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

So good afternoon, everyone. My name is Kevin Hartman, and I help cover health care services here at Goldman Sachs with Bob Jones. So we're very pleased to announce our next guest, AmerisourceBergen, a leading health care services company in the U.S. and now globally. I'm joined by Steve Collis, Chairman, President and CEO; Jim Cleary, EVP and CFO; as well as Bennett Murphy, SVP of Investor Relations. Good to have you guys here. Hi.

Thanks for the opportunity, Kevin.

For sure. And so before, I guess, we get into questions, Steve, I believe you had a few introductory comments you wanted to make. So whenever you're ready, please go ahead.

Yes. Yes, thank you, Kevin, and welcome. It's the first time we've been interviewed by you, so we're pleased to be with you today. So hopefully, AmerisourceBergen is fairly well known to the audience. We are actually about to celebrate this year our 20th year as a public company. We came together just before 9/11 with Amerisource and Bergen Brunswick side. And I would best describe us as a global pharmaceutical-centric distribution and services business that fosters the positive impact on the health of people and communities around the world by advancing the development and delivery of pharmaceuticals and health care products. As a leading global health care company with a foundation in pharmaceutical distribution and solutions for manufacturers, pharmacies and providers, we create unparalleled access, efficiency and reliability for human and animal health. Our purpose is our core guiding light, and really it's as true today as when we established it about 5 years ago. Our purpose at AmerisourceBergen is we are united in our responsibility to create healthier futures. Our purpose has also been very helpful in guiding our ESG and D&I strategy, which ensures that AmerisourceBergen is making a positive impact on the people, planet and communities where we live and work. I encourage everyone who is particularly interested in the subject to look at our global sustainability report, which is the first report we have released, and I believe we keep on doing better in this area. Most excitingly, we closed last week on a strategic transaction with Walgreens Boots Alliance to acquire the majority of its Alliance Healthcare businesses and to extend and expand our existing distribution agreement and look at also some interesting U.S. synergies. The acquisition will enhance AmerisourceBergen's ability to deliver innovative solutions for our partners, further building on our platform to deliver key distribution capabilities and value-added services to support patient access in new geographies. Through our purpose, scale and expertise, we ensure that our partners have had the connectivity, capability and data they have needed to think, plan and act effectively. Our combined companies will continue to look for new ways to support pharmaceutical innovation and access with unparalleled global solutions. So that's an interesting introduction. We also -- I would note that, last week, we were honored to be listed as the eighth largest company on the Fortune 500 U.S.-based companies. So we -- that was actually announced the same day as we closed on the Alliance acquisition. So we're very proud of that as well.

Great. That's definitely helpful background, Steve. And so one of the first areas -- you touched on this just now. Obviously, congrats on officially closing the Alliance deal last week. And so maybe just to start, it would be great if you could just give an update on how planning and integration has been going. Obviously, it's still early on. And just overall, what is most exciting to you about the potential opportunities that you could see coming out of this combination as we look forward.

Well, also, Kevin, I just want to thank you for squeezing us in. We weren't exactly sure when we're going to close, and once we closed, we wanted the opportunity to talk about how proud we are to welcome the exceptionally talented Alliance Healthcare and experienced Alliance Healthcare team. This is interesting because, of course, we're a large public company, as is WBA, even larger and certainly much more associates and very international. But we're really taking the Alliance Healthcare business out of that public footprint and putting them into ours. So you're absolutely right. The planning for this acquisition is extremely important. But we feel like we bought a very strong asset, which is fairly well known, but maybe we're looking at this a bit differently because we believe that there is strong and effective pharmaceutical distribution and services company as we are and a leader in key markets. Alliance Healthcare's range of leading high-margin innovation businesses strengthen our global platform of higher-margin personal manufacturer commercialization services and hopefully, will continue to position AmerisourceBergen as a partner of choice for manufacturers with significant global and local presence. As we bring the integration process, both AmerisourceBergen and Alliance Health will focus on what we've always done well, executing and delivering an exceptional experience for our customers, partners, patients and other stakeholders. Our teams are working together to strategically and thoughtfully integrate processes and teams as well as new ways to meet the needs of our customers and their patients. So one example I might give you is like we're looking at the areas of cell and gene therapies and new life cycle products and how can we assist with launches and access in key countries. And that's something that we certainly are very passionate about and have much in common with Juan Guerra and the team at Alliance Healthcare. So thank you. Thanks for the question.

