AmerisourceBergen Corporation (NYSE:ABC) Q1 2023 Earnings Call Transcript

AmerisourceBergen Corporation (NYSE:ABC) Q1 2023 Earnings Call Transcript February 1, 2023

Operator: Hello, everyone, and welcome to the AmerisourceBergen Q1 FY 2023 Earnings Conference Call. My name is Bruno and I will be operating your call today. I will now hand over to your host, Mr. Bennett Murphy. Mr. Bennett. Please go ahead.

Bennett Murphy: Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen’s fiscal 2023 first quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. 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. Reconciliation of these measures to GAAP are provided in today’s press release, which is available on our website at investor.amerisourcebergen.com. We’ve also posted a slide presentation to accompany today’s press release on our investor website. During the 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 expressed permission of the company. You will have an opportunity to ask questions after today’s remarks by management and we ask that you limit your questions to one per participant in order for us to get to as many participants as possible within the hour. With that, I’ll turn the call over to Steve.

Steve Collis: Thank you, Bennett. Good morning and good afternoon to everyone on the call. Today, we will discuss AmerisourceBergen’s fiscal 2023 first quarter results, our future under a new unified identity, and our impact from our position at the center of global pharmaceutical innovation and access. In the first quarter of fiscal 2023, we delivered solid financial results, with revenue of nearly $63 billion, representing 5% growth on a year-over-year basis along with adjusted EPS growth of 5%. These results reflect the resilience of our business as we focus on execution excellence, provided value-added solutions to our customers, and benefited from our strong market position. We also acted on opportunities to utilize our strong balance sheet to employ our value-creating approach to capital allocation.

Our business continues to have strong fundamentals as we maintain our focus on providing a differentiated value proposition to our customers and partners up and down the health care value chain. Importantly, our performance underscores the strength of our pharmaceutical-centric strategy, as we leverage our expertise, capabilities and scale to drive our long-term sustainable growth. As we announced last week, our future includes operating under a new unified identity as Cencora. Our new name resonates with customers and team members across geographies, reflects who we are as a purpose-driven organization, and better represents our impact across pharmaceutical care. Cencora also aligns with our growth strategy and long-term vision of building on our leadership in pharmaceutical distribution and growing our high-margin, high-growth businesses.

Importantly, while our name will be changing, our purpose and who we are as an organization remains the same. We remain united in our responsibility to create healthier futures as we focus on advancing our core business, enhancing our capabilities and growth and innovating to further drive our differentiation. We continue to advance our core business by providing our market-leading customers with a leading distribution network. Throughout our history, we have invested in our infrastructure to ensure that critical medications reach their destinations efficiently, reliably and securely. We also seek to be next-minded in our investments, and we have further enhanced our specialty distribution infrastructure with a new state-of-the-art facility on the West Coast, which we celebrated opening during the quarter.

We are now even better positioned to support our customers and partners with the unique logistical needs and by facilitating patient access to their specialty medicines, we promote the continued rapid growth of specialty pharmaceuticals in the market now and in the pipeline for the future. To strengthen our role as the partner of choice for global pharma and biotech companies, we continue to plan for the future of healthcare delivery and enhance our capabilities accordingly. This includes building on our legacy of leadership in specialty medicines to support our customers’ growing needs across a broad range of categories. We have recently expanded our portfolio of specialty solutions with the acquisition of PharmaLex, a leading provider of pharmaceutical services ranging from clinical development consulting to market authorization.

PharmaLex enhances our capabilities with additional regulatory affairs, development consulting and scientific affairs, pharmacovigilance and quality management and compliance services in both the US and internationally. With these enhancements, the acquisition not only advances our strategic imperative of expanding on our leadership in specialty but also on investing in innovation to further drive our differentiation. With assets such as PharmaLex, our comprehensive portfolio of specialty distribution and commercialization solutions is uniquely positioned to serve pharma and biotechs across the product life cycle, lead specific logistical and market access needs and ultimately deliver the most innovative and promising treatments to the patients who need them.

As we continue to support pharmaceutical innovation and access, we are focused on enhancing our differentiation by investing in our business to support our partners in bringing the latest scientific advancements to patients worldwide. In the area of cell and gene therapy, for example, we have many capabilities to serve our customers’ current and future needs. This includes our technology-centric partnerships such as our integrated technology platform designed to accelerate patient access to prescribe cell and gene therapies and to deliver complete visibility throughout the treatment journey. This also includes investing in our global specialty logistics capabilities which range from facilitating decentralized clinical trials to providing white glove distribution of the most time- and temperature-sensitive therapies.

