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Article by DailyStocks_admin    (06-18-08 07:40 AM)

The Daily Magic Formula Stock for 06/18/2008 is AmerisourceBergen Corp. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

AmerisourceBergen Corporation is one of the world’s largest pharmaceutical services companies, with operations in the United States, Canada and the United Kingdom. Servicing both healthcare providers and pharmaceutical manufacturers in the pharmaceutical supply channel, we provide drug distribution and related services designed to reduce costs and improve patient outcomes. More specifically, we distribute a comprehensive offering of brand name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers located in the United States and Canada, including acute care hospitals and health systems, independent and chain retail pharmacies, institutional pharmacies, mail order facilities, physicians, medical clinics, alternate site facilities, and other customers. We also provide pharmaceuticals and pharmacy services to workers’ compensation and specialty drug patients. Additionally, we furnish healthcare providers and pharmaceutical manufacturers with an assortment of related services, including pharmaceutical packaging, pharmacy automation, supply management software, inventory management, reimbursement and pharmaceutical consulting services, logistics services, and physician education.

Industry Overview

We have benefited from the significant growth of the pharmaceutical industry in the United States. According to IMS Healthcare, Inc. (“IMS”), an independent third party provider of information to the pharmaceutical and healthcare industry, industry sales in the United States are expected to grow between 4% and 5% in 2008 and between 6% and 9% over the next five years. IMS also indicated that certain sectors of the market, such as biotechnology and other specialty products and generic pharmaceuticals, will grow faster than the overall market.

The factors contributing to the growth of the pharmaceutical industry in the United States, and other industry trends, include:

Aging Population . The number of individuals over age 55 in the United States is projected to increase to more than 75 million by the year 2010. This age group suffers from chronic illnesses and disabilities more than the rest of the population and is estimated to account for approximately two-thirds of total healthcare expenditures in the United States.

Introduction of New Pharmaceuticals . Traditional research and development, as well as the advent of new research, production and delivery methods, such as biotechnology and gene therapy, continue to generate new pharmaceuticals and delivery methods that are more effective in treating diseases. We believe ongoing research and development expenditures by the leading pharmaceutical manufacturers will contribute to continued growth of the industry. In particular, we believe ongoing research and development of biotechnology and other specialty pharmaceutical drugs will provide opportunities for continued growth of our specialty pharmaceuticals business.

Increased Use of Generic Pharmaceuticals . A significant number of patents for widely-used brand name pharmaceutical products will expire during the next several years. In addition, increased incentives by managed care organizations to utilize generics has accelerated their growth. We consider the increase in generic usage a favorable trend because generic pharmaceuticals have historically provided us a greater gross profit margin opportunity than brand name products, although their lower prices reduce revenue growth.

Increased Use of Drug Therapies . In response to rising healthcare costs, governmental and private payors have adopted cost containment measures that encourage the use of efficient drug therapies to prevent or treat diseases. While national attention has been focused on the overall increase in aggregate healthcare costs, we believe drug therapy has had a beneficial impact on overall healthcare costs by reducing expensive surgeries and prolonged hospital stays. Pharmaceuticals currently account for approximately 10% of overall healthcare costs. Pharmaceutical manufacturers’ continued emphasis on research and development is expected to result in the continuing introduction of cost-effective drug therapies and new uses for existing drug therapies.

Legislative Developments. The Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”) significantly expanded Medicare coverage for outpatient prescription drugs. Beginning in 2006, Medicare beneficiaries became eligible to enroll in prescription drug plans that are offered by private entities. Medicare reimbursement rates for certain pharmaceuticals were impacted by implementation of the MMA by the U.S. Department of Health and Human Services (“HHS”). Further Medicare reimbursement reductions and policy changes are scheduled to be implemented in the future. In addition, effective January 1, 2007, the Deficit Reduction Act of 2005 (“DRA”) changed the federal upper payment limit for Medicaid reimbursement from 150% of the lowest published price for certain prescription drugs (which is usually the average wholesale price) to 250% of the lowest average manufacturer price or AMP. On July 17, 2007, Centers for Medicare and Medicaid Services (“CMS”) published final rules to implement these provisions and clarify, among other things, the AMP calculation methodology and the DRA provision requiring manufacturers to publicly report AMP for branded and generic pharmaceuticals. CMS has stated that it expects the federal upper payment limits will become effective for covered outpatient multiple source prescription drugs beginning in January 2008. The U.S. Congress may consider further reductions to Medicaid reimbursement and may take action before the end of 2007 to modify Medicare and Medicaid drug payment policy. These policies may adversely affect our specialty distribution business directly and our wholesale drug distribution and specialty distribution businesses indirectly.

The Company

We currently serve our customers (healthcare providers, pharmaceutical manufacturers, and some patients) through a geographically diverse network of distribution and service centers and other operations in the United States and Canada and through packaging facilities in the United States and the United Kingdom. In our pharmaceutical distribution business, we typically are the primary source of supply for pharmaceutical and related products to our healthcare provider customers. We offer a broad range of services to our customers designed to enhance the efficiency and effectiveness of their operations, which allows them to improve the delivery of healthcare to patients and to lower overall costs in the pharmaceutical supply channel.

Strategy

Our business strategy is focused solely on the pharmaceutical supply channel where we provide value-added distribution and service solutions to healthcare providers, primarily pharmacies, health systems and physicians, and pharmaceutical manufacturers that increase channel efficiencies and improve patient outcomes. Implementing this disciplined, focused strategy has allowed us to significantly expand our business, and we believe we are well-positioned to continue to grow revenue and increase operating income through the execution of the following key elements of our business strategy:

Optimize and Grow Our Pharmaceutical Distribution and Service Businesses . We believe we are well-positioned in size and market breadth to continue to grow our distribution business as we invest to improve our operating and capital efficiencies. Distribution anchors our growth and position in the pharmaceutical supply channel, as we provide superior distribution services and deliver value-added solutions, which improve the efficiency and competitiveness of both healthcare providers and pharmaceutical manufacturers, thus allowing the pharmaceutical supply channel to better deliver healthcare to patients.

With the rapid growth of generic pharmaceuticals in the U.S. market, we have introduced strategies to enhance our position in the generic marketplace. We source generics globally; offer a value-added generic formulary program to our healthcare provider customers; and monitor our customers’ compliance with our generics program. We also sell data and other valuable services to our generic manufacturing customers.

We believe we have one of the lowest cost operating structures in pharmaceutical distribution among our major competitors. We launched our Optimiz ® program in fiscal 2001 for AmerisourceBergen Drug Corporation, which reduced our distribution facility network in the U.S. from 51 facilities in 2001 to 26 as of September 30, 2007. The program, which is complete, included building six new facilities and closing 31 facilities. We closed our final two facilities in fiscal 2007 to complete the plan. These measures have reduced our operating costs and our working capital. In addition, we believe we will continue to achieve productivity and operating income gains as we invest in and continue to implement warehouse automation technology, adopt “best practices” in warehousing activities, and increase operating leverage by increasing volume per full-service distribution facility.

In an effort to supplement our organic growth, we continue to utilize a disciplined approach to seek acquisitions that will assist us with our strategic growth plans.

In October 2007, the Company acquired Bellco Health (“Bellco”), a privately held New York distributor of branded and generic pharmaceuticals, for a purchase price of approximately $181 million in cash. Bellco is a pharmaceutical distributor in the Metro New York City area, where it primarily services independent retail community pharmacies. The acquisition of Bellco expands the Company’s presence in this large community pharmacy market. Nationally, Bellco markets and sells generic pharmaceuticals to individual retail pharmacies, and provides pharmaceutical products and services to dialysis clinics. Bellco’s revenues were $2.1 billion for its fiscal year ended June 30, 2007.

In fiscal 2006, we made three acquisitions to expand our distribution and service businesses into Canada. We acquired Trent Drugs (Wholesale) Ltd. (“Trent”), a Canadian wholesaler of pharmaceutical products and subsequently changed its name to AmerisourceBergen Canada Corporation (“AmerisourceBergen Canada”), which gave us a solid foundation to expand our pharmaceutical distribution capability into the Canadian marketplace. AmerisourceBergen Canada then acquired substantially all of the assets of Asenda Pharmaceutical Supplies Ltd. (“Asenda”), a Canadian pharmaceutical distributor that operated primarily in British Columbia and Alberta. The Asenda acquisition strengthened our position in Western Canada. Thereafter, AmerisourceBergen Canada acquired Rep-Pharm Inc. (“Rep-Pharm”), a Canadian pharmaceutical distributor that primarily served retail community pharmacies in the provinces of Ontario, Quebec and Alberta. The above acquisitions have positioned us as the second largest pharmaceutical distributor in the Canadian market.