No, that -- I think that makes a lot of sense. I know you mentioned, obviously, this is another publicly traded asset, but I do think the service portion of the business, I think, was maybe underappreciated by some investors as part of the Alliance business overall. And so just for additional overview, it would be great if you could just give us a sense of within those services businesses like manufacturer services, products and retail, any flavor for the relative size of those businesses, what the growth outlooks look like and just general description of kind of how you see those businesses fitting into your portfolio more broadly?

Well, I actually said to the group earlier that certainly in the U.K., we have the most developed business. And I think it's important when you talk about Alliance, you also talk about their relationship with Boots. But one of the things that Jim and I, as we really -- and work with Bennett to look at how do we communicate to investors our excitement and what an attractive portfolio Alliance Healthcare has that spans pharmaceutical distribution and manufacturer services, was the way that they've adapted to different markets. And so to supplement their core distribution business, Alliance Healthcare's Alloga, Alcura and Skills businesses provide a range of manufacturer services and solutions that will help supplement our current offerings on an expanded scale. So for example, the Alphega network, which is very much akin to Good Neighbor Pharmacy, provides an independent pharmacy footprint of 7,000 members across 10 countries. And this is similar to our Good Neighbor Pharmacy network in the U.S. In addition, Alliance Healthcare offers private label solutions very much like we offer in the U.S. So we believe that the presence that we have in all the first world markets [ extends ] in the world, and of course, we didn't buy some businesses. We didn't buy the German and Italian business. They'll still be in the WBA fold, but this will strengthen our differentiated value proposition and enable us to support pharmaceutical innovations. And certainly, we're very interested in developing the specialty medicines program in Europe and in the U.K. And as I said, we're interested in innovation and how new products will roll out, like Aduhelm, I'm sure we're going to talk about that later. But Jim, I know part of the question was also on the financial side and you may want to just talk about that as well.

Yes, sure. Sure. Thanks, Steve, and thanks, Kevin, to you and Bob for having us to your conference. And you're asking about some of their services and innovation businesses. And as we've said since first announced on the acquisition, the Alliance Healthcare businesses have a higher percentage of their earnings coming from higher-margin innovation business compared to AmerisourceBergen standalone. And that's one of the many things that caused us to like the Alliance opportunity. And to put this in context, you know that at AmerisourceBergen, global commercialization services and animal health represent approximately 20% of AmerisourceBergen's operating income. And this percentage is significantly higher than that for Alliance Healthcare innovation businesses, the percentage of operating income that comes from innovation businesses at Alliance Healthcare. And so these innovation businesses at Alliance, in addition to building on our global platform of manufacturer services, they also help the overall margin of the consolidated business. As for the overall size of Alliance, in our press release last week, when we announced the close of the transaction, we adjusted our fiscal year 2021 guidance to reflect the 4-month contribution from Alliance. We said that we expect pro forma revenue for the combined company to be at least $210 billion for fiscal year '21, up from revenue growth for stand-alone AmerisourceBergen being in the high single-digit percent range. I mean we also indicated that adjusted diluted earnings per share would be in the range of $8.90 to $9.10, raised by $0.45 to $0.50 from the previous range to account for the expected contribution from Alliance in these 4 months of our fiscal 2021. And this represents high-teens EPS accretion.

Got you. That's really helpful context and actually a good segue into the next question. So Steve, you just talked about Alliance obviously spans a number of different countries, many of which I'm sure have been impacted by COVID to various degrees. Can you give us any sense high level of what volumes and demand have looked like in these markets and how you're -- if you're expecting any sort of benefit from normalization of the vaccine has rolled out more globally? And then even for you, Jim, maybe, within the context of that high-teens accretion that you called out, how we should be thinking about COVID and the impact that could have on the accretion kind of longer term.

Yes. I'll be happy to jump in on that. And so I think the key point, Kevin, is that like AmerisourceBergen, the Alliance business has been resilient and performed strongly throughout the COVID-19 pandemic. That's one of the many things that's impressed us. I mean, of course, utilization is varied by country given different COVID-19-related restrictions and caseloads. But we're optimistic that the vaccine rollout will continue progressing, lowering COVID-19 case counts and resulting in more normalized activity. And so like Amerisource Bergen, at Alliance, there's strong fundamentals of the distribution business and the higher-margin innovation businesses.

