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AmerisourceBergen Corporation (ABC)

December 14, 2011 12:30 pm ET

Executives

Peyton R. Howell - Senior Vice President of Business Development and President of Consulting Services

Antonio R. Pera - Senior Vice President of Supply Chain Management

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

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

Unknown Executive -

David W. Neu - Senior Vice President of Retail Sales and Marketing

Michael D. Dicandilo - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

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

Analysts

Jonathan B. Green - Murphy & Durieu, L.P., Research Division

Unknown Analyst

Robert C. Jones - Goldman Sachs Asset Management, L.P.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

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

Ricky Goldwasser - Morgan Stanley, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

David Larsen - Leerink Swann LLC, Research Division

Barbara A. Brungess

Good afternoon, everyone. Thank you, all, very much for coming to AmerisourceBergen's Investor Day. I'm Barbara Brungess, Vice President of Corporate and Investor Relations.

And as we get started here today, I just want to reinforce that during the presentations today and the webcast, we'll be making some forward-looking statements about our business prospects and our financial expectations. We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations. And for a discussion of some of those key risk factors, we refer you to the forward-looking statements on the screen today, as well as in -- to our SEC filings including our recently filed 10-K report for our fiscal 2011.

Also AmerisourceBergen assumes no obligation to update the matters disclosed in this meeting and the webcast and we ask that it not be rebroadcast without the permission of the company.

With that, I'd like to introduce Steve Collis, President and CEO of AmerisourceBergen.

Steven H. Collis

Good afternoon, everyone. I hope the chicken's good. We didn't get a chance to taste it, but we hope you all enjoy it. Thank you very much for coming here today. I think that this is the best weather we've ever had for Investor Day in New York, and we're pleased that we could bring some sunshine. So hopefully we -- with all said, that we'll also enlighten and educate you with our presentation today.

As you know, I took over as CEO July 1. It's certainly been a very busy couple of months. If you think back to everything that's happened in the last few months, it's pretty remarkable. And I did see my predecessor recently and he looked about 10 years younger, and good for him. He deserves it. But very honored to be here today. Very honored to be representing all of AmerisourceBergen as our CEO and certainly I'm happy to be here with the people to my left who's, I think, an extraordinary management team. Definitely, I would say the best in the industry. I have -- in April, I will have been with the company for 18 years. Mike DiCandilo is 21 years. I think almost everyone in the room knows Mike very well. So we often say that, together, we have the 38 years that Dave Yost had when he retired, so that we've certainly have a lot of tenure with the business.

Next up after me is going to be Dave Neu. I think this is the first time Dave Neu will be speaking to this audience. Dave has tremendous knowledge in this industry. When I joined the former Bergen in 1994, Dave immediately reached out to me. He was already running our retail business, has tremendous customer intimacy knowledge and knows the generic space very well. And I'm very pleased you're going to be hearing from Dave today. I think we can all learn from his experience with the company.

James Frary heads up our Specialty Group. You met James for the first time last year. You will recall he's the gentleman who started off with ABC on a consulting project and ended up liking us so much that he literally begged Dave if we could find a position for him. And we're very fond of homeless Harvard MBAs so we took him in, and he's doing a great job running our specialty business.

Peyton Howell has had 20 years with the company. She really came to us as an entrepreneur, having started up the Lash Group. And I've spent 17 years telling her how important it is that she stays with the company. I've known Peyton for almost all my career with AmerisourceBergen and there's no one that has more energy and drive. She shows up just about everywhere. And there's a rumor going around that she has a twin, but we know for sure that's not true. It's just Peyton being in many places, it just almost seems like at the same time.

Tony Pera heads up our supply chain. Tony's someone who's really has headed up a lot of generic companies. We're pleased that he's now with us. It's a lot safer on our side with [indiscernible] stent problems that he would have been encountering when he was still directing the manufacturing industry. But he certainly helps us to understand the business very well and brings a tremendous knowledge in that supply chain area and very strong negotiating style and a real passion for the business, which I'll see -- which I know you'll come across in the presentation today.

And, of course, Mike needs no introduction. Really the architect of the strong balance sheet, the great performance that we saw on the finance side last year and a big help to all of us as we run this company so well and so competently, I think, and so professionally for our shareholders.

So I'm going to start off just talking about the last decade. Last Dave Yost story, I promise you. I went to visit him in his holiday house, and we had laminated this slide for him for his retirement present. It only cost us about $20, but he had it in his living room, honest to God. He absolutely loved this slide. It was laminated. It was up there with the pictures of his grandchildren. So he's definitely -- and we all are very proud of this. It was a tremendous decade. We obviously had the one year in 2005, but look at the 10-year trend, remarkable, a 17% compound annual growth rate in EPS. And we're very proud of the acceleration in the last 5 years. And you will note 2010 was -- one of the people in this room called it a year for the ages. I think that, that's absolutely right. And we're very proud that we followed it up with a 14% growth in 2011 and we still have a pretty healthy growth rate for 2012.

When you think about ABC, one of the things that makes our jobs easier is the tremendous diversity within our customer base. Obviously, we have the well-known customer that was about 19% of our revenues. You recently saw our 10-K, that we talked about 19% of our revenues. But think about all the other segments that we've had, the strength in the segments, that we're #1 or 2 in all of those market segments outside of big, large retail chains. And it's a tremendous portfolio offering we have. It's also important to note with -- especially with this year that we're having in our fiscal year '12 with 34 generic launches that almost every customer we have the opportunity to sell generics to. That's a very, very important part of ABC's portfolio. And the generics will often be the lead determinant of what their pricing looks like. We are able to make an independent pharmacy that buys their generics from us and is compliant on their generics with us. We're able to offer them very competitive brand pricing and we really do price on a portfolio basis. So this tremendous flexibility to the over 20,000 customers we serve based on their portfolio, based on their requirements, based on their mix as to how we price those products and we are able to change that as market conditions change. So great, great pricing flexibility within AmerisourceBergen.

If you think back to the first decade and we had the anniversary in August of our first decade and it certainly was a cause for celebration, you talked about the 2 large companies coming together. At the time, we talked a lot about the best of the best, favoring speed over precision to the nth degree, but we both -- we first focused on keeping our large customers but also building a highly efficient distribution network. Dave took the very bold step. He didn't need to do it. It was the last few years of his tenure of implementing -- of embarking on the SAP, ERP implementation, which Dave Neu will share with you. It's going very, very well. It's certainly something that we are all really proud of, that our people should be proud of. They've worked hard on it. Our customers are starting to enjoy the benefit of this. And we're tremendously excited about what this ERP system is going to mean to our future. Very analogous to what the efficient distribution center has meant to us through our optimized program.

During the last 10 years, in 2001, when the merger was consummated, Steve Collis wasn't a big deal in AmerisourceBergen. Our specialty business was still very small. AmerisourceBergen Specialty Group has helped define that specialty business. We are the leader. We have over a 50% market share throughout the specialty business. We have helped define that. Everyone else is trying to catch up to us, but we continue to set new parameters, new boundaries and continue to offer great innovative services and very strong intimacy with the customers. So we are the leader in this area and we expect to continue to be the leader.

PRxO Gen is our proprietary generics formulary, a key theme for today as we look at this robust generic platform that AmerisourceBergen has built and also the strong market conditions. Think about PRxO Gen as the #1 thing that Mark and I look everyday at, how we're doing on PRxO Gen sales, how we're doing on compliance with our customers. This is the #1 driver for how successful we're going to be from a financial point of view in 2012.

One of the things that's just remarkable about our performance is our strong balance sheet. In fact, all 3 rating agencies upgraded us in the last 12 months. So just a tremendous performance. I think one of the things that I'm very proud of is recently we went out into the market, we were able to get the 3.5% money for 10 years. Exactly half of what the Italian government was paying at the same amount at the same time. So we are really proud of that. Not that we don't like the Italians or anything, but we're very proud of how we could borrow money for a long period of time at such an interesting low rate and that enables us, of course, to carry on funding our expansion opportunities. And we think we've delivered tremendous value to shareholders. And we do -- or we are very proud of the offering we have and the performance we've had with our stock.

So what's the next decade about? What's going to be different about Steve Collis? I often get this question. And a lot of what you see is not going to be shocking to you because AmerisourceBergen does a great job. We're very well-positioned. There's no need to rock the apple cart. Things are going very, very well. But we want to carry on. We want to enhance our role as a preferred partner to both the manufacturer and to the provider. That hasn't changed. But that's a very powerful statement. We want to be the preferred partner to -- whether you're an independent pharmacy, whether you're a community physician, whether you're a large skilled nursing facility, whether you're PharMerica or any of the different sites that we service, whether you're a manufacturer that's using Lash services, we want to be your preferred partner. We want to be the partner that you go to.

One of the things that AmerisourceBergen is very proud of and our 11,000 associates are very proud of is the role that we serve in helping improve patients' lives. This is something that really unites our company whether you're working in the distribution center, in a call center, in management, in national accounts, in IT. All of us feel that we are doing something to help the health system that we all service, and that's a really strong motivator. And we are going to carry on that privileged position by offering innovative products and services that drive quality and efficiency.

And if you look at AmerisourceBergen's portfolio, that is one of the common things we have in our DNA. All those companies that you see within AmerisourceBergen are helping drive quality and efficiency. And our value should be no shock to you. We want to be accountable. We've always been accountable. There haven't been many surprises from AmerisourceBergen. We focus on collaboration. We have to have a holistic view of the customer. We focus on innovation. We're a company that prides ourselves on our integrity and we have tremendous passion. I think one of the things that surprised me when I moved over from the Specialty Group where we always just thought we had the most passion about our business was the passion in the Drug Company, in the core drug wholesale business, the "$65 billion a year" Drug Company that serves over 20,000 customers a day. There's the same passion there that we saw in the Specialty Group and certainly the passion that goes on in our Consulting Services division is also really remarkable and very unique and we don't take it for granted. We want to keep on feeding that passion. We want our people to feel great about what they do everyday and be very proud of the services that we all offer.

So what's going to be the secret sauce for the next decade? It's going to carry on being generics. It's going to carry on being specialty. We hope at some stage we can play a key role in bringing biosimilars into the U.S. markets. We think that, that's going to be very important to us. James is going to talk about that. We have to carry on delivering the innovative services and thought leadership. Why? Our customers demand that of us, okay? They know we can do pick, pack and ship. They want more. And we want to focus on the services that will drive value to them, that they will recognize, that will make us sticky. That when a large customer comes up for bid, it won't need to go on an RFP because they know that, overall, AmerisourceBergen has the best value proposition and is the best partner for them. That preferred business partner that's very, very important. And we have the ability to invest in our platform. I think you'll see us invest judiciously whether we're buying back stock or we're investing in a technology system or we're buying a company. You will always see AmerisourceBergen invest judiciously, very thoughtfully and making sure that we stay within our core business and our core business parameters.

That's a lot what the next decade is going to be about. And I think you've seen us make some interesting acquisitions. The first question I got when someone came to the door, are you more acquisitive than your predecessor? No, we've just had some great opportunities in the marketplace, and in particular one large company come up that we hadn't expected to come up. So that's why we've had some great opportunities and we have a tremendous balance sheet that enables us to do all these things.

Why do we feel good about our business? Demographics are going to continue to drive growth. There's a healthy demand for pharmaceuticals. My family is using more of them. Everyone is using more of them. The aging phenomenon. So we continue to believe that health care is going to be a great place to be and in particular the pharmaceutical supply chain is an especially great place to be.

Expansion of coverage is going to be a good thing for us. Yet, at the same time, we reckon that there's going to be cost containments. And we are part of a business -- of an industry that drives tremendous efficiency and we're going to share some information on that.

And also at no time in our history has there been less questions about the distributors' role. Our role is now very well understood by manufacturers, by providers, dispensers and legislators as well. More than ever, our role is now very well understood by legislators. They understand that we are part of what makes health care delivery in this company -- in this country very, very efficient.

Looking back historically at what's happened. This is a graphic way of looking at it. I think what I'd like to point out here was really 2006 was a Part D year. That was the highest growth we've seen in the last couple of years. And we expect that in the future, as coverage is expanded through the health care reform initiatives, we also believe that you'll see some more robust utilization trends. I think what's also important to know there is that this is really top line sales, but the scripts have been going up a lot. And the average script is more affordable than it's ever been because so much of the portfolio is now in generics. You're seeing an industry now with over 80% of the scripts are now -- are going to be generic. So this is an important trend for us. And I think everyone in the room understands that AmerisourceBergen is extremely well-positioned to capitalize on the generic wave, which we are right in the midst of, and we've been talking about a long time this fiscal year 2012 is going to be a momentous year for us in terms of generic conversions.

This is a study that I think is really worth mentioning. It was done by Booz Allen looking at the health care -- the pharmaceutical supply chain. And you will note if we would all suddenly disappear, not only AmerisourceBergen but Cardinal, McKesson and the regional wholesalers, the cost of getting the products to the dispensers would add about $41 billion to the health care system. So that's a remarkable amount of money. And I think that, that's why everyone understands that we are a company that drives value for everyone that utilizes our service, be it a manufacturer or a dispenser. So I think that, that's very powerful. I think it's also really important to note that even though this industry had already been through its consolidation, but in the last 4 years we've had 80 basis point increase in efficiency. So another question we keep on getting is how much more efficient can you get? Well, we keep on finding new ways to innovate and drive efficiency for our business. And Dave is looking at all sorts of things: how can we be more efficient, how can we make sure that every product we're stocking is the one that our customers want, how do we make sure that we get our returns efficiently and make sure that the system stays safe and that we have a reliable, accurate supply and full rate. So these are things that we work with everyday, and you should know that AmerisourceBergen believes we can get more efficient in the future.

Just one more nod to fiscal year 2011 because it was another great year. 14% up on our GAAP and you'll note that, that's GAAP earnings; total revenue of $80.2 billion, up 3%; and operating margin expansion of 8 basis points, which was really driven by specialty generics; and the cash flow from operations of $1.2 billion. A lot of that was driven by James' transition to the Specialty Group and very strong focus on the working capital and also by trend towards a little bit of customer consolidation with larger customers playing as well. So we did very well from a cash flow perspective. We were able to complete 3 acquisitions although the largest one did -- was concluded in fiscal year '12 and still buy back $840 million of stock. So a very, very remarkable year. And think about this. I mean we don't have it up on the slide there, but we also had a leadership transition. We did an ERP implementation. Dave took over as president of the Drug Company. We went into 3 segments. So I couldn't be more proud of the work that the team did and how they've supported me in my new role as CEO of the company. It's really a great privilege to work with all the people in AmerisourceBergen.

What else did we do? Well, we got recognized by J.D. Powers for our Good Neighbor Pharmacy group. Two years in a row we've won the quality award. So we're very proud of that. Dave's going to talk to you -- Dave Neu's going to talk to you about what we're doing to drive the Good Neighbor Pharmacy brand. We think that, that's a key part of our strategy. And we're very proud to achieve this recognition for the second year in a row. We also received the VIP, value, innovation and pricing award, from our largest customer for the second year in a row. Again our focus throughout this period of the large contemplated merger is really focusing on giving a large PBM customer the type of service and quality and attention that they've always come to expect from AmerisourceBergen, and we are not letting up. And we're very proud to receive this award for the second year in a row.

What else are we doing in 2011 from an operational perspective? I think it's very well known. Probably 18 months ago, no one could say oxaliplatin. I bet everyone in the room could recite it. Probably your kids can recite it. Your grandkids can recite it. It was a great, great event in AmerisourceBergen's history. And we also did very well with gemcitabine and docetaxel.

We talked about SAP. Couldn't be more proud of how the team has performed. We completed the back office right at the start of fiscal year '11 and now well into the deployment in the DC. So this has been great.

We also looked at our sales force. And we looked at -- with the SAP platform and with the change in health care economics, how could we be more efficient? How could we touch the customer more while being more productive about it, be more thoughtful about the customer encounter and we've -- we had a very good outcome there, which Dave will talk about it.

