NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements present the consolidated financial position, results of operations, and cash flows of AmerisourceBergen Corporation and its subsidiaries, including less-than-wholly-owned subsidiaries in which AmerisourceBergen Corporation has a controlling financial interest (the "Company"), as of the dates and for the periods indicated. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals, except as otherwise disclosed herein) considered necessary to present fairly the financial position as of March 31, 2023 and the results of operations and cash flows for the interim periods ended March 31, 2023 and 2022 have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimated amounts. Certain reclassifications have been made to prior-period amounts in order to conform to the current year presentation.
Restricted Cash
The Company is required to maintain certain cash deposits with banks mainly consisting of deposits restricted under contractual agency agreements and cash restricted by law and other obligations, including opioid-related legal settlements.
The following represents a reconciliation of cash and cash equivalents in the Consolidated Balance Sheets to cash, cash equivalents, and restricted cash used in the Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (amounts in thousands) | | March 31,
2023 | | September 30,
2022 | | March 31,
2022 | | September 30,
2021 |
| | (unaudited) | | | | (unaudited) | | |
| Cash and cash equivalents | | $ | 1,539,406 | | | $ | 3,388,189 | | | $ | 2,960,759 | | | $ | 2,547,142 | |
| Restricted cash (included in Prepaid Expenses and Other) | | 87,740 | | | 144,980 | | | 452,014 | | | 462,986 | |
| Restricted cash (included in Other Assets) | | 61,517 | | | 60,370 | | | 60,029 | | | 60,000 | |
| Cash, cash equivalents, and restricted cash | | $ | 1,688,663 | | | $ | 3,593,539 | | | $ | 3,472,802 | | | $ | 3,070,128 | |
Recently Adopted Accounting Pronouncements
As of March 31, 2023, there were no recently-issued accounting standards that may have a material impact on the Company’s financial position, results of operations, cash flows, or notes to the financial statements upon their adoption.
Note 2. Acquisition
The Company acquired and assumed control of PharmaLex Holding Gmbh ("PharmaLex") effective January 1, 2023 for $1.473 billion, subject to customary adjustments, including a $29.3 million cash holdback. PharmaLex is a leading provider of specialized services for the life sciences industry. PharmaLex's services include regulatory affairs, development consulting and scientific affairs, pharmacovigilance, and quality management and compliance. PharmaLex is headquartered in Germany and operates in over 30 countries. The acquisition advances the Company's role as a partner of choice for biopharmaceutical partners across the pharmaceutical development and commercialization journey. PharmaLex is a component of the Company's International Healthcare Solutions reportable segment.
The purchase price has been preliminarily allocated to the underlying assets acquired, including $37.5 million of cash and cash equivalents, and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The preliminary allocation is pending the final valuation of the intangible assets and the corresponding deferred taxes, as well as finalization of the working capital account balances and lease right-of-use assets and liabilities.
The purchase price exceeded the current estimated fair value of the net tangible and intangible assets acquired by $1,016.7 million, which was allocated to goodwill. Goodwill resulting from this acquisition is not expected to be deductible for income tax purposes.
The estimated fair value of the intangible assets acquired of $558.9 million, and the estimated useful lives are as follows:
| | | | | | | | | | | | | | |
| (in thousands, except useful lives) | | Fair Value | | Useful Lives |
| Customer relationships | | $ | 522,634 | | | 12 |
| Trade names | | 30,931 | | | 5 |
| Software technology | | 5,333 | | | 6 |
| Total | | $ | 558,898 | | | |
The Company established an estimated deferred tax liability of $146.0 million primarily in connection with the intangible assets acquired.
Note 3. Variable Interest Entity
The Company has substantial governance rights over Profarma Distribuidora de Produtos Farmacêuticos S.A. ("Profarma"), which allow it to direct the activities that significantly impact Profarma’s economic performance. As such, the Company consolidates the operating results of Profarma in its consolidated financial statements. The Company is not obligated to provide future financial support to Profarma.
The following assets and liabilities of Profarma are included in the Company's Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2023 | | September 30,
2022 |
| Cash and cash equivalents | | $ | 19,366 | | | $ | 23,144 | |
| Accounts receivables, net | | 199,993 | | | 192,930 | |
| Inventories | | 214,652 | | | 207,858 | |
| Prepaid expenses and other | | 66,845 | | | 63,982 | |
| Property and equipment, net | | 41,406 | | | 35,554 | |
| Other intangible assets | | 64,536 | | | 66,568 | |
| Other long-term assets | | 76,849 | | | 71,327 | |
| Total assets | | $ | 683,647 | | | $ | 661,363 | |
| | | | |
| Accounts payable | | $ | 249,248 | | | $ | 215,515 | |
| Accrued expenses and other | | 45,164 | | | 47,952 | |
| Short-term debt | | 21,871 | | | 60,851 | |
| Long-term debt | | 96,981 | | | 64,918 | |
| Deferred income taxes | | 22,512 | | | 25,801 | |
| Other long-term liabilities | | 54,690 | | | 52,417 | |
| Total liabilities | | $ | 490,466 | | | $ | 467,454 | |
Profarma's assets can only be used to settle its obligations, and its creditors do not have recourse to the general credit of the Company.
