Nov 5, 2020
Operator
Good day, and welcome to the AmerisourceBergen Q4 FY '20 Earnings Call. Please note, this event is being recorded.
I would now like to turn the conference over to Bennett Murphy. Please go ahead.
Bennett Murphy
Thank you. Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen's Fiscal 2020 Fourth Quarter and Full Year Results.
I am Bennett Murphy, Senior Vice President, Investor Relations. And joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO.
On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these financial measures to GAAP are provided in today's press release and are also available on our website at investors.amerisourcebergen.com.
We have also posted a slide presentation to accompany today's press release on our investor website.
Steve Collis
Thank you, Bennett, and good morning to everyone on the call. Today, we will be discussing AmerisourceBergen's strong performance in fiscal 2020 and our expectations for fiscal 2021.
Importantly, we would like to start by, first of all, acknowledging the exceptional efforts of our associates to support our customers and help them navigate the challenges stemming from the COVID-19 pandemic. In fiscal 2020, we once again delivered strong performance due in large part to our continued ability to innovate and execute, an inherent resilience of our business.
Driven by our purpose and guiding principles, our associates stepped up whenever we're challenged to address the unprecedented circumstances facing our industry. Thanks to them, we've been able to meet stakeholder needs while enabling the continuity and stability of the supply chain and demonstrating the vital nature of our role in a health system as an invisible pillar for pharmaceutical innovation and access.
When the COVID-19 pandemic first emerged, we put the health, safety and well being of our associates and customers first. We implemented enhanced, clean protocols and supported associates by providing additional pay power for associates who needed quarantine or care for family members, bonuses for frontline associates and back up dependent case.
We also shifted all suitable roles for remote work. Feedback from our associates on these measures have been overwhelmingly positive.
More than 90% of our associates surveyed say communication, collaboration and creativity and innovation have remained the same or better. We also understood and appreciated our opportunity to deliver on our purpose and be part of the solution, given our central role in the supply chain.
In addition to our normal supplier portion and process, our teams have ensured that critical medications are allocated on a propriety basis to facilitate patient access.
Jim Cleary
Thanks, Steve, and good morning, everyone. For AmerisourceBergen, fiscal 2020 was a year of resilience made possible by the diligent execution of associates across our organization, enhanced by the exceptional performance they delivered across our businesses.
And following our purpose, our associates adapted and innovated to meet the needs of our customers and their patients. Our team strengthened our relationships with partners, both upstream and down, focusing on providing transparency and solutions at a time they needed it most.
AmerisourceBergen's long history of internal investment helps support this important work and enabled us to establish robust business continuity plans, which utilized our efficient and modernized distribution network and our strong IT infrastructure. I take great pride in being part of such a purpose-driven company and have been humbled by the results that our teams have delivered.
Steve Collis
Thank you, Jim. Before we open the call up for questions, I would like to share my reflections on a year that has made a lasting impact on our lives.
2020 has been a year of uncertainty and challenge for communities across the globe. During this time, AmerisourceBergen has put the needs of our associates, our customers and our communities first, from planning safe ways to work to ensuring the delivery of live-saving medication and to enabling our profits to bring relief to communities from California to Nevada.
Through our purpose, scale and expertise, we have ensured that our partners have had the connectivity, capability and data needed to think, plan and act effectively. As we work to ensure that patient needs were met across our footprint, we recognized that we were only able to do so because of the resilience of our business, which has been reinforced by our focus on pharmaceuticals, our diverse portfolio of customers and businesses, our differentiated customer experience and our leadership in specialty.
As I've said for the last few months, I've never been prouder to be a part of AmerisourceBergen. I've been humbled by the conviction, dedication, inspirational efforts and professional execution carried out by our associates.
Their teamwork and passion have truly enabled us to deliver on our purpose of being united in our responsibility to create healthier futures. I remain incredibly proud of the work that our associates are undertaking across all areas of our business.
This concludes our prepared remarks for today. Now I'll turn the call over to our operator to begin the Q&A session.
Operator?
Operator
Steve Collis
Operator, our first question, please?
Operator
Our first question will come from Robert Jones with Goldman Sachs.
Robert Jones
Great. I guess maybe just to start on guidance in the pharma segment, you're calling for a mid-single-digit EBIT growth there.
Wanted to just get a little bit more on your thoughts around the underlying assumptions versus some of the more one-time items, specifically thinking about things like lapping PharMEDium, which you mentioned and then, obviously, additional COVID costs from this year that might not recur at the same level at least for next year. And then I guess to the upside, I know, Steve, you continue to talk about the growing opportunity with biosimilars.
