Jul 24, 2014
Executives
Barbara A. Brungess - Vice President of Corporate & Investor Relations Steven H.
Collis - Chief Executive Officer, President, Director and Chairman of Executive Committee Tim G. Guttman - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Analysts
Robert P. Jones - Goldman Sachs Group Inc., Research Division Glen J.
Santangelo - Crédit Suisse AG, Research Division Ricky Goldwasser - Morgan Stanley, Research Division Robert M. Willoughby - BofA Merrill Lynch, Research Division Garen Sarafian - Citigroup Inc, Research Division Lisa C.
Gill - JP Morgan Chase & Co, Research Division
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the ABC Third Quarter Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded.
I'll turn the conference now over to Ms. Barbara Brungess.
Please go ahead.
Barbara A. Brungess
Good morning, everyone, and welcome to AmerisourceBergen's Earnings Conference Call covering our third quarter of fiscal 2014. I am Barbara Brungess, Vice President of Corporate and Investor Relations; and joining me today are Steve Collis, AmerisourceBergen President and CEO; and Tim Guttman, Senior Vice President and CFO.
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 2013, as well as our quarterly filings for fiscal 2014. Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be rebroadcast without the expressed permission of the company.
As always, those connected by telephone will have an opportunity to ask questions after our opening remarks. Now here is Steve Collis to begin our comments.
Steven H. Collis
Thank you, Barbara, and thank you, everyone, for joining us this morning. I'm very pleased to report outstanding operational and financial performance in our third quarter of fiscal 2014.
On what has been one of the most dynamic and exciting years in AmerisourceBergen history, we have seized upon unique opportunities to grow our core business, we've made substantial investments in our infrastructure and important advancements in our long-term strategic goals, and we have prudently managed our capital structure in order to ensure we can both continue to invest in our future growth and return funds to shareholders. Significantly, during the current quarter, we will not only celebrate the 13th anniversary of the creation of AmerisourceBergen, but we will also pass the $100 billion mark in revenues for the first time in our history.
In certain cultures, turning 13 signifies the passage into adulthood, and one could conclude that ABC is coming of age by exceeding an important milestone. While there is still work to be done to complete our fiscal year, as we enter our fourth quarter, I feel we are very well positioned to either meet or exceed the financial, operational and strategic objectives we communicated to our investors and our board at the beginning of our fiscal year.
Tim will provide the details on our financial performance, but I just want to highlight a few things. Revenues were up 38.5% to a record $30.3 billion, driven primarily by the continuing onboarding of the Walgreens business and good performance in the rest of our business.
Adjusted operating income dollars were up 26%, and as expected, our operating margin is now decreasing at a slower rate. Our adjusted diluted earnings per share from continuing operations in the June quarter increased almost 30% to $1.01 per share.
We have carefully managed through a challenging working capital transition over the course of fiscal 2014, and our balance sheet is tracking to get back to the levels we were at before the transformational implementation of the Walgreen contract. In addition, we successfully refinanced $500 million in long-term debt at the best rates we've ever had access to, and we have implemented a special repurchase authorization funded by 3-year debt in order to further offset the potential dilution that may result from the exercise of warrants issued to Walgreens and Alliance Boots.
Separately, we've made very good progress on our normal share repurchase program, under which we've repurchased $432 million through June 30. I am very proud of these results as they are driven by organic growth in our business and by the creative strategic thinking of our associates.
The strategic position we occupy in the changing health care landscape continues to allow us to capitalize on both important fundamental trends in the pharmaceutical market, as well as on evolutionary dynamics. Our reach across product life cycles, our partnership philosophy and expanding knowledge of global pharmaceutical markets sets us apart as we focus on driving success for our manufacturer and provider customers.
Our diverse book of business, unique insight into manufacturer requirements and expertise in navigating active regulatory environments, combined with the near- and long-term investments we have made, position us well for growth through preserving and extending our influential place in this attractive industry. One of those investments, the acquisition of a minority interest in Profarma in Brazil, closed during the June quarter.
A few years ago, we identified Brazil as an attractive market for long-term growth, with a particular focus on specialty. After many years of exploring the market,, we identified Profarma as our preferred partner.
Their extensive experience in Brazilian market, combined with our expertise in Specialty Distribution and global manufacturer relationships, make Profarma an ideal investment platform for us. We believe that demographics and industry characteristics of the Brazilian market will be an exciting market for us to participate in while we capitalize on the health care market's expansion and the improving access to pharmaceuticals that is part of this emerging economy.
In our assessment, we also believe we evaluated cultural fit and the vision of the Profarma team under Sammy Birmarcker, and we share a common vision for the future of pharmaceutical care and our role in shaping it. The specialty joint venture is well underway.
And as we continue to increase our global reach through specialty and niche distribution, product sourcing and other manufacturer services, we would open up new value-creating opportunities for AmerisourceBergen, as well as for our customer and manufacturer partners. Our global and national strategy is, of course, driven in part by the long-term strategic relationship with Walgreens and Alliance Boots.
The onboarding of Walgreens business is proceeding very well, and we are very pleased with the progress that the Swiss joint venture has made in negotiations with generic manufacturers. The JV has good momentum, and we are pleased that we have recognized some benefits earlier than we originally expected.