And we added new business in selected markets such as Canada and such as mail order and ultimate stock business in the Drug company. So we've been able to be very, very effective at bringing in new business where we're #1 or 2 and where we've targeted our sales and business development efforts.

Acquisitions, it comes up a lot. So we've done 3 acquisitions. You'll see them listed out there. Premier Source and IntrinsiQ were kind of organic opportunities in that we already were working with these companies and there was a good relationship between the senior managers. Having said that, they both drive tremendous value for us in the strategic side as we look towards molecular diagnostics, for example, and much more strong informatics need on oncology side. These businesses are going to help drive areas where we already have tremendous strength in. So we think that these are great additions to our portfolio. Again, TheraCom was a unique opportunity. We were in a competitive situation, but we have tremendous confidence. I've worked with the Lash Group for 14 years. As I've said, they've always delivered the numbers. We have above-market growth rates there, and we think that we have an opportunity to do a wonderful integration here, and it really has added our capabilities which Peyton will share more with you.

So how should you all think about what we'll be doing on acquisitions in the future? We had nearly $2 billion in cash in the fiscal year '11, continued strong cash flow growth every year, so what will we be doing? We'll be looking for acquisitions that will increase our value, that will increase that stickiness, increase that innovation aspect to our customers, both on the dispenser side and on the manufacturer side. We want to strengthen our core competency. If you look at those 3 acquisitions, all of them strengthened competencies that we already had and that we're a market leader in.

We will look at niche opportunities in the international area. We've had a very strong performance in Canada on the specialty side. We took 2 relatively small businesses that, in total, we paid just over $20 million for, and we now have a market-leading specialty business in Canada, which is growing among the fastest rates of any businesses we have in the company. We also think that Canada, for example, could be more for a model for what the specialty business will look like in other parts of the world. So this is an exciting area for us. Looking at white glove distribution services, looking at the consulting top services in the rest of the world, many of these companies all asking us to get involved on the manufacturer side. So we think this is something that ABC could be very interested in.

And, of course, we would never make an acquisition that we don't believe, in the long-term, will enhance our shareholder value. That's very, very important to us, and we're not going to do something out of ego. We're not going to do anything because it's the new, new thing. We're going to do things that are thoughtful, that are contemplative of our position in the marketplace and our future position in the marketplace where do we want to be.

How have we realigned our business units? We keep on being more efficient. Honestly, we did not replace my position at ABC. There's no COO standing up in front of you. Instead, all the 3 business heads are reporting directly to me. I like with the businesses. I like being with the customers. I like being with their people that are running their businesses. We also took the fourth segment, Packaging, and really looked at what the services they were performing. And we said on American Health Packaging, which is the hospital unit dose business that really was a provider-based business and should be embedded in the Drug Company so we made that change. And we took our Anderson contract packaging business, which is very well-positioned and aligned that with our Consulting Services business where we've seen a tremendous synergy on the operating side in terms of key operating metrics and quality measurements as well on the business development side and put that under Peyton. So we streamlined the businesses. But it's very important -- and what I keep on stressing to the 3 business leaders that you see and you'll hear from today is the holistic approach. How does the portfolio work together? We focused on that collaboration and focused on meeting the needs of all of our customers by using the total resources at the command of AmerisourceBergen.

So looking ahead, no surprise here. These are the themes that I talked about last year. We have added a fifth, but this is what's drives our vision, mission and values. This is what drives, I think, in everyday when we look at business opportunities, when we look at key customers, we ask these questions. Is it going to increase customer and supply value? How do we collaborate? Is it going to work with the overall portfolio? How we're going to be an innovator? Is it going to help us enhance our position. Are we going to be seen as being more sticky with our customers? Are our customers going to value this contribution from this new offering? So these are not only acquisitions. There are also things that we develop internally. Some of our customers might have unique reporting requirements or unique connectivity requirements. If James is looking at how do we get information back to the third-party payer from oncology practices, we look at it against these core tenets. Maximizing operating efficiency. Everyone of our customers is having to deal with this. How do they become more efficient? How do they do more with less? AmerisourceBergen has been doing this for years and years and years. Our industry, as you just heard, took out 70 basis points in operating expenses over the last 4 years. So we believe that we can help drive efficiency and help pave the way for many of our customers to be as efficient as they need to be in the upcoming year of tremendous health care reform.

The last tenet is something that I think probably we don't talk about enough or haven't talked about historically enough. But in meeting with our associates, you know that they do really value us listening to them. We've done a tremendous job with, say, launching our first engagement survey, really publicizing these vision, mission and values, talking to the associates about how we're investing in them, offering them continuing education for their careers, talking to them about how they manage their career, really talking about the expectations of a high-performance culture, talking to them about do they need to be more efficient everyday in what they do, talking about the longer they stay with us the more valuable they become, and a lot of our compensation is going to be focused on this high-performance culture. So in that sense, I spent a lot of time about. I really enjoy being with our associates. I think we have great associates, and you've seen that through the very consistent and above-market performance we've had with our earnings.

What is the theme of collaboration and innovation mean? Well, we have tremendous examples of the portfolio working together. As you know, we have 34 generic launches this year. Well, ASD within the Specialty Group is really an expert in outbound telemarketing. So we've been doing the prebook orders for the generics through that ASD capability that we have. Another great example that I haven't actually got up there, but if you look at the capabilities we have within our Consulting divisions, notably Xcenda and Lash, we really -- it really helps drive the fee-for-service approach that we have on the supply chain and helps us explain to regulators really why the fee that we earn from the thought process and really a discipline do not belong in any reimbursement metrics. And I think we've been very, very successful with that both with manufacturers as well as with regulators.

If you look at, for example, our ION practice management and you look at the Good Neighbor Pharmacy, there's a tremendous synergy there. Both of these are smaller, disaggregated customers that need AmerisourceBergen services more than ever with increasingly sophisticated needs from the marketplace. So these are businesses from a customer offering where they need more of AmerisourceBergen, and we are stepping in to filling some of the gaps that they see. So with both the ION offering and third-parties and negotiating managed day contracts as well as with Good Neighbor Pharmacy with our provider network, we're looking at helping them with their reimbursements, helping them with their dialogue with payers, so that we can make sure that they can carry on dispensing the products that are so important to the future of AmerisourceBergen.

So if you look at our value proposition, think about us in the middle, think about all those different constituencies, think about the patient at the center, think about the manufacturers that are very reliant on us not only for the distribution services, but also for the credit management services, the financial services, the market access that we provide, think about the larger hospitals what they're going to be facing with the medical home, with the integration challenges they're having and the system challenges that they're having. And you think about AmerisourceBergen and the solution, as a solution center and a touch center, touching all these different facets of health care everyday. That's a very, very valuable part of the supply chain to be in and we think we do it very well and we think that we can enhance our position even further in the years ahead.

So I know you all had a -- you're all here and you should be here to talk about fiscal year '12 and what are we going to do to keep up this great trend, the compound annual growth rate we've had of 17%. So some themes you should be listening for when you hear our business leaders present: Execution on generics, how you're going to make sure that you have the generic execution that's going to make up for the gap from the specialty earnings that you had in fiscal year '11. You should be thinking about that; thinking about how you're going to carry on deploying ASP in your distribution centers as your customer facing; think about how you're going to cope with reimbursement pressure to customers, particularly in the specialty business and in the core drug wholesale business; and think about how we're going to overcome the difficult comparisons to fiscal year '11 and make that pretty difficult 8% to 12% earnings growth rate that we've talked about publicly.

So I believe we have the team to succeed. You're going to hear directly from this team on all these key issues and I think you're going to have a very interesting and rewarding afternoon as you listen to our business leaders talk about their individual segments.

With that, I am going to hand over to Dave Neu who's going to talk about our Drug Company. As I said, Dave has been with us for 29 years. He's a tremendous leader. He's about the best communicator that I've met. He speaks to his people constantly. Customers love Dave. The industry really loves Dave, and I think you're going to hear in the next half an hour why Dave is such a great leader for the Drug Company. Thanks.

David W. Neu

Thank you, Steve. I always got to start with a bang. I appreciate you highlighting the 29 years. I don't know if that's the scars of battle or the new bar for tenure. I'm sure you guys will weigh in on that. But I tell you, it will -- it all rolls up to a great amount of pride. I've grown up with this organization and I gave a lot of thought today about how to have a very succinct message with all of you about our confidence level, about the sustainability of ABDC on this kind of performance and how to talk about that in the simplest of terms, but very specific investments the organization has made and is making.

So just a couple of things and I'm going to give you just a few slides on '11. We're going to talk at great detail today. Tony is going to spend quite a bit of time on the generic marketplace on the supply chain and how that relates to some of the investments. Mike, of course, is going to frame financially the year. But I want to give you some perspective about why the excitement level in the Drug Corporation.

This is really the foundation for why we've been as successful as we have. And I've been with the organization the last 10 years since the merger, then a part of this proud team about why those -- that performance level has sustained. And I will tell you that this is a big piece of that.

There's a couple of things on here that may be new to you. I'm sure that directionally you know that the Drug Corporation is $65 billion, 5,000 associates. What may be new is the 35 distribution centers. So 26 of those are in the U.S. of course, but 9 of those now are in Canada. Nine of those distribution centers are part of Canada and our business expansion plan there. In fact, you probably heard about the Pharmasave contract. We're very proud about what's happening up north and some of the things we're doing to leverage the Drug Company across the line. Then, you've also, of course, seen the product line in different cuts. But I will tell you that we are taking a bit of -- a more regional approach, a more focused approach on certain lines that our customers are saying that's important to their business. It doesn't mean we're losing control on capital. You've seen that. You'll see it again today from Mike. But there are high-margin lines that are important to the customers. There are high-margin lines that are important to us. And in certain markets like New York, we've looked at those and said, this is important to how our customers view not only ABDC, but their ability to drive additional profitability beyond the pick, pack and ship that they expect everyday.

So this is a bird's eye view. This picture is a recurring picture. This is a picture of the A-frame you saw it in Steve's. I don't know how we took this, maybe someone was in the rafters that night, but it is such a fundamental about how we drive efficiency and productivity in the distribution centers. I think we almost kind of take it for granted. I can tell you the associates are so committed to service level and quality, we lose track at times of how important that is to the customers. The customers, I believe, at times take it for granted. Order accuracy is 99.95%. So a lot comes with that: how we help manage in a drug shortage environment; high communication with the suppliers and customers; how we make sure that we manage all elements, brand, generics, OTC, health and beauty aids and so on; and 20,000 deliveries a day. Our customers have come to expect that whether the weather is just right or we deal with some of the anomalies that we've all seen over the last year or 2 in particular that, that product gets there the next morning.

So I think most of you know this, but for those of you that don't, our customers order up until 8 or 9 p.m. every night. Our people are in filling those orders in the evening till 3 or 4 in the morning. Those trucks go out at between 8, 9:00 and in the early afternoon. All those customers everyday are receiving product. That just-in-time environment is a very critical part of the supply chain and we're very, very proud of how we've designed ours to meet that need.

So financial highlights. This is a piece, of course, of the corporate story, but you'll hear that same theme from Mike, which is a couple themes. The first is ABDC Drug is up 5%, a bit ahead of market. And there's a number of reasons for that, which we'll talk about. Gross margin is up. Expenses are flat. Operating margin is up. But I think what's really critical here is in the midst of all of those line items -- and you know some of what drives those, we'll talk about them, but managing the capital side not only with the customer on DSOs but also on the inventory and delivering those kind of results is something that we will continue to sustain as part of the investments that we're making.

So 3 themes today. So how do we think about -- so what is this confidence that the Drug Company has about sustainability. Three areas we're going to talk about: Operating efficiency improvement, how we feel about that, what we're doing about that. The second is driving value and what are those areas. There's a finite amount of resources in any organization. We're no different. We've got to focus and we are, we're going to talk about that. And the third is how do we target growth. So we talked about Canada that's one geography, but there are markets for targeted growth and we'll go into a little bit of detail on those as well.

So this is very kind of summary map here of North America. And as you think about our company as a North American organization and what we're doing now, you can see distribution centers all the way from Nova Scotia and Newfoundland all the way to B.C. So Pharmasave is coming on March 1. A lot of investment by them and by us and it's an important customer and has opened a lot of conversations with a lot of new opportunities in Canada about AmerisourceBergen Canada and what we now look like up north. It's an exciting time for us and you'll be hearing a lot more about it.

We have a couple of things called out on this slide, and this is the first time -- of course, I'm in front of you. We talk about greenfields. This slide talks about greenfields. We didn't want to change in the vernacular, but those greenfields had been built since the merger. Those are very large facilities, highly automated. They really are part of very well equipped distribution network. And I think as we look at going forward, a couple of things: Over $1 billion invested in this network, getting it ready for what health care's going to look like, that bolt-on automation operations as well as on the technology side.

I think the other piece to think about here is how do we become more efficient with the network. And I'm going to talk about what efficiency has looked like and where we see it moving. So a couple things. You have to have an innovative engine inside of a company and that word gets overused. But when it comes to operating efficiency, that innovation doesn't just come from an investment in SAP. That comes from the business process and the design around that investment with the organization. That means retooling, that means lining and that means getting an organization excited to use those tools and making them real, internally and with the customers, and that's what's happening. And we'll talk about that in a minute.

But a couple of examples, improved returns processing. We've optimized customer service. We've only been up in 3 distribution centers since the kickoff of the third phase. We've already optimized customer service in a couple different areas specifically how we have redundancy on the telephone system and the customer service group DC to DC for those that have flipped. Consolidated inside sales. We'll talk about leveraging assets between the 3 business units, but Specialty and Drug now have a new test on consolidating inside sales to approach the market in a way where we add different dimension, in a virtual service model which is specific to what happens with our new order entry system, taking hardware and looking a look at it differently with -- excuse me, with the customer and looking it more from a centrally managed order entry environment.

And then operational improvements and not necessarily tied to SAP, but you can see things everywhere from track and trace to getting more specific on the regional product lines and some new things that we're doing. Tony will highlight on accelerating the PRxO Gen product launch approach by our go-to-market strategy.

This slide, I think, you all have seen in the last 4 to 5 years. Mike DiCandilo told me if I turn this on its side, it would really look good. But I wanted to give some context. If you look at lines per hour and the kind of improvement that we have had from FY '06 to FY '11, what it really shows is a 40% improvement in lines per hour over those 5 years. And there's just layers and layers of things that we've done in the distribution network to get there. If you look at expenses per line, that's dropped 15% in that same period. SAP has direct application to both of these everywhere from what they do to hook into PkMS, to how we manage information, to how we manage all the processes to manage through those fundamental productivity elements.

The SAP implementation which we call BT, Business Transformation, kind of our brand within the Drug Company, 3 phases. You've heard about 2 of these and elements of the third. The first which was master data management was completed to both the customer file and the master file and products were done. Big improvement to our business for continuity and consistency of approach and a big deal for our customers having a much better tool for the sales organization. Back-office migration for AR and AP, inventory management, financial management was completed in October of '10. Made a significant difference in the tools that not only our regional teams use to manage the customer relationships and get insight, but also how we think about EDI connectivity to our customers, managing payment, managing AR. I will tell you that this is a quantum leap forward for the company and clearly an investment that will yield some significant advantage on how the customers, national customers view doing business with us. And then on the distribution deployments, that plan is DC by DC. So we've done 3 so far. We'll be accelerating to approximately 2 or so per month as we get just little deeper into this, and we'll be going through those deployments up into the first quarter of calendar '13, fully done at that time and the advantage of that DC rollout is that our customers and our internal organization are tracking down and the initial reaction has really been extraordinary. So we're pacing that. Our customers have been part of the rollout plan. And I think what's happening now is they're starting to understand that the connection about how they deal with ABDC, the customer experience, the way they experience our organization has really changed for those that have made that transition.

