Jan 24, 2008
Executives
Mike Kilpatrick - VP, Corporate and IR David Yost - President and CEO Mike DiCandilo - EVP and CFO
Analysts
Eric Coldwell - Baird Robert Willoughby - Banc of America Securities Charles Boorady - Citigroup Lisa Gill - JP Morgan Larry Marsh - Lehman Brothers Tom Gallucci - Merrill Lynch Ricky Goldwasser - UBS Glen Santangelo - Credit Suisse John Ransom - Raymond James & Associates Charles Rhyee - Oppenheimer and Company Barbara Ryan - Deutsche Bank
Operator
Welcome to the AmeriSourceBergen first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr.
Mike Kilpatrick. Please go ahead, sir.
Mike Kilpatrick
Good morning, everybody, and welcome to AmeriSourceBergen's conference call covering fiscal 2008 first quarter. I'm Mike Kilpatrick, Vice President, Corporate and Investor Relations.
And joining me today are David Yost, AmeriSourceBergen President and Chief Executive Officer; and Mike DiCandilo, Executive Vice President and Chief Financial Officer. During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations.
We will remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations. For a discussion of some key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2007.
Also, AmeriSourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be taped without the express permission of the company. As always, those connected by phone will have an opportunity to ask questions after our opening comments.
And here is Dave Yost, AmeriSourceBergen's President and CEO to begin our remarks.
David Yost
Good morning and thank you for joining us. I would describe our first quarter fiscal results as steady, solid and in line with our expectations.
With our PharMerica Long-Term Care operations being spun tax free to our shareholders last July and the large acquisition this quarter, our quarterly results have a lot of moving parts. Mike will provide clarifications in his remarks.
Other than discussing our planned sale of PMSI operations, I will focus exclusively on the pharmaceutical distribution, which will probably represent the entirety of our operations going forward. Today, we announced that we are pursuing the sale of our PMSI workers' compensation business, which is reported separately from our pharmaceutical distribution business in our segment labeled 'Other'.
Please note that prior to July 30th, this segment was labeled PharMerica and included our long-term care business. We have stated on numerous occasions that the PMSI workers' compensation business is not core to AmerisourceBergen.
While PMSI has historically enjoyed relatively high gross and operating margins with exceptional return, committed capital and strong cash generation, the business has been in some regards a victim of its early success, attracting competition into its space. After considerable analysis, we decided that PMSI's long-term potential may best be achieved with new ownership that may include the combination of similar assets and/or operating and/or management synergies and begun the process to that end.
The sale of PMSI will allow AmerisourceBergen's senior management to devote more time to our core business of pharmaceutical distribution and services. Obviously, if we do not receive appropriate valuation, we will not sell the property, and we will execute the turnaround plan currently in place.
We would expect the PMSI sale process to be completed in several months, and we'll lightly use the proceeds to repurchase our stock during the balance of our fiscal year. Since it is early in the process, we do not want to opine on expectation and value in what we expect to be a robust process, given the interest from both financial and strategic buyers.
It would be inappropriate to discuss the possible sale of PMSI without commenting on the outstanding management team and the dedication of the 850-plus associates of PMSI. This team has historically delivered fine results, and in the face of increased competition and recent disappointing financial results, developed a robust turnaround plan that I am confident will be delivered whether the sale occurs or not.
Regardless of the outcome, I want to thank all the associates of PMSI for their strong contribution over the years. Before I drill down the performance of our pharmaceutical distribution segment from the quarter, I would like to address a few industry issues from 50,000 feet: First, AMP, average manufacturer price, which is shaping up to be an FY '09 event for ABC.
You will recall that AMP was due to be the metric used to set the ceiling for CMS reimbursement to state under their Medicaid programs beginning in January of '08. Under the program, the maximum states would be reimbursement for the ingredient portion of Medicaid prescription was 250% of AMP.
In addition to the re-ingredient cost, you will recall, the pharmacy also receives a dispensing fee established by the individual state. The controversy around AMP was that in calculating AMP for retail reimbursement, CMS intended to include prices from dispensers outside the retail class of trade, including many of lot of facilities that may receive pricing not generally available to the retail trade.
ABC joined others in the industry to vigorously protest CMS' proposed actions using our Washington lobbyists, personal lobbying, numerous letters in support of trade association, efforts and the like. In mid-December, in response to a suit filed by NACDS, a preliminary injunction was issued, stopping the program from going into effect.
CMS has until February 17th to appeal the injunction. In the order, the judge stressed that CMS should work with the pharmacy associations to resolve the matter.
This is a very good news for retail pharmacy. The timing and nature of any final resolution is unknown at this time.
My guess is that it will be summer or later. In the meantime, states are discussing and/or increasing the dispensing fees, South Carolina being the most recent.
The office of Inspector General of the Department of Health and Human Services earlier this month issued a report reinforcing the position that dispensing fees should be increased. So there is clearly positive momentum on this topic.
