Feb 4, 2011
Executives
Michael Dicandilo - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chief Operating Officer of Drug Unit R. Yost - Chief Executive Officer, Director and Chairman of Executive & Finance Committee Barbara Brungess - Vice President of Corporate & Investor Relations Steven Collis - President and Chief Operating Officer
Analysts
David Larsen - Leerink Swann LLC George Hill - Citigroup Inc Lisa Gill - JP Morgan Chase & Co Ricky Goldwasser - Morgan Stanley Helene Wolk - Bernstein Research Steven Valiquette - UBS Investment Bank Glen Santangelo - Crédit Suisse AG Lawrence Marsh - Barclays Capital Robert Jones - Goldman Sachs Group Inc. Eric Coldwell - Robert W.
Baird & Co. Incorporated Andrea Alfonso - Merrill Lynch
Operator
Welcome, and thank you for standing by. [Operator Instructions] Now I would like to turn the call over to your host for today, Ms.
Barbara Brungess. Ma'am, you may begin.
Barbara Brungess
Thank you, and good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our first quarter of fiscal 2011. I am Barbara Brungess, Vice President of Corporate and Investor Relations.
And joining me today are Dave Yost, AmerisourceBergen Chief Executive Officer; Steve Collis, President and Chief Operating Officer; and Mike Dicandilo, Executive Vice President and Chief Financial Officer. During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations.
We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations. For a discussion of some key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2010.
Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be rebroadcast without the express permission of the company. As always, those connected by telephone will have an opportunity to ask questions after our opening remarks.
Now here is Dave Yost to begin our comments.
R. Yost
Good morning, and thank you for joining us. As you know from our press release this morning, ABC got off to a great start on our fiscal year that began October 1, 2010, with strong first quarter results featuring record revenue of just under $20 billion, record-low operating expense-to-revenue ratio, operating margin expansion and EPS of $0.57, up 10% over the December quarter of last year.
That double-digit EPS increase is particularly noteworthy when you recall that in our December quarter last year, our EPS was up a phenomenal 44% over the year before, which was on top of a 12% increase the year before that. The point being that we continue to post good numbers on top of good numbers.
This is our sixth consecutive year that we expect to increase our operating margin, and this quarter was the 13th consecutive quarter that we have increased our operating margin quarterly on a year-over-year basis. During the last two quarters, we delivered that operating margin improvement at the same time that we incurred significant duplicate information technology expenses due to our transition to a new ERP system in the drug company.
We continue to do a good job controlling our receivables and assets, all of which resulted in a great quarter. On January 27, we received a credit rating upgrade to A- from S&P, reflecting our financial strength and forecast.
The cliff notes are lots to like about ABC and the industry we operate in and more good things to come. As I think all of you know, Steve Collis was named President and Chief Operating Officer of ABC in November, and he will provide some color on our operations for the quarter, and Mike Dicandilo will provide financial insights as usual.
Before I turn the floor over to them, I will provide some thoughts on the industry. The industry continues to be vibrant and resilient with new generic introductions providing incremental opportunities to the solid growth fundamentals of organic growth and cost leverage.
Our focus continues to be on specialty distribution in generics. And this quarter, as last year, both were strong.
And again this quarter, our two growth drivers overlapped as we had strong generic contribution in Specialty though not as strong as last year. Projected industry growth rates for the year are 3% to 5%, seeming in the right zip code to us.
I would continue to describe the industry pricing environment as competitive but stable, with few million dollar accounts changing wholesalers historically and none recently in this $210 billion-or-so U.S. market.
We did not see any legislative efforts in Washington currently that change our outlook for the year. We expect AMP to be published sometime after the rules are established, and we do not anticipate AMP implementation to substantially impact our business.
With our strong cash flow and cash balance, let me reconfirm our often stated 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 and our basic business of pharmaceutical distribution or related services would have great appeal to us. We would be very comfortable in the $200 million to $300 million range, but would readily consider something larger if it made good strategic sense.
We are in excellent position for acquisitions, both financially and organizationally. Absent acquisition opportunities, which would increase shareholder value, we will continue to consider increasing our stock buybacks as we did last year.
We have solid momentum after the first quarter of our fiscal year, and continue to be very excited about our prospects going forward. Before I turn the floor over to Steve, I want to reiterate my Investor Day message that this is a great time to be investing in the wholesale drug space, particularly ABC.
We continue to be comfortable with our FY '11 guidance, delivering strong EPS growth on top of the 31% increase in EPS that we delivered in FY '10. In our FY '12, we expect to experience the benefits of the largest retail brand-to-generic product conversion in history, starting in our first fiscal quarter.
In FY '13, we expect to experience the benefits of our new ERP system, and the elimination of running dual IT systems as well as carry-over benefit from generic introductions late in FY '12. FY '14 should benefit from the $32 million-or-so uninsured patients entering the healthcare system with pent-up demand for pharmaceutical products.
In FY '14 and '15, should be good years for generic introductions. So lots to like about ABC in the years to come as well as this year.
That ABC circle of life just keeps getting better. Here's Steve Collis, ABC's President and Chief Operating Officer.
Steven Collis
Thank you, Dave, and good morning, everyone. I'm very pleased to speak to you this morning about the performance within our four business units in our first fiscal quarter.
