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

All right. Great. We're going to get started with our next session here with AmerisourceBergen. I'm Steven Valiquette, the health care services analyst here at Barclays. With us from the company, we have Steve Collis, company's CEO; and also Jim Cleary, the CFO. This will be a fireside chat. We'll dive into those questions in a few minutes here. But I think first, I'm going to turn it over to Steve just to give some comments.

Good afternoon, everyone. I appreciate your attendance here. I think this was right 2 years ago when we -- where we come in to Miami or not. And so that's right around when things started getting canceled. So I'm just going to make some introductory comments about AmerisourceBergen. We have had a few investors that have asked us for some more fundamental sort of discussions today. So we are a pharmaceutical services and distribution company focused on the prescription dollar. We have strong representation almost all first world countries. We are really focused in the U.S. on our specialty business and our related services business. During last year, we acquired Alliance Healthcare which is amongst the most prominent European wholesalers, which has given us a chance to be more of a global player. We were able to finance that acquisition very efficiently, and we are significantly deleveraging over the last year, and we'll continue our deleveraging through next year. We have had a strong purpose-based culture and we have 42,000 associates around the world who are united in our responsibility to create healthier futures. And we have customers both up and downstream in the channel and we look forward to talking to Steve who knows our business well and happy to be here with my colleague, Jim Cleary as well.

Okay. So let's kick things off here. We'll just talk about -- certainly, I think investors focus on one of the key drivers for ABC being the specialty drug distribution business as a key part of not only the growth but also just the strategic direction going forward from here. You guys have clearly been a leader in the specialty distribution area. I guess the question is, how is the company evolving to maintain that leadership position when we see some of your competitors also trying to enhance their capabilities?

Yes. So a couple of things. I'll start off in the U.S. and then comment on Europe. In the U.S., we're strongly differentiated by our presence with the Part B drugs, in almost all of the allergies, including especially oncology, ophthalmology, rheumatology, dermatology. We have very strong market share presences. And we often supplement our core distribution capabilities with practice management data insights, value-based care, partnership programs and contracting through our ION and IPN businesses. Those businesses have been the leaders in the various areas of service that they perform for well over a decade now and has certainly have given us very close connections to the community oncology market which is our former specialty business. Also broadly outside of the Part B space, AmerisourceBergen has got a strong interest and awareness, knowledge with our manufacturer services businesses focused on adherence and reimbursement services as well as pricing and pricing strategies for manufacturers, and we're well known for those businesses. In Europe, our Alliance Healthcare acquisition is not quite as prominent in specialty, but is a player through Alloga pre-wholesale and specialized services business. Our goal is to really help broaden the class of services that our European business is servicing as well as enhance our manufacturer services capabilities, but we do believe that particularly with businesses like Alloga, Alliance is well positioned to also participate in the specialty market. Our thesis, one of the synergies is global wholesale services and data analytics, compliance services, and we certainly feel like everything we've seen from the early days of Alliance have shown promise towards living out that potential. Jim, anything you'd add on specialty or...

Well, as we look at it from a financial standpoint and as we do our planning, it clearly will be a growth engine for the company given the growth and innovation in the market over the next several years.

We also are enhancing our services around cell and gene therapy and biosimilars has been a big driver for specialty for both our customers and for the company. So we focus a lot on increasing our contracting and presence with biosimilars, which every launch is a bit different, but we definitely are holding on, particularly in the Part B therapies.

Okay. Great. So I guess, building on that last comment, as we do think about the biosimilar launches, clearly, a lot of investor focus on that right now. When I think about that for the pharma supply channel, I think about some products have big sales through the physician or clinical channel, and that's where distributors will do pretty well. Some of them go through more like specialty mail order, and that's where maybe PBMs do a little bit better. So I guess I'm curious, as we think about just so much focus on biosimilar Humira for 2023. And maybe just talk about your thoughts around that particular launch. What that means potentially for ABC? And then just any other comments you want to make about the pipeline for biosimilars beyond Humira, as you think about the overall opportunity set and interchangeability within that?

Well, Humira, it's clearly one of the biggest drugs in history, incredibly effective for patients. And as Steve, as you pointed out, it has largely been in the U.S. dispensed through the specialty PBM channel. We do participate in it. Sometimes we are the distributor, but it's more of a lower margin, lower touch sort of business for us. It's interesting, we don't preclude any possibility that we could contract with all classes of trade, all segments of the industry for biosimilars. And it's certainly something we're very aware of, very mindful of, very focused on. And our success with the launch like Humira will be largely dependent on what contracting positions some of our customer base downstream chooses to deploy. But even if, say, our largest PBM mail order customer were to not contract with us, we still would have several opportunities because we have broad access to all sorts of distribution and dispensing points. So we would expect to participate and that's going to be interesting. It's also going to create a lot of innovation headroom given the size of the drug. And AmerisourceBergen has been very implemental in -- instrumental in introducing biosimilars into the U.S. and sees it as a trend which we'll continue to benefit from.

