the world. So I think that's a real strong opportunity for us and something we're absolutely pursuing.

So in closing, the specialty market continues to be a growth driver. The fundamentals are strong. The pipeline is rich, a great mix of different types of products that access our portfolio in very interesting ways. The Specialty Group will continue our leadership in specialty market. I think the breadth we have, the depth, the level of experience, the reputation and the collaboration across those entrepreneurial companies that I mentioned really make us unique in the marketplace. We've got a sterling reputation for quality and for customer satisfaction. We'll continue to build on and we'll continue to innovate to enhance the success of our partners, enhance their growth and we'll grow through them. So, great to share that with you.

And I will hand it off here to Peyton, and just a couple of comments real quick. I mentioned how hard it is to follow in the footsteps of Steve Collis, and Steve's got this personal brand in Specialty Distribution. Peyton is actually, if you can imagine having a bigger brand than Steve, Peyton is known as Mrs. Lash, and so I've tried my best to follow in Steve's footsteps, I can't imagine becoming the new Mrs. Lash. But anyway, with that, Peyton is just -- can make a significant contribution to us in the manufacturer relation side, and very excited about that.

Peyton R. Howell

Thank you. And I'm going to take the starting point James have given us, and give you a few examples and highlights of the success that we've had in our Consulting Services businesses, which really dovetails nicely from that piece. And as a reminder, all of our Consulting Services that I'm speaking to, the customer is the manufacturer, and so these really give us a differentiated opportunity with the manufacturer.

So first and foremost, these are established businesses with long credibility and particularly Lash Group and Xcenda now are well-known in the space as trusted leaders within that. And that's important because, obviously, for a manufacturer, especially if it's an emerging biotech manufacturer, this is their -- often their first entrée into a space, and they're looking for that long-term-type relationship. And a lot has changed for us in this past year. When I was before you, just a year ago, we had just acquired TheraCom and Premier Source. Now those are fully integrated under one leadership and management team under Tracy Foster as part of Lash Group. And at the same time, our Xcenda pure play consulting business to manufacturers has also experienced significant growth.

And when you drill down what do these businesses do for manufacturers kind of into buckets, it's probably easiest to look at those 3 circles, and they're all very aligned to the core of AmerisourceBergen, and I think that's one of the fundamental inner underpinnings of this. First of all, we support really proving the value of that manufacturer's products. And in today's health-care landscape and certainly as we look forward, we know that's going to be critical for the success of any product, to be able to connect the dots for a payer, public payer or private payer, as to the value proposition of that product and then also work our way through the administrative side of what that means from an access perspective. Supporting patient access really kind of is the largest piece of the business, and it tactically supports directly patients and health-care providers in actually being able to turn a prescription into revenue, obviously, our critical function. And today, it's really gone from a nice-to-have type of service model, but for today's products, it's, frankly, an essential must-have type of service model. And then in a world where there are fewer of new blockbusters coming, improving adherence is critically important. It's critically important to the manufacturers. In fact, their next blockbuster often is improving adherence to current therapies. It's also critically important to payers and to the community because that's where you make a difference in health outcomes.

So those are really the 3 buckets of all of the services, both pure Consulting Services, as well as our longer-term partner relationships, where we're serving as an outsourced partner for manufacturers, really reside. And altogether, we have a market-leading position in this space, and we also know that this is a space that's really positioned for significant growth because of the need for these types of services.

So why are they important at the end of the day? As I mentioned, they're essential, and I think that's the first and foremost. But we also know that as the health care landscape gets more complex, that beginning stage of supporting patient coverage for a brand-new product, continuing coverage as new competitors come into a landscape, in which case you may have prior authorization, depth restrictions in terms of patients being mandated to try one therapy before another. And our service models are really designed to first work with payers to minimize that type of disruption, and make sure it's appropriate type of managed care, and then also to support patients and health-care providers with the tactical work of actually getting patients to access the prescriber has made. So it's very critical from a supportive perspective for this therapies. And as the products move across the product lifecycle that Steve showed you, the needs continue. So there's one set of needs at that launch period, the needs of all with competition and market maturity, and they continue on, obviously, even into the bio similar space, as James just highlighted.

And then lastly, the other reason these are really important services is that it gives us an ability to have a very intimate relationship with the manufacturer and together to partner to develop very unique relationships and capabilities, and many of those services are directly designed to support our customers as AmerisourceBergen. So they help that oncologist be able to be more efficient in their practice. They help that hospital to be able to support the new focus on discharge planning and making sure patients aren't readmitted within 30 days. So many of these service models are really essential to the new part of health care that we're looking towards.

As an example, I've just given you across that lifecycle that Steve shared, just a few examples to make it real because I know that some of these businesses are those that you're less familiar with. But in the development stage, a typical type of engagement where we work with the manufacturer would be a strategic reimbursement assessment, often working on the front end in terms of how that product would fit into the landscape from a health economics and outcomes perspective. That typically informs that prelaunch design. What are the market access issues that, that product's going to face and what type of services strategy, given the competitive landscape, should the manufacturer consider? And those are important service models that need to be factored into their commercialization strategy as a whole.

And then specifically, one of the big parts that we saw growth this past year is the payer and managed market strategy. So not long ago, a manufacturer worried about finding an agency here in New York City and really working on an agency of record. Now the common vernacular is a managed markets agency of record, and these are differentiated services, where you're really focused on how are you going to message and explain this product from a health outcome perspective to payers as well as to the new care models that are evolving, like accountable care organizations.

All of that obviously comes together a product launch. That's when it's go time. Time to implement these programs and services, and there is incredible pressure now to really support that launch in a smooth way. And I can tell you in the black box of the world of reimbursement, that's a very difficult prospect because the systems aren't designed to support new product launches, and so it's one where you actually need extraordinary resources and that's where our scale, particularly because of the acquisition of TheraCom, gives us a unique ability to leverage in a cost effective way those resources to support the needs of manufacturers.

And then related to launch, another fast-growing part of our Consulting Service business has been our field reimbursement resources, and that's where some of our Xcenda consultants actually act as the manufacturer, really, out in the field and dovetail directly with our call center services, supported by Lash Group and TheraCom. It's been a beautiful enhancement. Frankly, this area has grown much faster than I ever expected, in part, because it gives a PIPA-compliant way to be able to support practices and address specific patient needs. And when you have a lot of turnover and strain within the physician office and even in the hospital clinic market, these are resources that really help tactically when a new product is being introduced and makes that easy for those practices.

