Jul 27, 2010
Executives
R. Yost - Chief Executive Officer, President, Director and Chairman of Executive & Finance Committee Michael Dicandilo - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chief Operating Officer of Drug Unit Michael Kilpatric - Vice President of Corporate and Investor Relations
Analysts
Lisa Gill - JP Morgan Chase & Co Ricky Goldwasser - Morgan Stanley John Ransom - Raymond James & Associates Robert Jones - UBS Helene Wolk - Bernstein Research Steven Valiquette - UBS Investment Bank Garen Sarafian - Citigroup Inc Charles Boorady - Citigroup Inc Glen Santangelo - Crédit Suisse AG Robert Willoughby Thomas Gallucci - Lazard Capital Markets LLC Lawrence Marsh - Barclays Capital Charles Rhyee - Oppenheimer & Co. Inc.
Richard Close - Jefferies & Company, Inc.
Operator
Welcome, and thank you for standing by. [Operator Instructions] Now I will turn the meeting over to Mr.
Michael Kilpatric. Sir, you may begin.
Michael Kilpatric
Good morning, everybody, and welcome to AmerisourceBergen's conference call covering the fiscal 2010 third quarter. I'm Mike Kilpatric, Vice President of Corporate and Investor Relations.
And joining me today are David Yost, AmerisourceBergen President and CEO; and Mike Dicandilo, Executive Vice President and CFO. During the conference call today, we will make some forward-looking statements about our business prospects and financial expectation.
We remind you 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 2009.
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 telephone 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.
R. Yost
Good morning, and thank you for joining us. As you probably know from our press release this morning, ABC delivered a very strong third fiscal quarter that ended in June in a series of strong quarters.
We are well on our way to delivering an outstanding year that ends September 30, and this is on top of our last year fiscal 17% EPS increase and ahead of the 16% compound annual growth rate we delivered over the last eight years. There's lots to like about this quarter and our long-term performance.
Mike will drill down on the details, but here are the highlights. Revenues were a record $19.6 billion, increasing well over $1 billion from the June quarter last year and up 6.6%.
Gross profit again increased in double digits. Total operating expenses were down 10 basis points as a percent to revenue versus last year, equal to the historic low of the first two fiscal quarters' operating expense ratio.
Operating margin was up an outstanding 28 basis points this quarter. Diluted EPS were $0.57 on a GAAP basis, up a robust 36% over last year and up 24%, excluding special items.
That's on top of the 20% increase we reported last June, big increases on top of big increases. We did a good job of controlling our receivables and inventory and had over $1 billion in cash on June 30.
The quarter reflected the theme of consistent growth that continues to be characteristic of ABC. Though we usually do not mention external recognition, I'm going to make an exception this quarter due to the extraordinary nature of three noteworthy items.
First, our largest customer recognized us with their VIP award for value, innovation and performance at their first-ever supplier award banquet. At ABC, customer recognition is the most important, and recognition from our largest customer is very meaningful.
Second, Bloomberg Businessweek, in the June 21 issue, included ABC in their annual list of the 50 Best Performing Companies in the S&P 500 based on total shareholder return for the last five years. Bloomberg Businessweek reported ABC's five-year return as 115%.
And Fortune Magazine, in their May 5 issue, ranked ABC as number 22 in total shareholder return for the period of 1999 to 2009, with an annual rate of return of 22% over that 10-year period. Our associates and I take great pride in the fact that only 21 companies on the Fortune 500 outperformed ABC for the last 10 years.
Before I address some company specifics, a few words on the industry. First, pharmaceutical industry revenue growth.
The IMS forecast of 3% to 5% for calendar 2010 seems to be in the right zip code to us. Second, manufacturer pricing environment.
Fee-for-service, of course, mitigates much of the impact to wholesalers from brand-name manufacturer price increases. We currently expect brand-name price increases to be similar to the 8% to 9% range we experienced last year.
It is important to note two milestones regarding fee-for-service. One, we signed a fee-for-service agreement with Glaxo this quarter.
So now essentially all of our brand-name Pharmaceutical business is operating under some type of fee-for-service. And two, we renewed our fee-for-service contracts with the three brand-name manufacturers that recently completed mega-mergers.
Both these events demonstrate the value that the national wholesalers bring to our manufacturer partners under our prime vendor relationships with our dispensing customers. Not only do we make a wide array of product available to our dispensing customers on a daily, just-in-time basis, providing inventory control to both manufacturer and dispensing customers, capturing valuable realtime data in the process, but among other things, we provide pharmaceutical supply channel security, and we manage the credit and receivable function for the manufacturer for literally tens of thousands of customers.
We think these recent fee-for-service agreements lay to rest any question about the value the national wholesalers bring to manufacturers. Third, competitive pricing environment within our industry.
I would continue to describe the environment as competitive but stable, with few billion-dollar pieces of business in play in the next 12 months or so and a few billion-dollar pieces of business changing hands historically. Now a closer look at ABC.
Among the big news at ABC this quarter would be the fact that we went live with the first phase of our business transformation process that includes an eventual total conversion to SAP, among other things. We expect to begin the next phase of business transformation in our first fiscal quarter of FY '11, and we'll continue through a phased approach.
When completed, our BT implementation will provide us with insights, flexibility and operating efficiency, which will differentiate our offer to our current and potential customers and meet or exceed their information technology needs for years to come. It is important to note that during the phasing period of business transformation, we will be operating two systems, both SAP and our legacy IT systems, putting some pressure on cost-containment efforts.
The very good news is that when completed in FY '13, we will get relief from the dual-system expenses and have a state-of-the-art ERP system. Our investment in business transformation is an important investment in our future, just like our investment in new distribution centers several years ago that are now helping to drive down our operating costs.
Another item of note would be the status of our inventory oxaliplatin, generic Eloxatin. We have a policy against providing insight in these specific item inventories but are making an exception in this case due to the size and unusual circumstances around the product and its impact.