I was hoping maybe you could also touch on what, if anything, is considered in that opportunity for fiscal '21?
Jim Cleary
Sure. Well, Bob, this is Jim, and I'll start with some of your questions you asked on guidance and then turn it over to Steve for your final part of the question.
So fiscal year '21 financial guidance, I mean it reflects strong growth across multiple businesses, building upon the momentum from the strong fiscal year '20 despite the COVID-19 challenges. And if you know, we're guiding to mid-single-digit revenue growth and mid-single-digit operating income growth, and that mid-single-digit operating income growth is both in Pharma Distribution segment and in Other.
And adjusted diluted EPS guidance in the range of $8.20 to $8.45 and keeping in mind there that we don't include unidentified capital allocation in our guidance. So in terms of pharmaceutical distribution, again, some of the things that are driving it.
We continue to benefit from our pharmaceutical-centric positioning, particularly from our leadership in specialty, where we're seeing biosimilars continuing to contribute meaningfully. We're expecting pharmaceutical utilization trends generally consistent with the experience we had in fiscal year '20.
We're assuming that brand inflation and generic deflation levels that they are in line with what we saw in fiscal year '20. We will have a tailwind in the first quarter of fiscal year '21 from the exit of PharMEDium.
And so that will be a benefit of $20 million in operating income tailwind comparing of the first quarter of '21 with the first quarter of '20. And then we continue to remain disciplined on expense management.
We work -- and I'm strongly encouraged by our OpEx performance in fiscal year '20 and continue to remain focused on expense management. We're unlikely to have the same level of favorability related to some of the corporate and administrative expenses in fiscal year '21 that we had in fiscal year '20, like our internal health care expenses would be an example of that, but we continue to expect to perform well on the OpEx front.
And so if we look also kind of quarterly cadence, I would say that the first quarter will be a bit stronger because we have the tailwind compared to first quarter of fiscal year '20 related to PharMEDium. And then the second quarter will be a little bit tougher because we're comparing to the second quarter fiscal year '20 wherein March we had elevated sales with the onset of COVID.
Steve Collis
Well, thanks for the question. Yes, we've seen encouraging usage of biosimilars and the biosimilars market has continued to -- we expect to materially increase by 2025.
Most importantly, we see -- potentially increased molecule demand by 2% to 4%, indicating increased patient accessibility as supportive care and other products become more affordable and especially with some of the copay and equity that we try to highlight elsewhere. So of course, for ABC, these products are the most impactful.
But I think biosimilars are a key trend for us. They're important for our customers.
They're important for the patients that we all ultimately serve. And the pricing is remaining intact to the commercialization business that we are so in favor of performing for, for ABC are able to still being played access and adherent solution.
So very positive trend for ABC, we believe. Next question, please?
Sorry, Bob, please go ahead, Bob.
Robert Jones
No, I was just going to say the one other item. I saw that AmerisourceBergen was selected by HHS for this Strategic National Stockpile initiative.
I was just wondering if you could comment on what, if anything, is included in guidance around that new contract?
Steve Collis
Yes. No.
So there's nothing specific in our guidance. We can confirm that we've been selected to store, manage and distribute Strategic National Stockpile pharmaceuticals.
And I think this is a further testament to that value that ABC provides, our deep promotional expertise. And I think one of the areas that we've really been focusing on is our data and analytics capabilities.
And we've talked a lot, in my script, in particular, about innovative solutions that enables to provide -- that provide unique solutions to government and commercial partners. So we believe that during this period, we've become the invisible pillar of innovation.
And this is a further example. I think many, many more stakeholders are aware of the capabilities of an AmerisourceBergen than they were before.
So I think this is extremely good evidence of it. So we're proud to receive this award.
Jim Cleary
Yes, Bob, and I'll just -- Bob, I'll just add that the contract is in our numbers, but there's nothing specific to call out.
Steve Collis
Next question please, operator?
Operator
Our next question will come from Lisa Gill with JPMorgan.
Lisa Gill
First, just to start and go back to your comments around biosimilars. Jim, I understand that the comments that Steve made and that this is positive, but is there any way for you to frame what the potential margin opportunity would be for a biosimilar versus a traditional branded drug that goes through your specialty business?
Jim Cleary
Yes. Yes.
Let me start out there. And as we commented on biosimilars, it's really one of the very positive things that's driving our strong results in our specialty physician services business.
