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Edited Transcript of ABC earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q3 2019 AmerisourceBergen Corp Earnings Call

CHESTERBROOK Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of AmerisourceBergen Corp earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bennett Murphy

AmerisourceBergen Corporation - VP of IR

* James F. Cleary

AmerisourceBergen Corporation - CFO & Executive VP

* Steven H. Collis

AmerisourceBergen Corporation - Chairman, President & CEO

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Conference Call Participants

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* Charles Rhyee

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Eric R. Percher

Nephron Research LLC - Research Analyst

* Glen Joseph Santangelo

Guggenheim Securities, LLC, Research Division - Analyst

* Lisa Christine Gill

JP Morgan Chase & Co, Research Division - Senior Publishing Analyst

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the AmerisourceBergen Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to now turn the conference over to our host Mr. Bennett Murphy. Please go ahead.

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Bennett Murphy, AmerisourceBergen Corporation - VP of IR [2]

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Thank you. Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen's Fiscal 2019 Third Quarter Financial Results.

I am Bennett Murphy, Vice President, Investor Relations. And joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO.

On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release and are also available on our website at investor.amerisourcebergen.com.

We have also posted a slide presentation to accompany today's press release on our investor website.

During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K.

AmerisourceBergen assumes no obligation to update any forward-looking statements. And this call cannot be rebroadcast without the express permission of the company. (Operator Instructions)

With that, I will turn the call over to Steve. Steve?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [3]

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Thank you, Bennett, and good morning to everyone on today's call. Today, I am pleased to discuss AmerisourceBergen's continued strong performance in the third quarter of fiscal 2019, the critical role we play in the U.S. health care system and how we continue advancing our people, culture and strategy to position AmerisourceBergen for long-term growth.

First, our fiscal 2019 third quarter financial performance. Revenues increased a solid 5% to $45.2 billion for the quarter. And our adjusted diluted EPS was $1.76, an increase of 14% compared to the previous fiscal year period.

We are extremely pleased with the continued overall strong performance of both the Pharmaceutical Distribution and Global Commercialization Services & Animal Health groups.

This quarter's results reflect solid execution, continued strong specialty product sales, growth of some of our largest customers and the overall strength across our businesses.

The Pharmaceutical Distribution Services segment grew operating income quite well as our distribution business continues to work diligently to serve our manufacturer and provide our customers more efficiently and effectively.

First, our innovative services and solutions continued to provide our partners with access to a state-of-the-art distribution network and best-in-class customer experience offerings, enabling them to provide a more integrated, seamless and personalized experience for their patients while enhancing their ability to maximize business performance.

Next, we are leveraging our expertise, capabilities and actionable insights to identify and execute new opportunities that create shared value for all stakeholders.

Finally, our specialty distribution and practice management services are supporting market access to complex pharmaceuticals and enabling community-based providers to run their practices more efficiently while ensuring patients have access to vital pharmaceuticals when and where they need them.

For PharMEDium, progress continues as expected. As we communicated this past May, the consent decree was finalized and PharMEDium is currently in the midst of a third-party audit inspection at its 2 open facilities while they continue their commercial operations. The results from these audits will be an important input into an assessment of a future work plan to reopen the Memphis facility. Entering into the consent decree and completing these initial third-party order inspections are meaningful milestones for PharMEDium as we continue our ongoing comprehensive, strategic and financial review of the business.

Moving on to our Global Commercialization Services & Animal Health business group, reported as Other. We are extremely pleased with their performance this quarter as the group achieved double-digit year-over-year operating income growth, led by strong performance from MWI Animal Health.

During the third quarter, MWI benefited from solid demand from its strong customer base, particularly within the companion animal health segment. The business also continued to efficiently service its customers and their patients by driving additional cost efficiency through technology improvements. MWI, along with World Courier and the entire comprehensive portfolio of AmerisourceBergen Consulting Services businesses are executing on their plans and continuing to find new ways to expand upon our robust and pharmaceutical-centered value proposition, creating additional value for our customers and partners.

Our leading data and technology platforms, new digital tools and partnerships are creating additional efficiencies, enhancing the customer experience and advancing patient outcomes for manufacturers. As manufacturers needs evolve, AmerisourceBergen will continue to respond with differentiated solutions that further support enhanced access for pharmaceutical commercialization in companion and production of animal health products, making AmerisourceBergen the essential partner for the global pharmaceutical industry.

AmerisourceBergen devotes the same relentless focus and unwavering support towards creating value for our downstream customers. Community providers are the cornerstone of access and care in their local communities. AmerisourceBergen's ongoing commitment to community providers, including independent pharmacists, reflects our continued recognition and support of the value that they bring to patients and their local communities.

Last week, we actively engaged in a record number of our independent pharmacy partners at ThoughtSpot 2019, our annual conference and trade show hosted by Good Neighbor Pharmacy. This conference provided -- provides independent community pharmacists with practical and clinical education resources helping them optimize their businesses, especially as community pharmacy becomes a support local movement.

