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

Hi, everyone. And thank you for joining us at day 3 of Morgan Stanley's Global Healthcare Conference. I'm Ricky Goldwasser, I'm Morgan Stanley's health care services analyst, and I'm very pleased to have AmerisourceBergen's CEO, Steve Collis; and CFO, Jim Cleary, here with us in our next session. Amerisource is one of the largest drug distributors in the country and has played a very important role during the COVID pandemic. And we're looking forward for the next 30 minutes of conversation. But before we get started, please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. It's not for members of the press. So if you are a member of the press, please disconnect and reach out separately. And for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, Steve, I would like to pass it over to you for some opening remarks.

Hi, Ricky, and it's a pleasure to be here with you today. This is, to be honest, my first virtual investor conference. So looking forward to the experience. And coincidentally, yesterday, we did our ThoughtSpot, which is our retail pharmacy trade show that we do for many, many years with thousands of our independent pharmacies participating. We did that virtually and I participated in the opening session for that as well. So definitely, we all are adjusting to this new world, and I truly appreciate Morgan Stanley for providing this platform for us to do what we love to do, which is talk about AmerisourceBergen. For those of you who are not as familiar with us, we are a global health care solutions leader, driving innovative partnerships with global manufacturers, providers and pharmacies to improve product access and efficiency throughout the health care supply chain. We are strongly positioned for long-term value creation for several reasons that we like to point out. We have a strong customer base of key anchor customers across the segments in which we operate. Our history of investment has resulted in our large footprint and comprehensive offering, which has allowed us to become leaders in the U.S. specialty distribution and services segment. This also means that we are well positioned to take advantage of emerging trends such as the development of biosimilars. We have developed an innovative services and solutions platform that serve manufacturer and provider customers. Some of our businesses like Lash and ION are literally the best-known service companies in their field. And we have a history of successful corporate stewardship. At AmerisourceBergen, we have a focus on value creation and maintaining our strong financial health. We are also dedicated to creating healthier futures around the world by engaging our associates, operating in a sustainable and responsible manner and enabling healthy and resilient communities where we live and work. The important role AmerisourceBergen and, indeed, our industry plays has never been on fuller display than during COVID, and our ability to ensure continued access to pharmaceuticals has never been more critical. Our supply chain has become the invisible pillar of medical innovation and a strategic asset to the health care system, not just to our manufacturer and provider customers, but government, indeed, as well as they prioritize stockpile, channel awareness and critical drug sustainability of supply. So that's the -- concludes my opening remarks, and we'll look forward to questions now, Ricky.

Great. So now Amerisource is in a unique position. You have visibility into drug trends at pharmacies and utilization trends at physician offices with specialty and your Animal Health and World Courier and other segments. Could you maybe give us an update, maybe start with that, on how volumes across the U.S. business has been trending in August and September to date compared to the pre-COVID baseline and versus your expectations?

Yes, Ricky, this is Jim. And I'll provide some updates on some of those trends that we're seeing. And I'll start by taking a step back. And as we said during our Q3 earnings call at beginning of August, our businesses have proven to be more resilient than we had expected. And going all the way back to May during our Q2 call when we first started to talk about the impact of COVID, we indicated that we expected the disruption to be manageable, but our teams and businesses have executed really well and have proven to be more resilient than we had expected. And the shape of the rebound is similar across our businesses. We saw a pull forward of sales into March as customers stocked up and lower sales in April. And then we saw, broadly across our businesses, a rebound of sales from May to June to pre-COVID levels in June, and then stabilization in the month of July at pre-COVID levels consistent with June. And you asked about various businesses. It's really been that kind of general shape of the rebound has been similar across many businesses. You asked about World Courier. We had mentioned that World Courier had a record month in June due to increased volume and weight as we are solving complex problems for manufacturers. You asked about Animal Health. Animal Health has also shown a similar rebound to other businesses. Particularly strong, I would say, in companion animal, stronger in companion animals and in production animal, but we're seeing a rebound across the business. And then you'd asked about specialty and physician offices and very strong trends in our specialty physician services businesses. We expected the trends to be strong in oncology, but we saw similar trends in other specialty businesses also. And so as I said, in early August, when we announced our Q3 earnings beat, we also raised guidance by more than that beat. And we indicated that our businesses saw sales rebound in June to pre-COVID levels and then stabilize at those pre-COVID levels in July. And also I wanted to say that we feel great about the resiliency of our business and continue to see positive end market trends broadly across our businesses in August, in line with our updated expectations.

