Cencora, Inc. (COR) Earnings Call Transcript & Summary

Okay. Great. Thanks. Good morning. I'm Steven Valiquette, the Health Care Services analyst here at Barclays. Welcome to our next session of the virtual version of the Barclays Healthcare Conference. It is going to feature AmerisourceBergen. So we're pretty fortunate to have a full lineup from management. This includes Steve Collis, who most of you know, is the Chairman, CEO and President; we also have Jim Cleary, who is the CFO; and also, Bob Mauch, who is the Group President, but for further background, both the Pharmaceutical Distribution and the commercialization services and animal health care support in to Bob. And he's also formerly the Group President of the Pharmaceutical Distribution Services. So with that, welcome, gentlemen, and thanks for taking the time today.

So let me -- just give me 2 seconds here to shift gears. Obviously, coronavirus, major topic around this conference. So we'll certainly kick off with a few questions around that. And yes, so the shutdown in China, and there's also been some restrictions from India and a few drugs has created some concerns for investors that drug shortages could occur just due to API shortages. So let's just start maybe curious to see what you're seeing and hearing in relation to this? And also, does ABC typically stockpile inventory of certain drugs in these types of situations? I guess we'll just start there.

Steve, thank you. And obviously, the coronavirus has had an effect because we would much rather be doing this in person with you and seeing all of our investors and other parties that have an interest in ABC and not having this annoying train in the background, would also be an advantage. But as you would expect, as a responsible company, we've been actively monitoring COVID-19 since the outbreak in Wuhan, literally from December when we first got reports of it. Obviously, that's an important area for chemical and API manufacturing, and we are in constant communication with our manufacture partners. And we have those sort of bilateral relationships and the concern for the mutual customer, the provider customers and ultimately, the patients we serve to plan and analyze to ensure sustainability of supply. So we are monitoring this very fluid situation and trying to be as proactive as we can to make the necessary preparations and investments to prepare for a disruption if one would occur. So as an active participant -- ABC is an active participant in the pharmaceutical supply chain. We're constantly monitoring the situation, and we will continue to work closely to ensure a stable supply chain. Just -- let me make a point, 2 points, and then I'll answer the next question. But we are guided by our purpose, which is being united in our responsibility to create healthier futures. And we see a prioritization of operational as our key priority through the crisis. I'd also remind everyone that in our case, with the benefit of almost 26 years with the company, in 2001 and 2008, '09, '10, all the other crisis. And of course, everyone is different, and this is very unique in my experience. But ABC has managed to, not only survive, but prosper through these difficult times, so -- and do a great job on behalf of all the stakeholders that we serve through some other very difficult moments in our history.

Okay. Great. That's certainly helpful as far as all that color. Somewhat tied into that, at the same time, if there is going to be some shortages or potential shortages on raw materials that could lead to some price increases on some drugs as well if the finished dose manufacturers pass through some rising costs on bulk material. Just curious if you're seeing any trends around that as far -- probably more on the generic side than the brand side, if I had to guess. Are you seeing any changes -- any notable changes in generic inflation or spot prices in relation to this whole dynamic?

Yes. Steve, as of now, we're not currently facing any shortages or anything on the pricing situation. But like I said in the previous question, we continue to monitor very closely and make the necessary preparations to ensure continuity of supply for our customers. I think we've had questions on shortages and allocations in the past. You should rest assured that ABC has a well-credentialed allocation method, which is fair to the large customers and the small customers. And I think I've told the story several times that, that was one of the concerns of reaching the Walgreens deal. And Bob, and the supply chain teams have really worked out a very fair process for everybody. So we will try to be always very thoughtful and calm. And for example, we would try to make sure that if any customer was -- had a proclivity towards holding or anything that we -- our system should prevent that happening. And we're also working very closely with our procurement partners at WBAD. In fact, as recently as an hour ago, Bob and I were involved talking through some of the mutual opportunities and concerns we have to be even more coherent and integrated as we face those prices together with our partners on WBAD and the Walgreens side.

Okay. Great. Speaking of some of the historical precedents. I mean, obviously, there's been other situations, people are trying to draw parallels to, whether it's SARS, or MERS, Ebola, choose which one you want to try to compare it to. But I guess the question would just be, are there any learnings from those experiences that make you more well equipped to handle this? And is there any one of those that really sticks out that would you say is most comparable to what's going on with coronavirus?

