AmerisourceBergen's CEO Presents at Morgan Stanley Healthcare Conference - (Transcript)

AmerisourceBergen Corp. (NYSE:ABC)

Morgan Stanley Healthcare Conference - (Transcript)

September 9, 2013 02:25 PM ET

Executives

Steve Collins - Chief Executive Officer

Tim Guttman - Chief Financial Officer

Analysts

Lisa Gill - Morgan Stanley

Lisa Gill - Morgan Stanley

Good afternoon, everybody and welcome back to our next session. It's my pleasure to introduce the AmerisourceBergen team. To my right is Steve Collins, Ameris’ CEO and to my left is Tim Guttman, Ameris’ CFO. So Steve, Tim, welcome to our conference.

Steve Collins

Thanks for having us.

Lisa Gill - Morgan Stanley

And Steve, we'll just [start off] with you just giving us a couple of minutes introduction with the Amerisource story. This is being very (Inaudible) lot of change happening. You can help us [frame] that?

Steve Collins

Yes, someone was reminding me earlier one of the one-on-ones that last year this time what a difficult time it was for your industry and how well the whole industry has done and lot of discussion last year were on contract processing. We had some big contracts but AmerisourceBergen is probably known very well for our focus on the supply chain. I became CEO two years ago. We've probably been a little bit more aggressive on acquisitions. We did three or four acquisitions in the first year, at this year clearly our big focus has been on implementing our Walgreens and Alliance Boots contract.

Last week we started shipping directly to 8200 stores on the brand side, which was really taken over the brand distribution for the Walgreens stores over the course of the next year, we'll be doing all the generic distribution, that's really an in-sourcing deal that, what we take the Walgreens has been doing the self distribution on the generic products so we bringing that back into the wholesale industry.

So we believe that strong positive for our industry also most notably we’ll be working together with a Alliance Boots and Walgreens to buy generics together. All solid products in particular is where we're starting out, there is a private label opportunity, there's sourcing, this scale opportunity, so we think that’s a very exciting development for AmerisourceBergen and our partners in this venture, and we're also dealing with some of the balance sheet working capital impacts of this transaction.

So very much we're not losing focus on our core business, we have over 25,000 other customers that are very coveted that we taking great care of, that will be support of this transaction that we also very much in operating months there to get all the different aspects of this transaction implemented including sourcing, including contract implementation on both brand and generic including as strategic benefits for our specialty business, so that’s a lot work, we're working on even for the balance sheet perspective as we do with hedging, as we do with changes in that financial disclosures primarily because of some of the impacts of this transaction say on equity accounting et cetera.

So we’re very busy with these aspects, at a thought of our business that we are well known for our specially and consulting business we’ve had overall a good year in specialty but definitely some weakness in the community oncology sector in the United States which is a core customer segment for us.

We are seeing a lot of transitions to hospitals, we’re working on transitioning some of those practices into hospital setting and actually doing joint services between our hospital distribution business which is in our core drug wholesale business and our specialty distribution business.

So that’s been a key operational transition that we've been working on as lot of those practices are being acquired in community settings as they deal with sequestration, we carry on being very, very responsive to brand manufacturers, working with them on their strategies helping them through World Courier our clinical trial logistics business to take some of those products international clearly the international relationships that we have with the large [piece of Wallgreens] will be very helpful to that.

So I think I could carry on for another 25 minutes but you probably have other questions and our CFO want to talk as well. But no lack enthusiasm for AmerisourceBergen and all the different things we do. So…

Lisa Gill - Morgan Stanley

And if anybody in the hall have a question please raise your hand don’t wait for the end to ask your question don’t be shy about it. So Steve, as you said December 1st Wallgreens business did turned on can you share with us kind of like the progress today the experiences obviously you've been doing some pilots with Wallgreens you prefer to bring them [around], what have you learned?

Steve Collins

Well I would say I've had more relaxing Labor Days before, because we really we started processing the orders started on the Sunday night of the Labor Day weekend it’s truly enormous when you talk about $25 billion in brand business next year well we all have a different respect – but at 8200 store levels and 26 distribution centers is a lot and AmerisourceBergen is truly just a awesome operating company and (inaudible) when we were into distribution centers whereas we looking at how we are cooping the one distributions and the volume had doubled as the result of this transaction and will go up three times to four times as we bring on the generics and our businesses that have the right people, we have the right systems in place, we've have made the right infrastructure investments in terms of our cages, vaults, transportation routes et cetera, so we've handle this very, very well as you correctly point that out. We did a couple of test programs by, just before September 1 we were shifting toward 80, 200 stores, but the scale of this is truly remarkable.