With capabilities that ensure life-sustaining pharmaceuticals are consistently delivered on schedules at the right temperature and through the most complex situation, we have gained the trust of pharma and biotechs worldwide to be their partner of choice. This trust is built individually partner-by-partner, and behind each success story is the unparalleled dedication and talent of our team members who now include the team from PharmaLex. Our people are the foundation that drives our business forward and I’m humbled every day by the impact we make as we are guided by an unwavering pursuit of our purpose. United in our responsibility to create healthier futures, we embrace our role as a responsible business from a foundation of ethics, integrity, and transparency, we are committed to advancing our environmental, social, and governance initiatives to foster a positive impact on the planet and people while improving access and equity in health care.

Last week, we published our seventh annual environmental, social, and governance report, which highlights the progress we made in fiscal 2022. I’m particularly proud of the progress we made to create a more diverse, equitable, and inclusive culture. In fiscal 2022, we established a center for excellence that oversees governance of DEI, including our DEI Global Counsel and employee resource groups, establish channels through which teams across the organization can better partner, collaborate and consult, and improve the way we measure our progress using a data-driven approach. In a similar fashion, our supplier diversity program has made great progress investing in minority-owned enterprises. I’m impressed by the direct, indirect, and community impacts of our $1.8 billion spend with small and diverse suppliers.

Through our program, we have supported more than 11,000 jobs within our supply chain and in suppliers’ communities. We remain committed to making a positive impact in our communities. In recent years, our business has been at the forefront of responding to global health care challenges including the COVID-19 pandemic and the mpox public health emergency. From these experiences, we have strengthened our public and private relationships and further evolved our capabilities to increase our agility and resiliency. We are well-positioned to solve for potential future challenges, in particular, those that disproportionately affect vulnerable populations due to our footprint, reach, and strong relationships with governments, manufacturers, providers, and community organizations.

One significant global health issue that we are helping to address is antimicrobial resistance, which the World Health Organization, the US government, and the European Commission have each initiated action plans around. We recently led a call to action for health care distributors in partnership with GIRP, the umbrella organization for full-service health care distributors in Europe to explore public and private multi-sector collaborative efforts to drive a global response. ESG has become increasingly important to our stakeholders and to hold ourselves accountable to making progress in areas that further our business objectives and reinforce our ESG priorities. We are incorporating an ESG metric within our executive compensation program for fiscal 2023.

Designed based on feedback we have collected, our ESG metrics includes three quantifiable components focused on business resiliency planning for climate-driven events, female representation in leadership roles globally and employee inclusion and engagement. As we continue to think about what the future holds for public health, pharmaceutical innovation, care delivery and more, we are also constantly evaluating our leadership to ensure that we have the right team driving our future success. This includes the individuals guiding our organization from the top and we are pleased to have welcomed Dr. Redonda Miller to our Board of Directors in January. The addition of Dr. Miller, who is President of Johns Hopkins Hospital, further illustrates our focus on adding key skill sets and diverse perspectives to help support our business strategy and delivering on our purpose.

We also want to offer our sincere thanks and appreciation to Dr. Jane Haney and Mike Long for their meritorious service. Their advice, wisdom and counsel have helped shape the AmerisourceBergen of today. Looking forward to the rest of the year and beyond, we are powered by the resilience of our business and remain confident that our pharmaceutical-centric strategy will deliver long-term sustainable growth by enabling us to capture exciting opportunities in pharmaceutical innovation. We have a strong foundation in place, and our high margin, high-growth services reinforce the differentiated value we provide to our partners and customers, which in turn strengthens our relationships and bolsters our position at the center of global pharmaceutical innovation and access.

As we continue to advance our foundation, enhance our capabilities and invest in innovation to further drive our differentiation, we remain purpose-driven and well-positioned to create significant shareholder value. Now I will turn the call over to Jim for a more in-depth review of our first quarter results and our updated guidance. Jim?

Jim Cleary: Thanks, Steve. Good morning and good afternoon, everyone. Before I turn to our results, I want to join Steve in expressing my excitement on our recent announcement that we intend to change our name to Cencora in the second half of calendar 2023. By becoming Cencora, we will be able to better connect with our team members, customers and other stakeholders on a unified basis across our footprint, and Cencora will better represent our role and impact as a leading healthcare solutions organization supporting pharmaceutical innovation and access. Now turning to our first quarter results, and as a reminder, my remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated. AmerisourceBergen delivered solid results in our first quarter that were mostly in line with our expectations.