As resilient and customer service are entrepreneurs, independent community pharmacists differentiate themselves by being hyper local and customizing their store experience with hometown pride in mind. AmerisourceBergen is committed to empowering our 4,600 independent pharmacist customers to tell their stories and serve their patients with additional help from tools and resources that we provide. For example, our Good Neighbor Pharmacy's networks, business and marketing services are enabling pharmacists to focus on the in-store experience for patients, connect effectively with providers and create an unique experience tailored to their community.

We have also introduced more digital tools to help pharmacists personalize the care they provide and measure the impact of their performance. Moreover, our Elevate Provider Network provides pharmacies with intuitive analytics and benchmarking system solutions to help pharmacies maximize profitability, improve operational effectiveness and enhance patient care.

On a much broader industry scale, AmerisourceBergen as a driver of solutions continues to advocate and support independent pharmacists and all of our community-based provider customers by telling their stories to patients, providers and lawmakers. Our passion and commitment to being a solution provider in the U.S. health care system has not wavered. AmerisourceBergen responds when customer needs or problems arise.

We are a forward-thinking and creative organization and will always look to be a part of the solution and relentless in our pursuit of opportunities that can add value for our customers and partners as well as drive efficiency, support transparency and enhance access within a safe and secure health care supply chain.

We also respond as a global solutions leader when industry challenges like the opioid epidemic confronts the higher -- entire health care industry and local communities. AmerisourceBergen understands and appreciates the enormity of the opioid challenge and we take our role in the supply chain very seriously.

We continue to collaborate with our partners and other stakeholders to stop suspicious orders and to halt diversion. Notably, as a logistics provider and distributor, we do not have access to patient information and we are not qualified to interfere with the very personal clinical decisions made between patients and their physicians. That said, we recognize the important role we play in the supply chain and work hard every day to be a responsible company providing daily reports to the DEA of all controlled substances shipped to our customers, including opioid-based medications.

Building on the company's commitment to transparency, AmerisourceBergen will be releasing a comprehensive report next month describing how we as a company have responded to opioid epidemic, including the Board's oversight of risks associated with the company's role and to distribute a prescription of opioid medications. Our actions are a reflection of the innovative problem-solving culture driven by AmerisourceBergen's 21,000 associates who work tirelessly every day across over 50 countries to deliver on our purpose of being united in our responsibility to create healthier futures.

Our people are a competitive advantage for AmerisourceBergen. Anchoring on our strongly defined purpose and under the leadership of our Chief Human Resources Officer, Silvana Battaglia, we continue to make advancing our people and culture a top priority. First, we are making investments to further engage, develop and attract talent. We are expanding opportunities for career growth development and collaboration across the company to support our corporate strategy and accelerate our growth as one ABC.

On the topic of attracting talent. We're excited to welcome our new Chief Strategy Officer, Leslie Donato, who joined us a few weeks ago and brings nearly 30 years of long-range strategy and health care industry expertise to AmerisourceBergen. Reporting directly to me, Leslie along with her team, will help us identify and implement growth initiatives that drive value for our manufacture partners and provider customers and continue to create long-term value for all of our stakeholders. Leslie's experience in global business development, strategy in the pharmaceutical industry, make her an impeccable candidate to lead and grow our strategy function.

Next, we are deepening our commitments to diversity and inclusion within our workforce and supply base. As a company, we are proud of our perfect score on the 2019 Corporate Equality Index, the nation's premier benchmarking tool on corporate policies and practices related to LGBTQ workplace equality, and remains steadfast in expanding our diversity and inclusion efforts to further strengthen the innovative, creative and diverse exchange of ideas and solutions that can enrich the value that we can provide to all of our stakeholders.

AmerisourceBergen's culture is inspired by our purpose, shaped through collaboration and rooted in mutual respect for one another. We are leading through our guiding principles, promoting recognition and appreciation for strong performance and ensuring a safe and secure work environment in order to fortify our competitive edge.

Advancing our people and culture, further supports and enables AmerisourceBergen to be well-positioned to continue creating shareholder value and delivering long-term sustainable growth. We appreciate the unique value each associate brings to AmerisourceBergen while also recognizing the collective and vital role that AmerisourceBergen and our industry play in enabling access to pharmaceuticals for the patients that need them.

Overall, the pharmaceutical distribution industry delivered unparalleled efficiency, access and security to the U.S. health care system. In a research published this week, Deloitte analyzed the critical role that distributors play in connecting 2 highly fragmented markets of 1,300 manufacturers and 180,000 points of dispensing. The report noted that distributors do much more than ship products for manufacturers to pharmacies and providers highlighting that our industry's core services, which includes distribution, inventory management, financial risk management and information-sharing, generate tens of billions of dollars in value annually to the health care ecosystem.