Before I get to the specifics, I'd like to share some observations I've made since I became President and Chief Operating Officer in November and what they may mean for us as we go forward. From my many years of running ABSG and almost two years running ABDC, I feel now I have the opportunity to take a look at our operations from a different and more holistic perspective.
We have a wealth of expertise in all of our business units and are in an excellent position to bring the combined strength and cultures of our businesses together in a way that would differentiate us and drive tremendous value to our customers, and in turn, to our shareholders. Since being appointed COO last year, I have focused on four things: Firstly, driving innovation for pharmaceutical manufacturers and healthcare providers; secondly, increasing customer and supplier value; thirdly, expanding our business in targeted markets; fourth, continuing to optimize operating efficiency.
I am very confident that we will be able to execute on all of these objectives because our entire organization is aligned on our ability to capitalize on our strengths and to explore new areas, where we can apply our expertise to the new demands of healthcare in America. As most of you know, I've been with AmerisourceBergen for 17 years, and you all know that both Dave and Mike have very long tenures with ABC.
Longevity is really a distinguishing characteristic of ABC management. Most of the key folks that have helped found and grew ABSG are still with the company.
That same kind of longevity is indeed found in the Drug Company, in our Consulting Services group and in our Packaging Group. Across the board, these businesses have intimate knowledge of the marketplace, close relationships with customers and suppliers, and perhaps most importantly, the heaviest fingers on the pulse of change.
They have been successful because they are dedicated to ABC, and they are dedicated to our customer's success. So we have a deep and broad bench of forward-looking leaders in all of our businesses working hard every day to deliver excellent programs and services to our customers and suppliers.
At AmerisourceBergen, we believe we have the best overall value proposition for the marketplace. I regularly call on customers, and I can confidently say for an example to an independent pharmacy owner, that if he or she signs up with ABC, we will help his or her business do better than it is doing today.
When I call on a hospital, I'm thrilled to show them how we can help drive better medication management within the hospital and provide tools to improve direct cost recovery, both of which impact a hospital's bottom line. We are busy with the physician customer served by our Specialty group.
I can say with confidence that we will provide that physician the commercial and clinical tools that he or she needs to improve the efficiency of the management of their practice, and we will help enable them to have successful interactions with payers. And when we combine the insight we gained from servicing the entire spectrum of healthcare providers, with the expertise we have in our Consulting Services and our Packaging Groups, we rarely have an unmatched suite of solutions and scale for pharmaceutical manufacturers.
From custom packaging to commercialization services, comparative effectiveness studies, patient adherence programs, reimbursement consulting and more, we believe we offer the most comprehensive and cost-effective solutions for manufacturers available in the market today. In addition to the offsetting programs and services that we bring to market, as Dave mentioned, the key drivers of profitability growth for ABC remains Generics and Specialty.
And we believe that with the mix of business in our Drug Company, a large footprint in Specialty and opportunity for Generics in the Specialty space, we are uniquely positioned to continue to benefit from the new generic introductions and growth in the Specialty market in the years ahead. Turning now to the performance of the individual business units, I'll start with our Drug Company.
With revenue growth of 5%, the Drug Company was a driving force in our top line growth in the quarter. Drug Company performance in the quarter was driven by institutional segments and was aided by above market growth in certain of our large customers.
ABDC has a tremendous breadth of customers, and we expect to continue to benefit from above-market growth on some of our key strategic customers. We continue to expect our Long’s contract to contribute through the June quarter.
And while we're hopeful that we could retain some of that business going forward, we do not have any contributions from Long’s including our assumptions for our fourth fiscal quarter. Our ProGeneric solution program again, had above market low double-digit growth in the quarter.
As generics continue to be a key driver of profitability for both ABC and our customers. We continue to make good progress expanding the penetration of our proprietary generics offering across all of our business segments and driving compliance among customers in the program.
It is worth repeating that we believe our customer mix in the Drug Company coupled with our strong generic sourcing and commercial programs, positions us very well for the generic opportunities that lie ahead in 2012 and beyond. Turning now to the Specialty Group.
As expected, the Specialty Group's revenue was down 4%, due primarily to the loss of an $800 million contract we discontinued in our 3PL business in September. We also saw a decline in ESA sales in the dialysis space, ahead of the ship that abandonment of reimbursement as we had expected.
Overall, the Specialty market continues to be strong, and we are competing as effectively as ever and maintaining our market share on oncology space as our Nuclear Solutions offering continues to gain traction in physician practices. Nuclear Solutions is an integrated suite of practices or practice tools designed to boost efficiency, cost effectiveness and compliance with new protocols within community oncology practices.
The mid-November launch of gemcitabine has gone as planned and we continue to believe that we have enough Oxaliplatin inventory to serve our customers through the March quarter. We are still riding on the launch of docetaxel, which we expect will be launched by the end of our fiscal second quarter.
Overall, specialty generics continue to be a tremendous opportunity for us to drive value for our manufacturers and for our physician customers. Moving on to other businesses units.