Got it. That makes sense. And so maybe still on topic, I know that the deal with Walgreens also included an expansion of your strategic partnership with the company, particularly as it relates to sourcing, logistics and distribution. Is there any more details you could provide specifically on what you see as the biggest sources of incremental opportunity? And specifically, I know you guys called out, I think, $150 million benefit by year 4, which would be split between the 2 companies. Any sense you can give us on the cadence of this rolling on and what line of sight might be into achieving this target?

Yes. So I would say that this -- you can characterize this agreement. And of course, we're in early days, and the success will be judged by how well we do the integration and achieve the synergies and how well we grow our markets and our profitability and the relative position of Alliance in the industry. But I would say that the extension and the expansion of the Walgreens partnership solidify really a very successful and valuable partnership for AmerisourceBergen and our shareholders. And even our customers, if you look at the sourcing benefits we've obtained from WBAD. We believe that we have really been a tremendous partner to WBA in the U.S. and supported their growth as a strategic partner. And we've tried to find innovative ways to create value commercially. So by extending and expanding on our partnership, which I'll tell you about some of the ways we plan to do this, we will aim to really create incremental growth and efficiency, which the market always really does require of us and will hopefully allow us to serve our customers even more efficiently. So joint teams from both of our companies have really studied this and identified opportunities, including enhanced logistics efficiency, which has become more important in this post-COVID world. Product offerings and assortments and generally just leveraging the scale, I mean, it's no secret, of course, for example, that WBA does a lot more in front store and those sort of consumer products than we do. And is there a way to benefit from that? So we're also looking specifically at areas like shared transportation, backhauling and network coordination. So those are some of the key themes. I'll quickly hit the benefits by year 4 from these opportunities. We called out $150 million, which will -- we split equally between ABC and WBA, and we feel good about achieving those synergies, and our teams continue to work on executing those previously identified opportunities. And Jim, you might want to talk about the ramp on that?

Yes. And so we -- yes, on those $150 million of benefit that will be shared equally between AmerisourceBergen and WBA, we expect those to ramp up over a 4-year period, and they'll ramp slowly over the 4 years as our teams work together diligently to implement these benefits that Steve talked about.

Got it. That's helpful. And so similarly, on the deal, you guys have talked about deleveraging following the close. For a while, obviously, pre-acquisition, you guys have been sitting with quite a very small amount of net debt for quite some time. So what's the right way, I guess, to think about what you're targeting for leverage longer term? And is there any sort of internal time line that you guys are targeting to get to that level just post deal closing?

Yes. You're absolutely right. We had built up cash and had a low level of net debt as we were disciplined in looking at capital deployment opportunities until we found this very attractive opportunity with Alliance. And if you're aware, we raised over $3 billion of debt for the acquisition, and we're committed to paying down over $2 billion of this debt over the next 2 years. And we are focused on maintaining our strong investment-grade credit rating at all 3 of the ratings agencies. And since each agency has its own rating methodology, we're mindful of both net and total debt when thinking about leverage. But due to our strong free cash flow, we feel confident in our ability to pay down over $2 billion of this debt over the next 2 years, Kevin.

Got it. That makes sense. Maybe one last one on the deal, and we can move on to some other topics. So the recent press release was talking about Alliance getting consolidated within the other segment for the balance of fiscal '21. Obviously, the landscape of your business now has changed. And so longer term -- and I'm assuming these conversations might be ongoing. Generally, how are you guys thinking about segment reporting? Is Alliance something you guys might break out longer term? Are you thinking about mixing up services between distribution? Any detail on how you guys are kind of thinking more broadly about reporting would be helpful.

Yes. Kevin, that's a great question. And you're absolutely right. In our most recent press release, we did indicate that Alliance will be reported within the other segment for the balance of fiscal year '21. And we're currently evaluating our future segmentation. And we will provide detail on a new segment structure ahead of our fourth quarter earnings call.

