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

Good morning, and thank you for joining us today. I'm Ricky Goldwasser. I'm Morgan Stanley's health care services analyst, and I am pleased to have AmerisourceBergen's CEO, Steve Collis; and CFO, Jim Cleary, here with us today. Before we get started, just wanted to note this webcast is for Morgan Stanley's clients and appropriate employees only. It's not for members of the press. And for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And with that, thanks again, Steve and Jim. Great to have you here. And Steve, I'd like to turn it over to you for some just introductory remarks to help frame the conversation.

Yes. Good morning, Ricky, and thank you for the opportunity to be here and welcome my colleagues, Jim and Bennett. AmerisourceBergen is a purpose-driven and leading global health care company, with its foundation in pharmaceutical distribution. We play a vital role in the pharmaceutical supply chain as a key pillar of pharmaceutical innovation and access. We create unparalleled access, efficiency and reliability for human and also animal health. And I have Jim Cleary here from our MWI acquisition. Key to our success is our 41,000 team members who embody our purpose of being united in our responsibility to create healthier futures. During the pandemic, we've worked very hard, and we feel our team is as engaged and is as talented as they've ever been at any time in the company's 20-year history. We have a strong foundation in place across our businesses. And in June, about a year into the pandemic, we took another significant step forward by closing the Alliance Healthcare transaction and welcoming the talented Alliance team to the AmerisourceBergen family. The acquisition of Alliance Healthcare is another evolution in the development of AmerisourceBergen, which enhances our ability to provide innovative global health care solution and is a critical component to our future success, given the size and scale and resources that Alliance brings to us. Our expanded reach in pharmaceutical distribution and added breadth and depth and manufacturer services further strengthens our ability to provide health care services and solutions for our partners globally. As we're ending off our fiscal year '21, we remain well positioned to succeed with our customer focus, our leadership in specialty, ability to execute and innovate and track record of successful corporate stewardship. Corporate stewardship includes an ongoing focus on financial strength, investing in our talent and a purposeful approach to ESG. Jim, I think you have some additional comments for these as well.

Yes. Thanks a lot, Steve, and thanks, Ricky, for having us at your conference. So we've got a great group of investors you have us meeting with today. So thanks a lot. So over the past year at AmerisourceBergen, we've proven that our businesses have been strong and resilient, and our teams have worked diligently to help our partners navigate complexity and provided solutions, upstream and down, to support the pandemic response. And I think our industry as a whole has stepped up to meet the unique challenges that global supply chains faced. As you know, we recently reported exceptional results for our third quarter of fiscal '21. And these results, along with our updated guidance, I think that they clearly exemplify our consistently high level of performance and execution, and how we continue to benefit from leading with market leaders. Our company is well positioned for long-term growth as we continue to be driven by our purpose of being united in our responsibility to create healthier futures. Our purpose not only guides our business, but as Steve was saying, also guides our ESG strategy, which ensures that AmerisourceBergen is making a positive impact on the people, planet and communities where we live and work. And some examples of our ESG strategy include unlocking the value of our differences through a thoughtful approach to diversity, equity and inclusion; adapting to our changing climate and ensuring a responsible pharmaceutical supply chain; and focusing our philanthropy and volunteering efforts on supporting healthy and resilient communities. And so I encourage everyone to check out AmerisourceBergen's Global Sustainability Report, our fifth-ever report, which showcases how our business practices align with many of the leading global sustainability frameworks. And so with that, Ricky, I'm sure you have a lot of questions, so I'll turn it back over to you.

Great. Thank you, Jim, and thank you, Steve. And for everybody who's listening to us, if you have any questions for the team, just type it into your browser and I'll relay the question on your behalf. So Steve, under your leadership, AmerisourceBergen has really grown into a diversified enterprise. I think you rang the opening bell at the exchange a few weeks ago to mark the 20th anniversary of the Amerisource and Bergen deal. And since you've expanded from core U.S. -- as a company from core U.S. distribution to leading the industry on specialty, expanding into manufacturer services, animal health, most recently Alliance that helped expand your geography into Europe, so -- but how are the pieces of the enterprise are tied together? So what is that common thread that differentiates you in the marketplace?

