Overview
The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein and in conjunction with the financial statements and notes thereto included in AmerisourceBergen Corporation's (the "Company's") Annual Report on Form 10-K for the fiscal year ended September 30, 2008.
In May 2009, the Company declared a two-for-one stock split of its outstanding shares of common stock. The stock split occurred in the form of a 100% stock dividend, whereby each stockholder received one additional share for each share owned. The shares were distributed on June 15, 2009 to stockholders of record at the close of business on May 29, 2009. All applicable share and per share data in this Management's Discussion and Analysis of Financial Condition and Results of Operations have been retroactively adjusted to give effect to this stock split.
The Company is a pharmaceutical services company providing drug distribution and related healthcare services and solutions to its pharmacy, physician, and manufacturer customers, which are based primarily in the United States and Canada. Substantially all of the Company's operations are located in the United States and Canada. The Company also has a pharmaceutical packaging operation in the United Kingdom.
The Company has three operating segments, which include the operations of AmerisourceBergen Drug Corporation ("ABDC"), the AmerisourceBergen Specialty Group ("ABSG"), and the AmerisourceBergen Packaging Group ("ABPG"). The Company has aggregated the operating results of ABDC, ABSG, and ABPG into one reportable segment, Pharmaceutical Distribution.
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, long-term care and other alternate site pharmacies, and other customers. ABDC also provides pharmacy management, staffing and other consulting services; 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 pharmaceutical distribution and other services primarily to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including dialysis clinics. ABSG also distributes vaccines, other injectables, plasma, and other blood products. In addition, through its specialty services businesses, ABSG provides drug 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, 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 contract packaging services for pharmaceutical manufacturers. Brecon is a United Kingdom-based provider of contract packaging and clinical trials materials services for pharmaceutical manufacturers. Acquisition
In May 2009, the Company acquired Innomar Strategies Inc. ("Innomar"), a Canadian specialty pharmaceutical services company, for a purchase price of $13.4 million, net of a working capital adjustment. Innomar provides services within Canada to pharmaceutical and biotechnology companies, including:
strategic consulting and access solutions, specialty logistics management, patient assistance and nursing services, and clinical research services.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Divestiture
In October 2008, the Company completed the divestiture of its former workers' compensation business, PMSI. In accordance with the Financial Accounting Standards Board's ("FASB's") Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company classified PMSI's assets and liabilities as held for sale in the consolidated balance sheet as of September 30, 2008 and classified PMSI's operating results and cash flows as discontinued in the consolidated financial statements for all periods presented.
The Company sold PMSI for approximately $31 million, net of an estimated working capital adjustment, which includes a $19 million subordinated note due from PMSI on the fifth anniversary of the closing date (the "maturity date"), of which $4 million may be payable in October 2010, if PMSI achieves certain revenue targets with respect to its largest customer. Interest, which accrues at an annual rate of LIBOR plus 4% (not to exceed 8%), will be payable in cash on a quarterly basis, if PMSI achieves a defined minimum fixed charge coverage ratio, or will be compounded semi-annually and paid at maturity. Additionally, if PMSI's annual net revenue exceeds certain thresholds through December 2011, the Company may be entitled to additional payments of up to $10 million under the subordinated note due from PMSI on the maturity date of the note.

Results of Operations
                         AmerisourceBergen Corporation
                         Summary Financial Information

                                                      Quarter Ended June 30,
(dollars in thousands)                                2009              2008            Change

Total revenue                                     $ 18,393,899      $ 17,996,666               2 %


Total gross profit                                $    519,223      $    498,045               4 %


Pharmaceutical Distribution operating income      $    213,200      $    205,390               4 %
Facility consolidations, employee severance
and other                                                 (213 )          (7,865 )           N/M


Total operating income                            $    212,987      $    197,525               8 %


Percentages of total revenue:

Pharmaceutical Distribution
Gross profit                                              2.82 %            2.77 %
Operating expenses                                        1.66 %            1.63 %
Operating income                                          1.16 %            1.14 %

AmerisourceBergen Corporation
Gross profit                                              2.82 %            2.77 %
Operating expenses                                        1.66 %            1.67 %
Operating income                                          1.16 %            1.10 %

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (Continued)


                         AmerisourceBergen Corporation
                         Summary Financial Information

                                                     Nine months Ended June 30,
(dollars in thousands)                                 2009               2008            Change

Total revenue                                     $   53,043,927      $ 53,031,887               - %


Pharmaceutical Distribution gross profit          $    1,561,542      $  1,517,964               3 %
Gain on antitrust litigation settlements                       -             1,585             N/M


Total gross profit                                $    1,561,542      $  1,519,549               3 %


Pharmaceutical Distribution operating income      $      664,641      $    633,010               5 %
Facility consolidations, employee severance
and other                                                 (5,504 )          (9,426 )           N/M
Gain on antitrust litigation settlements                       -             1,585             N/M