Optimize and Grow Our Specialty Distribution and Service Businesses . Representing over $12 billion in operating revenue in fiscal 2007, our specialty pharmaceuticals business has a significant presence in this rapidly growing part of the pharmaceutical supply channel. With distribution and value-added services to physicians and a broad array of pharmaceutical and specialty services for manufacturers, our specialty pharmaceuticals business is a well-developed platform for growth. We are the leader in distribution and services to community oncologists and have leading positions in other physician administered products. We also distribute vaccines, other injectables, plasma and other blood products and are well-positioned to service and support many of the new biotech therapies which will be coming to market in the near future.

We expect to continue to expand our specialty services businesses, which help pharmaceutical manufacturers, especially in the biotechnology sector, commercialize their products in the channel. We believe we are the largest provider of reimbursement services that assist pharmaceutical companies to launch drugs with targeted populations and support the products in the channel. We provide physician education services, third party logistics and specialty pharmacy services to help speed products to market.

In fiscal 2007, we acquired three specialty services businesses, beginning with I.G.G. of America, Inc. (“IgG”), a specialty pharmacy and infusion services business specializing in the blood derivative intravenous immunoglobulin (“IVIG”). The addition of IgG supports our strategy of building our specialty services to manufacturers. We also acquired Access M.D., Inc. (“AMD”), a Canadian company that provides reimbursement support and nursing support services to manufacturers of specialty pharmaceuticals, such as injectable and biological therapies. AMD expands our specialty services businesses into Canada and complements the distribution services offered by AmerisourceBergen Canada. Lastly, we acquired Xcenda LLC (“Xcenda”), a consulting business that provides additional capabilities within pharmaceutical brand services, applied health outcomes, and biopharma strategies.




Expand Services in the Pharmaceutical Supply Channel. We offer value-added services and solutions to assist manufacturers and healthcare providers to improve their efficiency and their patient outcomes. Programs for manufacturers, such as assistance with rapid new product launches, promotional and marketing services to accelerate product sales, custom packaging, product data reporting, logistical support and workers’ compensation are all examples of value-added services we currently offer. We are continually seeking to expand our offerings.

Our provider solutions include: our Good Neighbor Pharmacy ® program, which enables independent community pharmacies to compete more effectively through pharmaceutical benefit and merchandising programs; Good Neighbor Pharmacy Performance Network, our managed care network, which connects our retail pharmacy customers to payor plans throughout the country and is the third-largest in the U.S.; best-priced generic product purchasing services; hospital pharmacy consulting designed to improve operational efficiencies; scalable automated pharmacy dispensing equipment; and packaging services that deliver unit dose, punch card and other compliance packaging for institutional and retail pharmacy customers. We also continue to pursue enhancements to our services and programs.

In fiscal 2007, we acquired Health Advocates, Inc. (“Health Advocates”), a leading provider of Medicare set-aside cost containment services to insurance payors primarily within the workers’ compensation industry. Health Advocates was renamed PMSI MSA Services, Inc. (“PMSI MSA Services”) and operates under PMSI, our workers’ compensation services business. The addition of PMSI MSA Services, combined with our leading pharmacy and clinical solutions, gives our workers’ compensation business the ability to provide our customers with a fully integrated Medicare set-aside solution.




Divestitures. In order to allow us to concentrate on our strategic focus of pharmaceutical distribution and related services, specialty pharmaceutical distribution and related services, and other pharmaceutical supply channel services such as packaging, we may, from time to time, consider divestitures.

On July 31, 2007, the Company and Kindred Healthcare, Inc. (“Kindred”) completed the spin-offs and subsequent combination of their institutional pharmacy businesses, PharMerica Long-Term Care (“Long-Term Care”) and Kindred Pharmacy Services (“KPS”), to form a new, independent, publicly traded company named PharMerica Corporation (“PMC”). At closing, Long-Term Care borrowed $125 million from a financial institution and provided a one-time distribution back to the Company. Long-Term Care and KPS were then spun off to the stockholders of their respective parent companies, followed immediately by the merger of the two institutional pharmacy businesses into subsidiaries of PMC and the exchange of Long-Term Care and KPS shares for PMC shares, which resulted in the Company’s and Kindred’s stockholders each owning approximately 50 percent of PMC immediately after the closing of the transaction.

Operations

Operating Structure. We are organized based upon the products and services we provide to our customers. The Company’s operations are comprised of two reportable segments: Pharmaceutical Distribution and Other.

The Pharmaceutical Distribution segment includes the operations of AmerisourceBergen Drug Corporation (“ABDC”), AmerisourceBergen Specialty Group (“ABSG”) and the AmerisourceBergen Packaging Group (“ABPG”). Servicing both healthcare providers and pharmaceutical manufacturers in the supply channel, the Pharmaceutical Distribution segment’s operations provide drug distribution and related services designed to reduce costs and improve patient outcomes.

ABDC distributes a comprehensive offering of brand name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, alternate site facilities and other customers. ABDC also provides pharmacy management, consulting services and scalable automated pharmacy dispensing equipment, medication and supply dispensing cabinets, and supply management software to a variety of retail and institutional healthcare providers. Substantially all of ABDC’s operations are in the United States and Canada.

ABSG, through a number of individual operating businesses, provides distribution and other services primarily to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers. ABSG also distributes vaccines, other injectibles, plasma and other blood products. In addition, through its specialty services businesses, ABSG provides a number of commercialization services, third party logistics, group purchasing services, and other services for biotech and other pharmaceutical manufacturers, as well as reimbursement consulting, data analytics, practice management, and physician education. Substantially all of ABSG’s operations are in the United States.

ABPG consists of American Health Packaging, Anderson Packaging (“Anderson”) and Brecon Pharmaceutical Limited (“Brecon”). American Health Packaging delivers unit dose, punch card, unit-of-use, compliance and other packaging solutions to institutional and retail healthcare providers. American Health Packaging’s largest costumer is ABDC, and, as a result, its operations are closely aligned with the operations of ABDC. Anderson is a leading provider of contract packaging services for pharmaceutical manufacturers. Brecon is a United Kingdom-based provider of contract packaging and clinical trial materials (“CTM”) services for pharmaceutical manufacturers.

Our Other reportable segment includes the operating results of Long-Term Care, through the July 31, 2007 spin-off date, and PMSI. Subsequent to July 31, 2007, the Other segment only includes the operating results of PMSI.

PMSI provides mail order and on-line pharmacy services to chronically and catastrophically ill patients under workers’ compensation programs, and provides pharmaceutical claims administration services for payors. PMSI services include home delivery of prescription drugs, medical supplies and equipment, and computer software solutions to reduce payors’ administrative costs. PMSI also offers Medicare set-aside cost containment services to its insurance payor customers through PMSI MSA Services, Inc.

Sales and Marketing. ABDC has a sales force organized regionally and specialized by healthcare provider type. Customer service representatives are located in distribution facilities in order to respond to customer needs in a timely and effective manner. ABDC also has support professionals focused on its various technologies and service offerings. ABDC’s national marketing organization designs and develops business management solutions for AmerisourceBergen healthcare provider customers. Tailored to specific groups, these programs can be further customized at the business unit or distribution facility level to adapt to local market conditions. ABDC’s sales and marketing also serves national account customers through close coordination with local distribution centers and with the management of the Specialty and Packaging groups. ABDC sales and marketing ensures that our customers are receiving service offerings that meet their needs. Our Specialty and Packaging groups and the PMSI business each have independent sales forces and marketing organizations that specialize in their respective product and service offerings.

Customers. We have a diverse customer base that includes institutional and retail healthcare providers as well as pharmaceutical manufacturers. Institutional healthcare providers include acute care hospitals, health systems, mail order pharmacies, long-term and alternate care facility pharmacies and providers of pharmacy services to such facilities, and physician offices. Retail healthcare providers include national and regional retail drugstore chains, independent community pharmacies and pharmacy departments of supermarkets and mass merchandisers. We are typically the primary source of supply for our healthcare provider customers. Our manufacturing customers include branded, generic, and biotech manufacturers of prescribed pharmaceuticals as well as over-the-counter product manufacturers. In addition, we offer a broad range of value-added solutions designed to enhance the operating efficiencies and competitive positions of our customers, thereby allowing them to improve the delivery of healthcare to patients and consumers. During fiscal 2007, operating revenue for our Pharmaceutical Distribution segment was comprised of 62% institutional and 38% retail.