Note 4. Income Taxes
The Company files income tax returns in U.S. federal, state, and various foreign jurisdictions. As of March 31, 2023, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company’s financial statements, of $528.3 million ($464.5 million, net of federal benefit). If recognized, $446.3 million of these tax benefits would have reduced income tax expense and the effective tax rate. Included in this amount is $20.5 million of interest and penalties, which the Company records in Income Tax Expense in the Company's Consolidated Statements of Operations. In the six months ended March 31, 2023, unrecognized tax benefits decreased by $24.9 million. Over the next 12 months, tax authority audit resolutions and the expiration of statutes of limitations are not expected to result in a reduction of unrecognized tax benefits.
The Company's effective tax rates were 16.4% and 18.2% for the three and six months ended March 31, 2023, respectively. The Company's effective tax rates were 23.7% and 24.1% for the three and six months ended March 31, 2022, respectively. The effective tax rate for the three and six months ended March 31, 2023 was lower than the U.S. statutory rate primarily due to the benefit of non-U.S. income taxed at rates lower than the U.S. statutory rate, benefits from tax authority audit resolutions, and tax benefits associated with the vesting of restricted stock units and stock option exercises, offset in part by U.S. state income taxes. The effective tax rate in the three and six months ended March 31, 2022 was higher than the U.S. statutory rate primarily due to U.S. state income taxes as well as discrete tax expense associated with foreign valuation allowance adjustments, offset in part by the benefit of non-U.S. income taxed at rates lower than the U.S. statutory rate.
Note 5. Goodwill and Other Intangible Assets
The following is a summary of the changes in the carrying value of goodwill, by reportable segment, for the six months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | U. S. Healthcare Solutions | | International Healthcare Solutions | | Total |
| Goodwill as of September 30, 2022 | | $ | 6,280,240 | | | $ | 2,223,646 | | | $ | 8,503,886 | |
| | | | | | |
| Goodwill recognized in connection with acquisitions | | — | | | 1,020,013 | | | 1,020,013 | |
| | | | | | |
| | | | | | |
| Foreign currency translation | | 2,895 | | | 106,746 | | | 109,641 | |
| Goodwill as of March 31, 2023 | | $ | 6,283,135 | | | $ | 3,350,405 | | | $ | 9,633,540 | |
The following is a summary of other intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 | | September 30, 2022 |
| (in thousands) | | Weighted Average Remaining Useful Life | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Indefinite-lived trade names | | | | $ | 17,000 | | | $ | — | | | $ | 17,000 | | | $ | 667,932 | | | $ | — | | | $ | 667,932 | |
| Finite-lived: | | | | | | | | | | | | | | |
| Customer relationships | | 15 years | | 4,955,699 | | | (1,082,350) | | | 3,873,349 | | | 4,226,547 | | | (931,961) | | | 3,294,586 | |
| Trade names and other | | 4 years | | 1,249,458 | | | (254,964) | | | 994,494 | | | 542,346 | | | (172,127) | | | 370,219 | |
| Total other intangible assets | | | | $ | 6,222,157 | | | $ | (1,337,314) | | | $ | 4,884,843 | | | $ | 5,436,825 | | | $ | (1,104,088) | | | $ | 4,332,737 | |
On January 24, 2023, the Company announced its intent to change its name to better reflect its bold vision and purpose-driven approach to creating healthier futures. The Company intends to begin operating as Cencora in the second half of calendar year 2023. The new name represents a unified presence that will continue to fuel the Company's ongoing growth strategy and advance its impact across healthcare. In connection with the Company's name change, it evaluated and shortened the useful lives of certain trade names. The Company also reclassified $651.0 million of trade names from indefinite-lived to finite-lived trade names. The revised useful lives of these trade names, all of which were acquired through prior acquisitions made by the Company, range from less than one year to three years. The below future amortization expense amounts reflect the impact of the intangible assets' revised useful lives.
Amortization expense for finite-lived intangible assets was $140.8 and $78.8 million in the three months ended March 31, 2023 and 2022, respectively. Amortization expense for finite-lived intangible assets was $213.2 million and $159.1 million in the six months ended March 31, 2023 and 2022, respectively. Amortization expense for finite-lived intangible assets is
estimated to be $548.6 million in fiscal 2023, $656.5 million in fiscal 2024, $530.9 million in fiscal 2025, $359.0 million in fiscal 2026, $300.5 million in fiscal 2027, and $2,685.5 million thereafter.