Our Consulting Services units turned in a record top line performance in the quarter, as the impact of healthcare reform has driven demand for the expertise and service we provide like never before. By breaking out the Consulting Services unit from the Specialty Group, we expect to make excellent progress in extending our service offerings beyond specialty manufacturers and see increased opportunities in the large branded pharma space as well as synergies with core Drug Company customers.
At the end of December, we had approximately 2,000 people on our Consulting group, just to remind you of the scale of those operations. And finally, our Packaging Group had a solid quarter.
They added some new business, and they now serve all 15 of the top branded pharmaceutical manufacturers. Most notably, they expanded their clinical trial service offering, which had previously been based primarily in Europe, into the U.S., giving manufacturers greater flexibility and a complete solution to the clinical trial packaging and other needs.
In addition, we launched a liquid packaging facility at Anderson Packaging, meaningfully expanding their capabilities beyond dry orals, solids and powders. As I conclude my remarks, I want to reiterate that we are achieving very solid performance on top of an outstanding year of growth in our fiscal 2010.
I am exceptionally pleased with our operating results today. We are meeting our objectives, and we are on track to perform well for the year.
With that, I turn it over to Mike for the detailed financials.
Michael Dicandilo
Thanks, Steve, and good morning, everyone. Lots to like about the quarter and an excellent start to fiscal 2011.
Before getting into the quarterly details, I just wanted to take a minute to thank all of our associates and business transformation finance and elsewhere who worked very hard to make our back-office Go Live a success and enabled us to report our results on our new ERP system for the first time this quarter. It's an important milestone for our company, and we look forward to expanding our capabilities with the new system, and we remain on track to begin to implement our customer-phasing modules later this fiscal year.
So let's turn to the quarter, which has Dave and Steve both indicated was extremely solid and above expectations despite some very tough comparisons to the prior year. Starting with the top line, our revenue of $19.9 billion increased by just under 3% and was right in line with our expectations.
This growth was driven by the Drug Company, which increased its top line and above-market 5%, driven by certain of its largest customers, primarily on the institutional side. We continue to forecast Drug Company revenue growth to be between 3% and 5% for the full year.
Specialty Group revenue was down almost 4% as expected, due to the discontinued $800 million 3PL contract that we mentioned last quarter. This account loss will continue to impact our Specialty revenue growth rates the rest of the year and our full year forecast of flat to a 5% revenue decline for Specialty remains unchanged.
While our Packaging and Consulting group revenues are very small compared to our consolidated revenues, with each of them representing less than 1/2 of 1% of total revenue, both exceeded plan with record revenues been achieved by our Consulting group. Moving to gross profit.
Where our performance this quarter is especially notable because of the extremely tough comparison to last year's results. Gross profit of $580 million in the quarter increased 3%, and gross margin of 2.92% increased one basis point compared to the prior-year period.
The quarterly increase in gross profit was driven by revenue growth, Specialty Generic revenue growth, which was in the low double digits once again. Additionally, we performed very well under our fee-for-service contracts with our suppliers, and we were also helped in the quarter by an unusual $12 million benefit related to the Duane Reade business, which I will explain in a moment.
All of these positive gross profit factors in the quarter were offset in part by normal competitive pressures and a $20 million reduction in gross profit contribution from large Specialty Generics. The combination of carryover Oxaliplatin product in the November launch of gemcitabine contributed about $0.06 to the current December quarter, compared to the $0.10 benefit provided by Oxaliplatin's in last year's first fiscal quarter.
Looking forward, despite the delay in the introduction of docetaxel, we continue to expect the impact of the three large Specialty Generics in fiscal '11 to meet or slightly exceed the $0.25 benefit we received from Oxaliplatin in fiscal '10. Turning back to the Duane Reade benefit, as a reminder, this relationship pre-dated the 2001 AmeriSource and Bergen merger.
And from its inception, the contract had a confinement inventory component, which is unusual for ABC. This inventory was carried on our balance sheet at a substantial discount to its contractual value, due to our concerns about its recoverability at the time of the merger.
In the December quarter, we received full value for this inventory resulting in a $12 million gain. The end result is a nice benefit to the first quarter but not a continuing factor going forward.
Our LIFO charge in the quarter was $9.9 million compared to $7.8 million last year, reflecting a quarter-over-quarter decline in generic price deflation. We were very pleased with our expense control this quarter, as operating expenses of $303 million were up less than 1%, which was really impressive performance when you factor in the significant increase in IT cost as a result of our back-office Go Live.
This greater than $10 million increase in IT cost during the quarter was offset in part by ongoing productivity improvements, a $4 million reduction in bad debt expense and a similar size reduction in incentive compensation costs. As a percentage of revenue, operating expenses were a record low 153 basis points in the quarter, down three basis points from last year.
The combination of that expense margin reduction and the uptick in our gross margin led to operating margin expansion of three basis points and total quarterly operating income of $277 million grew a solid 6% over last year. Below operating income, net interest expense in the quarter of $19 million increased 11% over the first quarter of fiscal '10, which had only a 1/2 quarter impact from our prior year November bond issuance.
Additionally, below the operating income line, we realized a $1.7 million net benefit in other income, primarily due to a payment received in excess of the amount accrued from a note relating to a past business disposition. Our effective tax rate in the quarter was 38.1% compared to 38.2% last year, and we continue to expect an annualized effective rate closer to 38.4%.
