Hello, everyone, and welcome to the AmerisourceBergen Third Quarter Fiscal 2022 Earnings Call. My name is Victoria, and I will be contour call today. . I'll now pass over to your host, Bennett Murphy, Head of Investor Relations to begin. Please go ahead.

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2022 third 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. On today's call, we'll be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investor.amerisourcebergen.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of QS assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K. AmerisourceBergen assumes no obligation to update any forward-looking statements, and this call cannot be or broadcast without the express permission of the company. (Operator Instructions) With that, I'll turn the call over to Steve.

Thank you, Bennett. Good morning and good afternoon to everyone on the call. Before we discuss our results for the quarter, I want to provide a brief update on opioid-related litigation. As previously disclosed, we have reached an agreement for a settlement with the state of Oklahoma that is consistent with the state's allocations under the comprehensive settlement agreement. That brings the total number of states saving opioid-related claims to 48 or 49 eligible states. In July, we were pleased to receive a ruling from a federal judge that held that our distribution of FDA-approved medications to licensed and registered health care providers in Capell County and the City of Huntington was not a public nuisance, and we are optimistic the ruling will hold up upon appeal. Additionally, we reached an agreement with the remaining counties and municipalities of the state of West Virginia to resolve opioid-related claims. We are encouraged by this continued progress, and we will not comment deeply at this time. AmerisourceBergen continues to work diligently with our partners to combat drug diversion while supporting real solutions that help address the crisis in the communities where we live, work and serve. Turning now to our third quarter of fiscal '22. AmerisourceBergen delivered another quarter of strong results driven by continued high levels of execution across our company and the strength and resilience of our businesses. During the quarter, revenue was up 12.5% over the prior year period to $60 billion. Adjusted operating income increased by 20% and adjusted EPS grew by 21%. These strong results and the increase in our full year outlook, which Jim will discuss in greater detail, are driven by our team members' continued strong execution, the resilience of our businesses and our differentiated solutions. Our business is further enhanced by the strength of…

Thank you, Steve, and thank you all for joining us on today's call. Before I turn to our results, as usual, my comments will focus primarily on our adjusted non-GAAP financial results. Growth rates and comparisons are made against the prior year June quarter. For more details on our GAAP results, please refer to our earnings press release. In our third quarter, AmerisourceBergen continued to deliver strong results as our teams executed on our strategic imperatives. Our core foundation in pharmaceutical distribution and suite of complementary higher-margin, higher-growth services around the world position us well to deliver differentiated long-term value creation supported by our commitment to talent, diversity, equity and inclusion and ESG. As Steve mentioned, in June, we passed the 1-year anniversary of the Alliance Healthcare acquisition. Our purpose-driven teams have worked diligently on integration and execution, and we are pleased that the acquisition has delivered high teens EPS accretion in its first year as expected. Turning now to our third quarter results. AmerisourceBergen finished the quarter with adjusted diluted earnings per share of $2.62, a 21% increase with solid operating income growth in both segments. Our consolidated revenue grew approximately 13% to $60.1 billion, driven by revenue growth in both segments. Consolidated gross profit increased 27% to $2.1 billion as a result of increases in gross profit in both segments. Gross profit margin grew by 39 basis points to 3.44% driven by the Alliance Healthcare acquisition, an increase in the U.S. healthcare solutions segment and good performance in the International healthcare solutions segment. Consolidated operating expenses were $1.3 billion, up from $996 million as a result of higher distribution, selling and administrative expenses as well as depreciation expense primarily due to the Alliance Healthcare acquisition. Consolidated operating income was $756 million, up 20%. The increase was driven by…

. And our first question comes from Elizabeth Anderson at Evercore.

And thanks for all the details on the back half guidance. I was wondering, given all the puts and takes that you've been talking about and sort of trying to establish, as you said, sort of like phase we are in the pandemics like run rate trends, can you talk about the underlying volume growth assumptions in not only your -- what happened in the third quarter and then sort of underlying your guidance in the fourth quarter? I'm just trying to sort of parse out like where you're seeing strength in those and relative areas of weakness in both the sort of visits and sort of core retail scripts versus maybe some of the mail acceleration that you talked about in both the U.S. and Europe.

Yes. So thanks a lot for that question, Elizabeth. And I'd say overall, what we're seeing across our business is resilience and strength. And of course, those are words we used a lot in the prepared remarks. But getting kind of a little bit more into the detail, we are seeing strong underlying fundamentals. We're seeing good utilization trends, and we're seeing good volumes both in the U.S. and international, and I described this as being in line or somewhat ahead of our expectations. We're definitely aided by our leadership in specialty distribution, and that's allowed us to capture the strong trends there, the benefits of the strong specialty utilization trends which we would expect to continue. And so that's one area where we've seen strong trends, and you did comment, as we did in our prepared remarks, that we did see some increased volumes in mail also during the quarter. But overall, I think that we've just continued to demonstrate resilience and strength in the various phases of the pandemic as we look over the last 2.25 years or so, the fundamentals and the utilization trends have really been quite good. And we're seeing really the same thing in the various phases of the economic cycle. We're continuing to see strong fundamentals and utilization trends really across our businesses in the U.S. and international, which is largely due, of course, to the pharmaceutical-centric nature of our businesses

Our next question comes from Lisa Gill at JPMorgan.