As the products grow and emerge into that growth segment, the service needs change; then it becomes really important to be able to be proactive versus reactive on that payer strategy. So that's when those managed market agency services really take on to the next level of detail, where you might have your next level of data in terms of the health outcomes reality and real world data of what this product is doing in the marketplace and what that means from a payer perspective. And then here's also where the adherent services really become critically important as well for the continued growth of that cycle of the product and supporting patient retention overall. And then market maturity. Again, the needs change, but in many ways, these become the differentiator for products. Some of our services actually use nurses on the front end as a way to differentiate, for example, against competitors, use different type of patient-education tools because as the product becomes more mature, oftentimes the consumers more directly influencing the choice of care. So the service models may vary, but I thought these examples across Steve's product lifecycle might give you a bearing for the kinds of work that we're doing for manufacturers.

Again, we do have a market-leading position and of course with our growth as well as our acquisition in this area, we truly have unmatched scale, as well as a breadth in that offering, and that's been critically important to meet the wide range of deeds that exist across manufacturers So now, today, we have over 120 programs for 60 different manufacturers. That includes pharmaceutical, biotech, device, as well as some diagnostic manufacturers, including those emerging molecular diagnostic manufacturers that we gained through the acquisition of Premier Source. So we're in the mature space as well as really into the emerging and kind of cutting-edge science as well, which have a very different reimbursement needs. So that's been a great experience for us.

Our capability has expanded dramatically. We have a 4,200 call center seat capability, as we sit today, that we can actually use as our baseline. Obviously, we can expand from there very easily. And again, that's unmatched. That includes reimbursement counselors, nurses, pharmacists, as well as a wide range of case management professionals to help with that care coordination, that Dave alluded to, of being such importance across different health care providers. So a lot of excitement, obviously, in this area.

With this, we've also grown our core consulting business as well. So this past year, we had more than 1,200 consulting engagements for 100 different manufacturers. Many of those were really clients like ICS-type clients as well. So there's a strong partnership with that part of the business to develop commercialization solutions, work with emerging manufacturers and support their needs as they prepare for launch. And those field reimbursement teams I mentioned that we just started doing a few years ago, we support more than 10 products now at this time with that model. So that's a model that's moved very quickly to being something that manufacturers used to do in house that they've now opted to outsource to partners like us.

Here's a case study of a launch from this past year, and I think it's another good way to kind of key together what our experience has been. I'm going to leave this blinded so that I can speak frankly. In this product, we worked pre-FDA approval in a very intimate way, frankly, on the consulting side. We knew the product was going to launch into a space with heavy Medicare coverage, and that working with Medicare in advance was going to be critical to make sure the product was recognized and differentiated from existing products in the marketplace. So that was very successful from a reimbursement assessment, coding and payment strategy perspective. We developed a wide range of payer reimbursement tools and resources to really support the launch. Again to make it easy for physicians that had never purchased this product and administered -- this is an injectable product to make this easy for them, as well as to be able to support the needs of more established practices. And have health policy tracker tools, so that as Medicare coverage decisions were made, there was clarity about the coverage that existed for the product. All of that paid off in spades. In fact, when we launched the program, this was one of our largest launches upfront in terms of a comprehensive reimbursement support line type service, we ended up quadrupling the staff for this team. The sales projections were quadrupled from what we all had planned for, which is a wonderful problem to have. But one that, frankly, without our scale and without our resources across our multiple call center locations, one that we would have really not been able to meet. Frankly, no one really could have had the scale in terms of reimbursement, resources and case management professionals available to support the practices. So this was really a unique success, and one that's been recognized by this client, which is wonderful to be part of. With this, we also had field reimbursement resources, which I believe were also critical for launch because they're an extension of these very cost-effective call center services, which bring a lot of efficiency. But for some practices, especially in non-oncology specialties, where they really need deeper reach, that gives us an ability to send in an expert to really help make it easy and establish that practice in caring for patients.

We're now into the next phase. We're nearing a year of FDA approval of this product, and so now we're in the next phase, looking at managed markets type work, how to support the product growth. As of now, we'll begin to face new types of review from a payer perspective, which would be very normal in that space. So again, the needs change, but the services that we can provide to support that growth really continue.

It's a good kind of practical real-world example. When you put it all together for fiscal '12, there's really 3 big highlights, a very successful integration of TheraCom and Premier Source. Again, we did that acquisition of TheraCom just almost exactly a year ago. In addition to that integration, the growth that came from acquisitions, we also had organic revenue growth of nearly 20%, which I'm extremely proud, obviously. That's significant growth, particularly when you're the largest player in the space. And along this way, we've been able to also expand our capabilities. So TheraCom brought us unique and differentiated capabilities, particularly being best-in-class on pharmacy benefit products, which dovetailed beautifully to the Lash Group skill in those medical benefit products. So together, we have that full service offering. And of course, Premier Source really focuses also on the molecular diagnostics and emerging biotech. So when you look at that life cycle that Steve presented, we really have the best-in-class offering from a manufacturer services perspective for all of the different products as they enter.

In terms of the way we deliver value, I followed Steve's setup here in terms of what are the big ways that we add value. And Consulting Services, just like the core business of ABC, follows that very nicely. We're very focused on innovating for providers. We got a great deal of innovation, particularly, this past year, by adding in those pharmacy benefit capabilities through TheraCom. So we also have a wide range of new e-capabilities so that we can deliver almost self-serve type models, both to patients directly as well as to practices. Again, new cost effective-type options available for those practices where it makes sense. We also are putting more of our consulting resources into iPad-type tools and resources, and we're seeing that the pharmaceutical and biotech industry is really gravitating towards those types of resources, which is an opportunity for us to be able to take what we do today and parlay at a new way.

We also have found new efficiency from operational excellence and particularly for our team, it's leveraging technology. The world of reimbursement and patient access can be very labor intensive. So the more that we leverage technology and automation, the more efficient that we are with the time of our consultants. And then, of course, also being able to leverage the investments and these innovations that we make for one client that we can actually then leverage across the portfolio, and that's a huge part of our value proposition to manufacturers. And there's lots of reasons they don't want to do these services in-house, and very few do, do them in-house because, obviously, there's PIPA issues and privacy issues and compliance issues for a manufacturer, but there's huge costs per manufacturer to innovate in this area, and then only be able to leverage that innovation for their portfolio of products. We offer an ability to innovate, lever and pull from that menu in differentiated ways for each and every manufacturer, and that's a real differentiator for us, given our breadth of experiences and the strength of what we do.

