Jan 26, 2010
Executives
Mike Kilpatric - VP, Corporate & IR Dave Yost - President and CEO Mike DiCandilo - SVP and CFO
Analysts
Larry Marsh - Barclays Capital Randall Stanicky - Goldman Sachs Tom Gallucci - Lazard Capital Robert Willoughby - Banc of America Glen Santangelo - Credit Suisse Helene Wolk - Sanford Bernstein Lisa Gill - JP Morgan Ricky Goldwasser - Morgan Stanley Steven Valiquette - UBS Charles Rhyee - Oppenheimer & Company AJ Rice - Soleil Securities
Operator
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode.
(Operator instructions) Today's call is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the meeting over to Mr. Mike Kilpatric.
Sir, you may begin.
Mike Kilpatric
Good morning, everybody and welcome to AmerisourceBergen's conference call covering fiscal 2010 first quarter. I'm Mike Kilpatric, VP of Corporate and Investor Relations and joining me today are Dave Yost, AmerisourceBergen President and Chief Executive Officer and Mike DiCandilo, Executive Vice President, Chief Financial Officer.
During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations. We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations.
For discussion some of the key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2009. Also AmerisourceBergen assumes no obligation to update the matters discussed in this conference call and this call cannot be taped without expression permission of the company.
As always those connected by telephone will have an opportunity to ask questions after our opening comments. And here is Dave Yost, AmerisourceBergen, President and CEO to begin our remark.
Dave Yost
Good morning and thank you for joining us. As you probably know from our press release this morning, AmerisourceBergen delivered an extremely strong first quarter to our fiscal year that began in October 1, 2009.
We're off to a strong start, and as a result, have increased our revenue and margin assumptions, and EPS guidance for fiscal 2010. This quarterly performance follows our strong September quarter which, which completed a strong fiscal '09 where we grew our GAAP EPS at 17%.
There is a lot to like about this first quarter where we hit historic records in many key metrics. Mike will drill down on the details, but here are the highlights.
Revenues were a record $19.3 billion, up a robust 11.5% over last year, crossing the $19 billion threshold for the first time. Gross profit margins expanded 15%, reflecting our strong generic programs, and specialty positioning.
Again this quarter our dollars of operating expense were closely controlled, hitting an historic low as a percent of revenues. Operating margin continued to expand as it has in each of the last four years, this quarter by a whopping 22 basis points.
We continued to do a great job controlling our receivables and inventory. Diluted earnings per share were $0.52 on a GAAP basis, up a robust 44% over last year and that's on top of a December EPS that was up 12% last year.
Lots to like about this quarter. The highlights of the quarter reflect a theme of consistency that continues to be characteristic of AmerisourceBergen and demonstrates the strength of our two profit drivers, generics and specialty pharmaceuticals.
Before I address some of the company specifics a few words on the industry. First, healthcare reform, healthcare reform is obviously a moving target after the election in Massachusetts and the outcome will probably not be known for sometime.
The key takeaway though is that our industry and the role that ABC plays in it is strong with or without healthcare reform. If healthcare reform results in more pharmaceuticals being dispensed that is good for the industry and ABC.
But I would note that without healthcare reform we posted very solid results this quarter and over the last eight years delivered 16% compounded EPS growth. Second, on the topic of pharmaceutical industry revenue growth.
IMS forecasts of 3 to 5% for calendar 2010 seemed to be in the right ZIP code for us. Part of our strong revenue this quarter reflects increasing industry momentum.
Third, the manufacture pricing environment. With only three weeks of a calendar logged to date, it is a little early to forecast the trend.
January manufacturer price increases have been about what we expected, and as noted previously, we expect brand name manufacture price increases to be down from the 8 to 9% range we experienced the last two years. Fee per service, of course, mitigates the price impact and as noted previously, we started on fee per service with Pfizer January 1.
Four, the competitive pricing environment within our industry. I would continue to describe the environment as competitive, but stable with few billion dollars pieces of business in play in the next 12 months or so and few billion dollars pieces of business changing wholesalers historically.