First, I just want to start, Jim, with your comments initially around 2023 and just get your thoughts on how you're thinking about foreign exchange. You talked about the dollar being stronger, and you didn't specifically call that out as we think about 2023. So that would be my first question. And then second, more broadly speaking, just given your position on how strong you are in the specialty side and given what we're seeing on the biosimilar side, can you talk about was there any impact in the quarter from biosimilars? And how do you think about biosimilars over the next couple of years as we have a number of drugs that will lose patent protection?

Okay. Well, I'll start out and talk about 2023. And importantly, there's really no change from what we indicated during our Investor Day. On a consolidated basis, what we'd expect is organic operating income growth of 5% and then an incremental 3% from capital deployment, whether that be share repurchases or M&A. So we'd expect EPS growth of 8% on a consolidated basis. Of course, that's x COVID. So you'd have to start by taking '22 and subtracting out the $0.70 expected benefit from COVID and then grow 8% from there and then add back in whatever the assumption would be for COVID in 2023. And we're seeing a lot of the drivers in 2022 continue to be drivers in 2023, continued strength in our U.S. businesses. Clearly, our leadership in specialty will continue to benefit us. And then when it comes to international, as I said, we're seeing the business is performing well with good fundamentals. Now 2 things that we are monitoring in international: of course, our FX, which you've mentioned; and inflation also. And both those things will impact fiscal year '23. And there have been some offsets to FX in fiscal year '22, including the price adjustments that we saw in the developing country, Turkey, which have helped to offset some of the impacts in fiscal year '22. And when we report fiscal year '23 results, and when we're discussing international, we'll discuss it on a constant currency basis in addition to a as-reported basis. But overall, we feel very good about '23 as where we've done doing our planning. We're going through a detailed planning process now, and we feel very good about '23 and feel very good about the fundamentals in the business. And as I said before, there's really kind of no change to our initial thinking that we talked about at Investor Day, x COVID operating income, organic growth of 5% and an incremental 3% from capital deployment or EPS growth of 8%.

Yes. Lisa, on the biosimilars, we continue to see positive trends in biosimilars. In fact, there was a recent announcement in the ophthalmology space, which is our sweet spot the Part B side, and we'll see how that goes. We'll certainly keep you updated. Therapeutic comparability and good contracting support are helping enable physician utilization and taking cost out of the system, which will make more room for innovation. And we are very encouraged by the biosimilar. We don't specifically call it out, but it's part of the general growth of our strong specialty position in health systems and in physician practices, including oncology. But as we just had noted in ophthalmology, we're going to see an important launch as well. So we also are noting regulatory enhancements, including interchangeability, on some of the molecules. So this is a very dynamic space in which AmerisourceBergen was clearly an early adopter, and we expect to strongly participate in the system in the launch of these drugs, particularly on the Part B side. Thanks.

Our next question comes from Eric Percher at Nephron Research.

I'd like to drill into Turkey just a little bit more. And I know that operators that you have, have long experience in international. So question one would be what you're seeing in Turkey with hyperinflation and the price adjustment, have you seen this in other countries before? And maybe I'll ask you if you can just once more help us on the mechanics on the P&L. And then on the balance sheet, am I right in seeing the adjustment this quarter as completely related to the balance sheet, the $28 million? And is that a revaluation owing to the hyperinflation?

Yes, sure. I'd be happy to take that question, and thank you for asking it. And first of all, I think you're absolutely right. We've been very pleased with the management team at Alliance. And of course, they have a lot of experience in their markets and really have just shown a lot of expertise in managing the business. With regard to your question on the Turkey high inflation accounting, which was covered in our press release today, very importantly, there's no change in how we translate the P&L of Alliance Healthcare's Turkish subsidiary in our adjusted results. The -- just as you were saying, and when you asked the question, the GAAP to non-GAAP adjustments relate to the accounting impact of remeasuring various components of their balance sheet. And of course, on a consolidated basis, Turkey is a very small part of our overall results, but I will get into a little bit more detail here. The GAAP accounting items driven by Turkey becoming a highly inflationary economy is fine under U.S. GAAP. And the result is remeasurement of lira-denominated assets and liabilities at each balance sheet date using the U.S. dollar exchange rate then in effect, and that impacts recorded in our P&L. And previously, that translation was recorded as an adjustment to their -- to equity on our balance sheet. And there is a detailed discussion of this in our 10-Q, but I think very importantly, there's no change in how we translate the P&L of Alliance's Turkish subsidiary and our adjusted results.