Next, manufacturer pricing environment. We are not seeing anything anywhere, including Washington, to lead us to believe that the brand manufacturer pricing will be any different this year from recent history.
We expect brand manufacturers to increase prices in the 5% range during the year. Although there continues to be some seasonality, particularly in the March quarter, fee for service with brand name manufacturers mitigates the impact of price increases.
Regarding pharmaceutical market growth, our perception is that the total market growth for the quarter was a little soft by historic standards due to a weak flu season, increased generic penetration, continued anemia headwinds, Medicare Part D impact and lack of new blockbuster drug introductions, but that total market growth in the mid single-digit range is a realistic expectation for this year. Regarding the customer pricing environment, I would continue to describe the current environment as competitive, but stable.
There are not a lot of single customer, multi-billion dollar wholesale opportunities in the market, which itself speaks to market stability and the total market approaching $300 billion in size. [No] multi-billion dollar accounts continues to enhance recently.
Individual skirmishes tend to be somewhat anecdotal, but we are not seeing any wholesale or rational pricing in the market. Again, the industry remains very competitive.
Now, turning to our pharmaceutical distribution business, which includes our traditional growth distribution business; our specialty pharmaceutical distribution and services business; our packaging business and our new acquisition, Bellco Health. As we review our performance this quarter it is important to remember that very strong performance we delivered in our December quarter last year with operating revenues up 16% and operating earnings up 40%.
Our operating revenues in pharmaceutical distribution this December quarter were a record $16.1 billion, up 4%. You'll recall that beginning in November, with reporting of our fiscal yearend results, we provided revenue guidance of 5% to 7% for the year and said that the December quarter, our first fiscal quarter would probably be below that which is what occurred.
As we look at the balance of the year, we are raising our yearly guidance to a range of 7% to 9%. This revision reflects the strong revenues we expect from certain existing institutional customers.
In addition, as noted previously, some of the current headwinds we are experiencing will decrease as we move to our fiscal year. For example, last year we stopped doing business with a large account in January and began dealing with the anemia drug issues after the March 12th FDA black box warning.
Our revenues going forward include the full impact of the Bellco acquisition we made this quarter. With over 90 days of experience, we are very pleased with Bellco, our largest acquisition to date.
Our generic penetration, our New York Metro market position and our Bellco dialysis revenues are right where we thought they would be. And the Bellco associates are every bit as strong as we expected.
The drug company revenues continue to be at or above plan in both the US and Canada. We don't talk a lot about Canada since it is about 2% of our overall business, but we continue to get traction in that market.
We are now operating in a consolidated facility in Montreal and are consolidating several facilities in Toronto. In the US, our wide array of value-added services continues to gain traction, driving revenue growth with Good Neighbor pharmacies on track to reach the 3,000 store mark by September, Diabetes Shoppe at about 1,000 stores and GNP Provider Network at 5,000 stores and growing, giving our customers important access to third-party pay programs.
Revenues were steady at AmeriSourceBergen Packaging Group and particularly robust at Anderson Packaging where several programs were begun and/or expanded. During the March quarter, we plan to move into our new expansion at Anderson, which is 750,000 square feet.
We think it will be the largest packaging facility under one roof in the world. Our Specialty Group, this quarter revenues include the impact of the $800 million of OTN's annual revenue loss due to its purchase by a competitor in November and continued headwinds on anemia drugs.
We think the anemia business has essentially bottomed out, providing us with upside later in the year. The anemia business was down 47% year-over-year in the Specialty Group.
For drug and specialty combined, anemia drugs were 4% of revenue in the quarter and were down 4% sequentially and 30% year-over-year. Excluding the anemia issues, our growth continues to be robust in the rest of the Specialty Group.
We continue to be very excited about our Specialty Group and expect revenue growth in the mid-teens in FY'09. The customers within this segment, including physicians and biotech manufacturers, have a large appetite for value-added services where our service offer is unequaled by any other provider.
We expect many of the new molecular entities to enter the supply channel through this segment. Though our overall revenues continue to be moderated by generics, we continue to be very excited about our generic program due to their strong profit and working capital contribution.
Our proprietary program, PROGenerics, continues to gain traction aided by the newly acquired Bellco telemarketing operation and various incentive programs we have implemented with our customers. Our drug retail customer mix heavily weighted by non-warehousing regional change, and food/drug combos as well as independence provides us great generic opportunities.
Our operating margin of a 119 basis points, a decrease of 6 basis points over last year was primarily driven by large manufacturer price increase that occurred in December last year, but it is expected in the March quarter this year, and the dialysis business of Bellco. Going forward, we would expect operating margin expansion in the low single digits.
As noted on our Investor Day, we are proceeding with the three to five-year process of implementing a new business transformation program, which includes a new ERP system for the drug company and the corporate office at a cost, expense plus capitalized cost of a $150 million or so, which is included in our CapEx guidance. We continue to be on schedule for this project and are currently evaluating the RFPs for the ERP system integration contract that we expect during this quarter.