Alongside the industry's value proposition, AmerisourceBergen possesses a differentiated and well-established strategy and unique value proposition that takes advantage of key macro trends in health care. AmerisourceBergen as a pharmaceutical-centric leader in distribution and commercialization services continues to benefit from growth in the U.S. pharmaceutical market, which is driven by innovation, patient demographics and prescription utilization trends.

Our focus on strong customer partnerships in each market segments and innovative services and solutions, both upstream and downstream, further enables us to grow and evolve to address the needs of manufacturers, providers and the patients they serve. We are a trusted partner to manufacturers and providers, a responsible steward of shareholders' capital and more than ever a global solutions leader, united in our responsibility to create healthier futures.

As we head into our fiscal 2020 planning process, we feel confident that our business strategy, relationships and execution, position AmerisourceBergen to continue to create long-term value for all of our stakeholders.

Now, I will turn the call over to Jim for a more in-depth discussion of our quarterly financial results. Jim?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [4]

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Thanks, Steve.

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by stated growth rates and comparisons are made against the prior year June quarter. For a detailed discussion of our GAAP results, please refer to our earnings release.

As we closed-in on the end of our fiscal year, we are extremely proud of the performance of our associates to deliver strong operating results. The execution and efficiency across our businesses is clearly benefiting our results as we continue to work diligently to be the partner of choice, both upstream and down.

Turning now to discuss our third quarter results. I will provide commentary in 2 main areas this morning. First, I will detail our adjusted quarterly consolidated results and our segment performance. Second, I will cover the upward revision to our fiscal 2019 adjusted EPS guidance.

Moving now to our third quarter results. We had strong performance for revenue growth, expense management, operating income growth, operating margin, EPS and cash flow. We finished the quarter with adjusted diluted EPS of $1.76, an increase of 14% primarily due to higher operating income, a lower share count and lower net interest expense.

Our consolidated revenue was $45.2 billion, up 5% primarily driven by solid revenue growth in both the Pharmaceutical Distribution Services segment and our Global Commercialization Services & Animal Health group.

Gross profit increased 5% or $58 million to $1.2 billion. Operating expenses increased 3.7% to $723 million.

We had solid overall expense management this quarter as we continue to focus on effectively managing operating expenses throughout the business and have been able to move faster than originally anticipated to capture synergies related to our fiscal 2018 acquisition of HD Smith. Additionally, we had a favorable impact on the SG&A line from better-than-expected health care benefit-related costs.

Consolidated operating income was $507 million, up 6.8% with our operating margin up 2 basis points. As a reminder, we have lapped the headwind caused by PharMEDium over the previous 4 quarters, lapping the headwind from that business held slightly with our year-over-year comparison.

Net interest expense decreased $11 million to $36 million primarily due to an increase in interest income as a result of an increase in our average invested cash balance and an increase in interest rates. Given our strong cash flow year-to-date and the better-than-expected interest income, we continue to expect our net interest expense to be lower for the fiscal year.

Moving now to income taxes. Our income tax rate was 21%, up from 20.3% the prior year quarter. Our diluted share count decreased 4% to 211 million shares. We repurchased $175 million of our shares this quarter. As a result of our opportunistic share repurchases this year, we have bought back over $520 million of shares in the first 9 months of our fiscal year.

Regarding free cash flow and cash balance. Year-to-date, we had adjusted free cash flow of $1.3 billion, which excludes the benefit of $143 million of antitrust litigation settlements. We ended the quarter with $3 billion in cash, of which $660 million was held offshore and the majority was U.S.-denominated cash.

This completes the review of our consolidated results.

Now I'll turn to our segment results. Beginning with Pharmaceutical Distribution Services. Segment revenue was $43.5 billion, up 4.7%. The segment continues to benefit from strong specialty product sales, growth of some of its largest customers and overall market growth. Segment operating income increased about 4.9% to $412 million with our operating income margin up 1 basis point.

Our unique and balanced portfolio of customers and industry-leading specialty distribution businesses are key drivers of our performance and positively differentiate AmerisourceBergen.

Additionally, I will highlight that we have had notable success this year relating to increased penetration within our existing health systems customer base.

The execution by our Pharmaceutical Distribution businesses continues to be impressive as our teams work tirelessly to create significant value for our partners, both upstream and down, all while maintaining focus on managing our operating expenses.

I will now turn to the Other segment, which includes businesses that focus on Global Commercialization Services & Animal Health, including World Courier, AmerisourceBergen Consulting and MWI.

In the quarter, total revenue was $1.7 billion, up 9%, primarily due to growth at MWI and Consulting's Canadian operations. MWI had an exceptionally strong quarter recording its first ever $1 billion revenue quarter driven by particularly strong growth in companion animal, including strength in new customer wins and increased sales to existing customers.