Now a closer look at ABC. Our robust 11.5% revenue increased over $19 billion reflected the strength of the overall market, new business, particularly in the drug company and strong performance in almost every market segment.
The drug company had double-digit increases in independent and hospitals, reflecting new business that we began to anniversary in March. The specialty group now at a run rate over $16 billion annually with a little more than half of the revenue coming from oncology, have particularly strong revenues in ASD, our vaccine nephrology of blood plasma distributor, and ICS our third-party logistics provider.
Our packaging group bounced back a with double-digit revenue increase. We had the strongest generic quarter in our history with a handful of noteworthy product introductions, reflecting the strength and diversity of our customer mix, where nearly all of our customers look to us for their generic product.
Our strong position in the oncology market benefited this quarter from the August launch of Oxaliplatin the generic version of Eloxatin. Our generic revenue increase was more than double our total revenue increase.
Our strong gross profit performance this quarter was due in part to our generic programs. We continued to increase our generic penetration with existing customers and during the quarter launched the program specifically tailored to the needs of -- customers.
In hospitals, our generic initiative that melds our proprietary ProGen offering with specific requirements of a large GPO launched in August and is proving very successful. It is important to note that even without generic launches, our EPS growth would have increased in the 20% ZIP code.
The important take away here is that we have a strong sustainable business model without generic introductions. As demonstrated this quarter, our performance can become truly outstanding when significant generic launches are added.
Our strong revenues continue to reflect our broad service offering in each of our market segments. We've spoken previously about our broad offering at specialty group that is orders of magnitude ahead of any offering in the market.
Last, for example, our patient reimbursement counseling business has some 1300 associates and had a very strong quarter. Oncologist as another example looked to us for far more than product and our oncology revenues continued to be strong because of the value-added service we provide oncologist in addition to outstanding execution of basic pack and ship.
Our good neighbor pharmacy franchise like program for independents and regional retailers now numbers over 3,700 stores. We have over 5,000 stores participating in GNP provider network, providing access to third-party payers.
Helping hospitals to improve their operation and to save money is standard operating procedure at ABC. The message here is that programs and services are an important driver of the success in the distribution business and along with generics had a positive impact on our gross margin this quarter.
Again, this quarter, the associated of ABC did an extraordinary job of controlling expenses. Of our 22 basis point improvement in operating margin, 12 of those basis points came from driving our total expenses down to 156 basis points, a record low and those total expenses include all of our corporate expenses.
This only happens when cost control is part of the culture of a company, as it is at ABC. While it is true that we continue to benefit from the very efficient distribution centers we constructed after the merger, the true secret sauce of expense control is the dedication, discipline and very positive attitude of our associates who work hard every day, knowing that people's health, and sometimes lives depend upon what they do.
Our expense control is particularly noteworthy, because due to our generic penetration, the number of pharmaceutical invoice lines we ship are increasing faster than our revenues. Or said another way, due to our increased penetration, we have to ship more bottles of pills to get the same revenue.
We delivered this strong expense control as we continue significant expenditures on business transformation our new S&P based ERP system. Our BT program is on schedule and on budget and will position us extremely well to meet the future needs of our customers.
We are currently in test on several elements of BT, and expect to begin implementing back office functions to BT later this fiscal year. Along with controlling expenses, we continued to do an outstanding job controlling our inventory and receivables driving down our DSO this quarter by one day to 17 days, in spite of a challenging financial environment particularly for smaller businesses.
Our receivables performance is a key indicator that we are delivering value to our customers. Given our strong balance sheet, let me reiterate our position on acquisitions.
Although none are contemplated in our guidance, we are receptive to acquisitions, and have spent over $1 billion in the last eight years on acquisitions. An acquisition in our basic business of pharmaceutical distribution or related businesses like (inaudible) would have appeal to us, and we look to stay within our area of core competency.