As we have indicated before, contributions from the JV will be an important driver of our future growth goals and will position us well to deliver long-term value to all of our stakeholders. We have also utilized our partner's experience in markets they have strong offerings in to share best practices and import various cross-cultural or franchise opportunities back to our broader customer base.
We are fortunate to be an integral part of a vibrant and growing industry and one that is a vital link between manufacturers of life-saving products and health care practitioners who provide patient care. As imperatives of health care reform and other cost-containment efforts increasingly pressure providers of care, I believe that our partnership philosophy sets us apart as we strive for collaborative long-term solutions to pharmaceutical care's biggest challenges.
Let's now turn to the performance of our business segments in the quarter. Our Pharmaceutical Distribution segment delivered excellent performance.
AmerisourceBergen Drug Corporation revenues were up 45%, driven primarily by the continued onboarding of the new business from Walgreens and strong sales of certain new, branded specialty products, largely distributed to specialty pharmacies. Excluding the new Walgreens business, drug company's revenues were up 9%.
The rollout of the distribution of generics to Walgreens stores is progressing very well and ahead of our original schedule, and we expect to complete the transition by the end of our fiscal year. There is still work to be done on both the physical distribution of generic products and with the Swiss joint venture, but we are very pleased with the progress we have made with this important partnership relationship with Walgreens and Alliance Boots.
By the end of the September quarter, we expect we will complete the implementation of the strategic distribution contract we announced last March. And as we enter our fiscal 2015, we will be servicing the over 8,000 U.S.
Walgreens stores with all of the pharmaceuticals they dispense. Our drug company also saw strong performance in other customer segments as well.
Hospital, alternate site and independent retail customers both performed well in the quarter, and generic sales were strong across-the-board. I am very proud that not only did ABDC do an incredible job onboarding Walgreens, but as we committed, service levels to all of our customers never slipped during one of the most operationally challenging years our company has ever experienced.
In addition to the Walgreens business, the key drivers of growth in our distribution business include overall market growth trends, new brand product introductions and pharmaceutical price inflation. Price inflation on brand products continues to be quite strong, and generic inflation was better than expected in the quarter.
Generic and price inflation remain extremely difficult to forecast, but given what we experienced in the June quarter, we now expect fiscal 2014 generic inflation to be slightly higher than fiscal 2013. Much of generic inflation continues to be driven by less than 20% of our portfolio of generic products.
There is no doubt that there are discernible and dynamic trends reshaping the generic industry, including consolidation of customers and manufacturers, globalization and increasing quality and regulatory challenges. In this environment, AmerisourceBergen is able to leverage our global contracting relationship with Walgreens and Alliance Boots and our strong manufacturer relationships to achieve high service levels for our Progenerics customers.
New customer interest in our Progenerics portfolio is greater than ever before. As with generics, the value proposition we bring to specialty products also continues to be an important driver of growth for all of our customers, including community pharmacy.
We are focused on helping our customers have the ability to meet all of their patient needs, which increasingly includes sophisticated specialty therapies. By working with manufacturers, we ensure our customers have access to new product launches and that they are adequately reimbursed for the specialty services they provide.
Having a broad range of customers, including community pharmacies who are qualified and clinically suited to dispense these life-changing therapies, is an increasingly important trend in health care. And our demonstrated expertise in this area leads us to believe we are the best partner to help our customers participate in this important area.
Next week, we will host our independent retail customers at our ThoughtSpot trade show in Las Vegas. We expect a strong turnout and a lot of energy around exploring the next generation of programs and services from AmerisourceBergen.
We will tell our customers how we can help them meet the challenges and opportunities of running an independent pharmacy today, star ratings, indication therapy management, merchandising, third-party group pricing through our provider network, ProGen formularies, all of these compelling services an integral offering of what makes our GNP the leading independent franchise offering today. As we reported over the course of the fiscal year, the growth we have experienced across our drug company has driven the need for significant capital investments in our infrastructure.
We've made outstanding progress in this area, with the new Orlando distribution center currently in the testing phase and the national distribution center in Columbus scheduled to open early next fiscal year. AmerisourceBergen Specialty Group also had a good quarter, with revenues up 13%, driven by strong performance in ASD and Besse, which offset slightly lower performance in our community oncology business.
I am more convinced than ever that our oncology franchise is the key differentiator for AmerisourceBergen, and we just have to ensure we continue to develop additional programs and services to spread those capabilities over broader venues of care. As intense change is driven by technology, health care reform and market shifts towards a more consumer-oriented model, there is no question that health systems are in the vanguard of health care reform and the franchise we have with health systems is a valuable asset for ABC and we intend making more it collaborative and value added.
The impetus of reform has made our customers very interested and open to forming a closer relationship with ABC as they try and drive greater efficiency and tighter operating methods for their own businesses. Fundamentally, we believe our unique expertise and collaborative approach helps us deliver tremendous value to providers across the health care spectrum.
From independents to the premier drug chain stores, to some of the most prestigious hospitals and health systems in the U.S., our ability to help all of our customers succeed based on the unique business requirements is a principal driver of our future growth and value equation. Turning now to our manufacturer services business.
Both World Courier and our consulting business performed well in the quarter. World Courier continues to grow in its existing market, and we remain excited about the opportunities to utilize this platform to further expand both our specialty and manufacturer service offerings into other markets.