And then we're growing, increased connectivity, as James alluded to, in terms of connecting our programs and services with a wide range of distribution models. That's particularly important in the specialty area. And as we work with manufacturers, we're really trying to understand their needs so that we're positioned to meet those needs in the future. This area of patient retention is again getting increased focus. It's even beyond compliance and adherence in terms of ADA patient access, and then being also prepared for other changes from a health reform perspective.

So as we look to '13 and beyond, we do think health reform brings us more opportunities. The more challenges that there are from a reimbursement perspective in many ways is an opportunity for our business. So it's an ironic type of situation. We also do very little work today helping the uninsured, and that's I think, an area that people get confused. Most of our work is actually for people with covered lives. So if we do with health-care reform see more patients moving into coverage, that means there's more things, frankly, we can offer for those patients and it really fits our service proposition very, very nicely.

In terms of biosimilars, this full suite of services we anticipate really being necessary for biosimilars, as they compete. So again, we're very well-positioned to take advantage of that as that comes to play in the coming years. And then we'll continue to leverage things like automation and technology to really be able to support. At first, pharmacy benefit products, but we certainly hope in the future that those types of resources will be leveraged also on the medical side as well. So those are the big areas as we look at '13 and beyond that we have a core opportunity.

I'm clicking away, there we go. So in summary, when you look at manufacturer services, it's clearly a core from a patient access perspective. It's an underpinning, really, to distribution. You can't get the product reimbursed. If the prescription really can't be filled, then the distribution obviously isn't there. So there really is an underpinning to everything that we do. Strategically, and this relates to my new role, it clearly deepens our manufacturer relationship as we work together to directly support their needs as well as the needs of prescribers and health care providers and patients. It's an area where we have market leadership, and we believe that's critical from a patient access perspective and being able to cost effectively support those needs over time, and then it's clearly a high-growth model. We've experienced that high-growth model now for a number of years. We expect that to continue based on the growing needs of these types of services to support launches, particularly when you think about the launches that James mentioned. The fact that those are often not the blockbuster-type launches, and that they really need to maximize these smaller scale specialty type product launches. It's a great opportunity for us.

So with that, it is my pleasure -- these are really flipping. Watch out, Tim, every time you hit it, it goes like 3, 4. But before I bring Tim up, I have to say this is Tim's first Investor Day, but it's hard to believe. He's been an incredible colleague. He is someone who supports all of the business leaders in a very unique way, and he's someone who's really beyond the role of the CFO, frankly. He collaborates with us. He innovates with us so that we can really be focused on our customer.

And so with that, please join me in welcoming Tim Guttman, our CFO.

Tim G. Guttman

All right. A little bit of pressure there. It is my first Investor Day, so I was listening to Peyton and I thought, okay, I got to have kind of a neat opening, kind of an icebreaker, and it just came to me. And I'm kind of making Barb nervous since we're live. But I thought, okay, I have 11 slides today to present to the group. We just finished our 11th year since the ABC merger. I'm in my 11th year at ABC, and then it's 12/12/2012, and I thought, wow, that's kind of neat, and that's the best I could come up with for a finance guy. So a lot of numbers, finance guy. So anyway, so that's my icebreaker.

But really, today, I'd like to cover 3 areas. I'd like to talk about our ABC business model. I'll do a look back. I'll talk about our historical performance and then, finally, I'll wrap up with a look forward. I'll talk about '13 and I'll add some color.

All right. So I'll be careful with the clicker. So our ABC business model, when I stand up here and I'm part of the team, I mean, we're a very good company in a very good industry. And when I look at this, we have 6 pillars that drive our financial success, and that top one, stable industry. Health care is the leading industry in the U.S. economy. We're a big part of that. We're a key player. We provide services, value-added services. We added products up and down the supply chain. So it's a great industry to be a part of.

Organic growth, I think you've heard that earlier today from, I think, just about every speaker. From organic growth, when we look at the market, we look at pharmaceutical sales, not necessarily scripts, when you look at sales, revenues of about $320 billion today, growing to about $360 billion by 2016 for IMS, so again, very good organic growth, especially in '14, '15 and '16, 2 drivers, health-care reform and clearly demographics. Demographics are in our favor.

Diverse revenue base. Again, I think Steve talked a little bit about this. It's something that enables us to diversify our risk a little bit. We have a strong drug franchise, a very strong market, a leader in specialty, and we'll talk some more about our customer base in a few slides. And really that next one, the opportunities for margin expansion. I think this one is really the kind of the foundation of our success. You got to have margin expansion, and it's something that we do really well and there are 4 drivers. You can grow your generic mix. You can definitely grow your businesses with high margins like in specialty, consulting, like a World Courier. You can certainly leverage your expenses, which we do especially well, and then you can go out and make more smart acquisitions, like a World Courier, where they have a very good margin profile.

Finally, well, excellent cash flow generation. Since the merger, we generated about $9 billion of free cash flow. Nine years in a row we've exceeded our free cash flow, as exceeded net income. We have a great track record. And again, what do we do with all that cash? Well, we either reinvest it in internal projects. We redeploy it. We look for thoughtful, prudent acquisitions that make sense or if we have excess cash, like we've done in the past, we return it to shareholders, accelerate earnings through share repurchases or dividends.

So again, those are the 6 pillars that drive our success. I kind of look at those as our enablers. And again, we've done very well historically with these and we expect to continue to do so in the future.

You can tell this is a favorite chart. Steve had it in his presentation, I have it in mine. This is our GAAP EPS, 16% CAGR. And when I look at this chart, I see consistency. And as a company, consistency through changing environments. Industry environment has changed. The economic environment has changed. And really, if you kind of chunk this up in 3 parts, the left side is really post-ABC merger, 2 companies combining different cultures, collapsing DCs, building new DCs. At that point, we had the luxury of high brand, growth in the industry. In the middle years, we had the transition of fee-for-service. Everybody thought that, that was going to be the demise of the industry. Right now, many of our contracts were in the third-generation on contracts with suppliers. Economics have been relatively consistent or better. So we've managed through that. That's helped us generate, again, a fair bit of cash.

And finally, that third piece over on the right, we've had the benefit of our leading oncology franchise with oncology drugs, oxaliplatin. And then in '12, clearly the benefit from those oral solids, generic Lipitor and Zyprexa.

So all in all, consistency, managing through different environments, 10% growth on top of 15% on top of 31%, and we're real proud of this in terms of our overall performance.

Revenues, 5% growth when you look at this, this is 7 years since the fee-for-service change. The last few years, a little bit of a dampening impact from that brand-to-generic conversion. Still, that 5% is mostly organic, which is a very good sign, right? We're not out there buying significant revenue. And also we've had an impact, a negative impact from M&A. We've had 2 large chain customers -- Duane Reade, Longs -- that we lost due to M&A, and we've worked through that.