We finished the quarter with adjusted diluted EPS of $2.71, an increase of 5% over the prior year quarter. Adjusted EPS benefited from a lower share count as a result of our recent opportunistic share repurchases, and strong fundamentals in our business helped offset previously anticipated elevated expenses in the quarter. Our consolidated revenue was $62.8 billion up 5% driven by growth in our US Healthcare Solutions segment, which was offset by foreign currency pressure on the translation of our sales in the International Healthcare Solutions segment. While the US dollar weakened from the historically strong levels seen in the fourth quarter of fiscal 2022, the year-over-year comparison still created a headwind as expected, which I will discuss in more detail when reviewing segment level results.

Consolidated gross profit was $2. 1 billion, up 5% due to growth in the US Healthcare Solutions segment. While each segment had better gross profit margins relative to the prior year quarter, consolidated gross profit margin was flat year-over-year as the foreign exchange impact on the higher-margin International Healthcare Solutions segment was a drag on margin growth at the consolidated level. Consolidated operating expenses were $1.4 billion, up 9.8% due to higher distribution, selling and administrative expenses to support revenue growth and reflecting inflationary impacts on certain operating expenses. As I called out on our November earnings call, we did not begin to see inflationary pressures in our business until towards the end of the March 2022 quarter.

The higher expense growth rate in this year’s first quarter was driven by a tougher comparison versus the prior year period. We expect the operating expense growth rate to decline sequentially in the subsequent quarters and to become a more normalized rate for the full year. Consolidated operating income was $734 million, a decrease of approximately 2% compared to the prior year quarter or up 4% on a constant currency basis. The as-reported decline was driven primarily by the impact of foreign currency translation for the International Healthcare Solutions segment, and was partially offset by growth in the US Healthcare Solutions segment, which I’ll discuss in more detail when I review segment level results. Moving now to our net interest expense for the first quarter, net interest expense was $46 million, down approximately 14% due to higher interest income resulting from higher cash balances and interest rates on investments.

Looking ahead, our average cash balances will be lower following the opportunistic share repurchases we announced in the quarter, the successful early completion of the PharmaLex acquisition, and the upcoming March 2023 debt repayment. Our lower invested cash balances will drive our net interest expense higher in the coming quarters and result in higher interest expense versus fiscal 2022, as I called out in November. Turning now to income taxes, our effective income tax rate was 19.1% compared to 21.2% in the prior year quarter. The lower tax rate for the quarter was in line with our expectations and we continue to expect our full year effective tax rate to be in the range of approximately 20% to 21%. Our diluted share count was 206.3 million shares, a 2.3% decline compared to the first quarter of fiscal 2022, driven by opportunistic share repurchases over the past several months, including $700 million of repurchases completed in November and December.

Regarding our cash balance, we ended the quarter with approximately $1.7 billion of cash due to the timing of holidays around the PharmaLex acquisition closed at the beginning of January. We prefunded the acquisition on December 29, which resulted in a prepaid asset on our balance sheet and lower cash balance when we closed the quarter. In the quarter, adjusted free cash flow was $584 million, and we remain on track to achieve our adjusted free cash flow guidance of approximately $2 billion for the fiscal year. This completes the review of our consolidated results. Now I’ll turn to our segment results for the first quarter. US Healthcare Solutions segment revenue was $56.2 billion, up approximately 6% for the quarter as we continued to see strong specialty sales and broad based solid growth in our human health distribution businesses.

US Healthcare Solutions segment operating income increased by approximately 1% to $572 million. Sales to specialty physicians and health systems were once again strong in the quarter as our leadership in specialty continue to position us well to deliver growth including in biosimilars, where we are seeing good trends in oncology and more recently, ophthalmology. The strength in specialty and broad-based good utilization trends in human health distribution helped to offset the previously anticipated higher operating expenses, as well as softness in the animal health market. As has been widely discussed in the animal health industry, there are short-term pressures in both the companion and production animal markets. From a cadence perspective, however, some of the softness in our animal health business in the quarter is related to timing and will normalize in the second quarter.