So there's a couple of areas on the value side about what the customer relationship means and what it kind of does in terms of improved access and stickiness for those customers that have been with us for many, many years. The first is something that we are extremely proud of, and there's no flashing lights here. There should be because this year the Good Neighbor Pharmacy provider network that is the provider network of our independent and many regional chain customers became the third largest network in the country, so just slightly overtaking Rite Aid this year. And as a reminder, this group handles the reimbursement. Those contracts that come in from the PBMs and the payers, we represent those pharmacies and represent that contracting. We don't own the lives, but we represent the contracting with them to make sure that they get access to those plans. That's a very, very important asset as part of GNP. So the growth that's going on within GNP and the growth in our programs, and I didn't get into a full blowout of each of the layers, but it has to do with a bit of a change in focus. No change on branding and advertising. No change on the programmatic piece, no change on taking a disaggregated market and making sure that we provide value, but we've got a demographic situation that needed to be tended to. If you look at the average age of the pharmacist that's in the Good Neighbor Pharmacy network, you look at the clientele, we had a new demographic moving in and we needed to deal with that as our customers were saying, "Listen, with this branding and advertising, it's refreshed. It's new. It's different. We need some new things." So we launched this year 3 new social media approaches and none of these are innovative. Someone might say "Well, gosh, you're slow to catch up. This stuff has been going on for a while." Well, I will tell you the GNP national advisory board worked with us on 3 layers: Twitter, to generate that interest to move people to Facebook; Facebook, to put out to the consumer the approach for Good Neighbor Pharmacy; and then advertising campaigns and a reflection of what we're doing on branding through YouTube. We launched this at the trade show with all of our customers together and the reaction by our customers is that it's increasing consumer participation. There is an element now that they are noticing. People are coming into the stores and talking about this. So it's not the be all, end all. But I think what's happening is we've got a group that is taking a look at our network beyond just the network and the advertising piece and really looking at how can we drive value for the different layers of demographics that we have to deal with.

PassPort is another area of high value and efficiency for the Drug Company as well. PassPort is the new order entry environment that was developed as part of our business transformation effort. As I said before, each of those distribution centers that flipped, the customers go on PassPort. This has been a bit of a quantum leap for the company as the hardware starts moving to a place of being secondary to the order entry environment and really that web access and that access real time to the things that we're doing whether it's product catalogs, it's the speed of price updates, it's insight into the different elements of a product as a customer comes in and has questions. All that data sheet information is contained. This has been a big deal, and the usability of this was something that was primary focus and was developed with the customers and focus groups all over the U.S.

So our theme on generics is one that has been out there for some time. Tony is going to talk about the market and how we feel about what that means considering the size of launch activity this year. But there have been questions of our organization from the customers, "Hey, you've got a fantastic program. What are the things that you can do to help us manage our generic business, not just how we purchase it?" And there's a couple of things that we needed to put in place that happened this year. One was first-to-shelf placement. We improved our first to shelf. That is the new item introduction launch by over a day. And that's a big deal. So for us to get our product in, for example, that gets released at midnight and that product is heading out at 12:01 to customers to have deliveries to those distribution centers and then to the customers the next morning, that was a significant improvement. The contracting process, the customer said, "Listen, we want unique files based on our needs." We have different customer mix, we have different geographies, different managed care plans. We want you to tailor those to us. We now have multiple files for multiple customers to address that need. That also has allowed us to get much more specific about margin and compliance and the customer relationship.

The other piece is the multichannel approach. We've talked a lot about independence, but we have a very specific focus on regional chains that are big buyers on generics especially those that don't have their own warehouses. Offsite now -- and we'll talk about the offsite channel in a minute, has many different variations and many different needs for generics. There's a lot of activity, in fact new resources in the field to deal with it.

And now on the hospital side. We've got new health systems that are starting to look at the generic space as more of a partnership as opposed to a traditional buy-sell.

So just a couple of comments on those markets and some reflection on what Steve mentioned as it relates to the customer experience work. So big change for us this year: For the Drug Company to move to consolidate to 2 business channels from 3 was a very timely and very important move to managing our business relationships. And there's a couple of reasons for that. I use this example. In retail, in alt care, which had been 2 segments of 3 before: health care systems, retail and alt care with, of course, regional chains in the retail space and different cuts to health systems, but fundamentally 3 channels. And we kind of talked about an independent on Monday is traditional independent. On Tuesday, he wants to try to move into long-term care. So he wants some files. He wants to understand a little bit about the positioning, understand our relationships with the GPOs. On Wednesday, he wants to look at specialty. He's got some customers that are asking about it. He's wondering if he can participate. He needs some intellectual understanding of what can we do for him. On Thursday, he's not sure. He's frustrated. He didn't get the scripts. He's back and I'm an independent. I'm an independent community pharmacist. This is going on all the time in the environment and that dynamic includes change as something we had to deal with as a sales organization.

We've renamed now retail and alt care, community and specialty pharmacy. And the reason is we really believe that there was an opportunity to leverage the asset from the Specialty company into the Drug Corporation. So Specialty has a very specific purpose and it manages those very specific patient profiles that the manufacturers want us focused on and they do it in a way that adds all kinds of resources and backroom contribution to that. In the Drug Company, we have customers that want to understand managed care and how they can fill some of the scripts. So that move to bring some of those assets into Drug and to help with that expansion has really given us a new look into targeting our growth markets.

So we looked, I think, broadly at the health care environment and there were a couple of things, of course, that jumped out, but the theme here is that the growth in health care, as all of you know, at the bottom couple of bullets here: Just more patients, more total dollars. Fewer dollars per patient really is driving those 3 or 4 buckets on the right. So what it translates to whether it's increased capacity utilization and need to deal with that or how they deal with variable costs or how they deal with the administrative functions is what can ABDC do to help as their businesses are moving around in relationship to that.

So here is the changes we made. We got about 95% of this done in FY '11 -- and I have to tell you the amount of improvement in customer touch and responsiveness has been noticeable. The theme here is better tools for the sales organization to change the way that they approach the market and how many times specifically they touch the customer. So every organization is going to look at their sales team on some frequency. But I will tell you with the change in the retail and alt care space, we had a very specific objective and that was how to follow the patients and where they're going in relationship to our customers that are purchasing product and stay ahead of the curve. We did some of that with telesale supplement. We did some of that with inside sales and some customer service improvements. We did that by adding some solutions our portfolio for all 3 segments and we did it by changing the way that we call on those customers. And we now have increased our touch to the customers 2.5x over what we had just 12 months ago. And all of those touches don't have to be face-to-face. Some of those are face-to-face. Some of those are by a higher-level intellectual expert that brings additional competency to the relationship and some of those are by telephone.

So this is the market when we look at community and specialty pharmacy, again the consolidated retail independent, retail chain and alt care environment. And you look at the dimensions here of how a sales organization deals with this. So think about the cross-company ability of the Consulting, the Specialty Group and the Drug Company and what that means to deal with these different environments as opposed to the previous model of a traditional account manager just within Drug going in trying to deal with all of these needs. What's happening is we're seeing opportunities for growth within our existing customer base now that we've got them segmented and focused in a little bit different way as opposed to kind of one-size-fits-all in retail. Alt care has always been a little bit different, but we've been a bit monolithic on the retail side. This is a fundamental change for us and a very positive one that is also translating to increased customer satisfaction for the customers that we've highlighted.

I think the last thing that I would mention here is the generic offering was a fundamental approach to not only deal with the buying groups and independents that are some of the higher compliance purchasers of generics but also port that over to the regional chains. What we're seeing now is a different approach is required everywhere from the file to the approach for each of these segments and it's going to translate into increased share in the generic approach for our go-to-market strategy.

On the health system side, 3 fundamental needs. One is how we deal with quality care, the second is handling the market growth and the third is cost control. And 3 very specific approaches and a little bit different than the community and specialty pharmacy piece. On the far left, medication process, medication policy, medication tracking. We use our consulting group, PHS, within the Drug Company to partner up with the account managers to bring that expertise now to the quality care component of these 3 pillars. On the market growth side, Dave asked us to help them with outpatient pharmacies. The acute care setting, the IDNs say, we need to understand not employer pharmacy, but outpatient pharmacy and what we can do to tie in to an ambulatory approach to track with that patient that's moving around. We bring not only consulting experience but also technology and automation to that equation. And then on the cost control side, it's all the things that you would think of that a customer has needs for to manage their P&L. What we can do on inventory management, what we can do on labor, what we can do to help them with overall efficiency. We have business coaches that are specifically assigned to help those customers improve their P&L. And I will tell you that when you look across how we've leveraged the different groups, it feels very different to the customer in terms of the way again they experience ABDC now.

So just to kind of wrap up the theme here. I have to tell you when you look at the operations and the value components of what we're doing and the processes that are part of it, I think the missing element before the business transformation effort was this whole enabling technologies piece. We are a decentralized organization. We had customer touch. We had speed. We were close to the customer. But at times, a little bit of a lack of continuity and consistency of approach. And I will tell you what's happening now with this investment is this organization is starting to show up to the customers throughout the organization where we've implemented the BT work. It's starting to look much more similar and consistent. It's not only easier on our side, but it translates to being able to manage the business at the 1-inch line, and that is the competitive battlefield that we are in health care as well as drug distribution. And we are better equipped to do that.

So our focus for '12: generics, of course, and we're going to give a lot of dimension to that here; that cross-company leveraging of the assets; SAP implementation, we will continue on this accelerated path this year, not only do it well but be primarily through it by the end of calendar '12 and then finish up at the beginning of '13. You'll see some contributions to the P&L, of course, partially in '13 and full year affect in '14 on some of those redundant costs associated with the 2 systems. Mike will talk about that. Growth in target markets. I think you've seen a little bit of a different design, much better equipped to deal with it; and importantly best-in-class customer service. We believe that we have done something here that is a bit of a game-changer about this consolidation to 2 markets.

So just to close. We've had a decade of strong performance and we could not be more bullish and excited about the next decade. I can tell you I take this very personal. I've grown up here. I've been part of this last decade. I've got a team that has a lot of pride in the results that you've seen in many meetings and is very committed to doing these things to move the company forward. To talk about the investments, 3 areas: operations, technology and the commercial organization. And you'll be hearing more and more about how we're doing with that in meetings as we move forward. And the last piece is the team. We've got a fantastic team. You don't get a chance to always meet them. But I will tell you we've got a mix of some very, very seasoned talent as well as some new thinking that's come into the company and we're well-positioned, not only for FY'12, but for the next 10 years.

So I look forward to seeing you in years to come

and coming back to show you a fantastic year for '12. Thank you very much.

I'd like to introduce James Frary. James -- as you probably know, a couple of you asked me about him a little earlier when you were coming in if he was here. He was in Southern California when we recruited him out. I think he -- I think the first time we met was about 2003 when he was with Mercer. He moved out to Philadelphia. He just got started in the drug company, made a great contribution. And then we split the difference and asked him to moved back to Dallas and take over as President of Specialty company. Not only is James doing a fantastic job because he is a big piece of how what you just saw works, but he's a great business partner to all 3 of the units that are going to drive the performance. So thanks, James. And with that, come on up.

James D. Frary

Okay. Thanks, Dave. That's 29 years, a tough act to follow for me. But what they don't tell you is, Dave started when he was 10 years old. So it's -- we're kind of twins here. But anyway, so I'll -- privileged to be here and excited to talk about the Specialty Group. This is my second year in front of this group and close now to my second year in the Specialty Group after moving over from Drug Company, as Dave mentioned.

And the longer I stay, and especially the more time I've spent, the more excited I am about the business we're in. We've got a tremendous business, a great group of companies in the Specialty Group, great leadership, great people who are very passionate, as Steve said, about what we do, about the mission to our customers, to the patients that they service. And I think just a phenomenal environment. So fascinating business, fascinating industry and it just continues to get better for us. So very excited to share this with you.

So who is the Specialty Group? Just give you a little rundown. This is similar to last year's slide. The Specialty Group, we consider ourselves to be the preferred partner to specialty manufacturers and providers in the United States, and when we do think our numbers prove that out clearly. We've got 4 of the leading distribution companies in the specialty space: ASD Healthcare, focused on blood derivatives and nephrology products, flu vaccine products as well; Beese Medical, focused on physician specialties across the board, including ophthalmology, urology, rheumatology, et cetera; Oncology Supply, the largest oncology products distributor in the U.S., and ICS is the largest 3PL focused on specialty pharmaceuticals in the U.S. So 3 big distribution companies and related services that fit very well with what those distribution companies do with the markets they serve. Both U.S. Bio and ION Solutions, ION Solutions with the largest physician membership in the oncology space today. So 6 very imported businesses.

We're very privileged and I'm proud to add IntrinsiQ. Last September, we announced the acquisition of IntrinsiQ within the ION Solutions portfolio. We'll talk a little bit more about IntrinsiQ but just a very exciting capability that we bring in to add to the breadth and depth of the businesses that we put to market in Specialty. So this is the Specialty Group. Very excited to walk through some highlights.

Just to get a sense of how those groups fit together and particularly in conjunction with Consulting Services that Peyton leads, it really -- this chart gives you a sense of how we match up against the pharmaceutical product life cycle really in the pipeline stage and development, through product launch and into market maturity. You can see our services from those businesses really line up very well against the product life cycle to ensure the success in commercializing those products, to ensure the success of caregivers in providing those products, that we really have the range of services that are needed for our partners in the value chain. And that's what's made us the preferred partner in specialty. So you got a good sense of our services here.

And so what does that help us to accomplish? A leading position in specialty markets. So roughly $26 billion, 2009 numbers, product value running through specialty distributors in the U.S. We represent more than half of that in our business units. And you see the bulk of the revenues obviously distributed through our distribution companies here. But also, other services which are -- include U.S. Bio and ION Solutions. Smaller in top line revenues but very, very important to what we do in servicing the needs of our partners in specialty.

So in total, significant -- a significant player in the specialty markets, really speaks to the success of the strategy that Steve launched with the Specialty Group more than 15 years ago and that we've continued to extend and fortify as we move forward here. So doing very well from a top line perspective.

And as I mentioned, that's enabled us to establish market leading positions in most specialty markets. It's a diverse marketplace. There are a lot of unique needs between different types of players, physicians, different types of manufacturers, other vendors that play in the space. But we're the largest oncology product distributor, the largest distributor of blood products in the U.S., the largest distributor in dialysis, strong positions in most other physician specialties and the largest 3PL provider dedicated to Rx. So that strategy, that breadth of products has really enabled us as we go very deep in these markets and secure market-leading positions that we've sustained and fortified through the years.

So in addition to being a great company with marketing-leading positions, we're also very excited about the industry that we compete in. And so why we are excited about Specialty Distribution? Why -- how do we add value to our partners in the supply chain?

And in this chart, I think this picture really demonstrates it. And this is true also -- Steve talked about Booz Allen study of pharmaceutical distribution in total. Specialty is very similar, and there are lot of common areas. Dave mentioned independent retail pharmacy. A lot of similarities in terms of what we do in Specialty in creating networks and connecting all of the pharmaceutical manufacturers who provide specialty products with all of the providers across the country who need access to those products. So that network that we form creates significant value.

And Arthur D. Little in April issued a study quantifying the value that specialty distributors -- of the $26 billion in 2009 product value flowing through the specialty distributors, how much value do those distributors create versus a direct distribution model from manufacturers. And in total, if you add up the tangible value, tangible costs of order management, physical distribution, financial management, et cetera, it's $3.5 billion in costs, which is about 13% of product value. And I'm sure all of us in this room will be very excited that we were able to enjoy all of that 13%. But as you know, we retain a fraction of that savings and our partners enjoy the remainder. So significant value creation. And that's what makes our business so great, that's what makes drug distribution such a great business, is we know we're creating great value for our customers and for society. We play an important role in the equation of costs and quality in health care. So this is part of what sustains the value of the specialty distributor and makes us very excited about the industry that we're in.