So just to unpack this a little bit. In the last couple of days, we had some of your peers here at our conference. And the responses were a little bit varied as they talked about September-to-date trend depend, to some degree, I think related to demographic and customer mix. So if you can kind of just maybe give us a little bit kind of like color on what you're seeing September to date in comparison to that kind of like June, July base levels?

Yes. Ricky, as I said, we've seen similar shape of the rebound across our businesses. We saw it getting to pre-COVID levels in June, stabilize in July at those pre-COVID levels. And then as I said, we have seen positive end market trends broadly across our businesses in August, which are in line with our updated expectations.

And Steve, in your earlier comments, you talked about your annual retail pharmacy trade show that went virtual yesterday. Can you maybe share with you some of the feedback you are hearing from your retail pharmacy customers? There's so much discussion around structural changes to behavior post -- in a post-COVID world. What trends are you seeing in the independent versus national accounts? And what are kind of like your pharmacy customers asking from you as they think about kind of like the foreseeable future?

Ricky, I'll go back to the March, April time period. And of course, it was a confusing time for all of us. It's -- and I just want to say that independents echo a lot of -- all the familiar trends that we've been talking about, they remain resilient. So effectively, the shape of the rebound in independent pharmacy sales over the June quarter was like our other distribution businesses with a pull forward in March, obviously, lower sales in April. But then like other distribution businesses, a rebound in sales for May, June and then stabilizing in the month of July, consistent with June. So independents, yesterday, we had this Pharmacy of the Year award and the 3 independents were from 3 different states, actually 3 very different cultures, but all of them reflected that amazing patient ethos. And they -- whether they did home deliveries or helped with meals for people in the community that were having a tough time, that were unemployed, they talked about all of that. And so the love of community, the love of the patients is just so -- it's so important to them. And I think that, that's what enabled them to endure and be successful. And of course, patient and insurers hear that, and also they continue -- the insurers continue to pay. So just to reiterate, independent pharmacies are resilient. They're entrepreneurial. Many of them talked about getting into new, like, compounding services. And the patient access challenges were probably even more acute in the -- more apparent even in the acute care settings than they were in an independent. So we're happy with where we are at independents. Yes, and I think the other part of your question is in a post-pandemic world, what would -- what could we expect from independents? And we look to maintain the strength that we've been building on in the COVID environment. So our sourcing and distribution teams are leveraging our commercial expertise and data and analytics capabilities to provide manufacturers and government entities with actionable channel insights. We're also able to provide significant transparency into the pharmaceutical supply chain and related end markets, which is an important resource as stakeholders seek to fully be informed by the data that face new challenges. And generally speaking, we think that there will be an increase in patients in maintaining their health. So also some deferred health care expenses and procedures, but even hopefully increased medication adherence as people focus more on being healthier. And they -- for example, you'd want to avoid having any comorbidities. I think people are much more aware of that, for example.

And along the line of the response to COVID vaccines, pharmacies are being more and more highlighted as an area for vaccine administration once it becomes available for more widespread retail distribution. The Trump administration today unveiled some new guidelines. I think they're telling the states to submit a plan by October 16. Obviously, AmerisourceBergen has some of the capabilities that are required for vaccine distribution around cold chain. Can you talk with us about how you see that market evolving and opportunities to participate in COVID vaccine distribution?