This project is a good indication of the company's willingness to invest in the programs and infrastructure necessary for our future success in meeting our customers' future needs. While we have no acquisitions included in our guidance except Bellco, Bellco continues to be the type of acquisition that would have appeal to us, a well-run company in the pharmaceutical distribution or related service space with a solid management team, good operating metrics and good potential for operating and/or management synergies.
Before I turn the floor over to Mike, I want to emphasize my enthusiasm for our industry and the role that ABC plays in it. The fundamentals of our industry continue to be very, very strong.
Our FY'08 features a streamlined organizational structure, the largest acquisition in our history and the right segments to capitalize on generic opportunities and new specialty products entering the market. We look forward to continuing our history of strong operational and financial performance.
Now, here is Mike to provide some added color.
Mike DiCandilo
Thanks, Dave, and good morning, everyone. I'm very pleased to present our first quarter results, which were right in line with our guidance, as our pharmaceutical distribution performance slightly exceeded our expectations and offset PMSI's disappointing results.
Our outlook remains strong. And after I review the quarter, I'll finish with an update on our outlook for the year.
As we indicated last quarter and reemphasized during our Investor Day in December, our comparison of consolidated results will be impacted by the inclusion of PharMerica Long-Term Care's results in our prior year numbers before the July 2007 spin date. I would also mention that as a result of our announcement today that we are pursuing the sale of PMSI, our workers' compensation business, PMSI's historical results of operations maybe reclassified to discontinued operations in our next March quarter, although PMSI's December quarter results are included in our consolidated results this quarter.
Now moving to those consolidated results. Operating revenues of $16.2 billion for the quarter were up 3.5%, driven by the 4% increase in pharmaceutical distribution revenue with most of that increase coming from the Bellco acquisition.
Consolidated operating income declined primarily due to the Long-Term Care spin as LTC contributed $9 million of EBIT to our prior year results as well as the $8 million reduction in PMSI operating income, both of which are reflected in our other segment. Pharmaceutical distribution operating income declined 1% as expected due to the absence in the current quarter of a major supplier pricing increase that occurred in December of last year, a slow flu season and tough generic comparisons, offset in part by the acquisition of Bellco.
Included in operating income for the quarter was $10 million gain for the drug company arising from a settlement of litigation with a competitor regarding a retail buying group. In addition, special items in the quarter included antitrust litigation gains of $1.6 million compared to $1.9 million last year and facility consolidation, employee severance and other costs of $200,000 compared to $6 million of these costs last year.
Net interest expense of $16 million in the quarter was doubled last year's $8 million as expected due to the reductions in interest income as average cash balances were significantly less than last year at this time, mainly due to our significant share repurchase activity and acquisitions. Our effective tax rate for the quarter was 38.2% down from last year's 39.1%.
You may remember that the prior year rate was abnormally high due to the non-deductibility of certain PharMerica Long-Term Care transaction costs. We expect our effective rate to be slightly north of 38% for the year as we will have less benefit from tax free investment income this year compared to fiscal 2007.
Our GAAP diluted EPS in the quarter was $0.66, up $0.03 or 5% compared to the prior year and included a net $0.04 benefit from the competitor litigation gain and net special items mentioned earlier. Long-Term Care results contributed $0.03 to the prior year EPS, and the prior-year quarter was negatively impacted by $0.02 for special items.
Net of the discussed items' EPS for both the current and prior year quarters were $0.62 with the current quarter in line with our expectations. Average diluted shares outstanding in the quarter were 167 million, down a significant 28 million shares or 14% from last year.
This reflects our substantial fiscal '07 share repurchases as well as our front-ended repurchase activity in the current December quarter. Outstanding shares at the end of the quarter were 162.5 million.
Now, taking a closer look at the pharmaceutical distribution segment. Revenues were up over 4% in the quarter, driven by the Bellco acquisition.
The drug company grew 2.5%, offsetting the Specialty Group, which was down 3%. The drug company growth rate was negatively impacted by 2% in the quarter by the prior year's CVS ProCare loss, which will anniversary in the March quarter.
The 3% Specialty Group revenue decline, which was consistent with our guidance of flat to down 5%, was due to the anemia drug decline and OTN, as Dave discussed in some detail. Bellco contributed 3.6% to the segment's growth rate, although at a lower than average operating margin due to their customer mix.
Our packaging group, while very small in relation to our overall segment results, continues to have excellent momentum led by Anderson Packaging, which is expected to open its newly expanded production facility in the March quarter. Gross margin was down 4 basis points in the quarter due to reduced price appreciation, a light flu season and fewer new generic introductions.
As we noted earlier in December, we expected that a large brand name manufacturer, which raised prices in December 2006, would not raise prices in the December 2007 quarter, and they did not. We continue to expect that particular manufacturer to raise prices in the March quarter; however, that increase has not yet happened.
Segment gross margin was favorably impacted in the quarter by the $10 million litigation settlement with a competitor. We had a LIFO charge in the quarter of $3.1 million compared to a $7.3 million charge in the prior year, reflecting fewer brand name drug price increases and continued generic drug price deflation.