So all in all, I mean, the other -- this other thing I'd like to point out during this time period is our Specialty business and the contribution that it's made. Back in 2006, Specialty was about a $10 billion business. Now we had a record year in 2012, 16.4%. That's a CAGR that's just under 9%, which is outstanding, again, above market. So again revenues, one of those pillars that we talked about, it's important to have revenues to make sure that you drive financial results.

In terms of a simple chart, in terms of our mix of revenues. When we're out talking to investors, they frequently ask, "How are you different from your competitors?" And I think this is -- this chart kind of tells us. It's pretty simple left and right, about 40% each, institutional, which is hospital and all sites, that right side, retail, which is a chain and independents, a nice balance there. Top and bottom, about 20% each, PBM, our large new contract and then Specialty at the bottom there. So a nice mix. That little sliver is Consulting and World Courier, small, but don't count them out. They're a fast grower, good margins.

And really the thing I -- that when you look at this, we certainly with a diverse book of business, it does help because you're somewhat buffered in terms of your segments, in terms of regulatory pressure. Usually, if you have a nice balance, you're not exposed as much in terms of regulatory pressure impacting 1 segment versus another. So that does -- is a big advantage to us.

And then finally, I think the last thing I'd like to point out on this slide is really, the fact that with the drug business in particular, we cycle through a lot of our big contract renewals. So for the next 2 to 3 years, we feel pretty good about what's on the horizon in terms of large contract renewals with key customers.

All right. Operating margin expansion. I think that, again, Steve referred to this 7 years in a row. This is basis points. Every basis point is about $8 million for us and that translates to about $0.02. So every basis point is really critical. We've been quite successful over 5. That right-hand side of the chart, again, the benefits of the generics over the last couple of years, on the oncology side and in '12, the oral solids.

It's a -- it is -- the streak is going to be over in '13. We do have a difficult comparison, and again that's primarily due to our new, large PBM contract that we won. But we had a price of market. We lost a shared customer, a large food-drug combo, a buying group, and then also just a lower generic launch year. Having those 3 impacts in 1 year has really put some compression on our margins.

But again, I think to end this slide on a very positive note is the fact that we have a lot of confidence that historically, we can grow our margins. And this -- and I would consider '13 a reset year. So when we get to '14 and beyond, we're very confident in our ability to start expanding margins again.

All right. Moving over to cash generation. Why don't you just -- a lot of lines. Focus on the yellow and the green. The yellow free cash flow, again, one of our financial principles, always have your free cash flow above your net income. This shows 7 years. And actually, we've done it 9 years in a row. Again, this is post fee-for-service. And you can see the acceleration in free cash flow above net income the last few years, mainly due to just managing working capital very tightly, getting a benefit from LIFO and also having some bonus tax depreciation has really helped us accelerate that free cash flow.

The thing that I'd like to point out on this is the bars. In terms of the blue, you can see that when you look at those bars, 5 of the 7 years are at or over 100% in terms of free cash flow, return to shareholders. Again in '12, we did our ASR. We took advantage of the pretty good market in terms of our share price, went to the market, did the ASR to benefit EPS for '13. Again, very solid performance in terms of our ability to return excess capital to shareholders.

All right. Let's transition to fiscal '13 and guidance. Revenue growth, in the 6% to 9% range. And when we split that up, Drug is 6% to 9%, again, primarily due to that new large PBM contract. Specialty, very solid, 7% to 9%, a very good growth at oncology, but primarily that 7% to 9% is from ICS, SE and ASD.

Operating margin, we talked a little bit about this. We have a slide coming up. Decline in the high single-digit to low double-digit basis point range, again, those 3 factors that I covered before. Cash flow, $750 million to $850 million, a little bit lower than where we were last year, down slightly again. When we had our conference call back for Q4, we discussed our PBM contract, the fact that we were impacted a couple of days in our DSO on that large contract.

CapEx in about the $180 million range. CapEx this year for '13, a little bit less SAP spend, less IT, probably more spend in what I would call the operating-income-type initiatives through the different initiatives that we have on schedule to help drive the business growth.

And then finally, share repurchases, at least $200 million. It's what we guided to. And as we progress during the year, as always, we'll reevaluate that as we go.

In terms of EPS for the year, we're consistent. We reaffirmed this morning $3.06 to $3.16, up 11% to 14%. And when you put that altogether, what does that really mean? It means that our operating income is growing about 3% to 5%, a little bit lower than what we've done historically, but we're using one of our levers, our balance sheet and, again, that financial flexibility to get back to a very respectable growth range, 11% to 14%.

And I guess I'd like to wrap up here in terms of this slide, in terms of quarterly comments. We don't provide specific guidance for the quarters, but, again, looking out over the year, we feel much better about the second half of the year in terms of growth. The first half last year, if you remember, we had the benefit from the generics and in quarters 1 and 2. So typically, March is our strongest quarter, but again year-over-year, we feel better about the second half in terms of growth rates.

One of the favorite slides usually in the presentation, this is when we split out by business unit to revenue growth and operating margin. Drug Company, about 78% of our revenue. The revenue growth we just covered, 6% to 9%, again, primarily due to that large new PBM contract. You can see the margin range, 1.25% to 1.32%, again, down slightly, that new PBM contract. The loss of the topical business, which had a fair amount of generics and then also that the low generic launch year.

ABSG, about 20% of the mix, 7% or 9%; again, a pretty good growth at oncology but much stronger, better growth at ICS, SE and ASD. Revenue mix of margin -- I'm sorry, 1.80% to 1.90%, a little bit lower than last year and really 2 drivers there. One, the contribution from our oncology generics will be less this year in '13 versus '12. And really the second contributor, 2 of our businesses that are growing faster have lower margins than the rest of the business, so a mix.

And then other, the 2% consulting World Courier. This year, we have the benefit of having World Courier for all 12 months versus 5 months in fiscal '12. You can see the operating margin, 6% to 7%. I think the one thing I'd like to point out here for the other category is, in that TheraCom business, there is a piece that's consulting and distribution. That distribution piece is about 1/3 of the revenue in this category. And that business has had a very traditional distribution margin, bringing down the overall margin.

So if you add that all up together, 6% to 9% revenue growth; operating margin, 1.46% to 1.50%. Last year, we were 1.58%, so, again, down about 8 to 12 basis points.