Our diluted EPS in the quarter of $0.57 increased by $0.05 or just under 10% compared to last year and exceeded our 6% increase in net income due to the 4% reduction in average diluted shares outstanding. The share reduction primarily resulted from our share repurchase program, net of stock option exercises over the last 12 months and the dilutive effect of stock options.
Average diluted shares in the quarter were 280.7 million. Now let's turn to our balance sheet and cash flows, which were in line with our normal December trends.
We used $99 million of cash and operations compared to usage of $42 million in the prior-year quarter. Normal seasonal increases in inventories and payables timing offset continued impressive receivable performance.
Capital expenditures were $50 million in the quarter compared to $43 million last year, and in addition to our ERP spend, reflected some discretionary buyouts on leased equipment and certain technology investments in the Specialty Group. We continue to expect to spend in the $150 million range for the year, but based on our early pace, may be somewhat higher.
Despite the normal seasonal slow start for the year, we continue to expect free cash flow to be in the $625 million to $700 million range for fiscal '11. Average inventory days on hand during the quarter were 25 days, down one day from last year.
Average DSOs were consistent at 17 days, and average DPOs were down one day, mostly due to timing. Our gross debt to total debt and capital ratio at the end of December was 32%, in line with our target range of 30% to 35%.
We bought $185 million of our shares during the quarter and are ahead of the pace needed to hit our $400 million target. As of the end of December, we have $413 million remaining under our board-authorized repurchase program.
Our cash balance of $1.4 billion at the end of December leaves us with great financial flexibility as we look forward. While we are very encouraged by our strong first quarter, keep in mind, we have a lot of our year left, and our full year fiscal '11 diluted EPS guidance remains unchanged at a range of $2.31 to $2.41 per share, supporting assumptions for our EPS guidance of 2% to 4% revenue growth, low- to mid-single-digit basis point operating margin expansion, free cash flow in the range of $625 million to $700 million and share repurchases in the $400 million range also remain unchanged.
Once again, we are very pleased with our start to our fiscal year, and we continue to be very excited about our positioning in the marketplace and our prospects for the rest of fiscal 2011 and beyond. And I'm going to turn it back to Barbara Brungess, our Vice President of Corporate and Investor Relations for Q&A.
Barbara Brungess
Thank you, Mike. We will now open the call to questions.
[Operator Instructions] Please go ahead, operator.
Operator
[Operator Instructions] Our first question comes from Robert Jones with Goldman Sachs.
Robert Jones - Goldman Sachs Group Inc.
So there’s obviously been a lot made of a few Specialty Generics, and I guess rightfully so. I was wondering if you could guys can give us a better sense of the performance of the underlying ABDC business and particularly as it relates to small molecule generics.
Specifically, I was hoping you could maybe touch on what you're seeing out there in terms of pricing and market share among the retail independent?
Steven Collis
Yes, I'll start up on that, Steve Collis. Overall, we saw growth on our proprietary program in the mid-teens.
We believe that we are growing our generics above the market. We're very focused on compliance within our independent customer base, and we feel very comfortable on our position and our ability to execute in this area.
I think Mike may have some additional comments.
Michael Dicandilo
Mark, from an appreciation standpoint, I think you hit it right on the head. There are a few generics because of different situations of availability in the marketplace that did rise significantly in price and provided us a small boost to the quarter.
Certainly, something we don't build into our forecast going forward, because it's hard to predict if those type of events will continue in the future. But it did have a boost, again, I would say it was a small number of items having a disproportionate benefit.
Robert Jones - Goldman Sachs Group Inc.
And I guess my follow-up would be around the guidance. I mean, obviously, a lot of focus on the timing of the generic Taxotere launch.
Could you maybe share with us at what point the guidance would be come under pressure if we don't see a launch of generic Taxotere or is the current range able to sustain not having generic Taxotere in the market?
Michael Dicandilo
Yes, Bob, this is Mike. I think our assumption in our guidance is that Taxotere will launch by the end of March.
And certainly, we've got a $0.10 range and that will cover any delays from there. But if you start getting into past due and into our -- late in our fourth quarter, that could have some impact on where we would fall in the range.
Operator
Our next question is from Larry Marsh with Barclays Capital.
Lawrence Marsh - Barclays Capital
Let me see if I can reflect on Bob's questions and then a follow-up. The question is it seems like so far Specialty maybe a little bit of oxy, taxo but probably better margin opportunity with oxy, and it sounds like the ESAs are about in line with your expectations.
As you think into the next two to three years in that pipeline, is there any other product category that you think are going to be particularly good opportunities as you leverage your footprint? Or do we think of this year and last year's kind of unusually large Specialty margin years, because of the particular products you guys have called out, repeatedly?
R. Yost
Larry, this year, tough comparison. But remember, in FY '12, oxy comes back and we know how that story played out, and that played out very, very well.
So we get out to '12, we will have some more contribution from Specialty. But I think it speaks to the balance.
The big generics are starts for us and 10,000 were in FY '10 and '11, and the Specialty then in our '12, which starts in November. Just a few months from now, we get the real retail impact, and as that starts to fade a little bit, we come back with more Specialty.