And we do see higher margin opportunities with biosimilars than we see with traditional brands. And that was one of the factors, for instance.
We were quite pleased this year, which we -- when we saw our operating margins tick up a couple of basis points in biosimilars. And the adoption of biosimilars being stronger than we expected is one of the factors that caused our operating margin to tick up during the fiscal year.
Lisa Gill
But when we think about it, if we were just to use traditional margin, is there a way to think like is this onetime more profitable, 2x? I mean just to kind of put this in reference, as we start to think about the number of biosimilars that will come to the market over the next few years -- and I agree with you that I believe that this is a great opportunity, especially given the size of your specialty business and the manufacturing services that you have.
I am just trying to put this into context. I know you said that there is part of that in your 2021 guidance, but how do we think about that margin differential and the opportunity, not just for 2021, but over the next several years?
Jim Cleary
Yes. We do think it clearly was a positive factor in '20, it will be a positive factor for us in '21 and in future years, the growth of biosimilars.
We won't get specific on margin, but we'll say that the margin is higher than brand, specialty and not as high as generic margin and -- but we do feel like it will be a continued growth driver for our businesses.
Steve Collis
And Lisa, one final point, community oncology practices, particularly we believe members of our ION GPO that have really shown an ability to partner with key manufacturers have been early adopters in embracing biosimilars. And if you look at the data on our larger practices adoption versus providers on a national level, it's favorable.
So we believe that's further evidence of us being able to promote new and effective therapies.
Operator
Our next question will come from Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser
So I have one question that is really around CapEx and capital deployment. I think you increased your CapEx guidance for this year.
So what areas are you looking to spend on? And how should we think about these areas as driving growth in the foreseeable future?
And then clearly, it sounds like you're getting closer to an opioid settlement and resolution of litigation that's occupied you for a few years now. So now with you -- you're freeing up kind of like that capacity, how are you thinking strategically about capital deployment in areas for potential expansion?
Jim Cleary
Sure. Let me start out there.
So yes, we are expecting capital expenditures to be a little bit higher in fiscal year '21 than fiscal year '20. They were about $370 million in fiscal year '20, and our guidance is about $400 million in fiscal year '21.
And we've got many projects in place, there's no one project that's driving our CapEx. It's really a shared focus across supporting growth.
So a lot of our CapEx is about supporting both, increasing our efficiency and then enhancing our commercial and compliance capabilities. And then in terms of capital deployment, our capital deployment strategies remain unchanged; invest in the business, strategic M&A, opportunistic share repurchase and maintaining a reasonable dividend.
And one thing I think is really nice to point out is that our balanced approach to capital deployment has been a commercial and financial differentiator for us. We ended fiscal year '20 with a trailing 3-year average adjusted return on invested capital of over 18%.
And I think we are well positioned for capital deployment ending fiscal year '20 with zero net debt.
Steve Collis
Yes, just -- thanks, Jim. I just would add that for strategic, accretive M&A, it's important that the targets must be actionable with appropriate returns.
Jim and Laza, our controller, work very closely with our finance committee of our Board, and we evaluate all opportunities. But I'd say that overall, we didn't do any M&A this year, but AmerisourceBergen continues to benefit from our strategy being pharmaceutical centric, particularly our strength in specialty.
And we're always looking to pull on our key strengths. So our commercialization services, animal health, those are areas -- patient access, analytics and data to the extent that they are in the special area, those are all key areas for us, Ricky.
Operator
Our next question will come from Glen Santangelo with Guggenheim.
Glen Santangelo
Steve, I just wanted to also follow up on sort of the opioid litigation. It's obviously an encouraging sign.
And assuming you're correct and the number that you put in the press release that you reserve for the $5.5 billion after tax over 18 years, it's only about $300 million a year. And so when I think about that in the context of free cash flow of about $1.5 billion, how do you think about changes you may or may not have to make to your historical capital deployment strategy?
And then, Jim, maybe my follow-up for you would be, is there anything you can do in this low interest rate environment to maybe get creative on how you fund or pay for settlement? Or do you just anticipate this may be something that you fund out of free cash flow?
Steve Collis
Yes. Glen.
Again, I think I will answer -- Jim and I answered the last question pretty thoroughly. We were always contemplated.
And our first priority is, of course, always internal investments, and we did about $360 million, $370 million this year. And we have always robust requirements from the business, which also gets well scrutinized.