Just covering capital deployment. We ended 9/30 with about $1 billion of cash. We have $600 million available. We typically need about 2 days' working capital to run the business. And our free cash flow, our guidance, $750 million to $850 million. That leaves us total available of about $1.3 billion to $1.5 billion. Our commitment, at least $200 million in share repurchases, and with our new dividend of $0.84 on an annual basis, about $200 million. And again, that we expect during the year that we'll have just about $1 billion to deploy, and it gives us tremendous financial flexibility.

All right. Financial stewardship. We believe we are very good stewards. We've demonstrated that in the past. And when you look at this slide and, starting at the left, strong operating cash flow. And with how we manage it is the cash conversion cycle, right? So in the last 5 years, that cash conversion cycle has come down. It's a little bit less than 2 days right now. We've made terrific progress throughout all of our businesses, managing AR, managing our inventory turns and also managing terms on AP with our vendors. Terrific performance across the business units.

Strong balance sheet. We think we have a very appropriate level of debt. Also, our -- as a metric, our net debt, the total net debt equity is about 14%. Towards perfect shape from a balance sheet standpoint. Ample liquidity on a short-term basis if we need it. And then finally, we are committed to being investment grade. We get this question frequently from investors, "Why is it so important to be investment grade?" And we usually have a 2-part answer. One, it's the ability to raise debt efficiently, quickly, at a very competitive interest rate. And number 2, it will be a competitive disadvantage if we weren't investment grade. We do a significant amount of business with pharma companies. And they would have a tremendous amount of AR exposure, right? I mean, in some cases, we could be 1/3 to 50% of their AR. So again, when we're investment grade, it helps to mitigate their risk and their exposure on the balance sheet. So it is really important for us to be investment grade.

All right. Looking ahead, I guess this is my strong close. It's funny to look ahead when you haven't even closed Q1. But we are -- we like our prospects, when we look further out into '14, '15 and '16. I think you've heard that theme throughout the day. Certainly, we see better organic growth, which will -- again, one of those key pillars because of health-care reform and demographics. We expect that looking at the generic launch calendar, both for Drug and for Specialty, '14, '15, '16 look to be pretty good years, which again will be a benefit. And we really believe that over that time period, we will see a launch for biosimilars. And again, with our leading specialty franchise, that should only help us.

In terms of completion of SAP, we expect to complete SAP in about March. Our last DC will convert in March of '13. We need several months to basically decouple, decommission that legacy system. We'll see some small benefit probably in Q4 and primarily we'll see a fairly large benefit in fiscal '14.

EBIT contributions from acquisitions, like the World Courier, TheraCom. Again, with World Courier, we bought a great business, very stable, growing business. We can use that platform to develop our 3PL logistics program internationally.

And finally, the opportunities to deploy capital. We've talked about internal projects that have a compelling return. We've talked about acquisitions, where it makes sense, they're prudent, where we can add value. And then, finally, when we do have excess capital, when appropriate, we've demonstrated that we will return it to shareholders.

So that's it. That's all I have for my prepared comments. It's been a pleasure to be in front of the group today. And with that, I'd like to turn it back over to Steve Collis.

Steven H. Collis

So sometimes in the past, we've been accused of being a very modest company and that's fine. We're okay to continue being modest, but I hope you see the confidence that we have in our business and in our prospects. And I think you see why I have so much confidence because I believe I've got a -- just an outstanding team.

And with that, I'll ask the team to come up and answer some questions. I really enjoyed hearing all the different stories. I think our business unit heads were terrific. I learned something from every time I hear Peyton, Dave and James speak. And hopefully, you found this educational, informative. And we look forward to taking some questions from the floor now. John's the first one?

Question-and-Answer Session

John W. Ransom - Raymond James & Associates, Inc., Research Division

John Ransom, Raymond James. Two things. Given that you have $1 billion to play with, probably some people in this room would probably appreciate you sending some of that out before the end of the year, I'm wondering what the thought process behind, maybe -- and perhaps not doing that or if you haven't ruled that out. And then secondly, I'd like to just hear more about your thought process about as you look internationally. Is that going to be potentially a materials part of your business 5 years from now, not a material part of your business? What kind of things would you rule out? What kind of things are you excited about? And are there any parts of the world that you like better than others?

Steven H. Collis

Thanks, John. We think the 62% increase in dividends is great. I think that puts us right where we want to be. We don't really like doing things to respond to unique circumstances. We like to have that consistency. So we haven't -- we just -- our board hasn't been particularly interested in that. We think we had a great year in 2012 with utilizing our balance sheet, returned well above our net income to shareholders. So, Tim, a quick comment on that from you.

Tim G. Guttman

No. I think we like to -- we really believe that share repurchases are probable more efficient in terms of return to shareholders. We'd like to keep some flexibility. It's still early in the year, so we don't at this point -- we'll look to keep moving through the year and deciding as we go how to deploy that capital.

Steven H. Collis

And the second part of your question, John, on international side, the more we look at traditional wholesale markets outside the U.S., honestly, the more opportunity U.S. market, some of the hallmarks, the way that we do the specialty drugs, the prime vendor relationships that we have. And probably to me the most advantageous differential in the U.S. market is the relationship we have with manufacturers. The transparency, the mutual respect, the way that the data flows between us. These are just things that we kind of take for granted here, but the more you go outside the U.S., you just see that that's not the norm. Areas like parallel trade, it just has no appeal to us at all, for example. So we're very thoughtful about international. We think the way to go internationally is our specialty platform, which is really -- just think about it, 65% of the Specialty spend is in the U.S. with 5% of the population. So we think that that's not going to stay that way forever. Many times -- we've actually -- I think we've been kind of a good neighbor or good world citizen in Specialty and that we've been very educational to some of the emerging economies. And a lot of them have come to Dallas and to Philadelphia to understand more. When Peyton -- obviously, Peyton had 50 people from foreign countries come in different trade delegations, come and line up and speak to her and she's very patient with that because we just very -- we're very open about our strength in this area. But we also are convinced that we have an opportunity to start participating. And actually helping to define our specialty would be in those markets because we think that the manufacturers are going to demand a partner of our caliber, integrity and, frankly, knowledge. So I think that's really how we think about things. But I think James and Peyton may have some comments here as well.

