Feb 4, 2021
Operator
Good day, and welcome to the AmerisourceBergen Fiscal 2021 First Quarter Earnings Conference Call. All participants will be in a listen-only mode.
After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.
I would now like to turn the conference over to Bennett Murphy, Senior Vice President, Investor Relations. 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 2021 First Quarter Results.
I am Bennett Murphy, Senior Vice President, Investor Relations. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO.
Steve Collis
Thank you, Bennett, and good morning to everyone on the call. AmerisourceBergen has had a strong start to our fiscal 2021 year.
We delivered exceptional results, driven by differentiated commercial solutions with revenues of $52.5 billion for the first fiscal quarter representing growth of 10% year-over-year and our adjusted EPS increasing 24% versus the prior year quarter. Building upon our business resilience, our teams executed and leveraged our capabilities to create value throughout the supply chain.
Our focus-driven culture continues to empower our associates to think, plan and act decisively to support all of our partners and to facilitate patient access to critical medical treatments. In addition to these results, as we announced in January, we entered into a strategic transaction with Walgreens Boots Alliance to acquire the majority of its large healthcare business and extend and expand our existing distribution agreement.
As we have said, these agreements are part of the next evolution of enhancing AmerisourceBergen’s ability to deliver innovative solutions for our partners, further building on our platform to deliver key distribution capabilities and value-added services to support patient access in new geographies. AmerisourceBergen’s ongoing focus on patient access means providing innovative services and solutions to support our manufacture partners and provide customers with our differentiated value proposition.
Jim Cleary
Thanks, Steve, and good morning, everyone. My remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated.
Growth rates and comparisons are made against the prior year December quarter. For a detailed discussion of our GAAP results, please refer to our earnings release.
Operator
The first question today comes from Glen Santangelo of Guggenheim Securities. Please go ahead.
Glen Santangelo
Yes. Thanks.
Good morning and thanks for taking my question. Jim, I just want to follow-up with you on the guidance.
It’s kind of hard to reconcile all the moving pieces in the fiscal 2021 guidance. You’ve raised the guidance last month when the company announced the Alliance Healthcare acquisition and now you are raising it again today with these better than expected 1Q results.
So, could you maybe help us think about maybe what has changed from the beginning of the fiscal year taking into consideration some of the incremental COVID-related benefits you called out in the release and your prepared remarks? Thanks.
Jim Cleary
Glen, thanks a lot for the question. I’d be happy to talk about guidance and some of the moving pieces and first of all, I’ll say that of course it’s early in our year and at this stage after the completion of our first fiscal quarter.
We found a healthy increase in guidance versus our original guidance in November that were up $0.20 at the lower end of guidance and up $0.15 at the higher end of guidance. And this is really due to the fact that we are seeing positive trends across our businesses and really strong execution across the business both in Pharmaceutical Distribution and in Commercialization and Animal Health.
And some are based on positive trends that we are continue to see in Pharmaceutical Distribution include, continued very good performance in Specialty Physician services, very strong performance also in Health Systems including the distribution of COVID treatments. We are seeing strong biosimilar growth in Q1 in both Specialty Physician services and in Health Systems and very good growth at some of our largest customers and broadly across our businesses.
And then Commercialization Services and Animal Health, we are seeing strong growth in MWI and World Courier with continued positive trends. And so, as we think about guidance beyond these overall positive trends that I’ve mentioned just now in my prepared remarks, there are also some noteworthy moving pieces to call out related, first of all to the exit of PharMEDium.
We had our final tailwind in Q1, a $20 million tailwind related to the exit of PharMEDium in Q1, which of course doesn’t repeat in future quarters. We also had, which I mentioned in my prepared remarks, the inventory write-down recovery in Q1.
That was a $10 million benefit to GP in Q1 which of course doesn’t repeat in future quarters. And then also in Q2, we begin to lapse the significant year-over-year growth rates related to biosimilar utilization.
And so the contribution to operating income will continue to grow from biosimilars but not at the same rates we saw in the last three quarters of fiscal 2020 or the first quarter of fiscal 2021. And then also, a key point with regard to our guidance assumptions, is our guidance assumes that our sales of COVID therapies will be significantly lower by the balance of the year than they were in the first quarter, particularly during this second half of the fiscal year.