I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $6.6 billion, down 0.6% on a reported basis or up 17.7% on a constant currency basis. The as reported decline was driven by the impact of foreign currency translation on revenue for Alliance Healthcare as the business is more exposed to currency fluctuations. International Healthcare Solutions operating income was $161 million, down approximately 10% on a reported basis, driven by the impact of foreign currency translation on income for Alliance Healthcare and the divestiture of ProPharma Specialty, which represented approximately 3% of segment operating income in the first quarter of fiscal 2022. When looking at the segment on a constant currency basis, it delivered 11% operating income growth driven by solid underlying fundamentals and favorable manufacturer price adjustments this quarter in one of our developing market countries.

From a cadence perspective last year, this price adjustment occurred in our second fiscal quarter. This price adjustment activity offset the negative impact of the decline in the value of the local currency. That completes the review of our segment level results. I will now discuss our updated fiscal 2023 guidance expectations. As a reminder, we do not provide forward-looking guidance on a GAAP basis, so the following metrics are provided on an adjusted non-GAAP basis. I will also provide certain guidance metrics on a constant currency basis. Full details of our fiscal 2023 guidance can be found on Pages 8 and 9 of our earnings presentation on our Investor Relations website. I’ll begin with EPS. We are raising our full year diluted EPS guidance to a range of $11.50 to $11.75 up from our prior range of $11.30 to $11.60, representing growth of 4% to 7% on an as reported basis, or 6% to 9% on a constant currency basis.

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Our increased EPS guidance range is primarily a result of our opportunistic share repurchases in the first quarter, which results in our updated guidance on full year diluted average share count. We now expect our share count to be approximately 206 million shares, down from our previous range of 207 million to 209 million shares. Our increased EPS guidance range is also a result of the higher as-reported operating income and international health care solutions, partially offset by the reduced contribution from COVID in the US. Next, I would like to provide a brief update on COVID-19 treatment distribution contributions. In the first quarter, COVID-19 treatments contributed $0.12 to our consolidated EPS compared to $0.14 in the first quarter of last year, with about $0.09 in the US and $0.03 in our international segment.

Given trends we have seen to-date, we now expect the full year contribution from COVID-19 treatment distribution to be in the range of $0.25 to $0.30, down from our previous range of $0.30 to $0.35 that we provided in November. For the rest of the year, the majority of the expected COVID contribution is in the US segment with just a few more pennies of contribution expected in the International segment for the year. To reflect the lower expected contribution from COVID treatment distribution, we are lowering the bottom end of our US healthcare solutions as reported operating income guidance. We now expect the segment to deliver as reported growth in the range of 1% to 4% growth widened from the prior range of 2% to 4% growth. Our guidance for the US Healthcare Solutions segment excluding COVID contributions remains unchanged at 5% to 7% growth in fiscal 2023.

Now moving to the International Healthcare Solutions updated segment-level operating income assumptions. We are raising our as-reported operating income guidance for the International Healthcare Solutions segment to a range of a decline of 3% to growth of 1% from our previous range of a decline of 7% to a decline of 3%, driven by the general weakening of the US dollar and the incremental contribution from PharmaLex. The accretive and strategic deal is another example of how we create incremental value through capital deployment, and we are excited to welcome the PharmaLex team to AmerisourceBergen. PharmaLex’s leading solutions built upon our existing capabilities and will allow us to deepen our partnerships with pharma manufacturers as we provide support throughout the cycle from clinical development to regulatory support and access strategies to providing logistics services.

For additional operating income guidance measures for the International Healthcare Solutions segment, I would refer you to our investor presentation deck. These guidance measures also were increased driven by the general weakening of the US dollar and the incremental contribution from PharmaLex. In summary, regarding the updates we have made to guidance, there is no change in our guidance for as-reported consolidated adjusted operating income. And we are raising our adjusted EPS guidance for the full year, all while lowering our expectations for COVID contributions. Before I turn to my closing remarks, I would like to briefly discuss a few highlights about how we are working to ensure a resilient supply chain and mitigate our impact on climate change.

As a crucial member of the global pharmaceutical supply chain, we play a key role in ensuring the safe and reliable supply of medications. We take this role seriously and have robust plans and teams in place to support supply chain resiliency. In fiscal 2022, we advance these efforts and expanded the scope of our physical risk assessment process to reflect our expanded footprint since we last conducted a physical risk assessment in 2020. In 2022, we included nearly 400 sites across 24 countries, up from 100 sites. The updated assessment will inform our business continuity planning process to help ensure the continuity of supply in the event of extreme weather or natural disasters. While we prepare for and adapt our business to address the impacts of a change in climate, we continue to look at ways we can reduce our carbon footprint and be good environmental stewards.