Well, so we'll be absolutely honored to participate in COVID vaccinations. I think there's -- there are differences here between the regular flu vaccine and the COVID vaccine, including the follow-up, making sure that with some of the formulas you're going to have to have 2 shots. AmerisourceBergen is well prepared in terms of cold chain. Really, throughout our businesses, we have very specialized capabilities, particularly in specialty. World Courier and ICS have done frozen products and many other different types of product safety and storage and distribution requirements. Most importantly, our teams have been very involved in active discussions with the manufacturers, as we always are, to plan for distribution of a vaccine should one prove effective and gain approval, which would, of course, be a happy day for all of us. And we've been engaging with many federal government agencies to discuss the industry capabilities to support the scale and size of this approval and of this quick vaccination of as much of the U.S. population as possible. We'd all, of course, like to see this happen sooner rather than later. But given the uncertainty about approval and requirements for an approved vaccine. It's hard to say exactly what the distribution will look like. But I'm confident that AmerisourceBergen will have an important role in that.

And then I wanted to segue to biosimilars. You mentioned it in your opening remarks, obviously, a natural fit with your specialty business. But it also seems it's very interesting opportunities these days as the FDA, since March, have really kind of like become more, I would say, kind of like open-minded and is thinking about approval of drugs. So where are we in terms of the biosimilar opportunity? And can you talk about the role that ION is playing in educating, engaging providers in the community about the different drugs that are out there?

Yes. So first of all, this is definitely the year where we've seen biosimilars have a higher-than-expected utilization in the marketplace. The -- and then quite candidly, the growth we're seeing is encouraging for the future. And I feel like we were on then the leader talking about this many years ago and pleased to see that biosimilars are reaching their potential. And about a year or so ago, I wrote an editorial to say it's too early to throw in the towel on biosimilars. And I don't like op-ing, that sounds rough, but it is great to be proven right on occasion. So biosimilars are excellent. They provide patients with additional choice. We often talk about it as creating affordability and a room for new products to be improved, to be approved and creating some headroom for that. And for us, at ABC, the Part B products, as you know, are most impactful, particularly in oncology, where we are seeing really early positive signs for some important supportive care products in Neulasta, Herceptin, Avastin, Rituxan, all of them, we're seeing really important parts. The next part of your question was about a business that we acquired over 20 years ago and what a fundamental game changer that has been for our oncology business. The biosimilars are leading a lot of the changes. One of the many positive trends we're seeing on the Part B side of our businesses. When I was with the Specialty Group, dedicated specialty, we had just a handful of contracts, but we have a multitude of contracts and many manufacturers see ION as a key way to access our important customer base, our key opinion leaders, some of the largest practices in the country. And the services that ION provides, whether it's education, whether it's data, reimbursement services, policy advice are all incredibly important to community pharmacy and to that whole environment. And certainly, when we look at innovation and think about investment in AmerisourceBergen, our oncology business always comes at top to mind. And we're proud of the role that ION is playing in biosimilars and expect to continue to play a robust role in their acceptance and -- into the marketplace.

And one question that's coming from audience on the webcast is actually around pharma margins. So margins in the Pharmaceutical Distribution segment improved year-over-year for the first time in a while in the June quarter. So what was the driver of the increase of the expansion? And is it sustainable? And are you expecting to see more leverage as revenue growth accelerate off the flattish June quarter levels?

Yes. And so we did have an uptick in operating margin. And there are -- again, there are several things that drove it, but I'll start off by saying just this has been a year of really solid execution across our businesses. And obviously, the COVID environment has been challenging, but I think our just -- businesses have just performed so well and demonstrated the strength of our management teams, the strength of our customer relationships and our ability to execute. I could call out a number of things that helped to drive that uptick. One is, of course, the strength of our specialty physician services business, and a lot of that gets to what Steve was just talking about with biosimilars with our market presence there, with all the innovation that's happening in oncology and other specialties. So strength in specialty physician services is certainly one callout. A second callout that's benefited us this year is a moderation of generic deflation that we've talked about. And we initially said that we had started to see if it was too early to call a trend, but we saw that happened to some extent during this fiscal year, and that was one of the several things that benefited us. Just really strong performance on OpEx. Just really good execution, and we really kept our OpEx growth down, which really benefited our operating margin. And those are a few things that I could call out, but really across, whether it be in health systems or in other parts of our full-line business or in some of our businesses and other, just very strong execution and performance that enabled us to have that uptick there.

And Jim, just to clarify, could you talk about the specialty physician business? Did that benefit the Other segment? Or is that -- does that sit in pharma distribution?