So that value that we create in Specialty Distribution also allows us opportunities in other areas to create value as well for both our customers and for our shareholders. Especially, generics is certainly one that I think you're probably all are very familiar with, our performance in specialty generics. As you know, we had a historic performance in 2011. Tremendous opportunities. That was on top of a historic 2010, which started with the unprecedented launch of oxaliplatin in late 2009, So very, very successful performance in '11.

In particular, we had a strategic investment in oxaliplatin prior to that product coming off market that created a lot of value for our customers. And so we're very excited about taking that opportunity to market. We also were very successful in commercializing the launches of generic gemcitabine and docetaxel. We remain very close with our manufacturer partners to help them with the commercialization process, and our performance clearly demonstrates our ability to do that very well.

The opportunity for '12, as has been shared before, is moderated versus '11. And in particular, we see reduced profit contributions from those products that have been on the market for a period of time now, gemcitabine and docetaxel. We continue to service those generics, obviously. But also, oxaliplatin, we ended the last product of that buy-in that we made. Actually, I flew down to Oncology Supply down in Dothan, Alabama to help pick the last order, and it was a very emotional time for all of us. But fortunately, we'll see it come back in April of '12. So we're looking forward to that. And certainly, we have opportunity for future launches coming in. And we think we're in a great position with our market leadership, with the relationship we have with our customers and the ability to work with manufacturers very successfully to commercialize those products. We think we'll maintain our leadership position and do very well in specialty generics.

Biosimilars is another great opportunity for us, and Steve hit on this just a little bit. This is -- biosimilars are in other markets around the world, so they're not new. But in the United States, we're waiting for a regulatory pathway. We think that the pressures in the health care system in the United States, that we'll see that pathway come about. We were actually fortunate to get to tour a biosimilar manufacturer plant from one of our partners in Europe. And just the amount of knowledge, the amount of investment, the commitment that manufacturers have to make to bring those biosimilars to market is really incredible. It's not an easy -- it's not a trivial thing. It's going to behave much different than the generic market. But we actually think it's attractive for our business in Specialty because of all of those services we provide throughout the life cycle of the product. It's going to be a very competitive products. Those manufacturers are going to need those products to be successful to get a return on the investment that they have made, and we think they'll take full advantage of the broad suite of services, commercialization services that we provide to ensure their success in commercializing biosimilars in the United States. So we're very excited about biosimilars. We think this will be a great opportunity for us in the future as well.

So I thought we'll just talk a little bit about the marketplace and what we do for our customers. And I thought I'd focus on oncology. That's the biggest part of our business. And so to give you a snapshot of this, we're obviously doing a lot across the different specialty markets. But oncology is an important business for us.

So this chart just shows the fundamental drivers for growth in oncology are good for us. The yellow line here just shows the increase in patient population as projected over the next several years, and that increase is driven, obviously, by demographics. We're all very familiar with that. But in addition, the increasing and earlier diagnosis of cancer, creating tremendous patient demand for oncology services.

The blue line, which shows the, on top of that patient growth, the additional dollar pressures related to high-cost therapies, very targeted therapies coming out at a very high price point, the increasing use of diagnostic tools, increasing hospital utilization and other trends that are driving cost pressures up. So patient needing access to care, cost pressures being high. The question is where are these patients going to be treated. And we primarily service community practices. That's what community oncology is, is the heart of our oncology business. And we view community practices as key to providing that patient access, high-quality, very efficient fashion.

Over the last 30 years, there's been a dramatic change in how oncology care is treated, shifted from the inpatient in the hospital to the outpatient in the community practices and saved tremendous amount of costs for the system. And we think it delivers better care. And we believe in our customers and their ability to service these patients.

At the same time, it's -- certainly a lot of commentary out there about reimbursement pressures that are facing physicians in community oncology as in other markets that we service. But we're certainly very focused on that with our customers and also for their patients because we do think it's important for patients to have access to that high-quality care, and we do think that it's the most efficient side of care.

So the Community Oncology Alliance is a trade association for community oncology that we work very closely with, and they track the movement of practices in and out. And over the roughly 3-year period from 2008 to 2010, they tracked 300-so practices that have been acquired by hospitals.

Certainly, it's alarming for us. However, they're primarily smaller practices. We do service hospital business. It's about 1/3 of that business on the drug company side. And so we think that the -- there's a moderation there I'll talk to in a second.

The other is over 100 practices that merged into a larger practice. As ION Solutions provide leading service, flexibility and solutions to oncology practices, we tend to service the bigger practices. And so that's actually been, to a certain extent, a positive trend for us. As we see our customers acquiring other practices, that could be a good thing for us. So there some different challenging trends here. Some also positive signs that are emerging. We're seeing commercial payers really coming to awareness about the importance of community oncology in quality and efficiency for oncology care. And we hear this. We spend a lot of time with them in our meetings, with our physician customers, and they are looking for opportunities to help figure out how to improve quality and efficiency by empowering the community oncologist. So we think that's a positive trend.

In addition, hospitals who are acquiring practices and physicians, we increasingly see the conversation shifting from acquisition to partnership, to collaboration, to integration. And so we think that's a very positive trend as well. And both of these things line up very well with our suite of solutions. Our customers, our physicians are looking to us to help bridge the gap with payers, bridge the gap with hospitals, really bring our -- the power of our network to work for them to bring these solutions to life. And I think that's a very exciting thing for the role we play in oncology.

So what are those solutions? And how do we -- how do we meet the needs of our customers? Really, there are kind of 3 sets of areas. They're core services, distribution and GPO, that we've done very, very well for years where we've got clear market leadership, we've got the best service, best value out there. And we cover the broad categories: IVs, orals, supplies. We meet the needs of our customers very well. We provide flexibility for them, in particular for large practices. You have unique needs. We provide very customized solutions for them. We offer great engagement between physicians and manufacturers and supply excellent informatics for the -- for both to help them improve their businesses. So core services, we do very, very well.

Practice management, we've made significant investment here. Last year, we spoke about nucleus solutions in depth. And we'll give you an update on that today, but nucleus solutions really provides maximum flexibility. It's not a cookie cutter suite of technology products. It provides best-of-breed products in each category of technology that our practice would need in addition to proprietary technology in areas where we think we can really make a difference. We connect those systems together very well to make sure the practice can maximize efficiency. And we provide other services from informatics to pharmacy management, in-practice dispensing programs, et cetera.

The last is patient value, and this is an emerging area where we're increasingly helping bring those physicians together to form quality initiatives with payers. And really, beyond pathways, beyond just pharmaceuticals, it's IVs, orals and the total cost of care. So really helping to make the community oncologist the quarterback for total patient care, improving quality and improving efficiency for patients.

So just to give you a couple of examples of what we've been doing here. I'll give you 3. Nucleus, we've talked about in depth last year, and you can see a similar diagram to what we've shared. Nucleus is a suite of solutions that really connect the practice, all of the needs in the practice from clinical performance to inventory management to back-end claims management and the dashboard that really connects all that together to help them understand their business and drive it.

We've been very successful, made significant investment in building out nucleus solutions over the last couple of years. And as a result, our install base has grown over 100% year-over-year. As well, the dispensing out of those nucleus solutions has grown almost 300% year-over-year. And that's due to better targeting of which practices, the larger practices, adoption of those larger practices who can be very, very particular about what technology they're using, and greater utilization of practices that have nucleus solutions, moving more of their products through our suite of technologies.

So this has been a very, very successful program for us, rapid adoption from our customers. We've got a huge backlog of customers who are waiting for installation. But we're very careful in terms of how we install from the -- for very high service orientation. And we make sure that they're able to maximize and take advantage of this platform for their practice. So we're very excited, very proud about what the group has accomplished in nucleus solutions.

We're also very proud of the acquisition of IntrinsiQ and the oncology software and informatics they provide for our partners. IntrinsiQ is not a new company. They've been around for years. We've worked with them as a partner. Their software is installed in many of our customers. And so we have definitely kicked the tires on this company over the years. And we're really fortunate to have the opportunity to acquire them in September. So very excited about that. Very passionate about what they do in oncology. Their culture matches up very well with the Specialty Group companies, and we think their technology really helps us leapfrog into the future in terms of providing great decision support tools for chemotherapy dosing and beyond, as well as excellent informatics capabilities to provide information to practices and to pharma.

Third area I'll highlight is -- I mentioned on the patient solution side what we're doing to help bring physicians together with payers. So Michigan is a great example. We announced this in November, and it's called the Medical Home Initiative in Michigan. And what that means is really moving beyond pathways. So still kind of standardizing care but moving beyond that to target bigger cost buckets, beyond just Rx. So targeting side effect management, hospital utilization, trying to drive down emergency room visits and in-patient admissions. We see a huge opportunity, and we've got a lot of pilot programs that have proven the cost-effectiveness of this type of solution and the quality care it provides for patients. We think that this is going to be very important for our future, for our physicians. And this is a unique program not only in that it's a medical home program beyond just pathways, but the physicians own the contracts, they negotiated the contracts. We're there to support them with the tools to be successful with the program. And so we're very excited about this. We think that this really equips the community oncologist to become the quarterback for cancer care and really help them treat the total patient and improve cost and quality. So we think it's an excellent, excellent solution.

So in summary, specialty market continues to be a growth driver for ABC. We're very excited about the prospects for Specialty. And we think the fundamentals are strong. Strong opportunities in generics and biosimilars that will continue to present themselves in the marketplace and we'll take advantage of and I think we'll do very, very well with. We'll continue our specialty leadership. We've got the breadth, we've got the depth and nobody can match the position we're in the marketplace. We continue to invest in ourselves and our solutions to fortify our leadership and provide the best quality service, the best customer satisfaction of anyone in the industry. So we're very excited about the position we're in and the direction we're headed. And I appreciate your time. I look forward to sharing some of the wins for you next year.

With that, I'm going to had it over to Peyton Howell. We work very closely with Peyton and with all of her group. They're critical to what the Specialty Group does, as you saw in the life cycle chart. Very interwoven and so very excited to hand it over to Peyton.

Peyton R. Howell

Thank you, James. I'm going to move actually at a fast clip to keep us on time. When you're the smallest business unit financially, it's your job to do that. But I have some exciting news actually about our group, so I'm delighted to be here.

You might recall this time last year we had just broken out my group as a separate business unit consisting primarily of Lash Group and Xcenda. We've done 2 acquisitions in this area the -- this past year, and we've also integrated AndersonBrecon. So I want to give you an opportunity to learn a little bit more detail about what each of these businesses do and why we're excited about the future for this business unit in particular.

These are businesses, as Steve mentioned, that are very well established. But I think what will surprise you is really the scope and scale we now have in these business units and how they're positioned really for health care reform.

What's unique about these businesses, first and foremost, many times people think that we only work on specialty products. And in fact, we work really across all types of manufacturers. So both brands and generic manufacturers, biotech and device and, now with the addition of Premier Source, increasingly into new emerging areas, emerging biotech as well as the molecular diagnostic area, which we believe in the future will become critical for reimbursement of many of the biotech products that are obviously critical to us as well.

The businesses have a lot in common. They all are really driven by innovation. They're all really driven by value to the manufacturers. So these are pure play, outsourced services for a manufacturer, and they're looking for us to really provide and deploy innovation to create more efficiency and value for them. And these acquisitions overall give us the scale to really take the businesses to the next level.

This shows you how the businesses really array in terms of patient services, which includes our TheraCom and Premier Source acquisitions all being under one leader. Our strategic consulting right in the middle. And obviously, the strategic consulting side gives us that business development edge across the board, and then our contract & clinical packaging, which is both Anderson and Brecon.

And there's common themes. The customer is the same, and that's probably the most important theme in terms of that revenue base. The core business drivers are very consistent in terms of what drives these businesses moving forward, innovation, but they're people businesses. If I'm -- in fact, I have always joked with Steve, "If I'm not adding people, then I'm not growing." So we've done a lot of growing. In fact, this past year, and you can see that from the bottom slide here giving you a feel for the scale, typically headcount is actually the best way to really frame the scale of these businesses overall. And we're very excited about that.

When you put it all together, we have over 5,000 associates. Our fiscal '11 revenue growth, the top line growth, was over 20%, and we expect to continue in terms of above-market growth opportunities in this area. And we think there's opportunity for collaboration. Obviously, a number of these units are brand new to us. TheraCom acquisition closed only 45 days ago, and AndersonBrecon is brand new, this business unit, for this fiscal year.

So the collaboration areas are probably in 2 big buckets. The first one is clearly business development. And I would include in that business development the opportunity to actually move up the cycle with manufacturers. We have a global business development opportunity as well as both Brecon, which is actually based in the U.K., as well as Xcenda has -- have really seen growth in our international consulting and services, which is fabulous, obviously.

Surprise to me has been -- there's actually been quite a bit of synergy in our operations and quality management. So all of these businesses are routinely audited by manufacturers. That's really part of the value proposition that you're providing. And it's exciting to be able to share some of that quality management tools across these different types of businesses, and much more synergy there than I frankly expected.

This is what we look like geographically. This really doubles our call center locations from 3 major centers to 6, those are shown in green, as well as giving us a physical location now in the U.K. What's exciting and important about having that kind of scale is we need to be nimble and flexible for manufacturers.

This past year alone, we launched our products specifically, and the estimates related to how much reimbursement volume we would see within Lash Group ended up at 4x. It ended up a multiple of 4x the volume. So when you have that kind of a need for a manufacturer, it's a the great opportunity for us, obviously, but it means we need to be very flexible. Geographic diversity actually helps us with that significantly. So that's exciting from an efficiency perspective as well.

In terms of patient services groups, let me give you a feel for what they do and how they fit together. The patient services group really is a strategic partner directly for the brands. We work with specific brand teams, and each disease state can be quite a bit different. On a prelaunch side, in terms of prelaunch planning, this isn't only pre-FDA approval, this is also as we're planning a relaunch of a product that could be very mature in the marketplace. And that's important to know. We've actually had a number of those clients that have come to us from our competitors this past year, and we've really looked to change the service model in part because the reimbursement landscape is obviously growing more complex. So there's a need to be able to do that and change and evolve and really offer best-in-class as a competitive edge from a manufacturer perspective.

The services vary according to the product and the disease states, as you can imagine. Reimbursement support is probably the critical underpinning of most of these, and we expect that to grow and become more complex with health care reform. We also know co-pay assistance and patient assistance are critical. We're seeing a great deal of growth there.

A newer area for us but one that has done extremely well this past year is our clinical services and our nurse services. That really allowed the brand to grow even in a market where they may have limited new patient opportunities.

And then, of course, REMS management. Specifically, given the changing landscape and requirements from the FDA, there's a number of our programs where we actually support the manufacturer with their REMS requirements.

And then over time, you'll also see us adding more billing and collections and really revenue cycle management services into our fold. Premier Source actually does those types of services for our molecular diagnostic company. So again, continuing to really enrich our knowledge in that reimbursement area and patient access more broadly.

And then the data that comes out of these programs is obviously highly valuable, back to that manufacturer client, and ends up being critical in terms of making these programs fresh and new every year.

TheraCom, obviously, feeds into that. So TheraCom, Lash Group, Premier Source really provide all of those types of services but for different types of products. As I mentioned, TheraCom was just 45 days ago and a very exciting acquisition for us. This is a competitor that we've seen grow dramatically particularly in the past 3 years. So we've watched them from afar. We knew the people. And what we found very quickly was a culture very aligned with us. Over 950 associates in this business, so larger than a lot of people realize. And unique from our Lash Group business in that they're really focused and have a very unique pharmacy benefit capability that was extremely attractive to us. So it really gives us now the best-in-class capabilities for both pharmacy benefit products as well as the buy and bill specialty product. So really across that the portfolio.

And then one final unique thing about TheraCom is that it does include not just the service side, but it also has some distribution components in it. That's obviously material to us, and we're excited about that. They've developed a handful of very unique distribution-related programs. They include training kits, patient assistance-related services. Starter kit program often targeted a very unique product need. Some of these are actually for devices as well. So again brings us some new capabilities.