Okay. I think that makes a lot of sense. So yes, so moving on to other parts of the business. I mean I think as you probably are aware, generic deflation has been a pretty big focus for investors at least as of this most recent quarter. I know you guys have talked about seeing some pockets of pressure. Just wondering if you could elaborate a little bit on exactly where you were seeing that pressure and if your thinking has evolved about the overall pricing environment just based on what you've been seeing more real time.

Yes. Kevin, so as we said on our May earnings call, overall, deflation rates are generally in line with the last couple of years. There have been a few product-specific pockets of pressure. But overall, the rate is still relatively in line with our expectations for the year. And for the balance of the year, we expect overall deflation to be relatively in line with year-to-date. We have seen that manufacturers have been focused on their own portfolio optimization by avoiding excess competition in molecules and focusing on manufacturing complex, harder-to-make generics. But overall, I'll say the supply-and-demand dynamics remain generally balanced.

That's good to hear. And yes, that sounds consistent, I guess, with what most of your peers have been saying on that front. One other topic that's come up that's somewhat similar is just on volumes. Cold, cough and flu obviously, a little bit weaker this year, which has had some impact. But would just be curious to get your view of how volumes are trending of late. When do you think we -- if we're not there yet, when do you think we can get back to pre-pandemic levels? Just anything overall and what you're seeing just on the utilization front?

Yes. And so broadly speaking, our sales have been resilient across our business. We know there's been some noise in the external prescription data that people focus on, but we've lapped the onset of COVID-19 pandemic and script data now compares against the past year that had essentially no cough, cold and flu season. And I'll also say, and this is kind of what we covered on the May earnings call, that we are pleased with our performance. There has been some lower preventative and diagnostic physician activity. But we're optimistic that with vaccines and lower incidence of COVID-19, people will be scheduling these diagnostic procedures and getting referrals to physicians to treat conditions. And as we said in the press release announcing the close of the Alliance acquisition, AmerisourceBergen continues to have strong performance across its businesses, and we expect to update the rest of our previously announced fiscal 2021 financial guidance when we report results for the third quarter of fiscal 2021.

That's definitely helpful, Jim. So maybe even just a follow-up on that. So I know -- I think we've seen it in the results. Obviously, it seems like volumes have been somewhat resilient as you noted. Is it your view, if we're looking out to next year and lapping some of these recent quarters, should there be any tailwinds on a year-over-year basis as maybe there was some weakness, particularly from cold, cough and flu that you could see a benefit year-over-year? Or would you think that shouldn't be all that material just given some of your commentary on just how resilient the businesses have been?

Yes. Well, I think everything that you've said is -- rings true. Our business, overall, has been very resilient during COVID. But now that we've lapped the onset of COVID, we are comparing against the past year that had essentially no cough, cold and flu season. And as we said, we also are optimistic that with vaccines and lower incidence of COVID, people will be scheduling procedures and getting referrals to physicians. And so that's one of the reasons why we think that we're continuing to have strong performance broadly across our businesses.

That makes sense. Still within the pharma segment, so as COVID vaccine supply has become more available in the U.S., has there been any talks with you and the government about potentially these products running through just the more traditional distribution centers or channels? And then longer term, if annual booster shots were necessary and -- do you see any kind of potential benefit to ABC long term? Or would you think, again, similarly, maybe not all that material?

Yes. Great question. I think it's something that's ongoing discussion with Warp Speed and the government. And AmerisourceBergen has been highly involved in the political and legislative process. And I think probably regulators have become much more aware of our capabilities. And of course, we have the well-covered strategic stockpile work we're doing with the U.S. government. So we do always seek to be a part of the solution and would do anything that's feasible to support vaccine distribution in the U.S. and the goals that we've already accomplished so much and we're incredibly grateful. With my background, I have friends all over the world, and I tell you, I just really do feel so blessed to be in the U.S. with the tremendous progress we've made with vaccinations here, and you can sort -- certainly see the chance of resuming normal life. But there are ways that we continue to play a role outside of vaccine distribution. The work we did in the antiviral and antibody therapies is -- comes to mind during the pandemic. And of course, we are managing vaccine distribution a lot outside the U.S., most notably in Canada. And over time, it's entirely possible, in fact, I'd say, even plausible that vaccines will be managed to use the collective strength and established relationships and prime vendors and other tried and true distribution models that mature products take -- that more mature and accessible products take advantage of in the pharmaceutical distribution industry.