Steve, this is Bob Mauch. I'm going to take this one. I think what's important and you kind of you framed it in terms of learnings, but I think what's important to note, and Steve mentioned this a couple of times already, but what we know in terms of working in the supply chain on an ongoing basis. And it's very important to have continuous communication with our manufacture partners and our provider customers, and that gives us the best ability to be resilient in times of need, but also have the right information. So that we're being active and proactive when we need to be. So it's impossible to really answer kind of how quickly things would change since we don't really know how this will play out. But you should be confident that we're highly engaged with manufacturers and customers, making sure that we know what's going on, on both ends, and we can act accordingly.

Okay. So kind of tying all this together, I mean, it sounds like there isn't too much change where things stand right now. So I guess as far as the conclusion around all this, it sounds like as far as what's happening so far with coronavirus, it's something that can be absorbed within the current company guidance for fiscal '20 that ends in September, the way you see things right now? Is that a safe statement to make right now?

Yes. Steve, this is Bob again. And I think we certainly are hearing from the manufacture community. If you look at the brand suppliers, they're expressing a great deal of confidence in their ability to continue to meet demand. And while there are some reports, whether it's China or India that we're certainly monitoring very closely, it's too early to tell. And as I said in the previous question, we'll stay very close to it. We constantly monitor everything that's happening. It's unfortunate when situations like this happen, but we're committed to making sure that we ensure supply where it's available, and that we're helping ensure an efficient supply chain.

Yes. And then, Steve, I'll just add to Bob's answer. I just want to remind everyone that back when we announced our fiscal Q1 results, we increased our fiscal year '20 guidance to a range of $7.55 to $7.80. That was an increase of $0.25 at the bottom end of the range and $0.20 at the top end of the range. And also one other thing I want to remind everyone of is, if you look at AmerisourceBergen overall, about 98% of our revenue is domestic and only approximately 2% of our revenue is outside the United States.

Okay. Great. Okay. Let's shift gears here a little bit. Investors are still obviously focused on opioid litigation and potential settlements. Based on most recent headlines and press articles, et cetera, it seems like negotiations are still ongoing for some form of a broad settlement. So I'm sure you're somewhat limited on what you can say, but I guess, I'm just curious to get your latest thoughts on the progression of any discussions around all this.

Yes. I mean, as you correctly say, we can't say too much. I would say that this crisis, the coronavirus crisis, actually highlights a lot of what we've been saying, how important it is for us to be very strong financial companies and to have strong cash flow ability to invest in our business and to continue to grow our business and our relationship with our customers and our relationships with manufacturers. As I said on the earnings call, we are ready and prepared for the upcoming trials, but we also believe that the global settlement framework that we've outlined makes a lot of sense for states, governments, the attorney generals, the patients that will ultimately benefit. And we are committed to resolving this because we just frankly think that it's not productive to continue with litigation. So we remain committed to transparency. And of course, any definitive developments that occur, we will update our shareholders in an appropriate manner.

Okay. Great. Only one other question around opioids is that -- obviously, if there is a settlement, your cash flow is likely to be impacted. But at the same time, I think yourselves and the other drug distributors have indicated that insurance could cover some of the settlement payments. I don't know if you're at liberty to kind of discuss this or not in terms of just any sort of framework for just any approximation of percent of total liability that might be covered by insurance the way you see it right now, and/or is there some sort of maybe like just a cap on the dollar value of insurance coverage that you might have around the settlement?

Yes. Steve, as I'm sure you'll understand, we aren't able to comment deeply on that. And I'll just build on what Steve was saying and saying that our focus is to work with the necessary parties, including the state and local governments, and hope that they'll see the merits of a potential global framework while we're also preparing for upcoming trials.

Okay. All right. Great. So let's shift gears here again a little bit. Obviously, the world is changing by the minute, but as of a couple of weeks ago, seem like as we think about drug price reform, legislation that was maybe going to start to forge ahead again a little bit. Again, could it change? Just curious to get your latest thoughts on drug price reform. What you're monitoring that's potentially progressing? Just curious to get your thoughts around that?