In fiscal 2007, Medco Health Solutions, Inc. (“Medco”), our largest customer, accounted for 14% of our total revenue, 8% of our operating revenue, and 90% of bulk deliveries to customer warehouses. Our second-largest customer accounted for 8% of our operating revenue in fiscal 2007. Other than our two largest customers, no individual customer accounted for more than 5% of our fiscal 2007 operating revenue. Our top ten customers represented approximately 34% of fiscal 2007 operating revenue. In addition, we have contracts with group purchasing organizations (“GPOs”), each of which functions as a purchasing agent on behalf of its members, who are healthcare providers. Approximately 8% of our operating revenue in fiscal 2007 was derived from our two largest GPO relationships (Novation and Premier). The loss of any major customer or GPO relationship could adversely affect future operating revenue and results of operations.

Suppliers. We obtain pharmaceutical and other products from manufacturers, none of which accounted for 10% or more of our purchases in fiscal 2007. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable. We believe that our relationships with our suppliers are good. The ten largest suppliers in fiscal 2007 accounted for approximately 60% of our purchases.

In fiscal 2006, working with our pharmaceutical manufacturer partners, we completed the transition of our branded pharmaceutical distribution business to a fee-for-service model where we are primarily compensated for the services we provide manufacturers for a fee. Under a typical fee-for-service agreement, we are compensated for our services based on a percentage of purchases over a defined time period, with payment of fees being made directly or through a combination of direct payments and price increase entitlements. We believe the fee-for-service model has improved the efficiency and transparency of the supply channel.

Information Systems. ABDC operates its full-service wholesale pharmaceutical distribution facilities in the U.S. on a centralized system. ABDC’s operating system provides for, among other things, electronic order entry by customers, invoice preparation and purchasing, and inventory tracking. As a result of electronic order entry, the cost of receiving and processing orders has not increased as rapidly as sales volume. ABDC’s systems are intended to strengthen customer relationships by allowing the customer to lower its operating costs and by providing a platform for a number of the basic and value-added services offered to our customers, including marketing, product demand data, inventory replenishment, single-source billing, computer price updates and price labels.

ABDC plans to continue to make system investments to further improve its information capabilities and meet its customer and operational needs. For example, the Company recently announced a business transformation project that will include a new ERP (enterprise resource planning) platform, which will be selected and implemented throughout ABDC and throughout ABC’s corporate functions, as well as the development and implementation of integrated processes to enhance business best practices and lower cost. ABDC continues to expand its electronic interface with its suppliers and currently processes a substantial portion of its purchase orders, invoices and payments electronically. ABDC continues to implement a new warehouse operating system that is expected to improve its productivity and operating leverage. ABDC will continue to invest in advanced information systems and automated warehouse technology. As of September 30, 2007 approximately 85% of ABDC’s transactional volume is generated from our distribution facilities that have successfully implemented the new warehouse operating system.

In an effort to maintain and improve its information technology infrastructure, ABDC decided to outsource a significant portion of the information technology activities relating to its corporate functions and to its operations and entered into a ten-year commitment, effective July 1, 2005, with IBM Global Services, which has assumed responsibility for performing the outsourced information technology activities.

ABSG operates the majority of its specialty distribution business on its own common, centralized platform resulting in operating efficiencies as well as the ability to rapidly deploy new capabilities. The convenience of ordering via the Internet is very important to ABSG’s customers. Over the past few years, ABSG has introduced and enhanced its web capabilities such that a significant amount of orders are initiated via the Internet.

Our PMSI business provides proprietary information technology for workers’ compensation solutions. These systems provide eligibility authorization and reimbursement payments to participating pharmacies. They also provide order taking, shipment and collection of service fees for medications and specialty services. The systems also provide billing and reimbursement for other services rendered. PMSI continues to invest in technologies that help improve data integrity, critical information access and system availability.

Competition

We face a highly competitive environment in the distribution of pharmaceuticals and related healthcare services. Our largest competitors are Cardinal Health, Inc. and McKesson Corporation. ABDC competes with both Cardinal and McKesson, as well as regional distributors within pharmaceutical distribution. In addition, we compete with manufacturers who sell directly, chain drugstores who do their own warehousing, specialty distributors, and packaging and healthcare technology companies. The distribution and related service businesses in which ABSG engages are also highly competitive. ABSG’s operating businesses face competition from a variety of competitors, including Oncology Therapeutics Network (recently acquired by McKesson), FFF Enterprises, Henry Schein, Inc., Med-Path, Express Scripts, Inc., US Oncology, Inc., Covance Inc., and UPS Logistics, among others. In all areas, competitive factors include price, product offerings, value-added service programs, service and delivery, credit terms, and customer support.

The PMSI business competes with numerous billing companies in connection with the portion of its business that electronically adjudicates workers’ compensation claims for payors. PMSI also competes with various companies that provide home delivery of prescription drugs, medical supplies and equipment. PMSI’s primary competitors include Coventry Health, Inc., Fiserv Health, Medical Services Company, Cypress Medical Products and Progressive Medical, Inc.

Intellectual Property

We use a number of trademarks and service marks. All of the principal trademarks and service marks used in the course of our business have been registered in the United States and, in some cases, in foreign jurisdictions or are the subject of pending applications for registration.

We have developed or acquired various proprietary products, processes, software and other intellectual property that are used either to facilitate the conduct of our business or that are made available as products or services to customers. We generally seek to protect such intellectual property through a combination of trade secret, patent and copyright laws and through confidentiality and other contractually imposed protections.

We hold patents and have patent applications pending that relate to certain of our products, particularly our automated pharmacy dispensing equipment, our medication and supply dispensing equipment, and certain warehousing equipment. We seek patent protection for our proprietary intellectual property from time to time as appropriate.

Although we believe that our patents or other proprietary products and processes do not infringe upon the intellectual property rights of any third parties, third parties may assert infringement claims against us from time to time.

Employees

As of September 30, 2007, we employed approximately 11,300 persons, of which approximately 10,200 were full-time employees. Approximately 4% of full and part-time employees are covered by collective bargaining agreements. We believe that our relationship with our employees is good. If any of our employees in locations that are unionized should engage in strikes or other such bargaining tactics in connection with the negotiation of collective bargaining agreements, such tactics could be disruptive to our operations and adversely affect our results of operations.

Government Regulation

We are subject to oversight by various state and federal governmental entities and we are subject to, and affected by, a variety of state and federal laws, regulations and policies.

The U.S. Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration (“FDA”) and various state regulatory authorities regulate the distribution of pharmaceutical products and controlled substances. Wholesale distributors of these substances are required to hold valid DEA licenses, meet various security and operating standards, and comply with regulations governing their sale, marketing, packaging, holding and distribution. The DEA, FDA and state regulatory authorities have broad enforcement powers, including the ability to suspend our distribution centers from distributing controlled substances, seize or recall products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. As a wholesale distributor of pharmaceuticals and certain related products, we are subject to these laws and regulations. We have all necessary licenses or other regulatory approvals and believe that we are in substantial compliance with all applicable pharmaceutical wholesale distribution requirements.

We and our customers are subject to fraud and abuse laws, including the federal anti-kickback statute and the Stark law. The anti-kickback statute, and the related regulations, prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a person for the furnishing or arranging for the furnishing of any item or service or for inducing the purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering of items or services that are in any way paid for by Medicare, Medicaid, or other federal healthcare programs. The Stark law prohibits physicians from making referrals for designated health services to certain entities with whom they have a financial relationship. The fraud and abuse laws and regulations are broad in scope and are subject to frequent modification and varied interpretation. ABSG’s operations are particularly subject to these laws and regulations, as are certain aspects of our ABDC operations.

In recent years, some states have passed or have proposed laws and regulations that are intended to protect the safety of the supply channel. For example, Florida and other states are implementing pedigree requirements that require drugs to be accompanied by information tracing drugs back to the manufacturers. These and other requirements are expected to increase our cost of operations. At the federal level, the FDA issued final regulations pursuant to the Pharmaceutical Drug Marketing Act that became effective in December 2006. The regulations impose pedigree and other chain of custody requirements that increase the costs and/or burden to the Company of selling to other pharmaceutical distributors and handling product returns. In early December 2006, the federal District Court for the Eastern District of New York issued a preliminary injunction temporarily enjoining the implementation of the regulations in response to a case initiated by secondary distributors. On February 1, 2007, HHS and the FDA appealed this decision to the federal Court of Appeals for the Second Circuit. We cannot predict the ultimate outcome of this legal proceeding.

As a result of political, economic and regulatory influences, the healthcare delivery industry in the United States is under intense scrutiny and subject to fundamental changes. We cannot predict what reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.

CEO BACKGROUND

Charles H. Cotros


• Age 70.

• Director of AmerisourceBergen since January 2002.


• Interim Chairman and Chief Executive Officer of Allied Waste Industries, Inc. (waste management services) from October 2004 to May 2005.