We are in an excellent position for acquisitions both financially and organizationally. The future for FY '10 and beyond is very bright for ABC.
While we don't expect to deliver 44% EPS growth every quarter, we're obviously off to a very good start. Though it is early in our fiscal year, we have increased our revenue and operating margin assumptions and EPS guidance to reflect our performance and our optimism.
I am as excited as I have ever been about our industry and AB's prospects within that industry. Here is Mike for added color.
Mike DiCandilo
Thanks, Dave and welcome to all who have joined us this morning. We truly had a phenomenal quarter and we even exceeded the revised guidance we gave in December at our investor day.
We had a double-digit revenue increase, 22 basis point operating margin expansion, solid expense control, and working capital discipline all of which combined to provide greater than 40% EPS growth against the prior-year quarter that grew earnings in the double digits. Our performance was certainly driven by our positioning in the right parts of the market, generics and specialty and we benefited from recent product introductions in those areas.
I will detail the benefit we received this quarter from recent generic launches, and it was significant and we'll talk about the benefit anticipated from expected new launches over the remainder of fiscal 2010 in my financial review. I will also detail our updated guidance for fiscal 2010.
Now let's start with a look at the income statement. Our top-line growth was an outstanding 11.5% driven by revenue growth of just under 13% in the drug company and 8% in specialty, 7% of the drug company's growth and 6% of our overall growth came from our new customers that were added last year, primarily in March and April and will start the anniversary at the end of second fiscal quarter.
The remainder of the drug company growth was driven by overall market growth and the above market growth of a few of our largest customers. The specialty group grew a robust 7.7% driven by distribution growth, primarily ASD, our nephrology, blood plasma, and flu vaccine distributor and ICS our third-party logistic company.
As I mentioned previously, we will start to anniversary the 2009 new business in the drug company in March of 2010 and our revenue growth will slow accordingly and should be in line with market growth of 3 to 5% in the second half of our fiscal year. However with our great performance in the December quarter we are comfortable with raising our consolidated revenue growth assumption to between 7% and 8% for the fiscal year.
Our gross profit in the December quarter grew even faster than our top-line increasing 15% by far the highest quarterly gross profit gross rate in our recent history. On a percentage basis, our gross margin expanded by 8 basis points in the quarter.
Approximately 2/3rds of our quarterly gross profit increase was driven by the impact of recent generic launches including a full quarter benefit from the August 2009 at risk launch of Oxaliplatin which primarily aided the specialty group and a number of scheduled launches which benefited the drug company. This level of benefit to gross profit in the quarter was unusual and far exceeded the typical aggregate benefit we received from generic launches, which generally doesn't exceed more than a couple of pennies in any one quarter.
Looking forward, we expect a reduce but still substantial positive impact from generic launches in our second fiscal quarter, but we would expect the second half of our fiscal year to return to historic norms. Assisted by these new launches, generic growth in the quarter was well over 20% and helped to offset the margin impact from the growth of some of our largest customers who enjoy our best pricing.
We had a LIFO charge in the quarter of $7.8 million compared to $5 million in the prior-year quarter. Now moving to operating expenses, we enjoyed significant operating leverage once again as we handled the incremental volume with only modest expense increases.
Operating expenses increased 3% in the quarter, well below the 11.5% revenue increase with the majority of the expense increase relating to incentive compensation and health benefits. Operating expense margins in the December quarter declined by an impressive 12 basis points compared to last year.
We continued to expect we will have operating leverage going forward with operating expenses increasing in the range of 1% to 3% for the full year, well below our top line growth rate. As a result of the significant gross profit increase, in combination with the modest expense growth, operating income increased by over 30% in the quarter and operating margin increased by a significant 22 basis points.
Without the continuing exceptional benefit from new generic launches that we experienced this quarter, operating margin expansion will moderate throughout the rest of the year. However, factoring in our stellar first quarter performance, we are comfortable raising our full-year operating margin expansion assumption to the low to mid-single-digit basis point range.