So thank you, Ricky. Last Tuesday, we did ring the bell on the stock exchange. And the first time the company was made to ring the bell was, of course, 9/11, and that's a famous story in our company's annals, history annals. But we have our -- as you said, we have really grown the business both into global enterprise but also really strengthened the pillars of our business, including our talent and the customer base that we serve. We've made that ongoing investments that enhance our capabilities and support our market leadership in specialty pharmaceutical distribution and manufacturer services. Those are key areas that -- my background was in those key areas. I've been with the company for 27 years, and I remember my predecessors saying that it's absolutely critical that the next leader of the company knows a lot about specialty distribution. So that was a bit of a signal. But we literally -- many years ago, AmerisourceBergen was very keen starting the specialty distribution business to physicians. With Jim's -- over 5 years ago, we acquired MWI Health and is a leader in also community veterinarian practices and solutions and services and is a demand-driven sales force, particularly here in the U.S. We continue to innovate with industry-leading partnership and services models. We have talked about our manufacturer services models and companies like ION that really help physicians be much more successful. And we've expanded geographically both through our World Courier business, which expanded our global reach and local expertise for supply chain logistics and solutions, and then added recently the Alliance Healthcare, which is in about 12 or 13 different countries and -- including some emerging markets, and we continue to learn from all the different health care models. So the core of all the businesses is that they are pharmaceutical-based. We haven't invested very large in anything that isn't pharmaceutical-centered. Even the Animal Health business is well over 50% of revenues is with multinational pharma companies. And just as I'll wrap this question up, I just -- we're looking forward to obviously the next decades, end of the fiscal year, end of 20 years, and we have a clearly differentiated business that strongly positions us for long-term growth. I'd have to mention our incredible customer base. Most of the customers are very strong anchor relationships, whether it's in independent pharmacy, say, with community pharmacy, our committed -- our CPA relationship, and Walgreens is an anchor customer for us, Express Scripts. So we have a very strong end customer base that we feel really differentiates us. We've talked about our leadership in specialty and commercialization services, which has really been a key driver for us. A lot of manufacturers, when they want to launch products, particularly into the Part B markets, their first stop will be AmerisourceBergen, where they'll gain a lot of knowledge about how to approach their launch, how to approach complicated areas like reimbursement, analytics, managed care strategies. We have an innovative and entrepreneurial mindset. I think the best way that I could explain this is the performance we had during the pandemic, where we were able to do so much advanced work on all the anti-infective therapies into the hospitals. All of these products essentially were available to AmerisourceBergen, and we worked and partnered with the CDC and state health organizations. And I do believe that we have a track record of long-term successful corporate stewardship. Our Board, our management team is really focused on the long-term positioning, health and purpose of the company. So I think that does create a differentiation for us.

So Steve, you've really kind of like lead or built the specialty business for AmerisourceBergen, and it's been a meaningful contributor for results for some meaningful time here. But it seems that more recently, we've reached a tipping point. And as we think about specialty, how much of the benefit you're seeing this year is sort of COVID-related, which you sort of alluded to? And is that sort of transitory in nature? And how much is structural?

Let me talk about the structural and, Jim, the transitory gets to be the guidance. And of course, it is very much -- transitory is an excellent word because everything is still in flux. But specialty physician services, we spent a lot of time, Ricky, and -- with Bennett and his team's leadership and marketing communications. I think we've really come to understand, and the industry has come to understand, what we mean when we talk about that, which is distribution of oncology and physician-administered products in therapeutic areas. Other important areas for us are urology, rheumatology, ophthalmology, neurology, those are very important franchises. And we do those principally through our 2 physician-facing businesses, Oncology Supply and Besse Medical. But also importantly, we have expertise. Those are often like our independent pharmacies and veterinarians, small businesses. They do a lot more revenue because the ASP of the products that they administer are so expensive. So they require wraparound services. Some of those are the GPO contracting access to patient records that manufacturers need, understanding how the products are really administered in the market, what are the barriers to access, group purchasing, inventory data and analytics, and financing services. Specialty has been a very fast-growing part of the market for some time. By some accounts, over 50% of all brand sales are in the specialty category now with the patent cliffs that we've experienced over the last decade. And there will continue to be strong organic growth, particularly in oncology with so much investment by manufacturers, and so much patient need. And a lot of this is driven by patient needs. And there's some potentially very exciting advances in areas like neurology, cardiology, products that could be physician-administered and those are really our sweet spot. And we're well-differentiated, as I said a little bit in the earlier question, and well positioned for long-term growth because we have such high market share, because of our knowledge, the experience that we have and the portfolio and expertise really bolt through decades to support complex launches and the needs that manufacturers have for these specialized products particularly in the U.S. market. Obviously, some of this expertise is applicable to Europe, and that's one of the key areas of synergy and focus that we are already looking to drive benefit from the Alliance acquisition. Jim, one of the questions that Ricky had was really on what's going to be transitory or tipping point in nature.