Operating expenses were up 5% compared to last year with virtually all of the increase due to acquisitions. As a percentage of operating revenue, expenses were 180 basis points in the quarter, up 2 basis points from the previous December quarter.
Bad debt expense normalized versus our significant charge during the September quarter and was $3.3 million in the current December quarter compared to $2.4 million last year. Operating income was down 1%, primarily reflecting the tough gross profit comparison, and as a percentage of operating revenue, was 119 basis points, down 6 basis points from last year.
Now turning to our other segment formally known as PharMerica. Again, the current year results include only PMSI, and the prior year includes both PMSI and Long-Term Care.
And as I previously mentioned, Long-Term Care contributed $9 million of operating income to this segment's earnings in last year's first fiscal quarter. PMSI saw its revenue decline 8% to $109 million in the quarter due to customer losses.
Operating income fell by $8 million to $1.6 million due to the customer losses, price competition and an increase in operating expenses to manage the IT infrastructure and customer-facing initiatives that we detailed in December. During the quarter, PMSI initiated a significant cost reduction program to right size its infrastructure and expects the benefits of the program to be realized in the second half of the fiscal year and the full positive impact of all of the IT customer-facing and cost reduction initiatives to benefit fiscal '09.
Our announcement to pursue the sale of PMSI reflects our desire to focus on our core business. And if consummated, our use of proceeds will most likely be used for share repurchases, and we would expect the EPS benefit of the share repurchase to more than offset the loss of PMSI's future EBIT contribution.
Now, let's turn to our consolidated cash flows and the balance sheet. As I mentioned in December, I expect our cash flow generation for fiscal '08 to be back-ended due to favorable payables timing at the end of September '07 as well as our normal seasonal build of inventory in December.
Our use of cash from operations of $101 million during the December quarter was in line with these expectations. We had capital expenditures of $27 million during the quarter, consistent with our annual expectations of approximately $125 million.
From a statistical standpoint, inventory days on hand during the quarter were 27 days, down 1 day compared to the previous December. DSOs were down a half day to 19.2 days, and DPOs were down a half day from the prior year quarter.
From a share repurchases perspective, we bought $311 million of our shares during the first quarter with our expectation for the year continuing to be in the $400 million to $500 million range. We have $386 million remaining under our current share repurchase program at the end December.
Our gross debt to total capital ratio at the end of December was just over 30%, in line with our target range of 30% to 35%. Now, turning to our fiscal 2008 guidance, our EPS guidance remains unchanged for the year at a range of $2.77 to $2.95 per share.
However, we have tweaked some of our assumptions as we have raised our operating revenue guidance from 5% to 7% to a range of 7% to 9%, reflecting the strong growth of certain of our large low-margin institutional customers. This change in mix also impacts our operating margin expectation, which is now in the low single-digit basis point range.
The net result is that we don't anticipate any change in the EBIT contribution to our EPS growth range, just the relative contributions of revenue and margin. Also, with our front-ended share repurchases in fiscal 2008, average shares outstanding for the year should decline more than the 10% reduction we had expected.
The offset to the reduced share count is net interest expense, which is now expected to be more than double last year's $32 million. So, to summarize, a quarter very much in line with expectations.
Looking forward, the combination of increasing sales growth, easier comparisons and the continued benefit from our reduced shares should drive strong EPS growth over the reminder of the fiscal year. And now, I'll turn it back to Mike Kilpatrick.
Mike Kilpatrick, Head of Investor Relations
Thank you, Mike. We'll now open the call for questions.
I would ask you to limit yourself until all of you had an opportunity. And then if there is time, you can ask additional questions.
Go ahead, Alex.
Operator
(Operator Instructions) And the first question comes from the line of Eric Coldwell with Blair (sic) [Baird]. Please go ahead.
Eric Coldwell - Baird
Thanks and good morning. The question is primarily related to generics outlook for the fiscal year and maybe the calendar year.
Can you help us to understand based on your mix and your timing, when you think the comparisons start to improve, or normalize on the recent growth of new generic introductions? And then as an adjunct to that, could you talk to us about your outlook for new generics this year in terms of timing and opportunities on sourcing and the integration of Bellco generics business?
Thanks.
David Yost
We both might weigh in here, Eric. I mean the December quarter of last year was a particularly strong quarter.
You had three big products last December, and you had one big one, that went from generic to brand. So, last December was a very tough comparison.
The comparisons get easier starting with this quarter going forward. It's hard to exactly predict these things, Eric.
When we look at the balance of the year, we're looking at Protonix, and we don't know how that's all going to end at this point, but some initial sales there for sure; Fosamax, which is a big one coming off, Risperdal, which we expect Fosamax this quarter. We expect Risperdal at the end of the June quarter.
So, it's really a fourth quarter event for us. So, there is clearly some good news in the pipeline.