Below operating income, net interest expense of $17 million increased by 22% over the prior year, reflecting the impact of our $400 million bond issuance in November, net of the related revolver pay down, as well as lower rates earned on our invested cash balances. As a result of the bond offering and continued low market interest rates to be earned on invested cash, net interest expense for the year should be approximately $20 million higher than last year's net interest.
Our effective tax rate in the quarter was 38.2%, slightly less than our anticipated effective rate for the year of 38.4, and less than the 38.6% rate in last year's December quarter. Our record quarterly diluted EPS of $0.52 per share grew by 44% compared to last year, the EPS increase exceeded our 35% growth in income from continuing operations, due to a 6% reduction in average outstanding shares compared to last year as a result of our continuing share repurchase program.
Now let's turn to our cash flow and balance sheet. We used $42 million of cash in operations in the quarter, much less than the $304 million we used in the prior-year quarter.
We had our normal seasonal increase in inventory as we added between 2 and 3 days of inventory at the end of the calendar year, reflecting our need to keep high service levels for our customers, despite a number of supplier holiday week closings. On average our 26 days of inventory on hand during the quarter, was consistent with last year's average days on hand.
Our DSO for the quarter was very impressive once again at 17 days, down a day from a year ago, reflecting improvements in both drug and specialty. This improvement continues to reflect the quality of our service and customer base as well as the diligence of our associates.
DPOs in the quarter were consistent with the prior year. Capital expenditures were heavily weighted towards our ERP-enabled business transformation effort and a $43 million were similar to last year.
We purchased $145 million of our common stock during the quarter and are ahead of the pace needed to hit our full year $350 million share repurchase assumption. As we have consistently said, our first goal for cash deployment is to grow our business through acquisitions or internal investment and to the extent we have additional funds, subject to market condition as always we would return those funds to shareholders.
We have now returned over $4 billion to shareholders through repurchases since August 2004. During the quarter, we also improved our already strong balance sheet by taking advantage of improving market conditions to issue $400 million of 10-year bonds at an effective rate of less than 5%.
With the proceeds we've repaid over $200 million of revolver borrowings and while having a negative interest spread impact in 2010, we have improved our financial position by extending debt maturities, increasing liquidity and locking in very attractive long-term rates. Our gross debt to total debt and capital ratio at the end of December was 33% very much in line with our long-term goal of a range of 30% to 35%.
Now turning to guidance for fiscal 2010. As a result of the first quarter exceeding our revised expectations we have increased our annual diluted EPS guidance from the higher end of a range of a $1.82 to $1.92 to a new range of $1.89 to a $1.98.
This reflects an increase to our revenue growth assumption, as I mentioned earlier to a range of 7% to 8% and increase to our operating margin expansion assumption to a range of low to mid single digit basis point expansion and no changes to our free cash flow range of $500 to $575 million, or our $350 million share repurchase assumptions. In addition, as I noted at investor day in December, the fourth quarter of fiscal 2010 has the toughest comparison to the prior year due to the benefit we received from generic launches and the LIFO credit we experienced in the fourth quarter last year.
So, again, a fantastic quarter by any measure, reflecting our positioning in the right areas of the market generics and specialty, the quality of our customers and our associates and our continued focus on operational excellence, and working capital discipline. Now here is Mike Kilpatric for Q&A.
Dave Yost
Thank you, Mike. We will now open the call to questions.
I would ask you to limit yourself so people have an opportunity to ask questions, and Barbara, you may go ahead.
Operator
And thank you. We will now begin the question-and-answer session.
(Operator instructions). It will be one moment, please, for the first question.
And our first question comes from Larry Marsh with Barclays Capital.
Larry Marsh - Barclays Capital
Thanks, and good morning, everyone. Dave, I tell you this quarter is going to be one for the ages.
This is a great start for the year. Congratulations.
Dave Yost
Thank you very much.