Note 6. Debt
Debt consisted of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2023 | | September 30,
2022 |
| Multi-currency revolving credit facility due 2027 | | $ | — | | | $ | — | |
| Receivables securitization facility due 2025 | | 350,000 | | | 350,000 | |
| Revolving credit note | | — | | | — | |
Overdraft facility due 2024 (£10,000) | | — | | | — | |
| Money market facility | | — | | | — | |
0.737% senior notes due 2023 | | — | | | 672,736 | |
$500,000, 3.400% senior notes due 2024 | | 499,437 | | | 499,195 | |
$500,000, 3.250% senior notes due 2025 | | 498,687 | | | 498,347 | |
$750,000, 3.450% senior notes due 2027 | | 746,043 | | | 745,622 | |
$500,000, 2.800% senior notes due 2030 | | 495,653 | | | 495,348 | |
$1,000,000, 2.700% senior notes due 2031 | | 991,040 | | | 990,480 | |
$500,000, 4.250% senior notes due 2045 | | 495,270 | | | 495,162 | |
$500,000, 4.300% senior notes due 2047 | | 493,421 | | | 493,288 | |
| Alliance Healthcare debt | | 244,408 | | | 336,886 | |
| Nonrecourse debt | | 118,852 | | | 125,769 | |
| Total debt | | 4,932,811 | | | 5,702,833 | |
| Less AmerisourceBergen Corporation current portion | | — | | | 672,736 | |
| Less Alliance Healthcare current portion | | 244,408 | | | 336,886 | |
| Less nonrecourse current portion | | 21,871 | | | 60,851 | |
| Total, net of current portion | | $ | 4,666,532 | | | $ | 4,632,360 | |
Multi-Currency Revolving Credit Facility
The Company has a $2.4 billion multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility") with a syndicate of lenders, which is scheduled to expire in October 2027. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based on the Company’s debt rating and ranges from 80.5 basis points to 122.5 basis points over SOFR/EURIBOR/CDOR/RFR, as applicable (102.5 basis points over SOFR/EURIBOR/CDOR/RFR as of March 31, 2023) and from 0 basis points to 22.5 basis points over the alternate base rate and Canadian prime rate, as applicable. The Company pays facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on its debt rating, ranging from 7 basis points to 15 basis points, annually, of the total commitment (10 basis points as of March 31, 2023). The Company may choose to repay or reduce its commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of subsidiaries and asset sales, with which the Company was compliant as of March 31, 2023.
Commercial Paper Program
The Company has a commercial paper program whereby it may from time to time issue short-term promissory notes in an aggregate amount of up to $2.4 billion at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed 365 days from the date of issuance. The notes will bear interest, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase the Company’s borrowing capacity as it is fully backed by the Company’s Multi-Currency Revolving Credit Facility. There were no borrowings outstanding under the commercial paper program as of March 31, 2023.
Receivables Securitization Facility
The Company has a $1,450 million receivables securitization facility ("Receivables Securitization Facility"), which is scheduled to expire in October 2025. The Company has available to it an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to $250 million, subject to lender approval, for seasonal needs
during the December and March quarters. Interest rates are based on prevailing market rates for short-term commercial paper or 30-day Term SOFR, plus a program fee. The Company pays a customary unused fee at prevailing market rates, annually, to maintain the availability under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of March 31, 2023.
Revolving Credit Note, Overdraft Facility, and Money Market Facility
The Company has an uncommitted, unsecured line of credit available to it pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides the Company with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed $75 million. The Revolving Credit Note may be decreased or terminated by the bank or the Company at any time without prior notice. The Company also has a £10 million uncommitted U.K. overdraft facility ("Overdraft Facility"), which expires in February 2024, to fund short-term normal trading cycle fluctuations related to its MWI Animal Health business. The Company has an uncommitted, unsecured line of credit available to it pursuant to a money market credit agreement ("Money Market Facility"). The Money Market Facility provides the Company with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed $100 million. The Money Market Facility may be decreased or terminated by the bank or the Company at any time without prior notice.
Senior Notes
In March 2023, the remaining balance of $675 million on the original $1.5 billion of 0.737% senior notes matured and was repaid.
Alliance Healthcare Debt
Alliance Healthcare debt is comprised of uncommitted revolving credit facilities in various currencies with various rates. A majority of the outstanding borrowings were held in Egypt (which is 50% owned) as of March 31, 2023. These facilities are used to fund its working capital needs.
Nonrecourse Debt
Nonrecourse debt is comprised of short-term and long-term debt belonging to the Brazil subsidiary and is repaid solely from the Brazil subsidiary's cash flows and such debt agreements provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts, and cash flows of the Brazil subsidiary.
Note 7. Stockholders’ Equity and Earnings per Share
In May 2022, the Company's board of directors authorized a share repurchase program allowing the Company to purchase up to $1.0 billion of its outstanding shares of common stock, subject to market conditions. In the six months ended March 31, 2023, the Company purchased 5.0 million shares of its common stock for a total of $778.8 million, including 4.4 million shares from Walgreens Boots Alliance, Inc. ("WBA") for $700 million. These purchases excluded $28.4 million of purchases in September 2022 that cash settled in October 2022. As of March 31, 2023, the Company had $182.5 million of availability remaining under this program.
In March 2023, the Company's board of directors authorized a new share repurchase program allowing the Company to purchase up to $1.0 billion of its outstanding shares of common stock, subject to market conditions. No shares were purchased under this program as of March 31, 2023.
Basic earnings per share is computed by dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed by dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding, plus the dilutive effect of stock options and restricted stock units during the periods presented.
The following illustrates the components of diluted weighted average shares outstanding for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | Six months ended
March 31, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Weighted average common shares outstanding - basic | | 202,316 | | | 209,244 | | | 203,188 | | | 208,900 | |
| Dilutive effect of stock options and restricted stock units | | 1,940 | | | 2,747 | | | 2,118 | | | 2,680 | |
| Weighted average common shares outstanding - diluted | | 204,256 | | | 211,991 | | | 205,306 | | | 211,580 | |
The potentially dilutive stock options and restricted stock units that were antidilutive for the three months ended March 31, 2023 and 2022 were 3 thousand and 32 thousand, respectively. The potentially dilutive stock options and restricted stock units that were antidilutive for the six months ended March 31, 2023 and 2022 were 187 thousand and 202 thousand, respectively.