• Chairman and Chief Executive Officer of Sysco Corporation (foodservice marketing and distribution organization) from January 2000 until his retirement in December 2002.


• Held variety of other positions with Sysco Corporation starting in 1974, including President from 1999 until July 2000 and Chief Operating Officer from 1995 until January 2000.


• Also a director of Allied Waste Industries, Inc.



Jane E. Henney, M.D.


• Age 60.


• Director of AmerisourceBergen since January 2002.

• Professor, College of Medicine, University of Cincinnati since January 2008.


• Senior Vice President and Provost for Health Affairs at the University of Cincinnati from July 2003 to January 2008.


• Senior Scholar in Residence at the Association of Academic Health Centers in Washington, D.C. from 2001 to 2003.


• Commissioner of Food and Drugs at the United States Food and Drug Administration from 1998 to 2001.


• Vice President for Health Sciences at the University of New Mexico from 1994 to 1998.


• Deputy Commissioner of Operations at the United States Food and Drug Administration from 1992 to 1994.


• Dr. Henney is a medical oncologist and has held several posts at the National Cancer Institute, including Deputy Director from 1980 to 1985.


• Also a director of AstraZeneca PLC and CIGNA Corporation.



R. David Yost


• Age 60.


• Director and Chief Executive Officer of AmerisourceBergen since August 2001.


• President of AmerisourceBergen from August 2001 to October 2002 and since September 2007.


• Chairman and Chief Executive Officer of AmeriSource Health Corporation from December 2000 to August 2001 and President and Chief Executive Officer of AmeriSource Health Corporation from May 1997 to December 2000.


• Held variety of other positions with AmeriSource Health Corporation and its predecessors since 1974, including Executive Vice President – Operations of AmeriSource Health Corporation from 1995 to 1997.


• Also a director of Electronic Data Systems Corporation and PharMerica Corporation.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto contained herein.

The Company is a pharmaceutical services company providing drug distribution and related healthcare services and solutions to its pharmacy, physician, and manufacturer customers, which currently are based primarily in the United States and Canada. The Company also provides pharmaceuticals to workers’ compensation patients and related services to insurance payors. The Company is organized based upon the products and services it provides to its customers. Substantially all of the Company’s operations are located in the United States and Canada. The Company also has packaging operations located in the United Kingdom.

On July 31, 2007, the Company and Kindred HealthCare, Inc. (“Kindred”) completed the spin-offs and subsequent combination of their institutional pharmacy businesses, PharMerica Long-Term Care (“Long-Term Care”) and Kindred Pharmacy Services (“KPS”), to form a new, independent, publicly traded company named PharMerica Corporation (“PMC”). (See Divestiture section below). As part of this transaction, the Company entered into a pharmaceutical distribution agreement with PMC, under which it continues to distribute pharmaceuticals to and generate cash flows from the disposed institutional pharmacy business. The historical operating results of Long-Term Care are not reported as a discontinued operation of the Company because of the significance of the expected continuing cash flows resulting from the pharmaceutical distribution agreement entered into between PMC and the Company. Accordingly, for periods prior to August 1, 2007, the historical operating results of Long-Term Care will continue to be included in the historical continuing operations of the Company.

In this Form 10-K, the Company has renamed as Other the reportable segment referred to previously as the PharMerica segment. The Other segment includes the operating results of Long-Term Care through the July 31, 2007 spin-off date and the Company’s workers’ compensation-related business (“PMSI”).

Acquisitions

In October 2006, the Company acquired Health Advocates, Inc. (“Health Advocates”), a leading provider of Medicare set-aside cost containment services to insurance payors primarily within the workers’ compensation industry, for $83.8 million. Health Advocates was renamed PMSI MSA Services, Inc. (“PMSI MSA Services”) and operates under PMSI. The addition of PMSI MSA Services, combined with our leading pharmacy and clinical solutions, gives the Company’s workers’ compensation business the ability to provide its customers with a fully integrated Medicare set-aside solution.

In October 2006, the Company acquired I.G.G. of America, Inc. (“IgG”), a specialty pharmacy and infusion services business specializing in the blood derivative intravenous immunoglobulin (“IVIG”), for $37.2 million. The addition of IgG supports the Company’s strategy of building its specialty pharmaceutical services to manufacturers.

In November 2006, the Company acquired Access M.D., Inc. (“AMD”), a Canadian company, for $13.4 million. AMD provides services, including reimbursement support, third-party logistics and nursing support services to manufacturers of specialty pharmaceuticals, such as injectable and biological therapies. The acquisition of AMD expands our specialty services businesses into Canada and complements the distribution services offered by AmerisourceBergen Canada Corporation.

In April 2007, the Company acquired Xcenda LLC (“Xcenda”) for a purchase price of $25.2 million. Xcenda will enhance AmerisourceBergen’s consulting business within its existing pharmaceutical and specialty services businesses and provide additional capabilities within pharmaceutical brand services, applied health outcomes and biopharma strategies.

On October 1, 2007, the Company acquired Bellco Health (“Bellco”), a privately held New York distributor of branded and generic pharmaceuticals, for a purchase price of approximately $181 million in cash. Bellco is a pharmaceutical distributor in the Metro New York City area, where it primarily services independent retail community pharmacies. The acquisition of Bellco expands the Company’s presence in this large community pharmacy market. Nationally, Bellco markets and sells generic pharmaceuticals to individual retail pharmacies, and provides pharmaceutical products and services to dialysis clinics. Bellco’s revenues were $2.1 billion for its fiscal year ended June 30, 2007.

Divestiture

As previously noted, on July 31, 2007, the Company and Kindred completed the spin-offs and subsequent combination of their institutional pharmacy businesses, Long-Term Care and KPS, to form PMC. In connection with this transaction, Long-Term Care borrowed $125 million from a financial institution and provided a one-time distribution back to the Company. The cash distribution by Long-Term Care to the Company was tax-free. The institutional pharmacy businesses were then spun off to the stockholders of their respective parent companies, followed immediately by the merger of the two institutional pharmacy businesses into subsidiaries of PMC, which resulted in the Company’s and Kindred’s stockholders each owning approximately 50 percent of PMC immediately after the closing of the transaction. The Company’s stockholders received 0.0833752 shares of PMC common stock for each share of AmerisourceBergen common stock owned. Additionally, the Company entered into a pharmaceutical distribution agreement with PMC and the Company also entered into an agreement with PMC for the provision of certain transition services for a limited transition period following consummation of the transaction.

The Company spun off $196.6 million of net assets of Long-Term Care to PMC as a result of this transaction and recorded a corresponding reduction to its retained earnings.

Reportable Segments

The Company’s operations are comprised of two reportable segments: Pharmaceutical Distribution and Other. The Other reportable segment includes the operating results of Long-Term Care, through the July 31, 2007 spin-off date, and PMSI.

Pharmaceutical Distribution

The Pharmaceutical Distribution reportable segment is comprised of three operating segments, which include the operations of AmerisourceBergen Drug Corporation (“ABDC”), the AmerisourceBergen Specialty Group (“ABSG”) and the AmerisourceBergen Packaging Group (“ABPG”). Servicing both healthcare providers and pharmaceutical manufacturers in the pharmaceutical supply channel, the Pharmaceutical Distribution segment’s operations provide drug distribution and related services designed to reduce healthcare costs and improve patient outcomes.

ABDC distributes a comprehensive offering of brand name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, alternate site facilities and other customers. ABDC also provides pharmacy management, consulting services and scalable automated pharmacy dispensing equipment, medication and supply dispensing cabinets, and supply management software to a variety of retail and institutional healthcare providers.

ABSG, through a number of individual operating businesses, provides distribution and other services primarily to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers. ABSG also distributes vaccines, other injectables, plasma, and other blood products. In addition, through its specialty services businesses, ABSG provides a number of commercialization services, third party logistics, group purchasing, and other services for biotech and other pharmaceutical manufacturers, as well as reimbursement consulting, data analytics, practice management, and physician education.

ABPG consists of American Health Packaging, Anderson Packaging (“Anderson”), and Brecon Pharmaceuticals Limited (“Brecon”). American Health Packaging delivers unit dose, punch card, unit-of-use, compliance and other packaging solutions to institutional and retail healthcare providers. American Health Packaging’s largest customer is ABDC, and, as a result, its operations are closely aligned with the operations of ABDC. Anderson is a leading provider of contracted packaging services for pharmaceutical manufacturers. Brecon is a United Kingdom-based provider of contract packaging and clinical trials materials (“CTM”) services for pharmaceutical manufacturers.