Okay. All right. Maybe just shifting gears here a little bit and talking about the international segment for you guys. I don't know, it's been close to 3 quarters now since I think that deal closed. Maybe give us an update on how the integration is going? And then one question we are getting maybe just to tie this topic in as well as I think you guys might have a little bit of exposure around the Ukraine, Eastern Europe a little bit. Maybe just talk about whether or not that's potentially -- or any level of disruption around that part of the business, even though it's small just as part of your discussion around the integration of the international segment?

Yes, we had some questions from investors today, and I would say it's almost 9 months since we completed the acquisition of Alliance. And we knew the business very well. We had a extended diligence process, which was a little bit hobbled by not being able to visit in person, but we certainly are trying to make up for that now. But it is a strong wholesale business with a strong P&L oriented culture. It's a little bit of an unusual large-scale acquisition because we took it out of a public company. So we're dealing with some transitional issues. But overall, we knew we bought a very strong company with strong management, strong customer relationships. I would have to point out the U.K. business, which is most like the U.S. is their strongest presence, their strongest plethora of offerings, and we continue to do very well there in the U.K. and in the other countries that we acquired. As far as the Ukraine goes, I'm going to let Jim comment a bit, but it's a very, very small part of our business is in Eastern Europe and Asia, Russia, it's -- we have, in total, under 70 employees in that general area. It's less than 1/10 of 1% of World Courier sales, which is a relatively small overall revenue part of AmerisourceBergen, but is part that we really enjoy. And often in those areas, particularly with World Courier, we're an adjunct and a service provider to pharmaceutical companies and we often guided by what they do. So our intention is to not undertake new business in Russia, but to work with the manufacturers on existing programs that we have and make sure that there's continuity of patient care including those patients that are receiving medications for rare diseases, sometimes in oncology and continuation of clinical trial product. Jim, anything you'd add to those questions?

Sure. I'll just add that, of course, in Ukraine, we are very actively supporting humanitarian aid through our foundation and our -- both our associates and our foundation. And what I'll add circling back to Alliance is we -- there's been a number of opportunities for AmerisourceBergen and Alliance to start to work together on opportunities. And the management team there has really integrated very well into the AmerisourceBergen team. And the sorts of initiatives that we're working on together, there are a lot of opportunities between our World Courier business and the Alloga business at Alliance. The Alloga business is the 3PL business. It does a lot of pre-wholesaling and really having the World Courier logistics specialist and the Alloga logistics specialist work together on a potential manufacturer programs really is an exciting opportunity. There are also opportunities for our Good Neighbor Pharmacy that supports independent pharmacies and the Alphega network of independent pharmacies at Alliance to work together really does create some additional long-term synergies. And there's even been some working together in opportunities in the Animal Health market. Alloga does 3PL pre-wholesaling for a lot of the leading Animal Health manufacturers and the MWI business that's the leading Animal Health distributor, part of AmerisourceBergen here in the U.S., we have had a presence for many years in the U.K. And so Alliance and our Animal Health business are starting to work together. There are some examples in the U.K., for instance, where we're able to really improve customer service by having those businesses work together. And that's just a start. Overall, when we announced the deal, we indicated that we'd achieve high-teens accretion. We'd get high-teens EPS accretion from Alliance in the first year. And so we do feel really good about the deal financially. And then finally, on top of all that, when we announced the deal, we also extended our contract with Walgreens by 3 years -- for an additional 3 years to -- and so that was just one of the other kind of benefits that we got from the deal.

Okay. Great. Yes. I mean, certainly, it was a very positive news as far as the financial accretion from that deal for sure. You just kind of touched on this, but maybe is there anything else worth mentioning over and above what you just talked about as far as just long-term ways to create more value from that deal beyond just financial accretion. You have hit a lot of them right now, but anything else that comes to mind as part of that.

We extended also. We signed a 10-year contract with Boots, I mean because there was they were not really at arm's length because they were within the same corporation ownership. So we had to do a new arm's length contract, which was a lot of work. We also have a lot of interesting models if you take countries like Norway and the Netherlands where we have an integrated retail and wholesale model. It's a small part of our business, but it's interesting to learn about. We also have synergies in the U.S. that we're working with Walgreens on, which were accelerated as a part of that deal. And we're looking at areas like central fill loss, mild distribution and some sourcing opportunities that we had in the front store. So there's lots of things that we're working on together with Walgreens in the U.S. And we just also are excited about the cross learnings and it's -- Juan Guerra, who is President of Alliance Healthcare he tells these people. The good news is you're owned by wholesaler. The bad news is you're owned by wholesaler, which means that we are very, very interested in what they're doing. We have a lot of knowledge to add. We're looking at some technology deployments there, which I think we're absolutely accelerating and looking at areas of expertise in warehouse automation and just general sourcing that we can do together. So far, it's been a really positive first year. And Jim and I are looking forward to spending more time, we actually are going to be able to get out to Europe next week and we're looking forward to that opportunity.