Steve, I was actually at an industry dinner on Saturday night and somebody who is very close to the situation with the development of vaccines for the coronavirus made the comment that 9 of the 12 companies that are in the lead to develop the vaccine are U.S.-based companies. And I think, I hope that when anything is considered on pricing, we realize how fortunate the United States is to have such a strong and robust pharmaceutical manufacturing industry where almost all the innovation in the world occurs, and I think that all of that needs to be taken into account. ABC is very active with key stakeholders in D.C., and our priority is to educate policymakers about the impact of policy changes. Of course, there are a lot of others who impact -- talk about the impact on manufacturers, but our particular concern is to talk about the smaller community providers, including oncologists and pharmacies. And of course, it's not as much an area of interest in veterinarians, but any community practitioner that we serve, we feel we have a special responsibility because access to community-based setting is, we believe, critical for patient care and one of most cost-effective and low-overhead forms of patient care, which is truly specialized to the patient's need. So that's one of the key priorities we have when we -- when we were in D.C. We're not taking a position on IPI per se, but what we would be concerned about is any change that impacts access to the setting and also staff and innovation. So in the specialty setting, as you know, particularly for oncology, we would want -- not want to see anything that really caused the shift in care away from the community setting. So we'll see. We're monitoring the situation in D.C. very closely. We believe that a rational discussion would always keep in mind that pharmaceutical care is the most efficient form of health care and that an adherent patient really prevents a lot of acute health care costs. And I think that there is a lot of misinformation out there. And ABC has been quite active in talking about that, talking about the benefit of biosimilars, which we feel is really starting to take hold. But really, according to CMS, national spending on retail drugs increased 2.5% in 2018 versus 2017. So I think those are some of the statistics to keep in mind when you have a rational and responsible discussion about drug pricing.

Okay. All right, great. All right. Shifting gears here. Just kind of talking about Pharma Distribution operations. So as we kind of look across the overall pharmaceutical supply channel of the publicly traded companies. You're actually one of the very few those have right now, any sort of a formal major cost-cutting program outside of kind of what you talked about with PharMEDium previously. So I guess I'm just curious, how do you think inceptionally about a more formal program versus just a general cultural approach to cost reduction within ABC that I've always thought of as being pretty strong and probably still even left over from the Dave Yost days from previously. But just curious how you're thinking about your cost structure? And whether a formal program makes sense? Or are you already as lean and as mean as you want to be?

Steve, this is Bob Mauch. I'll take that. It's a great question, and I'm glad you pointed out a bit our historical focus, and it's important to say that, that continues. We're very intent about making sure that we're the most efficient that we can possibly be while also balancing the need to allow for customer growth and patient access, which we've experienced, and we're always working to become more efficient by leveraging our scale and efficiency. Generally, on margin, won't get into anything around the peers, but I do think it's important to note that we're focused on operating income dollar growth and leveraging our scale and strategic partnerships to do that. As we do that, there's a couple of -- as large customers grow or as -- and Jim often uses the example of a large -- our second-largest customer who brought on new brand-only volume in the past year, that creates margin rate pressure, but it adds to operating income dollars. And in general, as those larger customers grow, you can see some margin rate pressure. And that's offset by, for example, the wrap around services that we provide to our specialty physician services and a little bit outside of Pharma Distribution, but in our commercialization services as well. So full circle, we don't see the need right now for a formal program because we are very focused on it and feel good about our ability to grow the operating income dollars.

And I'll build upon what Bob is saying. Yes, of course, managing operating expenses is always really important to us in building our scale and efficiency. As we look at our fiscal year '20 guidance that we updated on our most recent earnings call, our revenue guidance for the year is mid- to high-single-digit percent growth while our OpEx is a mid-single-digit percent growth. And if we look at our performance on OpEx in the first quarter of the fiscal year, it was particularly strong. We had 5% revenue growth, 3% GDP growth and then 2% OpEx growth, which drove 5% up in growth. And so it's something we're always focused on. And so as we look at the longer term, as Bob said, and Steve has said, we want to grow operating income and we can do that through our key anchor customer growth. We can do that through our leadership in specialty and in commercialization services and animal health. We can do that through deploying capital and then also always a key way for us to do that is by leveraging our scale and efficiency.

Okay. Great. As we kind of think about specialty drug distribution for a moment, most investors know that ABC does have leading market share and specialty drug distribution within the industry. And this -- it seems like every other company is trying to chip away your market share. I guess I'm just curious, as we think about market shares overall, I mean, is this a situation where you're just trying to hold on to what you have? Or do you have a lot of programs in place where you think you could actually increase your market share further from here? Just curious to hear about -- as you think about it from that perspective, where do we stand on market share? Whether you can increase? Do you maintain? And what programs are really driving that?

