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AmerisourceBergen (NYSE:ABC)

Q1 2012 Earnings Call

January 26, 2012 11:00 am ET

Executives

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

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

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

Analysts

Matthew Coffina - Morningstar Inc., Research Division

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

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Kipp R.F. Davis - Barclays Capital, Research Division

George Hill - Citigroup Inc, Research Division

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

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AmerisourceBergen first quarter earnings. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Barbara Brungess. Please go ahead.

Barbara A. Brungess

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our fiscal 2012 first quarter results. I'm Barbara Brungess, Vice President of Corporate and Investor Relations. And joining me today are Steve Collis, AmerisourceBergen President and CEO; and Mike Dicandilo, Executive Vice President and CFO.

During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations. We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations. For a discussion of some key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2011.

Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be rebroadcast without the expressed permission of the company. As always, those connected by phone will have an opportunity to ask questions after our opening remarks.

Now here is Steve Collis to begin our comments.

Steven H. Collis

Thank you, Barbara, and good morning, everyone. I am pleased to report that AmerisourceBergen delivered solid results in the first quarter of our fiscal year 2012.

Our revenues were up 2% to $20.4 billion. Earnings per share were up 9% to $0.62. We generated $432 million in operating cash flow and we repurchased $128 million of our shares. Our financial results were in line with our expectations and position us well to meet our objectives for the remainder of the year.

Our excellent cash generation and strong balance sheet provide us with outstanding financial flexibility and give us the ability to fund our strategic initiatives and grow our business.

AmerisourceBergen is fortunate to be an important part of a growing industry. As I discussed at our Investor Day in December, demographics in the expansion of health care coverage should drive organic growth in our industry over the next several years. In addition, launches of new pharmaceuticals as well as new indications for existing drugs should also drive sales growth. The tremendous wave of over 30 brand to generic drug conversions that we expect in our fiscal 2012 as well as additional conversions expected in subsequent years will mitigate the top line dollar growth in our industry. It will drive tremendous value for wholesalers, healthcare providers and patients alike.

These trends bode well for AmerisourceBergen in particular. Our diverse revenue base positions us well to benefit from organic growth driven by demographics as well as from the influx of the uninsured over the next few years. Our customer mix also puts us in a favorable position to benefit from the historic influx of generics. In addition, cost-containment efforts underway by the federal government and other payers drive demand for our services most notably in our Consulting Services group.

Today, we are more entrenched than ever before with our manufacture customers and we expect that to continue to increase. As our provider customers face reimbursement and other challenges, they increasingly turn to AmerisourceBergen for help in making their healthcare practices run as efficiently as possible without sacrificing excellent patient care.

Over the last several months, a few large contracts in our industry have been the subject of much dialogue for various different reasons. Overall, however, the market continues to be competitive but stable. We continue to participate in discussions that are important to our business, our industry and our customers in Washington, D.C., educating lawmakers about our business and the value we and our customers provide to the healthcare system.

I've discussed our core tenets several times over the last year but they continue to drive our efforts and that bears repeating. Firstly, collaborate to drive innovation for all stakeholders, increasing customer and supplier value, expanding our business in targeted markets, maximizing operating efficiency and maintain a high-performance culture. Our associates creatively tackle challenges and identify new opportunities to add value on a daily basis. They'll focus on meeting our objectives for the year, both in terms of the service we provide to customers and suppliers and in our financial performance, and I'm honored to work beside them.

Turning now to our business units. AmerisourceBergen Drug Corporation had solid revenue growth in the quarter, up 2%. We had positive revenue growth in both retail and institutional segments, even with the previously-discussed loss of a large retail -- retail customer in September of 2011. Our ultimate side segment was particularly strong in the quarter and hospitals and independents had very solid growth.

We now have over 4,600 members in our Good Neighbor Pharmacy network which makes it the third largest network of pharmacies in the U.S. That is a powerful endorsement of the role that independent retail pharmacy plays in the complex healthcare landscape today.

Patients preferred choice when determining where to fill their prescriptions and our retail customers are very adept at fulfilling unique patient needs. Our SAP implementation continues to run smoothly with redistributions and our conversions complete, and the remainder plans for the beginning of 2013. Our investments in our Canadian operations to support significant new business wins are also well underway. We are very pleased to be the leading distributor independent pharmacy in the Canadian market as well as the leader in Specialty Distribution and services.

AmerisourceBergen Specialty Group had another strong quarter with revenues up 4%, with particularly strong performance in third-party logistics and good performance in Oncology Supply. The integration of IntrinsiQ has gone very well, and our customers have responded favorably to the tools at office. While our Specialty Group is based after our oncology franchise, we are an instrumental part of the commercialization strategy for any infusible product launched in the physician marketplace.