We've have look at other supply chain context in that industries by the time you've done all the different transitions with the brand and generic, we don’t believe that there is another like supply chain contract conversion in any industry in history, so pretty walking transaction, but so call everything is going very, very well.

And we've some test surveys back from Wallgreens and they are very, very happy with the progress and we have exceeded both internal and external standards for this contact implementation.

Lisa Gill - Morgan Stanley

And so there has been a lot of discussion and I was corrected earlier this morning not about local, but global share of sourcing global distribution (Inaudible)?

Steve Collins

Okay.

Lisa Gill - Morgan Stanley

And so a lot of discussions about global distribution and obviously you and Wallgreens who might think that (Inaudible) it really started, imitated that this discussion and conversation. So can you update us on the (Inaudible) venture, and just help us understand AmerisourceBergen's role with the joint ventures and the conversation that the (Inaudible)

Steve Collins

Well. Clearly the U.S market is unique and we serve so many different customer segments, it's important to bring our experience and our expertise in U.S across, if you think about Wallgreens although they're a very big generic, buyer they're just dealing with buying for their stores and surely they have different they have infusions centers their specialty businesses, but they're really just buying for their stores, we buy on behalf of so many different customers segments, we also have a very good generic sourcing team. We believe we've been instrumental in bringing some of the international manufacturers into the U.S. So a lot of expertise in sourcing.

So really a lot of the ideas that even went into initial AmerisourceBergen merger looking at the base of the best, looking at the best experience, the best people, the best systems, the best products, the best in class contract relationships, we're bringing that all three of that, we're bringing that to the purchasing JV that we have in (Inaudible).

So we think that there's a tremendous amount of scale, that's a three of our (Inaudible), about some accounts up to 15% of the global generic business will be sourced through this JV, potentially we could invite other parts of (Inaudible) as things gets going. So we are excited with the progress, we have really had a lot of discussions with manufacturers, I think part of the discussion was is this JV real and we say first of all it is a ten year distribution contract that's highly unusual.

Second of all, it's equity changes and third of all, we are actually doing all of our contracting for our solid products together through (Inaudible). So, everyone has accepted that this is a very authentic JV transaction relationship and we expect that we all have some unique contract attributes that we will receive from manufacturers to match up with the global scaling capability that we have through the relationship, to match up with the global scaling capability that we have, through the relationship. Tim, you want to add anything.

Tim Guttman

Yes, I would just echo Steve. We think we clearly have unique U.S. and international scale and it’s going to really enabled us to have a good win-win situation with the generic manufacturer when we sign a longer-term, multi-year agreement. We believe that’s going to provide some better economics. And it's still early, we are just starting negotiations, we’ve identified a key executive that will go over to the procurement joint venture and represent our interest at ABC and work with Walgreens and Alliance Boots. So it's still early but we're real pleased with where we are at the progress and really nothing has changed our thinking in terms of how impactful that procurement joint venture can be to our business.

Lisa Gill - Morgan Stanley

So, if you can help us put together kind of that idea and how we should think about the financials and the margin progress. So when you think about the generic and the opportunity to buy it better to harness AmerisourceBergen generic purchasing scale projected at 15%. Do you need for that to get to kind of around March timeframe where you bring on the Walgreens generic or is that an independent process?

Tim Guttman

That's a great question, but I guess I would answer it this way. As Steve mentioned, we're distributing brand now, brand drugs to Walgreens in January we will start with generic. But they really are independent. One doesn’t stop us from the others. So I mean we will start negotiations with the generic suppliers through the procurement JV independently of our distribution agreement. And like I said, we think that again it’s going to enable us to drawing and signing multi-year deals, it's going to enable us to all three of us that size matters and we are going to be able capitalize and get some better economics.

Steve Collins

One of the - just some things to consider, so on the distribution contract, we had a contractual date launched to take over the brand distribution of September 1, the generics we really take in back over from Walgreens that were being self distribution. So there is more a need to go quickly, so definitely more plan, full process is called for is absolutely appropriate. We got to be shutting down a certain distribution centers on other side. So it’s just being very thoughtful here and again 75% of the volume is on the generic side, so that is something to think about, but absolutely the two are end of (inaudible) other the contract that we bet that we will get benefits through our distribution business and our reported results as we bring on that additional scale of the generic volume. That will be a benefit to our business because we do get benefits from scale, we are at scalp business not only in the purchasing, but also in the distribution and the supply chain business as well. So does that make sense?