Note 8. Related Party Transactions
WBA owns more than 10% of the Company’s outstanding common stock and is, therefore, considered a related party. The Company operates under various agreements and arrangements with WBA, including a pharmaceutical distribution agreement pursuant to which the Company distributes pharmaceutical products to WBA and an agreement that provides the Company the ability to access favorable economic pricing and generic products through a generic purchasing services arrangement with Walgreens Boots Alliance Development GmbH (both through 2029) as well as a distribution agreement pursuant to which it supplies branded and generic pharmaceutical products to WBA’s Boots UK Ltd. subsidiary (through 2031).
Revenue from the various agreements and arrangements with WBA was $16.8 billion and $33.0 billion in the three and six months ended March 31, 2023, respectively. Revenue from the various agreements and arrangements with WBA was $15.4 billion and $31.6 billion in the three and six months ended March 31, 2022, respectively. The Company’s receivable from WBA, net of incentives, was $7.2 billion and $7.0 billion as of March 31, 2023 and September 30, 2022, respectively.
Note 9. Restructuring and Other Expenses
The following illustrates the expenses incurred by the Company for restructuring and other items for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | Six months ended
March 31, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Restructuring and employee severance costs | | $ | 43,531 | | | $ | 8,579 | | | $ | 46,851 | | | $ | 15,221 | |
| Business transformation efforts | | 15,703 | | | 3,936 | | | 28,623 | | | 8,278 | |
| Other expenses | | 38,210 | | | — | | | 38,210 | | | — | |
| Total restructuring and other expenses | | $ | 97,444 | | | $ | 12,515 | | | $ | 113,684 | | | $ | 23,499 | |
Restructuring and employee severance costs in the three and six months ended March 31, 2023 primarily included expenses incurred in connection with a workforce reduction in the Company's U.S. Healthcare Solutions reportable segment.
Business transformation efforts in the three and six months ended March 31, 2023 included rebranding costs associated with the Company's name change to Cencora and non-recurring expenses related to significant strategic initiatives to improve operational efficiency. The majority of these costs related to services provided by third-party consultants, including certain technology initiatives.
Business transformation efforts in the three and six months ended March 31, 2022 primarily related to costs associated with reorganizing the Company to further align the organization to its customers' needs. The majority of these costs related to services provided by third-party consultants, including certain technology initiatives.
In the three months ended March 31, 2023, one of the Company’s foreign business units experienced a cybersecurity event that impacted a standalone legacy information technology platform in one country and the foreign business unit's ability to operate in that country for approximately two weeks. In connection with this isolated event, the Company incurred costs to restore the foreign business unit's operations in that country, which was recorded in Other expenses in the above table. The majority of Other expenses in the three and six months ended March 31, 2023 related to the cybersecurity event.
Note 10. Legal Matters and Contingencies
In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, government investigations, stockholder demands, and other disputes, including antitrust, commercial, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought from the Company in some matters, and some matters may require years for the Company to resolve. The Company records a reserve for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
For those matters for which the Company has not recognized a liability, the Company cannot predict the outcome of their impact on the Company as uncertainty remains with regard to whether such matters will proceed to trial, whether settlements will be reached, and the amount and terms of any such settlements. Outcomes may include settlements in significant amounts that are not currently estimable, limitations on the Company's conduct, the imposition of corporate integrity agreement obligations, consent decrees, and/or other civil and criminal penalties. From time to time, the Company is also involved in disputes with its customers, which the Company generally seeks to resolve through commercial negotiations. If negotiations are unsuccessful, the parties may litigate the dispute or otherwise attempt to settle the matter.
With respect to the specific legal proceedings and claims described below, unless otherwise noted, the amount or range of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company’s results of operations or cash flows for that period or on the Company's financial condition.
Opioid Lawsuits and Investigations
A significant number of counties, municipalities, and other governmental entities in a majority of U.S. states and Puerto Rico, as well as numerous states and tribes, filed lawsuits in various federal, state and other courts against pharmaceutical wholesale distributors (including the Company and certain subsidiaries, such as AmerisourceBergen Drug Corporation ("ABDC") and H.D. Smith), pharmaceutical manufacturers, retail pharmacy chains, medical practices, and physicians relating to the distribution of prescription opioid pain medications.
An initial group of cases was consolidated for Multidistrict Litigation ("MDL") proceedings before the United States District Court for the Northern District of Ohio (the "Court") in December 2017. In April 2018, the Court issued an order creating a litigation track, which included dispositive motion practice, discovery, and trials in certain bellwether jurisdictions. In November 2019 and January 2020, the Court filed Suggestions of Remand with the Judicial Panel on Multidistrict Litigation that identified four cases filed against the Company for potential transfer from the MDL back to federal courts in California, Oklahoma, and West Virginia for the completion of discovery, motion practice, and trial. All four cases were remanded to those federal district courts. Trial in the two consolidated cases in West Virginia commenced in May 2021 and concluded in July 2021. On July 4, 2022, the court entered judgment in favor of the defendants, including the Company. The plaintiffs filed an appeal of the court’s decision on August 2, 2022. The Oklahoma case, in which the plaintiff was the Cherokee Nation, was resolved through a settlement with the Cherokee Nation, as announced on September 28, 2021. The California case, in which the plaintiff was the City and County of San Francisco, was resolved pursuant to the comprehensive settlement described below (the "Distributor Settlement Agreement"), and all claims against the Company have been dismissed in both cases.