In addition, our Specialty Group often collaborates with our Consulting Services group to help ensure patients have access to products by utilizing the full capabilities of our physician networks, as well as our reimbursement and patient support program expertise. For example, during the quarter, we executed very well on the launch of a new brand of ophthalmology product, establishing significant market share in just the first few months of introduction. This is a great example, not only of excellent cross-company collaboration, but also of the strength and tremendous value of our diverse offerings.

AmerisourceBergen Consulting Services delivered a strong quarter while making excellent progress in the integration of TheraCom and Premier Source. Our Consulting and Packaging business both performed well in the quarter. And while the group only represents about 1% of our revenues, we believe our packaging and consulting associates are providing essential expertise to pharmaceutical manufacturers to help ensure that their products are brought to market as safely, quickly and efficiently as possible.

In addition, our reimbursement expertise helps ensure that patients who can benefit from both new and mature therapies have access to the products.

Given the continued strength of our balance sheet, we continue to look for acquisitions that meet the criteria we've had in place for quite some time. They should increase our value offering to existing customers both up and down the channel. They should be within our established core competency and they should increase shareholder value. While we have not contemplated any further contribution from acquisitions in our guidance, we continue to be receptive to acquisitions and we continue to be interested in opportunities in pharmaceutical and Specialty Distribution and Services, as well as Consulting and Packaging services. While we historically have been very comfortable in the $200 million to $300 million range, we would consider selling larger if it made good strategic sense and would deliver value to our company and our shareholders.

Looking ahead, the results we've had in our first quarter have positioned us well to meet our objectives for the full fiscal year. We have a difficult comparison to overcome in 2012, but we continue to expect earnings per share to be in the range of $2.74 to $2.84, an increase of 8% to 12% over fiscal 2011.

Looking further ahead to 2013, we should have a carryover from some of the launches that occur late in our fiscal 2012 including the relaunch of Oxaliplatin, and we should begin to benefit from the completion of our SAP implementation.

In fiscal 2014, we should begin to see the 30 million to 40 million uninsured patients in the healthcare market driving demand for pharmaceuticals that should carry over into 2015 and beyond. In addition, 2014 and 2015 are expected to be good years with generic conversions, and of course, there's a chance that biosimilars may also come to market in that timeframe.

Before I turn it over to Mike for a detailed look at the financials, I want to reiterate the confidence that I have in our business and our future because demand is strong for the products we distribute and the services we provide. We were pleased to be recently be ranked 24th on Bloomberg Businessweek's list of the top 50 performing companies in the U.S. in recognition of our historic financial performance and our future growth opportunities.

As I stated earlier, we play an essential role in the pharmaceutical supply channel, we positioned ourselves well to benefit from generics and specialty products, and we have continued to invest in our existing businesses and opportunities we see in our future.

Finally, our exceptional associates at ABC set us apart in our industry and I'm proud to be their leader. Here is Mike.

Michael D. Dicandilo

Thanks, Steve, and good morning, everyone. I'm very pleased to report first quarter fiscal 2012 results on track with our internal plans, highlighted by good performance on new generic launches, strong expense discipline, significant progress towards integrating TheraCom into our consulting group and exceptional cash generation, all of which gives us confidence in reaffirming our annual EPS guidance.

As we go through our quarterly results, keep in mind that last year's first quarter included a $12 million or $0.03 benefit reflected in gross profit from the Duane Reade contract termination last December.

So let's turn to the quarter, and starting with the top line, revenues were $20.4 billion, a 2.4% increase over last year's quarter. Drug company revenue was up 2% as strong growth in the alternate site hospital and independent customer groups offset the expected decline on the chain side, as this is our first quarter without the Longs/CVS contract.

The Specialty Group revenues increased 4% with our 3PL business especially strong this quarter. The Consulting group, though small to the overall company top line, had a very strong quarter in our acquisitions, with TheraCom being the biggest contributor, added about 0.6% to overall ABC revenue growth in the quarter.

Gross profit was $593 million in the quarter, up 2% from last December, and gross margins of 291 basis points in the quarter were down 1 basis point from last year. As I mentioned earlier, the prior year quarter included a $12 million benefit related to the completion of the Duane Reade contract and the contribution to current quarter gross profit from our acquired companies helped to offset this headwind.

Performance from new generic launches were in line with our expectations as were benefits from price appreciation. We gave an early update during our Investor Day in December on trends with generic Lipitor scripts. And since then, trends have normalized very much in line with our expectation of approximately a 70% conversion rate to the generic. Specialty generic trends were also in line with our expectations.