Okay. Great. Actually, maybe just 1 or 2 quick follow-ups just on that for a second. You mentioned the long-term renewal of the Boots distribution contract. With that asset, seemingly it's up for sale right now by Walgreens from some of their own disclosures. I mean is that something where, is there a change in control where you're still let's call it, money good as far as your distribution contract with that asset? Or does that create some risk in any way, address that topic for a moment?

Yes. Yes, we did anticipate the potential change in control, and we have ourselves protected to a certain extent. But if there is an acquirer there, we'll definitely meet with them and consider them as a key customer and flagship customer in the U.K. So absolutely, we look forward to having a strong relationship with them. And the work that we do, the level of integration between Alliance and Boots is something extraordinary. A lot of people who have a lot of experience in distribution like myself and Jim, we really, as we look at understand cross-docking operations and the various aspects of sourcing and the DTP programs and Solus programs that they do within the U.K. business. It's pretty remarkable. And we are the largest scale by far distributor. So pretty unique and integrated relationship. Anything you'd add?

Yes. So we are protected contractually. But also we have just a very high level of integration, as Steve was saying. For instance, the IT integration between the businesses is significant.

Okay. One other quick follow-up on this subject just for a second here. I mean, obviously, I think in the U.K. and Europe, there's much higher levels of comfort, the same entity owning distribution and retail dispensing assets. I don't know if you're able to opine on this or not, but to the extent that asset is for sale, is that something that would ever make strategic sense to own from the ABC point of view or any high-level thoughts you can share around that?

No, no, we -- I think we would be in retail incidental to the wholesale business in a way, not to minimize anything that our associates are doing in Norway and Netherlands. But is not a core area of focus for us. It's not how we in our businesses, not our -- not where we have expertise, and they are very different sort of disciplines, we think so. We really want to help our customers be successful at retail, particularly the Alphega and Good Neighbor Pharmacies. And we have that cross learning opportunity that we are applying to what we call all our holy grail of community practitioners, which is pharmacists, veterinarians and oncologists, Part B providers. So there is some commonality there that we'd like to provide. But No, I don't think we'd be interested in a large-scale retail acquisition.

Okay. Got it. Okay. So why don't we shift gears here a little bit, talk about some of the COVID therapies that has provided a little bit of a tailwind for the company over the past 18, 24 months or so. I think you talked about it being a tailwind for '22, but given how COVID is kind of oscillating we had obviously the Omicron spike, then things quieted down. Now there's chirping about another one may be coming again. But maybe just give us your latest thoughts on how things are trending with supply-demand dynamics for COVID therapies and any way to tie it into your guidance around that as far as some back half of your fiscal year still getting some contribution. Just any updated thoughts would be great.

I'll take the first half of the question, and Jim can certainly take the financial guidance. These have been a real incredible source of pride for AmerisourceBergen. We've shown to be a real leader in data and analytics, which has led to us being the distributor for COVID therapies, particularly all the EUA products. As those products get general approval, we expect that they would move more into a general distribution and that's what a lot of the mainstream manufacturers are -- we would anticipate. But we've been in a unique position to intersperse between the CDC state governments and look at where the pandemic hotspots are and really allocate those therapies. The most prominent therapies for us right now are the 2 oral therapies, and we are working with the CDC on those. Inventory has been fairly difficult, particularly on the Pfizer product, as you know. But it is purchased by the CDC and there is a commitment for a significant amount of units. And we anticipate that we carry on being the distributor for those but we don't take title on it. It's more of an agency type business. Jim, I think you want to comment.

Sure. And we've been quite transparent about the contribution of COVID therapies to our profitability. Last year, in fiscal year '21, we had $0.30 of EPS from COVID therapies. In the first fiscal quarter of fiscal year '22, we had $0.10 of EPS from COVID therapies. And we've indicated that it will be a tailwind in fiscal year '22 compared to fiscal year '21. And just how much of a tailwind, that's why we have a guidance range. And that's one of the things that would move us within the guidance range. And we are getting a lot of questions on COVID therapies, which is understandable. But one other point I'd like to make as you look at our performance, one thing that you know that's just very good about AmerisourceBergen, we talked about this on our first quarter call. It's just how broad-based the performance is. Of course, we are benefiting from COVID therapies now but we're really seeing strong broad-based performance across our businesses.