So I think the fact that we've got the strong footprint in both retail and Specialty will suit us very well as we go forward out the '12, '13, '14 and beyond.
Lawrence Marsh - Barclays Capital
And a quick follow up on that point, Dave. You're communicating a good growth on ProGenerics.
Tony talked about it in Analyst Day and your peers talk about good growth in their preferred sourcing programs. Is there any way to compare and contrast yours versus your peers?
And is the message really that we're hearing that the supply chain companies are taking share from sort of go direct or other sources in the marketplace since we're all seeing the good growth numbers from you guys?
R. Yost
First of all, I do think it's tough to compare them. I mean, you have to look at the individual source programs and how they were year-over-year and what's in that base going forward and probably best to compare individual companies on.
I'm a little uncomfortable. I don't know exactly what's in their programs.
But I do think it speaks -- I think the growth in all of our program speaks to the additional penetration we are getting with our customers and expanded into other classes of trade, and we're now moving into hospitals, into alternate site in the regional change and alike. I think it's a very good barometer on how well the industry is doing and the value that the wholesalers in general are bringing to their customers.
So Generics have turned out to be a great boon for the industry. And I think it really -- again, it speaks just to the value we are bringing to the customers.
Operator
Our next question is from Robert Willoughby with Bank of America Merrill Lynch.
Unidentified Analyst
This is Ann Wilson in for Bob today. Can you cite your ongoing expenditures on internal technology initiatives and when does that taper off?
And would there be any other expenses that could offset that in an expected decline in tax?
Michael Dicandilo
Our project CapEx is included in our $150 million guidance and should be roughly half of that total spend or so this year. It has tailed off some from last year as we moved through the initial programming phases to the implementation phases that are much more geared to expense than capitalization.
I think the key point we like to make about the IT expenses with our Go Live at the beginning of -- starting in July, and with the second phase at the beginning of October, our run rate for IT expense because of running both our legacy system and our ERP system during the transition period through 2012, our run rate is going to be about $40 million higher per year than it was in fiscal '10. And really starts in the fourth quarter of fiscal '10, so there's about a $30 million impact this year.
As we get to next year, the comparison is really flat between the two years. And when we finish at the end of '12, we should get that benefit falling into fiscal '13.
Operator
Our next question is from Lisa Gill with JPMorgan.
Lisa Gill - JP Morgan Chase & Co
Dave, some of your competitors have talked about price stability on the generic side. I'm just wondering what your take is on it and what that does for your margin over time and how we should think about how generics will impact you specifically over the next couple of years as we continue to see this price stability?
R. Yost
I think this price stability is good call out, Lisa, and we're clearly seeing that. I mentioned in my prepared remarks, we're not seeing huge -- first of all, we don't have a lot of huge accounts, so we have not seen a lot of big account movements.
So I think the price stability in generics is good call out. And I think that really speaks well to our prospects going forward.
Part of the reason I think we see that price stability is with large market basket of items. We have just 7,000 or so items in ours, you really begin to compete on a value basis and you're not exactly comparing the exact same market basket in your exact same manufacturers even if you got the same product.
So it really provides us an ability to differentiate our offer in terms of value, and we're seeing less in price competition in that. But the other thing that's great about generics is it gives our customers the ability to also have a very attractive margin at retail.
So it's a total win-win and the stability is a great call out.
Steven Collis
If I could just add to that, I tell you, there's no -- the metric on the compliance and the performance of our accounts with the expected generic targets is something that we pay incredible attention to. And we are very aware that we have great reporting tools, we have great, for example, our in-stock program and the retail accounts is something that gives us a lot of insight into what's going on in our practices, in our pharmacies and these are very, very important metrics when Dave and I look at how we judge how the team is performing and how our sales force is performing.
Lisa Gill - JP Morgan Chase & Co
And then just a follow-up on your comments on the Duane Reade and the contracts on the consignment basis. Will that have any impact as far as cash flow or inventory level if you were carrying the inventory for them?
And then secondly, Dave or Mike, should we be thinking that contract was more profitable or was the profitability similar even though it was a consignment type of relationship?
Michael Dicandilo
Yes, Lisa, it's good call out. I mean, our working capital will fall, because that's an extra element we had with that contract.
As I mentioned, we really did not have with any other contracts. So it's a nice little boost to our cash flow.
R. Yost
When we had the contract, Lisa, it was an attractive contract for us. Because we supplied a full range of products, including generics.
So it was nice when we had it but it's gone, and we moved on.
Steven Collis
As we said, it was factored in our guidance coming out of the end of December. So no change to our guidance.
Operator
Our next question is from Glen Santangelo with Credit Suisse.
Glen Santangelo - Crédit Suisse AG
Steve, I want to first as a quick question on the specialty drugs. I hate to keep beating this horse, but it's obviously important.
Can you just kind of refresh sort of your expectations for Eloxatin, I think, you kind of suggested you're only going to have it through the first half of fiscal year. And Mike I think you guys called it out at about $0.03 to $0.04 contribution on a per-quarter basis.
Is there anything going on with respect to the pricing or reimbursement or inventory that would have change those assumptions?
Steven Collis
I'll start off first with the market. We do expect to have inventory through this quarter.