Our LIFO charge in the quarter was $3.2 million compared to $9.9 million last year, reflecting the brand to generic conversions, and we continue to expect a full year charge of approximately $15 million.

We did a very nice job managing our operating expenses this quarter despite our acquisition-related transaction costs and the inclusion of our acquired companies' ongoing operating costs, including 2 months of TheraCom's results.

Operating expenses were $308 million, up 1.6% and included $3.6 million of acquisition-related transaction costs. Operating expenses in the quarter would have been down year-over-year x the impact of our acquisitions, fueled by a year-over-year decline in compensation costs including favorable benefit comparisons. Keep in mind that our operating expenses are usually at their lowest level in our first quarter and should increase sequentially as we progress throughout the year. Our guidance continues to include an annual expense increase of about 3% related primarily to our acquisitions.

Operating income of $285 million in the quarter increased 3% and operating margins expanded by 1 basis point compared to last December. Again, this year-over-year growth was slowed by the $3.6 million of acquisition costs in the current quarter and the previously-mentioned $12 million gross profit benefit realized in the first quarter of fiscal '11.

Moving below the operating income line, interest expense of $23 million in the December quarter increased 18% compared to last year, primarily as a result of our $500 million, 3.5% bonds that we issued in mid-November. Proceeds from this debt offering helped to fund our acquisitions and will also contribute to the retirement of our 2012 bonds that mature in mid-September. As a result, our expected interest rate expense will continue to trend higher than last year for the rest of fiscal '12.

Our effective income tax rate of 38.2% was slightly higher than last year's 38.1% and slightly below our expected annualized rate of approximately 38.4%. Our diluted earnings per share of $0.62 was up $0.05 or 9% compared to last year and exceeded our net income growth due to the reduction in our average diluted shares related to our ongoing share repurchase program. Average diluted shares outstanding for the quarter were 263.1 million, down over 6% from last December.

Now let's turn to our balance sheet and cash flows where trends continue to be very favorable. We generated $432 million of cash from operations in the quarter compared to using $99 million of cash in last year's first quarter. Much of that increase came from very favorable working capital at quarter end, particularly in the timing of our payments to vendors. As I have discussed often with our daily volume exceeding $300 million per business day, our quarter end working capital snapshots are subject to great volatility, and one should be careful not to extrapolate the first quarter's results to the full year cash flow forecast.

Capital expenditures were $48 million in the quarter compared to $50 million last year, and as we mentioned in December, included significant investments to expand our infrastructure in Canada as well as some discretionary buyouts on leased equipment, offset in part by declining ERP spend.

We continue to expect the capital spend for the year in the $150 million range. We bought back $128 million of our shares during the quarter and we also closed our $250 million TheraCom acquisition.

With our strong free cash flow performance in the quarter, we continue to be comfortable with our estimate of free cash flow in a range of $700 million to $800 million for all of fiscal '12. We had our normal seasonal increase in inventory in December. But despite the higher-ending balance, our average day sales in inventory for the quarter remained at 25, consistent with fiscal '11. Average DSOs of 17.7 in the December quarter were up slightly from 17.4 days last year and the favorable payables timing helped raise average quarterly DPOs by over 2 days compared to fiscal '11.

With our recent debt offering, our gross debt to total debt in capital ratio at the end of December was 39.9%, above our target range of 30% to 35%, and will remain above the range in the next couple of quarters until we pay off our $392 million of debt, which matures in September.

Our cash balance of just under $2.4 billion at the end of December leaves us with great financial flexibility to fund our strategic initiatives, return significant amounts of capital to our shareholders and pay off our maturing debt.

Now let's turn to fiscal '12 guidance. And with our first quarter on track, our outlook is unchanged. Our diluted EPS guidance remains at a range of $2.74 to $2.84. Our assumptions behind this guidance also remain the same and include flat-to-modest revenue growth, operating margin expansion in the high single-digit to low double-digit basis point range and free cash flow in the $700 million to $800 million range. Additionally, we continue to expect to spend approximately $400 million for share repurchases.

So before I turn it back to Barbara, let me reiterate that 3 months into the year, we are performing well in our key areas of the business. And despite some tough comparisons ahead in the next couple of quarters, we are well-positioned to meet our financial targets for all of fiscal '12.

Now here's Barbara for Q&A.

Barbara A. Brungess

Thank you, Mike. We will now open the call to questions. [Operator Instructions] Please go ahead, Cara.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Tom Gallucci.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Steve, I think you touched on in your prepared remarks briefly, but I was wondering if you could sort of expand a little bit. The competitive landscape obviously has got a lot of attention in the investment community lately, whether it's because of the VA or the impact of the various M&A activity out there potentially. What are you expecting in terms of contract churn over the next year? Similar to the last year? If it's higher, is it because of certain unique reasons? Or do you see sort of the potential for more churn out there because of other types of reasons and maybe decisions that specific customers may be making?