To refresh your memory, oxaliplatin cannot be sold by the generic manufacturers after June 30, 2010, until reintroduction in August 2012. Wholesalers can continue to sell through any inventory that was on hand as of June 30.
We currently estimate that given our expected level of demand, we will have sufficient oxaliplatin inventory to meet the needs of our oncologist customers, at least through the first half of our fiscal '11 that begins October 1. The two primary growth drivers at ABC, generics and specialty, were very much in evidence again this quarter.
Sometimes, of course, the two drivers overlap as they did this quarter with oxaliplatin in our Specialty business. The wide diversity of our customer base with only one customer representing more than 10% of our business, with the next largest dropping down at a 5% range, enhances our generic growth driver where the vast majority of our customers look to us for at least some of their generics.
Our Generic business was very strong, with double-digit increases over last year, easily outpacing our 6.6% revenue growth. Our traditional drug company, ABDC, had a revenue increase of 8%, reflecting the strength of the market, the strong growth of our largest customers, as well as the strength of our programs and total service offerings.
We have now anniversary-ed most of the new business that accounted for the double-digit revenue growth of the last few quarters. Our Specialty Group, ABSG, was up 3% with a run rate over $16 billion annually, with about half of the revenues in oncology products to oncologists.
We service the largest number of community oncology practices in the industry by far, and significantly, most of the largest and most innovative. I recently met with several of our largest practices and continue to be thoroughly impressed with the patient accessibility and focus on quality care they provide.
ASD, our blood plasma, nephrology and vaccine distributor and ICS, our third-party logistics company, had strong revenues in the quarter as did our Consulting businesses, Lash and Xcenda. Our Packaging business also had strong revenues in the quarter.
Our total company double-digit gross profit increase this quarter reflected our attractive customer mix and generics. We continue to benefit from the at-risk launch of oxaliplatin, generic Eloxatin, as I noted earlier.
Cost control continues to be an important part of the culture of ABC and our CE2 customer efficiency, cost-effectiveness philosophy is an important part of that culture. This quarter, the total cost of running ABC was about equal to last year in spite of a 6% increase in revenue, and the associates of ABC drove total operating costs as a percent to revenue down 10 basis points versus last year, equaling our historic best performance in this metric.
Along with controlling expenses, our associates continued to do an outstanding job controlling our inventory and receivables, driving our DSO to 17 days again this quarter. Our receivables performance is a key indicator of the strength of our customer base and that we are delivering value to our customers.
We continue to do an excellent job controlling our inventory, while maintaining very high service levels. Operating margin expansion has continued to be a key focus of this management team, which delivered an impressive 28 basis points increase in operating margin this quarter versus last year.
In each of the last four years, we have increased our operating margin by five to eight basis points, and of course, the basis points on $75-plus billion of revenue is a significant $7.5 million or $0.015 a share. 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 business 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. So when you add up all the elements, we had a great quarter and a great fiscal year-to-date and have reflected our optimism by increasing the guidance for EPS and revenue for fiscal year 2010, which Mike will detail.
Before I turn the floor over to Mike for some added color, let me give you my very early thoughts on FY '11, which we will begin October 1 since we continue to get questions about the current year contribution of oxaliplatin and our ability to grow our business next year with this comparison. We are still in our very detailed bottoms-up planning process, but here are our preliminary thoughts.
The $0.05 per share benefit from special items we enjoyed this quarter will not be repeated next year. The oxaliplatin benefit enjoyed in FY '10 will not be repeated in total, but the combination of inventory carryover of the oxaliplatin product, combined with the benefit of two other specialty generic introductions, could provide a similar benefit in total to the FY '10 benefit we received from the at-risk launch of oxaliplatin.
In addition, we now expect not to renew the contract with Duane Reade ending December 31, 2010, which represents approximately $500 million of annual revenue. Net of special items and assuming the specialty generic offset at this preliminary stage, we see EPS for FY '11 increasing in the 7% to 11% range over the midpoint of our increased FY '10 guidance.
We continue to be very comfortable with long-term EPS growth goal of 15%. Looking past FY '11, our FY '12, which begins October 1, 2011, will include the largest brand to generic product conversion in industry history that is expected to begin November 2011.
For FY '13, we expect to begin to experience the benefits of our business transformation and the elimination of running dual IT systems. FY '14 will benefit from the 30 million or so uninsured patients entering the healthcare system with pent-up demand for pharmaceutical products, the most efficient element of the healthcare system.
So both the next year and the next several years will be strong. With ABC's position in generics and specialty and with our diverse customer base and cost structure, I have never been more enthusiastic about the role of our company within an industry with a future that has never been brighter.
Here's Mike.
Michael Dicandilo
Thank you, Dave, and good morning, everyone. Another great quarter and a superb nine months leading to increased EPS guidance, once again, with our new forecasted range for fiscal 2010 of $2.16 to $2.20, representing an increase of 28% to 30% over EPS from continuing operations of $1.69 a year ago.
Our third quarter performance was driven by above-market revenue growth, benefits from new and recent generic launches, a robust price increase environment and continued cost in working capital discipline. These are all familiar themes, with generics providing most of the upside against our expectations in the quarter.
In addition to our continued strong operational performance, favorable litigation results contributed $0.05 per share to the quarter, enhancing our GAAP results. $0.04 of these litigation benefits are included in gross profit, and the other $0.01 is included in operating expenses within the facility consolidations line.
I will give more detail on these items within my income statement review, and we'll summarize our increased EPS guidance at the end of my comments. Now let's start with a walk down the income statement.
Our record $19.6 billion of revenue in the third quarter increased 6.6% over last year and was above market growth. The Drug Company grew 8%, helped by the strong growth of its largest customers, as well as a 1% contribution from a large new customer added last August.
The Specialty Group grew 3%, driven once again by ASD, our blood plasma and nephrology distributor and ICS, our third-party logistics company. The Specialty Group has grown 5% for the nine months ended June, which is in line with our 5% to 7% guidance for specialty growth for the year.