The strategic rationale hopefully is pretty clear from what I've just described. This is really all about growth and about us seeing an opportunity to continue to support patient access. Simply put, these used to be nice-to-have, value-added services for our manufacturer. These are now essential to the success of a product not just at launch but throughout the product life cycle.

In terms of these businesses together, we believe we clearly now have a leading market position with an unmatched scale as well as that breadth of services. We also are -- we're not shy about our proven outcomes. We focus in metric outcomes. And that's how we've retained all of our clients, frankly, from a manufacturer perspective, is that we can deliver back to them data that shows the speed at which we're able to move patients on to therapy following that prescription. Those are some the key gaps in our current health care system that are critical to manufacturers.

You can see the number of programs we're currently running. And what I'm most of proud of is that we're currently servicing 14 of the top 15 pharmaceutical manufacturers now, in addition to a wide range of emerging biotech and device customers as well, which is exciting.

And as we look forward to the patient services businesses, we actually think this need for these service models will only grow with health care reform. We're going to see patients that need help actually going through the exchanges and becoming insured. As they reach insurance, they're likely going to be in a state that we call underinsured, and those are actually the sweet spot for these businesses because those are patients that really need help navigating patient access and also needing things like co-payment assistance.

And then perhaps more importantly, we've got a new focus coming into health care that includes health outcomes and cost efficiency. And so these services are valuable in 2 specific ways. One is supporting patient adherence and being very patient centric but also being provider centric. As providers are squeezed for reimbursement, they don't have time to figure out these issues on behalf of patients. These are not areas they're reimbursement to work on. And so it's critical to be able to support practices in that way, and that's exactly what we do.

As I mentioned, the pure play strategic consulting business within our group is Xcenda, and Xcenda also had very nice growth. And you can see the scale of this business. It's quite a diverse business with over 120 active clients for fiscal '11. The 3 big areas that we saw significant growth this year that I should highlight are, first, in our managed markets agency clients. This is where we're helping a manufacturer to position their products to payers. So again, the customers, the manufacturer, but it's really deploying their outcomes and evidence information in ways that are appropriate to a payer environment. Field reimbursement has had extraordinary growth this year in part because we actually marry in those services with the Lash and TheraCom-type model. So that would be a consultant based in the field to really support practices' knowledge of billing, reimbursement, coding, et cetera, and it relates to the direct extension of those programs.

And then, as I mentioned, we're also seeing significant growth in our international projects. Manufacturers are really looking internationally in terms of the landscape, how do different governments really view coverage of different products and what can they learn from those models that they can apply back here to the United States.

For Xcenda, all of our services really fall into 3 buckets. There's value services like the one I mentioned, the managed market agency services. And also, our core thing that we're often known for, reimbursement analysis and market research, falls into that group. Evidence is really one of the bread-and-butter components of Xcenda. So helping with health outcomes. These are teams manufacturers use to try and develop in-house. And increasingly, they're outsourcing those resources. And certainly, emerging biotech almost uniformly outsources those types of resources. Analytics and also risk management and epidemiology. So really identifying how a product is going to fit and be best positioned into a health care landscape.

And then last, patient access. So access services. That includes our payer and provider access services that really help explain to physicians how to reimburse for our product, what the billing looks like. And that's where that field reimbursement team fits in as well. So the full life cycle of health care products are really covered. And one of the things that excites me about this business is it's highly scientific, but we're applying it in ways that add energy and excitement and creativity. We're doing much more work now that bridges some of the traditional communication-type tools with the science of our business.

And another way to look at Xcenda and everything we do is really from a value cycle perspective. I kind of like the way this chart helps kind of walk you through the opportunity that we have with manufacturers. First, in that prelaunch phase, and this could be very early prelaunch, even pre-Phase 2 in some instances, you're really looking to identify what is the reason for a need for that product or technology. As you approach launch, then really you're trying to understand what is that current unmet need in the market and how can we solve it. What's the reason to get both the payer's attention as well as the prescriber's attention. As you move into the launch and post launch, then it's that data that show that you're actually meeting the need, giving that reason to believe and that this is a product worth moving forward with. And then, of course, as it becomes more mature, you should have data that really shows how your product is addressing that need commercially. This is where some of that total cost of care data that James mentioned becomes critically important. We think that with health care reform, that part of our business, will continue to grow significantly. And that's really when payers have an ability to really endorse or incent use of our product as well.

And then, of course, the cycle continues, because then, once you reach that phase, then there's likely an unmet need and the cycle continues.

So when you look at the health reform and the health care landscape and some of the things that James mentioned in terms of medical home and accountable care organizations and new payment models, we very much think that our consulting business is very well positioned to support manufacturers in this changing landscape.

And then last but certainly not least, our contract & clinical packaging business has really had an amazing year. It's actually been record-setting growth for our business. We are now the largest contract packager in the United States, and we have a very long history of quality and frankly have built a great deal of trust with manufacturers.

We work across branded, generic but also over-the-counter and specialty products as well as biologics and, obviously, those each have very different packaging needs. This business has grown to now be over 1,500 associates and over 1 million square feet of facilities.

It's also a global business model already because of our acquisition of Brecon many years ago. And we're now uniting that business, Anderson and Brecon, into 1 brand under 1 leader for 2012. And again, we expect to see continued growth to this business, and I'll highlight a couple of areas specifically where we've diversified.

Why do manufacturers outsource packaging and why would they choose us, really comes down to 3 things. First, speed and scale. Right now for manufacturers, speed is critical of importance. And you'd certainly have a time factor that plays in terms of having that scale. We currently support 14 of the top 15 manufacturers in this business as well.

Expertise is also critical and naturally where there's also a lot of value. So our ability for our engineers to deploy our packaging technologies efficiently and effectively is critical to that, as well as the project management phase. Project management is critical to executing on time these types of opportunities. And then quality is a key differentiator for us. This is a Lean Six Sigma business for us. In fact, every single associate is, at minimum, of a yellow belt, very unusual in the packaging marketplace and a source of tremendous pride for our company, and an area where, in fact, we're sharing some of that model with other parts of our Consulting Services business.

Two areas I'd like highlight related to new growth for packaging. The first is our clinical trial packaging business. We're already doing this in Europe. And particularly, we've now added this capability to the United States, and that's where we've already seen some significant growth and also as an example where we're leveraging the resources of AmerisourceBergen.

So when you think about packaging in preparation for our clinical trial, it gives us that introduction to a manufacturer early on, which is clearly valuable to my entire portfolio of businesses. But we can also package the comparator product along with the experimental product as part of that. So that's a unique advantage that we have as part of AndersonBrecon. We're currently able now to provide clinical trial packaging product supply for over 100 countries, again a very unique capability for us.

And then the second one to highlight is a really emerging area, an area where we believe we're one of the few innovators, and that's called the Specialty Pharma Center, SPC. That's a fancy acronym for an area that's actually a little bit hard to describe. I like to picture on this one. It gives you a flavor because this is really a unique capability to support potent compounds. And I've actually been in this facility recently. And the growth here is significant because we're becoming more aware of the risks associated with handling products. So this is an area where manufacturers then look to outsource those types of packaging needs to someone with expertise in that specific area. We use dedicated facilities to actually support our potent packaging.

This facility in Rockford, Illinois just opened this past year in February and was quickly filled. In fact, we were filled up very quickly in terms of activity. We had 9 different clients that we worked on in just of that first 7-month period, and we're now adding this capability to our facility in the U.K.

A few quick concluding thoughts. First is that we believe this whole area of Consulting Services for manufacturers is really a fundamental grower, and there's a number of things contributing to that. First is that these are all services that they require a great deal of investment. So we have a value proposition that any one manufacturer would never have alone. And certainly, as manufacturers have that cost pressure, that's really facilitating the growth of our services to provide best-in-class services without the types of investment they would need to do it themselves.

The regulatory environment is also supporting our growth. This certainly makes sense when you think about some of the really unique needs of products. When you also think about HIPAA and compliance concerns, many of these programs and services really don't make sense for a manufacturer to do themselves. And then also, most of these services require unique capability and unique scale and the ability to change quickly in terms of changing volume. Very difficult to predict that volume. And that will change over time. So that's obviously something that we offer across these businesses.

And then when we think about our fit within AmerisourceBergen, we also think this is a really unique differentiator for us. Really everything that my business does is related to supporting patient access, right? Ultimately, that's what's critical to actually have a product dispensed and distributed. And so really, everything we do relates to that. But it also deepens our manufacturer relationships, gives us the edge in terms of what's coming from a pipeline perspective and also, as a business unit, very focused on what Steve mentioned in terms of the mission of our company, that's to be very patient focused. And it has kept us very grounded, frankly, in the real world of health care and how we touch patients and physicians every day. And when I look at this business overall, I think this is a real differentiator for AmerisourceBergen. Certainly, all of ABC's competitors are in some form of these businesses in some way or another, but none has the scope or scale of the offerings that we offer as part of this mix.

So with that, I'd like to thank you, and I'm going to turn it over to my colleague, Tony Pera. He is Senior Vice President for Supply Chain, and he's going to touch on both generics as well as branded. Thank you.

Antonio R. Pera

Thank you. It's a pleasure to come here and address this group. And we had a chance last year. And I think 2 years before that, I had a chance to address this group. And I just want to say a few opening comments, too, about -- talk a little bit about branded and focus more of my discussion on generics. Apparently, generics are pretty important to us. And so we will spend a little time talking about that.

So -- what's that? As I've said, I'm not talking a lot about the branded because I think there's -- generally, the news is very good here as far as our fee-for-service agreement. Virtually every manufacturer is on a fee-for-service agreement that we have now. There are no -- certainly, none of the majors. The fee-for-service, the renewals have gone very well. We continue to retain and express our value very well to the manufacturers.

Our performance to these contracts and the metrics that we -- that are set up in that is very near the 100% level. And let's -- one of the things that we've been trying for years is tie in to get paid for what we do and the value we provide rather than price fluctuations. And we're now less than 10% of our compensation is really subject to the price fluctuations, which is the direction we've always really wanted to go in.

We have retained our value, as I said, and we've been very successful in doing that. We're probably now, in some cases, in the third and fourth generation of fee-for-service agreements and some new agreements.

But the key for us here is really this value proposition and expressing our value. And we -- we've called this document here our 4 pillars of value. And it's really applicable not only to the branded side of business but also to the generic suppliers and even the OTC. And it really is -- expresses all the value components that we supply, that we provide our manufacturers in the distribution. So often, people really just think of us as pick, pack and ship, and that's a very small portion really of what we do. Depending on which manufacturer it is and depending on which -- what role and what you expect, we do a lot more than that. In the case of the branded folks, there's a strong emphasis on the financial management piece as well: the ability to collect, the ability to have a very productive receivables for them. In the case of generics folks, it's really about the ability to deliver share, you'd -- be able to deliver market share in the generic products that we put on our PRxO Gen program, which we'll talk a little bit more about.

Of course, there's the added benefit of the transparency with all the information and all that data that we provide, all of the manufacturers that sign on the -- that sign fee-for-service agreements. And each one of them values those different -- those components differently. But to view us as simply a pick, pack and ship is really underestimating and really not taking into account our full value.

So as we look at generics here, we know that -- and I'm going to state some obvious points here. We'll get past these. But the patent expirations, which we'll talk a little bit more about, the use of generics to reduce health care costs, certainly one of the answers to how do you control drug care costs, is generic or -- or drug costs is generics.

There's increased awareness and acceptance of generics, no longer controversial.

I always tell the story back when I started in generics many years ago we really had to go out of our way and even the injectables to demonstrate equivalents to customers because they were hesitant to buy. No longer an issue. I think that, that -- those arguments are past. And as a result, generic dispensing rates continue to rise, and we expect that trend to go forward. And as a matter of fact, many of you have seen this type of slide here from IMS. I think this is straight out of IMS Health. And the data that suggests that again, dollars and number of scripts continue to favor the generic trend. We're already seeing through year-to-date, about 78%. We're certain that, that number will go over 80% next year. So it's a trend on both the scripts and, of course, a very small portion of the dollars as is appropriate with a lower price.

What the -- as we know, there are many patents coming off now, and we looked at it. There's a lot of different public sources for this information. This is really a translation of many of those sources into our fiscal year. The important fact about this or the important thing to note is obviously, 2012 is a pretty darn big year, and there's a couple of major players in there with the Lipitor and the Zyprexa, which we'll talk more about.

But 2013 is not a bad year at $10 billion. It's very comparable to last year, which was not a bad year. And if you look at '14, again looking at that number of -- near $18 billion, we're -- we see some good roads ahead beyond this year for generic. So we expect -- and of course, there's also some of these generics that come at the second half of this year for us, which will spill into the following year. So the next few years here look very healthy for generics. It's not just 2012.

And of course, as Dave and Steve and -- have talked about, the customer mix to ABC is key. And we really do believe that we have the right customer mix with the generics business both in the retail and -- in the retail health care providers, the institutional providers and also the specialty physician that James had talked about. So we really are covered very strongly in the areas where we provide value with our generic formulary.

As we know, the economics of generic versus branded to us is the fact that we make much more money, much more gross profit dollars on -- per unit on the generic than we do on the branded. And this is particularly true in the exclusivity period. And these are not secrets of the business, obviously, with a higher dollar price during the exclusivity period. Reduced receivable risk associated with a lower price, reduced working capital, which comes with a very -- in the generics, which is very typical, 60-day payment terms versus the 30 that you normally see in the branded and normal practice on that side, all of those produce a much higher return on committed capital. And again, these are just some basics here that just need to be said to level set.

As far as the management of our generics philosophy -- the management of our generic portfolio and our philosophy, is really, one of the things that we pride ourselves on is the ability to monitor and react to industry trends and industry happenings. And I have the tell you, more than ever with the ongoing shortage issues, with the different regulatory actions, that value component is extremely important to our customers. And I think we have a great visibility because of our presence in the market to anticipate.

Can we anticipate every kind of move that happens? Absolutely not. We are affected. The drug shortage that's going in the injectable business right now, and this is predominantly an injectable problem, is -- it's severe and is affecting everybody. There's no way that we're immune to that. But have we been able to anticipate some regulatory moves and switch out and get an alternate source or supplier maybe a little bit better than others? Certainly better than any independent could do. We have been doing very well with that.

We, of course, manage our PRxO Generics program. That is the whole point, is to really manage that whole portfolio and deliver the greatest amount of value through that way, not just price. So we look for products from reliable sources. That has become a bigger issue. Price -- it always was about price, price, price. And price will always be there. The economics can be made to work. But what we really need is the reliability of suppliers. And we have a history with many suppliers, and we know who the good suppliers are and we really try to work closely with those. History is no guarantee of the future, but, of course, I think that's what we have to go on. We know the people we work with and provide transparency to us and really provide us that comfort level in providing business, not just price. The lowest price doesn't automatically get it. So we are about delivering the optimal value to the customer, and we think having the product reliably is a very key component anymore in the business. And of course, all of this really supports and is part of the support of the prime vendor model.

Our generics -- our PRxO Generics program formulary that consists of over 7,500 SKUs. Again, few -- we focus on a few handful of big products. But pharmacy has to deal with most of these SKUs in their pharmacy. And it's our ability to manage that portfolio and provide value across that line. That really is the value proposition here to our customers. It is that whole -- that portfolio. If you look at every item that we have and take it as a basket, I'm certain that our independents couldn't do better on their own, and they couldn't -- we could -- couldn't get that kind of value without us in the picture.

We tailor the programs for specific customer needs. We've talked about expansion into the alternate site. Each of these alternate sites, whether it be a nursing home, have different -- nursing home or even a physician office have different needs and different needs of the program and different portfolios. We try to tailor custom offerings to those folks. We focus on their profitability. Ultimately, the health of the customer is our health as well, and we want to make sure that the customer is -- we're providing the tools to the customer so they can optimize their profitability with generics as well.