Larry Marsh - Barclays Capital
,
Dave Yost
Well I take the second part and let Mike has the first. In terms of visibility, I mean, you call out the two key ones, (inaudible) which just got a six-month extension, so we're looking for that, latter part of -- latter part of this year, a and (inaudible) as well.
So I think they are going to continue to come down the pike there, and I think, provide good upside for us. I'm not sure they are all going to be quite successful as Oxaliplatin, but I think it really demonstrates it -- of our two key growth drivers one of is generics and the other is specialty pharmaceuticals and in this case you had them both hitting in the same place, so it was very, very strong.
Mike DiCandilo
Certainly, Larry, we benefited, you know, primarily because of the large footprint we have in the specialty market. We are over 50% of the oncology market, which put us in a great position and then the launch itself, which as a reminder was at risk, had all of the characteristics we like.
It was a high-priced product with only a couple of manufacturers involved and with our market share, the price stayed up a little bit higher, I think, than people probably expected during the quarter. Now, of course, as we go on further in the year, we would expect that to drop and the benefit, as I said, I think will still be fairly substantial in the second quarter, not as big as 1Q and will continue to go down, I think as we get to the third and fourth quarter.
And again, keep in mind, it is an at-risk product and that can change at any time.
Larry Marsh - Barclays Capital
Very good, thanks.
Dave Yost
Thank you. Next question, Barbara?
Operator
Next is Randall Stanicky with Goldman Sachs.
Randall Stanicky - Goldman Sachs
Great. Thanks for the question.
Just a follow up, can you talk about how Lovenox, the generic Lovenox would run through your P&L and to the extent that you can clarify whether you factored anything in and whether you have any views on how many competitors that could come to market?
Dave Yost
Mike DiCandilo
Yeah, you know, Randall, again, it's not in our guidance. You know, I think the most we could say about that product is just remember it -- it is, beyond just the retail market.
There is a good part of that that is going to hit the institutional market outside of retail where our penetration in Pro Generics is somewhat less than it is in the retail space, but, again, in our assumption the rest of year a normal quarter has got a couple of pennies in each quarter from generic launches and that's where we expect to be in two to three and four with two a little bit stronger again because of the continued Oxaliplatin performance and certainly if Lovenox come out it would be added to that.
Randall Stanicky - Goldman Sachs
Okay. Great.
Thanks, guys.
Dave Yost
:
Operator
And next is Tom Gallucci with Lazard Capital.
Tom Gallucci - Lazard Capital
Good morning, thanks. Maybe slipping away from the generics a bit.
You also had much stronger revenue growth and raised that for the year, can you talk about some of the drivers that you are seeing there. Iis it sort of new business or is it gaining traction faster or is it some of your existing customers that has grown much faster than the market.
Dave Yost
Oh yeah discount all of the above time I mean, another one we added up -- the market I think was little stronger than we thought particular latter part of December of the market and ended up in a little stronger than we thought. Sometime as a wholesaler you are dependent upon your revenue growth depends upon how well your customers are.
We got a really good customer mix and some of our customers continue to do very, very well -- that help we had 6% of the revenue growth was new customers as Mike mentioned the anniversary of those starting in March and April, but it was really all the above and I think the fact, you went to so many different markets hit really well for us also.
Tom Gallucci - Lazard Capital
Dave, just follow up to on your comments about being receptive to acquisitions, obviously nothing in the guidance but if we're sitting here 6 to 12 months from now, would you have expect to have done a deal? What the pipeline of opportunity look like?
Dave Yost
Tom Gallucci - Lazard Capital
Thank you.
Dave Yost
Next question?
Operator
Next is Robert Willoughby with Banc of America.
Robert Willoughby - Banc of America
Here is a tough one for you, Mike. Do you actually have the outstanding balance sheet share base as of December 31?
Mike DiCandilo
The outstanding as of the end of the quarter is 283.8 million, Robert.
Dave Yost
He just has that memorized, Robert. I meant is this man is just a wealth of information.