As part of these efforts, in May 2022, we submitted a near-term target to reduce our greenhouse gas emissions to the science-based targets initiative for validation. In January, we learned the science-based targets initiative approved our near-term science-based emissions reduction target. In addition to the items Steve and I have discussed today, our recently published ESG report contains additional information on how we are living our purpose and creating healthier futures through our ESG initiatives. The report aligns with a number of leading ESG reporting standards and frameworks and key data points have been externally assured. I would encourage you to review the report’s entirety on its dedicated microsite at esg.amerisourcebergen.com.

In closing, our updated fiscal 2023 guidance reflects our continued strategic use of capital to create value for our stakeholders through a combination of returning capital to shareholders and investing in our business to further our value proposition for our partners. Powered by the continued resilience and growth of our business. As we progress through 2023, we remain focused on executing on our long-term strategy, and through our foundation and pharmaceutical distribution and complementary higher-margin, high-growth businesses, we are well positioned to create long-term sustainable growth. Now I will turn the call over to the operator to open the line for questions. Operator?

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Q&A Session

Operator: Our first question is from Elizabeth Anderson from Evercore. Elizabeth, your line is now open. Please go ahead.

Elizabeth Anderson: Hi, guys. Thanks very much for the question. I was wondering if you could talk about PharmaLex a little bit more. Obviously, that was nice to see the transaction closed early. And now that you’ve had it for a whole month, I was wondering if you could talk a little bit about what some of the early wins are in terms of from like a client perspective and sort of what they’re most interested in, and what are some of the things that have been new to you since fully taking ownership of the asset.

Steve Collis: Hi. Good morning, Elizabeth, and thanks for the question. Maybe I could just start with some general comments about our approach to capital deployment. Literally, there’s nothing this management team takes more seriously other than our reputation and capital deployment. It’s our key opportunity, and we want to make sure that we leverage all the available dollars we have. Having said that, PharmaLex is a continuation of AmerisourceBergen’s strategy of investing to further our leadership in specialty distribution and services. Our portfolio has literally been built through decades of significant organic and inorganic strategic investments, including this recently completed acquisition. This is complementary to our US existing manufacturer services platform, and also, you will recall that when we bought the Alliance business, we focused on their value-added services businesses, and in fact, pointed out that they had a higher percentage of the operating income coming from those services.

So, we feel that this significantly enhances our international capabilities. AmerisourceBergen is focused on growing our higher-margin, higher-growth businesses. And particularly, we’ve identified this area as a robust area for us. Our goal is in the long term to be the first stop for any services that manufacturers would like to deploy our businesses like PharmaLex and AmerisourceBergen for. Let me also just say that I was literally two weeks ago with the PharmaLex management team. We’ve had some calls before, it was a pleasure to meet them in person. I’ve been very impressed with the approach that Bob Mauch and his leadership team have taken with this integration and with the merging of PharmaLex into our existing businesses. And I’m very excited about the opportunities ahead for this acquisition.

Thank you.

Operator: Our next question is from Michael Cherny from Bank of America. Michael, your line is now open, please go ahead.

Michael Cherny: Perfect. Thank you so much for taking the question. Maybe if we can dive into the US segment for a bit. There’s a number of moving pieces embedded within your reiterated 5% to 7% ex-COVID EBIT growth. You talked about some of the OpEx pressure you have that’s annualizing over the course of the year versus last year. You talked about some of the variability in animal health. Along the other side, what’s allowing you to drive forward with hitting that robust growth metrics, thinking through where some of the potential upside variability may be in volume versus price versus mix? Just curious to dig a little bit more into some of the good stuff there that’s putting you basically within the general range that you would typically have as part of your long-term guidance from last year’s Analyst Day?

Jim Cleary: Yes. Thank you, Michael, for asking that question and I think really kind of a key point and a key takeaway is that we really have continued strong performance in our US business and strong performance in specialty and broadly across human health distribution, and we’re seeing continued strong utilization trends. And so that’s true in the US, and it’s really true at Alliance also where we saw international strong performance and utilization trends during the quarter. I called out in my prepared remarks as you referenced that COVID came in below our expectations during the quarter. And as I said in the prepared remarks, we had a softer quarter for animal health and higher OpEx growth rate during the quarter, but we expect that to normalize for the full year.

And really kind of, I think, the key takeaway is just strong performance and execution both in specialty and broadly across human health distribution, and that’s kind of evidenced in our maintaining that guidance rate, excluding COVID of 5% to 7% in the US segment. And as reported, excluding COVID, on a consolidated basis, improving our adjusted operating income guidance from 3% to 5% to 4% to 6%.