Total operating income                            $      659,137      $    625,169               5 %


Percentages of total revenue:

Pharmaceutical Distribution
Gross profit                                                2.94 %            2.86 %
Operating expenses                                          1.69 %            1.67 %
Operating income                                            1.25 %            1.19 %

AmerisourceBergen Corporation
Gross profit                                                2.94 %            2.87 %
Operating expenses                                          1.70 %            1.69 %
Operating income                                            1.24 %            1.18 %

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Operating Results
Total revenue of $18.4 billion in the quarter ended June 30, 2009, which includes bulk deliveries to customer warehouses, increased 2% from the prior year quarter. This increase was primarily due to the addition of two new large customers and the above market growth of ABSG, and was offset, in part, by the July 1, 2008 loss of certain business (approximately $3.0 billion on an annualized basis) with a national retail drug chain customer. Excluding the loss of the above-mentioned business, total revenue in the quarter ended June 30, 2009 would have increased by 6% from the prior year quarter. During the quarter ended June 30, 2009, 68% of total revenue was from sales to institutional customers and 32% was from sales to retail customers; this compared to a customer mix in the prior year quarter of 66% institutional and 34% retail. Sales to institutional customers increased 5% in the current year quarter primarily due to our expanded relationship with a large institutional buying group customer and the 6% growth in ABSG. Sales to retail customers decreased 3% in the current year quarter primarily due to the loss of the above-mentioned national chain business, offset, in part, by the addition of a new large independent retail buying group customer. Total revenue of $53.0 billion in the nine months ended June 30, 2009 was flat compared to the prior year period as ABSG's revenue growth of 6% was offset by the 1% decline in ABDC's revenue. Bulk deliveries of $429.1 million and $1,265.2 million in the quarter and nine months ended June 30, 2009 decreased 12% and 42%, respectively, from the prior year periods. These declines were due to the prior fiscal year transition of a significant amount of business previously conducted on a bulk delivery basis with our largest customer to an operating revenue basis. 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 customer payments to us and payments by us to our suppliers. ABDC's total revenue increased by 2% and decreased by 1% from the prior year quarter and nine-month period, respectively. The loss of certain business with a large retail drug chain customer, as mentioned above, was more than offset by the addition of two new large customers in the current year quarter. ABSG's total revenue of $4.0 billion and $11.5 billion in the quarter and nine months ended June 30, 2009 increased 6% from the prior year periods due to good growth broadly across its distribution and services businesses, offset in part, by declining anemia drug sales (see paragraph below). The majority of ABSG's revenue is generated from the distribution of pharmaceuticals to physicians who specialize in a variety of disease states, especially oncology. ABSG also distributes vaccines, plasma, and other blood products. ABSG's business may be adversely impacted in the future by changes in medical guidelines and the Medicare reimbursement rates for certain pharmaceuticals, including oncology drugs administered by physicians and anemia drugs. Since ABSG provides a number of services to or through physicians, any changes to this service channel could result in slower or reduced growth in revenues.
Revenue related to the distribution of anemia-related products, which represented approximately 5% of total revenue in the quarter ended June 30, 2009, decreased approximately 7% from the prior year quarter. The decline in sales of anemia-related products has been most pronounced in the use of these products for cancer treatment. Sales of oncology-related anemia products represented approximately 1.8% of total revenue in the quarter ended June 30, 2009 and decreased approximately 25% from the prior year quarter. Several developments have contributed to the decline in sales of anemia drugs, including expanded warning and other product safety labeling requirements, more restrictive federal policies governing Medicare reimbursement for the use of these drugs to treat oncology patients undergoing dialysis or experiencing kidney failure, and changes in regulatory and clinical medical guidelines for recommended dosage and use. As a result, oncology-related anemia drug sales have continued to decline further in fiscal 2009 from our fiscal 2008 total. In addition, the U.S. Food and Drug Administration ("FDA") is continuing to review clinical study data concerning the possible risks associated with certain anemia products and the Centers for Medicare & Medicaid Services ("CMS") announced last year that it is considering a review of national Medicare coverage policy for these drugs for patients who have cancer or pre-dialysis chronic kidney disease. The FDA or CMS may take additional action regarding the use, safety labeling and/or Medicare coverage of these drugs in the future. Further changes in medical guidelines for anemia drugs may impact the availability and extent of reimbursement for these drugs from third party payors, including federal and state governments and private insurance plans. Our future revenue growth rate and/or profitability may continue to be impacted by any future reductions in reimbursement for anemia drugs or changes that limit the dosage and or use of anemia drugs.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

