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

[Audio Gap] Bank of America Healthcare Conference. I'm Michael Cherny, the Healthcare, Tech and Distribution Analyst. It's my pleasure to have with us AmerisourceBergen, Jim Cleary, Chief Financial Officer; and Bennett Murphy, Head of IR. This is going to be a, hopefully, informal conversation. But I know, Jim, you have a few things you wanted to start off with, maybe to kick things off.

Sure. And I'll literally make some opening comments for just a couple of minutes so we can get into the Q&A, which is always fun. But Mike, first of all, I want to say thank you for hosting us here today. It's great to be here in person. And I'll say that we look forward to hosting you in person at our Investor Day coming up on June 1, 3 weeks from today, which we're really looking forward to. It was a week ago today that we announced our results for Q2, and they were really good results. Revenue up 17%. Operating income up 30%. EPS up 27%. And if we look at that 30% operating income growth in our international Healthcare Solutions segment was up 260% due to the acquisition of Alliance Healthcare. And in the U.S., Healthcare Solutions segment operating income was up 11%, which was very strong, and it was driven by increased volume of COVID therapies versus the prior year, was also driven by broad-based good results across our businesses, including sales to specialty physician practices, good prescription volumes that benefited at our distribution businesses and also better performance in our manufacturer services business. We also increased guidance on 3 key metrics: EPS, consolidated operating income and operating income guidance for our U.S. Healthcare Solutions segment. EPS guidance was up $0.15 at the top end of the range, $0.20 at the bottom end of the range. So our new EPS guidance is $10.80 to $11.05 that we feel very good about. And so -- but let me just take a step back, and again, I'll just talk for another minute on AmerisourceBergen, where we are a leading global health care company. We have a foundation in pharmaceutical distribution, and it's complemented by higher-margin businesses and services across our footprint. We have 42,000 purpose-driven team members. Our purpose is that we're united in our responsibility to create healthier futures. This purpose, it drives our business strategy and our ESG strategy. With regard to business strategy, we have 5 strategic imperatives lead with market leaders. And some examples of that, our relationship with Walgreens, very strong here in the United States. Our relationship with Boots Now in the U.K. On the Animal Health side of the business, our very strong relationship with Mars, which is the largest donor of veterinary practices. Our second strategic imperative is to leverage our infrastructure to create efficiency and access and customer experience. And an example of that is kind of our experience during COVID, the health care supply chain performed extremely well. The pharmaceutical supply chain performed extremely well during COVID as did our supply chain, in particular. And that was driven by a number of things, in particular, for instance, our automation of our distribution centers. Our third strategic objective is to expand our leadership in specialty. That was clearly demonstrated in our beat and raise. During the second quarter, we really benefited by our leadership in specialty. Our fourth strategic objective is contribute to Rx outcomes by collaborating with upstream and downstream partners. And an example of that is the work we've done on COVID therapies being exclusive distributor, but number of COVID therapies. We've really contributed by partnering on Rx outcomes. And then finally, invest in innovation. And this is one of the many topics we'll talk about on our -- during our Investor Day 3 weeks from now is the investments we're making in innovation. So looking forward to Investor Day. We'll have sell-side analysts in person. It will be virtual for buy-side investors. And so we look forward to being able to talk a lot more about our business then. So I'm sorry, I'd like talking about our company. I probably went on a little longer than I said I was going in. But plenty of time for Q&A.

No. And I know the Analyst Day -- Investor Day will be the main course, but at least we'll have a little appetizer here on...

Awesome.

On the updates of the business and look forward to it as well.

You mentioned an important component that we think about relative to the supply chain during COVID, which is resiliency. Resiliency in the pharma supply chain. As you think about, particularly for the baseline business, both traditional small molecule drugs, specialty, I want to touch on antivirals after, where do you think we sit right now in terms of the demand curve from your customers, both big and small? You mentioned some of the larger customers, obviously, also a very strong independent pharmacy base. Where are they looking to you in terms of where they sit in the return to whatever post-COVID normal is?

That's a really good question, and I'll hit just briefly on the first statement you made. And I truly do believe that the pharmaceutical supply chain was perhaps 1 of the most resilient and best-performing supply chains out there during the COVID environment. And that's -- I think that -- I think we all should feel very good about the way that we've demonstrated that in our industry. In terms of where the market is now, and I'll talk in terms of utilization trends. The way that we see it is it's pretty much back to normal now. There might be a couple of pockets out there where it's still coming back. But we feel overall, and we've been talking about this for some time that utilization has been coming back. And our view, based on looking at our businesses is it's back to normal now. And Bennett, I'm not sure if there are any details you'd like to add there?

No, I think that was good.

Okay. And I'm very fortunate today to be joined by Bennett Murphy, our Head of Investor Relations, and he really does a fantastic job on that front.

And so I guess, maybe to the breakdown into specialty, ABC's long had a leading specialty distribution business. As you think about the volatility that's occurred across the market broadly on like procedures, on care for complex diseases, it doesn't seem like it's had any meaningful impact on your specialty business. How do you think about that ability to continue to place your products into a market that's been more volatile and also essentially lead with your share positioning?