Other

Prior to its divestiture, Long-Term Care was a leading national dispenser of pharmaceutical products and services to patients in long-term care and alternate site settings, including skilled nursing facilities, assisted living facilities and residential living communities. Long-Term Care’s institutional pharmacy business involved the purchase of prescription and nonprescription pharmaceuticals, principally from our Pharmaceutical Distribution segment, and the dispensing of those products to residents in long-term care and alternate site facilities.

PMSI provides mail order and on-line pharmacy services to chronically and catastrophically ill patients under workers’ compensation programs, and provides pharmaceutical claims administration services for payors. PMSI services include home delivery of prescription drugs, medical supplies and equipment and an array of computer software solutions to reduce the payors’ administrative costs. The recent addition of PMSI MSA Services gives the PMSI business the ability to provide its customers with a fully integrated Medicare set-aside solution.

Year ended September 30, 2007 compared with Year ended September 30, 2006

Consolidated Results

Operating revenue of $61.7 billion in fiscal 2007, which excludes bulk deliveries, increased 9% from the prior fiscal year. This increase was primarily due to increases in operating revenue in our ABDC and ABSG operating segments, both of which are included in the Pharmaceutical Distribution reportable segment. Our acquisitions contributed 1% of the operating revenue growth in fiscal 2007.

The Company reports as revenue bulk deliveries to customer warehouses, whereby the Company acts as an intermediary in the ordering and delivery of pharmaceutical products. Bulk delivery transactions are arranged by the Company at the express direction of the customer, and involve either shipments from the supplier directly to customers’ warehouse sites (i.e., drop shipment) or shipments from the supplier to the Company for immediate shipment to the customers’ warehouse sites (i.e., cross-dock shipment). Bulk deliveries of $4.4 billion in fiscal 2007 decreased 3% from the prior fiscal year. Revenue relating to bulk deliveries fluctuates primarily due to changes in demand from the Company’s largest bulk customer. The Company is a principal to these transactions because it is the primary obligor and has the ultimate responsibility for fulfillment and acceptability of the products purchased, and bears full risk of delivery and loss for products, whether the products are drop-shipped or shipped cross-dock. The Company also bears full credit risk associated with the creditworthiness of any bulk delivery customer. As a result, and in accordance with the Emerging Issues Task Force Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” the Company records bulk deliveries to customer warehouses as gross revenues. Due to the insignificant service fees generated from bulk deliveries, fluctuations in volume have no significant impact on operating margins. However, revenue from bulk deliveries has a positive impact on the Company’s cash flows due to favorable timing between the customer payments to the Company and payments by the Company to its suppliers.

Gross profit of $2.3 billion in fiscal 2007 increased 4% from the prior fiscal year. This increase was primarily due to the increase in Pharmaceutical Distribution operating revenue, an increase in compensation under its fee-for-service agreements and the growth of its generic programs, offset in part by a $27.8 million charge incurred by ABSG relating to tetanus-diphtheria vaccine inventory and the decline in gross profit of the Other segment. During fiscal 2007 and 2006, the Company recognized gains of $35.8 million and $40.9 million, respectively, from antitrust litigation settlements with pharmaceutical manufacturers. These gains, which are net of attorney fees and estimated payments due to other parties, were recorded as reductions to cost of goods sold and contributed 2% of gross profit in fiscal 2007 and 2006. The Company is unable to estimate future gains, if any, it will recognize as a result of antitrust litigation (see Note 13 to the consolidated financial statements). As a percentage of operating revenue, gross profit in fiscal 2007 decreased 17 basis points from the prior fiscal year due to the decline in gross profit of the Other segment.

Distribution, selling and administrative expenses, depreciation and amortization (“DSAD&A”) of $1.5 billion in fiscal 2007 increased 3% from the prior fiscal year. This increase was primarily related to our operating revenue growth, operating expenses of our recently acquired companies, an increase in bad debt expense of $14.7 million and an increase in share-based compensation of $8.6 million, all of which was partially offset by a decline in DSAD&A of the Other segment, and a decline in employee incentive compensation. As a percentage of operating revenue, DSAD&A in fiscal 2007 decreased 14 basis points from the prior fiscal year primarily due to the decline in DSAD&A of the Other segment resulting from the divestiture of the Long-Term Care business.

In 2001, the Company developed an integration plan to consolidate its distribution network and eliminate duplicative administrative functions. The plan, which is complete, included building six new facilities, closing 31 facilities and outsourcing a significant portion of its information technology activities. To complete the plan, we closed two distribution facilities in fiscal 2007 and now have 26 distribution facilities in the U.S. as of September 30, 2007. The Company closed six distribution facilities in each of fiscal 2006 and 2005. During fiscal 2006, the Company opened the last of its new distribution facilities and completed the outsourcing of a significant portion of its information technology activities.

In fiscal 2006, the Company incurred a charge of $13.9 million for an increase in a compensation accrual due to an adverse decision in an employment-related dispute with a former Bergen Brunswig chief executive officer whose employment was terminated in 1999. In October 2007, the Company received a favorable ruling from a California appellate court reversing certain portions of the prior adverse decision. As a result, the Company reduced its liability in fiscal 2007 to the Bergen Brunswig chief executive officer by $10.4 million (see Bergen Brunswig Matter under Note 13 of the consolidated financial statements). The fiscal 2006 compensation expense and the fiscal 2007 reduction thereof have been recorded as a component of the facility consolidations and employee severance line in the above table.

In fiscal 2007, the Company sold certain retail pharmacy assets of its Long-Term Care business prior to the Long-Term Care divestiture, and as a result, recognized a gain of $3.1 million.

In fiscal 2006, the Company realized a $17.3 million gain from the sale of the former Bergen Brunswig headquarters building in Orange, California. This gain was recorded as a component of the facility consolidations and employee severance line in the above table.

All employee terminations have been completed relating to the aforementioned integration plan. The Company paid a total of $20.7 million and $20.6 million for employee severance, lease cancellation and other costs during fiscal years 2007 and 2006, respectively, related to the integration plan. Remaining unpaid amounts of $15.9 million for employee severance, lease cancellation and other costs are included in accrued expenses and other in the accompanying consolidated balance sheet at September 30, 2007. Most employees receive their severance benefits over a period of time, generally not in excess of 12 months, while others may receive a lump-sum payment.

Operating income of $820.3 million in fiscal 2007 increased 10% from the prior fiscal year due to the Pharmaceutical Distribution segment, offset in part, by the Other segment. As a percentage of operating revenue, operating income in fiscal 2007 increased 1 basis point from the prior fiscal year due to the 5 basis point improvement in Pharmaceutical Distribution’s operating income margin that was largely offset by the decline in the Other segment’s operating income margin. The gain on antitrust litigation settlements, less the costs of facility consolidations, employee severance and other contributed $33.8 million to operating income in fiscal 2007 and contributed 5 basis points to operating income as a percentage of operating revenue. The gain on antitrust litigation settlements, less the costs of facility consolidations, employee severance and other contributed $20.8 million to operating income in fiscal 2006 and contributed 4 basis points to operating income as a percentage of operating revenue.

Other loss of $3.0 million in fiscal 2007 primarily related to other-than-temporary impairment losses incurred with respect to equity investments. Other income of $4.4 million in fiscal 2006 primarily included a $3.4 million gain resulting from an eminent domain settlement and a $3.1 million gain on the sale of an equity investment, offset in part, by losses incurred relating to an equity investment.

Interest expense increased from the prior fiscal year primarily due to an increase of $114.3 million in average borrowings primarily related to the Company’s Canadian operations. Interest income decreased from the prior fiscal year primarily due to a decline in average invested cash and short-term investments of $313.6 million from the prior fiscal year. The decrease in invested cash and short-term investments from the prior fiscal year was primarily related to the Company’s $1.4 billion of purchases of its common stock in fiscal 2007, offset largely by $1.2 billion of net cash provided by operating activities. The Company’s net interest expense in future periods may vary significantly depending upon changes in interest rates and strategic decisions made by the Company to deploy its invested cash and short-term investments.

Income tax expense reflects an effective income tax rate of 37.1%, versus 36.8% in the prior fiscal year. The tax rate for fiscal 2007 was greater than the tax rate for the prior fiscal year, which benefitted from more favorable tax adjustments than the current fiscal year and a larger portion of the Company’s invested cash in tax-free investments. The Company expects to have an effective income tax rate between 37% and 38% in future periods, which will primarily depend on its mix of tax-free and taxable investments, including cash and cash equivalents.