Lisa Gill - Morgan Stanley

It does, it does, and for us to think about stuff like the timeline and as you mentioned that when onboarding the generics timeline is not – shouldn’t think about a set timeline (inaudible) quarter each, quarter or kind of like a one point in time?

Steve Collins

We would really expect to be complete by the end of calendar year ‘15, and hope to be even sooner than that.

Tim Guttman

And Ricky we’ve always talked about in terms of the contribution in our fiscal ‘14, from the procurement JV, we always said that’s going to be a much smaller amount. ‘14 is really more about the economics and the contribution from the distribution agreement, little bit from that procurement JV it’s really when we get to ‘15 when we have the distribution agreement for brand and generic for the entire year and a good benefit from the procurement JV.

Lisa Gill - Morgan Stanley

So when you think about the long-term, when you think about kind of that calendar year ‘15 and beyond do you feel that the B part of the JV provides ABC with a sustainable advantage compared to your competitors or is it just kind of like leveling things?

Steve Collins

I think each of us have got different strategies and certainly we talk about and we communicate this deal as reinvesting in our core supply chain expertise, maybe it’s a little bit simplistic but I look on it as we gave the warrants that are very attractive for us and that was a certain return that we’re expecting for our shareholder and for the business from giving us those warrants that are at what’s turning out to be relatively very attractive price. So we expect to get a good return on that and that’s really should come about not from the distribution contract which we really looked as an [arms-in] transaction but from the purchasing and other synergies.

So the other synergies that we can look at are, we keep on finding new opportunities just being last week with some of the key store executives, they talked about the front store opportunities, putting clinics into our good neighbor for pharmacies, going and doing third party contracting together. You look at the 80 to 100 Walgreens stores and you look at the 4,700 GNPPN third party contracting that we have, the capability that we have together that’s all very interesting.

If you look at (inaudible) the private label products, you look at the boots, laboratories line which in a [pocket free] line that is sold to independent pharmacies in Europe and the UK and we have more than enough to say great, and it's pretty exciting opportunities on the World Courier upfront and bringing that business together with our three (inaudible) business. So many of the U.S. manufacturers are saying to us can you contact for our products globally, or with the Alliance Boots footprints, or World Courier footprint. We definitely have an accelerated opportunity to do that.

So you know it's just a lot of interesting things that we can do together without doing acquisitions that just should create compelling value for our shareholders and for our business and for our channel partners. So we can do things for manufactures as we bring these relationships together that we couldn’t have contemplated in a year or two, we think we can do it in lot quicker.

Alliance Boots has a big oncology business in Germany that’s very much a key to our own business what can we do together, Al Fajer, and Good Neighbor Pharmacy. It’s just a lot that we can work on and we keep on finding new things that we can do together and so far the relationship between the three companies is excellent and we expect that it will continue along that.

Tim and were out in London, we met Ornella Barra the largest wholesaler, the top 100 global executives and we had fascinating, we had a lot common with them when you look at our focus on retail and on independent pharmacy on institutional manufacturer relationship, so lot to work on it and we think that this dispositions us extremely well and as to how competitors are positioned, you probably have been one and you can ask them, or you really had some of them, right. So.

Lisa Gill - Morgan Stanley

So are you mentioned oncology business…

Steve Collins

Yes.

Lisa Gill - Morgan Stanley

And you really kind of like created the specialty business within ABC?

Steve Collins

Well, thank you for saying that. No one else says that, thank you.

Lisa Gill - Morgan Stanley

So at this point in time right, the specialty business is changing and you alluded to it some of your prepared remarks. And given you players in the industry and given what you are seeing in the pipeline. How do you think the specialty business will evolve, how is ABC, what is ABC doing right to prepare for that kind of next level.

Steve Collins

Well, first of all, we are trying to bring some of the specialty expertise into our general health systems business. And so how do we work for 340 [accounts], how to get the manufacturers of patients data that they once regardless of the setting that they are in. When we meet with key manufacturers they are talking about smaller patient populations, more clinically differentiated drug, stronger adherence top programs. All of these areas the AmerisourceBergen has really strong capabilities in the top assistance that we do, I think the TheraCom acquisition we gave that we completed has really given us strong expertise at the retail adjudication level, looking at some of those programs.

I think patient assistance programs are still going to be very much here with an expanded Medicaid programs. So our Specialty business, you Tim and I are busy completing off the fiscal year ‘14 budget reviews and we are not backing off any investments, we are going to carry on investing in those businesses, we're going to carry on having market leading portfolios, with manufacturers, with providers, our 3PL business is doing very well, we love how World Courier has positioned us globally.