Steven H. Collis

I think that these are really 2 or 3 really isolated events. I mean the VA comes up every 8 years. It's not a surprise to anyone that it comes up in this particular time frame. And obviously, we've gone to great lengths to point out that the industry is a lot different than it was in 2003. And we bid that as you would expect us to bid a large contract. And then, of course, there's been a couple of big M&A deals, which one in particular was not at all expected, but we expect to participate in that. Our focus has been on servicing the companies that we do service to the best of our abilities. And I think we do a great job for them. And we expect that will be a part of any discussion going forward with those businesses. So just to sum it up, the competitive environment remains very similar to how it's been in the past. And we don't have a particular large amount of contracts coming up in the next couple of quarters. I mean, Mike, anything to add?

Michael D. Dicandilo

No, Steve. I think you said it well. The atmosphere is always competitive but stable as you mentioned.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Okay, great. And then now just on the follow up there, maybe a smaller topic but there's been some activity around generic Lovenox today. Just curious if you could frame that drug for us and the potential impact, roughly speaking, if there were more supply on the market.

Steven H. Collis

Well, Tom, generic Lovenox, we have done very well with that. It's part of our pro-generics offering and we already have had expectations that there would be competition in the marketplace. And that's built into our expectations.

Operator

The next question comes the line of Robert Jones with Goldman Sachs.

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

Just trying to get a better sense of some of the individual impacts in the quarter. First, I guess in the acquisition side, aside from the announced severance costs, was there an impact on operating expenses from the acquisitions in the quarter? And then I guess along those lines, if you could give us some color around how Lipitor and Zyprexa contributions ultimately shaped up relative to your expectations?

Michael D. Dicandilo

Well, let me -- I'll start with the cost of the acquisitions. I think we highlighted on the face of the P&L that we had $3.6 million of transaction costs related to closing the deal that we did in this quarter, the TheraCom deal. In addition, we obviously have an ongoing operating cost from all 3 of the companies we've acquired in the last few months that are incremental to last year's first quarter. And as I mentioned, they're included in our normal SG&A. And if you took out the normal run -- the ongoing operating costs, our year-over-year SG&A would have been down. So I think that speaks well to the rest of our business and the continued impact of our productivity efforts throughout the company and our continued focus on keeping our costs down.

Steven H. Collis

Yes. And on the 2 big generic launches in the quarter, I mean, we had said on our Investor Day which we really were into the very big one -- the prominent one, we were only about a week or so into it that conversion rates were slightly lower than expected, but it settled down around about that 70% level, which is a little bit less than you'd expect. But it's definitely trending in the right direction. And Zyprexa's right around where we expected it, around 80%. And we performed very much at expectations for both of them with the exception of the Lipitor, which we discussed at Investor Day, but which we now feel is back on track as we sit at the end of January.

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

Okay, got it. And just a follow-up, I guess around the buyback, it's $750 million left on the authorization and reiterating the $400 million that's stays in the guidance. I was wondering at what point in the year, what would trigger you to maybe look to upsize the buyback in fiscal '12?

Michael D. Dicandilo

First off, let me just clarify, we've got $380 million remaining on our current authorization. And obviously, our guidance for the year is $400 million of share repurchases. And I think you can look back to our historical performance to understand how we might deploy additional capital for repurchases. If we don't make any other larger strategic moves, we certainly have the capacity to increase the share repurchase. And once again, we've shown that we would do that, similar to what we did last year if that's how the year progresses and we continue to meet our cash forecast. So we're in a very good position.

Operator

The next question comes the line of Larry Marsh with Barclays Capital.

Kipp R.F. Davis - Barclays Capital, Research Division

This is actually Kipp Davis in for Larry. So this is just sort of a follow-up on Lipitor. So it sounds like you're communicating that it came a little bit slower initially than you would expect it in terms of generic conversion. Now you're sort of more comfortable with where it is. Just kind of curious after we think about Zyprexa, and of course, other generics that are going to come on line, how have your thoughts changed for the rest of the year? What do you think some of the key variables are with regard to whether it's manufacturer, strategies, et cetera, that might cause you to change your thoughts about the generic contributions throughout the year?

Steven H. Collis

Yes, this is -- Lipitor was as we said a lot, is really a unique product. I mean, first of all, just the size of it, just the prominence of it. And we think that it's also uniquely a mail-ordered drug. So Pfizer was able to contract with large purchases of the product directly. We think that this is an unusual situation. We don't think it's been particularly successful. And we don't -- we have not changed any of our plans for any other generic launches this year. And as I said, we feel very reassured by the fact that the conversion rate is now approaching 70% and looks like it could go up from there.