Steve, yes, you touched on some of the COVID treatments and the benefit that you've seen from that in the first half of the year. I was curious, again, I would assume as the vaccines ramp up, the necessity, thankfully, for those products is becoming a bit less. But just any detail you could give on how that utilization of those products has trended in recent months relative to earlier in the year? And just what you're considering in guidance for benefit from those products, how is it kind of compared to what you guys were expecting on that front?

Yes. So we're very proud of the role that we played. And some of those products have actually progressed to where they're not EUA products. So -- and the good news is that they were for really very sick people. A lot of them were very sick people, to prevent further hospitalization and indeed death, so as it's well demonstrated as the vaccines have taken place. And the weather has improved and whatever else is happening. The need for these treatments has fallen quite materially. And over time, we expect that the therapies, as I said, with the vaccine, that's -- that they'll probably be managed using the existing supply chain we'll deliver to their established customers. And we've assumed in our guidance since February that sales of antiviral and antibodies will be significantly lower for the balance of the year and, of course, into -- and also as we start our planning season for 2022. So...

That's really helpful. Another topic that I think has been, certainly this week, a lot more topical has been the approval of aducanumab, the Alzheimer's drug. It'd be great if you guys just give your high-level thought about what this could potentially mean for the supply chain. And I know it's still very early and there's a lot of variables that still need to be solved for. But just overall, if you think that approval of this and if there is solid uptake, could there be any sort of material benefit to the distributors just as this gets rolled out more broadly?

Yes. Well, we're tremendously excited about the benefit it could have to all of society as we've all, in some way, been affected by this insidious disease and how tough it is on individuals and families. So we're very thrilled. And we expect to begin distributing the product in the next few weeks. And there have been such limited options for this disease, so we're very excited and hope that Biogen and the product is going to be very successful in treating the disease. So we expect to provide access, distribution solutions and patient access programs. But of course, it's hard for us to speculate on what end market uptake can be. I got this question earlier in the day, and I would just say that the sites of care, obviously, this is an infusible product, so that is an AmerisourceBergen sweet spot. We expect that a percentage of this could be physician administered. And I don't think that scale will be a problem. I think that the market will adapt. We've proven during COVID and during other key product launches that the market is very adaptable and fungible, and we'll adapt to meet our patient needs. So we're certainly hopeful that this product will have a tremendous impact on patients' quality of lives.

That's super helpful, too. And so one more question on just the pharma side of the house. I know contract renewals have not been nearly as topical or seemingly as important as they used to be maybe a few years ago. But high level, anything you'd call out for calendar '21 that's unique from a contract perspective? Looking back, I think Kaiser might be up this year. I know you guys re-signed [ Dipen ] and Humana back 3 years ago, and contracts are typically 3 years. So just any context you might be able to provide on this front would be great.

Yes. Kevin, actually, there hasn't been anything that we've called out in 2021 that's unique from a contract renewal perspective.

Got you. No, that makes sense. So if I'm looking outside the pharma segment, I think one other -- the other segment has been -- resilient is almost underselling. I feel like the performance has been really solid there lately. MWI, specifically, again, it would be great to get your sense of where kind of volumes have trended more real time. And broadly, you've talked about the increase in pet ownership that's come as a result of the pandemic. How are you thinking about the potential longer-term benefits to this segment as a result of that trend?

Yes. That's a really good question, Kevin. And our Animal Health business has seen strong trends throughout the pandemic, particularly in the companion animal market. And I was reading an article recently that indicated that over 12 million families in the U.S. got a pet since the pandemic began. And also the companion animal market's experiencing positive trends because people have been really focused on the health and well-being of their whole families, including their pets. And so this really should have long-term benefits on the companion animal market. And the production animal market, it continues to perform well given the current environment. And as restaurants and other venues reopen more fully, we'd expect the market to return to its previous growth trajectory. So at MWI, there's been really strong execution and strong customer relationships that's allowed the business to remain a best-in-class provider and really well positioned to capture these positive market trends.