On July 21, 2021, the Company announced that it and the two other national pharmaceutical distributors had negotiated a Distributor Settlement Agreement that, if all conditions were satisfied, would result in the resolution of a substantial majority of opioid lawsuits filed by state and local governmental entities. The Distributor Settlement Agreement became effective on April 2, 2022, and as of March 31, 2023, it included 48 of 49 eligible states (the "Settling States"), as well as 99% by population of the eligible political subdivisions in the Settling States. Pursuant to the Distributor Settlement Agreement and related agreements with Settling States, the Company will pay up to approximately $6.4 billion over 18 years and comply with other requirements, including establishment of a clearinghouse that will consolidate data from all three national distributors. The exact payment amount will depend on several factors, including the extent to which states take action to foreclose opioid lawsuits by subdivisions (e.g., laws barring opioid lawsuits by subdivisions). West Virginia and its subdivisions and Native American tribes are not a part of the Distributor Settlement Agreement and the Company has reached separate agreements with these groups.
On July 25, 2022, the State of Alabama amended its complaint in a pending state court action against another distributor in order to add the Company as a party. The trial in the Alabama state court is scheduled to begin in February 2024.
The Company’s accrued litigation liability related to the Distributor Settlement Agreement, including an estimate for the State of Alabama (with whom the Company has not reached a settlement agreement), as well as other opioid-related litigation for which it has reached settlement agreements, as described above, was $5.9 billion as of March 31, 2023 and $6.0 billion as of September 30, 2022. The Company currently estimates that $434.2 million will be paid prior to March 31, 2024,
which is recorded in Accrued Expenses and Other on the Company’s Consolidated Balance Sheet. The remaining long-term liability of $5.4 billion is recorded in Accrued Litigation Liability on the Company's Consolidated Balance Sheet. While the Company has accrued its estimated liability for opioid litigation, it is unable to estimate the range of possible loss associated with the matters that are not included in the accrual. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment is highly subjective and requires judgments about future events. The Company regularly reviews opioid litigation matters to determine whether its accrual is adequate. The amount of ultimate loss may differ materially from the amount accrued to date. Until such time as otherwise resolved, the Company will continue to litigate and prepare for trial and to vigorously defend itself in all such matters. Since these matters are still developing, the Company is unable to predict the outcome, but the result of these lawsuits could include excessive monetary verdicts and/or injunctive relief that may affect the Company’s operations.
Other lawsuits regarding the distribution of prescription opioid pain medications have been filed by: third-party payors and similar entities; hospitals; hospital groups; and individuals, including cases styled as putative class actions. These lawsuits, which have been and continue to be filed in federal and state courts, generally allege violations of controlled substance laws and various other statutes as well as common law claims, including negligence, public nuisance, and unjust enrichment, and seek equitable relief and monetary damages. Motion practice and active discovery are ongoing in many of these cases. In Alabama, discovery is proceeding for a jury trial scheduled to begin on July 24, 2023 that will include up to eight plaintiff hospitals. The Company, as well as additional pharmaceutical distributors and manufacturers, will be defendants in the July trial. Ongoing and additional litigation is anticipated in cases filed by subdivisions that are not participating in the Distributor Settlement Agreement, as well as in cases filed by non-governmental or non-political entities, including hospitals, third-party payors, and individuals, among others. Certain cases related to opioids filed in various state courts have trial dates scheduled in 2024 and later, although all such dates are subject to change. The Company is vigorously defending itself in the pending lawsuits and intends to vigorously defend itself against any threatened lawsuits or enforcement proceedings.
Since July 2017, the Company has received subpoenas from several U.S. Attorney’s Offices, including grand jury subpoenas from the U.S. Attorney's Office for the District of New Jersey ("USAO-NJ") and the U.S. Attorney's Office for the Eastern District of New York ("USAO-EDNY"). Those subpoenas requested the production of a broad range of documents pertaining to the Company’s distribution of controlled substances through its various subsidiaries, including ABDC, and its diversion control programs. The Company produced documents in response to the subpoenas and engaged in discussions with the various U.S. Attorney’s Offices, including the Health Care and Government Fraud Unit of the Criminal Division of the USAO-NJ, the U.S. Department of Justice Consumer Protection Branch and the U.S. Drug Enforcement Administration, in an attempt to resolve these matters. On December 29, 2022, the Department of Justice filed a civil Complaint against the Company, ABDC, and Integrated Commercialization Services, LLC ("ICS"), a subsidiary of the Company, alleging violations of the Controlled Substances Act. Specifically, the Complaint alleges that the Company negligently failed to report suspicious orders to the Drug Enforcement Administration. In the Complaint, the Department of Justice seeks civil penalties and injunctive relief. This Complaint relates to the aforementioned and previously-disclosed investigations. On March 30, 2023, the Company filed a motion to dismiss the Complaint in its entirety on behalf of itself, ABDC, and ICS. The Company denies the allegations in the Complaint and intends to defend itself vigorously in the litigation.