So we think that we can really make a difference as manufacturers help launch these very complex therapies throughout the world and as more countries are interested in gaining access to these clinically differentiated products that have hard touch, small provided population, small patient population, maybe some of the vast components to them, maybe some genetic testing components to them. We think that our Specialty business is going to be a leading global practice in all those areas. And these are the areas that we want invested.

When we think about buying companies in other markets, we think Walgreens and Alliance Boots global expertise, really makes this combination unique. So we having wanted to go and our wholesalers in Central America or South America before because we have to go and run big retail operations. But now clearly we have that opportunity to do it. It's the right companies present themselves or we can have the right relationships. But we are not rushing anywhere, we don’t feel compel to do anything. If something arises, we just think that we have even more capabilities to do that and even more financial resources to do that than we would have had absent this transaction.

Lisa Gill - Morgan Stanley

I will take a quick break to see if there are any questions from the audience. Questions?

Question-and-Answer Session

Lisa Gill - Morgan Stanley

Just given all the organic growth opportunities you are speaking to, on the strength of your balance sheet relative to your peers, should we view their capacity as dry-powder for even more deals or is this something that really this is going to go towards share repurchases because it seems like your plate is quite full right now but you really do have quite a bit of excess capacity in the balance sheet relative to your peers. So how are you looking at that?

Steve Collins

Well, we think at our business, we are all being through where the balance sheet hasn’t been quite as strong. We really like it this way. It's definitely a competitive advantage to us and we always love to have that flexibility. We do have to deal with impact of the warrants. We’ve got a hedging strategy that we've implemented and we will cover 60% of the valuation from the warrants with that, but we would expect to recover some of the rest of that through share repurchases. But we're very interested in great opportunity. If we could find more World Couriers we’d be very interested in doing acquisitions.

So what we like is top quality companies that are competitively differentiated that have made strong investments in their own infrastructure that have got good people and that have got good positions with manufacturers, specialty business. So we have a lot in our core drug business, we would like to maybe enhance our specialty portfolio, so that’s a bit how we think about M&A, about some of the (inaudible) we manage so well.

Steve Collins

Yeah, it’s a good question. We get that frequently, I mean we like keeping the dry powder in case anything comes up, I mean from M&A standpoint, but typically our sweet spot for M&A is between 50 million and 300 million, but we are in a pretty good situation. We generate a lot of cash and that cash can fund some M&A, can fund CapEx and it can fund, it can fund share repurchase and that’s our philosophy and I don’t see that change and we are not going to lever up to do more share repurchases.

When we look out ‘15 and beyond and we get past the Walgreens implementation, we expect our cash flow to accelerate a bit. So we think we are in a pretty good cash position. As we look out, like I said and so we are pretty satisfied with our philosophy, what we have done in the past and I think that’s a good indicator for what we will do in the future.

Lisa Gill - Morgan Stanley

When we think about the balance sheet and the cash flow, does your cash requirements change now that you have [decline to size] of Walgreens?

Steve Collins

Yeah, it’s an interesting question. I would answer that this way, this year, yes, a little bit, because of timing of the contract starting up late in the year and having to buy inventory and next year the working capitals a little bit tighter, I think we talked about that publicly especially the first half, because again the transition of brand early and in generic late. So again there is little bit I would call it lumpiness in working capital over the next 12 to 15 months, but once we get past all that we expect pretty good working free cash flow and we will have some small permanent investment in working capital on the contract but nothing significant.

Lisa Gill - Morgan Stanley

So in the past there was kind of some magic number in the industry that you needed intra quarter around $1 billion just to make sure that you have cash available for purchasing and for to be opportunistic on the purchasing, but as the product mix shift right as we’re seeing kind of like more generics in the marketplace. What is kind of like cash that you are still comfortable in the intra quarter you feel comfortable that we should be thinking about?

Steve Collins

From a cash standpoint we always like to at least have, we always do kind of a minimum of about 500 million of really true cash and that’s little bit over a day of kind of working capital sales that we can really function with, but anywhere between that 500 million and about 1 billion is what we like to have again as dry powdering case anything comes up be opportunistic. So that’s kind of the range.

Lisa Gill - Morgan Stanley

Moving on to branding inflation and generic inflation, I think the branding inflation I think is something that we can (inaudible) and the motive behind what’s the manufacturers are doing. On the generic side the market dynamics have been very, very interesting and we have seen lack of price deflation, in some cases price inflation has become kind of like the mode of operation right, not just the passing phenomena. Do you think that isn’t the case, just recently I think there were couple of manufactures that had some again FDA issues, how do you think about generics in nations in the contributions to your business?