But essentially, they been some of our best returns and the area of interoperability, et cetera, those are very important for us. But as we look at different liquidity options, as we look at the cash holding and the free cash flow, we really -- we'll keep on looking at being that preferred place for shareholders to invest.
Jim has a comment as well.
Jim Cleary
Yes, Glen. As I commented earlier, our capital deployment priorities remain unchanged.
We're certainly cognizant of the potential settlement and the impact of the settlement as we consider capital deployment. But at the same time, it's really important that this doesn't change our strategic focus and the need to invest in our business and return capital to shareholders.
And as everyone knows, the other important piece of running our business is remaining investment grade, and that's something that we've been aware of and conscious of throughout the opioid discussions.
Steve Collis
Thank you. Next question, please?
Operator
Next question will come from George Hill with Deutsche Bank.
George Hill
Steve, I'm going to ask kind of a characterization question, first of all, with the fiscal '21 guidance, we talked about very small moving puts and takes as opposed to any large moving puts and takes. It almost seems like, what I would characterize, as a normal year going back to all the pricing concerns and everything that we've seen scratching back to 2015.
I guess I'd ask, would you characterize it that way? And then my quick follow-up would be, as it relates to the '21 guidance, can you talk about how you're thinking about volumes relative to the pre-COVID baseline?
Steve Collis
Yes. George, thank you.
I mean it's interesting that you're referring to the past 12 months with all the recurrences that we've had, not necessarily for AmerisourceBergen but in our society as a normal year. But look, the resilience of our businesses were truly on display.
We had, of course, the spike in March and in the -- the softish April and May. And if you go back to those times, the confusion that we had, so I think we've had also -- in 2009, we had the fiscal crisis and the worldwide recession.
And our business was extremely recession-proof in those times as well. And payers keep paying, our customers keep on seeing their patients and keep on really finding ways to access patients.
So I think if you think about fiscal year '20, the resiliency overall, the way that some of our businesses that were a bit softer, including, say, even our production, animal health businesses came back. Those are all very important to us and I think a good reason why we performed the way we did.
If you look at fiscal year '21, we expect that overall providers will be able to navigate through any surge in the virus in patient loads very effectively. I think that we're much more aware of patient treatments, more effective therapies that are available and that have been improved or brought into utilization, even now one for FDA utilization.
So we're quite optimistic about our providers' abilities to sustain and manage through any prolonged COVID crisis. And then some of the trends that we've talked about, we've talked about them a lot, including our portfolio of customers and the businesses.
We are pharmaceutical centric and our ability to do incredible business continuity planning, which should not be underestimated, I think, positions us very well. Jim, I see you have a comment?
Jim Cleary
Yes. And I think the last 6 months of fiscal year '20 -- well, all of fiscal year '20, but in particular, the last 6 months of fiscal year '20, we really demonstrated the resilience of our businesses to operate in this environment.
And so that gives us good confidence in our fiscal year '21 guidance as we look at mid-single-digit revenue growth guidance and mid-single-digit operating income guidance for fiscal year '21.
Steve Collis
Next question, please, operator?
Operator
Our next question will come from Charles Rhyee with Cowen.
James Auh
This is James, on for Charles. I just had a question on Other.
The performance in Other was strong this quarter, adjusted op income up 21%, up 5% for the year, which is ahead of the fiscal '20 guidance despite COVID. But can you speak more on what drove the strong growth in the quarter and then some of the puts and takes heading into fiscal '21?
Jim Cleary
Sure. And in the Other segment, yes, we did have a very strong quarter, up -- operating income up 20% and we did hit 5% operating income growth for the year, and we're guiding growth next year to mid-single digits.
And we saw some of the businesses and Other be a little bit more impacted by COVID during our third fiscal year, but really come back nicely in the fourth fiscal quarter. Really, kind of the standout business in the Other segment has been our World Courier.
World Courier has really has demonstrated the value of its service in global specialty logistics that manufacturers really valued during this environment. And so that's been a standout and really very strong momentum to into next fiscal year.
But we're really seeing good performance during the quarter from other businesses also. We saw MWI with 8% revenue growth, including double-digit revenue growth in companion animal and have returned to growth in production animal also during the fourth fiscal quarter, and we saw solid performance out of Lash and other businesses.
So we think those businesses are very well positioned going into fiscal year '21.
Steve Collis
Next question, please?
Operator
Our next question will come from Eric Percher with Nephron Research.
Eric Percher
I want to return to the theme on pharmaceutical growth and maybe some of the seasonality. So I think we heard you loud and clear for medium in Q1.