Income from continuing operations of $493.8 million in fiscal 2007 increased 6% from the prior fiscal year due to the increase in operating income, partially offset by the increase in interest expense. Diluted earnings per share from continuing operations of $2.63 in fiscal 2007 increased 16% from $2.26 per share in the prior fiscal year. The divested Long-Term Care business contributed $0.08 and $0.10 of diluted earnings per share from continuing operations in fiscal 2007 and 2006, respectively. The gain on antitrust litigation settlements less the costs of facility consolidations, employee severance and other contributed $17.0 million to income from continuing operations and $0.09 to diluted earnings per share in fiscal 2007. The gain on antitrust litigation settlements, the eminent domain settlement, the sale of an equity investment and the favorable tax adjustments, less the costs of facility consolidations, employee severance and other contributed $23.2 million to income from continuing operations and $0.11 to diluted earnings per share in fiscal 2006.

Loss from discontinued operations of $24.6 million, net of tax, in fiscal 2007 relates to an adverse court ruling received by the Company with respect to a contingent purchase price adjustment in connection with the 2003 acquisition of Bridge Medical, Inc. (“Bridge”), as previously discussed in Legal Proceedings under Item 3. Substantially all of the assets of the Bridge business were sold in July 2005.

Net income of $469.2 million in fiscal 2007 was flat compared to the prior fiscal year. Diluted earnings per share of $2.50 in fiscal 2007 increased 11% from $2.25 per share in the prior fiscal year. The increase in diluted earnings per share was due to the 9% reduction in weighted average common shares outstanding resulting from the Company’s purchases of its common stock in connection with its stock buyback programs (see Liquidity and Capital Resources), net of the impact of stock option exercises.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Consolidated Results

Operating revenue of $17.3 billion in the quarter ended March 31, 2008, which excludes bulk deliveries, increased 13% from the prior year quarter. This increase was due to growth in our Pharmaceutical Distribution segment, particularly within our ABDC operating segment, and the Bellco acquisition. Additionally, in the March 2008 quarter, we began to transition a significant amount of business previously conducted on a bulk delivery basis to an operating revenue basis. This business transition, which contributed 5% of the operating revenue growth for the quarter, resulted from the new contract that we signed with our largest customer. Operating revenue of $33.5 billion in the six months ended March 31, 2008 increased 8% from the prior year period primarily due to an increase in revenue within our ABDC operating segment and the Bellco acquisition.

Bulk deliveries of $552.2 million and $1.7 billion in the quarter and six months ended March 31, 2008 decreased 55% and 25%, respectively, from the prior year periods. These declines were due to the customer transition discussed above. Due to the insignificant service fees generated from bulk deliveries, fluctuations in volume have no significant impact on operating margins. However, revenue from bulk deliveries has a positive impact on our cash flows due to favorable timing between the customer payments to us and payments by us to our suppliers.

Total revenue of $17.8 billion and $35.2 billion in the quarter and six months ended March 31, 2008 increased 8% and 6%, respectively, from the prior year periods. These increases were driven by revenue growth in the Pharmaceutical Distribution segment of 9% and 7% in the quarter and six months ended March 31, 2008, respectively, including a 3% contribution from the Bellco acquisition.

Gross profit of $558.8 million and $1.1 billion in the quarter and six months ended March 31, 2008 decreased 8% and 11%, respectively, from the prior year periods. These decreases were due to the declines in gross profit of the Other segment, primarily resulting from the July 2007 divestiture of Long-Term Care. As previously mentioned, for periods prior to August 1, 2007, our operating results include Long-Term Care. The declines in the Other segment gross profit for the quarter and six months ended March 31, 2008 were partially offset by 10% and 7% increases in gross profit in the Pharmaceutical Distribution segment, primarily due to revenue growth, including the acquisition of Bellco. During the quarter ended March 31, 2007, we recognized a gain of $1.8 million from antitrust litigation settlements with pharmaceutical manufacturers, which represented 0.3% of gross profit. During the six months ended March 31, 2008 and 2007, we recognized gains of $1.6 million and $3.6 million, respectively, from antitrust litigation settlements with pharmaceutical manufacturers, which represented 0.1% and 0.3% of gross profit, respectively. As a percentage of total revenue, gross profit in the quarter and six months ended March 31, 2008 decreased 54 basis points and 58 basis points, respectively, from the prior year periods primarily due to the declines in the Other segment, as explained above.

Distribution, selling and administrative expenses, depreciation and amortization (“DSAD&A”) of $320.6 million and $632.9 million in the quarter and six months ended March 31, 2008 decreased 17% from the prior year periods. These declines were primarily related to decreases in the DSAD&A in the Other segment and were partially offset by operating expenses of our recent acquisitions, primarily those of Bellco.

As previously mentioned, in January 2008, we announced our intention to pursue the sale of our workers’ compensation business, PMSI, and during the quarter and six months ended March 31, 2008, we incurred costs, primarily professional fees, relating to this planned divestiture. However, in April 2008, we decided to terminate our effort to sell PMSI because the final bids received for the business did not reflect its fair value. As a result, we are focusing our attention on various initiatives, a number of which are ongoing, to enhance the operating performance of the workers’ compensation business.

During the quarter and six months ended March 31, 2007, we incurred costs relating to the Long-Term Care spin-off and recognized a $3.1 million gain relating to the sale of certain retail pharmacy assets of our former Long-Term Care business.

During the six months ended March 31, 2008, we reversed $1.0 million of employee severance charges previously estimated and recorded. We paid a total of $2.2 million and $8.2 million for employee severance, lease cancellation and other costs during the six months ended March 31, 2008 and 2007, respectively. Most employees receive their severance benefits over a period, generally not in excess of 12 months, while others may receive a lump-sum payment.

Operating income of $236.7 million in the quarter ended March 31, 2008 increased 7% from the prior year quarter due to a 16% increase in the Pharmaceutical Distribution segment’s operating income, which was offset, in part, by the decline in operating income of the Other segment. In the prior year quarter, Long-Term Care contributed $6.8 million to the Other segment’s operating income. Additionally, PMSI’s operating income in the quarter ended March 31, 2008 declined by $7.8 million from the prior year quarter. Operating income of $431.7 million in the six months ended March 31, 2008 was flat compared to the prior year period as the 8% increase in the Pharmaceutical Distribution segment’s operating income was offset by the decline in operating income of the Other segment. In the prior year six month period, Long-Term Care contributed $15.9 million to the Other segment’s operating income. Additionally, PMSI’s operating income in the six months ended March 31, 2008 declined by $16.0 million from the prior year period. As a percentage of total revenue, operating income in the quarter and six months ended March 31, 2008 decreased 1 basis point and 6 basis points, respectively, from the prior year periods. These declines were due to decreases in the Other segment and were offset, in part, by increases in the Pharmaceutical Distribution segment’s operating margin.

The costs of facility consolidations, employee severance and other, and the gain on antitrust litigation settlements had the following net effects on operating income as a percentage of total revenue:




Quarter ended March 31, 2008 – decreased operating income as a percentage of total revenue by 1 basis point.



Quarter ended March 31, 2007 – increased operating income as a percentage of total revenue by 1 basis point.





Six months ended March 31, 2008 – had no impact on operating income as a percentage of total revenue.





Six months ended March 31, 2007 – decreased operating income as a percentage of total revenue by 1 basis point.

Interest expense increased from the prior year quarter due to an increase of $170.3 million in average borrowings. Interest income decreased from the prior year quarter primarily due to a decline of $721.1 million in average invested cash and short-term investments and to a lesser extent, a decline in the weighted average interest rate from the prior year quarter. The decrease in invested cash and short-term investments from the prior year quarter was primarily due to our use of cash for share repurchases, acquisitions and capital expenditures, which, in the aggregate, exceeded our cash provided by operating activities since the prior year quarter.

CONF CALL

Michael Kilpatric

Good morning everybody and welcome to AmerisourceBergen conference call covering 2008 second quarter results. I’m Mike Kilpatrick Vice President of Corporate and Investor Relations and joining me today are David Yost, AmerisourceBergen President and CEO and Michael DiCandilo, Executive Vice President, and Chief Financial Officer. During the conference call today we will make some forward-looking statements about our business prospects and financial expectations. We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations. For discussion of some key risk factors we refer to you our SEC filing including our 10-K report for fiscal 2007. Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call and this call cannot be taped without the express permission of the company. As always those connected by telephone will have an opportunity to ask questions after our opening comments.

Here is Dave Yost, AmerisourceBergen CEO, and President to begin our remarks.