Robert Willoughby - Banc of America
Do you know what it would be for next quarter. That's great thank you very much.
Great quarter.
Mike DiCandilo
Thanks.
Dave Yost
Okay. Next question, please?
Operator
Next is Glen Santangelo with Credit Suisse.
Glen Santangelo - Credit Suisse
I just ask you if I heard you correctly did you say in your preparatory remarks that the earning would have been up 20% if there were no generics in contribution in the quarter?
Dave Yost
I said that we would without the extraordinary -- generic introductions we would have been in the 20% ZIP code.
Glen Santangelo - Credit Suisse
So that would imply that basically generics added close to a dime in the quarter, these generic introductions; is that fair?
Dave Yost
Yeah.
Glen Santangelo - Credit Suisse
And then--
Dave Yost
We said it would normally be a couple $0.03 something like that.
Mike DiCandilo
Glen Santangelo - Credit Suisse
Dave Yost
As Mike mentioned that was an at-risk launch, and the legal -- the legal issues could reoccur any time. So, we're -- I mean, literally we could pick up, the paper or the mail and have that challenged in court and stopped.
Glen Santangelo - Credit Suisse
Okay. So as of right now, it's an at-risk lawn, there's product out there, and you are just waiting to see how long it goes.
Dave Yost
Absolutely.
Glen Santangelo - Credit Suisse
Okay. Thank you.
Dave Yost
Next question.
Operator
Next is Helene Wolk with Sanford Bernstein.
Helene Wolk - Sanford Bernstein
Hi Dave, good morning. I just wanted to ask a question about the ESAs, and any expectation you have built in to guidance around the ongoing still review of clinical utilization?
Dave Yost
There is a protein stimulating agents continue to be, somewhat, question mark going forward. You know, rough justice.
They were strong in the nephrology business, up in double digits, a little bit of headwind continuing on the oncology business but, when the smoke clears total ESAs were up in the low single digits.
Helene Wolk - Sanford Bernstein
Dave Yost
Flu is not a really big deal for us. I think we have said historically rough justice the total flu season which spans several quarters for us is in the $100 million ZIP code, so, not a huge issue for us, and nothing unusual to report.
Helene Wolk - Sanford Bernstein
Thank you.
Dave Yost
Next question, please?
Operator
And next is Lisa Gill with JP Morgan.
Lisa Gill - JP Morgan
Thanks very much and good morning. Dave in your prepared comments you said that things are fairly rational and the drug distribution rate business right now and that there's not any large contracts up.
Did you mean just in your own book? Because my understanding is that one of your competitors does have some business up for renewal over in the next 12 months.
Dave Yost
What I should have said and what I hope I said was not a lot in the total industry, Lisa. There are a couple that are up for review.
We don't have any. Some of our competitors do.
But the point I wanted to make is that with the very large ones, the relatively small number point one, point two, they tend to be pretty sticky. Natural function of the fact that -- generally with very large customers there are lot of unique services that you provide, you get very closely integrated with them going forward.
If you look back over the half dozen years or so, there were not very many multi-billion dollar customers have changed hand and in fact there are very many million dollar customers but it tends to be a pretty sticky business.
Lisa Gill - JP Morgan
And just one other follow-up, with moving to fee per service with Pfizer on January 1. Any surprises there as you turn that business over?
Dave Yost
No Lisa. We've worked for long time to get to a fee per service arrangement with Pfizer and it's really, it still January but so far it has been going very well for us, hopefully for them as well.
Lisa Gill - JP Morgan
Okay. Great, thank you very much.
Dave Yost
Next question please Barbara.
Operator
And next is Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser - Morgan Stanley
Good morning. Just a couple of questions around generics again.
I think first in the prepared remark you talked about generic revenue increasing double the total company's revenue hogging around 20% plus. What percent of that growth is coming from the generic Eloxatin?