Generics in this space have moderated top line growth but have certainly enhanced our overall profitability. With our stronger-than-expected revenue growth for ABC as a whole, we now expect top line growth for fiscal '10 to exceed our previous 7% to 8% forecast and assume full year revenue growth to be between 8% and 9%.
This range implies fourth quarter revenue growth in line with market growth of 3% to 5%. Our gross profit in the June quarter grew in double digits for the third consecutive quarter, increasing 13% over last June.
4% of this growth was from a $19 million legal settlement we received from a pharmaceutical manufacturer related to antitrust litigation as disclosed as a subsequent event in our March 10-Q. Double-digit generic revenue growth, including the impact of several new and recent launches, also contributed significantly to gross profit in the quarter.
Oxaliplatin, once again, provided a large amount of that generic benefit, contributing $25 million or $0.05 of benefit to the quarter. This was in line with last quarter's contribution and better than we expected.
As Dave mentioned, despite the settlement between the brand and generic suppliers that prohibits those generic manufacturers from selling oxaliplatin after June 30, wholesalers can continue to sell the product they had on hand at the end of June, and we expect to have product available for sale to oncologists at least through the first half of our fiscal 2011. I will note, however, that with the 34% reduction in average selling price or ASP that became effective July 1 for this product, we anticipate a decline in our selling price, which will reduce our gross profit per unit going forward.
Accordingly, we are only expecting a benefit of approximately $0.03 in our fourth fiscal quarter from oxali [oxaliplatin]. In addition to oxaliplatin, there were a number of other generic launches in the quarter, which provided an incremental $0.02 to $0.03 over our normal couple-of-pennies-per-quarter expectation for new launches.
I also mentioned in my opening comments that there were significant manufacturer price increases in the quarter. And while much of this impact on the brand name side was mitigated by our fee-for-service agreements, there were a number of increases, particularly on the generics side, that provided benefits to the quarter.
That manufacturer price activity also drove an increase in our LIFO charge in the quarter. This charge for the quarter was $11 million compared to a $4 million charge last year, reflecting both strong brand-name price inflation and a year-over-year reduction in generic price deflation.
For the nine months ended June 30, our charge was $30 million compared to $21 million in the similar period last year. Our current expectation is for our annual LIFO charge to be in the low $30 million range.
As usual, we will perform our annual LIFO calculation at the end of September, and as in the past, there can be some adjustment as a result of that snapshot. Moving to operating expenses.
Total expense dollars in the quarter were flat compared to last June. Keep in mind that last year's quarter included an $8.9 million impairment charge for one of our subsidiaries.
In the current quarter, we benefited from a $4.4 million reversal of a legal accrual as a result of a favorable court decision related to ongoing employment litigation with a former Bergen Brunswig executive. Offsetting that positive item, bad debt expenses in the quarter increased by approximately $6 million over last year, primarily related to certain physician customers in the Specialty Group.
While we continue to expect operating expenses to increase 1% to 3% for the year, looking ahead to the fourth quarter and consistent with the last few years, we expect the significant sequential expense dollar increase between our third and fourth quarters. Historically, this has been due to the timing of certain customer promotional activities such as our annual customer trade shows.
In addition this year, as a result of going live in July with the first phase of our ERP-enabled business transformation project, we are now maintaining duplicate information technology infrastructures, and we'll continue to do so for the remainder of the transition period for the move from our legacy system to SAP. The incremental IT costs to maintain dual systems is expected to be approximately $10 million per quarter, with approximately half of that relating to the start of depreciation for the new system.
Our future savings will really start to accrue at the end of the transition period, starting in fiscal 2013 when we retire our legacy system and no longer have duplicate infrastructure costs or the project costs related to the ERP implementation. Moving to operating income, EBIT of $282 million in the quarter increased a robust 32% over last year, 21% excluding the favorable litigation items.
Operating margin expanded by an impressive 28 basis points in the quarter and for the nine months, are up 23 basis points, well above our expectations. As we have mentioned consistently throughout the year, we expect a tough fourth quarter comparison due to the benefit we received in the prior-year fourth quarter from a LIFO credit and from generic introductions, specifically oxaliplatin.
In addition with our higher expense levels expected in this year's fourth quarter, I would expect relatively flat operating margins in the fourth quarter compared to the prior year. We have increased our operating margin expansion expectation for the full year to the mid- to high teens basis point range.
And keep in mind that our operating margin expansion expectation when we began the year was in the flat to low single-digit basis point range. Moving below the operating income line, net interest expense of $18 million was up 22% as expected due to our bond offering earlier in the year.
Our effective income tax rate was 38.1% in the quarter compared to 36.8% in last year's June quarter, which benefited from certain adjustments. Our diluted EPS of $0.57 in the quarter increased by 36% compared to last year's EPS from continuing operations and was above our 30% growth in income from continuing operations due to a 5% reduction in average diluted shares outstanding.
The reduction in shares was primarily due to our continuing share repurchase program, net of option exercises. Excluding our $0.05 litigation benefit, diluted EPS of $0.52 was up $0.10 or 24% compared to the June 2009 quarter.
Now let's turn to our cash flows and the balance sheet where we continue to demonstrate excellent performance. We generated $213 million of cash from operations in the quarter, bringing our nine-month total to $559 million compared to $430 million for the first nine months of last year, and we remain on track to hit our full year targets.
We had $44 million of capital expenditures in the quarter and $132 million for the nine months and currently expect between $165 million and $175 million for the year, an increase over our prior estimates, primarily due to the timing of certain business transformation expenditures. From a working capital standpoint, average inventory days on hand during the quarter were 24 days, consistent with the prior year.
Receivables management continues to be a focus as average DSOs in the quarter were 17.2 days, down almost a day during the prior year. Average DPOs were up one day, mainly due to the timing of purchases.
From a share repurchase perspective, we purchased $95 million of our stock in the quarter, bringing our nine-month total to $350 million, meeting our initial guidance for the full year, and accordingly, we are increasing our fiscal 2010 share repurchase guidance to $450 million. At June 30, we have $218 million remaining on our current share repurchase authorization.