Yes, sure. And thanks, Steve. And so outside of specialty physician services, which is the part of specialty distribution that we spend the most time talking about, AmerisourceBergen, as you know, also has specialty distribution solutions into health systems. And it's these solutions into health systems which have been leveraged over the past year by the COVID-19 antibody and antiviral manufacturers to get their products to hospitals across the country effectively and efficiently. And this is just one of many examples where AmerisourceBergen businesses are just very well positioned and able to come with solutions to manufacturers when those solutions are needed, and this is a prime example. And as we said during our earnings call, these therapies contribute approximately 25% to fiscal '21. The majority of this was in the first half of '21 when we had exclusivity for the largest product. And through the end of -- it's approximately $0.25 in fiscal '21. And again, most of this was in the first half of '21 when we had exclusivity for the largest product. And so through the end of June, the COVID-19 therapy sales declined in line with the expectations that we've shared publicly since the first quarter of '21. But I will say that they've been elevated, as you would expect, as of late due to increased hospitalizations. And so with regard to transitory, the benefit from exclusivity is not expected to repeat in '22. And now taking a step back from COVID therapies, when we did our guidance raise in early August, it was a result of a strong execution across our businesses, both in pharmaceutical distribution and in Other. A number of our businesses in Other, our commercialization services businesses, also really benefit from specialty product sales. But really where we get the biggest benefit is in specialty physician services where biosimilars are also having a very positive impact now, Ricky.

So a couple of follow-up questions. So first of all, Jim, to your point that you're starting to see a pickup as we see sort of the pandemic research. As we kind of think about quantifying it, is the pickup that you're seeing now sort of similar to what you've seen in the first half of the year?

Yes. We've certainly seen a pickup in sales, and it's been meaningful. During the first part of the year, we did have an exclusive and we no longer have an exclusive on the key products, but we certainly are, Ricky, as you would expect, seeing a meaningful pickup in sales given the uptick in hospitalizations.

And then wanted to pick up on something, Steve, that you sort of mentioned in June. You kind of like pointed to it as well. And it's about biosimilars, but it's really about sort of the opportunity to explain the biosimilar business by leveraging on your Alliance assets now and the presence in Europe. I think Europe has been ahead of the U.S. in biosimilar adoption. I think, Steve, in the past, you said that the type of products that are going to be most successful in biosimilars are the one where you have sort of multiplayers in the marketplace and more competitive dynamics. So what are you seeing in the global, in the European market that make you excited about biosimilars? Was that included in your initial guidance? Or should we think about it as potential upside opportunity to drive kind of like long-term growth?

I'd say, in general, that all the Part B-type drugs, it's more interesting in the U.S. The markets are smaller. The pricing is -- the pricing models are more attractive for distributors and for patients and customers. And it's -- I think the market was slow to adopt a little bit. And as we've seen, 2 or 3 entrants is really the sweet spot for us. We've had 1 or 2 products where we get to 5, 6, and then the pricing becomes somewhat competitive. Although the ASP, our formula does temper that a bit, but still, it's -- the U.S. is, by far, the most interesting market. Everything works so differently in Europe. We really aren't seeing a common trend across all the European countries in even important areas like specialty distribution and biosimilars. But -- and the contracting is very different. We obviously use WBAD a lot. Overall, I'd say that the European countries aren't quite as WBAD. They often have to do things on their own and there are a lot of market conditions. A lot of, of course, countries like Netherlands, it's in a tender system, and they have to go with who the government-prescribed winner of the bid is. So it is very, very different. The U.S. system, of course, is by far the biggest specialty market in the world and where we have developed a lot of expertise. I've been on record as saying, and I still believe that there could be global contracting strategies. You look at the vaccine, if we had this in place first-world strategy for a Pfizer-BioNTech or Moderna could have really been in place essentially to AmerisourceBergen because not only do we have the distribution and access points, but we also have very strong 3PL businesses across AmerisourceBergen in Europe and in the United States, which is a real strong weapon for us to access markets and respond to manufacturer initiatives and public health initiatives very, very quickly. And so many of our companies have been able to do that, including World Courier, which has gotten to some very difficult countries, gotten vaccines into some very difficult countries. So good question and really strong idea for our teams, Ricky, to continue to work on a global biosimilar strategy.