David Yost

Good morning and thank you for joining us. Our Pharmaceutical Distribution Segment delivered excellent results in our second fiscal quarter ending in March. I will address separately our other segment, which contained our PharMerica Long-Term Care operation last year, but not this year and our PMIS Workers Compensation business in both years, but first the highlights in Pharmaceutical Distribution. In the Pharmaceutical Distribution Segment total revenues were $17.8 billion, up 9% for the quarter. Bulk revenues decreased significantly to 552 million, as some of that revenue was captured in operating revenue, making total revenues an irrelevant number and as Mike will detail, we are now making total revenue our revenue guidance and analysis metric. This was our largest operating and total revenue quarter in our history. Our operating margin on total revenue in the RX Distribution Segment expanded a very strong 9 basis points to 134 basis points to revenue, reflecting a gross margin expansion due to a robust manufacture pricing and generic environment and decreases in our operating expenses as a percent to revenue. Net of our Bellco acquisition, we spent less absolute expense dollars running our core drug company t his quarter versus last year, with a strong revenue increase. Consolidated diluted EPS was up 21%. Excluding the impact of PharMerica Long-Term Care the previous year, the EPS was up 26%. We generated $192 million in cash for the quarter with good asset management by driving our inventory and receivables days down. We delivered strong return committed capital and return on invested capital, all in all an excellence performance. At AmerisourceBergen we continue to focus on the basics, increasing revenues, controlling costs, managing our inventory and receivables.

You’ll recall that in January we announced our intention to pursue the sale of PMSI, our Workers Compensation business and speculate that if the sale process were to produce an acceptable price, PMSI would be listed as discontinued operations beginning in the March quarter. After reviewing final bids from interested parties, we have decided to discontinue the sale process of PMSI since the final bids did not reflect our valuation of PMSI’s potential. Although we had significant interest and strong first and second round bids, we saw final bids decrease significantly following the collapse of Bear Stearns and further tightening of credit markets. We continue to think that PMSI can be a strong contributor to ABC and we’ll devote our efforts to achieving that end. The disappointing financial results of PMSI this quarter reflects in part the distraction of the sale process and we look to PMSI to be on track in the September quarter and into FY09. As I mentioned last quarter, PMSI has an outstanding management team and a dedicated team of about 800 associates that has historically delivered fine results in the face of changing markets and increased competition and we expect a return of that tradition.

It is important to keep PMSI’s contribution to our earnings in perspective. When PMSI was hitting on all cylinders, they accounted for 5% of our earnings and today PMSI is in the 2% range. The total performance in the other segment is complicated by the fact that last year’s numbers for the quarter include the contribution of PharMerica Long-Term care operation which was spun on a tax free basis to ABC shareholders in July and immediately combined with Kindred’s long-term care assets and then taken public. The PharMerica operating results are not allowed to be classified as discontinued operations due to our long-term pharmaceutical supply contract with the new company.

Now turning to some industry issues. First market growth. IMS reported last month their assessment that the market grew the 4% range for calendar year 2007 and a forecast total market growth in the 3 to 6% per year range for the next three calendar years with calendar ’08 in the 2 to 3% range. Since the slowing in historic growth is strongly influenced by the impact of generics and because we have a strong market share in the fast growing specialty business, we continue to be confident in our ability to deliver strong financial performance in the forecasted market environment.

Regarding the California Pedigree, California Board Pharmacy has voted to delay the implementation of a required pedigree on all products to July 1, 2011.Though AmerisourceBergen would have been prepared to implement the regulations as proposed, we are delighted about the delay so the issue can be addressed on a national level and a more costly patchwork of unique state regulations can be avoided. This week national legislation was introduced in congress which provides a planned national approach to the pedigree issue.

Regarding AMP or average manufactured price, due to the losses filed by NCPA and NECDS highlighted the flaws to the calculation of AMP as currently proposed; the implementation of AMP has been delayed. The court case will probably not be resolved until late this calendar year at the earliest. There is also a legislative effort in process to correct the deficiencies, but my guess is that will also stretch into our next fiscal year. ABC as well as others in the industry have been actively involved in this issue, but essentially there is nothing to report.

Regarding the manufacture-pricing environment, we are not seeing anything anywhere, including Washington to lead us to believe that the brand manufactured pricing will be any different this year from recent history. We expect brand manufacturers to increase prices in the 5% range for the entire year. Price increases continue to be strongest in our March quarter and that was true again this year with our March quarter price increases slightly ahead of the pace we experienced last year. Of course fee for service with brand name manufacturers mitigates the fact of price increases that we had noted on a previous occasion.

Regarding the customer pricing environment, I would continue to describe the current environment as competitive but stable. There are not a lot of single customer, multi-billion dollar whole sale opportunities in the market, which itself speaks to market stability in a total market approaching 300 billion in size. Individual skirmishes tend to be somewhat anecdotal, but we are not seeing any broad-based irrational pricing in the market.

On top of the revenues, it is important to address our anemia business, the erythropoiesis-stimulatin g agents or ESAs and the impact these products are having on AmerisourceBergen, particularly our specialty group. Sales of ESAs in oncology were down 45% in the March quarter versus the previous year and accounted for 2% of total revenue. March quarter oncology ESA sales were down about 7% from the December quarter. You will recall that it was in March 2007 the FDA issued their black box warning on ESAs. We previously expected oncology ESA revenues to stabilize in our June quarter. We now think we could experience added pressure from ESAs for the balance of the year. Again, it is important to note that oncology ESAs are 2% of total revenues.

Revenues this quarter in our specialty group were also affected by the $800 million of annual OTN revenues lost in November of this fiscal year due to its purchase by a competitor. Though ABSG, our specialty group, is clearly weathering some headwinds, it is important to recall the very strong historic performance delivered by this unit and the key strategic space this unit holds. With our $12 billion of revenues, we are the largest distributor by far of specialty Rx products and services to the specialty physician market, exactly the territory where new and innovative products will undoubtedly enter the market. Finally discussing revenues, I’m going to address generics. As we have noted frequently, generics provide us great opportunity to provide value both up and down the supply channel for the manufacturers we aggregate demand across our customer base and provide daily delivery to our geographically diverse customer base within our prime vendor distribution model. For our customers we search the market for the best generic value including price, quality of product, reliability of supply and continuity of color, shape, and size of pill. Our generic business continues to grow faster than the market. We continue to increase generic penetration among existing customers as well as add new customers as our pro-generics is one of our programs that differentiate ABC from our competitors. Generics as a percent of revenue dollars are in the low double digits to our retail business and growing nicely. To the extent that the total pharmaceutical distribution market growth rate has been impacted by total generic penetration, reflects opportunity for distributors like AmerisourceBergen and particularly AmerisourceBergen with our strong customer base of independence, regional change, food/drug combos and clinics that rely upon us for their generics decisions.

I recently met with the advisory board of our Good Neighbor Pharmacies who continue to be very optimistic about their businesses and the role they will continue to play in health care. GNP now numbers about 2,900 stores and we look to be at our ’08 goal of 3000 stores by fiscal year end. Our good neighbor preferred provider network has over 5000 stores.

On the M&A front, we were actively engaged in the bidding process of the regional wholesaler that was recently purchased by a competitor. The continued interest of our peers in this space continues to validate our strategy. Our October $162 million acquisition Bellco Drug, our largest acquisition ever, continues to meet or exceed our expectations on all key metrics. We will continue to invest in the future and our ability to meet the future needs of our customers. This includes a business transformation program, a part of which is a new ERP system for the drug company corporate office and an expense plus capitalized cost to be spread over the next three to five years, which is included in our CapEx guidance. We continue to be on schedule and on budget on this program and have our systems integrator on board.

Mike will provide some additional color on our narrowed EPS guidance, but I would like to emphasize that our revised guidance continues within the original range and reflects a narrowing of the range at the top end, reflecting, primarily reduced PMSI expectations as well as slowed market growth and continued pressure on anemia product sales and oncology. Within the second half, we expect the September quarter to be stronger than the June quarter.

Before I turn the floor over to Mike, I want to emphasize my enthusiasm for our industry and the role that ABC plays in it. The fundamentals of our industry continue to be very, very strong. Our FY08 features a streamlined organizational structure, the largest acquisition in our history and the right segments to capitalize on generic opportunities and new specialty products entering the market. We continue to execute on the basis of revenue generation, quest control and asset management while continuing to provide outstanding service and programs to our customers, key differentiators for AmerisourceBergen. We look forward to continuing our history of strong operational and financial performance.

Now here’s Mike for some added color.

Michael DiCandilo

Thanks Dave and good morning everyone. We are very pleased with our excellent second quarter and first half of fiscal 2008 results. As our Pharmaceutical Distribution performance was strong once again in every financial category. We have a number of items to discuss today that impact our consolidated results and forecast including PMSI, our switch from operating to total revenue guidance, our modifications to our fiscal 208 guidance and the inclusion of our former LTC business results in our prior year numbers, all of which I will detail.