Regarding OpEx, we are starting to compare to the part of the fiscal year that had notably low expenses, particularly in the second half of the fiscal year. And as you’ll recall, we called out in fiscal 2020, particularly in the back half of the year, that last year benefited from lower OpEx growth associated with lower healthcare costs and travel.
And then just finally, Glen, there is a couple things below the operating income line. We assume in our guidance that the acquisition as per the Alliance acquisition has issued a few months before closing the acquisition and we have associated carrying costs.
And then, also importantly, there is no share repurchases in our guidance as we prepare for the acquisition. So, overall, I’d say this, we feel very good about the increase in guidance.
The fundamentals in our business are strong as evidenced by the excellent Q1 results and we’ve done a good increase in guidance, particularly given the fact that it’s early in the fiscal year.
Operator
The next question comes from Eric Coldwell of Baird. Please go ahead.
Eric Coldwell
Thanks. Jim, first, before my question, I just have to say, you raised guidance here for the second time in a month and then you tell you saw seven things that are headwinds.
So I am sure, the underlying performance has to be pretty fantastic if that’s the case or at least headwinds for the rest of the year I guess, we wouldn’t call it. I am really interested, you’ve talked a lot about patient access and manufacturer services and I think in the past the street perhaps thought that was maybe a bit more lived service than it really is.
I mean, we are seeing it with these $2 billion revenue be it in a quarter with low scrips and low cough cold flu season. You’ve talked a lot about COVID therapies and I know you’ve had several exclusive deals with manufacturers.
I am curious if you could possibly quantify the revenue impact and maybe even the margin impact if you are willing to go that far on the antiviral and antibody distribution to Health Systems that you’ve highlighted a few times today?
Jim Cleary
Yes. Sure.
Absolutely. First of all, thank you for your positive comments on the quarter.
Yes, the fundamentals of our business and the execution and the performance of our businesses have been very strong. With regard to the impact of COVID therapies, approximately $0.12 of EPS in the first quarter is due to the net impact of COVID and this reflects the important work we are doing distributing COVID therapies.
And it also includes elevated expenses associated with things like, associate bonuses for frontline associates, cleaning cost of payroll ramp which represents things like quarantine pay overtime and temporary health and that the expenses that I just described were a couple pennies during the quarter and are included in the $0.12 of net benefit to EPS during the quarter that I just mentioned. And I think one important thing to call out is that our guidance does assume that our sales of COVID therapies will be significantly lower for the balance of the year, particularly in the second half of the year.
But some will be net effect during the quarter was $0.12 of EPS.
Operator
The next question comes from Lisa Gill of JPMorgan. Please go ahead.
Lisa Gill
Hi. Thanks very much.
And good morning. Great quarter, as well and as we think about just a couple moving parts, Jim I just want to understand the renewed relationship with Walgreens.
So, generally, when you have a contract that renews and you extend the length you end up at about some amount of pricing or do something else of, is there anything attached to this new extended relationship with Walgreens as we think about what the margin structure of the overall business will look like going forward, is my question. And then secondly, I just wanted to understand underlying utilization trends.
You talked about going into the March quarter that there were some things that were pulled forward a year ago. But what have you seen here in the first months of the March quarter around general utilization?
And how do we think about cough cold and flu impact on your business?
Steve Collis
Hi Lisa. Thanks for your comments.
I’ll take the first question. question if I don’t answer this.
I think you can hold the guidance. But, I just think we should got back to the 2013 deals and it was really a remarkable deal that in many ways, thanks to our industry.
– of course was a key feature. There was a big change in our industry and we were able to get much more competitive pricing for generics.
But also the way we structured the distribution agreement with taking on the generic stuff of Walgreens which I think has been a terrific benefit to not only Walgreens, but to ourselves and our scale and leverage. And also brought again more competitive pricing to our customers.
So, the way we seek that up was really brilliant I think and very – it’s and the agreement has self-regulating mechanisms and so working through 2029 which this is next phase of contract will go through. We took into account changes in brand mix, many areas like that.