James D. Frary

Yes. I would just add I think Steve and I were at the International Federation for Pharmaceutical Wholesalers in Mexico a couple of months ago. And I think just the experience there, you are sort of at a family outing with wholesalers, pharmaceutical wholesalers from around the world. And just really affirm this strategy of following the manufacturer into other emerging markets around the world, high-growth markets. The players in those markets are very interested in the capabilities and the unique nature of the U.S. market, the prime vendor relationship. But also that manufacturer piece, I think, for us really differentiates ABC globally. There is really not a comparable player or partner globally. So it creates opportunities on both sides, both the providers in those markets and the solutions we deliver in hospitals and clinics and retail pharmacies as well as the manufacturing services coming into those markets. So I think it sort of validates the strategy that we are on.

Peyton R. Howell

And I would probably also add, I mean, we're currently talking to manufacturers, particularly some of the emerging biotech manufacturers, where ICS, Lash and Xceda [ph] have supported their commercialization in the U.S. and they're actively looking for us to support their growth globally. So there's definitely a real opportunity for us to be able to support their needs.

John W. Ransom - Raymond James & Associates, Inc., Research Division

I just actually have a follow-up for Peyton sort of on that same topic. Do your role changed sort of recently? And I think one of the ideas is to sort of present Amerisource to manufacturers with one face. So I was wondering if you could expand on some of the opportunities you think you might have as a result, whether it's on the pricing and the cost side or the revenue side or a combination of both.

Peyton R. Howell

Absolutely, I think it's an opportunity to differentiate AmerisourceBergen in the marketplace with manufacturers and to really leverage the scale of both our wholesale distribution as well as our strengths in specialty distribution with one voice. It's all to stay connected, obviously, with the manufacturer services businesses that we provide will be able to hopefully approach manufacturers in a more strategic and complicated way so that we can meet their needs today but also make sure that for the future, we're also oriented to those needs. So we think there's obviously an opportunity on the sourcing side on to continue to be able to make sure we're related to their needs and supporting their needs, but then also on these broader services that have both the U.S. and international opportunity, make sure we're aligned to that. So it's really both sides of the equation.

Lisa C. Gill - JP Morgan Chase & Co, Research Division

I just actually had a question around health care reform and your thoughts going forward as far as utilization goes, Steve. Have you done any analysis as to what you think that's going to do for utilization, number 1? And then number 2, Tim, in your slide you talked a little bit about improving margins in 2014 and you talked about the 4 drivers you have today. Can you maybe talk about what you think are going to be the key drivers as we go into 2014 around margin improvement? Is it going to be generics [indiscernible] has a better year or will it come from acquisitions, other areas? Those are really my 2 questions.

Steven H. Collis

Yes. So on health-care reform, I think I commented in my presentation. An increase in utilization is going to be good for us. And we really are going off the IMS forecast. We found that to be the best fit for our business. We often get asked questions about script trends, but we really look at the global sales. It seems to be the best indication for us on how we're going to be doing in the future. We had an interesting example a couple of years. We've got a very strong business in community pharmacy in the Southeast. And when 10-K expanded, we had a really nice pickup in business. So we think we'll do very well, obviously, I think community pharmacy. A lot of health care reform is going to come in Medicaid. With our book of business, we think we should do well from that. So health-care reform, we think is a net positive for us. Basically whichever side of care benefits from health care reform whichever customer base benefits, you'll see AmerisourceBergen maybe even getting slightly disproportionate benefit from that. So we believe the health-care reform will be a net positive for us. I think the economy improving, more employment. If these trends happen will be good for us. So Peyton, any comments before we end...

Peyton R. Howell

No, that's perfectly right. We try to be conservative because, you're right, it's unclear exactly how many lives will come in and exactly when. And certainly, we know from experience with Medicare Part D benefit expansions that they come in overnight, right? They come in over time. But 1 key point Steve has made is the importance of Medicaid. We are oriented towards large customers, so large hospitals. We sell pharmacies as well as the physician space that's served disproportionately. Medicaid patients, though, with that expansion there is obviously positive for us.

Steven H. Collis

I was going to say it and actually one of my colleagues said, "We might want to move on from that." Then he said, "Can you come up with something?" I said, "Well, you've given like an hour to come up with something different for that." But the circle of life is still great and I think very much in plan. We just called it demographics but that is the ABC circle of life.

Peyton R. Howell

You told him to kill the circle of life.

Steven H. Collis

No. I didn't. He might be listening.

Tim G. Guttman

I'm sure he's listening.

Peyton R. Howell

Absolutely.

Tim G. Guttman

No. I think it leads to your question on margin. Let me set it up first by saying that with the organic growth getting better in '14, '15, '16, probably between 1 and 4, we really need to have margin expansion or else we're not going to get to our EPS target that we have internally. So margin expansion is really critical. And I see that really coming through generics; that's definitely a key area. But not only Drug but Specialty, we expect especially generics to improve. And clearly, our businesses like the World Courier and some of the businesses now that James has, the ICS, ES, the ASD, fast growers. And then finally, I would just say expense leverage. We do that exceptionally well. And we should have the benefit from the SAP conversion, so just managing expenses, leveraging and just being smart about how we do things. So those are the 3 big areas that I think that will get us that margin expansion.

George Hill - Citigroup Inc, Research Division

Maybe just to take Lisa's question in another direction and look at it from the provider's perspective. You guys have a tremendous footprint in the hospital space. I guess, can you talk about how you feel your exposed from the ambulatory side. Do you need to do a better job of touching ambulatory providers given the integration that's expected to occur between the inpatient and the outpatient? Or you feel like you have enough ambulatory capacity through Besse? And then a quick one for Tim. Is the express business you guys picked up was a capital creating event for the prior vendor. Do you expect that to be a capital creating event for ABC in 2013 as well?

Steven H. Collis

Yes. I'll just talk a little bit about the hospital. I might also ask Dave to -- I need you to comment here. But as we started to look at our oncology business, we started to assess how much oncology we'll do in the health system area, and it's pretty remarkable. We're doing in the billions of dollars in oncology in the hospital. And when we meet with large hospital GPOs or even hospital buying groups that represent their own networks, it's remarkable because this is such an area of focus for them and while our Specialty portfolio really transcends just what we call our Specialty business, it so important that we take an integrative approach to the business and we have Gina Clark with us as well, who is our SVP of Marketing. But also we've done a lot of work with the communication platform and a lot of it was taking these different pieces and putting together a cohesive story, which I think in this last year we've done a wonderful job of taking those strengths and really helping provider solutions that interface with the manufacturers that oncologists are going to demand wherever they're employed, whether it's in their own practices. We've also seen a lot of -- a large -- actually, ION is an oncology supplier, or it may not be well known but we actually have the largest practices. Many of the largest practices have been our customers for a long time. A lot of them are becoming super practices as they acquire more and more of smaller practices that may not be our customers. So that's another good driver within oncology. But I think particularly on the ambulatory side, Dave, do you want to make a comment? And then we'll let Tim answer the financial questions.