Okay. All right. Let's shift gears here a little bit again. We'll talk about some volume and pricing questions. I know how much you guys look at IQVIA data, but the investment community still focuses on that as one of our primary sources for things at our fingertips. The good news, U.S. prescription volumes, if you strip out the COVID vaccines, they're actually trending along pretty nicely right now. But by contrast, the generic pricing shows a little bit of deflation accelerating. But feedback we get from some of the manufacturers is it's actually the big buying groups that are driving a lot of that. So that actually could be much more net positive for drug distributors than anything that negative. My question really around all this is maybe just any updated thoughts you might have around generic pricing trends, either from just a buy-side procurement perspective or even on your sell-side customer pricing and also just the -- in relation to those 2, any notable dynamics that are shifting one way or the other would be helpful if there's any updates?

Yes. Well, over the last handful of years, we've managed to really live with generic deflation, and that's been well encompassed within our guidance. And I think we've done a confident job of that. And so it's been less of a surprise us. Having said that, any sort of moderation in deflation would be a helpful positive driver for us. And you do wonder with the CPI index moving up like this, whether they would find they now be an inflection point, and you would start seeing some more firmness in the market and not this cycle of competition, which leads to high single-digit deflation. So yet to be seen also interesting on the brand side, by the way, to see what happens there because politically, you always -- it was always sort of untenable in the last couple of years to have the inflation index for brand drugs be too high. So we should start to see some reaction in the July, the July period, see what manufacturers do on price increases. And ideally, you see some sort of a firming in the generic market as well, which would be a benefit to us. Jim?

And what we're seeing now is in line with what we've seen in the last couple of years and in line with our expectations and supply and demand is in balance. And one additional thing, which we're proud of is over the last several years, our teams have really worked to rebalance our contracts also. And so that we're making a fair profit on brand specialty and generic rather than just say over-earning on generic and that rebalancing of contracts that we've done is something that we are benefiting from now, Steve.

Okay. Okay. We're at the 2-minute mark here. I want to squeeze in a few more questions. So we've done a lot of work ourselves on the traditional generic ANDA pipeline, separate from the biosimilars, which we talked about earlier in this session, obviously. Curious to get your thoughts, it seems like from just talking to a wide array of investors, that there seems to be a lot of visibility for large-cap pharma on another "patent cliff" coming up but it doesn't feel like there's quite as much enthusiasm on the inverse of that on a "generic wave" for the farmer supply channel. I mean I'm trying to beat that term as much as I can. I guess I'm curious how you guys are thinking about any contribution from traditional ANDA generic pipeline, which historically has been a major source of profit growth for the industry, but just your outlook around that would be helpful.

Yes. A lot of the benefit on the loss of exclusivity side is going to come to the biosimilar manufacturers. So I think those manufacturers have made investments, and they are pretty varied. It goes from the Amgens of the world to some new entrants, but they will benefit and particularly on the Part B drugs, we are very interested in helping them explore access to community oncology market and helping out with our businesses like Lash and Xcenda that are such key adjuncts. So we think that it will be beneficial to us. On the oral solids on the traditional generic markets, nothing much. It's -- the launches have not been as eventful for us over the last handful of years as they used to be.

It's all about what's going to happen now from here though, right?

Yes. We'll see.

Yes. We'll follow up on that. Okay, that's fine. Last minute here, I am sure we touched on this topic just around health care inflation, obviously, topical for every company, whether you're a manufacturer, distributor, end dispenser, every area of health care, it's a topic right now. So I mean the -- first of all, let's talk about any sort of wage pressure, how that has been impacting the business in any way, what you've been doing to sort of offset that? I think it's kind of not as much of a risk factor for your business model versus others. But also just any updates on any sort of supply channel disruption one way or the other. I think that's also been pretty well addressed. It's not really been an issue. It would be good just to hear any potential reiteration of that, if that's still the case.

I think overall, it's notable that over the course of the pandemic, I think that the pharmaceutical supply chain has been one of the best performing supply chains, which I think is an important point to make. And on the question of cost inflation, whether it be wage inflation or fuel inflation, that's something that's certainly covered in the range of our guidance and within the range of our guidance. One thing about pharmaceutical distribution is the products are very value dense. And so while it is impacted by fuel inflation, it's impacted much less than other distribution businesses because the products are so value dense. And then on wages, of course, we do pay competitive wages and talent is incredibly important to us.

Okay. Great. Okay. Well, with that, we're into overtime now. So I think we'll end it there. So I want to thank Steve and Jim for their time today, and thanks, everyone, for joining us. Thank you.

Thank you. Have a good afternoon.