Our gross debt to total debt in equity ratio at the end of June is 32%, in line with our target 30% to 35% ratio, and we continue to have more than $1 billion of cash on our balance sheet, which continues to provide us with great financial flexibility. Now let's turn to our updated fiscal 2010 guidance.
We are increasing and narrowing our diluted EPS guidance from a range of $2.01 to $2.10 to a new range of $2.16 to $2.20. This new range represents a 28% to 30% increase over 2009 EPS from continuing operations, which as a reminder, were a strong 17%.
This new range, as always, is on a GAAP basis and includes the $0.05 benefit we received from litigation items in the third quarter. Our updated guidance implies the diluted EPS range of $0.44 to $0.48 in the fourth quarter.
As a reminder, the major differences between our fourth quarter EPS range and our third quarter diluted EPS of $0.57 are: the non-recurrence of the $0.05 of litigation benefits we received in the third quarter, increased operating expense expectations in Q4 of $0.03 to $0.04 versus Q3 and a net reduction of $0.02 to $0.03 in buy-side profits as declines in the benefit from oxaliplatin and price increases should offset the benefit from new generic introductions in the quarter. From a full year fiscal '10 assumption standpoint, we now expect revenue growth to be 8% to 9%, operating margin expansion to be in the mid- to high teens basis point range, free cash flow to remain in the $525 million to $600 million range and share repurchases to increase to approximately $450 million.
Keep in mind that Dave's preliminary comments on fiscal 2011 EPS growth are based on a $2.13 base EPS for fiscal '10, which is the $2.18 midpoint of our GAAP range, less the $0.05 of litigation benefits we received in fiscal 2010. As always, we will give our detailed guidance in early November on our fiscal year-end earnings call, where we would expect to have much greater clarity on all of our fiscal 2011 assumptions, including the specialty generic opportunities.
So again, a lot to like about the third quarter, the nine months and our outlook for the full year. We continue to benefit from our market positioning in specialty and generics and from the incredible work ethic and dedication of our associates, who continue to provide superior service to both our external and internal customers.
The future continues to be very bright for AmerisourceBergen. Now here's Mike Kilpatric for Q&A.
Michael Kilpatric
Thank you, Mike. We will now open the call to questions.
I would ask you to limit yourself to one question until all have had an opportunity. And then if there is still time, you can ask additional questions.
Go ahead, Corey.
Operator
[Operator Instructions] Lawrence Marsh of Barclays Capital.
Lawrence Marsh - Barclays Capital
The question I had really just a clarification on the guidance, Dave and Mike. So $2.32 at the midpoint of the $2.13 in that range of 7% to 11%.
You mentioned I think you're including some contribution in the first half from oxaliplatin. And I think you also mentioned you're assuming some contribution from the potential launch of Taxotere and Gemzar.
How are you handicapping that given where we are in that process? And then how do we think of the seasonality of the results, especially given the lawsuit Duane Reade's starting in January?
R. Yost
Larry, we want to be careful here. We're not oddsmakers, as you know.
We don't really have any insight into the patent laws, but our best guess at this point is that the end site [ph] (37:37) of being the hydrochloride and docetaxel will be a first quarter event. That's what we're looking at right now.
Lawrence Marsh - Barclays Capital
So obviously some contribution I don't relate too much. And then I guess, along those lines, just maybe clarify a little bit, if you could, the revenue contribution from specialty this quarter, up 3%.
I know you had sort of targeted 5% to 7%. Is that just a higher-than-expected impact from generics?
And how do you think about the ESA volumes in oncology that you're seeing?
R. Yost
I'll start out. I mean, nine months, Larry, we're pretty much in line with our guidance of where we said we would be.
I think you hit the big issue. It's probably the generics, but the big issue is generics and the specialty, which is impacting our top line but have a very attractive impact on our bottom line, and there's going to be more of that, of course, going forward.
I would say the other issue is that there's just been a lack of blockbuster drugs introduced in that space, and that's probably the biggest issue. I think another important takeaway here is that we are maintaining our market share, and we think it represents market softness not individual.
Mike, do you have a little bit about ESA?
Michael Dicandilo
ESAs, Larry, continue to be a small drag as they relate to oncology. They were down about 12% over the prior-year quarter but have stabilized sequentially, really being flat.
And just as a reminder, they're less than 1.5% of our total revenues today. So we don't expect them to be a big drag as we go forward.
And also, just going back to your previous question, you had asked about seasonality as far as next year. And I think, first off, it's too early for us to comment on seasonality or quarter-by-quarter impact.
And as a reminder, we only give guidance for the full year as well.
Operator
Robert Jones of Goldman Sachs.
Robert Jones - UBS
So you talked about some of the things that you're contemplating for a specific drug. And I know you guys don't like getting into this too much.
But we saw the approval jerk Lovenox on Friday. I was just wondering how that's contemplated in both the fiscal 2010 and then as we look into the preliminary guidance you gave for next year, how that's contemplated in that number as well?
Michael Dicandilo
Sure, Robert, this is Mike. We're happy to see a generic introduction.
That's going to be a significant contributor. I think that contribution is going to be much greater in 2011 than 2010.
Right now, there's only one generic supplier that's been approved. And often, when there's only one supplier, it acts more like a brand name drug than it does like a generic until more manufacturers come into play, which we would expect to happen.
And again, maybe that's in fiscal '11. I think the other thing that's important to note about Lovenox is that it's mostly sold to our institutional pharmacy customers.
And as a result, a very small percentage will actually go through our ProGeneric program, where we get our highest profit margin. A lot of that product is going to be sold through third-party GPO contracts so the overall margin percentage is less than what I've seen some people estimate at this point.
However, I think this is a product that is going to maintain a fairly high generic price in relation to the brand price because of its difficulty to manufacture, and again I think it's going to provide a nice impact in fiscal '11. It's contemplated in our guidance, and it really helps to levelize the generic contribution between the two years.