The unique combination of the service offerings that comprise our consulting business continue to be an important value driver for AmerisourceBergen, as well as for our manufacturer and provider customers. Moreover, the knowledge in the regulatory compliance and policy area that we can access from the leadership of our ABCS businesses is a great benefit to us as we look at the enhanced skill set we need to deal with regulators and legislators on complex and complicated reimbursement and technical areas, such as pedigree, Medicare and Medicaid reform, inpatient and outpatient reimbursement, et cetera.
As we look ahead to the last quarter of our fiscal 2014, we are well positioned to meet or exceed our objectives for the full year. We now expect our adjusted earnings per share guidance for the full year to be in the range of $3.89 to $3.94, an increase of 21% to 23% over last fiscal year and, importantly, driven primarily by strong growth in operating income.
Our near-term priorities include completing the onboarding of the Walgreens generic business, completing the Swiss JV negotiations, completing the remaining capital projects and completing our business plan for 2015. Longer term, we will also work collaboratively with our business partners to leverage existing platforms and to explore new opportunities.
We will continue to invest in our core business to provide our partners with a streamlined and differentiated way to conduct business with us on a global scale. Our interest in potential acquisitions and other investments to key specialty and manufacturer services area remain strong and has a global reach.
Of course, we will deploy capital wisely and with a view to both growing our business and returning funds to shareholders. Along the way, we would help shape health care delivery by providing exceptional service and through meeting customer needs amidst the rapidly changing regulatory and in operating environments.
It is too early to give explicit guidance for fiscal 2015, but we can outline some of the key drivers we are considering. Growing our operating margin is a top priority as is generating free cash.
There are many moving parts in the market, including the timing of generic launches, the rate of brand and generic inflation, the normal course of business contract renewals and the extent to which health care reform efforts translate into pharmaceutical sales and volume growth. We will provide detailed guidance for fiscal 2015 at our year-end earnings call in the fall.
In conclusion, I am very pleased with the outstanding performance we delivered in the first 3 quarters of our fiscal year. Our associates have risen through every challenge, and I have great confidence they will continue to enable us to meet our objectives by meeting the needs of the marketplace and, thus, ensure a successful future for AmerisourceBergen and all of our stakeholders.
Now here is Tim.
Tim G. Guttman
Thanks, Steve. Good morning, everyone, and thank you for joining us today.
My remarks this morning will focus on our adjusted results from continuing operations. In our press release, we included a reconciling table between GAAP and adjusted results, and we highlighted the specific items that we excluded.
I will cover a few of these excluded items as I work through recapping our June results. Please note that all financial comparisons are for the third quarter ended June 2014 compared to the same period of the prior fiscal year, unless otherwise noted.
Before I start my detailed review, let me cover a few high-level comments. With 3 quarters completed and heading into the homestretch of our fiscal year, we're very pleased with the progress we've made.
During the June quarter, operationally, we onboarded a significant amount of Walgreens volume while maintaining high service levels to all of our other customers. And we are also on track to complete a number of capital projects that support our operations.
Financially, we have worked through the complexity related to the phase-in of this distribution agreement and the Swiss procurement joint venture to deliver impressive June quarter results. Additionally, we refinanced debt and took steps to offset the potential dilution from the warrants issued to both Walgreens and Alliance Boots.
With that, let's start the detailed June quarter review, beginning with the top line. Revenues were $30.3 billion, up 38.5%.
Our Pharmaceutical Distribution segment was responsible for the strong overall revenue growth, consistent with the last 2 quarters. As Steve mentioned, we increased our generic drug distribution to the Walgreens store system.
We've converted about 70% of their stores at the end of June. Excluding the Walgreens growth, our consolidated revenues would have increased about 10%.
More than half of this revenue increase was related to 2 brand drugs recently launched, used for treating hepatitis C. The June quarter's adjusted gross profit was $823 million, up 21%, again mostly due to the performance in our Pharmaceutical Distribution segment, driven primarily by significantly higher revenue growth, both brand and generics.
Operating expenses. This quarter, total adjusted operating expenses were $429 million, up 17%.
Consistent with the last 2 quarters, the Pharmaceutical Distribution segment and corporate IT accounted for the majority of the overall dollar expense increase due to the continued onboarding of the Walgreens business. Operating income.
Our adjusted operating income was $393 million, up 26%, and this growth was significantly better than the percentage growth we had in either of our first 2 quarters. Our adjusted operating margin was 1.30%, down 13 basis points due to the large amount of Walgreens brand drug business.
Overall, we're pleased with our margin progression at this point in the fiscal year. Moving below the operating income line.
Interest expense was about $20 million, up about 10% due to the new 10-year debt that we issued in May. As a reminder, we successfully refinanced our September 2015 bonds with new 10-year bonds due in May 2024 at the lowest interest rate we've ever had for a 10-year debt, 3.40%.
The make whole payment resulting from the early retirement of the debt, about $20 million net of tax, has been excluded from our adjusted results. Additionally, in May, we also issued 3-year bonds specifically to fund the repurchase of shares to offset potential warrant dilution.
The interest associated with these 3-year bonds will be excluded from adjusted earnings going forward. Income taxes.