David W. Neu

Sure. And yes, there's a little bit here patients moving into the acute care setting and those that are leaving. What we're experiencing with PHS when they do a consulting arrangement for outpatient pharmacy is there's more and more requests to get Good Neighbor Pharmacy involved to help them, not just to design the pharmacy but I think they're getting clear that the injection of the network, the Good Neighbor Pharmacy provider network, that when that patient leaves, the ability to capture that as it moves out into retail significantly improves. So it will be interesting how the health systems and IDNs look at more strategic models about what happens to those patients when they move out into the community. But it's really starting to open up for us.

Tim G. Guttman

Yes, I think the question's -- the question on the express, our large PBM contract. I mean, actually it's not a cash contributor. In terms of their DSO, we probably lost 1.5 days compared to the old contract, which was quite favorable. We actually had put some pressure on our free cash flow this year.

George Hill - Citigroup Inc, Research Division

Yes. I also had a quick question on the margins. It was on the -- that slide towards the end with the margin side segment. I don't think you could pull it up again. It's a tricky slide [indiscernible] I guess whether you pull that up or not, really what the question is, it sounds like from your collective comments, should we assume then you'll have operating margin expense across all 3 of these segments over time? Is that the way to think about it? Or are some more likely to see it sooner rather than later. Just and additional color about these 3 segments on the margin expansion would be helpful.

Steven H. Collis

A good question. I think, I don't know if we really look at it quite that way. But -- just to -- some of the key trends I think in 2013, we don't have a robust year with brand-to-generic launches. And that's been a key driver in operating margin in Drug company, so in '14 we'll see that. Also the completion of the SAP towards the back end of '13 will be very helpful to our comps in '14. And so I think we definitely think that, that's a very competitive margin range. We'd like to try retain it. On the ABSG side, carrying on with a great mix of our distribution and services businesses. I think in the portfolio effect, it seems like there's a good margin for us. We'll keep on trying to tweak it a bit, a couple of points here and there, but also we'll be very impacted by Specialty generic launches within a particular year. Again, specialty has got a much narrower formulary so you can be very much impacted by not only generic launches but also even adverse events that might happen with one particular big brand drug. So that -- those are some of the things we think about. And then in our other segment, we think that there's lots of room with the scale we have, over 4,000 people working on in the patient services area. We just keep on finding ways to be more efficient and we'd expect that to continue. So basically, I think it's safe to say that in every one of these segments we focused on the more efficient, providing more value and we would like to try to get a couple of more points in the Drug and Specialty, the large units, and then certainly in the other segments, we think about it in terms of percentages increases often driven by efficiency. But any -- Tim or Peyton? Anybody want to add anything?

David W. Neu

Yes, I would. You're right. I mean, we believe we can expand margins for ABC in total. In '14, '15, '16. In any given year, especially on the ABSG side, you may be impacted by a larger year in terms of generics. So again, there may be some puts and takes for a specific business. But overall, we still believe that we can grow the margin mid-single to high-single-digits looking out.

George Hill - Citigroup Inc, Research Division

And just one a real quick question on a different topic. There was a noise earlier this year around one large retailer exploring the feasibility of buying branded drugs directly in the U.S. And I'm just curious if you can remind us again your thoughts around the feasibility of that or why that may not be possible and just the barriers around that.

Steven H. Collis

Again, if you think about the scale of AmerisourceBergen, and, indeed, I would say just our industry, just these margins we work on and going back to the study that I think both James and David referenced, this is a definitive third-party study, we are tremendously efficient and that creates efficiencies for our customers. And we think that large customers really get a lot of value from the industry and that they are best served by staying in the industry. But we probably don't want to comment directly on any customers or industry participant strategies. But that is our view. I mean, we express that constantly and not only do we express it, it's something that we firmly believe. So I don't know, any comments from anyone else but that's definitely how we feel. I mean, any couple more questions back there?

Unknown Attendee

I don't know who's the most appropriate person to ask this question or answer this question but I'll throw it out there. You talked about the renewal cycle last couple of years being pretty heavy. You're pretty much through it, most of the large customers. Leaving express scripts aside, because, obviously, it's a very unique contract. When you went back through these renewals with customers, what were the -- were there any changes in the way they viewed the value you provided or the demands they wanted upon you with regards to services, inventory management, whatever it may be in terms -- and kind of what they expect with ABC particularly given that they're all still staring down the barrel of changes because of health-care reform?

Steven H. Collis

Yes, a great question. And I'll just start off and then I think I'll give it over to Dave Neu, who's been in more of these battles than just about anyone in our industry. Dave is head of our Retail business. I joined Bergen in 1994 and Dave was already the person who was heading up all these huge RFP proposals for the business. But certainly, the generic wave has been something that I think has come up a lot with customers. I mean, we have several customers at the last contracting cycle. We had with them -- they were -- their total sales were a couple of percent of -- in generics. And by the time we're renewing them now they were in the midteens. That was not uncommon. So -- but you know, so many customers just approach us with, "Hey, I like the relationship. It's definitely not broken, let's work together. Let's look at the market. I wanted to be treated fairly." But definitely, the objective is just to renew with us. So I think that's the overwhelming majority of customers. And, Dave, I'll let you comment further.

David W. Neu

I think the fundamental, if you go through the last series of big ones, is I think there's 2 or 3 shifts that have been notable. I think in addition to the fact that there is a larger percentage of generics that are being negotiated in those contracts, so it has a little bit different profile in terms of where margin flows through the profit pools sort of deal. They are looking beyond just traditional pack -- pick, pack and ship relationships. They really want us to think about coming in as a supply chain expert and do almost a consulting engagement to look at their business top to bottom. And clearly articulate value about how to help improve their overall performance. And in some cases, to be able to stand behind that. So again, without getting into specific customers, some of the wins that you've heard that our organization has announced, those have been complicated deals that has been full supply chain assessment and technology review for them to make those decisions. And I think with the investments we've made in SAP, some of the infrastructure things that I mentioned earlier, I think that's really starting to work for us right now.

Steven H. Collis

Thanks. Great question.

George Hill - Citigroup Inc, Research Division

And I just wanted to go back and follow-up on the provider consolidation question before. It sounds like you're viewing that as somewhat of an opportunistic way. I guess, looking at it from the other side, from the hospital perspective as it relates to the Drug business and the oncology centers consolidating as it relates to the Specialty business, is there a risk as you are forced to deal with bigger, more administrative purchasers in both those segments?