The other thing you don't know what's going to happen with people going at risk introductions, which is impossible to predict, but I think I would not be surprised to see that happen.
Operator
Next question comes from the line of Robert Willoughby with Banc of America Securities. Please go ahead.
Robert Willoughby - Banc of America Securities
Thanks. Dave or Mike, I guess we've never seen the PMSI business on the standalone basis performing up to its standards.
So, can you give us some sense in terms of how you are seeking to value this thing? Are we taking multiple revenues or what is ultimately the EBITDA margins we hope to see from something like this?
Mike DiCandilo
Yes, Bob, this is Mike. I think when we look at our PMSI business, I think guidance that we gave people is we expect that business to return to long-term operating margin run rate of 7% to 9% really starting in fiscal '09 as we get through our turnaround efforts.
And we would expect that any expression of value, which we're not going to get into in details, but we would expect that any offers would reflect when we expect that normalized run rate to be once we get through with the turnaround.
Robert Willoughby - Banc of America Securities
Okay. No ranges, you'd care to propose out there, broad ranges?
Mike DiCandilo
No, I think our guidance overall is, again, we expect us to be somewhat accretive. We expect that the benefit from the proceeds reinvested will more than outlay the loss of the future EBIT contribution.
David Yost
We expect a pretty robust process. So, we want to be careful, we don’t show our hands here.
Robert Willoughby - Banc of America Securities
Got you. Thank you.
David Yost
You bet. Next question?
Operator
Next question comes from the line of Charles Boorady with Citigroup. Please go ahead.
Charles Boorady - Citigroup
Thanks. Good morning.
In terms of the higher revenue growth expectations, can you give us, at least broadly speaking, components to that in terms of the percent growth trends in volume versus pricing for brand and generic?
David Yost
Well, as we look out, we think of the brand name manufacturer price increases will be in the neighborhood of 5%, and we are not really seeing anything anywhere to lead us to believe that there will be any difference. The increase in our guidance is really a function of individual customers who we think we have better insight to, than we did when we made our original forecast, and relative trends on what they are seeing in their business.
So, we watch our revenues very, very closely. I mean, I literally monitor them everyday, as does Mike, and we do a lot of forecasting customer-by-customer.
And our new guidance reflects the best insight. We have to our current customer mix looking out over the balance of our fiscal year.
Charles Boorady - Citigroup
The pricing on generics and general volume growth trends in generics?
Mike DiCandilo
The volume trends slowed to a bit versus historically in the quarter. We continue to think that's a short-term blip and will be picked up as we've some more new branded generic conversations as we go throughout the year.
David Yost
Well, we've clearly taken that into our guidance. And again, generics continue to be very important for us.
We provide value-added service, both down the channel and up the channel. And because of that, it give us better pricing opportunities.
So, we've taken that into account as we've calculated out our guidance.
Charles Boorady - Citigroup
And just finally, when you take in combination the higher revenue expectation with the lower margin expectation, is the impact of these large institutional clients neutral bent to the bottom-line or up slightly, down slightly?
Mike DiCandilo
Well. It certainly helps us slightly, but certainly not enough to adjust our guidance that's well within the range.
And again, I think the way to look at it is, that our EBIT contribution to EPS is roughly going to be the same as it was before, just the pieces changing a little bit with the revenue growth being a little bit higher and margin expansion being a little bit lower. And that clearly is just a function of our customer mix.
Charles Boorady - Citigroup
Terrific, thanks.
David Yost
Thanks.
Operator
Next question comes from the line of Lisa Gill with JP Morgan. Please go ahead.
Lisa Gill - JP Morgan
Hi, good morning. Just a couple of quick follow-on questions.
As it pertains on the revenue growth side, is this more of ABC picking up some additional business or is this looking at your integral customers and their growth projections are better than expected? And then secondly, Mike, when you talk about the margins on drug distribution, are you talking about perhaps some of the renewals that had to happen?
Or again, is it just your larger customers, or the ones that are putting their businesses in this [fast terrain], and the margins are lower on those customers? And then just a last follow-up, is the guidance range that you gave, can you just remind us again, if that's on GAAP or continuing operations?
So when you look at this quarter, should we be looking at it as being $0.62 or $0.66?
Mike DiCandilo
Lisa, I'll start out with some guidance. Our revenue guidance reflects both.
It reflects both the fact that we've got individual customers who are growing faster than the market and getting a traction, which is always very, very attractive for wholesaler, and we continue to do very well in competing with our peers in catering new business. So, it's really coming from both things.
And we've got some good sales momentum with our sales team right now and in all of our segments. We've talked a lot about the anemia business, and how much headwind that's providing for the specialty business, but if you take that out, the specialty business is growing very well.
The programs that we've got for our independent and regional chains and food/drug combos are getting some traction, which includes our generic program, and we have done some very great things in our institutional business, which includes some consultation services and helping their business better. So I will tell you, we've got good momentum right now, Lisa, and we are just feeling good about better place in the market.