So, we didn’t really have to make any adjustments because the market mechanisms were really comprised. And then the second part of your question, I’ll leave Jim to answer.
Jim Cleary
Yes. The second part of your question was on utilization and I will say, on the – with regard to the Walgreens relationship, we are really excited also about them expanding the agreements and all the initiatives that we are going to be working on with Walgreens with regard to growth and efficiency around things like sourcing with just like Distribution and the potential synergies that we have targeted there.
And then, on utilization, we aren’t really calling out anything on January at this point. We are still in the first few days of February.
But I’ll just comment then on the first quarter and the first quarter of the year, we really saw very strong fundamental trends throughout our businesses many of which we talked about in the prepared remarks. And that’s what I was really focused on and we really focused on as a company is, the sales data, and sales trends in our businesses and probably given our strength in specialty, clearly we’ve seen strong trends in specialty physician services and strong trends in Health Systems.
But I’d also say just broadly across our businesses, we saw good volume and profitability trends across our businesses in both Pharmaceutical Distribution and our Global Commercialization Services and Animal Health businesses.
Steve Collis
Thanks.
Operator
The next question comes from Robert Jones of Goldman Sachs. Please go ahead.
Unidentified Analyst
Hey. This is Kevin on for Bob this morning.
Thanks for taking the questions. I just wanted to – in the Other segment, growth was obviously pretty strong and are coming around like 17%, I think year-over-year.
I know you guys talked about the overall COVID impact. I wanted to know any of that could be attributed to the Other segment.
And then, just as we are looking out over the balance of the year, guidance is calling for growth somewhere south of that. I know you have somewhat easy comp in fiscal 3Q.
Is there anything just on the cadence over the course of the year and what might drive that sequential deceleration would be helpful.
Jim Cleary
Sure. So, with regard to Other segment, we did have a very strong quarter with revenues up 11%, operating income up 16% and you had asked about the impact of COVID on the Other segment and it really calls probably the one thing, I’ll call out is that, it’s been an opportunity for World Courier really to prove its value to manufacturer partners with things like direct-to-patient capabilities and with things like just start best-in-class solutions being able to help manufacturers navigate the complex environment for global logistics that has become more complex in the COVID environment.
And so, COVID has enabled the World Courier to really show its value. And then, I think the second part of your question has to do with the guidance.
And we’ve really kind of gone through guidance in the prepared remarks. And the first question, I guess, you talked about cadence and so the one thing that I’d reemphasize is that we look at cadence for the year, we had a particularly strong quarter in the March quarter of fiscal 2020 as there was a pull forward of sales during the month of March with the onset of the COVID.
And so, that makes the March quarter 2021 a little bit tougher comp.
Operator
The next question comes from Ricky Goldwasser of Morgan Stanley. Please go ahead.
Ricky Goldwasser
Yes. Hi.
Good morning. And congrats on the quarter.
So, thinking about kind of the vaccine, I understand that you are doing kind of outside the U.S., not yet into U.S. But, how do you assume the market is going to evolve?
And what could be the opportunities for U.S. specialties I think we are waiting for the JNJ vaccine approval that could change some of the access points in the marketplace.
So, how do you think about your potential role there?
Steve Collis
Hi, Ricky. Thanks for the question.
So, I actually was on a couple of calls on Dr. we had Dr.
Gottlieb as guest at our ThinkLive Commercialization Summit. And of course, we are all fixated on this.
And I do believe that the U.S. is getting tremendous amounts of supply in the next couple of months.
And the pharmaceutical distribution is highly efficient and sophisticated. I kind of when people point to any impediment to vaccination as distribution and it’s just September and we believe that the people will get the patients will – the supply chain will not be a problem.
As you know, the U.S. has got enough appropriate infrastructure to ensure accurate and timely delivery.
I also do appreciate that in the U.S. we have seen that this already enhances a lot of distribution and supply chain as the whole COVID pandemic has really disclosed the importance and we’ll obviously talk about companies like AmerisourceBergen being then visible to that organization and I think that’s really true to without us getting the products to market and the access that we talk about so much has been – will not be as efficient as it is.