Robert Jones - UBS
And I guess, just as a more broader follow-up, there's been a lot of back-and-forth and confusion in this in the marketplace. But I was wondering if you guys could just discuss and tell us how you would characterize the generic launch schedule, say, over the next 12 months, relative to what we've seen over the past 12 months?
Michael Dicandilo
Again, I think it's very important to realize that it differs for all of the wholesalers because we all have different fiscal years and it differs for other people in the industry as well. Again, I think, as we look early on at fiscal '11, we see the impact from generic launches, whether they occurred in fiscal '10 or rolling into fiscal '11 or just new launches in '11, I think we look at the impact as being very comparable to what we have had in fiscal '10.
And as a reminder, fiscal '10 is better than what we expected at the beginning of the year with a couple of at-risk launches that have contributed significantly and a couple of launches that have had exclusivity where our original thought would be that there was no exclusivity involved.
R. Yost
Again, it's important to note that the -- really, most people like to talk about Lipitor and Zyprexa and so forth, that started in November '11. That's our fiscal '12.
So Mike's point about when the fiscal year starts, it would make a big difference on generic introductions. But for our fiscal '12, that's going to be unprecedented in terms of brand generic conversion.
Operator
Tom Gallucci of Lazard Capital.
Thomas Gallucci - Lazard Capital Markets LLC
Just a couple of housekeeping items. First, on the guidance.
Mike, can you just clarify, so how much were you expecting oxaliplatin to be, sort of, for the full fiscal '10, just to be -- make sure we understand that, that framework did you offer there?
Michael Dicandilo
Sure. I mentioned it was $0.05 this quarter, Tom, and we expect about $0.03 next quarter.
And that's after contributing close to $0.14 in the first half.
Thomas Gallucci - Lazard Capital Markets LLC
And then how are you thinking that you mentioned Duane Reade? How you're thinking about longs for fiscal '11?
R. Yost
At this point, Tom, we're expecting the contract, which is volume-based contract, to pretty much run through at least through our third fiscal quarter, and that's our current thought. We'll have some more guidance on that as we give you our detailed guidance for FY '11.
Thomas Gallucci - Lazard Capital Markets LLC
And then Dave, you talked about acquisitions and being sort of open to them. Certainly, the balance sheet can handle them.
If you could put odds on it, would you expect to do a deal in sort of the next six to 12 months? Or is it just sort of a general awareness that you're interested if there's a right thing.
But you really have no visibility on and then doing them or not at this stage?
R. Yost
There's nothing out there right now, Tom, that is available that we're looking at. But that can change in one telephone call.
We're certainly open to it. Our most recent one, which is our largest one has been -- worked out very, very well for us.
So we are very, very open to anything in our core competency, but nothing on the horizon at the moment.
Thomas Gallucci - Lazard Capital Markets LLC
What's the blackout period on the buyback around earnings?
Michael Dicandilo
Our blackout period around earnings?
R. Yost
Thursday.
Michael Dicandilo
I think 2 days after today.
Operator
Robert Willoughby of Bank of America Merrill Lynch.
Robert Willoughby
As it relates to the tone in [ph] of range you threw out there for fiscal '11, are we assuming the normal amount of share repurchases, something in line with what you did this year?
Michael Dicandilo
Yes, I think no material differences, Bob, in what our capital deployment has been in '10. Obviously, we'll refine that a little bit next quarter when we talk, but I think that's a fair assumption.
Operator
Glen Santangelo with Credit Suisse.
Glen Santangelo - Crédit Suisse AG
Just a quick follow-up, a question on oxy, if I'm doing the math correctly, it kind of suggests you made about $0.22 this year from oxaliplatin. And if you're expecting kind of $0.03 in the fourth quarter, Mike, is that a reasonable run rate to use for the first two quarters of fiscal '11?
Michael Dicandilo
I think it is, Glen. Certainly, ASP can change.
It's a very complicated formula that sometimes surprises people. But assuming that stays in that range, I think that's a fair assumption.
Glen Santangelo - Crédit Suisse AG
And so if we kind of back into that logic then, you're kind of suggesting that maybe the incremental contribution from both Gemzar and Taxotere combined is only about $0.15, which seems a little bit small to me, particularly given the revenues on those two combined drugs would make it a fair amount bigger than the Eloxatin. And I understand there's kind of pricing implications and all that, which would impact the margin.
Am I correct in saying that Eloxatin in and on itself is significantly bigger than Gemzar and Taxotere combined?
Michael Dicandilo
Right now, Glen, that's our estimates here. As we've said often, we know that one of the things that made oxaliplatin so attractive was that is was an at-risk launch, and we took advantage of that launch very early on and had a lot of products available in the marketplace.
I think it caught some people from surprise. Certainly, these next two launches aren't going to catch anybody by surprise.
There may be some more manufacturers involved early on, at least, with one of the products than there were with oxaliplatin. So right now, that's our best guess.
A lot of things can happen between now and November when we give our updates. But I think that's where we are right now.
Glen Santangelo - Crédit Suisse AG
And just one follow-up on the Lovenox question. I appears that drug could be on exclusivity for a fair amount of time.
And then within your initial fiscal '11 guidance, have you assumed that Lovenox is on exclusivity for the full year fiscal 2011?
Michael Dicandilo
We would expect that there would be some competition in 2011.
Operator
John Ransom of Raymond James.
John Ransom - Raymond James & Associates
Did you give an ending share count? I may have missed that.
Michael Dicandilo
I did not, John. But the ending share count basic before any dilution is $281.2 million.
John Ransom - Raymond James & Associates
And secondly, just a bigger picture question, we're certainly seeing more pressure on the retail customers that you have. Is that materializing any way in some of your pricing discussion on your renewals?
R. Yost
I will tell you John, we're not seeing anything dramatically different. It's always been a competitive industry.
But we're not seeing anything really outlined as we look at our total -- as we look at the total company, there are some pockets where -- there's some elements, but nothing total overall. Our Good Neighbor Pharmacy continues to march forward, signing up people.
There's a half dozen or so retail customers that I stay pretty close to, just kind of monitor how things are going, tends to be somewhat anecdotal but their businesses are doing fine.