Operator: Our next question is from Erin Wright from Morgan Stanley. Erin, your line is now open. Please go ahead.

Erin Wright: Great. Thank you. Can you speak a little bit more about what you’re seeing in terms of underlying utilization trends in that international wholesaling business? And have there been any surprises in the most recent quarter that we should be aware of, and how should we be thinking about the quarterly cadence for the balance of the year there? And just more broadly, kind of on international, in the next five years or so, does your international segment and footprint and integration across that business look vastly different to you? And just with the name change and just thinking about how you think about the contribution of international over the next five years or so. Thanks.

Jim Cleary: Yes, I’ll start with some to the question, Erin, and then I’m sure Steve will want to comment also. So in the international business, we’re seeing good utilization trends and performance. Alliance had another strong quarter. If we look at our guidance update that we’ve done in the International segment, as I mentioned during the prepared remarks, on an as-reported basis, we increased our guidance by 4 percentage points at the low end of the range, and 4 percentage points at the high end of the range. And that’s essentially evenly split by the impact of FX since the dollar has generally weakened since we put out guidance and also the early close of PharmaLex. And so each of those things is worth about 2 percentage points.

But overall, in terms of the execution of the business, or I should say the performance of the business, we’re seeing really good execution by the management team and a good utilization trends. The one thing I’ll comment on, and I did mention this in the prepared remarks, is there was a price increase in a developing market that happened in the first quarter of this fiscal year that happened in the second quarter of last fiscal year. So that will impact the cadence just a bit. Steve?

Steve Collis: Yes, thanks, Erin. I think AmerisourceBergen is very is very consistently facing — is trying to really be squarely in the prescription drug market, our services and distribution are anchored around the prescription market. I’ve been impressed with Alliance. It’s now our seventh quarter reporting them, and they’ve been very resilient. We have strong market positions in almost every country we’re in. and where we’ve had to, we’ve complemented it. Some of the smaller markets, for example, Norway and Netherlands, we’re in retail. We’ve also got a very strong Alloga business, which was one of the most interesting aspects of this integration and acquisition for us. We’re aligning that very closely with our ICS business, which is being more closely aligned with World Courier in the past historically and is focused on the more complex therapies.

And Alliance Alloga business has a very strong basis in core pharmaceutical products. So I’m also excited about what PharmaLex is going to bring to the equation. We have about 2,500 team members that we’ve added with PharmaLex and about 800 of them have PhD equivalent degrees. I go back to my experience and a lot smaller scale, but when we acquired Xcenda when I was at the specialty group, the uplift in talent and intellectual thought around the manufacturer was so important to the development of the specialty group, and I think that PharmaLex can be analogous to our European and international business growth. So, we’re — I think we’re just are very well-positioned. I like what this acquisition is going to bring to us. And Jim just has one more comment I’d like to make.

Jim Cleary: Yes, thanks. Just one thing I do want to say, Erin, thanks very much for the question on international, I do want to say, of course, as you look at our business overall, our operating income mix is about 80% in the US and 20% international.

Steve Collis: Thanks for the question.

Operator: Our next question next from Eric Percher from Nephron Research. Eric, your line is now open, please go ahead.

Eric Percher: Thank you. A question on US health care, I see you pretty consistently called out specialty to physician practices as a growth driver. And I noticed the last quarter or two, we haven’t seen mail called out, recognizing it could be reading too much into the — a few words here. But I’m curious, is there any change to distribution activity or self-distribution for the largest mail and specialty clients, and I know there’s been some discussion that we could see biosimilar source directly as we see larger volumes in the pharmacy benefit. Any thoughts on those trends?

Steve Collis: So, Eric, thanks for the question. No, we — AmerisourceBergen is focused on following the prescription dollar — so we have a broad segment of our customers, and I think it’s well known that Express Scripts Cigna is our lead customer in that area. They are a fast-growing customer and we’re not going to comment too specifically on them. But some of the customers do source Part D, more specifically Part D products directly and we’ll see that, that trend could continue. But it’s just really one segment of our portfolio of customers, and we’re happy with the relationship. We want to do the best job we can as a distributor for them. And the needs of large complex customers like Express Scripts are very different than the needs of some of our smaller customers that tend to use our services more readily. So, probably that’s all on that. Jim, anything you’d add?