Our adjusted effective income tax rate was 38% for the current quarter, and we also expect this to be our full year adjusted tax rate. Our adjusted diluted EPS from continuing operations increased nearly 30% to $1.01, driven by exceptionally strong organic operating income growth.
Our adjusted diluted share count was 230.7 million shares, down about 2%. It's important to note that our adjusted share count excludes the impact from all shares repurchased under our special share authorization, which the board approved in May for the purpose of further offsetting the potential warrant dilution.
Let's move forward and discuss our segment results for the current June quarter, starting with Pharmaceutical Distribution. Total segment revenues were $29.8 billion, up 39%.
As mentioned earlier by Steve, drug company led the way, driving the majority of the increase due, again, to the implementation of the Walgreens contract. Our revenues from this business have been better than expected.
Also, we continue to see considerable growth in our alternate site customer segment, up by about 20%, driven primarily by the sales of the hepatitis C drugs mentioned before. And for the second quarter in a row, we had very good growth in our ProGenerics program with revenues as a percentage growing about 20%, helped by a generic drug that launched back in December.
As a reminder, the Walgreens generic business does not run through our pro business line. Our specialty business group had a revenue increase of about 13%, led by ASD, Besse Medical and also ICS, our third-party logistics business.
Our Oncology Supply business was down just slightly versus last year, primarily due to the impact of branded generic conversions and also pricing on maturing generics decreasing over time. The sales growth percentages for the drug company and specialty are before interest segment eliminations, consistent with how we have reported these growth rates in the past.
Moving to gross profit. The segment's gross profit was $691 million, up $139 million or about 25%.
Drug company was the driver or the majority of the segment gross profit increase as a result of the high revenue growth especially in generics. And during the quarter, the procurement joint venture continued to execute contracts, which enabled us to recognize additional fee income at a faster rate than previously expected.
Any remaining supplier contracts should be executed by the procurement JV this September quarter. Finally, during the June quarter, better-than-expected generic price appreciation helped drive some of the improvement in our performance.
Operating expenses were $332 million and were up 21%. Similar to recent prior quarters, the expense increase is primarily due to supporting the segment's significant volume growth.
We are in the last stages of adding headcount and delivery capabilities as we push to have all the Walgreens stores converted for generic distribution by September 30. Adjusted segment operating income was $360 million and up 29%, driven by the outstanding performance of our drug company.
We can now move to the Other segment, which includes Consulting Services and World Courier. In the June quarter, segment revenues increased 13% to $620 million, driven by the consulting business and, specifically, the TheraCom distribution business we have within consulting.
From an operating income standpoint, this segment had operating income of $34 million or essentially flat. Our World Courier business had a solid increase in operating income, which helped offset consulting being down somewhat due to the start of a new key program shifting to the September quarter and also slightly higher expenses.
This completes our segment review. Let me switch gears and cover our 2 large GAAP items, warrants and LIFO.
Warrants. The fair value of the warrants increased significantly to approximately $950 million, driven primarily by the increase in our share price from March 31 compared to the closing price on June 30.
Because of this change in fair value, the related inception to date expense is adjusted. Consequently, our warrant expense was $145 million, with roughly half of this total related to this adjustment.
LIFO. This quarter, we revised our LIFO model based on current and expected drug pricing trends and our forecasted inventory mix of September 30.
We now expect a full year LIFO expense of about $400 million. Consequently, for the June quarter, we recorded a GAAP expense of about $133 million, which brings our cumulative expense through 9 months to $294 million.
Forecasted brand and generic inflation rates are both key assumptions in our LIFO calculation. We expect brand drug inflation to continue to be strong.
And this quarter, we revised our overall expected generic deflation rate for the fiscal year due to the level of generic price increases we had in the June quarter. Let's move to our balance sheet and cash flows.
We continue to make very good progress in the working capital area. Our June 30 cash balance was about $1.3 billion.
Our fee cash flow through 9 months now stands at $430 million. We are in a very good position to be on the high end of our full year free cash flow guidance previously guided at $500 million to $700 million.
As a reminder, our fiscal year ends on a Tuesday, which is a low cash collection day. So expect to have a lower cash balance at September 30.
During the June quarter, we also made very good progress with share repurchases. Under our regular share repurchase program, we purchased about $180 million of stock.
We now stand at $432 million purchased through June 30. We are also well positioned against this guidance target, which was $500 million for the full fiscal year.
Under the special share repurchase program, which is to be used separately to offset expected warrant dilution, we've repurchased $142 million through June 30, a pretty good start given that we began fairly late in the quarter with this initiative. Now let's turn to fiscal '14 guidance.
With one quarter remaining in the fiscal year and better visibility over the next couple of months, we believe it's appropriate to increase and narrow our adjusted EPS guidance. We now expect adjusted EPS for fiscal '14 to be in the range of $3.89 to $3.94, which reflects outstanding growth of about 22% over the prior fiscal year.
Part of this growth is due to realizing benefits from the procurement JV earlier than originally expected and also completing the rollout of the Walgreens generic business earlier than calendar year end. This means that we will anniversary these benefits in fiscal '15 earlier than originally contemplated.
A couple of additional points about our fourth quarter. Our revenue growth will slow a bit as we anniversary the Walgreens brand drug business in September.