John Ransom - Raymond James & Associates
What do you think they're doing to offset things like AMP and AWP and Medicaid? And what have you -- how are they able to keep theirs margins uploaded?
R. Yost
They're moving into new and creative things, John. There's a lot of DME work going on.
There's a lot of medication therapy management, initiatives started. We've got a very strong private label program that helps them.
We've got a strong coaching program that is helping them run their businesses. The generics that are entering the business provide them with the great opportunities to enhance their margins.
So the guys who will -- the retailers out there who are creative are finding some pretty good niches. They have a lot more service than generally a lot of their chain or large-box competitors.
So they're clearly holding their urn and doing just fine..
John Ransom - Raymond James & Associates
And then the other thing that we're seeing, there's been a little bit of consolidation back on the generic manufacturer side, maybe pushing towards the mainstream players, a little bit away from some of the emerging Asian players. Have you seen any effect from that?
Are you seeing that all in your sourcing?
R. Yost
We really haven't, John. The one thing about the larger generic manufacturers, that allows them to drive risk launches when they've got a pretty strong balance sheet.
so that can probably play into our favor. Michael, can close to that?
Michael Dicandilo
Yes, I know, we continue to have roughly 100 manufacturers on our ProGeneric source program, covering over 6,000 SKUs. So I think we've got plenty of flexibility within that manufacturer base so one or two consolidation is not going to have a big impact on us.
John Ransom - Raymond James & Associates
And last question, do you think there'll be any material effect on just your revenue metrics from dials that's bundling and some of the clinical concerns on the -- just overuse of ESAs?
Michael Dicandilo
Yes, John, obviously, some new guidelines came out yesterday, and we haven't had the full opportunity to back all of it. But it appears to be very positive for the dialysis providers and not nearly the haircut that some were expecting.
So I think that's a very positive sign. And I don't think we expect any material degradation to our revenue next year as a result of the proposed changes or the changes.
Operator
Lisa Gill of JPMorgan.
Lisa Gill - JP Morgan Chase & Co
Dave, could you make some comments around the new fee-for-service agreements? I was just wondering, are there any changes to what you've done historically?
That would be the first question. And then secondly, with bringing Glaxo now under fee-for-service, will there be any impact to margins as we think about 2011?
Michael Dicandilo
Lisa, this is Mike. I don't think there's going to be any material change in the profitability as a result of the agreements.
The good thing, obviously, with somebody like Glaxo, is much more of our compensation is guaranteed and directly related to our services then subject to fluctuation and manufacturing pricing activity. I think overall, we'd all work to simplify some of the agreement, to make them work for both partners from an administrative standpoint.
But I think our goal, as we talked about at our Investor Day in December, was to get through this renewal process with the mega-mergers and make sure that the combined entities that continue to recognize the value that we were providing them and maintain our economics. And I think, as we have now finished that process, I can say that has been accomplished.
Lisa Gill - JP Morgan Chase & Co
And then just one follow-up. You increased your bad debt reserve, Mike, in the quarter.
Are you seeing anything specific within that, the drug retailers, that you have concern? Or was it just a basic review and that's the reason you brought the reserve out?
R. Yost
No, Lisa, most of that increase, as I think I may have alluded to in my comments, is in the Specialty Group. We had a couple of physician practices that went under during the quarter, which we had to write off, as well as a couple of others that have some issues with reimbursement that because of that, we felt it was appropriate to strengthen their reserves.
But I don't think, as I look at it, that there's any indication of a long-term negative trend in that business. Just as a reminder, our total bad debt expense on an annual basis is typically in the $30-million range, which is in the four to five basis points of revenues.
I think we've done an excellent job. Our past dues on balance have come down the same way our overall DSO has come down.
So we're very confident that this is not indicative of any longer-term trend.
Operator
Ricky Goldwasser, Morgan Stanley.
Ricky Goldwasser - Morgan Stanley
I have a few follow-up questions and some housekeepings. So first of all, can you give us the growth for the bulk revenue and the customer mix for the quarter?
Michael Dicandilo
The bulk revenue was $238 million in the quarter, down from $400-some million last quarter, continuing that trend as we've transitioned more and more of that business, particularly with our largest customer to servicing that from our existing inventories. And from a mix standpoint, I think it's 31% retail and 69% institutional in the quarter.
Ricky Goldwasser - Morgan Stanley
And then one follow-up on Lovenox, just to get a better sense, I think you mentioned that fiscal year '11 guidance just seems there's going to be some additional competition on Lovenox. So from your perspective, are you thinking about an authorized generic?
Or additional generic competitor? Because obviously, that's going to have an impact on pricing and your ability to drive EPS.
Michael Dicandilo
I think it could be either one. I hate to drill down too much on an individual product.
And again, we're relying a little bit of the assessment from our business people. But we expect additional competition.
And when there's competition, I think that's going to be an enhancement to our margin.
R. Yost
So we're a little careful about talking about individual products here. I mean, one of the things that makes our company so attractive is broad-based offering we have.
And with any individual products, we're a little uncomfortable getting too granular on them.
Ricky Goldwasser - Morgan Stanley
So maybe a general question, just as we think about 180s in the impact on profitability, obviously, in the past, you said it when you see more than one competitor in the marketplace, you see a benefit to your margin. So just to clarify, does an authorized generic would count, in generally count as kind of that additional competition that you need to see in the market?
R. Yost
Yes.
Operator
Steven Valiquette of UBS.
Steven Valiquette - UBS Investment Bank
Two questions really on the guidance. First on fiscal '10.
Certainly, there's really been no fall-off in EPS in the September quarter from the June quarter. Obviously, you mentioned generic a lots and the unique situation for this year.
Is anything else happening this fiscal year to drive that sequential decline inherent the guidance, or is it entirely generic oxaliplatin [ph]?