From an operating income standpoint, the Other segment had operating income of $95 million, up 16%. This group is lapping some challenging quarters and also experiencing some nice growth at multiple businesses. In particular this quarter, MWI continues to benefit from maintaining, expanding and adding strong customer relationships with an intense focus on delivering exceptional customer service while optimizing its operations.

Also in the Other segment and taking a step back from this quarter's results, we continue to be encouraged by the success Lash has had in both renewing and winning long-term customer relationships in fiscal 2019, particularly compared to fiscal 2017 and 2018. The Fusion platform continues to be a differentiator for Lash's service offering. And while fiscal 2019 continues to be a transition year for Lash, we are excited about the long-term outlook of the business.

This completes the review of our segment results. So now I will turn to our fiscal 2019 guidance.

As we said in this morning's press release, we are raising our fiscal 2019 adjusted EPS guidance from $6.70 to $6.90 to our new guidance range of $7 to $7.10 as businesses across AmerisourceBergen continue to execute at a high level.

Turning now to operating income. We now expect to grow operating income in the 3% to 4% range as we have narrowed our Pharmaceutical Distribution operating income guidance to a range of 2% to 3% growth. Our operating income guidance for the Other segment is unchanged at high single-digit growth for the fiscal year.

Regarding tax rate. Entering the last quarter of the year, we are narrowing our tax rate guidance from a range of 21% to 22% to guidance of approximately 21%.

Turning now to free cash flow. Given our significant free cash flow year-to-date, we now expect our adjusted free cash flow for fiscal 2019 to be between $1.5 billion and $1.7 billion, up from our previous guidance range of $1.4 billion to $1.6 billion.

Regarding share count. Given the amount of opportunistic share repurchases year-to-date, we are lowering our expectation for weighted shares outstanding to approximately 212 million shares, down from our previous expectation of approximately 214 million shares for the year.

Lastly, we are not making any changes to our working assumptions around pharmaceutical pricing for the full fiscal year. Broadly speaking, both brand and generic pricing are trending relatively in line with our original expectations for the year.

Turning now to the fourth quarter, we continue to expect strong performance across AmerisourceBergen's businesses. However, as a reminder, the fourth quarter tends to be a lower contribution period for us. Notably, our operating expenses tend to be higher in that quarter as we exit the fiscal year. And we are not expecting the SG&A favorability experienced in the third quarter to repeat in the fourth.

As it pertains to fiscal 2020, our corporate process remains unchanged. We will provide comprehensive financial guidance at the end of the current fiscal year. This approach allows for our guidance to be fully informed by the output of our year-end business planning process.

In closing, the execution and efficiency delivered across AmerisourceBergen continues to be impressive. AmerisourceBergen's strategy, leadership in growing markets, strong customer relationships and our transition toward one ABC to increase collaboration and develop talent across the enterprise have us well-positioned and continues to create long-term shareholder value.

Thank you for your interest in AmerisourceBergen. Now I will turn the call over to the operator to start our Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Glen Santangelo from the company of Guggenheim.

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Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [2]

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Steve, I just want to talk about the margin experience this quarter. Clearly, you had strong margins in both segments. And, Jim, I appreciate the detail. But I was wondering if you could unpack those margins a little bit and maybe give us a better sense for what really drove the strength in each of the segments to help us better assess maybe the sustainability of some of those trends as we look to the balance of the year and into fiscal '20? And then I have a follow-up.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [3]

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Glen, I'd like to answer the question but Jim Cleary is literally jumping off his seat to answer. So I'm going to give him -- I'm going to give our CFO an opportunity.

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [4]

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All right. Thanks, Steve. Yes, Glen, we feel very good about the quarter. And one of the things we feel good about is, as you brought up in your question, margin performance in the quarter. And I'm going to start kind of general, then I will get into the details of it.

First of all, one thing driving our margins is our strong value proposition. And we feel like we offer very high-quality services in logistics, financing, safety, security and we offer them very efficiently. So we feel we're very fairly compensated for those services and have a strong value proposition.

If we kind of look at the overall business, revenue's up 5%, gross profit up 5%, operating expenses up 3.7% and op income up 6.8%. So we actually had a 2 basis point improvement in operating margin.

And looking at pharma distribution, and I'll get a little bit more into the detail here. Revenue up 4.7%, operating income up 4.9%. So 1% -- excuse me, a 1 basis point improvement in operating margin in pharma distribution. And that really kind of driven by very strong performance in specialty, in particular our specialty physician's services business and, of course, all the wraparound practice management services that we offer benefit our margins, and was driven by really strong performance with health systems. And we had good generic penetration with customers in our health systems business unit and so that was a benefit also. And then I'll also call out expense management benefited us also. And we got to kind of our run rate of HD Smith synergies sooner than anticipated.