This is kind of a drug that has a pretty high whack and then I noted you are not going to comment on Lovenox specifically, but when you think about your fiscal year '10, and you compare to an average year, what do you think is the likelihood of potential new launches that are not included in your budgets? Is this kind of like just going to be a normal year or do you think there is a potential for more activity than we have seen in the past?
Thank you.
Dave Yost
I'll take the second part, Ricky. I will tell you your forecast in adverse launches, pretty --for the business.
So we don't consider any of them when we put together our guidance and we do our plan in process. You pick up the newspaper tomorrow morning and we'll all get surprised.
We do not focus in any adverse launches. I'm really not qualified to opine on whether, 10, 11 will be unusual or not.
Mike DiCandilo
Yeah. From a generic growth rate, I said we were well over 20.
Dave said more than double, the top-line growth rate working at about 5 to 6% of that is coming from the specialty side, with, the drug company growth being over 20, contributing over 20%, still even without that growth. And a good part of that was the new business that we added over the last year and if you carved out that new business, we would probably be in the, somewhere in the low to mid-teens range which is, still above the base revenue growth rate, showing that we continue to have good compliance and good penetration.
Dave Yost
The key issue here, I think is that we have said all along that we have two profit drivers at AmerisourceBergen. One is generics and it's a, function of our customer mix with, almost all of our customers, looking to us for their generic needs and the other one is specialty which is a very unique market.
This quarter you had both of those, specialty is doing very well in generics and generics shooting up in specialty. So, I would say this was a great quarter to really demonstrate the power of the profit drivers when they line up.
Ricky Goldwasser - Morgan Stanley
So, just to follow-up on that, specialty grew 7.7%, but I'm sure the top-line growth was somewhat offset by Eloxatin because of the price decline, the 20% price decline. So, what would specialty grow at if you exclude Eloxatin and does that mean in the second half of your fiscal year we're going to see accelerated growth in the specialty bucket once we anniversary, the Eloxatin impact?
Dave Yost
They were talking this specifics about anyone segment, Ricky. But Charles, you had a couple of, they had a couple of headwinds.
I mean, as we mentioned earlier, they had a little headwind on the ESAs. The erythropoiesis is a stimulating agent as well as the Eloxatin.
So they have been in the low single-digits.
Mike DiCandilo
Yeah, our guidance, Ricky, for the year revenue growth in specialty hasn't change, the 5 to 7% and as we said it is about a 2% drag expected from generics and I don't think we have changed there. So once we anniversary, should it pick up a little better.
I think the answer is yes.
Ricky Goldwasser - Morgan Stanley
Okay. Thank you.
Mike Kilpatric
Next question.
Operator
Next is Steven Valiquette with UBS.
Steven Valiquette - UBS
Hi, thanks. I know you guys don't want to talk super in-depth on individual generic drugs, but we did have the re-launch of the 1 billion plus generic Pulmicort and Restoril [ph] in mid-December and I guess I'm curious, did that contribute meaningfully into the December quarter into the channel or maybe just the general question is, when you have a big generic launch with two weeks to go in the quarter, generally speaking would that be a big earnings driver in that same quarter or is it more beneficial in the following quarter.
To get a sense for that one, they kind of come right around the end of the quarter.
Mike DiCandilo
Yeah, the timing is important and typically we would have something launched in mid-December would have a reduced impact in the quarter of launch and would have the full impact in the next quarter. So we would expect the contribution from any drug in that situation to increase the following quarter.
Dave Yost
The other thing, the only thing I would add is we want to be little careful about talking about any individual product, because we had a half dozen or so, generic launches this quarter, vast majority, a number of them in the drug company. So it was a good quarter all the way around for generic launches.
Steven Valiquette - UBS
Okay, great thanks.
Mike Kilpatric
Next question, Barbara.
Operator
And next is Charles Rhyee with Oppenheimer.
Charles Rhyee - Oppenheimer & Company
Yeah, thanks for taking the question. Maybe more speaking broadly about generics, I think another comment you had made, Dave was the increase in the generic penetration in your the client base as also a driver for the (inaudible) and generics.