Shareholder Securities Litigation
On October 11, 2019, Teamsters Local 443 Health Services & Insurance Plan, St. Paul Electrical Construction Pension Plan, St. Paul Electrical Construction Workers Supplemental Pension Plan (2014 Restatement), Retirement Medical Funding Plan for the St. Paul Electrical Workers, and San Antonio Fire & Police Pension Fund filed a complaint for a purported derivative action in the Delaware Court of Chancery against the Company and certain of its current and former officers and directors (collectively, “Defendants”). The complaint alleges that the Defendants breached their fiduciary duties by failing to oversee the compliance by certain of the Company’s subsidiaries (including the Company’s former subsidiary Medical Initiatives, Inc. ("MII")) with federal regulations, allegedly resulting in the payment of fines and penalties in connection with the settlements with the USAO-EDNY in fiscal 2017 and 2018 that resolved claims arising from MII's pre-filled syringe program. In December 2019, Defendants filed a motion to dismiss the complaint. After briefing and oral argument, on August 24, 2020 the Delaware Court of Chancery denied Defendants' motion to dismiss. On September 24, 2020, the Board of Directors of the Company established a Special Litigation Committee to conduct an investigation concerning the plaintiffs’ allegations, and on November 10, 2020, the Delaware Court of Chancery granted the Special Litigation Committee’s motion to stay the litigation pending its investigation. On September 22, 2021, the Special Litigation Committee filed its report under seal and moved to dismiss the case. The Special Litigation Committee’s motion to dismiss the case is fully briefed and awaiting oral argument.
On December 30, 2021, Lebanon County Employees' Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan filed a complaint for a purported derivative action in the Delaware Court of Chancery against the Company and certain of its current officers and directors. The complaint alleges claims for breach of fiduciary duty allegedly arising from the
Board’s and certain officers' oversight of the Company’s controlled substance diversion control programs. The defendants moved to dismiss the complaint on March 29, 2022. On December 22, 2022, the Court of Chancery granted the motion to dismiss. On January 9, 2023, the Plaintiffs filed a Motion for Relief from Judgment and Order Pursuant to Rule 60(b) from the Chancery Court’s judgment. On January 20, 2023, the Plaintiffs also appealed the ruling to the Delaware Supreme Court. On March 21, 2023 the Court of Chancery denied the Plaintiffs' Motion for Relief from Judgement and Order Pursuant to Rule 60(b).
Subpoenas, Ongoing Investigations, and Other Contingencies
From time to time, the Company receives subpoenas or requests for information from various government agencies relating to the Company’s business or to the business of a customer, supplier, or other industry participant. The Company’s responses often require time and effort and can result in considerable costs being incurred. Most of these matters are resolved without incident; however, such subpoenas or requests can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the healthcare industry, as well as to substantial settlements.
In January 2017, U.S. Bioservices Corporation ("U.S. Bio"), a former subsidiary of the Company, received a subpoena for information from the USAO-EDNY relating to its activities in connection with billing for products and making returns of potential overpayments to government payers. A filed qui tam complaint related to the investigation was unsealed in April 2019 and the relator filed an amended complaint under seal in the U.S. District Court for the Eastern District of New York. In December 2019, the government filed a notice that it was declining to intervene. The court ordered that the relator's complaint against the Company and other defendants, including AmerisourceBergen Specialty Group, LLC, be unsealed. The relator's complaint alleged violations of the federal False Claims Act and the false claims acts of various states. The relator filed a second amended complaint, removing one state false claims act count. The Company filed a motion to dismiss the second amended complaint and all briefs on the motion were filed with the court on October 9, 2020. The motion to dismiss was granted on December 22, 2022. The False Claims Act claims were dismissed with prejudice, and the state claims were dismissed without prejudice. On January 24, 2023, the relator filed Motions to Reconsider Dismissal and For Leave to Amend the Complaint. Response briefs on those motions were filed by the Company and all briefing was completed on February 15, 2023.
In December 2019, Reliable Pharmacy, together with other retail pharmacies and North Sunflower Medical Center, filed a civil antitrust complaint against multiple generic drug manufacturers, and also included claims against ABDC and H.D. Smith, and other drug distributors and industry participants. The case is filed as a putative class action and plaintiffs purport to represent a class of drug purchasers including other retail pharmacies and healthcare providers. The case has been consolidated for multidistrict litigation proceedings before the United States District Court for the Eastern District of Pennsylvania. The complaint alleges that ABDC, H.D. Smith, and others in the industry participated in a conspiracy to fix prices, allocate markets and rig bids regarding generic drugs. In March 2020, the plaintiffs filed a further amended complaint. On July 15, 2020, the defendants filed a motion to dismiss the complaint. On May 25, 2022, the Court granted the motion to dismiss without prejudice. On July 1, 2022, the plaintiffs filed an amended complaint, again including claims against ABDC, H.D. Smith, and other drug distributors and industry participants. On August 21, 2022, the Company and other industry participants filed a motion to dismiss the amended complaint. All briefs on the motion were filed with the court on November 22, 2022.
On March 3, 2022, the United States Attorney’s Office for the Western District of Virginia notified the Company of the existence of a criminal investigation into MWI Veterinary Supply Co., the Company’s animal health subsidiary, in connection with grand jury subpoenas to which MWI previously responded relating to compliance with state and federal regulatory requirements governing wholesale shipments of animal health products to customers in certain states. The Company is cooperating with the investigation.
Note 11. Litigation Settlements
Antitrust Settlements
Numerous lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. These lawsuits are generally brought as class actions. The Company is not typically named as a plaintiff in these lawsuits, but has been a member of the direct purchasers' class (i.e., those purchasers who purchase directly from these pharmaceutical manufacturers). None of the lawsuits have gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement funds. The Company recognized gains related to these lawsuits of $49.9 million in the six months ended March 31, 2023 and $1.8 million in three and six months ended March 31, 2022. These gains, which are net of attorney fees and estimated payments due to other parties, were recorded as reductions to cost of goods sold in the Company’s Consolidated Statements of Operations.