Steve Collins

So for us obviously generics is the huge problem with our profitability and we perform a lot more services for generic manufacturer, different type services than we do for brand manufacturers. And I think we are going to have a great opportunity to work with some of the loss generic manufacturers (inaudible) which we were excited about.

Bu specifically on brand price inflation has been robust in the U.S., the same sort of range we have seen, driven by some new therapies coming out and then ultimate therapy is taking pretty big cost increases and we don’t see that changing as manufacturers do with the patent [clip]. The generic price increase has probably been a bit more interested from the economic modeling perspective.

I think you have seen a lot of consolidation there. I think you have seen a lot of manufacturers look at their economics on products and trying to say, I don’t just want 20% of my products to drop 8% of my profitability, I want to see all my products, was close to all my products being profitable.

If you think about $4 generic, you think about the quality requirements that will require does that really makes sense in today’s US healthcare market, probably not. So I think you have just seen some strong cost rationalization. Now from our perspective that’s good because even if our margins stay the same, you would rather get that margin of the higher price product.

So it’s hard, even if you are making 30% on the $4 product, that is a $1.20, it doesn’t really covering our cost of distributing the products, that is positive for us. A lot of the price inflation has been driven by a small amount of product, under a 100 products have driven that this year. And you’ve seen that there had been some critical supply storages, you have seen maybe just one or two manufacturers. But we haven't seen any real change in what happens within the six months after a patent expiration and when the 7 or 8 manufacturers we still and that be fairly competitive. But our objective is to make profit on generics throughout the product life cycle. That's what AmerisourceBergen and I believe our industry is very focused on. So that's what we like to see happen. Tim, do you have any comments?

Tim Guttman

No, I feel it was a good year last year and it's continued this year, it's been a good year on both brand and generic and it's a good thing for ABC and hopefully it will continue.

Lisa Gill - Morgan Stanley

And is that something that you now model as part of your budget?

Steve Collins

Well, we’re fast approaching our year end, we haven't talk about fourth quarter or for guidance. But we always model some level of generic price appreciation. But I just want to, I don't want to go into details yet at this point. But we kind of assume that it's going to be kind of the same level as last year.

Lisa Gill - Morgan Stanley

But Steve there was a great thing right for the last minute and half, the next catalyst, the upcoming catalyst is indeed fourth quarter in your guidance. So can you just help us think about what are the different moving parts that we need to think about as we prepare for fiscal year ‘14?

Steve Collins

Yeah, well let me just start, I mean ‘14, we have the impact from the new transaction Walgreens, we talked about that being an incremental $0.20. It's a much better. One of the positives certainly for ‘14 is much better generic launch year on both the drug side, which is oral solid and also the specialty side. Should we have healthcare reform, which for us, we will get a little bit of a benefit in ‘14, probably modest that there is going to be a ramp up, but should be a pretty solid good year. That's what we talked about there consistently.

And again, I think a real positive from our standpoint is a lot of our large contract renewals are behind us and that’s certainly something that impacted us in ‘13. We talked a lot about in the past, but going in to 14, we're in pretty good shape when it comes to our large contracts. So we feel real good about that side in terms of margin or retention and keeping all of our large customers. So I feel at this point still early but we feel like ‘14 is shaping up to be a good year.

Lisa Gill - Morgan Stanley

And Steve, a little more seconds to go. So you can just past kind of concluding remarks that (inaudible) ABC as an invested opportunity over the next 12 months, right, I do think that we will put together is that should be more for longer-term forward?

Steve Collins

I think we're very well positioned. We focus on the supply chain. We like it. We believe we have excellent relationships with our key customers across all the different segments. We serve very strong manufacturer, knowledge expertise on our side and a truly innovative global partnership that we talk a lot about the benefits of. We think that you will see true differentiated benefit coming to our shareholders over the next several years.

So we’ve completed our SAP implementation, that’s been key opportunity to do a whole bunch of new services with the Walgreens collaboration, with the community pharmacy segments here in the U.S. really strong industry leading specialty practices.

So I think I am a big believer, I am a big believer in AmerisourceBergen and I tell you I think our people are just wonderful. They just did an outstanding job with this huge contract conversion in a short term out of time that we would have like to prepare for such a big contract change and as usual our people came through flying color. So, it’s a great organization to be the CEO of. Thank you.

Lisa Gill - Morgan Stanley

Thank you very much, Steve. Thank you very much, Tim.

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