Kipp R.F. Davis - Barclays Capital, Research Division

Okay, that's helpful. And then just a follow-up. This is also sort of around consolidation. How do we think about -- with a broadened specialty offering, how do we think about customer consolidation in the specialty space? And would we think that specialty would always be serviced as part of a larger PBM contract or would that sort of business potentially be carved out? How do we think about that sort of relationship there? I don't know if that's a question for James or any of you folks.

Steven H. Collis

Well, you raise a good question. I understand -- I think I understand what you're getting at. First of all, let me distinguish that our Specialty Distribution business is really dealing with physicians who administer products in their office. And there's been numerous articles, there's no doubt that AmerisourceBergen Specialty Group is the leading company in that area. And we're very, very successful there. In our drug company, we do have, within our ultimate side segment, several large companies that are involved with specialty products more on the mail-order side and on the patient delivery side. And we definitely have expertise in servicing those customers. So overall, AmerisourceBergen really services a huge part of the specialty industry, and we expect that to continue. So I hope that's helpful. I think both aspects of the Specialty Distribution are important to our company, important to manufacturers and important to the patients.

Operator

The next question comes the line of Eric Coldwell with Robert W. Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

I realize that all but one of your major customers purchase generics through AmeriSource. But there have been rumblings in the market that perhaps 1 or 2 of the larger retail systems are looking at internalizing generics, perhaps slowly but are testing the market there. Have you seen any shift in your customers' buying behavior around generics recently? Whether it be asking for greater discounts or looking to perhaps internalize some of the work?

Steven H. Collis

No, I mean obviously, generics are becoming more and more important. They're a bigger part of the prescriptions that the patients get in the U.S. every day, and that's certainly what we expected. But we really haven't seen any different shifts. I mean, we believe that our ProGen formerly and our overall generic offering offers the best everyday value to our customers. And we continue to work very hard at keeping that to be the case. And I think our customers appreciate it, Eric.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

That's great. Just one quick follow-up. Another healthcare distributor this morning highlighted that physician activity was slower than they expected. They saw less flu -- seasonal flu impact due to lower illness rates and the weather, obviously. I realize that's also a very small piece of your total business, but can you give us any comments on what you're seeing around primary care and the flu market, both for December quarter and where we are early this year?

Steven H. Collis

The flu vaccine has become a very small part of our over $8 billion in revenues. The most activity actually takes place for flu vaccine in our fourth quarter of our fiscal year, so the September quarter last fiscal year. We have some modest activity in this quarter but it really is primarily now become that September quarter. Of course, our retailers are impacted by seasonal trends. If there's a lot of flu, a lot of cold, that does help patient traffic. But we really focus on overall top line growth, not as much on individual prescription trends at the retail level. So hopefully, that's helpful for you. Mark, anything to add?

Michael D. Dicandilo

No, and they've been good, Eric. We're up year-over-year despite the completion of the Longs/CVS contract last quarter, which I think is an indication of strength in the top line force.

Operator

The next question comes from the line of Lisa Gill with JPMorgan.

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

Steve, you made a comment on the revenue line that you're seeing strength on the hospital side as well as in the independents. Can you maybe just talk about -- is this that you've picked up any incremental customers? Or is there some other reason why you're seeing increased strength in those customers? Because your revenue came in much better than we would've anticipated.

Steven H. Collis

I think we had some mix. I mean, the big customers grew pretty well in the quarter. But our hospital business is -- we believe we have good market share there. And really nothing extraordinary that happened, I mean, just good solid demand for our products.

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

What was -- did revenue come in where you were thinking? Or so do we have it wrong? Or is it just that this is what you were expecting based on what you've seen in your book and all of us got a little carried away on what our expectations were for the impact of generics?

Steven H. Collis

Revenues came in very close to what we're expecting. I mean, maybe slightly ahead of expectations. But very close to what we were expecting.

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

Okay, great. And then just as a follow-up, as we think about the oncology offices and we think about reimbursement as well as some of the programs for example, that United is doing around bundling of services, et cetera, are you starting to see any change as we move into the next year? And we start thinking about planned design changes and changes with the managed care companies around how they pay for oncology. Has there been any noted change this year?