Note 12. Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable as of March 31, 2023 and September 30, 2022 approximate fair value based upon the relatively short-term nature of these financial instruments. Within Cash and Cash Equivalents, the Company had $476.0 million of investments in money market accounts as of March 31, 2023 and had $1,602.0 million of investments in money market accounts as of September 30, 2022. The fair value of the money market accounts was determined based upon unadjusted quoted prices in active markets for identical assets, otherwise known as Level 1 inputs.
The recorded amount of long-term debt (see Note 6) and the corresponding fair value as of March 31, 2023 were $4,666.5 million and $4,325.7 million, respectively. The recorded amount of long-term debt and the corresponding fair value as of September 30, 2022 were $4,632.4 million and $4,130.3 million, respectively. The fair value of long-term debt was determined based upon inputs other than quoted prices, otherwise known as Level 2 inputs.
Note 13. Business Segment Information
The Company is organized geographically based upon the products and services it provides to its customers and reports its results under two reportable segments: U.S. Healthcare Solutions and International Healthcare Solutions.
Effective October 1, 2022, the chief operating decision maker ("CODM") of the Company is the Executive Vice President and Chief Operating Officer.
The following illustrates reportable and operating segment disaggregated revenue as required by Accounting Standards Codification 606 for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | Six months ended
March 31, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| U.S. Healthcare Solutions: | | | | | | | | |
| Human Health | | $ | 55,453,964 | | | $ | 49,770,781 | | | $ | 110,530,577 | | | $ | 101,552,910 | |
| Animal Health | | 1,239,492 | | | 1,171,982 | | | 2,399,458 | | | 2,369,500 | |
| Total U.S. Healthcare Solutions | | 56,693,456 | | | 50,942,763 | | | 112,930,035 | | | 103,922,410 | |
| International Healthcare Solutions: | | | | | | | | |
| Alliance Healthcare | | 5,560,936 | | | 5,609,472 | | | 11,021,627 | | | 11,166,143 | |
| Other Healthcare Solutions | | 1,203,999 | | | 1,168,219 | | | 2,354,586 | | | 2,261,330 | |
| Total International Healthcare Solutions | | 6,764,935 | | | 6,777,691 | | | 13,376,213 | | | 13,427,473 | |
| Intersegment eliminations | | (1,186) | | | (1,008) | | | (2,211) | | | (1,627) | |
| Revenue | | $ | 63,457,205 | | | $ | 57,719,446 | | | $ | 126,304,037 | | | $ | 117,348,256 | |
The following illustrates reportable segment operating income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | Six months ended
March 31, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| U.S. Healthcare Solutions | | $ | 756,137 | | | $ | 729,542 | | | $ | 1,328,553 | | | $ | 1,298,629 | |
| International Healthcare Solutions | | 175,991 | | | 187,068 | | | 337,273 | | | 367,128 | |
| | | | | | | | |
| Total segment operating income | | $ | 932,128 | | | $ | 916,610 | | | $ | 1,665,826 | | | $ | 1,665,757 | |
The following reconciles total segment operating income to income before income taxes for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | Six months ended
March 31, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Total segment operating income | | $ | 932,128 | | | $ | 916,610 | | | $ | 1,665,826 | | | $ | 1,665,757 | |
| Gains from antitrust litigation settlements | | — | | | 1,835 | | | 49,899 | | | 1,835 | |
| LIFO (expense) credit | | (54,270) | | | 16,059 | | | (79,320) | | | 60,738 | |
| Turkey highly inflationary impact | | (4,855) | | | — | | | (8,439) | | | — | |
| Acquisition-related intangibles amortization | | (140,114) | | | (77,952) | | | (211,992) | | | (157,458) | |
| Litigation and opioid-related expenses | | (15,813) | | | (52,090) | | | (28,519) | | | (84,725) | |
| Acquisition-related deal and integration expenses | | (59,113) | | | (11,790) | | | (80,109) | | | (33,140) | |
| Restructuring and other expenses | | (97,444) | | | (12,515) | | | (113,684) | | | (23,499) | |
| Impairment of assets | | — | | | — | | | — | | | (4,946) | |
| | | | | | | | |
| Operating income | | 560,519 | | | 780,157 | | | 1,193,662 | | | 1,424,562 | |
| Other income, net | | (15,720) | | | (948) | | | (22,048) | | | (6,120) | |
| Interest expense, net | | 64,109 | | | 52,916 | | | 110,125 | | | 106,288 | |
| | | | | | | | |
| | | | | | | | |
| Income before income taxes | | $ | 512,130 | | | $ | 728,189 | | | $ | 1,105,585 | | | $ | 1,324,394 | |
Segment operating income is evaluated by the CODM of the Company before gains from antitrust litigation settlements; LIFO (expense) credit; Turkey highly inflationary impact; acquisition-related intangibles amortization; litigation and opioid-related expenses; acquisition-related deal and integration expenses; and restructuring and other expenses; and impairment of assets. All corporate office expenses are allocated to the operating segment level.
Note 14. Subsequent Event
On April 20, 2023, the Company and TPG, a global alternative asset management firm, announced an agreement to acquire OneOncology, a network of leading oncology practices. The Company will invest approximately $685 million (representing approximately 35%) in a joint venture formed to acquire OneOncology for approximately $2.1 billion, and TPG will acquire the majority interest in the joint venture.