So all those things really contributed strong across the board performance and pharma distribution caused us to have that 1 basis point improvement in operating margin in pharma distribution. And there's also actually a 1 basis point improvement in gross margin also in pharma distribution.

And in Global Commercialization Services & Animal Health, we had very good performance on revenue and operating income and very strong improvement in operating margin, and really operating margin is the relevant metric to look at in that business because really kind of business mix between the different business units can really impact gross margin in our Other segment.

So very strong revenue, op inc and op margin. And Global Commercialization Services & Animal Health, we talked about, the very good performance in animal health in the quarter. We also had very solid performance in World Courier, which has been operating at a very high level for quite some time. And good performance in our Consulting business and we called out the Canadian business during our prepared remarks.

So I'd say, those businesses are very well-positioned in their respective markets and taking advantage of opportunities, which really kind of drove the operating margin improvement in the Other segment.

With regard to Q4, you had asked about Q4. And kind of the good operating performance, this very solid operating performance is built into our guidance increase that you'll see. And so we are expecting very solid operating performance in Q4. We probably won't have some of the G&A benefits, particularly kind of we don't expect the -- our internal health benefit costs, we don't expect that to repeat in Q4. We probably won't have the same benefit in interest expense in Q4. But of course, that doesn't impact the margins of our business.

And you asked also about the 2020. We are in the midst of our planning process for 2020. And that process is going quite well. And we'll provide 2020 guidance when we announce our year-end results.

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Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [5]

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Steve, maybe I'll just ask you one quick follow-up on the specialty business. It clearly seems to be a big driver for you and others. And given all the regulatory proposals that are out there that seem to be targeting the higher prices of the specialty drugs, one question that sort of keeps coming up to us is can any of these proposals impact the supply chain, are there any in particular that you're paying attention to? How do you sort of reconcile that as it relates to your business?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [6]

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Yes. Thank you. And I'm really very proud of our continued strong performance in our specialty businesses. We really have a unique portfolio of market-leading companies there. Of course, we don't own any practices but have really created a lot of practice management services.

Our Oncology business is, of course, our bellwether business there but our Besse Medical business also had really strong result with much more therapies being administered in Part B offsetting outside of oncology, including urology, ophthalmology and even orthopedics, we've started to do some work there.

So it's just there's so much innovation occurring in these settings. In fact, many of the new therapies, the immuno-oncology drugs are really additive to existing product utilization trend. So -- and we have just a great portfolio of customers. Our customers are often the aggregators there, so we're retaining our strong relationships with them and we've even announced some key re-signings, but they are also some of the consolidators as it's a difficult environment in oncology for smaller practices to be self-sustaining.

So it is a trend there for the larger practices and we tend to have strong, enduring long-term relationships with a lot of those customers. But our team's been in place for a long time. We've had some really good generation [staff] changes there that have brought in some leaders that have been around a long time that have fresh visions for the company. Our relationships with pharma in these areas is very strong. I just couldn't be prouder and more confident in the way we're positioned in these position -- specialty distribution businesses. So they have been just a terrific performer in fiscal year '19, but even the preceding years as well.

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Operator [7]

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And our next question comes from the line of Eric Percher of Nephron Research.

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Eric R. Percher, Nephron Research LLC - Research Analyst [8]

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Given that you raised the opioid topic, maybe a question there. I won't ask you to comment on the ongoing litigation. But as we scratch the surface of the ARCOS data, it appears that diversion activity looks very different maybe along the blue highway in other areas of the country. And I'd love to get your perspective on whether that is the case maybe and you can share relative to how you view your position.

And then relative to the report that's coming, maybe part 2 of the question, how do you balance the need to improve your own operations without handing ammunition to the plaintiffs?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [9]

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Well, first of all, that data was through 2012. I've just finished my eighth year as CEO and that was my first year as CEO. And also in 2013, the market shifted a lot with us taking over the Walgreens' distribution. And we took over all the distribution and we've pointed to that as a key change in the market for us as we took over both brand generics and even controlled substances.

So I just -- last night, I'll tell you a personal story quickly. We had an event for our foundation and one of the foundation charities we support is a company called Eluna that helps with victims -- the victims of the crisis is children and provides summer camps for them and we [met a few of the kids]. And this crisis is one that affects our society. It's one that as an employer we take very seriously. It's is one that as a supply chain leader, we take very seriously. We -- I think you understand our role and I read your report, Eric, with a lot of interest. So we've worked collaboratively to stop suspicious orders. I feel proud of the work we've done. We've revamped our program in 2007. We've reported all our suspicious orders. And we've reported controlled substances on a daily basis as well as the [hard pressed] reporting, which is not quite on a daily basis but is in regular intervals.

We've tried to work collaboratively with the DEA and all government-sponsored agencies. We feel like we've discharged our responsibilities very faithfully and very ardently in the absence of clear information.