Mike DiCandilo
Lisa, this is Mike. Our guidance is GAAP guidance as usual in the $2.77 to $2.95 range.
It includes the $0.66 in the quarter. Obviously, we are pretty early in the year and the $0.04 upside is pretty small to the overall range of $0.18 that we have and if anything should give people confidence of where they stand within that range, but certainly too early in the year to make a change.
Lisa Gill - JP Morgan
Thank you. Could you comment, Mike, at all around the margins?
I mean is it just that it's being your customers that are going back to the health pharmacies for --?
Mike DiCandilo
It's a mix issue, Lisa. It's really a mix issue.
Our biggest best customers are driving the majority of the increase, and they have the best pricing.
David Yost
Yes, that's been around for almost long as I have been.
Lisa Gill - JP Morgan
I appreciate the comments. Thank you.
David Yost
Yes. Next question, Alex?
Operator
Next question comes from the line of Larry Marsh with Lehman Brothers. Please go ahead, sir.
Larry Marsh - Lehman Brothers
Dave, you've been around a long time, so that's a good thing. Why would you?
If I had one thing to sort of highlight, David, it’s just kind of your view of the environment this year. Historically, as you get closer to a presidential election, you get more volatility of activity by some of your suppliers.
I guess you're saying you feel pretty comfortable about the pricing environment, if you will, from your suppliers this year, and you had Glaxo. As I see, it didn't raise price in January.
I would have thought it would have been in January. You're saying that you're comfortable by March.
So, I wonder if already we're getting some variability of results? I guess my question is what gives you kind of the sense of confidence?
I know you don't guide to quarter, so maybe it's just sort of a year-to-year thing. And then remind us how much impact do you have on variation and timing, given the number of fee-for-service agreements you have these days with some notable exceptions?
David Yost
Well, the first point, that you made Larry, is that fee-for-service clearly mitigates a lot of the impact on price increases. There is still some variability from quarter-to-quarter.
I will tell you, Larry, we are just not hearing or seeing anything from any of the brand name manufacturers to lead us to believe that they are going to change their pricing strategy. And we do not think, as we get closer to the election, which is our fourth fiscal quarter, the September quarter, that it's going to have the impact that it's had if you go back to the '04-'06 range, in part because of fee-for-service.
I will tell you, we monitor very closely some of our brand name. CEOs say, and they are also publicly making comments in fact, that they did not see the pricing change.
And so, that's giving us some confidence. The January quarter is about where we expected as we look out over the landscape.
So, we're really finding it, seeing it and sensing this kind of business as usual, Larry. And I've spent a lot of time in Washington.
I will be down there again next week. And again, we are not hearing or seeing anything from there that's giving us pause for this fiscal year.
Larry Marsh - Lehman Brothers
To that point, David, is there anything from Washington that you are concerned about, excluding AMP, which you have already talked about?
David Yost
The AMP was a big overhang. And the question is, is that going to be resolved legislatively or judiciously.
I don't know the answer to that, but I think it will clearly be resolved, Larry. I think if it does not getting resolved through the course by the summer or later and this thing could drag out to this time next year, I think there is a very, very good chance that the whole AMP issue would be resolved legislatively.
So, I think that's really been the biggest overhang on the industry in Washington, and I think that one is clearly being mitigated and probably moved out well into the next several quarters.
Larry Marsh - Lehman Brothers
Yes. Thanks.
David Yost
Yes, thank you.
Operator
Next question comes from the line of Tom Gallucci with Merrill Lynch. Please go ahead.
Tom Gallucci - Merrill Lynch
Hi, good morning, everybody. I have just maybe a follow-up to Larry's, and one other question.
In terms of price increases, I understand fee-for-service has sort of flattened out the variability in terms of the impact on the results. How significant, or doesn't it matter at all, the timing of an increase during the quarter?
So if you got it on January 1st versus some time in March, does that create a shift or do you more recognize it at the time of the increase? The other question I would have, is just on the specialty business, the anemia drugs.
I think you mentioned in your thought that business had sort of bottomed out at this point. So, do you have any view on are private payers beginning to adopt the Medicare policy or is it mostly Medicare sort of took its steps and now we are seeing the impact of that, but the rest of the market has stayed fairly steady?
Mike DiCandilo
Tom, this is Mike. I'll start as far as recognition of income when the price increase occurs, with our existing inventory; we recognize the price increase when we sell through the inventory.
So, the timing, whether it's in the beginning or the end of the month, does make a difference to us as we have to sell through the inventory to recognize the benefit.
David Yost
Just to amplify a little bit, you got a price increase in the last 10 months, when do you -- it's good for the March quarter.
Mike DiCandilo
Right?
Tom Gallucci - Merrill Lynch
Right. Sure, understood.
Mike DiCandilo
On the specialty business, we are not seeing the private payers following in this regard. So, I would say that's one of the reasons why we think it has really bottomed out.