The transaction is expected to close by the end of September 2023 and is subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are forward-looking and as such are not historical facts. This includes, without limitation, statements regarding the financial position, business strategy and the plans and objectives of management for our future operations; anticipated trends and prospects in the industries in which our business operates; and new products, services and related strategies. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report on Form 10-Q, words such as “aim,” “anticipate,” “believe,” “can,” “continue,” “could,”, “estimate,” "expect," “intend,” “may,” “might,” “on track,” “opportunity,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “strive,” “sustain,” “synergy,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances and speak only as of the date hereof. These statements are not guarantees of future performance and are based on assumptions and estimates that could prove incorrect or could cause actual results to vary materially from those indicated.
Forward-looking statements in this Quarterly Report on Form 10-Q may include, for example, statements about the following:
•the effect of and uncertainties related to the ongoing COVID-19 pandemic (including any government responses thereto) and any continued recovery from the impact of the COVID-19 pandemic;
•our ability to achieve and maintain profitability in the future;
•our ability to respond to general economic conditions, including elevated levels of inflation;
•our ability to manage our growth effectively and our expectations regarding the development and expansion of our business;
•the impact on our business of the regulatory environment and complexities with compliance;
•unfavorable trends in brand and generic pharmaceutical pricing, including in rate or frequency of price inflation or deflation;
•competition and industry consolidation of both customers and suppliers resulting in increasing pressure to reduce prices for our products and services;
•changes in the United States healthcare and regulatory environment, including changes that could impact prescription drug reimbursement under Medicare and Medicaid and declining reimbursement rates for pharmaceuticals;
•increasing governmental regulations regarding the pharmaceutical supply channel;
•continued federal and state government enforcement initiatives to detect and prevent suspicious orders of controlled substances and the diversion of controlled substances;
•continued prosecution or suit by federal and state governmental entities and other parties (including third-party payors, hospitals, hospital groups and individuals) of alleged violations of laws and regulations regarding controlled substances, and any related disputes, including shareholder derivative lawsuits;
•increased federal scrutiny and litigation, including qui tam litigation, for alleged violations of laws and regulations governing the marketing, sale, purchase and/or dispensing of pharmaceutical products or services, and associated reserves and costs;
•failure to comply with the Corporate Integrity Agreement;
•the outcome of any legal or governmental proceedings that may be instituted against us, including material adverse resolution of pending legal proceedings;
•the retention of key customer or supplier relationships under less favorable economics or the adverse resolution of any contract or other dispute with customers or suppliers;
•changes to customer or supplier payment terms, including as a result of the COVID-19 impact on such payment terms;
•the possibility that various conditions to the consummation of the acquisition of OneOncology may not be satisfied or that their satisfaction may be delayed; uncertainties as to the timing of the consummation of the acquisition of OneOncology;
•unexpected costs, charges or expenses resulting from the acquisitions of PharmaLex and OneOncology;
•the integration of the Alliance Healthcare and PharmaLex businesses into the Company being more difficult, time consuming or costly than expected;
•the Company's, Alliance Healthcare's, PharmaLex's or OneOncology's failure to achieve expected or targeted future financial and operating performance and results;
•the effects of disruption from acquisitions and related strategic transactions on the respective businesses of the Company, Alliance Healthcare, PharmaLex, and OneOncology and the fact that acquisitions and related strategic transactions may make it more difficult to establish or maintain relationships with employees, suppliers and other business partners;
•the acquisition of businesses, including the acquisitions of the Alliance Healthcare, PharmaLex, and OneOncology businesses and related strategic transactions, that do not perform as expected, or that are difficult to integrate or control, or the inability to capture all of the anticipated synergies related thereto or to capture the anticipated synergies within the expected time period;
•risks associated with the strategic, long-term relationship between WBA and the Company, including with respect to the pharmaceutical distribution agreement and/or the global generic purchasing services arrangement;
•managing foreign expansion, including non-compliance with the U.S. Foreign Corrupt Practices Act, anti-bribery laws, economic sanctions and import laws and regulations;
•our ability to respond to financial market volatility and disruption;
•changes in tax laws or legislative initiatives that could adversely affect the Company's tax positions and/or the Company's tax liabilities or adverse resolution of challenges to the Company's tax positions;
•the loss, bankruptcy or insolvency of a major supplier, or substantial defaults in payment, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer, including as a result of COVID-19;
•financial and other impacts of COVID-19 on our operations or business continuity;
•changes to the customer or supplier mix;
•malfunction, failure or breach of sophisticated information systems to operate as designed, and risks generally associated with cybersecurity;
•risks generally associated with data privacy regulation and the protection and international transfer of personal data;
•regulatory and legal implications relating to the March 2023 cybersecurity event sustained by one of the Company's foreign business units in one country;
•financial and other impacts of macroeconomic and geopolitical trends and events, including the unfolding situation in Russia and Ukraine and its regional and global ramifications;
•natural disasters or other unexpected events, such as additional pandemics, that affect the Company’s operations;
•the impairment of goodwill or other intangible assets (including any additional impairments with respect to foreign operations), resulting in a charge to earnings;
•the Company's ability to manage and complete divestitures;
•the disruption of the Company’s cash flow and ability to return value to its stockholders in accordance with its past practices;
•interest rate and foreign currency exchange rate fluctuations;
•declining economic conditions and increases in inflation in the United States and abroad; and
•other economic, business, competitive, legal, tax, regulatory and/or operational factors affecting the Company’s business generally.
These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.