So continuing on the global theme, how do you respond when investors ask you about the challenges that are associated with the European markets that some of your peers have encountered?

Well, I can ask -- I can make some key points about why we thought Alliance was different. And it's been a semi-public company with disclosed numbers. And this company has, like a lot of AmerisourceBergen's businesses, been very, very resilient, behaved with very similar sort of resiliency patterns. A bit different in all the markets but has been very strong performance throughout the pandemic and played a key role and like North American AmerisourceBergen, has really enhanced their profile with public and private agencies because of their response during the pandemic. But what interested us in Alliance? And Jim, we were out there talking -- it's almost 2 years ago when we first started getting really excited was when it clicked to us how much of their business is driven by services, not just distribution. And key to that, as I recently mentioned was Alloga. And Alloga is a 3PL business but it also does a lot of solus products or DTP distribution contracts. And that's a very, very significant part of their business because we often find that as a stealth way to enter markets and as a way to support manufacturers with unusual initiatives, or to have work in a unique contractual way with manufacturers. AmerisourceBergen is comfortable when we work with manufacturers. We understand CGMP. We understand SLPs very well, and that's been an area where throughout the 2 decades of our existence, we've been very strong in working with manufacturers there. I'd be remiss if I didn't mention the other benefits we got from this transaction with Walgreens, with extending our contract through 2029. The U.S. synergies, we used to call it back at 3, but we've got a lot of this contracted with time lines and financial frameworks and commitments. So it came at a very good time. Potential benefits between Alliance and World Courier is something foremost in our mind. They really are very complementary. They're not necessarily synergistics but very complementary to one another. And we think that the talents of the World Courier team and the deep experience and scale and expertise of the Alliance team will complement each other very well and also gives us a chance for some sort of scale benefits that we would have from a talent perspective and even areas -- back-office areas, shared service centers. We've already done, for example, a lot of work in Lithuania. That's something that's very interesting to us. Boots, very much like Walgreens, is an anchor customer. Boots is really an anchor customer and is large enough to be an anchor customer, essentially, for all of Europe. It's a very, very significant relationship. We were fortunate to be able to get out to Europe but just for a brief few days, Jim and I. And we were really impressed at the extensive logistics work that goes on between the 2 companies. It's a quite extraordinary and very, very unique relationship. And there are challenges. Some of the markets we'd like to be more profitable and notoriously some of the Southern European markets are challenging. We're not in all the markets. There's still some businesses that are retained by WBA, like their interest in the German joint venture in Italy. But overall, we've started off very strong. We only closed June 1, and I think we've established a good rapport. And just to sum up, perhaps the best thing I can say is that Alliance Healthcare possesses a range of leading services business that also support manufacturers and meet downstream customer needs, and this is a business that we feel very comfortable and familiar with. Ben, Jim, anything you'd add?

Steve, I think you covered it. That's great. Yes. And Ricky, as you're aware, due to the services businesses that Alliance has, their operating margin is higher than AmerisourceBergen's operating margin. So we will see an uptick in operating margins as we continue to consolidate Alliance.

Great. Shifting gears back to the U.S. and more to the core business in generics because generics is really sort of one of those KPIs that investors are very focused on. On your last earnings call, you said, I think, for the first time, that the portfolio is not as dependent on generic price fluctuations than it has been historically. So can you explain a little bit of this, does generic deflation still matter?

Yes. So our business model, it's not as reliant on generic pricing as it once was in the past. And as we commented on the last earnings call, and thanks a lot, Ricky for picking it up, is that several years ago, the leadership of our businesses recognized the need to have a more balanced profitability across the portfolio of pharmaceutical categories. And this approach, it helps ensure that AmerisourceBergen receives fair compensation for the value we provide across brand, generics and specialty. And so due to this approach, our business hasn't been as reliant on generic pricing for some time. And I think this has been demonstrated by our strong results in spite of generic deflation. And we thought this was an important point to communicate on our last earnings call.