So the data was interesting. I don't think it's appropriate for me to get into one state versus another, it's -- we've really looked at this on a distribution center basis and, again, we feel that ABC has acted really extremely responsibly with really one hand tied behind our back. So I think that's what I'd say.

Jim, would like to add anything?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [10]

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I think that covers it really well, Steve. Thanks.

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Eric R. Percher, Nephron Research LLC - Research Analyst [11]

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Is the goal of the upcoming report to help you identify other areas or to make clear as to both actions of the past?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [12]

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Yes. So we are pleased, it's been the first positive benefit. And we like transparency, we have no problems with transparency. Our Board has had tremendous oversight. We'll be coming out in the next few weeks with a report from the Board on our own supply chain. The risk that we have as a leading distributor in the pharmaceutical supply chain, really talking about our strong compliance program, our corporate integrity programs.

We have, of course, really upped our game on this even more. I'd say that continued quality improvement really applies here. One great example is we know so much more about the customers that we bring on to service. And I don't want to sound arrogant in any way, but I would say that it's a privilege to be an AmerisourceBergen customer. You'll be treated with respect, you'll be treated with fairness and we will do our best to service and give you the fairest pricing we can.

So what we expect from you is very good ethics and very good monitoring of the prescriptions, gets you in a much bigger position to manage than we are. So we -- that is just one example. I could tell you, we have been very, very scrupulous about what customers we bring on to service, particularly in areas of risk, pharmacies that serve as pain clinics, et cetera. So I think we really covered this topic. So thanks, Eric.

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Operator [13]

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And our next question comes from the line of Robert Jones of Goldman Sachs.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [14]

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I guess just to go back to some of the growth drivers that you highlighted in the quarter. Both you and your competitor who reported last night referenced growth from the largest customers as helping out in the current quarter. It doesn't really seem like we've seen an inflection in the same-store prescription growth at the large retail customers. So just trying to get a better sense of where that growth is really coming from. Is it really more the health systems and from specialty? And if it is those channels, Steve, I'm just curious what is driving the growth there and is it in fact sustainable?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [15]

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We saw solid growth in our U.S. businesses. And one differentiator from AmerisourceBergen is we are very indexed to the U.S. pharmaceutical business. Our customers are doing interesting things. They are doing acquisitions, they are in the forefront of a lot of the change in retail. Obviously, independents are having a tougher time with reimbursement headwinds. But again, there is nothing new to that. This is a challenge that has been evident for a long time. And I think with the guidance of Elevate, some of our pharmacies have made a decision not to participate in narrow networks and have looked at what they can afford, with the strong analytics' program that we have, they've looked at what can they afford to participate in. And I think they're in a better position to understand their data. And with the strong sourcing programs we have with WBAD and the strong reimbursement access with Elevate, we think that we've set our independent pharmacies to know very well what's going on.

The larger customers, of course, like our largest customer, WBA, they understand the market well, they have their own resources in those sort of areas. And we're happy with the growth from that customer segment.

One thing I would just point to is the portfolio of customers that we have at ABC. Clearly, and now this is a trend for several years, we have overperformed relative to our sales growth in specialty. And at specialty in the Part B setting, but it's also specialty drugs in the core drug distribution business where there is so much innovation going on and where so much of the manufacturers' R&D is going.

And when I listened to these debates last night, I just -- I wonder when anyone is going to make the point that this is one of the great American manufacturing industries. And we are so proud to be a part of this and when we see these wonderful new drugs coming out and there's just so many, I mean, 50 biotech companies went public last year. So we just -- we think we're very well-positioned and we're seeing the benefit of this innovation.

Jim, anything on any specific segments? Health systems is strong as you pointed out.

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [16]

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Yes. I think what's -- Steve, as you were saying, what really benefits us is that the broad portfolio of customers, the key anchor customers, independent pharmacies, health systems, physician offices, mail order, veterinary practices, it's that broad portfolio.

And I think, in particular, this quarter, while we've benefited really in many, many areas, a couple of things to really call out as we have is specialty and physician practices and health systems. Although that can -- while those businesses should be strong over a longer period of time, different parts of our businesses will benefit us from time to time. So having that broad portfolio is a real strength.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [17]

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Yes. And I'll, however, state, of course, with the 16% earnings growth year-over-year quarter is outstanding as well. So we were really proud of our performance in some of our smaller higher growth, higher margin businesses as well.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [18]

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And then if I could sneak in one follow-up for Jim. You referenced this better-than-expected health care benefit a few times in the SG&A line. Just curious what exactly was that and if you could give us any sense on the size of it that would be helpful.

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [19]

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Yes. And we actually talk about that and had a similar benefit last quarter, in the fiscal second quarter. And so our internal health benefit expenses were better than anticipated and it's really kind of due to a couple of things. One is lower claims experience. And the second is a change in benefit design that we're getting at the beginning of the year. And so that's benefited us the last couple of quarters and it was a couple of pennies in the most recent quarter.