Can you talk about what that penetration is? At least maybe in broad terms and sort of, how much room is there for that to continue to increase and how should we think about that over the next several years?
Thanks.
Dave Yost
It's clearly an increase in target, Charles because as the number of new generics come out, we got to continue to raise the bar. We literally track it, customer-by-customer to look at it.
We incentivize our customers and our salesperson to get added penetration. As we mentioned in my prepared comments, we came out with a new program, recently for the alternate site.
We have got a program with one large hospital groups to capture additional generics. So we're continuing to track and we're continuing to raise the bar.
Mike DiCandilo
Yeah, I think in broad terms, Charles, just to add to that, I think our penetration on the retail side, we think is in excess of 80% or so. And I think on the odd sites side is, where as Dave mentioned we have got a lot of potential and we are launching new programs.
Currently, we think we're getting about 50% of the potential on that side. So, a good potential from upside and as you know we've even made an entree somewhat with our program into the hospital market with our agreement with Novation that we signed last year to handle oral solids on our pro generics program.
Charles Rhyee - Oppenheimer & Company
Okay, great. So, if I could just follow up to that, a couple of years ago we had talked a little about trying to improving the compliance rate.
Is it fair to think that improving the compliance rate is the main reason we're receiving retail 80%, or is there reason to think that compliance can also continue to improve as well.
Mike DiCandilo
No, it's a good contributor and like Dave said, we keep raising the bar. So every time we renew a contract, I think we focus on making sure that the bar is raised and any of the exceptions are reduced and we get the compliance that we expect at the time that we signed the contract.
Dave Yost
Yeah, you just take this quarter outcome, I mean half a dozen or so, new introductions. Last quarter we already got more generic penetration that we had this quarter because customers just continued with the products available.
So we have constantly got to raise the bar and we monitor it very closely. I think we continued to do a better job at it.
Charles Rhyee - Oppenheimer & Company
Great. Thanks a lot, guys.
Mike Kilpatric
In view of all of the company's reporting today, we'll take one more question, Barbara.
Operator
And our next question comes from AJ Rice with Soleil Securities.
AJ Rice - Soleil Securities
This is going to be the last one. Maybe two quick things.
Hello, everybody. The cash flow guidance, you had a strong guidance coming in to the year, but you upped the income level but you didn't update the cash flow guidance.
Any comments about where you were in the first quarter in terms of the cash flow relative to your expectations? And then second, you mentioned a couple of time, the alternate site initiatives, can you maybe expand a little bit more and what you are doing there and there was also, somebody says you're going to pull it on the investor day.
Michael D. DiCandilo
Yeah. Charles this is Mike, I'll answer the first question and let Dave answer the second, but certainly, I think your cash flow guidance at the range it is, at 500 to 575 is a pretty broad guidance and factors in the increase in the earnings guidance, certainly, we were happy with our performance in the first quarter and we feel very much on track to hit that guidance for the year.
Dave Yost
Well, if you are little careful about getting too strategic on how we're picking off some of our alternate sights. But I will tell you that our formulary is unique.
We think that the demands in the alternate site are unique to retail in terms of their product, the generic offering in their product as well. They have got some pretty unique needs in terms of service.
They are also very, very sensitive to third-party access programs and like, so, we've worked pretty hard to have a customized program and getting some good traction there which is really paying off for us.
AJ Rice - Soleil Securities
Thanks a lot.
Dave Yost
You bet, I think with that we will cut it off. We are sensitive to everybody's time and we realize there is a lot of activity going on throughout out the market.
As I would just conclude by, again, thanking you for joining us. We have had a very, very strong first quarter.
Obviously, off to a very strong start for the year. We think our two profit drivers, which are generics and specialty pharmaceuticals were very much in evidence.
We have raised our EPS guidance going forward, very excited about how we started. So, with that we thank you and we look forward to sharing our second quarter results with you in April.
Thank you.
Operator
And that concludes our call today. Please disconnect your lines at this time.