R. Yost
If you started with the $0.57 and you knock out $0.05 for litigation, I think, other than oxaliplatin, that the big thing is I expect to step up in expenses of $0.03 to $0.04 between the third quarter and fourth quarter. As I mentioned in my comments, a big part of that is the fact that we're going to step up our IT costs from the maintaining duplicate systems as a result of our Go-Live with the first phase of our SAP project.
In addition, if you look back historically, you will see that we have had historic step-ups between 3Q and 4Q, related to a lot of sales promotional activity, particularly the fact that we run our customer trade shows in the fourth quarter and there's some significant expense around running those programs. There are really -- expenses are really the items in addition to a net decrease in the buy side.
Steven Valiquette - UBS Investment Bank
So that may answer the second question as well, which is kind of looking into fiscal '11, and somebody else mentioned this, too, but if you look at share buyback contribution, that alone has driven call it 7%- to 11%-type growth in EPS just from share buybacks alone over the past three or four years. So I would think that if you normally have some top line growth and some call it the three to five bps of operating margin expansion kind of inherent, I'm guessing the extra IT, probably have less margin expansion next year, and that would sort of where to reconcile the difference between what we're talking about in terms of EPS growth drivers for next year.
Does that make sense?
Michael Dicandilo
Yes, Steve. Your share buybacks sounds a little bit high to me, I mean, this year, we thought about a little 5%, as we did in the third quarter, about a 5% benefit.
That gets a little bit harder because we're still seeing some benefits from the shares we bought back last year when the entire market was depressed. And obviously, with the share prices up this year, we can spend the same amount of dollars next year and not get the same benefit.
So I think you'll see a little bit of -- you can have a reduced benefit even if we spend the same dollars from a share repurchase perspective. But yes, we've got a little bit harder expense comparison.
As Dave and I both said in our prepared remarks, it doesn't mean our goal is not to continue to reduce expenses elsewhere. We'll continue to do that.
Operator
Charles Rhyee of Oppenheimer & Co.
Charles Rhyee - Oppenheimer & Co. Inc.
One follow-up on the operating expenses, Mike. You kind of said it was going to be $10 million a quarter starting here in the fiscal fourth quarter and split 50/50 between SG&A and depreciation.
Did I hear that right?
Michael Dicandilo
That's correct.
Charles Rhyee - Oppenheimer & Co. Inc.
And you said it was going to probably web through fiscal 2012? Or you said it ends in fiscal 2013?
I didn't catch that.
Michael Dicandilo
I think you will continue to have that as we transition our customers from our existing platform to SAP. Most of that should be done some time in fiscal '12, which means we'll recognize the full benefit of not having those duplicate costs in 2013.
And we also won't have the project costs. So it's kind of a double benefit once we get off of the old system and disconnect it.
Charles Rhyee - Oppenheimer & Co. Inc.
And how much are the project costs from you then?
Michael Dicandilo
The project costs are -- I gave some guidance at the beginning of the year that they'd roughly be in the $30 million to $40 million range from an expense standpoint. And I think that will be fairly consistent year-over-year between '10 and '11.
The big benefit next year is our capital spend should come down dramatically from the $165 million to $175 million range I have this year as we start implementation of the new system. A lot of the development costs will go away.
And I think you'll see a significantly lower CapEx spend next year.
Charles Rhyee - Oppenheimer & Co. Inc.
And then my follow-up question relates sort of back to the environment for independence. And Dave, you mentioned a lot of other things you're constantly trying to do to improve the margins.
But some of that, as it relates to AMP itself, obviously, the markets are trying to figure out how that will be priced relative to generics. When you talk to your manufacturing partners, do you have any sense on when that pricing is starting is starting to fall out?
R. Yost
We really don't yet, Charles. It's still in flux.
We'll work on it. We got the old task force and reaching out to a lot of different manufacturers and getting different insights from different manufacturers.
So it's still in process, I would say. When we, given our guidance for FY '11, our detailed guidance on our next earnings call.
I think we'll have a lot better handle ons than in the early part of November.
Operator
Richard Close of Jefferies & Co.
Richard Close - Jefferies & Company, Inc.
Just really quick, obviously, the oxaliplatin has been a strong contributor for this year. But when you look back at your beginning year's guidance, where have you guys outperformed?
I think in the past, you've talked a little bit about other generic launches being a little bit more than originally anticipated. And if you could give us the total for the year?
R. Yost
Yes, we'll start right at the top, Richard. I mean, we are -- revenues have run a little stronger than we thought they would, and that's what resulted in the increased guidance of our revenues going from 8% to 9% versus where we're starting the year.
We've done a good job in our expenses and then continue to do a good job leveraging the business, which is one of the great drivers of this business, the oxaliplatin. It turned out to be better than we thought earlier in the year.
We thought, even in the last quarter, we thought that the pricing, the ASP, would be a little different than what it turned out. So those are pretty big ones that come to mind.
Mike?
Michael Dicandilo
No, I think you hit them, Dave. I think it's important to note, we started the year with some significant headwinds from a customer repricing and expected refinancing, which occurred, which kept us to that 8% to 14%.
We're now sitting on a year that's 28% and 30% over last year. And as I mentioned in my comments, last year was a strong 17% over the prior year.
So we certainly did get a benefit from oxy. But I think it's very important to realize that we had a very, very strong year above our long-term growth rate even without it.
R. Yost
Good perspective.
Richard Close - Jefferies & Company, Inc.
So on the quarter, I think you said $0.02 at $0.03 over couple of pennies, usually from new launches. That's the right number for the third quarter?
Michael Dicandilo
Yes.
Charles Boorady - Citigroup Inc
And what was it for the second and the first quarter? Did you give specifics on that previously?
Michael Dicandilo
I did. I think most of the excess in those first two quarters was really due to oxaliplatin.
In addition to oxaliplatin was my point this quarter, that you had Hyzaar and Cozaar and a little bit of exclusivity during the quarter from Flomax, which wasn't necessarily expected. So between the two of those, they provided a good part of that upside.
Operator
Helene Wolk of Stanford Bernstein.