We also expect that contributions from generic drug price increases will moderate somewhat in the September quarter, both on a sequential and year-over-year basis. So far, for July, generic price increases have been modest.
One final point about full year '14. We now expect that our gross profit contribution from generic price increases will be slightly better than what we realized in fiscal '13, driven by the activity in the June quarter, specifically, the number of price increases and the percentage increases applied to our higher generic inventory balance resulting from higher generic sales this year.
Looking beyond '14 and thinking about the generic pricing environment, I may be stating the obvious, but there are 3 possibilities with regard to the gross profit contribution we realize from generic price increases: the contribution can increase, stay flat or decrease. 2 of the 3 possible outcomes potentially create a headwind in our growth going forward.
When we provide fiscal '15 guidance during our fourth quarter conference call, we will provide our directional expectation. In summary, we are extremely pleased with our progress after 3 quarters.
We feel very good about the remaining quarter, and we believe we will successfully complete key projects and initiatives and be in a good position entering fiscal '15. Before I turn it over to Barbara for Q&A, let me give a quick callout to Steve, who recently celebrated his 20th anniversary at ABC.
Steve, congrats from all the ABC employees. Now here's Barbara to start our Q&A.
Barbara A. Brungess
Thank you, Tim. We will now open the call to questions.
[Operator Instructions] Please go ahead, John.
Operator
[Operator Instructions] And first go to Robert Jones with Goldman Sachs.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
It seems like there were several factors, obviously, that drove the better-than-expected 3Q and what seems to be a better, implied, 4Q. I wanted to ask specifically on the Walgreens prime vendor contract and then the benefits you mentioned that you're recognizing from the JV.
Can you guys maybe just give us a sense as far as the upside you're realizing here in the back half of the fiscal year? How much of that is driven from timing of those 2 contributors versus those contributors just being, overall, bigger than what you originally expected?
Tim G. Guttman
Bob, this is Tim. Thanks for the call.
Let me -- I think let me answer the question in this way. When we think about it, we're having a terrific '14, where we've raised our guidance.
We're above where we thought we would be. And I would say, I would look at that better than -- better contribution really half from our Walgreens and AB relationship, so meaning just better revenues than we expected, earlier generic distribution rolling -- being implemented also with the earlier JV contribution.
And I'd say the other half is from just core solid business, higher revenues. Revenues seem to be picking up, especially with the hep C products, generic inflation.
Our World Courier business is doing well. So that's -- I think, again, that's kind of how I would look at where that upside versus our original guidance came from for the year.
For the fourth quarter -- for the second half of the year, I'd say it's consistent with how we view the full year.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
That makes sense, and that's helpful. I guess, I was just trying to understand -- specifically, obviously, the Walgreens prime vendor and the JV are some pretty big factors for you guys this year and next year.
I guess, I was just wondering at this point whether it seems like they were bigger than what you had originally estimated. Or is it more of a timing?
Tim G. Guttman
Yes. I think we've been pretty consistent.
I mean, originally, when we gave guidance way back when, we always said that we thought the procurement JV benefit would come in Q4. So it, definitely, is coming in earlier.
I would say the rates of the -- the rates from the economics are probably what we expected and modeled. So that's good news, just coming earlier.
Generics are coming earlier than what we thought. We always thought we'd finish by calendar year end.
But I would say that -- but the revenues are also slightly higher than what we expected.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
That's great. And I guess just a follow-up on that, Tim, if I could, would be around the revenue guidance raised.
It seems like it's probably coming from -- at least, the biggest factor is being Walgreens and it sounds like the hep C, both of which are presumably lower margin contributors, yet your EPS raise implies -- at least the way I'm looking at it, there's some margin improvement. So maybe, could you help us understand the drivers of the better margins that you're realizing or expecting now and to the end of the year?
Tim G. Guttman
You're right, Bob. I mean, the -- we have had some really good sales growth from the hep C drugs.
They are lower -- good dollars, but lower margin items. But I would say the margin improvement is coming from good, solid generics, generic sales.
And also, the second half of the year, we had the benefit of generic Cymbalta strong for the year. Now we're seeing generic Diovan finally launched.
But again, having that -- I called out on my script, 20% growth in pro, especially, is helping that margin.
Steven H. Collis
Bob, just a quick comment, totally in support of what Tim said. We've substantially completed the implementation of the Walgreens contract, but we also completed the SAP implementation a couple of years ago.
And we really started to see some benefits in terms of managing our product mix, our contracts with customers. And this is just a solid operating performance across many, many segments.
I was particularly pleased to see a 9% rise in revenue, excluding Walgreens, because we really are seeing a lift in our overall business, more inventory, better transportation lines, better systems and -- it is really just a virtuous cycle going on in our core drug wholesale business, and we're just extremely pleased with them and proud of.
Operator
That will be from Glen Santangelo with Crédit Suisse.
Glen J. Santangelo - Crédit Suisse AG, Research Division
Tim and Steve, I just wanted to follow up on some of the comments you made on the Walgreens onboarding and the joint venture. It kind of sounds like both those benefits have come earlier than expected.
And so when we look to your fiscal fourth quarter, should we assume that we're seeing the full benefits of both that Walgreens contract and the joint venture in that quarter? And I guess I'm asking the question because as I start to think about my year-over-year growth, should we just be looking at normal comps for the back half of fiscal '15 at this point?