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Operator [20]

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And our next question comes from the line of Charles Rhyee with Cowen.

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Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [21]

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Wanted to go back a little bit about Part B a little bit more. I know you touched on it briefly earlier. Obviously, the Senate Finance Committee bill, I think, Steve, last quarter you talked about your thoughts that, obviously, your oncology clients kind of look at the Medicare plan as being sort of a difficult space here.

Looking at the Senate Finance Bill proposed, do you think that helps solve it with sort of a -- moving to sort of this inflation cap and making a sort of a fixed fee for physicians. Obviously, a move away from the IPI which seemed sort of unworkable. Just wanted to get your thoughts on what you -- what you're seeing with sort of the proposed bills as they stand now. And do you think that's a more workable solution for you and your clients?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [22]

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Yes. So a lot of the work we do in DC other than around supply chain integrity and trade quality and safety acts, those sort of things, is really advocacy for our customers. And the leader of our oncology business was just in DC this week, and we're going to be very active in areas that affect our customers, of course, our biosimilars is an interest. And what -- a sustainable overall brand pricing environment is, of course, good for us.

We also are big on patient access. Our Lash business is probably one of the best-known patient access businesses as we work to get patient access with many of these life-changing products as we can.

So we think we're very informed on this issue. I'd say, we bought the Lash Group in 1998. Ever since then, we've had the really humbling experience of the MMA where our fees [weren't] included in ASP. And I think not only ABC, but our industry and our trade associations are really on this.

We get that we have to be involved in the political process. The political process is pretty dynamic at the moment. I think that might be an understatement. We saw last month the rebate rules changed very drastically and very suddenly.

So I think, Charles, our best course of action is to stay the course, to be very involved with our customers, work with organizations like we work with COA, for example, Community Oncology Association, in oncology. And we really try to advocate a fair reimbursement and strong access for the patients that we feel we ultimately represent so that they can get settings in the -- they can get fairer settings that are most accessible and most comfortable for them and even we believe most affordable. So that's really where we're working very strongly.

Jim, it's an important question. Anything you want to add?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [23]

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I think that covers it great, Steve.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [24]

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I think Jim said a lot in the first question, so...

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Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [25]

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Yes, certainly. If I missed it earlier, can you just let me know, did you say when the auditing process is expected to be a completed for PharMEDium?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [26]

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Okay. Jim is going to take that.

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [27]

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Yes. And so the audits of our 2 open facilities are in progress and progressing well. And so it's kind of, we have previously stated, we are continuing operations at 2 of our facilities and we're also continuing our comprehensive, strategic and financial review of PharMEDium.

It's too early to speculate on future decisions, but, of course, we'll take into account the needs of PharMEDium customers and what's best for AmerisourceBergen shareholders and we'll provide updates during our next call.

And I'll also say that PharMEDium was not a headwind during the third quarter as we stated. In fact, it was a very slight tailwind in the third quarter, a smaller operating loss. And again, we don't expect it to be a headwind in the fourth quarter.

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Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [28]

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But there is no set end date yet for the audit itself. Is this just sort of like an ongoing process at the moment?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [29]

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Charles, we expect that we will have the process completed this month. Yes, yes. And I do feel good that I'm on the first of the month because these things just inevitably take longer than you expect. But we're expecting to wrap it up this month.

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Operator [30]

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And our next question comes from the line of Steven Valiquette of Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [31]

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So if we look at the new first-time generic launches so far in calendar 2019, it's actually been a pretty decent wave of exclusive launches, particularly in products that may see more a limited number of suppliers for quite some time. So I'm just curious if you're able to discuss how much our contribution from new generics is tracking relative to your expectations so far in calendar '19?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [32]

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We -- I can't say that we've seen a specific trend. I think we've talked over the last few years that this was -- when I started as CEO, this was the #1 metric we looked at. It was actually our first thing we looked at in the plan, was what the pipeline is. And as we've talked and explained many times, I think our competitors have had similar discussions that the market has changed.

The generic market I think is dynamic. We saw a big announcement at the beginning of the week. And there's a trend for authorized generics, which we think will be affected by transparency and if there is anything on the rebate rules.

So there's nothing really particular that we can talk about on new product launches, but the generic market is stable and really where we expected it to be and remains an important contributor to us for our profitability and our customer's profitability.

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Operator [33]

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

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [34]

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Steve, just given the strong cash flow, not just in this quarter but for the year, if I think back to a couple of years ago, you talked about potential strategic acquisitions in the areas of manufacturing services. Just can you give us any update as to how you look at that component of the market would be my question.

And then just on the follow-up side, as you think about pricing for both branded and generic, just curious how the quarter trended versus your expectations? And you brought up the potential merger, what you think that could do around your buying group?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [35]

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Okay. So I'll take the first one and let Jim do the second one. So thanks for the question, Lisa. We are very active. It's important -- I think it's something we spend a lot of Board time with, it's something we spend a lot of management time with and we're active. We -- if you look at my management team, so many of our team comes from acquisitions, including Bob who really essentially has both the pharma distribution and Other sector reporting to him now. Bob was really the founder of Xcenda.