We continue to expect that our total revenue growth in fiscal 2009 will be between 1% and 3%, with ABDC growing between 0% and 2% and ABSG growing between 5% and 7% for the fiscal year. ABDC's revenue growth is expected to be higher in the quarter ending September 30, 2009, in comparison to its revenue growth in the first nine months of fiscal 2009 due to the anniversary of the national retail drug chain customer loss described above and the addition of several new customers in the second half of fiscal 2009. The expected growth also reflects U.S. pharmaceutical industry conditions, including increases in prescription drug utilization, the introduction of new products, and higher branded pharmaceutical prices, offset, in part, by the increased use of lower-priced generics. Our growth has also been impacted by industry competition and changes in customer mix. Industry sales in the United States, as recently estimated by industry data firm IMS Healthcare, Inc. ("IMS"), are expected to contract between 1% and 2% in 2009 and are expected to be flat over the five-year period ending 2013 due to continued brand to generic conversions as well as the economic slowdown in the United States in 2009. IMS expects that certain sectors of the market, such as biotechnology and other specialty and generic pharmaceuticals will grow faster than the overall market. Our future revenue growth will continue to be affected by various factors such as: industry growth trends, including the likely increase in the number of generic drugs that will be available over the next few years as a result of the expiration of certain drug patents held by brand manufacturers, general economic conditions in the United States, competition within the industry, customer consolidation, changes in pharmaceutical manufacturer pricing and distribution policies and practices, increased downward pressure on reimbursement rates, and changes in Federal government rules and regulations.
Gross profit of $519.2 million in the quarter ended June 30, 2009 increased 4% from the prior year quarter. As a percentage of total revenue, gross profit in the quarter ended June 30, 2009 was 2.82%, an increase of 5 basis points from the prior year quarter. These increases were primarily due to the strong growth and increased profitability of our generic programs (with generic revenue increasing by 23% in comparison to the prior year quarter), increased contributions from our fee-for-service agreements with branded manufacturers, and higher brand-name manufacturer price appreciation. All of these positive factors combined to more than offset normal competitive pressures on customer margins in the current year quarter. Gross profit in the prior year quarter was impacted by an $8.4 million inventory write-down of certain pharmacy dispensing equipment. Gross profit of $1.6 billion in the nine months ended June 30, 2009 increased 3% from the prior year period. As a percentage of total revenue, gross profit in the nine months ended June 30, 2009 was 2.94%, an increase of 7 basis points from the prior year period. These increases were primarily due to the strong growth and increased profitability of our generic programs; increased contributions from our fee-for-service agreements, including $10.2 million of fees relating to prior period sales due to the execution of new agreements in the quarter ended December 31, 2008; and good growth from ABSG's businesses, all of which were partially offset by ABSG's $12.7 million loss on its influenza vaccine program, which included a $15.5 million write-down of excess influenza vaccine inventory, and normal competitive pressures on customer margins in the current nine-month period. Gross profit in the current year nine-month period benefited from a settlement of $1.8 million with a former customer. Gross profit in the prior year nine-month period benefited from a gain of $13.2 million relating to favorable litigation settlements with a former customer and a major competitor, and was partially offset by the above-mentioned $8.4 million inventory write-down. Additionally, in the prior year nine-month period, we recognized a gain of $1.6 million from antitrust litigation settlements with pharmaceutical manufacturers. This gain, which was excluded from the determination of Pharmaceutical Distribution segment's gross profit, was recorded as reduction to cost of goods sold.
Our cost of goods sold for interim periods includes a last-in, first-out ("LIFO") provision that is based on our estimated annual LIFO provision. We recorded a LIFO charge of $4.1 million and $5.0 million in the quarters ended June 30, 2009 and 2008, respectively. Our LIFO charge was $20.8 million and $17.7 million in the nine months ended June 30, 2009 and 2008, respectively. The annual LIFO provision is affected by changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences.
Operating expenses of $306.2 million and $902.4 million in the quarter and nine months ended June 30, 2009, increased by 2% and 1%, respectively, from the prior year periods. Operating expenses in the quarter ended June 30, 2009 increased from the prior year quarter due to an intangible asset impairment of $8.9 million, a legal accrual of $3.0 million relating to the OMH matter (see Note 9 to the Consolidated Financial Statements), and an increase in bad debt expense of $4.1 million, all of which was offset in part, by a reduction in facility consolidations, employee severance and other of $7.7 million from the prior year quarter. Operating expenses in the nine months ended June 30, 2009 increased from the prior year period due to an increase in bad debt expense of $11.6 million and an increase in asset impairment charges of $8.3 million, offset in part, by a decrease in depreciation and amortization expenses of $5.5 million and a decrease in facility consolidations, employee severance and other charges of $3.9 million. Additionally, expenses incurred in connection with our Business Transformation project, which includes a new enterprise resource planning ("ERP") platform, increased by $16.0 million from the prior year period. As a result of our cE2 initiative described below, we have been able to substantially offset these incremental costs by reducing our warehouse operating costs through continuing productivity improvements and by streamlining our organizational structures within ABDC and ABSG. As a percentage of total revenue, operating expenses were 1.66% and 1.70% in the quarter and nine months ended June 30, 2009; this compared to 1.67% and 1.69% in the prior year periods.