Steven H. Collis

This discussion has been around for several years and I think it's just really -- it's why our offering is so important. I mean, you look at why we acquired IntrinsiQ and you look at the investments we make in our ION business, our physician services company. We really want to enhance the dialogue between managed care companies and our community oncologists then. Our strategy is not to be a principal in those negotiations, but really to assist our customers so they have the information available and they have the sort of data that managed care companies are looking at. And we think are definitely enhancing that dialogue. It's not -- we're stopping that trend. I think as we sit here today -- I was in D.C. last week and often obviously with some of our large oncology practices, people are starting to recognize us. It's very important to keep cancer care in the community setting, not only from a patient point of view, clinical point of view, but also from an economic point of view. And that's obviously a trend that AmerisourceBergen supports and a big part of what our Specialty Group practice -- is able to demonstrate everyday.

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

So just to understand it, then you're not seeing anything as far as trends go -- and we think about how would it impact your revenue, you're not seeing any changes to utilization or the way that the product is delivered based on these discussions?

Steven H. Collis

No. And again, we've had that SP formerly -- for over 6 years now. So I think our practitioners are used to it. Everything as we said in the release, everything went very well in our oncology business this quarter.

Operator

The next question comes the line of A.J. Rice with Susquehanna.

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

I guess because there's so much focus on the VA contract, I'd love to get any perspective you'd be willing to offer on sort of the rebidding and the ask for additional information and say taking a second look, what does that imply about what they're trying to do there? And I guess, I'll ask you a similar question to the one I asked at the Investor Day. If you guys, with what you now know, if you were to be successful and get the contract, would you consider that to be something that would be additive to your results almost immediately?

Michael D. Dicandilo

Yes, A.J., this is Mike. I'll give a go at it and I'll let Steve add any additional comments. But when we got the additional information from the VA, it essentially clarified that there is a small part of purchases approximately 3% that were off contract and clarified that fact and asked us to rebid based upon that new information. I would go back to what we said, when we bid this contract back in June, we considered that to be our last and final bid. We took it very seriously. We considered the new information. We made the appropriate modifications, but it did not change our bid material from what we had done at the end of June. Should we get the VA contract? Yes, we think it would add right away. I think our expectations, it's a several billion dollar contract. There's not many of those out there. And typically, the largest contracts in our industry get the best price. And I would expect this to be similar and have the appropriate contribution for a large contract.

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

Okay. Just maybe then a follow-up on the comments you made in the prepared remarks. I think, maybe Steve made this comment about outpatient in the drug corporation being particularly strong. And I just was wondering -- maybe there's a little more color on what was exactly going on there in your opinion.

Steven H. Collis

I think, A.J., you talked about really our old site? That maybe my accent. That's really our nonhospital institutional business, our mail-order, skilled nursing facility, institutional pharmacy, et cetera. And we did have good revenue trends in that sector. And we have a couple of new customer wins there, particularly we've talked about the Humana contract where we had good revenue performance.

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

Okay. Yes, and I understood it was the alternate site. I guess, that's probably my lingo. I was just curious if it was -- if there was underlying pickup in trend or is it new business? So it sounds like it's mostly new business, maybe?

Steven H. Collis

Yes. Yes, you could say new business. But just good high-growth sector. I mean, benefiting from favorable demographics.

Operator

The next question comes the line of Charles Rhyee with Cowen and Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

I guess, one real quick follow-up about the VA here. Obviously, investors and analysts are all focused on this contract, but can you tell us essentially when you're in discussions with clients, I mean, is this something that ever comes up? Or is this something that people ever look at and refer to?

Steven H. Collis

No, I think everyone understands that it's a very, very different contract. The way it works, it's very unique both as in the DOD and it doesn't really come up.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay, that's great. And then, Mike, maybe a question for you. And I guess this kind of gets back to your original comments about how you see Lipitor come on. When we look at the LIFO charge in the quarter, obviously down less than a year ago. Should we expect that to sort of increase as we see more of this -- the rate of adoption on like Lipitor and some of the other generics come on? Is that a good proxy then for us to think about how the pace of generics are coming onto the course of this fiscal year?

Michael D. Dicandilo

Yes. The LIFO charge as expected, Charles, to be significantly below what it was last year and really 2 reasons. Last year was actually much higher than we expected because of how high the brand price appreciation was. And again our expectation is it's still going to be strong this year but may moderate a little bit versus last year on the brand side. But certainly, with all the new generic introductions and 34 launches, there's going to be a big impact on the generic price deflation this year from products coming off exclusivity. And that has led to lower overall expectation of what a LIFO charge is going to be. And that's really starting in the beginning of the year and will be pretty consistent the rest of the year as a lot of the launches are pretty well spaced throughout the year. And we'll continue to have launches next quarter and all the way through to the end of the year.

Charles Rhyee - Cowen and Company, LLC, Research Division

And so that sequential change, that's a good signal for us? And was this quarter sort of in line with what you had expected?