That makes sense. You can count me amongst 1 of those 12 million people who has gotten a pet, and I'm grateful that you haven't heard him yet on this call. So in the others part of the business, World Courier is certainly an area, it sounds like, you guys have been more focused on recently and has come more into focus just given all the complexity of clinical trials in the current environment. So similar type of question, I mean, how are you guys viewing the long-term growth algorithm for this business? And then what are you seeing on the clinical trial side as you start to see a more normalized environment in terms of volumes or those trials coming back online? Just any general commentary that you might have on what you're seeing with the clinical trials would be useful.

Yes. World Courier has really shown its value during the pandemic and should continue to benefit from the value that we've demonstrated there. It's continued its strong performance, driven by both traditional commercial offerings and also direct-to-patient capabilities, which have been important during the pandemic. And given the success of in-home clinical trials over the past year, some portion of clinical trials will likely continue to take place in the home even in a more normalized environment. And World Courier's strong execution, industry expertise, focus on providing partners with innovative solutions and services, as I said, have been highly valued by manufacturer partners, particularly as global shipments continue to be complex.

That's helpful, Jim. I know we're coming up. We've got a few minutes left here. One other topic I wanted to make sure we touched on which is biosimilars. I know last quarter, you talked about the benefit from biosimilars potentially, I don't want to say decelerating, but the incremental benefit maybe not being as meaningful just because we're lapping some tougher comps here. Just curious if you could give some detail about what you're seeing on this front and at this point, how we should be thinking about, overall, just what the biosimilar contribution is to your pharma segment and how that could evolve over the coming years just looking at the pipeline.

Yes. Yes. Thank you. I think we've been talking about biosimilars for a long time, but we continue to see positive trends in biosimilars, including within our specialty physician services and health systems. Those are the 2 main places where they have an impact on us. So factors that you should consider are that health systems are becoming more confident in utilizing these clinically equivalent biosimilar products and a greater appreciation for the cost savings that they bring into their system; better contracting and payer coverage and reimbursement for biosimilar coverage. So I think payers have really gotten it. And as we've seen in some products, particularly in oncology, where there's more choice, more biosimilars are being covered by commercial payers. And health system customers are adapting and utilizing all biosimilar products that are currently available. So key product categories are supportive care, oncology and anti-TNF, are the 3 current biosimilar markets where utilization will vary from customer to customer, depending if they have an oncology department and/or on-site infusion clinics. So we expect biosimilar growth to continue. But in terms of guidance, your question, it will not be at the same level year-over-year with biosimilar growth first started to accelerate, and really, we talked about it becoming meaningful to us.

That's helpful context, Steve. I guess one more on biosimilars. I know last quarter, you talked about how some specialties haven't been as quick to adopt biosimilars as oncologists, which I know is a huge focus for you guys. Any reason you think that this might not be the case? And what's the opportunity to get adoption up for other specialties? And what would that potentially look like for ABC going forward?

Yes. Yes. We just think that there will continue to be increased biosimilar utilization. I think it's going to be encouraged by economic trends that we've experienced post the pandemic and particularly in oncology, where our ION business is a key differentiator for us in terms of the value proposition we provide to both oncologists as well as our manufacturer partner. ION is a business that we've been the leader in this field for well over 20 years, and we take pride in the role that ION has played in gaining biosimilars acceptance in the marketplace. And we expect to continue to play a robust role in the acceptance and development in the marketplace. Outside of oncology, as you've asked about, there have been varying degrees of success and a number of reasons for less bio take -- uptake in these other specialties, including potential payer and PBM involvement and less physician education on therapeutic compatibility for these products. And looking ahead, the growth we are seeing in bio take -- biosimilar uptake is encouraging for the future not only for AmerisourceBergen but for patient access and the U.S. health care system overall, whether it's in rheumatology, GI or insulin biosimilars. Biosimilars contributions will be positive, though most meaningful particularly to AmerisourceBergen on the Part D side. And we've often said that we need biosimilars to be accepted and gain traction in the marketplace to make role for the innovative products that are coming out in the cell and gene therapy and just general specialty and other areas and including neurology areas now as we've talked about with Aduhelm.

Great. With that, I think we're about up on time here, though. I just wanted to say thanks again to Steve, Jim and Bennett for giving me the opportunity to talk to you guys today, and thanks to everyone who's listening in and hope for to you enjoy the rest of the conference.

Well, thank you so much. Thanks for the time. Appreciate the audience for listening in.

Thank you, Kevin. Thanks, everyone.