And with respect to the P&L, it sounds like the adjustment being made by the manufacturer, it's in their interest to make that adjustment given hyperinflation. You don't really have a bearing on that, but it helps offset. Is that the right way to think of it?

Yes. And so the way that it works there is due to the due to the currency devaluation that's happened, there's an annual price increase that happens. And that annual price increase is based on the value of the Turkish lira versus a basket of currencies, and that price increase happens every year. And this year, that price increase was particularly large, and there's actually been 2 of them because the devaluation has been higher than typical.

Our next question comes from Charles Rhyee at Cowen.

I just wanted to follow up on international a little bit more and maybe fold into what Eric was asking, but -- so you maintain the full year alliance EBIT guide, right, 6 85 to 7 15. And I think, Jim, you said last quarter, because of the currency headwind, you expect to kind of come in towards the lower end, it sounds like now you're saying that currency has gone even worse. We're maintaining the guidance. So clearly, it kind of suggests that underlying operating performance has been better. I guess 2 questions has been -- when we think about the modeling fiscal '23, should we be -- and assuming currency stays flat, are we actually -- should be modeling on a constant currency basis, let's say, an EBIT profile that's higher than the 6 85 to 7 15 range? And then secondly, or is some of this -- how much of the benefit that keeps us in the range is coming from maybe something like Turkey?

Yes, sure. And so there are really 2 things that keep us in the range. One is the second price increase in Turkey that we talked about. And then really the other thing is just very strong performance out of World Courier. We're seeing just a particularly strong performance there World Courier has had a long history of growth and good margins. And what we've seen in the most recent quarter is higher weights of World Courier shipments and also World Courier of receiving good value from manufacturers for the services that we provide. And so those are really the 2 things that are enabling us to maintain our guidance for the international business and fully offset what we've seen from an FX standpoint. And like I said, when we talked about fiscal year '23 and report fiscal year '23, we'll do that and talk about it on both a constant currency basis and an as-reported basis.

Great. And just a follow-up on World Courier. Obviously, you've been highlighting how strong it's been performing. When you look at some of the CROs that have been reporting, some have talked about potential slowdown in R&D just kind of delays or cancellations, others seem to have reported fine results. Just maybe what you're seeing in sort of the clinical trial space as it relates to World Courier.

So thanks. We did have a strong quarter with World Courier as we've got a bunch of higher weight shipments, and the team is driving value on incremental services we provide, including our home direct patient services, which are important for in-home trials, and there's certainly been a development out of the pandemic. But World Courier's expertise and reputation in helping customers navigate the complexity of global logistics is very well established. We've owned the business for coming on 10 years now. And I'm proud of the investment we have made in allowing World Courier to deliver best-in-class solutions while seeing a rapid growth. And there's been a really long history of growth and good margins. which we expect to continue into Q4 and hopefully into next year and the future as well.

Our next question comes from Stephen Valiquette at Barclays.

So just a couple of interrelated questions on generic drug pricing. Yes. Just for some of the third-party data that's tracked by investors, there was a bit of an inflection in recent months on some moderation of generic drug price deflation. I guess I'm just wondering if you're also seeing any changes from your new point of the market? And then also tie it into this, is there any early view that generic drug manufacturers are maybe looking to raise prices to offset some of the inflation that they're seeing in their own higher cost of generic drug manufacturing?

Yes. So with regard to your question on generic deflation, it's been in line with the past few years. It's been in line with our expectations. Supply and demand remain in balance. And as we talked about before, our business is not as reliant on generic pricing as it has been in the past. Our teams have done a very good job of rebalancing contracts and ensuring that we receive fair compensation across brand, generic and specialty, which is important, especially as more specialty goes through mail and retail. And with regard to potential generic inflation, there certainly are higher input costs for manufacturers and it remains to be seen if they'll be able to pass on the higher cost. We're not currently expecting generic inflation. But if that does occur, of course, it would be a tailwind for our business. But as a reminder, as I said due to our contract rebalancing our business model isn't as reliant on generic pricing as it once was. Thank you for the question.

Our next question comes from Kevin Caliendo of UBS.

First, I guess, on the Animal Health segment and MWI, on a year-over-year basis, was the contribution better or worse? What's happening with that business in terms of growth and margin on a year-over-year basis? And then as a follow-up, you mentioned that ophthalmology, you're seeing encouraging signs in the ophthalmology business. What exactly do you mean by that? Is that biosimilar possibilities? Or is that just straight supply/demand?