Michael D. Dicandilo

Yes. Yes, very much in line. And again, it's a $15 million annual expectation. We're always a little bit higher in the second quarter because that's where a lot of the brand inflation occurs. But otherwise, very much as we expected.

Operator

The next question comes from the line of Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley, Research Division

So just as a thought to the last question but taking it from a revenue perspective, so you grew revenue at about 2.4% and you're guiding us for flat revenues. So should we assume that second half revenues might decline given the timing of drugs going off 180s that you just mentioned?

Michael D. Dicandilo

Yes, some of that sequential change, Ricky, has to do obviously with our largest customer who only buys brand-name drugs from us and there's more products, though generic, their revs will moderate some over the rest of the year.

Ricky Goldwasser - Morgan Stanley, Research Division

Okay. So when we model, I just want to make sure that our model is kind of like accurate, should we assume kind of like a first half kind of like 2%? And then sort of like negative growth in the second half to get to kind of like flat year-over-year? Or is it going to be smoother than that?

Michael D. Dicandilo

I think it's going to be a little bit smoother.

Ricky Goldwasser - Morgan Stanley, Research Division

Okay. And then on the generic side, I know we talked a lot about that, but can you quantify kind of like the EPS impact for new generics? Is it back at this quarter? Just to give us a sense of how does it relate to kind of like this $0.05, $0.06 of benefit that you're seeing from Gemzar and Taxotere?

Michael D. Dicandilo

Ricky, I don't think we went -- get into a quarter by quantification of the impact of the new generics. And obviously, what happened last year has an impact as well the year-over-year impact. I think again our guidance for the year's, we expect that the cumulative impact of the 34 launches will offset the decline on the specialty generics side. From a specialty generic perspective, we had about a $0.06 benefit in the first quarter of last year. And this year was pretty similar down about $0.005 or so. Those comparisons will get more difficult the next couple of quarters as they were very big quarters here for Specialty. But I think the beneficial impact of the oral solids will also increase in those next couple of quarters as well. So we really haven't changed our viewpoint on the year about the offset on the oral solid side to the headwind on the specialty generic side.

Ricky Goldwasser - Morgan Stanley, Research Division

Directionally, will Lipitor and Zyprexa combine again directionally, no specific numbers higher or lower than that kind of like $0.05 to $0.06?

Michael D. Dicandilo

Again, Ricky, I don't want to get into the quantification. I think we gave a pretty good view at Investor Day that the top 2 players were a significant part of the year, in the 40% range, I believe we gave. And I think that's the best quantification that we want to get into at this time.

Operator

The next question goes to the line of George Hill with Citigroup.

George Hill - Citigroup Inc, Research Division

Most of my questions have been answered. Mike, I just want to ask another guidance question directionally. I know that you guys don't like to give quarterly guidance but straight expectations for Q2 or for a big number. And as we think about the branded Lipitor to generic conversion, I guess, I'd ask 2 questions, one, do you expect the Pfizer retention rate to stay at the 30-ish percent range? Or how quickly do you guys think that'll continue to fall? And if it hovers at 30%, it would look like the most profitable period for generic Lipitor to kind of be that first month right after May when there's no limit on multisource introductions and the whack probably won't catch up with the falling rate at which you guys can acquire the price. I guess, is it your sense that we might be -- I guess, is the consensus maybe seem too ambitious for fiscal Q2? And maybe should be a little more optimistic on fiscal Q3?

Michael D. Dicandilo

No, I'd say, again we do not -- let me make clear, we do not give quarterly guidance. And directionally, the March quarter has always been our strongest quarter because of the timing and the impact of manufacturer, our brand price increases and the impact that has on some of our fee-for-service agreements, that trend is -- continues to be our expectation this year. Certainly, the second quarter is a big quarter for the oral solid generics as well. Keep in mind, the first quarter, we only had a month of the Lipitor, 2 months of the Zyprexa generics. In the second quarter, we have a full quarter benefit from those plus some new introductions. So certainly, we think the year-over-year benefit from oral solids is going to increase in the next quarter from the first quarter. So the trending, I think is, again, very similar to where it's been historically. The second quarter continues to be our peak. The number of suppliers that come on board after the exclusionary period for Lipitor can impact our numbers somewhat. But again, we're expecting a handful of people there, and we're expecting a pretty significant price drop after exclusivity is over. As far as the 70:30, that's in line with our expectations. If it's a little bit more generic, it helps us. It helps us. But again, I think the historical trending, as far as quarterly progression is still intact, and as I've mentioned, we've got tough comparisons of 2 and 3 on the specialty side, but good performance on the oral solid side. And the fourth quarter continues to be our easiest comparison.