Steven H. Collis
Well, we still have significantly over 20% on generic implementation. But what we're hoping -- and again, we had no timetable there and it really was a collaborative approach given the strong relationship we have with Walgreens on the generic implementation.
We really had contractually, essentially the calendar year, to complete this. But we wanted to complete in our fiscal year for the reason it makes the comps easier.
But we expect to complete it. And honestly, one of the guiding factors was Orlando distribution center.
So that was very important to us. They have a big market presence in Orlando.
There's some seasonality there. So it was important to us to get Orlando DC up and running.
And as usual, ABC is performing ahead of expectations there. This is the -- going to be our biggest distribution center in the United States.
So that was an important guiding factor, but it looks like, all things being equal, we're pretty confident we're going to complete the generic implementation. As far as the run rate, I think you -- we want to make sure we're letting Walgreens and the Swiss contracting also consistently comment on asset [ph].
Essentially, the major contracts that we negotiated, there still are some a B&C market share manufacturer that we're competing things with. But they've done a great job for all 3 of the partners in this alliance.
And also, we made it -- in my comments, I will point back to the reference we made that the interest in ProGen and the generic global capabilities we have has never been stronger. So we're very pleased with where we are with the Swiss JV and the opportunities we have.
And I'll let Tim talk a bit about the timing differences.
Tim G. Guttman
Yes, Steve, you hit it correctly. I mean, we will -- we still will be ramping up generics for a lag during the fourth quarter.
We still have a couple of key markets to roll out. We're in pretty good shape on the WBAD [ph] procurement joint venture there.
But we do have some timing factors in Q4. I called out that key contract that is kind of starting up, shifted in consulting and, again, some generic launches with Diovan.
But we're in a pretty good position for the fourth quarter kind of jumping off to '15.
Glen J. Santangelo - Crédit Suisse AG, Research Division
Tim, maybe if I can just follow up then. I understand you don't want to give any fiscal '15 guidance on this call, but last quarter, you clearly took the opportunity to sort of remind investors as to the headwinds that are coming in potential fiscal '15.
And now it seems that the fiscal '14 numbers are clearly much stronger than expected as things are coming a little bit earlier, which, I guess, would suppress that growth rate in fiscal '15 even more. So as we think about sort of the headwinds you called out, the Department of Defense contract potentially, maybe generic inflation is flat or even moderates some.
How should we think about the headwinds and tailwinds maybe as we approach fiscal '15 and we start to, at least, think about growth rates in our model? Should it be a more normalized growth rate year now that fiscal '14 seems to be the -- at a more stable run rate?
Tim G. Guttman
Glen, great question. And again, you're right.
I don't want to give explicit guidance about percentages, but you're absolutely correct. I mean, we're still consistent with the headwinds and tailwinds we called out.
The headwinds, we have contract renewals. The DoD is still out there.
And community oncology is still a little bit under pressure from a revenue standpoint. And we have some onetime expenses, track and trace, we called out.
Just let me spend a minute on the tailwinds. The point is an important one.
We talked about having a full year benefit of brand and generics. We talked about full year benefit of Swiss co.
But I think essentially, you can say that part of our outperformance this year, we have pulled forward some of that contribution. We called it out.
We said we'd anniversary faster. So again, some of that tail me -- we're still going to have a tailwind into '15, but that tailwind will be lower, smaller.
'15 is still going to be a good generic launch year. We keep hearing that generic Nexium is on track.
And we expect good organic growth with the economy and ACA. But clearly, I want to make the point that we did essentially pull forward some of that contribution from the generics and the Swiss JV into this year to help us.
Operator
It's Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser - Morgan Stanley, Research Division
Can you -- given that generic price inflation is such a big factor in how you think about fiscal year '15, can you just quantify for us what was the contribution -- the bottom line contribution in the quarter? I know in the past, you said -- last year, I think it was like $0.03 to $0.05 in any given quarter.
So if you can give us the context for the June quarter.
Tim G. Guttman
Yes. Ricky, this is Tim.
That's just one thing we're not going to quantify. It's a driver of our gross profit.
I'm kind of glad you asked the question because when I talked to Glen's previous question at the end, it was also about generic price appreciation. So maybe I can handle that and your question this way.
I mean, when we think about generic price appreciation, I mean, this is kind of the -- this is the second year in a row where we had really good growth in generic price appreciation. And if you remember, our fiscal '13 was quite a bit higher than '12.
And now '14 is going to be higher than '13. Generic price appreciation, it's not in our control.
It's primarily event-driven. It's somewhat situational in terms of when there are mature generics with limited suppliers, you see some price increases.
So I guess my point here is we're not sure the growth is sustainable. And this is a key consideration when we build our '15 plan.
And most likely, it's going to be a headwind, which is what I called out at the end of my script. Even if that growth slows a bit, it's going to be a headwind, or it could be flat or down.
And what we're saying is we'll -- we need more time. We need to finish '14, and we'll report out on our year-end call.
Steven H. Collis
Ricky, just a couple of additional points. When we're talking to our global sourcing people, a couple of things that they would point out is that the price increases we're seeing, we're doing much more volume of generics not only in ProGen, but in our other generic sectors.
So we're doing more volumes. So you would expect that we have greater participation in price increases.