We are doing the distribution in Canada. Of course, Canada is sourcing the product from Europe.
We are proud of that role and we’ll are also proud that our World Courier business is doing some very complicate logistics. We actually heard again at the ThinkLive Summit the story of Norway where we had to – to get some products to remote on and before that expire.
So, these terrific stories are, I am sure that everyone involved in this unique logistics and distribution challenges has got great stories to tell. More of that, I would just say our future a large company and of course we’ll let them talk about it is also playing role in vaccine distribution.
So, ABC is well positioned to be in the same talk about for logistics and distribution. Thanks.
Operator
The next question comes from Eric Percher of Nephron Research. Please go ahead.
Eric Percher
Thank you. Steve, maybe I’ll ask you for some insight on distribution to the hospital channel.
Has the growth been dominated by the Gilead and Lilly products where you had talked about exclusives publicly. Are you seeing additional products?
And I think it’s hard to track product demand in the hospital channel, but we certainly can track the number of hospitalizations for COVID. So, has it just been more therapies adopted or has it been simply about the number hospitalized?
Steve Collis
No. It’s – there have been about 12 or 16 UA products and we are playing a prominent role in almost all of them because of the unique capabilities that AmerisourceBergen has on data reporting.
We have every hospital in the U.S. just about registered as a customer and the licensing.
And then, disability with limited supply and unprecedented demand in – and really waves of demand to call it a term that our competitor used a lot non-linear demand. So, it’s just based on patient inputs and so, it’s still quite extraordinary the role that we played and you will see that of course fluctuate from quarter-to-quarter and demonstrate a lot of time explaining that.
But the therapies aren’t opened and we hope that there won’t be as much in demand as that would in the first quarter. So, thanks.
Operator
The next question is from George Hill of Deutsche Bank. Please go ahead.
Unidentified Analyst
Hi. This is Charlotte on for George.
Thanks for taking my question. Can you expand more on what drove the gross profit margin expansion in the core drug segment?
And given the growth of – brand is in their conversion we would have expected much larger incentive. So, if you could just provide any color there?
Jim Cleary
Yes. Sure.
Yes, we did see very good margin performance during the quarter. I mean, it’s like that, margins were up 15% or 12 basis points and let me kind of go through some of the things that drove that.
One was increased specialty product sales as well as Specialty Physician Services and Health Systems. Really, in both Specialty Physician Services and Health Systems, included biosimilars.
But as we’ve talked a lot about in Health Systems it also included COVID-19 treatments. And so, really kind of those – that was one of the drivers of our increased gross margin during the quarter.
And we continue to see the positive trends in biosimilars. But of course, as we commented on, we began to see significant utilization in biosimilars in the second quarter of fiscal 2020 and we start to lapse that significant year-over-year comparison difference now.
And so, we’ll continue to see growth in biosimilars, but perhaps at a lower rate. Other things that helped our margin, getting back to your question, we are seeing growth overall in our higher margin businesses.
So Specialty Physician Services, we talked about MWI and World Courier are also higher margin businesses. Growth in those higher margin businesses got into our gross profit.
And then the other thing that I’ve called out is, exiting the PharMEDium business helps our – helped our gross profit. About half of the benefit was in GP and the other half in OpEx.
So that helped our gross profit. And then, the reversal of the inventory write-down reserve that I mentioned, that also helped our gross profit during the quarter.
So, there were a number of different things, but really the performance of our businesses was excellent and the performance of our higher margin businesses was particularly strong during the quarter.
Operator
The next question is from Charles Rhyee of Cowen. Please go ahead.
James Auh
Hi. This is James on for Charles.
You’ve noted strong performance in MWI and World Courier, which drove other operating profit growth. But can you just talk more about, maybe how the consultant services business is performing in the quarter?
And some of the dynamics that you are seeing in that business?
Steve Collis
Yes. Our Consulting business continues to perform well.
It’s an important part of our business, our labs business and our – business. At the labs business for instance, we are really kind of fully into rolling out Fusion and rolling out Fusion is going well and we view that to be a nice competitive advantage for us.
And so, our consulting businesses are very important businesses to us, provide really important manufacturer services, things that they’ll have good synergies with some of Alliance’s manufactured services business. So we look forward to that collaboration.