As you know, the ASP has risen pretty considerably in the last few months. And we don't necessary price off of ASP, but it is an important metric for our customers and we are, of course, always very mindful of our customer's profitability.
I'll let Mike answer the guidance part.
Michael Dicandilo
Glen, I think the way to look at it is we probably are getting a little bit bigger benefit and we expect to get a little bit bigger benefit from Oxaliplatin in the March quarter than we did at the beginning of the year with the ASP increase, and it's a nice offset to the delay in the introduction of Taxotere, to generic Taxotere. So it's a big reason why, for the year, we've kept the guidance similar to the $0.25 benefit we got last year with a little bit of upside over that.
Glen Santangelo - Crédit Suisse AG
And maybe, Dave, if I can just ask you a follow-up question on AMP, you brought it up in your sort of prepared remarks that something that could be introduced potentially this year and you sort of suggested that it will not substantially impact your business. I mean, does that kind of imply that it could have a minimal impact?
And I'm kind of curious from your perspective? In what would that impact your business because all the companies across all the industries are sort of saying AMP doesn’t impact them, and I'm trying to figure out who does it impact?
R. Yost
I think you got to drill down, Glen, on the magnitude what we're talking about. I mean, for us, it's a piece of a piece of a piece.
So when it gets down the individual retailer, it could possibly have an impact. But we actually don't even think it's going to have a big impact there, because we think that many of the states are already operating well below the FUL limit.
So we don't think it's going to have a big impact, and we'll have to wait and see. There's much delayed, but we just have to wait and see.
But the big issue is, that it's a relatively small piece of our total business.
Glen Santangelo - Crédit Suisse AG
So bottom line for you, though is, it wouldn’t be radically be a derivative impact on you, it's really a function of your customers get squeezed or not?
R. Yost
That's exactly right. And again, many of our customers, it's a piece of their businesses.
I think, almost no cases on all their business. So it ends up getting diluted down.
Operator
Our next question is from Tom Gallucci with Lazard Capital Markets.
Andrea Alfonso - Merrill Lynch
This is Andrea Alfonso calling in for Tom Gallucci. First, in your prepared remarks, you referenced normal competitive pressures as partially offsetting the benefits in the gross profit line.
Could you maybe describe what you're seeing there and has anything changed recently?
Michael Dicandilo
Actually, nothing has changed recently, Andrea, and that's what I was trying to point out. And for some of the people who have followed the industry for a long time, there have been times when there has been unusual competitive pressures.
And I wanted to point out that, that is not existent today and I don't want to make it sound like it's a walk in a park, and I don't want to make it sound like we don't have some issues from time to time on an isolated basis with accounts. But the point that I want to make out, that, overall, we're seeing the market to be very stable, competitive, but very stable.
Andrea Alfonso - Merrill Lynch
And as a follow-up question on the -- it looks like branded price inflation was off to a good start at the beginning of the year. Could you maybe detail what's your expectation are there for fiscal Q2?
Michael Dicandilo
This is Mike, Andrea. Last year, our brand name inflation was over 8%, pretty robust.
It's been in that range for the last couple of years, and our expectation this year was we were going to see some moderation probably down to the 6%-or-so range. So far, I agree with your observations.
It's been a very strong and if it continues at the same pace, we could be at the same level we were last year.
R. Yost
Just to refresh everybody's memory, fee-for-service offsets most of the impact to us, but it is statistics that a lot of people watch for sure.
Operator
Our next question is from Eric Coldwell with Robert W. Baird.
Eric Coldwell - Robert W. Baird & Co. Incorporated
Dave, for the last few quarters, it's kind of stood out to me that you've been pretty vocal about your interest in doing M&A if opportunities arise. And then in Steve's prepared comments, he mentioned that the company is at a point now where it could consider new growth areas, new avenues.
I realized it's difficult to identify specific things and especially if you are in discussions. But can you give us some heads-up on new areas that might be interesting to you?
What kind of adjacencies in your business you think could provide a good platform for growth perhaps through M&A?
R. Yost
The reason we called it out, Eric, is I just want our listeners to know that we really are very interested in M&A. We're buying our stock back because we haven't found any M&A acquisitions in any targets that we really liked.
But that's not our first priority. Our first priority is to grow our business, and one way to grow our businesses was with M&A that are accretive to us and could contribute to shareholder value.
Areas that I think would have most appeal to us as something in the distribution end, in Specialty, or in our traditional wholesale Drug business. Add on, businesses into our Specialty business.
So there are no holes that we think we have in our offering. It's something in the Packaging business.
But again, things that are-- would be attributed to our core competency, not moving far afield from where we are today. And the reason it's important to call that out as we talked about our growth goal of growing our EPS at 15% over the long term, we think we can do that without M&A.
So M&A would be attractive to us. So we just want to keep reminding people that we're interested even though there hasn't been much activity on that front, the last big acquisition we had was in 2008 when we bought Bellco Drug outside of New York.
Steven Collis
Eric, I'll just add. I didn't actually when I said innovate and expanding service, I didn't actually mean acquisitions.
We have tremendous opportunities within our organic business to implement new programs and services. I referenced the Packaging business, for example, where we've expanded beyond the core business that we did for brand of manufacturers and getting into clinical trials, for example.