The other thing that they would have us share is that there's a greater amount of products that are participating in generic price increases. So last year, we had some very significant increases in really small products but huge increases, hundreds of percent.
This time, it's more widespread. But still, probably less than 1/5 of the SKUs are subject to generic price increases.
So hopefully, that's some helpful data to you. But obviously, it's something we're managing in our guidance and in our results.
So thanks very much. And I think I cut you off.
Were you asking something else, Ricky, or...
Ricky Goldwasser - Morgan Stanley, Research Division
Yes, just one follow-up on this. When you think about your joint venture partners, kind of Walgreens, kind of talked about generic inflation is being a headwind for them, so from a joint venture perspective, are they kind of, in effect, trying to mitigate some of it by going back to the manufacturer, either getting greater discounts?
Steven H. Collis
Well, it's definitely a good question. I think -- look, having, say, our manufacturer partners in generics doing well is important to everyone and in all participants in the industry.
And there's been consolidation amongst the manufacturers. There's increasing quality and regulatory globalizations.
So -- and consolidation amongst the buying side, as you all know. So I think we want to make sure we have healthy partners.
And as our belief, a lot of our manufacturer partners are also committed to our joint mutual success. So there's definitely a headwind from generic price increases for all of our customers until third-party tables adjust, which is really just a timing lag.
But it can create significant increase. Now if it's widespread as it's been more, it's probably, I would guess, more manageable.
It's when you have very significant increases in a few products, a couple of hundred percent, that has caused real consternation in our customers from time to time until those tables adjust. But that's -- really, it is a timing issue.
And eventually, we should see an improvement in the system to adjust price increases in a more efficient manner. I think that would solve a lot of the provider angst about price increases.
Operator
That will be Robert Willoughby with Bank of America Merrill Lynch.
Robert M. Willoughby - BofA Merrill Lynch, Research Division
I think Ricky just asked the question, but I guess the generic inflation turning higher than you thought, how does that jive with the procurement expectation -- savings that you're expecting from not only your consortium, but others that are popping up? It just seems to be inconsistent with the industry's efforts to bring savings back to that customer to see inflation moving higher.
Steven H. Collis
Not necessarily, Bob. I mean, I think, we looked at -- we told you we believe that there was an opportunity to work together with Walgreens to get our pricing equalized.
So that's a lot of what we've been doing. And it's really, again, a relatively narrow number of products that we are seeing price increases on.
The generic business remains, of course, a very competitive business from a supply perspective and the new entrants from emerging economies like India and, potentially, China and other countries. So it's a very dynamic marketplace.
I've got to tell you, now having spent the majority of the 20 years I've had with AmerisourceBergen, which -- Tim, thanks for pointing out, on the specialty side, really -- the generic side is extremely interesting, dynamic. And I'm proud of the services we offer.
The partnership with Walgreens has been a great benefit to all of our customers and our shareholders. So I think we're well positioned.
Tim, anything you'd add on Bob's question?
Tim G. Guttman
No, I think you hit it, Steve. I mean, it's isolated.
It's a narrow list of products. It's not that many when we look at our portfolio of generics and how many actually -- most still have decreases or flat pricing.
Again, a relatively small percent are going up or having a price increase.
Robert M. Willoughby - BofA Merrill Lynch, Research Division
Do you expect -- I mean, you referenced consolidation of the manufacturers out there perhaps as one response to some of these purchasing coalitions that have been formed. I mean, wouldn't some of those activities continue and continue to create that inflation opportunity for them?
Steven H. Collis
It's hard for us to gauge who may or may not merge. That's definitely something.
But that's why we have a range of expectations. And I think, overall, we managed our performance very well.
So Tim, do you want to add a comment?
Tim G. Guttman
No, I think there is still -- I agree, Steve. And there's still capacity, and there are a lot of good generic suppliers out there.
So it's just really hard to -- again, we said it's not in our control, and it's very hard to forecast and predict.
Steven H. Collis
As we said, less than -- so less than 20% of the products was -- had price increases throughout the year. And it's a couple of percent less than 20%.
So again, generally, there are some price pressures. There are just certain products that through consolidation and unique circumstances that the manufacturers are able to enjoy some prices increases on.
Operator
That will be from Garen Sarafian with Citigroup.
Garen Sarafian - Citigroup Inc, Research Division
First, I guess, on the operating margins for 2015, Steve, you mentioned that that's the top priority. You guys have mentioned that before.
So I'm wondering, the size of the procurement portion of the JV, what do you guys see as the top area that are within your control, that you're planning to improve on the margin front next year?
Steven H. Collis
Definitely, growing with the right customer statements, making sure that we get all the generic purchases from our customers that we're entitled to, so compliance. And that goes to having a very robust and volume-based portfolio.
That's very important. We also -- sure, we want improve operating margin because last year was the first year that we decreased our operating margin.
But it's also -- it's been interesting to us, some of the innovative new therapies and having our customers broadly access them. We're not going to grow operating margin that way, but we are going to grow operating income.
We've got to increase our influence, and these are healthy drivers for our customers. So it's complex.
We are both focused on operating margin, but we also need to remember that operating income dollars are important to our shareholders and also drive increased participation by our customers. So we always manage everything in a mix.