I would love to hear any thoughts you have on COVID impact as we get through the middle of the year, how meaningful that is? And then 2 other specifics.
One would be generic pricing stable, is t less of a benefit than it was when we were moving from high deflation to lower deflation? And last of the 3, in the independent pharmacy marketplace, there's been reports of you extending your largest customer there for a long contract.
Did that have any negative in this year that might be unique relative to a normal year?
Jim Cleary
Yes. Let me start out there, Eric.
So you asked about kind of seasonality in pharm distribution as it relates to fiscal year '21. And again, I think what the second half of fiscal '20 demonstrated was our resilience and our ability to perform well and have solid growth in the COVID environment.
And so as we look to seasonality this upcoming year, you've commented, we do have that tailwind, the $20 million tailwind in the first quarter from exit of PharMEDium. In the second quarter, we do have a little bit more of a tougher comp, because as we've commented before, we saw sales spike in the month of March last year with the onset of COVID.
So that creates a little bit tougher comp during the second quarter. But I think really kind of the key thing is the resilience of the business.
And of course, we track the volumes in all of our businesses very closely, and we've just seen strong resilience in fiscal year '20 that we would expect to continue in fiscal year '21 in this environment. And then on generic deflation, the question you asked on generic deflation, we saw generic deflation moderate as we've commented during fiscal year '20, and our expectation for fiscal year '21 is for generic deflation to be consistent with what we saw in fiscal year '20.
And with regard to independents, and what we see an independent, Steve, I'm not sure if you'd like to comment at all on independents?
Steve Collis
Yes. I mean I'd like to -- I think you're talking about our largest pharm group customer.
And there's nothing to really comment on there. That's -- we're managing through, and that's really around pricing, balancing that we have talked about with all customers.
So kind of nothing important to comment on there at all, Eric.
Operator
Our next question will come from Steven Valiquette with Barclays.
Steven Valiquette
Congrats on these results. So the U.S.
elections obviously are not quite concluded yet as we all know. Just curious if you have any updated thoughts just on the outlook for drug price reform going forward, with at least some visibility on a split Congress.
But maybe just within your overall FY '21 guidance, do you make any sort of allocation for potential changes on either international pricing parity or other things? Or does all that just get absorbed within the guidance range?
Steve Collis
Steve, my 88-year-old father called me this morning and said, "What's going on in Pennsylvania. Why can't you get your results?"
So I don't think that, that was quite as directed as this comment. But on policy, I think we always go back to some of our key themes.
It's really important to remember that pharmaceuticals are the most efficient form of source of care. And that I think people sometimes forget -- that not you obviously, but that total health care spending, we actually are under 10% now and overall increases have been pretty reasonable.
So I think those are the themes that we try to highlight. And of course, if there were any changes that you referenced like the international pricing, those should be done thoughtfully and then transitioned in a sensitive way.
So I think you've seen the market rallied yesterday on health care stocks. And I think we -- at AmerisourceBergen, we have a seat at the table, we are involved.
We've really advanced in that area. We often get seen as experts on a lot of these reimbursement and policy areas as it affects our customers.
And that's a big part of our focus, right? We'll continue to advocate on behalf community-based care.
We will continue to be a fair partner to pharma and buy on those sort of organizations. And we'll also look to make sure that anything that affects our industry is fairly legislated like the pedigree rule is a good example of that, things like that.
So we think it's important. And also AmerisourceBergen, of course, really benefits as a mutual fund of all pharmaceutical-based spending.
So we will represent in all the segments, so you should just think about that. I think operator, we have time for -- no more questions, okay.
Our Investor Relations head is putting an end to questions. So I'm going to just end up by saying we're excited to finally be in fiscal year '21.
We're focused on execution and growth in fiscal year '21, which we now just completed October. Most excitingly, from a personal point of view, I remember when I joined the former Bergen Brunswig about 27 years ago that we were doing about $3 billion or $4 billion in sales.
And potentially, this next year, this upcoming year when we could celebrate the 20th anniversary, we all celebrate the 20th anniversary of Amerisource and Bergen merging, we could record a $200 billion in revenues, which would be quite a momentous achievement for a 20-year-old company. So just let me end by saying that we're excited about fiscal year '21.
We'll also be opening new headquarters for our company. And we're hoping that we can celebrate together with our wonderful associates that have done such a great job throughout this year.
We are well positioned to deliver growth and create stakeholder value as we are guided by our purpose of being united in our responsibility to create healthier futures. Thank you for your time today.
I know it's been a busy morning. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.