Steven H. Collis

Well, it's definitely a trend that we've gotten used to. If you think about most of the large customer losses that we've had, haven't really been losses. I think that the great example was Longs on the West Coast. It wasn't a loss. Our customer got acquired. So that's certainly a trend that we're mindful of. Sometimes we win. We try to be -- we try to think about the customers often when we do contract with new customers just because we believe they're going to be winners in the health care and they're the sort of customer profile that we want. We focus a lot on our mix of customers and our exposure to different segments. But those segments should be profitable and a good opportunity for us to provide mutual value. So that's a bit how we think about it. But the scale in AmerisourceBergen has the capabilities we have. We think we can go toe-to-toe with any customer in the U.S. and hopefully over the next few years, worldwide, that, in selected markets, we'll be able to manage Specialty and services top opportunities, both on the manufacture provider side. So that's really what we try to build here. World-class capabilities that are differentiated, that are in the core areas that we love and that we excel at. And you'll see us carry on, executing on those strategies. So there's no reason for us to be afraid of larger customers.

Unknown Attendee

Maybe specifically for James on Specialty. My math skills aren't so hot, but Page 17 shows 4,500 oncologists in 3,200 practices, which sounds like maybe a little over 1 per practice, which doesn't sound big. And it also sounds like the growth in '13 is less on the oncology side and more some of the other lines of business. Can you just talk about the disconnect between, I mean, to this point about how you fare in a consolidating world? The disconnect between you serving large, and yet it seems like the law of averages sounds small and how you're coping with it.

James D. Frary

Yes, I mean, you do have a significant amount of practices that are single-doc practices in medical oncology. So you have a very long tail of those small practices. And some of those have been able to compete and partner up and find ways to -- in rural areas and settings where you need that practitioner. But as we move up the scale, we also have a lot of the large practices. And our large practice program is the larger 2/3 size of practice within ION. It's kind of how we segment out our GPO relationship. Clearly, it's the leading large-practice program in the country. So I think it is true. I mean, there is a long tail, but there's also a good mix of large practices in our program. And those are practices who are increasingly acquiring those single-doc practices and where we see the biggest portion of the growth in the marketplace, to the earlier question.

Unknown Attendee

Is that part of -- is this trend hurting your growth on oncology this year? Is that part of what we're seeing with the higher growth and the other businesses that this consolidation is representing a bit of a headwind for you?

James D. Frary

For Specialty, there is no question there has been a migration of oncologists and other physicians from private practice into the hospital setting. So we have seen that pickup on our hospital business. And one of the big areas for us has been working collaboratively across both of our teams to help educate, be a thought leader in the hospital, a thought leader with a practice, in terms of how they can set up that relationship for the best possible outcomes. And there are different scenarios. You might have 340B hospital acquiring a practice for particular reasons. You may have a Part A hospital, for-profit hospital, buying an oncology practice. It's very different motivations and different solutions in terms of how they might be able to structure that. There's still opportunities to service an oncology practice that's been purchased by hospital from Specialty or from Drug as it best meets the needs of the hospital and the physicians in that relationship. So it really kind of depends but we, no question, have seen hospitals to be very inquisitive.

Steven H. Collis

But again, we have a good market share in hospitals. It's not 50% but it's 1/3. And so we benefit from that as well. But we do like -- we obviously are -- we have a lot of resources and a lot of our intellectual and mindshare capital really focused on helping preserve and enhance community oncology. So just time probably for...

Tim G. Guttman

Can I just add? Part of that reason, too, with oncology and my comments when I said good sales growth at oncology, even better with the other 3. Part of that oncology, too, is, remember, that they also have that brand-to-generic compression. They had, like an Oxy that just came back in the market in late Q4. They had that brand drug out pretty much the whole year. Next year, in '13, they won't. So again, that puts pressure on that top line as it -- like it does with a drug company.

Steven H. Collis

And we can be very impacted by drug -- top line brand drug like Oxy that goes just -- because there's so many -- it's a smaller portfolio of products we manage within Specialty. But it's a lot -- very few therapies that drive our $8 billion oncology business, actually. So time for one more question.

Unknown Attendee

Just want to clarify a question. Just to clarify on the margin opportunity in '14. Do you think you can get back 12 [indiscernible] in '14? And then second, can you give a little more color on the timing of earnings for next year, particularly, how we should think about maybe, 1Q progression from [indiscernible]?

James D. Frary

I think the answer for '14, is we think we can get back to mid-single type -- mid-single, high-single-digit. So again if we're in that range that we gave, that kind of puts the boundaries.

Steven H. Collis

On operating margin?

James D. Frary

On operating margin, yes.

Steven H. Collis

So we don't really look at quarterly. As Tim said, we're busy. We haven't even wrapped up Q1. So I think we haven't focused as much on the quarterly numbers. But we do, obviously, do 3-year plans. And we like where we are for '14 and beyond. So and that's probably all. We're a little bit ahead of schedule. I guess one more quick question, if anyone wants. But otherwise, I'll be happy to wrap up here.

Unknown Attendee

The question is on Medicare. Can you comment on your thoughts around potential across-the-board rate reductions? I mean, it sounds to me like the most likely outcome is that won't occur. Would you agree with that? And have any of your clients come to you that would have -- in hospitals or retail or physician clients, have they come to you and say, "Hey, can you help us work through this?" Can you please talk about your thoughts on them?

Peyton R. Howell

We are very hopeful. We agree with that we're very hopeful that we won't see that happen. We won't have sequestration happen, but, obviously, that's -- what's out there is the data that we have is the same as what you have. And it's ironic in health care because providers have actually been through this before. So we've had short-term gaps as well as actually gaps that had to be retroactively fixed on the physician side in terms of reimbursement before. So that adds a degree of comfort, to be honest with you, that's not in the general press because we've actually been in the circumstance many times over the past 12 years from a reimbursement perspective. But we agree with you that we're hopeful that those issues will be resolved in advance of any of that being necessary.

Steven H. Collis

Thanks, Peyton. So I guess I'll just have the strong close then. I think you saw a great presentation from AmerisourceBergen. We, again, are very proud of what we've accomplished in the last year. I think you're seeing a very cohesive collaborative team that really enjoys working with each other and are supported by great people, great products and wonderful customers. We enjoy our position. We are investing in our position. And you should carry on seeing great performance from us as a company. And that's what we expect and that's what we're predicting. So thank you very much for your attention. And we'll see you next year and at various conferences that we'll be attending throughout the year as well as visits. So thank you very much for your time today.

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