I can start with the ophthalmology business, and then we'll let Jim who's the expert, of course, on MWI, talk about it. Our specialty physician services business. We have talked a lot about increasing our services to other physicians. As the formulary increases as there's more products available in the administration area, and probably ophthalmology is our second largest area after oncology. That's been an area where we've been very involved particularly with the launch of many years ago was really what got us into that business. And we continue to develop services. And as they are biosimilars and as there are more therapies available for in-office administration and physicians have, for over a decade, become used to administering products, there's more relevance for what we call our IPN network and our basic medical distribution, which are fundamental parts of our SBS business. So we see growth there and we see a high market share, which we've always enjoyed in that segment, consistent with or even higher than our oncology market share rate. So it's just a robust area for us. And particularly, we look forward to the opportunity to assist physicians in adopting biosimilars. So that's really -- Jim, hand over to you on MWI.

Yes. So during the quarter, MWI had growth during the quarter, had revenue growth during the quarter, but that -- but the growth rate was lower than it had been in fiscal year '20 or '21. And of course, as you well know, there are a lot of pet adoptions during the pandemic and really good growth in the companion animal business, in particular, during the first part of the pandemic. And so some of the comps were a little bit tougher now for MWI. But it still had growth in that. And it's a very strong business, and we have kind of very good confidence in the long-term prospects of both the animal health market and our MWI business.

Our next question comes from George Hill at Deutsche Bank.

And I hopped on a little bit late, so I apologize if you guys covered this. But Jim, maybe could you talk about the outlook for COVID therapies as it looks like the COVID market is going to prove to be a little bit more durable than we might have thought 3 or 5 months ago. So maybe kind of the contribution of COVID therapy is the evolution and how you guys are thinking about durability.

Yes, I'll start out here. We've been really transparent about our contribution from COVID therapies. And in Q3, our contribution from COVID therapies was $0.14 on an -- for EPS versus $0.03 in the same quarter last year as we -- we're shifting volumes of the government-owned emergency-use authorization pills. And that's -- and we're kind of keeping our guidance for the full year in the U.S. of $0.60 and, on a consolidated basis, $0.70 including international. And so if we -- compared to what we would have thought a year ago, it's certainly been a lot more durable than we would have thought. And it is something that is hard to predict and estimate. And so that's why when we talk about our guidance for fiscal year '23, we say we'll do our guidance x COVID and that 8% EPS growth rate -- the x COVID back out COVID grow 8% and then make an assumption for COVID and add that on top.

Yes. One other point, we were pleased to see the FDA update to EUA for Paxlovid, making it easier for patients to access treatments at pharmacies. And we're really proud of the increased role that pharmacists will be playing in patient care. And I think that, that's -- as I said in my prepared remarks, that's a tremendous access to consumers and patients as they look to access these treatments conveniently. So when we think about living our purpose during the pandemic, there's nothing more there's nothing that embodies it more than the work we've done with these EUA products, and AmerisourceBergen and our associates are tremendously proud of it. So this is definitely something that has been distinguishing us in the last couple of years.

Our next question comes from A.J. Rice at Credit Suisse.

I might just take a second and ask you about the capital priorities and any updated thoughts on that. I know you've called out that you continue to pay down debt that you took on associated with clients, and you also highlighted continued availability for share repurchases. Maybe just updated thoughts on priorities looking out over the next 6 to 12 months and anything else that will be a major consumption or outlay point for capital deployment.

Yes. So yes. So our capital deployment approach, of course, remains similar to what it's been for quite some time, of course, investing in the business where we have great returns, strategic M&A, share repurchases, of course, having a reasonable dividend on our stock, and we've steadily increased the dividend that we paid. We have been paying down debt, and we will meet or beat our time frame for paying down 2/3 of the Alliance acquisition debt. And also, we started repurchasing shares earlier than we anticipated. We started repurchasing shares. In the month of May, we saw a good opportunity to do that. We've repurchased about 250 million during the quarter. And as a Board meeting after that, our Board increased our share repurchase authorization to $1 billion. So we have about $1.1 billion in total authorizations now, and we would look forward to any share repurchase opportunities in fiscal year '23.

This concludes our Q&A session. I would now like to turn over to CEO, Steve Collis, for any final remarks.

Thank you, everyone, for your attention on this busy Wednesday morning. AmerisourceBergen and Jim and I and Bennett are pleased and proud to have delivered another strong quarter and another guidance raise. Our business, our talent and our capabilities we have been on show throughout this quarter and throughout the pandemic and, historically, throughout various economic cycles, AmerisourceBergen has demonstrated tremendous resilience. We are well positioned strategically with a strong track record of execution to continue to deliver long-term value for all of our stakeholders. This concludes our remarks. Thank you for your time.

Thank you, everyone, for joining today's conference call. You may now disconnect.