Jim Cleary: I think that covers it. Thanks.

Operator: Our next question is from Charles Rhyee from Cowen. Charles, your line is now open, please go ahead.

Charles Rhyee: Yes, thanks for taking the questions. You mentioned before opportunistic share repurchases over the last few months. Can you talk about sort of what the capacity you have to continue to do that if, for example, Walgreens was to continue to take down its stake in the company, can you kind of give us a sense for sort of where you are in terms of that?

Jim Cleary: Yes. We obviously, we feel very good about the opportunistic share repurchases we’ve done over the past several months. And as you know, we’ve successfully collaborated with Walgreens on their two latest sales, repurchasing about $700 million in shares in conjunction with those sales. And we view these as a good opportunity to repurchase shares. And we continue to maintain a collaborative relationship with WBA. And we would expect to work together on any future plan sales, including potentially repurchasing shares. And that’s as a result of our very strong financial position, which continues, of course, and our focus on opportunistic share repurchases. And so if they do decide to sell additional shares, we would view it as an opportunity to repurchase.

Operator: Our next question is from George Hill from Deutsche Bank. George, your line is now open. Please go ahead.

George Hill: Good morning, guys and thanks for taking the questions. Jim, I’m going to take a shot at kind of two numbers related questions. I guess number one is with the closing of PharmaLex, can you say whether or not manufacturer services is now greater than 50% of gross profits in the International segment? And my brief follow-up would be is that if we look at the macro level, specialty drugs are now approaching 50% of kind of total sales in the Pharmaceutical segment. Is it safe to assume that, that mix is kind of reflective of ABC’s US drug sales mix as well? Thank you.

Jim Cleary: Yes, and so there was a lot there, and we specifically do not break out the percentage of manufacturer services. But I will say that those sorts of services are a really important part of our international business, just like they are in the US business. And I think one kind of key thing to call out is you’ll note that our operating margin is significantly higher in the International segment than it is in the US segment. And the reason for that is those higher-margin services businesses are a higher percentage of sales in our international segment than they are in the US segment. And they’re driven historically by things like World Courier, of course. But Alloga also, which is Alliance’s very successful 3PL business and some of alliances services business.

And now it’s an even greater percentage of the business given the exciting acquisition of PharmaLex. And so that’s just a little bit of commentary on the international market. And you asked about specialty products. In some cases, a number of the specialty products in the international market are 3PL. And so I think you also asked about the US business. And of course, specialty continues to be a driver for us in the US market, as you know, very well. And we’re a leader in the specialty business, both for physician practices and for non-physician parts of the business, and it’s really kind of a leading part of our legacy businesses that Steve started many years ago and a super important part of our future through our key partnerships.

George Hill: That’s helpful. Thank you.

Operator: Our next question is from Steven Valiquette from Barclays. Steven, your line is now open. Please go ahead.

Steve Collis: Steve, are you there?

Operator: Steven, your line is now open. You can proceed with your question.

Steve Collis: All right, we’ll go to the next question then Bruno.

Operator: No Problem. Our next question is from Eric Coldwell from Baird. Eric, your line is now open, please go ahead.

Eric Coldwell: Thanks very much. Two, if I might, and they’re both somewhat related in terms of when you first outlined the guardrails on fiscal 2023 outlook versus the updates today. First one, HUMIRA. I know pound-for-pound, it’s not as important as certain other drugs due to the channel of administration. But have your views changed at all now that we have front and center, we have the launch here? Have you had any change in perspective on the dynamics of that particularly large biosimilar in the market? And then second and somewhat correlated on the guidance timing through the last seven, eight months, whatever it is, the corporate name change in rebranding, maybe a bit of a silly question, but there will be some expenses associated with that absorbed in guidance or is it incremental?

I guess, when you first laid out the guardrails on fiscal 2023, were you assuming some expenses here or is this a newer topic that you’ve just subsequently absorbed? And if you could quantify that impact on the expense and capitalization side, it might be interesting? Thanks so much.

Steve Collis: Thanks. Good to hear from you Eric. So, I’ll start off. Obviously, we’ve talked about this for a while, and it seems like it was never going to be here. But of course, our first biosimilar HUMIRA launched this week, and it’s an important drug for the US health system, by some measures, the largest drug in history. And the introduction is going to be an important creator of headroom for the new innovative therapies that AmerisourceBergen is so well-positioned to serve our stakeholders in. So, that’s important. The first — so we’re interested to see how the trends go. And again, in July, we’ll see some more entrants, and some of them have different clinical aspects to them as you well know. But we’ve said consistently that Part B is our sweet spot.