First, I would like to remind everyone that our March or second fiscal quarter has traditionally been our strongest quarter from an earnings and margin perspective due to the relatively higher number of brand name manufacturer price increases during the March quarter and this year was no exception. Certainly our fee-for-service agreements have somewhat mitigated the variability of the quarterly contribution from price increases; however the 20% or so of our brand name business that is still subject to the timing of manufacturer price increases continues to benefit the March quarter more than any other.

Now moving to revenue classification. Historically on our income statement we have provided breakouts for both operating revenue and both deliveries to customer warehouses. Our margin analysis has focused on operating revenues as both deliveries gross profit and expense were both negligible as the majority of this revenue represented direct shipment from the manufacturer to our customers warehouses. As a result of our contract extension and expansion with our largest customer earlier this year, we began in the March quarter to transition a significant amount of business previously conducted on a bulk delivery or direct basis, to being serviced out of our distribution centers on an operating revenue basis. Over $700 million or 5% of our 13% operating revenue growth this quarter and a significant decline in both delivery revenue, resulted from this transition. Our on going bulk delivery business is expected to be in the $1.8 billion range annually and because of its insignificance to our total revenue, we will begin to discuss our operating ratios and give revenue and margin guidance on a total revenue basis only. As a results, our annual revenue guidance is now a range of 7 to 9% total revenue growth rather than the 7 to 9% range of operating revenue growth and our operating margin expansion guidance in the low single digit basis point range still holds, only it is on a total revenue base measure.

Now moving to our consolidated results. Total revenue increased 8% to $17.8 billion driven by 9% growth in pharmaceutical distribution which included a 3% boost from the Bellco acquisition. Consolidated operating income was up 75 as Pharmaceutical Distribution EBIT grew a robust 16% and more than off set the $15 million EBIT decline in our other segment. Seven million of the other segment decline relates to our former PharMerica Long-Term Care business, which is once again, included in our prior year numbers, causing an apples to oranges comparison to fiscal ’08. Special items were negligible in both the current and prior year March quarters. Net interest expense of just under $19 million in the quarter was up 89% over the prior year as expected due to reductions in interest income as average cash balances were significantly less than last year at this time due to our share repurchase activity. Our effective tax rate for the quarter was 38.9% up from last year as expected, reflecting less tax-free investment income. We continue to expect the effective tax rate to be slightly north of 38% for the full year. Diluted EPS in the quarter of $0.82 was up $0.14 or 21% compared to the prior year quarter and excluding PharMerica Long-Term Care’s $0.03 contribution in the prior year was up $0.17 or 26%. This increase was driven by the $0.16% increase in Pharmaceutical Distribution operating income and the significant reduction in average outstanding shares net of the impact of the increase in interest expense. Average diluted shares outstanding were 163.3 million, down nearly 29 million shares or 15% from the prior year, reflecting our share repurchase activity over the last 12 months.

Now moving to the pharmaceutical distribution segment where our performance in the quarter was outstanding. Total revenue was up 9% driven by the drug company which increased 8% and Bellco, which contributed 3% of the top-line growth. The specialty group was essentially flat, up less than 1% as expected due to the anemia drug situation in the OTN acquisition earlier this fiscal year. Anemia drugs used in oncology represented 2% of total revenues in the quarter and were down 45% from the prior year quarter. The drug company growth was driven by our institutional customers, including significant growth from our largest PBM customer, where we have expanded our relationship during the current year. Retail customer revenue was flat compared to last year’s quarter.

Our packaging group, while very small in relation to our overall segment results, continues to perform well led by Anderson Packaging, which opened its newly expanded production facility in March and now has the single largest pharmaceutical packaging facility in the United States.

Gross profit increased 10% during the quarter and gross profit margins expanded by 5 basis points driven by strong brand name drug price appreciation and increased generic drug contributions. As we noted last quarter, a large brand name manufacturer, which raised prices in December 2006 and did not raise prices in the December 2007 quarter, was expected to raise prices during the March quarter and that did happen, contributing to our strong results. Generic results benefitted from increased customer compliance as well as a couple of new introductions during the quarter.

We had LIFO charge of $9.6 million in the quarter compared to $1.6 million last year, reflecting the strong brand name price increases during the March quarter. We currently expect a charge in the $15 million range for the year.

Operating expenses as a percentage of total revenue were 169 basis points, down 4 basis points from the prior year, reflecting strong leverage in the drug company as virtually all of the dollar increase in our expenses resulted from our acquisitions, primarily Bellco.

Operating income was up 16% with operating margins expanding in the quarter to 134 basis points, up 9 basis points versus the prior year. After six-month segment operating income is up 8% with margins expanding by 2 basis points.

Now turning to our other segment formerly known as PharMerica. Again, the current year results include only PMSI and the prior year includes both PMSI and long-term care. As I previously mentioned, long-term care contributed just under $7 million of operating income to the segments operating earnings in the prior year’s second fiscal quarter. As Dave mentioned earlier, we have terminated our sale process with PMSI and are focused on more closely aligning them with ABC and continuing to make progress with their turn- around plan that we have spoken about the last couple of quarters. Unfortunately our progress is reflected in the financials, has been slower than we expected, which is reflected in this quarter’s numbers where revenues have declined by 8% to $105 million and operating profit declined by $7.8 million to $800,000. This reduction resulted in both declines in gross profit due to competition and reductions in reimbursement as well as increases in expenses where we continue development on our customer facing IT initiatives.

While we expect some improvement in the second half of this year and substantial improvements in fiscal ’09, it is likely that PMSI operating margins for fiscal 2008 will be in the 2 to 3% range, down from the 5% margins previously expected for the full year.

Now let’s turn to our consolidated cash flows on the balance sheet. We generated cash from operations of $193 million for the March quarter and $92 million for the first six months of fiscal 2008. We continue to expect our cash generation to be back ended for the year and have maintained our free cash flow estimate of 450 to $525 million. We had capital expenditures of $28 million during the quarter and $55 million for the six months on pace with our annual $125 million guidance. We continue to have a strong focus on asset management and our success in this area is reflected in our working capital statistics as inventory days on hand during the quarter were 25 days down nearly 3 days compared to March of ‘07 and DSOs were down 1 day to 19 days and DPOs were flat year to year.

From a share repurchase perspective we bought $84 million of our shares during the March quarter and have now bought back $395 million of our shares in the first six months of fiscal 2008. We have $302 million remaining under our share repurchase program and based on our first half activity and expected cash flow in the second half of 2008, it is likely that we will use a substantial amount of the remaining $302 million authorization in the second half of the fiscal year and exceed our 2008 share repurchase target of 400 to $500 million.

One final note on our capital structure, our debt to total capital ratio at the end of March was 29%, just under our target range of 30 to 35%.

Now moving to our fiscal 2008 guidance, our revised annual dilute EPS guidance is $2.77 to $2.87 for the year within our original range and reflects a narrowing of the range by low end to top end. This top end reduction primarily reflects reduced PMSI expectations, declines in anemia drug revenues below our original expectations and slowing market growth. Said another way, with our GAAP diluted EPS of $1.48 for the first six months, we would expect diluted EPS in the range of $1.29 to $1.39 over the second half of our fiscal year with the September quarter expected to be higher than the June quarter due to the anticipated timing of certain manufacturer price increases.

This updated EPS guidance reflects our total revenue guidance of 7 to 8% and Pharmaceutical Distribution Segment operating margin expansion in the low single digit basis point range. Our increased share repurchase assumption should result in even fewer average outstanding shares than previously expected for the year, now down 12 to 13% , the benefit of which will be offset in part by higher net interest expense.

Now let me take a minute to express some high level thoughts about fiscal ’09 in light of the recent reduction in market revenue growth estimates by IMS. Keep in mind that we have not yet started our detailed bottom up planning process for fiscal ’09, which we will commence shortly.

Our long-term EPS growth target of 15% reflects market revenue growth, margin expansion in the single digit basis point range annually and free cash flow approximating net income. As we have said to many of you in the past, we are very comfortable with this target when market revenue growth is in the mid to high single digits. To the extent market growth is below this range, in the low single digits, it becomes more difficult to meet the mid teens EPS target although if the lower market revenue growth is due primarily to brand to generic conversions, we can certainly offset some of the slower revenue growth with increased margin expansion. As it pertains to fiscal 2009, if IMS is near term revenue growth guidance of 2 to 3% proves to be accurate, we can certainly see a clear pathway to low double digit EPS growth in fiscal ’09; however, mid-teens EPS growth would be more challenging. As usual, we will give detailed guidance for fiscal ’09 when we release our fiscal ’08 earnings in the fall of this year.

So to summarize, a great quarter, excellent six month results and a fiscal year that remains in our original guidance range despite a couple of hurdles.

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