Helene Wolk - Bernstein Research
Just a quick follow-up on the 2011 generic outlook, I know you had mentioned a number of drugs that possibly are introduced in the first quarter. And I guess we all have differing expectations around each of those drugs.
While you don't point to individual drugs, can you give us sort of a relative ranking in terms of importance of each of those drugs to you for '11?
R. Yost
Helene, we're a little uncomfortable talking about individual products. I think my comment is upon the total FY '11 versus total FY '10 and where we are, and then where we look for FY '12 given our fiscal year starts October 1.
The really big ones, the Lipitors, Zyprexa and the like which are expected to come in November of '11 would be in our fiscal '12. So I'd say those are the relative -- that's the way it sorts out relatively.
Michael Dicandilo
And again, its just important to keep in mind, there are certain things this year that roll into next year, and that's all part of that consideration. But I don't think we want to get into a item-by-item detail analysis.
I don't think that helps us either competitively and I know our manufacturer would like us to talk about it as well.
R. Yost
The important point I think about the generics is just how well positioned with generics, both in our Specialty business and in our Base business where all, but our largest customers, look to us for some of their generic needs and how well we have done, as a company, over the years. And when I mentioned that we've been able to grow our operating margin in each of the last four years by five to eight basis points in each year, I mean, a lot of that is being driven by the generics.
The very positive impact that we've had on the generics that we've talked about going back half a dozen years or so, we're now seeing we've come to fruition and it looks very bright as we look forward. So our generic positioning, which we worked very hard to position ourselves in the marketplace to get advantage of that is one of the great drivers of our business, that and Specialty.
Helene Wolk - Bernstein Research
Just a question following-up on that and an earlier question around the generic manufacturer environment. Any changes that you're seeing either currently or on the horizon around supply availability, pricing and margin opportunity for you not sort of the deflation cycle?
Anything that's changing around the relationship with generic brand manufacturers?
Michael Dicandilo
Certainly, this year, there's been some well-known issues from a production standpoint and some raw material shortages, Helene. And I think that's resulted in certain generic manufacturers being in better positions than they thought they would be with certain products, which has led to an increased pricing of those generics.
During the quarter, we did get a benefit from generic price increases. We don't have the same fee-for-service constraint that mitigates the price increases with generic manufacturers that we do have with the brand names.
Now I'm saying that, so I think that's a long-term trend in that industry. I'm not sure that it is.
But I think what it shows is that the generic manufacturers are going to actively manage their portfolios. As more and more generics come on the market, they're going to make decisions about which ones to produce, which ones not to produce.
And certainly, that can lead to some price activity. But again, we'd like to keep in mind our philosophy.
We'd like to keep it spread around. And even when there have been some of those shortages, I think our broad base of 100 manufacturers has enabled us when there have been shortages to continue to provide great service to our customers.
R. Yost
Given the fact that our remarks were a little longer, we'll take one more call, Corey. Corey?
Operator
Garen Sarafian of Citigroup.
Garen Sarafian - Citigroup Inc
One is, I might have missed this, but the guidance for fiscal '11, that is 7% to 11% growth above the revised guidance that includes the $0.05? $0.01 in?
Michael Dicandilo
That is the midpoint of the new guidance, $2.16 to $2.20. The $2.18, which is the midpoint less the $0.05.
So the base is $2.13.
Garen Sarafian - Citigroup Inc
And then regarding your business transformation timeline. I'm looking at the last timeline that I have seen at the end of last year.
But the program timeline, the deployment was it ended in 2011, a little bit after midpoint of 2011. I'm wondering, has the timeline changed?
We both want to push out a bit or is this just -- I heard you say fiscal '12 or am I just looking at an outdated timeline?
R. Yost
I think we always intended to go somewhat into fiscal '12. I think the key is it's going to take us a while to unhook our existing systems right at the point of the last conversion.
And that period of time is probably going to take us into the end of '12 so that 2013 will be the first kind of clear year that we have where we're only running on one system. So I think in '12, you'll continue to have the existing system in play for part of it.
R. Yost
I've talked to a lot of CEOs who've been through this process, and there's one resounding theme and that is, do it right, not quick. So we are -- it's more important that we do it right, doesn't accelerate a quarter or two.
So we're pretty much where we thought we would be.
Garen Sarafian - Citigroup Inc
Lastly, as a follow-up to maybe another question that came up to ask a little bit differently. On your balance sheet, now your cash is at $1.3 billion and even in your prepared remarks, you look at M&A opportunities and that's your first -- your cash deployment is your first priority.
But just looking externally, what's preventing you from further M&A opportunities? Is it no attractive assets?
Is it pricing is not reasonable? Or anything else?
And at what points do you change your strategy to reduce the $1.3 billion to other purposes other than going to business such as much greater share repos?
R. Yost
The first part is reasonable properties at reasonable prices. So we would not do any goofy acquisitions just to log one.
So we're continuing to look. We've got a small group here that's constantly looking.
But we just have not found the right properties at the right prices. Mike, you want to comment?
Michael Dicandilo
I think just keep in mind from a deployment perspective that between our share repurchase and our dividend, which we've raised at least 33% each of the last five years, we're returning 100% or more of our free cash flow. And as I mentioned, there should not be great material differences between this year and next year.
But we still have that leftover cash balance that we'll look to deploy in a manner that provides the greatest return for our shareholders. And I don't think we've put a deadline on that, but if we don't find an acquisition by X point, that means that we're going to return it.
I think we've done a pretty good job of managing that and making sure our shareholders have gotten the right returns.
Michael Kilpatric
And now David Yost would like to make some final comments.
R. Yost
This went on a little longer than normal. So I will make this pretty quick.
Again, I just want to thank you for joining us. We continue to be very, very excited about our industry and the role that AmerisourceBergen plays in that industry.
We have lots of positive momentum in our two growth drivers, which are Specialty and Generics. And we look forward to sharing our full fiscal '10 results with you in early November.
Thank you very much.
Michael Kilpatric
That ends the call, Corey.
Operator
Thank you. This concludes today's conference.
Thank you for your participation, and you may disconnect at this time.