We have over 100 manufacturers in the PRxO Gen program. We really do want to work with all of the manufacturers and try to stay with them, get into the -- get the information. We don't exclude. We try -- there are specialty people who work on special products, and we want to make sure that they're included in our portfolio. It is a little bit of a different kind of philosophy, but we do welcome multiple and do welcome all suppliers. Again, big part of the Prime Vendor Model.

So when we look at trying to put together a forecast for our generic launches, and this year being a big year for that, we try to assess all the various factors here. And we have a pretty good historical base, pretty good knowledge base within the organization of all those factors and try to assess them and apply them to the different products.

So first and foremost is the date of expiry. And of course, we always want it the sooner the better. Always good for us but obviously a key driver on when the product is going to be launched. The status of exclusivity. Exclusivity, generally a good thing for us, limited exclusivity period. The presence of an authorized generic in that launch. Most of the oral generics do have an authorized generics, certainly a lot of the big ones. Number of players expected, fewer being better. But also, who the players are is important, too, because that can speak to different market dynamics depending on who the players are in the launch of the product.

Of course, we look in the channel consideration, the presence and how much of the particular product is going through mail order, retail, hospital, office oncology. And obviously, our strengths in retail and oncology are things that favor us that are good for ABC. We -- then we try to draw -- look at the expected conversion rate. Conversion rate, also called the uptake, the kind of -- the scale-up here of generic conversion of the script -- of the scripted volume there.

We do have a pretty strong database of about 100-plus different launches that we've done in the fairly recent terms in the last few years that we try to parallel to see which these products look like to try to take an estimate at both conversion rate and also the pricing erosion scheme that's going to happen.

So we -- it's really more than just a wild guess here on what's going to happen. We do have a pretty solid database, and we do try to apply that to all of our products as we set the launch strategy forum. So obviously, a higher conversion rate, better thing for us. And percent of the price of the -- percent of the brand, also the higher the better is a good thing for us.

So a little bit of color on 2012. There's actually more than 34 product launches. These are the ones that we're tracking that are fairly significant, that we've got our eye on this year. Just as a point of reference. Normally, on a good year, it's about half that, that we launch. So this is a very active year in new product launches. Seven of those launches represents about 80% of the new product dollars that we have associated with it. None, no single 1 is bigger than 25% of the new products. And of course, everybody knows the 2 big ones which we've already launched, and I'll talk a little

[Audio Gap]

The next slide. 17 of these 34 that we're -- that we've targeted here have an exclusivity period.

All are predominantly -- this year are predominantly retail and mail order. 17 of those 34 have a large mail order presence. And, well, we defined it, and others can define it different, we define large mail order presence as greater than 25% of the script volume going through mail order. And of course, the relevance of all of that is that we don't get the mail order business when it goes generic. So that's an important component to us as well. And no single product represents greater than 2% of our -- of all of our generics. So I think that's an important thing to keep in mind, too, that while we're doing a lot of generics and we -- lot -- launching a lot of products, some very big, none of them represents more than 2% of our overall generics.

So let's talk real briefly here on the early read on the 2 big ones. Now when I -- when they -- I should underline early here because it is very early Zyprexa launched about 6 weeks ago. And Lipitor, we're not even 2 weeks really into it yet. So it's difficult to say. But Zyprexa, what we're seeing right now is very much of a normal generic launch pattern here. The conversion rates are coming in as expected. Price, about as expected. It's really not a very surprising Zyprexa -- or launch for Zyprexa. And coincidentally, Zyprexa is our biggest product that we're expecting to launch this year, at least within our system here.

Lipitor, there is concern here, even though it is very early on some of the generic -- the conversion rates that -- of the uptake of the generic. We know that Pfizer has been very aggressive in trying to protect their brand, and we know they've gone to PBMs and offered incentives to do that. What we're seeing in the early phases here is that it is affecting the uptake. I don't think it's as severe here, and it's -- but it's so early to tell that I -- I'm uncomfortable at this point saying too much about the numbers that we're seeing. But we would be looking at maybe about a 70% rate at this point in time, and I think we're seeing more along the lines of a 50% rate. And so it's early to say too much on how it's going to change, but that's what we're picking up on it.

So those 2 launches are crucial. But as I said, we do have 32 others. Actually, we've launched 3 of the 34 that we're tracking already. It's been a very active first quarter, and we expect that activity to continue.

In summary of issues, branded is always a very challenging environment, but we really like where that's going, and we like our value in the fee-for-service and the agreements and the ability to retain our value. And the generics growth continues to be robust. We're in a great position here, right customer mix. And the PRxO Gen program continues to be a very important part of our business.

So with that said, I'd like to turn it over to the guy you probably all want to hear here, which is Mike Dicandilo.

Michael D. Dicandilo

Thanks. Thanks, Tony, and good afternoon, everyone. And also, thanks to our whole team. I hope you learned a lot today. I always learn a lot listening to each of our business leaders. And I hope you get an appreciation of how active we are, how many initiatives we have going on and how talented the people that are driving those initiatives are.

Really, 2 things I wanted to do today: One is just refresh everybody on our business model and our success against that business model over the last several years particularly since we've been in the fee-for-service environment, and then really take some of the concepts we heard earlier and try to translate them into our guidance for fiscal '12 and break down that guidance a little bit by some of its drivers.

So let's start by just refreshing everybody on our long-term financial goals. If you have been following us for quite some time, the good news is those goals haven't changed. Our key goal is to drive EPS growth by 15%, and the key drivers behind EPS growth, we really refer to them as the 3 pillars of EPS growth, is really revenue growth with the market, operating margin expansion through product mix changes to higher profit products, as well as expense efficiency. And the combination of those 2 are designed to drive the operating income up into the high single digits to low double-digit range, and then accentuate that operating income growth with great cash generation that will turn into capital deployment, which will help accelerate EPS faster than operating income, and the good news as Steve has shown earlier is we've overachieved versus our goal over the last decade, growing at an average rate of 17% per year on EPS. And as Steve said, this is all on a GAAP basis.

Particularly I wanted to look at the last 5 years really since fiscal 2006 and that's really the fee-for-service era. And I want to focus on that because when we first entered into the fee-for-service era, there was a lot of concern that, that value wouldn't hold. And in fact, we've done even better than we've done over the 10-year period. And when you put on top of that the fact that the economic conditions have been so challenging in the U.S. in the last couple of years, it's really impressive. So how do we do it and how did some of those pillars look over that time period?

Really starting with a look at our top line. Our top line revenues grew 6%. So just keep that in mind. We grew revenue 16%, we grew EPS 19%. That 6% was higher than the market growth over that period. The U.S. market growth was in the 4% range, a percentage or so of that excess was due to the acquisitions we have made both in Canada during that timeframe and also in New York with our Bellco acquisition. And the other percentage point over market is really coming from our customer mix, the growth we've had in Specialty, the growth we've had with some of our largest customers. On top of that revenue growth, we've had a great success in growing our operating margin, one of our key metrics, one we've focused on. You've all heard how important each basis point is to us. And when you're doing $80 billion of revenue, each basis point for us is $8 million. And $8 million is almost $0.02 a share, about .75 percentage point of EPS growth. So we focus on this. I think the important point is we've had expansion in each of the last 6 years, at least 5 basis points, and we've had gross margin expansion in each of the last -- in each of the last 6 years. And that really reflects that generic trend that we've been talking about. Obviously, it's been accelerated in 2000 and -- 2010 and '11 with the specialty generics that James talked about. In addition, we continue to have great expense efficiency, not just by pushing more volume through our distribution centers, but also from some of those cross-company initiatives that we've talked about. So very good performance and we certainly look forward to continuing that as we go forward.

As well as the discipline on the operating margins side, we've had a great working capital efficiency in our business for quite some time. Our inventory days have sort of leveled out over the last couple of years in that 25-day range. That's very much a factor of what Tony said, the fact that we have essentially all of our branded manufacturers under contract and those inventory days were paid to keep very level. We can actually run our business with a lot fewer days, but we're often incented by the manufacturers to keep higher days in the channel.

From a DSO perspective, we've been helped by our customer mix, some of the bigger customers growing faster, but we've also just done an excellent job in managing our receivables throughout our organization. We've had some great progress, I think, in the Drug Company. We're at about 13 days right now versus 17 days overall in the Physician business. We've also come down over time and done a really good job in 2011. As Steve mentioned earlier, we just had a phenomenal year with working capital management in the Specialty Group.

So what happens when you're growing your operating income in the double digits and you're keeping your working capital flat and you're keeping your invested capital flat is that you drive a lot of shareholder value through increasing your returns on invested capital. And we have really, I think, differentiated ourselves versus our competitors with our performance on our return on invested capital basis, topping 19% in 2011, more than -- or just about double our weighted average cost of capital. So we have generated really, I think, superior returns and created a great value for all of you and ourselves. Certainly from a cash generation standpoint, this slide's a little bit busy, but it shows a couple of things. Our goal is for our free cash flow on an annual basis to approximate our net income, and that's very powerful because then we can redeploy that cash and help grow our business. And the yellow line here is our free cash flow over the last 6 years, and you can see it not just approximated net income, but it exceeded net income in every year over that time period. And in particularly in 2011, that's where some of that benefit from the working capital management in the Specialty Group helped us.

In addition, we had some good tax benefits from accelerated bonus depreciation, which helped us as well. And what that excess cash generation has allowed us to do is increase our returns to shareholders. We've done that through both increasing our dividend in each of the last 6 years over 25 per -- at least 25% each of those years, and obviously, we've had some significant share repurchases and the green bars here are the percentage of free cash flow we returned to shareholders over each of those last 6 years with the lowest year of returns being 60%. And even the lowest year being well in excess of our stated goal of at least 30%. So very, very good results.

So now let's turn to the historical performance to really drilling down on fiscal '12. And starting with our overall guidance, our guidance is for an EPS increase of 8% to 12%. EPS in the range of $2.74 to $2.84. That's in a very flat revenue environment, obviously with the generics, and I'll drill down on that a little bit more. Continue to have great operating margin expansion, really driven on the gross profit side in fiscal '12. Another solid free cash flow year with a goal of $700 million to $800 million worth of CapEx remaining in that $150 million range. And share repurchases assumed in our model of $400 million for the year.

So let's break down that 8% to 12% guidance into each of the 3 pillars and look at some of the drivers within each component, starting with the revenue growth. Obviously the market growth is going to be very flat next year because of all the generic launches that we've talked about. The good news for us is our Specialty Group is going to retain or is going to continue to grow very nicely, overcoming the anniversary of the 3PL customer from last year.

We're going to be impacted some by the slowing growth of our largest customer and also the CVS Longs business which ended in September of '11. But overall, we're going to be right there with the market.

Margin expansion, no secret from what you've heard today. It's going to be driven by generics on the oral solid side in the Drug Company. They're going to be a substantial offset to the headwind that we have on the Specialty side, and I'll detail that for everyone in a couple of moments. From an expense standpoint, we were going grow expenses in the 3% range next year, which is slightly higher than the revenues. But most of that is attributed to the acquisitions, particularly of TheraCom, which Peyton talked about and also some of the investment we're doing up in Canada.

From a cash deployment perspective, our share repurchases of $400 million in combination with some of the repurchasing we did late in last fiscal year are going to help drive our shares down 5%. Obviously, some option exercises are going to offset that in about 1% impact. And also our interest expense is going to be up year-over-year. We went out to the market early in the year. We secured a very good rate as Steve said 3.5% for a $500 million offering, and we'll use that to pay back some debt that's coming due later in the year.

One other note I would make about the EPS growth is as I said on our earnings call, probably our easiest comparison is really in the fourth quarter, and that's for 2 reasons. One is we had some high expenses in the fourth quarter of last year that were somewhat one-time in nature. In addition, the specialty generics impacted the second and the third quarters the most in fiscal '10 and moderated a bit in the fourth quarter. So we have less of a generic comparison as we get later in the year.

So let's just drill down and remind everybody the impact of the specialty generics that we've talked about. We just had a phenomenal year in fiscal '11. James executed very, very well. And the 3 products together contributed about $0.48 to our EPS in fiscal '11. Obviously, with oxaliplatin off the market until in August of '12 and the moderation as docetaxel and gemcitabine age after their introductions, we're going to have much reduced impact from those 3. $0.14 to $0.15 is our estimate for the year, which leaves us with a $0.33 or $0.34 headwind going into this year. Put that in perspective, that's 13% of EPS. The good news obviously is we've got the oral solid launches which we are going to provide a very significant offset to that specialty headwind. I think Tony detailed out some of the individual contributors there. Again, important to note that the largest of those oral solids is only 25% of the expected benefit for this year, and that was Zyprexa which has already launched. So we continue to look for that offset and really growth in our generic program from a compliant standpoint even beyond just the benefit of the new launches in fiscal '12.

The only thing I like to do each year at Investor Day is just kind of break down the components of our business from a relative size standpoint, from a revenue growth and also from an operating margin that give you a little a little bit more flavor on each of our business units, starting with the Drug Company. It remains about 80% of our business. Again their growth is going to be flattish this year. But with the generic benefit, that margin range is going to be in the $1.43 to $1.47 range, which if you compare to where it was last year is well over 20 basis points ahead of the targets we gave you last year. So you're seeing, once again, the real power of that generic wave.

The specialty side, we remain just under 20% of the total business back to more normalized growth in that 5% to 6% range, with a margin range of 195 to 205 basis points, which is somewhat lower than last year, again reflecting the moderation from the 3 big generics. The consulting group is not really apples to apples to what we showed last year. It reflects a moving part of that Packaging Group in. As Peyton detailed, it also reflects the acquisitions of Premier Source and TheraCom. And as Peyton mentioned, the TheraCom acquisition has a distribution component, so it's helped accelerate the revenues. The revenues are going to be well above 1% of our total revenues and provide a lot of our revenue growth this year, and it's going to moderate the overall operating margin of that unit, which is usually well above 10%, reflecting that distribution business. So 5% to 6%.

So if you put that all together and you have margin expansion in the high single digits, 7 basis points to 12 basis point range, 157 to 162 versus the 150 we ended fiscal '11 with.

So let's move to capital deployment and talk about what we have available and what we have committed to already what you can expect. You know, we continue to start with a very robust cash balance of $1.8 billion. We expect, as I said earlier, to continue to generate cash from operations this year with free cash flow in the $700 million to $800 million range, and obviously we raised money from our debt offering. Keep in mind that every day, we like to have about $0.5 billion on hand just to operate our business. So you have to kind of put that aside and when you do that, we've got available for business, available for investment of about $2.5 billion. Certainly I mentioned the share repurchase, where we expect to spend $400 million. Dividends are going to be another $130 million. We're going to pay back the debt that's coming due in September, which is another $400 million, and we've already paid for the TheraCom acquisition early in November.

And that leaves us with a substantial amount of cash over $1 billion, $1.3 billion to $1.4 billion for continued investments. So we call that significant financial flexibility. And I've been asked to define what does financial flexibility mean? And I think it means 2 things. One, it means we've got a great balance sheet. It means we've got great access to capital, both on a long-term basis by being a solid investment-grade company that can raise money very quickly at a very low cost and also have a very ample liquidity on a short-term basis to make short-term decisions that benefit our company. And I use the purchase of the oxaliplatin inventory when we had the opportunity as a good example of that.

In addition, it's a company that's going to continue to have strong operating cash flow, and when you put all of those things together, it means we can both grow the company, make the right strategic acquisitions and also be able to return monies to shareholders, so that we can differentiate our returns to you. So we're very happy with how our balance sheet looks right now and with the prospects for that flexibility going forward.

So let me just wrap up by saying, we have been a great performer over a long period of time. We're very proud of that, very excited about that, but we continue to look forward, and we want to make sure we continue that performance as we look forward. '11 was even better than we expected. As Steve said, we met or exceeded each of our financial metrics that we put out at the beginning of the year. It looked like it was going to be a pretty tough year and we really hit a home run in '11. Of course, that makes '12 more challenging, and we do have that challenge with the 13% headwind, but as we've talked about, we've got the right opportunities and the Drug Company from a generic perspective and the right people to execute them. And certainly, we've got the ability to pull the right triggers if we need to from a cash standpoint. So we're very, very excited about our prospects going forward. We thank you for being here today to hear from our business leaders. And with that, I'm going to turn it over to Steve Collis to head up some Q&A.