So we've really -- the benefit of acquisitions is not only the portfolio effect and the acceleration of different services that we have and that the deepening of those services or the gaining of new technologies, say that, if we'd acquired a company that was really good in the areas that we're investing in with Fusion, we could have accelerated our process, for example.

So I think we just -- we are really well experienced in these areas and we want to be buying companies that have new services and new offerings that we don't have. So with businesses like World Courier and Lash and Xcenda, we have very high standards. So -- and we know the markets really well. And I think we've been trying to grow those businesses organically. But that's a good example of, do we need to do acquisitions or are we better with internal investment?

We're having a lot of -- as you've seen us invest $300 million to $400 million approximately every year. A lot of that is in technology to making us easier to do business with. It's in helping our customers understand the environments better. We've had the trade show last week and our digital offerings for our independent pharmacies, for example, were very well received.

So these are areas where we've seen more fruitful results for our shareholders than investing in small companies that sometimes are trading it up to 15x to low 20x EBITDA. So we are financially driven as well. We -- our Board really holds us to a standard and the management holds us to a standard, seeing these acquisitions be accretive within a reasonable time frame.

So we've brought in Leslie Donato and we think Leslie is going to do a great job and she knows the market, she's been a customer in her previous roles. She understands our commercialization businesses. Certainly, Jim, our CFO, has done a lot of M&A, but also some very interesting JVs and partnerships where it made more things to partner with the right company.

So I think we are focused on this area but it has to be at the right price and it has to be a company that is going to give us really an accelerant in our portfolio or new market share. We did HD Smith not all that long ago and I think that's a good example of executing on our core business also as we almost complete all the synergy capture by the end of this fiscal year.

Jim, please answer the second question of...

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [36]

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Yes, sure. And the second question, I believe, were on brand inflation and generic deflation, and I'll get into those. And -- but you know what, you're right. Our cash flow is very strong. And, of course, we've done over $500 million of share repurchases that's fiscal year and also we have been investing a lot in our manufacturer services business like Fusion and Lash and NOVA and World Courier.

But with regard to the inflation and deflation question that you would ask and branded inflation, yes, directionally as expected year-to-date, we had said mid-single digits in our fiscal year '19 guidance. So directionally as expected. And as you know, 95% of our branded buy side margin is fee for service. So it's really kind of the other 5% that relies on price increases from manufacturers for our economics.

And also in generic deflation, generally in the range of original expectations that we had put out at the beginning of the year and kind of generally in range of those original expectations.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [37]

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And operator, we have time for one more question.

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Operator [38]

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Perfect. And our last question comes from the line of Ricky Goldwasser of Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [39]

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So my question is about a strategic partnership with OneOncology. How is it structured? Do you share the profits? And do you -- and as part of this, do you have an opportunity to influence formularies? And do you see any clear -- any other opportunities to form similar relationships with other providers?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [40]

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Yes. We have -- certainly we announced OneOncology. It's really a partnership with ION and -- which is our practice management and contracting division. And certainly, again, as some of these oncology groups become bigger, our relationship with them is always interesting. I think that they have a sort of culture that's going to challenge us to keep on adding new contracting services, a new level of value to them as they really expand into various states.

We have, Ricky -- and while OneOncology is new, we have 2 or 3 other customers that are of -- that are in the practice aggregation business and that we are contracting with and other customers that are very strong in their region. So this is -- 2 of the 3 founding practices were -- not to get too granular, but 2 of the 3 founding practices of OneOncology were existing customers. And I think then you go to a new business and this is the sort of situation that we've seen in many of other sectors. So we actively participated and I think we're very proud that AmerisourceBergen was chosen to be the prime vendor and the services provider for that customer.

So thank you for the question. So with that, we're going to wrap up our third quarter call. And I just want to say that I think that this year has been a year of tremendous execution for our business, both on the pharma distribution and on the Other sector. Our corporate staff is working very well. We're responding to situations that arise, be it reimbursements or the challenges of the opioid process as one ABC. I think you're seeing an intention to get the PharMEDium issues resolved and behind us.

So I just think this has been really 9 months of solid execution. And as we look at the long term, I just would point you to the key drivers that have made AmerisourceBergen successful, which is our focus on the supply channel, our really strong deployment of capital and cash flow, whether it be an internal program, acquisitions or business expansion, internal investments. And really just a management team that knows how to keep those well-placed customers and work with them to ensure that they are successful in the marketplace and in turn AmerisourceBergen is successful.

So thank you for your time today, and this has been a pleasure having this hour with you with such good results to share. Thank you.

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Operator [41]

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Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.