And I can tell you this whole issue of the anemia and CMS' policy on this is very controversial with the doctors, the individual physicians, who think that the government is getting way too involved in where they practice medicine and they maybe motivated by financial interests. So, it continues to be a pretty hard topic, but we are hoping that the worst is behind us at this point.
Tom Gallucci - Merrill Lynch
Thank you very much, guys.
Operator
Next question comes from the line of Ricky Goldwasser with UBS. Please go ahead.
Ricky Goldwasser - UBS
Good morning. I have a few follow-up questions, first of all on guidance.
When you think about your initial guidance and now they were waiting (inaudible) maybe the top line. It seems things that I think were not in prior guidance or one that Protonix benefit in the March quarter and then the fact that Medco is one of your clients gaining the big contract, so there is a contribution from that contract that's probably benefiting EPS.
You still decided to keep EPS at same levels as before. So, if you can just kind of walk us through what's offsetting that, are there any other moving parts that are coming in below expectations?
And then one follow-up just on the whole pricing conversation. I just want to clarify that 25% of your operating earnings is still coming from price increases.
And then from what we are seeing, it seems that four other pretty large manufacturers still haven't raised prices January to date, while they did last year. And the question is, is your source of confidence based on the fact that you have relationship with these manufacturers and you know that the increases are going to come by March or is it, again, just kind of like your overall thought process that the year is going to be same, and if it's not going to be March, it's going to be in June?
David Yost
Well, we hear that a lot. Let me make sure I can remember all those things.
I'll start from the back and we'll kind move backward up. We certainly don't have any unique inside, Ricky, any information regarding the price increases that are proprietary or any they like.
It is my sense of what I feel about the market with what the people I talk to and the like or to sense the market. And some of that comes with experience and just being out and above.
Mike, you want to talk a little bit about the guidance.
Mike DiCandilo
Yes, again, I think the guidance reflects our best estimate of what's occurring right now. And though we do see some upside from the revenue lift, it's certainly well within the range.
We gave a pretty robust range of $0.18 during the year. And while we do think we get some benefit, it will be within that range.
I mean I don't think we have seen any deterioration of expectations in any other part of our business. Obviously, we were somewhat short in PMSI this quarter, which is factored into that as well, but there is nothing that has taken a wrong turn for us.
We're pretty optimistic. Certainly, the Protonix introduction is something that we always like, and we're glad it's going to be here and benefit us in the March quarter.
But there is always the expectation that there is going to be a couple of those items during the year, timing is not always known, but certainly it's not unusual for that to happen.
David Yost
Right. We've got a big base here, Ricky, and a lot of moving parts, particularly we are earlier in the year here.
And, so we take that all into account and are uncomfortable talking about individual customers, individual products. That's one of the things that makes our business very, very attractive.
It is not dependent on individual products. I mean you've got a wide range here of products, and a lot of stuff coming and going.
And that's why we have a range on the guidance, and that's one of the reasons why we're uncomfortable with quarterly guidance as we go forward. Thank you very much.
Next question please?
Operator
Next question comes from the line of Glen Santangelo with Credit Suisse. Please go ahead.
Glen Santangelo - Credit Suisse
Yes, Dave. I just had a quick follow-up question related to PMSI.
It kind of sounds like you are pushing for a sale here in the next few months, and that's obviously going to bring in some proceeds. And Mike sort of suggested that the reinvestment of those proceeds would more than offset the dilution from the loss of the earnings of PMSI.
Could you, Mike or David, either one, could you maybe give us a sense for what you expect in terms of the reinvestment of those proceeds? Is it a better you see your cash to be buying back stock here at $46 or kind of given the declining interest rate environment or does it make sense to be paying down debt here, because you kept your share repurchase guidance the same at $400 million to $500 million and you've already bought back $311 million in the first quarter?
So, should I read into that that you are more likely to pay down debt with the cash versus buy back stock?
Mike DiCandilo
No, Glen. I think in my comments I said we will most likely use the proceeds to repurchase our stock.
Our debt, I think is in a pretty good place. Very happy with where our debt-to-capital ratio is today within that 30% range.
So this is very much in line where we expect our capital structure to be, long-term. So, we see this as incremental proceeds that we would use again to use to buyback stock, and by doing that, we think that will provide us, as you mentioned, an EPS benefit that will exceed the EBIT contribution of PMSI on an annualized basis.
Obviously, there could be a little gap in timing there, because we do have to discontinue PMSI, or reflect them as discontinued operations in the March quarter, and as the sale takes into the June quarter, then there is a little timing issue. But again, we don't think it's that big when you are talking about a division that's expected to contribute about $0.08 to our total year.
That timing dislocation is well within our guidance range as well.
Glen Santangelo - Credit Suisse First Boston
Certainly. Thanks, Mike.
And just a follow-up; is it fair to say that the $400 million to $500 million -- if the deal does not happen, but if you sell PMSI that would be kind of additional proceeds on top of the $400 million to $500 million?
Mike DiCandilo
That's fair.
Glen Santangelo - Credit Suisse First Boston
Okay. Thanks a lot guys.