On our services side of our business, we continue to offer new services in the hospital area that there's opportunities to move beyond the traditional 340B and supply chain top consulting work we do. So there's opportunities for internal investment that we continue to consider.
We're spending a lot of time on expanding our oncology portfolio, and that's requiring some small investment. But it's an investment that we make every day of the week, and we love doing that and we love to support the people that provide such value to our business and to our customers.
Eric Coldwell - Robert W. Baird & Co. Incorporated
And just as a follow-up, the conclusion here or maybe the summary is that what you might look to diversify within the supply chain, you're not looking to diversify outside of the supply chain or outside of your core offerings. Is that fair?
R. Yost
That's exactly right, Eric. You said it very, very well.
Absolutely.
Operator
Our next question is from David Larsen with Leerink Swann.
David Larsen - Leerink Swann LLC
Just with respect to generic Gemzar and generic Taxotere. Can you maybe just talk about relative to Oxaliplatin, how does it looks like with respect to the number of suppliers in the market?
Is there a big difference there or not really?
Steven Collis
I think, first off, with Oxaliplatin right now, I mean, there's no new product in the market. So it's all the carryover from previously, when it was out there, there were a couple three-or-so suppliers.
And I think with these two products, we expect it to be fairly similar.
David Larsen - Leerink Swann LLC
And then, just in terms of like the expected margins on generic Taxotere and Gemzar, I mean, the sense that I get is, if the margin profile should be similar to oxy, is that correct?
R. Yost
Well, oxy was a little unique, David, in that it was an at-risk launch when it came out in August, so that carried some very unique characteristics with it. And it was the first really large generic in the oncology space.
So the Oxaliplatin was somewhat unique, so we would not expect follow-on introductions in that space to be quite as robust as Oxaliplatin was.
Operator
Our next question is from Steven Valiquette with UBS.
Steven Valiquette - UBS Investment Bank
You guys did a pretty good job controlling operating expenses this quarter, keeping it flattish despite the IT initiatives. Really, just trying to get a little more color on the potential sustainability of that trend for the rest of the fiscal year?
Steven Collis
We do a very good job of controlling expenses. We have a CE2 philosophy, which really implies increasing productivity and efficiency.
I think in the COO role, one of the things we're doing is looking at taking the best performing attributes of each of our different businesses. For example, efficiency, we have within the Drug Company and there really is always more room for improvements.
So you should expect that we'll have a continued emphasis on improving our operating margins, and we're going to manage that through our great portfolio of businesses and our great portfolio of customers and focusing on providing value to them and making sure that it meets the expected returns of our shareholders.
Steven Valiquette - UBS Investment Bank
Just on the PharMerica contract that was renewed, any material changes to the dynamics on that contract that are worth mentioning?
R. Yost
No, not really. We're very happy with the renewal of the contract.
We extended the terms. We like PharMerica's position in the space.
They've done some acquisitions in the last quarter that we are very pleased about that helped us. One of them was an account that we've been trying to secure for a long time.
So we're very happy with the relationship, and we hope to be their distributor for a long, long time.
Operator
Our next question is from a Helene Wolk with Sanford Bernstein.
Helene Wolk - Bernstein Research
Just a question on your comments about ESA use. I think you said it was within your expectation.
Can you tell us couple of things, one, of which is maybe some range of where your expectation was? And then, I guess secondly, are trends in the market stable at this point or still declining or what are you seeing in terms of the market movement?
Michael Dicandilo
Helene, this is Mike. At the beginning of the year, we said our expectation is with the new bundling reimbursement system.
We would expect to see a decline in ESAs used from a nephrology of roughly 10% to 15% for the year and expected most of that to start after January 1 when the new rules became effective. I think what we've expected to see and what we've seen a little bit this quarter is an advance of that, some behavior has changed.
And in the quarter, ESAs as used in nephrology were down about 5%, most of that impacting the Specialty growth.
Helene Wolk - Bernstein Research
And then just a quick clarification about the $12 million from Duane Reade consignment, was that anticipated and included in your guidance?
Michael Dicandilo
Yes. We knew when we didn't renew the contract at some point, we would get repaid.
We weren't sure exactly when.
Operator
Our next question is from Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser - Morgan Stanley
In last week or so, there's a number of headlines around the supplies used for generic injectables. Can you walk us through what impact did that have on you?
And where does generic injectables flow through your businesses. Does it go through the Specialty Group or through drug distribution?
R. Yost
Where it would fall, Ricky, is a function of where it's being administered. If it's a physician, you'll be able to take through our Specialty Group and is going through a hospital or traditional drug store it would be through our growth company.
What was the first part of your question, Ricky? I think I've missed it.
Ricky Goldwasser - Morgan Stanley
What is the impact on your, I think in this case it would be on drug distribution from the supply shortage because when we think about the supply, usually pricing trend tends to go up, which should be a positive for you but if you could just walk us through those dynamics.
R. Yost
The issue is shortages, it is something that we monitor very, very carefully and it does impact because it impacts our customers. So the big issue is just making sure we're getting the right product, the right places and working closely with the manufacturers on that.
But I can tell you that the shortage issue is something that our operating people are literally dealing with everyday, and it is having an impact.