Steven H. Collis

Thank you, Mike, and thank you very much, everyone, for your attention. I think we haven't acknowledged the folks out there listening on the webisode. We do very much appreciate your attention. I will tell you that the audience here has been terrific, very little Blackberry participation and iPad participation and a lot of listening. So we do very much appreciate that. And I just -- when you ask a question, please say your name and speak into the microphone so the people on the webisode can hear as well.

Question-and-Answer Session

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

John Ransom, Raymond James. Two things. If Lipitor stays at the 50% conversion, does that make any adjustment to your financial targets for the year, number one. And number two, could you remind us what the specialty revenues are the last couple of years on a reclassified basis. It seems like it's kind of been in that $16 billion to $17 billion range, but I don't know what the adjustments are.

Steven H. Collis

I'll start off. I may direct it to Tony. I mean, we do have 8% to 12% guidance. As we said, Zyprexa was the most important product for us this year. So within that 8% to 12%, some things gives us a little bit of flexibility if some things don't go wrong. But Michael might talk to you and on the specialty side, we have been very much impacted by the loss of the direct contract we had on one product line with U.S. Oncology, and we can talk -- Mike, you want to start off with you and maybe direct it to others?

Michael D. Dicandilo

Well, sure. John, I agree. Keep in mind, we said no one product is more than 25% of the gap we're trying to fill, which is 33% to 34%. So if you do the math there and you'd say, Boy, if one product is off by $0.20 or $0.30 from -- or 20% to 30% from your projection, it's not going to have a big impact on us for the year. But it could be a couple of pennies or so within the range that we have. From the Specialty, again, keep in mind that from past years, we've split out the consulting group when you go back a couple of years, which took that $0.5 billion or so prior to our acquisitions out of that historic number. And obviously, we had the loss of the 3PL customer that impacted the growth last year, but again, we expect to be back into that 5% to 6% growth range as we go forward.

Steven H. Collis

Tony, anything to add?

Antonio R. Pera

No, no. That was...

Lawrence C. Marsh - Barclays Capital, Research Division

So just a couple of things I wanted to follow up with Mr. Ransom 's question. So if you think about most of Lipitor, majority of Lipitor for you goes through mail, so you really don't impact that, how do you bracket the opportunities. That practically is your biggest single opportunity, do you think of Lipitor a little bit below that or is it about the same level or how do you think of that? And then along with that, just an elaboration of why you're so committed to the broadened supplier network with ProGeneric's given some of your competitor strategies, and then a quick follow up on that.

Steven H. Collis

You want to start off, Mike?

Michael D. Dicandilo

Well, I'll just start off by saying it is below Zyprexa. That is the -- Lipitor's contribution is expected to be below what we have for Zyprexa, which again is the largest one we have this year is the one that's close to 25% of the contribution.

Lawrence C. Marsh - Barclays Capital, Research Division

So are you willing to say how much below it is? Or just doesn't...

Michael D. Dicandilo

No, I think it's lower, Larry. Again, we got 25% is a $0.085 of what we've said the gap was that we are contributing. So it is obviously less than that for the whole year, so if you're off a small percent, it's off of a $0.07 or $0.08 type of number.

Steven H. Collis

First of all, it's such a high profile product, $10.5 billion product. I mean, I think the general press is following this almost as closely as they're following the Republican Convention. It's an unusual product, and obviously the incumbent manufacturer has not had an authorized generic, which is unusual. We're working through it. It's not something that we think is a trend that's in the benefit of our customers, and we've been very communicative about that. And we think that everyone's interests are best served by the ability to dispense the generic, which is the accepted model and the model that's proved to be very efficient and very economical for patients. So that's where we are and we will see how this all plays out, but it's very early days about, what is it, about 2 weeks, and we're monitoring it closely. But again, the reason it wasn't our biggest drug, even though it's the biggest drug in the industry, was because it's very much of a maintenance and mail-order drug.

Lawrence C. Marsh - Barclays Capital, Research Division

The second part was -- Tony.

Antonio R. Pera

The second part was, really -- it really is a philosophical thing with some of the small manufacturers. Fact is, looking at hindsight as to that philosophy, we have a few manufacturers right now that we work with that were small, that brought some unique value to the table back then. They are some of the most reliable suppliers right now. We think an exclusion strategy of manufacturers doesn't benefit us in the long run, and, of course, we work with the majors. But we also want to cultivate some smaller manufacturers as well and certainly not exclude them and give them a shot at our business as well. And I think it makes for a healthier industry, and I think from our standpoint, we have found some great value in some of the small manufacturers, unique capabilities, uniques products.

Lawrence C. Marsh - Barclays Capital, Research Division

A quick follow up. Since Dicandilo made the right choice and gave up baseball to become the CFO of AmerisourceBergen, I'm going to use an analogy here. If you think about somewhere in the future, if you feel like AmerisourceBergen has a maximum market share with their customers in a fully penetrated generic market somewhere in the future, and that represents the ninth inning of a ninth inning game in generics, what inning are we in today? What inning are we in for fiscal '12 for you guys as you see it?

Steven H. Collis

Is your question what inning -- what inning are we in with generics?

Lawrence C. Marsh - Barclays Capital, Research Division

Yes, that's right.

Steven H. Collis

I think the second best show we're going to have in generics is 2014, right? 2013 is just under $10 billion. So I think we're going to have lots of opportunities. We're going to have to the biosimilars. I mean, a lot of the products that I was around when we launched in the specialty business are going to come out. So we think there's a lot of room still there. We're looking forward to new brands being introduced in 10 or 15 years time. Our successor will be dealing with those generic launches, but I can see Mike is dying to jump in here, so...

Michael D. Dicandilo

I was just trying to figure out which sports you were following. But I'd say, Larry, you're certainly in the middle innings here. We've got plenty of room to continue to grow. Generics, as Steve said, some of the higher value ones are not even out yet. So we're going to have some big years as we go out through '13, '14, '15 and beyond as biosimilars start to kick in. So I've always said we love an environment where the size of our organization and the scale that we have is meaningful in the marketplace, and that is most meaningful in a generic marketplace. So we're very excited about the continued prevalence of generics.

Robert C. Jones - Goldman Sachs Asset Management, L.P.

Bob Jones, Goldman Sachs. When we talk about Specialty, we spend a lot of time talking about Specialty generics. I was wondering if maybe you guys can talk a little bit about the Specialty branded market. There's other supply chain participants who obviously can see that the market is going to grow double digits for the foreseeable future. I'm just wondering how you guys view that relative to AmerisourceBergen Specialty growth?

Steven H. Collis

Well, I might start off, Bob. Thanks for the question and one of the things in James' presentation when he talked about the study that was done in Specialty distribution at about $15.5 billion that was defined as a $26 billion industry. So we do define that industry. I think if you talk to our people, if you talk to our customers, there is no tiring of AmerisourceBergen. We keep on refreshing the portfolio. We've retained the leadership position particularly on oncology, blood products derivative. Blood products, we're getting to new areas like ophthalmology very effectively. We have a great services portfolio. So we don't intend to surrender anything there. We think that our competitors spent literally billions of dollars trying to catch up to what we both mainly organically. So this is not a platform that we are going to rest on our laurels on. What did Andy Grove say? Only the paranoid -- We're paranoid about our position. We want to maintain it. In fact, we want to enhance it. And James is certainly doing that.

James D. Frary

I appreciate the question. I think -- I mean, the pipeline from a manufacture perspective is the strongest on Oncology, so we do expect to see great brand of products come to market, and we've seen that with innovative therapies. Typically, they're more targeted. We've seen some personalized therapies come out, therapies with companion diagnostics and so forth. So a very high price point targeted therapies in the pipeline. We also see a pretty strong pipeline for competing products. They are not biosimilars, but they are multisource products and big, big categories where you have blockbuster biologics and other important products. So we think it's a robust pipeline from an Oncology perspective. I think from a growth in definition standpoint, research reports are all over that map. How they define Specialty and what growth forecasts they sort of read into that pipeline, but I would think we're comfortable with the direction that Mike sort of laid out there in the mid single-digit range and we continue think it's going to be a very attractive space.

Steven H. Collis

I mean, if you think about the prescription industry in the U.S. and you think about how AmerisourceBergen is positioned, the 2 most interesting areas and the very low cost prescriptions or generics, which we've talked a lot about what a great position we have there. And then on the branded side, the very extensive really biotech products with a small patient population. The niche position treated areas, as well as say, the oral oncology drugs. And again, we have an excellent franchise there that everyone covered. So again whatever way you look in terms of where the markets, the dynamic components of the market are, AmerisourceBergen is really well positioned.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Just a quick follow up. I know last year's presentation focused a lot on tearing down the walls of AmerisourceBergen, and I think Dave talked a little bit some of things we're seeing in the Drug Company around that. Are there any other specific examples you can share about where you have leveraged the Specialty business into the Drug business or vice versa, or even some of the other ancillary businesses across those 2 platforms?

Steven H. Collis

Well, we absolutely do think about the business from a holistic point of view. I mean, $300 billion-odd pharmaceutical industry, $65 billion is in the Specialty area of which we talked about, $26 billion approximately in that Specialty distribution, but the Specialty retail area is also very, very important. Almost every customer of ours is interested in that area. They want to have that discussion. They acknowledge their expertise. I think from the manufacture perspective, they recognize the expertise that we have. They very much often want a limited distribution options, want to look at companies like AmerisourceBergen that understand their product requirements, that have the reimbursement expertise, that can do the compliance consistency programs that can potentially manage a REMS program. So we have really built our portfolio around managing these products, and that products are becoming more and more mainstream, and the retail pharmacies are interested in that, the mail-order pharmacies are interested in that. The ultimate site institutional pharmacy customers are all very interested in that, but I might ask our team, starting with Peyton, I can see she wants to talk here.

Peyton R. Howell

I mean, I think I probably have the most examples of tearing down the walls this year because I've benefited from help from the other business units significantly. With the TheraCom acquisition, James' leadership team played a critical role in a lot of the due diligence, but also already now on the integration. We also have a number of programs for some of those branded specialty launches that you were just asking about where in fact James' businesses like a best-team [ph] medical are positioned in a preferred distribution position. And then my companies are actually running the launch and all the reimbursement services that we're working hand-in-hand on those. And also in Canada, we've had some unique consulting opportunities with Canada, and we've been working really as one. To be honest with you, we think of them frankly as part of our team. And same with IntrinsiQ, they bring us new data, and we've got a team to really help analyze that data in unique customized ways.

James D. Frary

Yes. I would add one additional area, which is the hospital space, and we've been working with a number areas in the Drug Company. They've got very deep knowledge there, very deep knowledge in the Specialty Group. And so bringing those groups together. One area is hospital collaboration and trying to help independent physician practices and hospitals to integrate systems, collaborate, again to put quality care initiatives has been a great area of collaboration for us.

Unknown Executive

I think outside of the tactics, I think a big part of this is the org [ph] Design. James worked in the Drug Company. So just move over to Specialty, just add a little bit different dimension about when we talk about an opportunity and have to marshal resources, whether it's Specialty or Drug, it lands very different in the organization. So whether we're talking about bringing in a consulting group or Peyton is giving us some perspective with a large customer on reimbursement and how we think about that, that's a significant difference for us over the last 2 years.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Tom Gallucci from Lazard. Cash, I guess, you mentioned before, not really necessarily looking to be a lot more aggressive with on acquisition front, but it still sounds like opportunistic. Mike highlighted maybe $1.3 billion or $1.4 billion of availability for sort of "further investment." Can you give us an idea, if you don't find acquisitions, are buybacks really the other primary use and sort of what's your sense of urgency, I guess, to use that capital versus letting it grow in the balance sheet?

Steven H. Collis

Well, we don't have a sense of urgency. I mean, even in talking about this with our Board the last -- the last couple of weeks, I mean a lot of them have been around a lot longer than I have, and they seen different economic times and they're encouraging us to maintain flexibility. I mean you never know what opportunities might come up and we want to be very available if great opportunities come up. But we don't feel any urgency at all. I think there has been some opportunities that came up. We've talked about TheraCom not being expected to come up for sale, but when it did, we were there, we were ready to act and certainly had the financial flexibility to do it. We've had this great experience in Canada as we've said with buying 2 relatively small specialty businesses bringing them together, using the expertise we have in the states. So those are the sort of things that we're interested in. But we certainly don't get any urgency to do accelerated buybacks or acquisitions. But markets are balance sheet architects, if you want to.

Michael D. Dicandilo

Tom, I think history serves as a pretty good guide here to the extent we don't add value-adding acquisitions or we don't spend the cash there. I think we have shown a pretty consistent history of upping our returns to shareholders. I think you'll continue to see us over time raise the dividend in line with our earnings growth. In addition to that, we certainly have the ability to upsize our share repurchases if we don't find those good growth opportunities. But certainly that remains. Our goal is to continue to grow the company, look for the right opportunities and be disciplined about it and make sure as we have in the past that we do maintain that discipline. If not, we'll opt to return to shareholders.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

The other one, real quick, is more of a housekeeping item. If I recall correctly, consulting margins in the past may have been shown to be higher that where you showed them today, was that from acquisitions coming down if I remember correctly or were there other things in the mix that we should talk about?

Michael D. Dicandilo

No, no. It's very plainly the impact of the TheraCom acquisition. It added over $600 million of revenues. A good proportion of that is the distribution news, which are distribution margins. So you probably have half of the revenues now in consulting at the traditional 10% plus margins in half the business and in distribution with the normalized distribution margin. So that's solely the impact there, the business, consulting business remains very robust and very profitable for us.

David Larsen - Leerink Swann LLC, Research Division

Dave Larsen with Leerink Swann. Given the sort of a late last minute launch of generic repertoire with Ranbaxy and the PBMs clearly stating that as of '12, they would do whatever is sort of best in terms of cost for their clients. Isn't it possible that you'll see generic Lipitor uptick a lot in 2012 relative to the past couple of weeks?

Steven H. Collis

Sorry, I was having trouble. So you were asking about is there a possibility that generic Lipitor uptake would change in the next couple of weeks?

David Larsen - Leerink Swann LLC, Research Division

In 2012 mainly because of the last minute launch by Ranbaxy, since we're sort of unclear what they were going to do and the PBMs have said that they'll do whatever is best for their clients in terms of cost.

Steven H. Collis

We certainly think that, that it's only been 2 weeks that certainly that the brands that if we're focusing on our 50% that, that is probably as high as it's going to get. It probably will switch. And it certainly as the 6-month exclusivity period ends, that could change very significantly. But as we said, it's still early days and it's a significant product to us, but it's not the most significant product. Tony, you want to comment?

Antonio R. Pera

Yes. I'm very certain again in '12 that after the 6-month exclusivity, that will -- the dynamics will change. What happens between now and that period is still up in the air, and that we'll see how this one plays out.

David Larsen - Leerink Swann LLC, Research Division

Okay. And then in terms of cross-selling opportunities like Drug Company to Specialty and Specialty to Drug Company. Can you put any numbers around sort of what the opportunity is there, like what percentage of your Drug Company customers are Specialty customers and vice versa?