Operator
Next question comes from the line of John Ransom with Raymond James & Associates. Please go ahead.
John Ransom - Raymond James & Associates
Hi, good morning. Glad I snuck in before my deadline.
I know Dave runs with military type punctuality. So I would have been out in the cold.
Yeah, you guys have been obviously, in the cycle of selling off businesses. You are generating a lot of cash and other than share repos, what types of businesses remain out there that you would be interested in buying?
David Yost
We coursed on one this quarter, John, it was probably a good indication of that, which is a regional wholesaler, very well positioned in a niche market. You know, Bellco and a couple of other, it seemed it was very attractive to us, not the least of which was an attractive dialysis business, which is a business that we understand well, and a telemarketing issue.
So there continue to be some regional wholesalers out there. They will continue to have interest to us, John.
There are tuck-in acquisitions as far as a specialty business can go. We continue to look to expand our service offering there.
We by far have the widest offering of services for the biotech manufacturers and the physicians to dispense their specialty drug. So we look there.
It's not that we are opposed to making acquisitions; we have spent a little north of $1 billion in the last six years. But we are very much disciplined about the price we will pay for it.
I want to make sure that really belong with us, and have a good operating, annual management synergy. So we continue to be open to buy businesses, but we just have not found a lot recently that may meet our high standards.
John Ransom - Raymond James & Associates
The expansion with Bridge, that sours you on IT type acquisitions?
David Yost
It really has not, John. I think that this year, Bridge was a good idea probably for the execution, in looking back.
But we would not want to go and attack whole in a really big way. But if we found little a tech acquisition that would really enhance our offering in any one of our segments, hospitals, retail business, and the specialty business, we would clearly take a look at it.
We are open to buy and I would tell you, we look at really dozens of acquisitions every quarter. So we don’t want to close the door on anything at this point.
John Ransom - Raymond James & Associates
Okay, Thank you.
David Yost
You bet.
Operator
Next question comes from the line of Charles Rhyee with Oppenheimer and Company. Please go ahead.
Charles Rhyee - Oppenheimer and Company
Yeah, hey guys, thanks for taking my question. I just wanted to drop back to some comments that you guys made around your anemia franchise, and you talked about how the share dropped down to about 4% of revenues.
But you also noted that it was down 47% year-over-year, looking at sort of what the scrip volumes have been, and the whole class of EPO type drugs looks like they are only down 30% and (inaudible) may be only coming down 30. So, can you help me understand maybe where the difference might be coming for you guys, versus what sort of the scrip data looks like?
David Yost
Yeah, let me just clarify that Charles. What we said is that the anemia drugs represented 4% of our combined drug and specialty revenue in the quarter.
They were down 4% sequentially, and 30% overall. So, they were very much in line with where the market was.
The 47% that you referred to was specialty, by itself was down 47%, and remember that specialty is heavily weighted to the oncology users of anemia drugs, which were down obviously much more significantly than the users for dialysis, which pretty much reside in the drug company for us. So I think that overall we are down 30% with the market.
Charles Rhyee - Oppenheimer and Company
Okay. So just to be clear, when you categorize your anemia drugs, if it's used for dialysis, it fits in the regular drug distribution business, whereas if it's for anemia of cancer, then it's fitting in your specialty business.
David Yost
Yeah, the specialty business, it is typically with the physicians and typically the physicians are using it for oncology. The drug company could be both, oncology users, and dialysis users, because we do sell to hospitals and other ultimate site providers within the drug company.
So they have both dialysis and cancer and the specialty group is primarily cancer.
Mike DiCandilo
We focus on whether or not it's physician. We manage our business based upon who is getting the product and how it's dispensed.
So that's the strange thing, it gets a little confusing, and that's one of the reasons we try to breakout both the specialty business, primarily in oncology, versus the total business.
Charles Rhyee - Oppenheimer and Company
Thanks.
David Yost
Alex. We have time for one more question, please?
Operator
Thank you, sir. And the last question comes from the line of Barbara Ryan with Deutsche Bank.
Please go ahead.
Barbara Ryan - Deutsche Bank
Thanks for taking my question. It was Glen's question, so it's already answered.
Thanks very much.
David Yost
Barbara, it's always great to hear from you.
Barbara Ryan - Deutsche Bank
Thank you. It's my pleasure.
David Yost
Thank you very much.
Mike DiCandilo
Well, thank you all for joining us on the call today, and I'd like to now turn it over to Dave, who would like make some final comments.
David Yost
Well, I'd just add that we continue to be very excited about our industry, (inaudible) play in it. The fundamentals continue to be very, very strong, as we are now proceeding through this fiscal year, we have a very streamlined organizational structure, which has give us added focus on our core business.
We've increased our revenue guidance going forward reflecting a good momentum that we have. We are in the right segments to capitalize on generic opportunities, especially growth opportunities.
We are very excited about our future and again, thank you very much for joining us.
Mike DiCandilo
Thank you, Alex. That will conclude the call.
Operator
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