Michael Dicandilo
The shortage situation is one of the factors that leads to the price increases that are sporadic and sometimes significant on generic side, Ricky, did we feel the benefit? I think the answer is yes.
This quarter we've had some of that benefits sporadically in the past back in the days when Heparin was in short supplies, a good example of that.
Operator
Our next question is from George Hill with Citigroup.
George Hill - Citigroup Inc
Steve, question around the recent firming in generic drug pricing, there seems to be a dynamic where there's an appropriate number of competitors where the price has kept to the level that allows you guys to make a good margin. And then, as more competitors come to market, pricing, of course, gets driven down in that margin opportunity recedes.
I guess, can you talk to us know about what is the level of competitors for supply in the generic market? How durable do you see that situation being with the competitive level on your supply side and maybe a little color around what's the right number of suppliers, what's the wrong number of suppliers and how we should think about that?
Steven Collis
The first thing is, it depends on what's type of launch it is. In the first six months, typically, we see a price close to the brand and then there's a price deterioration from there, It depends on the ease of manufacturer.
And I think that there's a lot of people on the manufacturing side, who can talk more about the pricing economics of generic manufacturers. But Mike, you may have some comments on this as well.
Michael Dicandilo
Again, I think, broadly, the less competition, the better for us, the harder to make generic drugs. Sometimes the antibiotics, et cetera, some of the liquids at times are the ones that are more volatile in the shortage-type situation.
But for us, the breadth of the number of manufacturers, the ease of manufacturing, all contribute to how far that price decline is going to be. I think one of the trends we've seen, I think that all of the manufacturers are getting a bit smarter.
They're gearing up for the future, where the volume going through their facilities is increasing. So they've got to make certain portfolio decisions, and I think they're trying to maximize their portfolio and move away from a lower-value opportunities to higher-value opportunities, and it's probably something we would be doing as well.
R. Yost
I think the basic premise that you have this right, George. What happens is that product comes on a market and there may be many manufacturers that then the prices drop, as Steve pointed out.
Then manufacturers fall away, as Mike talked about, and the prices start creeping back up. And we think that we are going to see a lot more rationalization as long as there’s more than one manufacturing, it puts us in a very good position.
But we think we're going to see fewer manufacturers making individual products as we go forward, and we think that puts us in a pretty good spot.
Steven Collis
Just one quick other comment, Dave, is our broad generic sourcing strategy is really very helpful in this regard. We almost have like an intelligence group within our sourcing strategy that really looks at supply chain issues and really puts us and our customers in a good position.
George Hill - Citigroup Inc
Do you guys have any opportunities because there's been some quality issues on the manufacturing side of the market? Is there ever a situation where you guys might look at a specific vendor and say -- where you become self-selecting and say, you're not necessarily a vendor that we have quality to meet our supply demand.
Is there almost the opportunity for you to limit the amount of competitors there by being selective until you buy from or that is just not a situation that materializes?
R. Yost
We are very careful, George, about who we do business with. And the issue of quality is a very, very important one, and it's one that we stress with our customers, and we literally have people who go abroad to India on the inspecting the suppliers that we have literally walking through the manufacturers.
We've got people on our staff we think are qualified to opine on those kind of issues. And the issue of quality is a key one for us, particularly with multiple products.
So it's a good call out and we appreciate you bringing that up.
Operator
Our last question comes from A.J. with Susquehanna.
Unidentified Analyst
This is Brandon Shroud for A.J. You talk about in your Investor Day about $40 billion of generic drugs coming online in your fiscal year given your timing for the September year.
How much do you think of that is exclusive, the more profitable type of situation?
Michael Dicandilo
Brandon, there's a lot of direction coming out and universally every scenario out there as far as exclusivity. And there's still some questions about the availability of certain suppliers to be able to come on board.
I mean, I think, the key for us is the biggest one and the biggest selling drug that's coming off, it comes in at the beginning of fiscal '12. And there is exclusivity there, so we expect it to be a very large contributor to '12.
And again, I don't want to go down the list one by one, but there are a number of other exclusive opportunities in '12.
R. Yost
It's a good question, Brandon. It's a little art, a little science in trying to get our arms around it.
But a good call out.
Barbara Brungess
With that, I'll turn it over to Dave for some closing remarks.
R. Yost
Thanks, Barbara. In summary, I just like to say that we had a strong and very clean quarter on top of exceptionally strong December last year.
We continue to focus on our key drivers in Generics and Specialty. We continue to be very, very excited about the industry and continue to be very, very excited about the row we planted.
So we thank you for joining us, and we look forward to sharing our second quarter results with you in late April. And Barbara, you're going to update?
Barbara Brungess
Before we go, just to highlight some of our upcoming events. On February 8, we'll be presenting at the UBS Healthcare Conference in New York.
On February 17, we'll be holding our Annual Meeting of Stockholders in Philadelphia. On March 3, we'll be attending the Citi Healthcare Conference in New York and on March 6, we'll be at the Raymond James Institutional Conference in Orlando.
And finally on March 16, we'll be presenting at the Barclays Healthcare Conference in Miami. In addition, we tentatively expect to report our second quarter earnings on or about April 29.
Thank you all very much for joining us today.
Operator
Thank you for participating in today's conference. You may disconnect at this time.