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (Continued)


The following table illustrates the charges incurred relating to facility
consolidations, employee severance and other, (which are excluded from the
operating expenses of the Pharmaceutical Distribution segment), for the quarter
and nine months ended June 30, 2009 and 2008 (in thousands):

                                             Quarter ended                Nine months ended
                                               June 30,                       June 30,
                                          2009           2008            2009           2008

Facility consolidations and
employee severance                     $      213      $   7,798      $    5,504      $   7,286
Costs related to business
divestitures                                    -             67               -          2,140


Total facility consolidations,
employee severance and other           $      213      $   7,865      $    5,504      $   9,426

In fiscal 2008, we announced a more streamlined organizational structure and introduced an initiative ("cE2") designed to drive increased customer efficiency and cost effectiveness. In connection with these efforts, we continue to reduce various operating costs and terminate certain positions. During the nine months ended June 30, 2009, we terminated 197 employees and incurred $3.2 million of employee severance costs. Additionally, during the nine months ended June 30, 2009, we recorded $2.2 million of additional expense relating to the Bergen Brunswig Matter as described in Note 9 (Legal Matters and Contingencies) of the Notes to the Consolidated Financial Statements. During the nine months ended June 30, 2008, the Company terminated 58 employees and incurred $7.6 million of employee severance costs. Additionally, during the nine months ended June 30, 2008, the Company reversed $1.0 million of employee severance charges previously estimated and recorded relating to a prior integration plan. Costs related to business divestitures in the quarter and nine months ended June 30, 2008 related to the sale of our former workers' compensation business, PMSI.
We paid a total of $14.3 million and $4.3 million for employee severance, lease cancellation and other costs during the nine months ended June 30, 2009 and 2008, respectively. Employees receive their severance benefits over a period, generally not in excess of 12 months, or in the form of a lump-sum payment. Operating income of $213.0 million and $659.1 million in the quarter and nine months ended June 30, 2009 increased 8% and 5%, respectively, from the prior year periods. As a percentage of total revenue, operating income in the quarter and nine months ended June 30, 2009 increased 6 basis points from the prior year periods. These increases were due to our gross profit growth, which exceeded the small increases in operating expenses. Operating income growth will be reduced by approximately 3% over the next twelve months due to the July 1, 2009 renewal of a large customer contract.
The costs of facility consolidations, employee severance and other, the intangible asset impairments, and the gain on antitrust litigation settlements had the following net effects on operating income as a percentage of total revenue:
• Quarter ended June 30, 2009 - decreased operating income as a percentage of total revenue by 5 basis points.

• Quarter ended June 30, 2008 - decreased operating income as a percentage of total revenue by 4 basis points.

• Nine months ended June 30, 2009 - decreased operating income as a percentage of total revenue by 3 basis points.

• Nine months ended June 30, 2008 - decreased operating income as a percentage of total revenue by 1 basis point.

Interest expense, interest income, and the respective weighted-average interest rates in the quarters ended June 30, 2009 and 2008 were as follows (in thousands):

                                      2009                                2008
                                       Weighted-Average                    Weighted-Average
                          Amount        Interest Rate         Amount        Interest Rate
 Interest expense        $ 15,684                   4.72 %   $ 18,067                   5.33 %
 Interest income           (1,032 )                 0.61 %     (2,101 )                 2.76 %

 Interest expense, net   $ 14,652                            $ 15,966

Interest expense decreased from the prior year quarter due to a decrease of $73.0 million in average borrowings and a decrease in the weighted-average variable interest rate on borrowings under our revolving credit facilities to 1.38% from 4.22% in the prior year quarter. Interest income decreased from the prior year quarter primarily due to a decline in the weighted-average interest rate, offset in part, by an increase in average invested cash of $383.6 million.

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (Continued)


Interest expense, interest income, and the respective weighted-average interest
rates in the nine months ended June 30, 2009 and 2008 were as follows (in
thousands):

                                      2009                                2008
                                       Weighted-Average                    Weighted-Average
                          Amount        Interest Rate         Amount        Interest Rate
 Interest expense        $ 47,946                   4.95 %   $ 58,648                   5.56 %
 Interest income           (4,590 )                 1.18 %     (7,567 )                 3.66 %

 Interest expense, net   $ 43,356                            $ 51,081

Interest expense decreased from the prior year nine-month period due to a decrease of $108.5 million in average borrowings and a decrease in the weighted-average variable interest rate on borrowings under our revolving credit . . .