Steve, I was hope you'd asked a question on specialty because Bob and Jim and I could not be more proud of the work that we're doing there. Some of the most important impact for work we do as a company. I'll tell a quick story. I think we're doing all right on time. So I was talking to an oncologist that I've known for over 20 years, and he was saying to me that the reason he's not retiring is because he's so excited about all the new weapons you had to fight cancer and treat patients in a much more personalized way, and a much more effective way. I remember when the first support of drugs came out and we could give chemotherapy, but now we have these very targeted drugs, and it's just a wonderful time to be practicing oncology and really helping people. So more on the macro stuff, let's talk about ABC. We built up our portfolio of specialty services literally over decades, and unfortunately, I love to be a bit of a historian now with this history of my favorite subject in school. But we started in '94 with building up what now is known as AST, but started off as alternate site distributors and in '96, we bought oncology supply; '98, Lash and ION were added and Besse right towards the end of the year. So those were really incredible investments we made in the specialty area, with honestly, I can tell you some understanding, but never really fully appreciated just how big those businesses could become because of the innovation and because of the shift in care settings. I think also what's not known about ABC within our community oncology business is we have most of the large companies that are outside of U.S. oncology. And a lot of those large companies are growing because of the value-based care transition and reimbursement pressures. There are a lot of aggregator models and ABC as a distributor, and ION and oncology supply do the work for a lot of those companies. So we are particularly fortunate. I think also, I'd be remiss if I didn't mention that our specialty franchise is not only specialty distribution, but our global commercialization services. So the expertise we have in reimbursement, it's very important. Our ION contracting is very, very important. The practice management services, we have partnerships there and we also have a lot of internal resources, which really helps practices manage data, inventory, analytics and financial services. So and then specifically on the global commercialization services for manufacturers, our businesses like World Courier, Lash, which deals with patient access, affordability and adherence. Xcenda, which deals with market access and field reimbursement service. NMR, which is our specialty model in Canada is very, very important. And we also are benefiting from, as I said in the last question, the strong growth in biosimilars. Which we think is really just starting. We have 17 or 16 biosimilars in the market now, and we expect that to continue increasing. And really, we need biosimilars to be successful to make room for the innovation that we'll be incurring with new drugs. It will be much more targeted in the bio area. So we are really excited about our positioning in specialty and we appreciate the question because this is something that we do think is a true differentiator for ABC. Bob, it's such an important question. Do you want to add one or two things?

I don't think so, Steve. It's -- the most significant part of the specialty growth that we have is we have a diversified portfolio of customers and manufacturer relationships. So you mentioned those businesses and certainly the different classes of trade where we have services both for manufacturers and downstream to the customers. So I think one of the reasons that ABC is, is differentiated in the specialty area. It is certainly because of oncology, but it's also because of the broad portfolio of customer relationships that we have. So as new innovations come to market, it's likely that ABC will be a significant player in that, whether it's a biosimilar, more of the generic category or all the way to the most innovative branded products, we believe we'll be well positioned.

That is a lot.

I was going to say, that's certainly helpful though, all that color. And obviously, it's impossible for anybody to predict the biotech or specialty pipeline. But everybody talks about Keytruda as being one of the key drivers of growth right now. But beyond Keytruda, what are the next few drugs that you would highlight as either driving growth right now or expected to really drive growth over the next year or so, the way you see things right now, not from the pipeline, but just existing drugs that are ramping up nicely from -- or about to from your perspective?

Yes, Steve, this is Bob. We wouldn't call out anything specifically. And I'm afraid I may have sort of -- I may have answered this question in the way I wrapped up the last one, because we really are focused on supporting the manufacturers and getting their innovative products to market. It's hard to predict which ones will be the fastest grower. So for us, it's important that one, the products get to market and they're commercialized in a way that makes sense for the providers, the payers and the manufacturers. And then also that the patients have access to care in terms of those products. So whether that's at physician's side or health system's side. And then as Steve mentioned, we have the field reimbursement services and the patient support services, inclusive of the health economics or the value proposition of the product. That we feel like we have a view of, obviously, the entire market and feel like we'll be able to help the manufacturers and, therefore, benefit from any of the products that are the fastest growing.

Okay. Great. All right, but with that, I think we're out of time. I'm going to flip it to Steve Collis to make a closing comment.

Okay. Well, Steve, thanks for the time today. It did go by very quickly. As always, AmerisourceBergen remains guided by our purpose of being united in our responsibility to create healthier futures. And being a purpose-driven organization is especially important in times like these. We remain convinced that pharmaceutical care remains the most efficient form of health care and continuing our diligent work around providing safe and secure access to pharmaceuticals for patients is vital. And we will continue our important work to collaborate with manufacturers and strategize with customers to ensure patients are able to receive the care they need and maintain the integrity of the supply chain. And thank you for your time today, Steve.

Okay. Great. Thank you for your time as well.