And so, overall, performance there is as expected and continues to be super important part of the company just grow us fast during the quarter is MWI and World Courier businesses. And as I’ve said, the ThinkLive Commercialization Summit was held this week.
It’s the first virtual one and really we took our whole businesses and focused on emerging trends like cell and gene therapies, access and reimbursement issues, co-pay accumulators, various issues that are the hallmark to manufacturers’ minds. And I had to stop listening to the – I just ran myself away from listening because it – quantity that we were able to provide.
We have such excellent people that understand the manufacturer side and understand the commercialization process, product lot cycles, emerging trends on innovation, it was really – I couldn’t have been more proud of the way that our people showed up in this conference and I look forward to seeing the rest of this because that really AmerisourceBergen’s expertise. You think of the work that World Courier does, it’s remarkably complex and we do it so well and we have such outstanding people and we displayed leadership in this area for many years as we have the collection, so many of our other commercialization businesses.
So, thanks for the question.
Operator
The next question is from Steven Valiquette of Barclays. Please go ahead.
Steven Valiquette
Thanks. Good morning, everyone.
So, I just want to check the box just on the brand pricing and generic price taken in early calendar 2021. I am guessing that brand pricing maybe has been in light of your expectations.
On the generic side, there is a little bit of a bump up in actual price increase activity because some that has called your attention or you would also characterize just overall generic pricing is going to be in line with your priorities. Just little more color there will be great.
Thanks.
Jim Cleary
Yes. Hope we could say for both in line with our expectations, brand and generic pricing are trending in line with the original expectations we had for the year.
You asked about generics. We saw that generic deflation moderated in fiscal 2020 and there was a leveling off at the end of the fourth quarter, but still in general range that we experienced about the year.
And then we are expecting similar levels of generic deflation in 2021 that we saw in 2020. So, as I said, both are trending in line with our expectations.
Operator
The next question is from Jailendra Singh of Credit Suisse. Please go ahead.
Jailendra Singh
Thank you. Actually, I want to drill down a little bit more into your MWI business.
Maybe can you parse out some of the trends you saw in the quarter, as well as more recently when it comes to both production and companion market, what are your expectations for the remainder of fiscal 2021 in terms of getting back to pre-COVID levels and production market and the degree of strength you expect in companion? Help us get a little color there please.
Jim Cleary
Yes. First of all, I’ll say that, strictly that the execution of our Animal Health business was just excellent during the quarter whether it’d be revenues, GP, OpEx, just really strong execution in customer service and customer focus by the team.
The growth in the quarter really came from the companion animal market, which is very strong right now. The production animal market has been more impacted by the COVID environment, but we feel very optimistic about the underlying strength and future of both the companion animal and production animal market.
Operator
The next question is from Kevin Caliendo of UBS. Please go ahead.
Kevin Caliendo
Hi. Thanks for taking my call.
I hate to bring up opioids, but just given that one of your competitors also reserves, it does seem like we are very close to the end here. I am not going to ask you for specific timing or anything like that, but how should we expect given what you know now a settlement to look like in terms of how you would play out lump sums or extended over the 18 years?
What’s your expectation of how a settlement if and when is done would take your balance sheet and cash flows?
Steve Collis
Yes. We continue to see progress in our discussion with the various parties.
We did record an accrual at the end of our fiscal year – September, year end. As believe the liability - and profitable.
Given ongoing discussions we really are limited in the comments unfortunately we can make about it. Thanks for understanding.
With that, I am going to close out today’s call. I couldn’t be more proud of the execution in the last quarter.
It proves that AmerisourceBergen continues to utilize our scale, capabilities and expertise to deliver differentiated solutions for our partners. Our strategic focus on pharmaceuticals, long history of leadership and investment in specialty, and strategic partnerships with customers and manufacturers continues to be foundational to our success.
As we look ahead with excitement for the opportunity to build on our differentiated platform with the Alliance transaction, I continue to be inspired by internal focus on also advancing our talents, culture and workplace. We are proud of our associates and guided by our responsibility to create healthier futures.
Thank you for your time and attention today.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.