We spend a lot of time worrying about return on investor capital, cash flow, balance sheet certainty. So I think ABC manages all those areas very, very well.
And we believe there's upside in managing our business very actively from a ProGen mix, from a customer mix perspective, making sure we're maintaining the right customers, that we're winning new business at healthy margins. All of that goes into sort of the performance that you've seen this quarter.
So when everything comes together, like it did this quarter, it's really a dynamic contribution from so many areas of ABC, sales, operations, procurement, backed by human resources and legal and regulatory. So it really is -- everything is coming together very, very well at ABC.
Garen Sarafian - Citigroup Inc, Research Division
Yes. So it sounds like there is no one particular area that you think is a spotlight.
Steven H. Collis
I think it really is a mix of everything. The sourcing is important, the sales management, the contract management.
Again, the data that we're getting out of the SAP system is extremely important to us, our specialty presence. For example, the growth in World Courier this year is above expectations.
ASD and Besse continue to outperform. And oncology business is managing through a very difficult transition in the community segment.
But again, we're using oncology more and more in other segments. Especially, pharmacy has got a big oncology component.
By some measurement, nearly 40% of the health system distribution that we distribute is in oncology products. So oncology remains a very important driver for all of ABC.
One of the areas that Profarma was interested in is oncology knowledge, for example. So it's an important international driver for us.
When you look at the type of products at Lash and Xcenda, ABC is businesses -- or managing, those are disproportionately oncology as well. So oncology is an extremely important area for AmerisourceBergen.
And we shouldn't really only think about it in terms of our Oncology Supply distribution business. ION, we believe it's got a lot of upside in terms of physician services and contracting potentially beyond just community oncology.
So those are all important drivers for us.
Operator
And that will be from Lisa Gill with JPMorgan.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
Steve, you mentioned that you have a 9% increase in sales, excluding Walgreens. Can you just give us an indication as to what you're seeing out in the marketplace?
Was any of those driven by ACA volumes, at all, in the quarter?
Steven H. Collis
Not really. I mean, it's hard to ascertain -- ascribe it to ACA or -- just general script growth is positive.
Again, those 2 new hep C drugs have been very impactful to our business. Of course, ABC has got a very big specialty pharmacy business in our drug company, where we're servicing specialty dispenses direct to patients.
So we have lots of customers there. Our alternate care business was very strong.
Some of the new chain business we brought on, excluding Walgreens, has been very strong; but just an overall very robust growth, which we're delighted with. I mean, having a market that's increasing is very important to us.
And I think there's been a lot of discussion about the pricing of some of these drugs, but the patient benefits have been enormous, the societal benefits. So again, we think that pharmaceutical care is one of the best and most efficient forms of health care.
And I think you're seeing some of -- the efficiency of these drugs is pretty remarkable, and we are proud to be a part of it.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
So those trends are coming through your core, like distribution business, but your -- also, your specialty business is also strong in the quarter versus our expectations. Is there anything specific to call out there?
So hep C is coming through drug distribution. There is clearly some other factors that are driving overall specialty.
And I think you called out the fact that oncology continues to be on the weaker side. So is it new drugs that are coming through on the specialty side, Brazil?
What are we seeing that's really driving the improvement there?
Steven H. Collis
What we're saying -- Lisa, nothing from Brazil yet. We just closed it a couple of quarters before the end of June, but we expect to grow.
Our ASD business really manages specialized distribution programs into hospitals where they have unique data requirements. They started off, of course, in the plasma distribution business, which is quite robust.
And then very interesting -- I mean, we bought Besse in 1998, and it was doing about $40 million. And it just continues to extend into other therapies.
And the therapies are very robust in ophthalmology, rheumatology, et cetera. These are great areas.
And despite the challenges of Medicare Part B, they, obviously, remain an important product of patient care. And we continue to do very well.
And I think maybe the payer mix is not quite as high as it is in community oncology, the Medicare payment itself. So we're just doing very well at Besse as well.
So our ICS business, it continues to do well. The Specialty Group, it's just got some terrific portfolio of companies.
And at times, we've had oncology outperform. And now when we have some weakness in community oncology, it's just great to see other companies really keep their growth rate going.
Barbara A. Brungess
Thanks, Lisa. Steve, do you have some closing comments?
Steven H. Collis
Yes. It's just -- of course, it's always wonderful when we can report such a strong quarter to our shareholders and our friends on the sell side.
Just to reiterate, as CEO, I could not be more proud of how all of our associates came together and worked together to deliver such outstanding performance. When you look at the accomplishments, whether it's in sales, operations, procurement and the support functions that make -- that drive all those performers, and clearly was just a great performance, including the treasury department, which did such a great job on refinancing our debt and managing the warrant, potential warrant dilution, et cetera.
So thanks for your time, and we will continue to work collaboratively, intelligently to carry on delivering results, such as we've just produced today. Thank you.
Barbara A. Brungess
Thanks, Steve. And just before we go, I'd like to quickly highlight that in September, we'll be attending the Morgan Stanley Healthcare Conference in New York and then also the Bank of America Conference in London as well.
So please check our website for updates on specific presentation dates and times. Thank you for joining us today.
And with that, I will turn it back to John, the operator.
Operator
Thank you. And now ladies and gentlemen, that does conclude your conference for today.
Thank you for your participation. You may now disconnect.