Steven H. Collis

We have some customers that -- one of the things about Specialty from a distribution perspective, we really have centralized warehousing, so a lot of customers like that even if they are national customers. We have other customers that really like the local service model. They'd like to use all 26 distribution centers. We also obviously have the therapeutic areas, most notably oncology, IVIG, blood plasma that gets serviced in our Specialty warehouses. There is a crossover with over 20% of the business now being characterized with Specialty products. There is definitely a crossover. We have our largest account that is run very strongly in the Specialty area, but we don't really look on it as that strictly. I think one of the things that is interesting is, as we do have some health systems customers and we have about 1/3 of that market as they acquire physicians' offices, we look to give them the benefit of our specialty experience, including some of the contracts that we have. So we're working on a couple of case studies right now. We could probably update you more next year. I think it is going to be more interesting to show you how we're dealing with that. And we have a lot of big health system customers that say, I'm going to be part of an accountable care organization or I have to have a medical home strategy. I don't necessarily want to buy an oncologist, but how do I partner with them better? So we're working with those sort of accounts. We've got a couple of interesting pilots going on. Again, James' knowledge of the drug distribution core business has been very helpful. Peyton's knowledge comes to bear here, and we're working on the holistic approach to the customers. So that's a lot of what you heard today, but I don't think anyone else in the panel has anything to add.

Antonio R. Pera

I'll add just maybe one dimension to that. I think there's a difference between cross-selling and using those assets for each company to do a better job, right? So for the drug company to have utilization of specialty assets to do a better job with their growth they're targeting within their business segment, I think is an important distinction as opposed to we're doing the cross-selling and looking for ways where we supplement. Are we taking something away or we adding to? So I think that right now we're very much focused on enhancing each other's business.

Unknown Executive

On the cross-selling side, we've got resource community practices as a sort of vertical, but specialty products that go in all classes of trade, in particular blood products and vaccines. We certainly have an overlap there, and the sales teams do work together when they spot opportunities to really grow our business with those customers. So it would really overlap with anybody buying vaccines which is a majority of our Good Neighbor Pharmacies, for example, anybody buying blood products which would be our hospitals. So there's a good integration there as well.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Two questions. First on the VA contracts. You didn't say anything today, so I assume there's no update. But I wondered if I could get you to comment -- my understanding is the bids are in and they're not likely to be changed. If we can dream here, if you were to win the contract, would that change your 2012 guidance materially?

Steven H. Collis

Well, I think that if we did win it, we'd be very happy to win it. We certainly -- we have an expression in the Drug Company that we coin, called play-to-win and we certainly did bid responsibly, but we'd very much like to have that customer. We think it's a sort of customer that ABC does very well with, that we'd very much enjoy to have in our portfolio -- is unique. A lot of large customers don't come up to bid because they're so integrated with the wholesaler. So this is unique that it does contract from regulatory point of view. We had to come up to bid every 8 years. It would be probably too late in our fiscal year '12. It would definitely impact fiscal year '13, and we -- I think it would just be really the fourth quarter that it would impact from our fiscal year if we were successfully winning it, A.J.

Antonio R. Pera

Well, it would. And I think the other piece is whether or not they go to the last and final. And so then do they stay with the same date or is that pushed back couple of months and then does it hit '12 or does it get right up against back into '12? So I think there's quite few variables.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just the other question. Thanks for all the commentary about the guidance. What about the ERP rollout? How does that impact your results this year versus last year? Can you just remind us on that and then maybe even give us a little flavor for 2013 and what the likely impact would be?

Michael D. Dicandilo

Sure, A.J. From the ERP spend as we said in fiscal '11, we had about $40 million of incremental spend from maintaining the 2 systems. That spend is going to continue in fiscal '12. We're going to have roughly the same $40 million, but the difference is it's not incremental over '11. It's not providing any headwind. It's just continuing. I think the other change from '11 to '12 is we're really done, the large majority of the development which really drove the capital expenditures on the ERP project. So the capital spend as far as the ERP project is going to drop tremendously year-to-year from '11 to '12. Some of that gets picked up in some of the other initiatives we talked about like the Canadian build-out, like the expansion in New York. So more of the CapEx this year will be bricks and mortars than pure ERP development costs.

Jonathan B. Green - Murphy & Durieu, L.P., Research Division

Jon Green with Murphy & Durieu. I just want to ask a question about your Good Neighbor Pharmacy network in light of the potential PBM merger. It seems like if you listen to everything that the community and independent pharmacists are saying, this could be the worst thing that ever happened. It seems like a great opportunity to sell everybody that's not currently part of that network on becoming part of the third largest pharmacy network in the country as a way to help navigate that potential merger. Are you seeing increased activity on that front or are you -- do you have an effort to try to take advantage of that situation?

Antonio R. Pera

John, that is exactly what's happening. Our call desk -- we've got a help desk that manages the third-party network in Orange, California, and their call volume has gone up about 40%, not surprising. I think, though, it does really raise some interesting opportunities for the Drug Company about how we think not just the numbers of people in the network, but what we do with that. We do have a unique position with the network because we do have agreements with all those pharmacies that we contract for them on their behalf. So the structural piece gives us some unique channel leverage. I think we're thinking through this as everyone is kind of looking at potential scenarios.

Steven H. Collis

Yes, I think the Good Neighbor Pharmacy is clearly one of the crown jewels of AmerisourceBergen. And it's very interesting to have Dave who probably really founded [ph] In a way the Good Neighbor Pharmacy network as a present of Drug Company. But the same as with community oncologists, same as with specialty, we're only adding to our capabilities there. We think it's a really important lever for us going forward. So great question.

Steven H. Collis

For those of you out in the webisodes, we're having a rash of questions here, it's very exciting. We thought everyone wanted to head for the door at 3:30, but there's a lot of questions.

Steven Valiquette - UBS Investment Bank, Research Division

Steven Valiquette from UBS. You guys mentioned earlier the ongoing supply shortages for generics overall, and just curious, has that intensified or moderated over the past 6 months or so, kind of where does that stand right now as far as a tailwind for you guys?

Steven H. Collis

It's certainly not something that we want to see continue. We think it's certain, it's an outpour, an outcome of -- probably all the generic opportunities, I think manufacturers are rationalizing the portfolio. There's also been a lot of consolidation so a lot of the capabilities to manufacture injectables are raising in just a few facilities and some of those have had problems. But the market described Tony as the man who invented generic injectable industry. I wouldn't say quite that way, but...

Antonio R. Pera

The shortages have gotten a little bit worse, hard to say especially in the injectable business and in the recent couple of months. But it's still -- it's been bad and it continues to be bad. So I don't know. And based on people I've talked to and just the outlook here, I don't know when we're going to see a really fundamental end in sight here where we see an end in these injectable generic shortages. Shortages on the oral side come and go and there's been a few here and there, but this injectable and particularly in some of the oncology products has been chronic. And I just don't see an end in sight with the various regulatory actions that are happening, and I just -- I don't see it.

Unknown Analyst

It's very early in the game, but can you discuss from your close relationships with manufacturers, biosimilars and how you see the economics of that as we go out to '14, '15? Do you foresee it being like the generic chemotherapy drugs where you have in years that maybe a bulk of them come on, a nice boost to earnings or just what are your thoughts on that so far?

Steven H. Collis

We have an very interesting event this summer that James and Tony and myself actually went to visit a couple of biosimilar plants in Europe, and what was really interesting was the sophistication in the manufacturing process, the huge capital investment that was needed. So we look at biosimilars and they're going to be similar, so I think there's going to be a lot of work that needs to be done on the contracting side, on the product launch support, on the physician education side, and the capabilities of AmerisourceBergen really come into play here, reimbursement, et cetera. We also focus on the policy side on making sure that manufacturers have the right environment for reimbursement for these products. What's the J code going to be, et cetera? We do think that these products would be somewhere in the range of 60% to 80% of what the brand would be and not much less than that. And we think that they're going to have acceptance. I think the market is going to be receptive to them and we think that we're going to have a great chance to introduce new products, new manufacturers through our customer base and do very, very well on that. So that's our hypothesis. I mean, Peyton, James, anything you want to add?

Peyton R. Howell

No. I think that's consistent.

James D. Frary

Yes. And I think both businesses have an opportunity here with the services side. Before generics, Specialty group has been very successful in creating value on branded products, and we view this as being really using the maximum of our portfolio, these biosimilars not like a generic in terms of AB -- perfect substitution but really accessing everything that we offer manufacturers.

Unknown Analyst

This is a question for James related to Slide 29. Maybe could you just talk about how the environment has changed and where you see us evolving both in terms of the shift that you mentioned towards more hospital ownership of practices, U.S. Oncology, and maybe any changes with respect to coverage under the medical versus the pharmacy?

James D. Frary

That is a broad question. I think that environment is -- there are certainly challenges. I mean the reimbursement pressures are significant for private practices. There have been a number of different types of legislation that have been proposed on ASP reimbursement. And we watch that very closely for our customers and also because we think community oncology is the right side of care. We want to make sure that the incentives are there to provide high-quality access to patients. So that's a very important issue for us. So from a landscape perspective, we've seen the numbers that I showed are showing at about 3%. It's really increased over time about 3% of practices per year, moving under hospital ownership. And I will say, though, I mean in all honesty, we increasingly hear from our hospital customers, the big, sophisticated hospital customers that they're looking more now toward collaboration integration as opposed to ownership. That they don't necessarily see the synergies there, but the need for integration is very important especially as we move into health reform accountable care organizations and all of that. So I think we're well positioned to help with that given our presence in community practices as well as the hospital business. We see both sides coming to us and looking for help there. So I think it's -- there are some positive trends from our perspective outside of the reimbursement issue, and we're certainly advocating on that. From Part B pharmacy perspective, we haven't actually seen a whole lot of movement on that. There's certainly been a lot of talk over the years about it, but it continues to be very effective Part B. Like we said, in terms of reducing cost, there are more studies coming out all the time about the efficiency that is created under Part B in the private practice arena. And we do feel like it's the right side of care, it's the right approach for that, that being said, private payers are experimenting with innovative payment models to try to get at what's a perceived incentive issue. And so we're certainly helping be a thought partner with our physicians in terms of how they can impact quality, how they can impact cost and what different types of payment models they might be able to work with them.

Steven H. Collis

I think we got Ricky at the back.

Ricky Goldwasser - Morgan Stanley, Research Division

A couple of questions. The first one going back to Pfizer and their very unique strategy around Lipitor. So when you look ahead in the next couple of years, do you think that there are other manufacturers that might follow Pfizer's strategy?

Steven H. Collis

We think really that Lipitor is very unique, again because it's got such a -- it's such a big maintenance drug. Just the very size of it, the fact that it was not an authorized generic. And certainly I think that the dispensers and regulators potentially could be very interested in how this goes and might have some say on what happens to future launches. Again, it's very, very early. AmerisourceBergen's position, I think, our industry position should be that we are in favor of the dispensers having the ability to dispense the generics and that there shouldn't be any curtailment or limitations put on that, but anyone else have any comments?

Antonio R. Pera

I think that authorized generic, what you said -- there was an authorized generic, but it was as a result of the litigation. It wasn't their own. I think the market dynamics, I think, would have been different if they had -- it was under their authorized generic or with somebody that they regularly partner with. I think that was a big nuance here, too, in addition to what Steve is saying.

Steven H. Collis

And in addition to the fact, there was uncertainty about Ranbaxy's -- there was going to be a second generic manufacture. So a lot of very unique circumstances, but we certainly are -- we're taking note and I'm sure other manufacturers will take note, but we think that this is very much a unique model, what follows [ph] we have no idea. Did you say another question?

Ricky Goldwasser - Morgan Stanley, Research Division

Yes. The second question, when you go through the presentation, you talked a lot about the potential reimbursement pressure that your customers are going to see in the future and how you need to provide more value. And I assume that at the same time, you also will need to lower your acquisition cost to deal with these cost pressures. So can you talk through a little bit about how you -- would you consider going more upstream in your sourcing, how do you think about private label and how would these kind of strategies would compare in terms of potential savings compared to how you source today?

Steven H. Collis

Well, certainly our reimbursement often it's a lot, what we've said all along, it's very important for us to understand the reimbursement environment, at least the regulatory environment. We've seen different models overseas where direct to pharmacy model in Europe has become very prevalent. I think a lot of that has been driven by reimbursement and by relationships with manufacturers. We would do -- we would certainly look at anything that's ethical, that's legal, that in the interest of our customers, that's going to drive value for our shareholders in the long term. So right now, we don't have anything clear on the horizon, but if we need to go to a more direct sourcing strategy, I suppose that, that is something that we could look at. So we do, I think we've been very creative. Maybe we don't get enough credit for how creative we've been on the sourcing side. Tony's group is in India. We had 2 of Tony's key guys tell me that they've got these ironclad stomachs now from all the traveling they've been doing in the parts of the world that you don't have the sort of food that we are eating for lunch today. So we have been, I think, a lot more broad in our supply strategy than people realize. We have the capability to inspect a lot of these plants and make sure that the new manufacturers that we're working with have the quality, but I think it's an excellent question and certainly something that we would do the right thing. I mean Tony wanted to...

Antonio R. Pera

You should note we are in private label right now certainly in the OTC segment, and certainly with the American Health Packaging with the unit dose area. So we do have a private label presence right now in those areas. It's certainly not a construct or something that we are out of or anything.

Steven H. Collis

But we don't think we're being significantly disadvantaged today under current reimbursement rules or current generic economics are not having our own label of generics. We don't believe that right now.

Unknown Analyst

[indiscernible] from not drawing revenue from branded drug manufacturers. Is there any risk there or how we should we think about that? What's the loss from the manufacturer agreement?

Steven H. Collis

Well, our strategy is really, and I think we've hit on it a couple of times, is really to replace the gross profit dollars on a more expensive [indiscernible] Items through the value-added service that we provide, the generic manufacturers and I think we have been very successful about that. Having said that, it's very, very important for us for our industry that the carry-on being new brand drugs. We want to see that -- we want to see the Pfizers of the world not focus on keeping their Lipitor poster generic launch. We want to see them focused on launching new drugs. We think that, that [indiscernible] best served and where the patients are best served and where the industry is best served. We look at where manufacturers are investing their R&D dollars. It's limited patient population often physician-administered specialty drugs, higher cost therapies that really are differentiated from a value perspective. That's where a lot of our consulting services come in. That's where our niche distribution capabilities come in. So we do think that the brand manufacturers are critical to our future, and we hope that they think that we're critical to theirs. We certainly do think that. And I think we've been very successful with the people services negotiations. We haven't taken any haircuts. There've been tremendous mergers on the branded side and yet we've maintained, if not enhanced, the value of all our people service contracts. Last question today.

Unknown Analyst

We talked a lot about the opportunity with biosimilars. Maybe can you just discuss sort of what you are hearing in Washington right now in terms of the FDA's progress in creating a framework for those drugs to launch? And you just mentioned going over Europe and visiting some manufacturers, is there any talk that you're hearing that some of the data you used for those launches, the FDA will accept that or are we running down the path where manufacturers will have to really do clinical trials to get their products to market?

Steven H. Collis

What I think -- I'll just make one quick comment and then I'll probably get Peyton to wrap up here. But one of the things that we -- that these products are safe. They're already being used in other parts of the world, you know? Not only Europe but in Asia. So these products are safe and this is such an international business that I think that the regulators probably would pay attention to what some of the data shows in other countries. But, Peyton, we don't get enough of Peyton because not only does she run theses businesses, but she spends a lot of time in Washington with regulators. So do you want to comment?

Peyton R. Howell

Well certainly in Washington, there's a lot of interest in biosimilars moving forward. But you're right, we haven't heard of a regulatory timetable for that next phase. I think a lot of people are assuming probably what you've heard as well that we'll see something in more detail in terms of guidance next year. There's a PDUFA reauthorization, as you know that's due. So that's a legislative vehicle for a lot of things to happen in Washington. But right now, not a lot is getting done in Washington, so I think the timetable is still unclear. But certainly James' business, in particular, is very well positioned for when this timetable moves forward.

Steven H. Collis

With that, I think we'll conclude. Again we thank everyone for your patience. We thank you for the interest. We really appreciate all the questions and all of you hanging in with us. Hopefully, you see that this is a great industry to invest in and in particular, to invest in AmerisourceBergen due to the strong offering and the strong capabilities that you saw on display here today. Thank you very much, everyone. Happy holidays to you all.

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