Moving on to a topical issue, opioids. Last week, over the weekend, you announced another important milestone as it refers to the settlement. So one, what are the next steps from here? And as we think about the liability of all the different states, I think there is one point, and we probably need to clarify is basically are if states opt or counties opt not to be included in the settlement, should we think about that as sort of kind of like being deducted from the $21 billion of proposed settlement for future liability? Or is that going to be an additional liability that we need to be aware of for the future?

Sure. So the accrual that we recorded in the fourth quarter of 2020, which is 31% of the proposed industry settlement, was related to global settlement to resolve cases currently filed and that could be filed by all states, counties, municipalities and other parties covered by the settlement. And so as it relates to payment, which is dependent on participation, the payment amount will depend on several factors, including the final participation by states and political divisions.

Okay. I think that sort of clarifies that. So we talked about the different parts of the business and the recent news. If we put all of this together and we think ahead for next year, you are about to provide fiscal year '22 guidance in early November. On the call, Jim, you kind of like talked about some of the headwinds, you just made sure that the people kind of like remember them. But can you also kind of like just kind of like remind us of what are the headwinds, but also importantly, what are the tailwinds that you're seeing for the next 12 months?

Yes, sure. Let me go through both of those. And we'll provide comprehensive guidance at the end of our fiscal year, which allows guidance to be fully informed by the output of our year-end business planning process, which is well underway now. And we talked about a number of the things that impact the modeling, like we no longer have the benefit of exclusivity of the COVID-19 therapies, we'll have higher interest expense related to Alliance, we'll have a little bit higher share count due to the fact that we delivered 2 million shares as part of the purchase price of Alliance and our share count will tick up a little bit next year, and that we'll -- we've committed to pay down $2 billion of debt over the next 2 years and prioritize that. So as we have employee stock compensation, share count will go up a little. But there's really a number of really very positive things, too, is we're in the midst of the planning process. And as we previously commented, we have good visibility and confidence. Our businesses are well positioned in their markets to take advantage of market trends. We're clearly benefiting by our very strong customer base and the fact that we have market-leading customers in all of our businesses. We're certainly benefiting from our strength in specialty. We're certainly -- feel very good about the Alliance acquisition. And so we do look forward to discussing fiscal '22 expectations when we do our fourth quarter earnings call.

Great. And we are almost at time. But before we kind of like end our session, wanted to touch on sort of really sort of the long term. And Steve, earlier on, you talked about really sort of the portfolio and how you're positioned and have confidence in long-term growth. Last earnings call, you emphasized the balanced nature of the portfolio, the stable fundamentals. Jim, you talked about visibility now. What is still holding you back from providing long-term growth targets?

Yes, let me...

Go ahead, Jim, please.

Yes, I'll jump in, Steve, and I'm sure you'll want to close. And Ricky, we do appreciate your focus on this, and AmerisourceBergen continues to be well positioned to deliver long-term growth. And we've demonstrated this through our results during the pandemic, the resilience of our businesses, as I've mentioned. We do feel like we have good visibility. We feel like we really benefit from our key partnerships. We feel like we benefit from our leading positions in faster-growing parts of the market like specialty. As Steve said, we also feel like we benefit from being pharmaceutical-centric. And so we do feel like the business is positioned for continued success in fiscal '22 and beyond.

And Ricky, if it's appropriate, I can just wrap because I see we were actually out of time. But I think Jim and I -- obviously half an hour is not enough time to cover the broad messaging of the company. But I hope you've understood some of our themes, which is the great Alliance acquisition, our presence in specialty and biosimilars, the diversified portfolio, our focus on corporate stewardship and doing the right thing by our shareholders and that we are hopefully seeing some light at the end of the tunnel with the complex opioid litigation. So AmerisourceBergen is really focused on innovation, customer focus, carrying on with our strong suits in specialty and biosimilars and key areas of support for, say, independent veterinarians, oncologists. Our health systems business is also doing very well. We want to be the best execution company, really focused on being that reliable partner with the best systems, the best investments in infrastructure. And our long-term growth will be supported by our purpose, and by our diverse and inclusive teams, and the strong culture that we have really tried to foster and engender at AmerisourceBergen. So with that, we'll probably hand over to you to say goodbye, Ricky.

Yes. Thank you very much, Steve and Jim, and looking forward to speaking soon on the November call.

Yes. Us, too. Thank you.

Thank you, Ricky.

Thank you, Ricky. Bye-bye.