George Hill - Citigroup Inc, Research Division

Okay. And maybe just a quick follow-up to Tom's question that's actually where investors worry about clients' trend being unusually high given what's going on in the M&A space. A lot of the big clients tend to see their relationships with the wholesalers as pretty transactional with low switch in costs. What can AmeriSource do, I guess, to make these relationships more sticky?

Steven H. Collis

Well, I think obviously, with the smaller customers, we have different services. But in the larger customers, I think we've proven time and again that our relationship to our largest customer is very valuable to them. We were happy to receive the VIP award the last 2 years in a row. And I think we can do different services especially around logistics, cash flow, joint negotiations, even look at some generic lines with large customers. I think there's lots of opportunities in the industry to work together. And then, of course, I just -- I'd be remiss if I didn't mention our specialty franchise, which I think is of great interest to almost anybody in the healthcare space. Specialty is really where the innovation, action's going to be in the years ahead. And definitely our expertise, our physician connectivity, our understanding of the trends there, some of the contracting we do with manufacturers is definitely of interest to all large participants from mail-order to retail to hospital, et cetera.

Operator

The next question comes from the line of Steven Valiquette with UBS.

Steven Valiquette - UBS Investment Bank, Research Division

So just to confirm, it sounds like there's no change to the $0.14 to $0.15 EPS expected from the -- in fiscal '12 from the big specialty generics. And then, is the reintroduction of generic Oxaliplatin in August, does that account for any material portion of that? Or is that going to be basically a rounding error at the end of today within fiscal '12?

Michael D. Dicandilo

It's included in the $0.14 to $0.15. But as you said, it's only a little bit more than a month of inclusion in our fiscal '12. But it is in there.

Operator

Next question comes from the line of Matthew Coffina with Morningstar.

Matthew Coffina - Morningstar Inc., Research Division

Two quick questions. So you said before that Medco is only about 5% of earnings. Maybe to help us get a better understanding of the flexibility in the cost structure here, what, from a specific standpoint -- what, from a practical standpoint, can you do in terms of reducing SG&A when you lose a large customer like that?

Steven H. Collis

Well, I think you look at our year and we always do a good job. I think ABC's got a history of always continuing to look for new efficiencies. And we continue that trend I think I highlighted in my remarks. Medco is unusual because we really had very few sites, it's a concentrated delivery, they actually work primarily with our large greenfields, so highly automated facilities. So I think that, that's why we pointed to a 5% contribution that also did contemplate the operating expense increase. But in that particular case, it's unlikely we would shut down any distribution centers or anything like that because of the way the business is currently contracted for and operates. Want to say anything else, Mike?

Michael D. Dicandilo

No, I think that's right. I mean, most of that impact is on the gross profit side. Our expense to serve is very low in that contract as it is with high-volume concentrated location type customers as Steve mentioned.

Matthew Coffina - Morningstar Inc., Research Division

Okay, great. And how do we think about Express Scripts in there, a CuraScript subsidiary? And would that be seen as a competitor to you? And how do you think they'll be thinking about that?

Steven H. Collis

Well, I think CuraScript does have the physician distribution business. They also have, I believe, a large amount of order specialty pharmacy business. But nothing extraordinary. We work with all channel participants. We do have some business relationships already with Express Scripts. And obviously, we think that there will be a subject for discussion should the merger be approved.

Operator

There are no further questions. I turn the call back over to Barbara Brungess.

Barbara A. Brungess

Thank you, Cara. And now, I think Steve would just like to make a few closing remarks.

Steven H. Collis

Yes. Thank you, everyone, for your interest and for joining the call today. We -- Mark and Barbara and I certainly do enjoy the exchanges. Our take away message that you should all receive from ABC today is that we're off to a solid start with our results for this first quarter. And we are well-positioned to meet our objectives for the year. And we also hope to see you at one of the upcoming conferences that we'll be presenting at. Thanks for your attention.

Barbara A. Brungess

Thanks, Steven. Before we go, I'll just highlight a couple of our upcoming events. On February 8, we'll be attending the UBS Healthcare Conference in New York. On February 28, we'll be attending the Citi Healthcare Conference, also in New York. And finally on March 14, we'll be attending the Barclays Healthcare Conference in Miami. So thank you, all, very much for joining us today.

Operator

Ladies and gentlemen, this conference will be available for replay today after 1:00 p.m. through February 2, 2012 at midnight. You may access the AT&T Teleconference replay system at anytime by dialing 1 (800) 475-6701 and entering the access code 231917. International participants, please dial (320) 365-3844, access code 231917. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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