This is very much a Part D drug, and it will be incrementally better for us in margins, but it’s mostly mail order. And as was pointed out previously, some of our Express Scripts, for example, and other customers in that category could be ordering directly, and they have limited locations, and it’s a much easier distribution function for manufacturers to fill. So, not — it won’t change our guidance or anything too much, but it is a very serious milestone in biosimilars, and we’ll look to see how the market absorbs this product. Jim, anything on the other guidance aspects?

Jim Cleary: Yes, Eric had asked about the name change and some of the costs and whatnot related to the name change. And Eric, we aren’t going to get into a lot of specifics at this time, but I will say that the spend will be spread out over the next three years, and it really happens in three phases. The first is planning and preparation, the second is launch, and the third is ongoing brand migration and a majority of these costs will be GAAP only as they are nonrecurring in nature. And then a portion of the cost will be capitalized and depreciated over time and recorded against our adjusted non-GAAP results. I’ll also comment that with regard to amortization of some of our existing trade names, there will be an increase in amortization expense, and it will be recorded and disclosed beginning in our March quarter and as a reminder, amortization expense relating to trade names is accounted for as a GAAP-only expense and is not included in our adjusted results.

Operator: Our next question is from Steven Valiquette from Barclays. Steven, your line is now open. Please go ahead.

Steven Valiquette: Great. Thanks. Good morning. Thanks for squeezing me back in here. Just a general question around Europe. There’s been some chatter in the marketplace about the possibility of expansion, the ability for entities in certain European countries to be able to potentially source drug inventory from other external European countries that may lead to lower drug costs. I guess I’m just curious if you have any high-level thoughts around this and at least maybe directionally, maybe talk about how this could impact your international operations. Thanks.

Steve Collis: Yes, so not a key area of focus for us. There is definitely a parallel trade market in Europe, which is actually highly regulated. But I haven’t heard that there’s any intention. This is not something we focus on. I haven’t heard that there’s any intention to expand that. And we really don’t have much further insight on that. Jim, do you agree?

Jim Cleary: Yes. Next question, please.

Operator: Our next question is from Brian Tanquilut from Jefferies. Brian, your line is now open. Please go ahead.

Brian Tanquilut: Hey, good morning. Just a quick question. Steve, how are you thinking about macro in the US? It looks like the US business is holding up pretty well, but as I think about your guidance for the year, how should we be thinking about the assumptions you’ve baked in, in terms of the expected hitting of the recession sometime in the middle of this year? Thanks.

Steve Collis: Yes, we, AmerisourceBergen, I think if we prove one thing, and our industry, in fact, has proved that we are pretty resilient. And what’s important to us is that our — the patients that we ultimately serve are able to access products. And the payer systems, both the commercial and government systems, continue to work very well. And I think I’ve told the story many times and in 2009, which is my first year running the full-on drug wholesale business in that time, and of course, the whole world was melting down. And we had less than $4 million or $5 million in bad debt. So but key for all of our businesses, whether it’s Europe or US, is continued patient access to care. And in many cases, we are working with single-payer systems.

But I just want to stress that one of the beauties about AmerisourceBergen is we go through many cycles, but the core and the specialty businesses and the manufacturer services we provide are so fundamental to the health systems. And then we are also very good at adapting to whatever changes we need to make. So I would say COVID is an extremely applicable application of that. We really were able to adjust so many of our businesses to go virtual and really had one month of disruption, I would say, because of just so much of the economy moving inside. But other than that, I have to say that AmerisourceBergen has proven through all sorts of cycles that we are very resilient and carry on producing earnings and cash flow, which is very important.

Jim?

Jim Cleary: Well, Steve, I would just echo that. From my perspective, it’s just one of the €“ just one of the wonderful things about our company and our industry is our proven resilience.

Steve Collis: Well, that wraps it up for today. And Jim, thank you for ending on that keyword, resilience. I would say that we had an excellent quarter, and I’m excited about the Cencora name change. And whether we’re talking about AmerisourceBergen or in the future Cencora, we are highly differentiated and well-positioned for long-term growth anchored in our core distribution and specialty services and also with our very high potential customer base. And we’ll continue to benefit from growth in the pharmaceutical market, driven by patient demographics, prescription utilization trends, and continued innovation. Thank you for your time today. It’s been a pleasure spending this last hour with you.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.