Yes, that's a great question. And as you all know, specialty has really been a key driver of our strong results for some time. We really have a leading specialty franchise. And we did see very early in COVID that there was an impact, but I think specialty practices quickly learned how to operate in that type of environment. And we've seen quite strong performance. Our business there is really driven most by oncology, but we also have strong franchises in ophthalmology and other areas of specialty also. One of the key drivers for us there has been the growth in biosimilars. Over the past few years, that's really benefited us from a margin standpoint. But overall, we see that specialty market, whether it being oncology or other areas in specialty is really operating very well now. We do -- we are a leader in that market. We have a lot of services that we offer. We not only do the distribution, but we have a lot of ground services like the leading GPO for oncology practices in that market. So it's an area where we're going to continue to invest in innovation and services because we view it as just a growth part of the market, and it's driven by demographics. It's driven by innovation. It's driven by biosimilars. And then, of course, we benefit from it because of all the services that we're able to offer in that market.

And I'm glad you mentioned biosimilars. It seems like for the last few years that they've been more one-off products, areas where various numbers of supply chain, especially ABC, have been able to contribute and deploy products into the market, save customers' money through innovative approaches. Now as we get to what could be termed the next wave crest, I don't know why you want to call it on potential biosimilar launches, how do you think about the opportunity set? I know it's definitely something we're going to hear more about on June 1. But how do you think about the opportunity set, given that there still is a mix of biosimilars coming to market that are truly substitutable versus biosimilars that you still have some reliance and focus on other members of the supply chain in order to make sure that they're adopted?

Great. I'll start out here, and then I'll turn it over to Bennett. The point I'll make and this is something we've been very clear on. We have opportunities to benefit across the market on biosimilars, but where we really see most impact with regard to AmerisourceBergen is in the Part B area and the oncology market, in particular, is where we benefited. And with regard to innovation and launches over the next few years, we think that there'll be continued good opportunities there. But I'll turn it over to Bennett, maybe going to talk about more what we're seeing across the biosimilar markets.

Sure. We've been looking forward to the Part B biosimilars coming to market for some time. When those oncology biosimilars came to market, we saw fast early adoption by our customers, which is very much a proof point for the value proposition and also really allowed for more room in the health care system and that it reduces cost. You mentioned customers, but it's not just customers, it's also patients themselves. And I think that as you look into some of the new biosimilars that are coming on Part D space, certainly, channel is going to matter in terms of impact for the supply chain. But I think no matter where a biosimilar comes, it's going to be good for the health care system overall because it will take out costs and make room for innovation and spending.

Turning to another topic. I know the contribution rate of antivirals has been a key focus point since last year. It's been an interesting evolution to me in the sense that you had an exclusivity early on with some of the early antiviral. As the market has morphed and gone to areas where you're not an exclusive distributor, you're still by far the leading distributor of antiviral. So maybe in the context of that, can you give us a sense on what about the Amerisource infrastructure allows you to continue to maintain that share in antivirals, continue to have these very strong contributions at a time where there's not a mandated contract that it only goes through the ABC channel?

Yes. That's a really interesting question, and I'll start out and then I'd love to get Bennett to provide his insights here also. But if we look at that market, there's basically -- we could break down the market in a couple of different ways. But first of all, I want to step back and say we are really kind of very proud and pleased that we're able to play the role that we're able to play in that market and really kind of providing access to these very critically important products. And it started out back in our fiscal year '21 where [ Beck Larry ] was the principal product that we were distributing. That's a commercial product now and it's distributed through other people also. And -- but we've continued to distribute that product. And where we're seeing the growth right now, the growth opportunity, the balance of the year is really in the antiviral pills. I mean there's a lot of media and press on it, thankfully. And so that's where we kind of see growth for the balance of the year, although we're still selling the other products. And I think we really done a lot with data and analytics to show our capabilities there. And so whether it be with the government or with the manufacturers, we've had just very strong collaborative working relationships and contributing very strongly to Rx outcomes. With regard to contribution, we're being very transparent about that. And we've been very transparent that during fiscal year '21, we made $0.30 from these COVID products in the U.S., and we indicated how much we made each quarter. In fiscal year '22, we've indicated that we'll make $0.60 in the U.S., and we've indicated -- in the first quarter, it was $0.10. In the second quarter, it was $0.22. And the back half, we're expecting to make $0.28 per total of $0.60 in the U.S. and then a contribution of $0.10 in international from various COVID products. So we will lay out every quarter kind of how much we're making from these products because it's really kind of hard to predict kind of what the volumes are going to be in fiscal year '23. So we decided just what's best to do is just lay it out every quarter. So it's very clear to stakeholders.

Yes. I think the -- I mean, the work that we're doing there is evidence of how the teams are really guided by our purpose of being united and our responsibility for health to create healthier futures. If you go back to the beginning of the pandemic, our team knew that we had the data and the analytics capabilities to come to the market with solutions for manufacturers as they're bringing these new products. In that case, it was the 1 product, but now we're well north of that in terms of what -- how many products have the emergency authorization that we're distributing. And that was really an example of how we leverage 2 of our strategic imperatives: one, leveraging our infrastructure to create efficiency; and two, capitalizing on our strength in specialty to solve for what it was a complex distribution need for hospital-infused products. And now certainly, with the expanded EUAs, there's also the prophylactic products and the antiviral bills. But there are a good number of products that we're distributing, and I think it's really evidence to the thought leadership across the team.

Yes. And 1 of the other interesting things about that market just so you have the details is it's -- there are periods of times where it actually contributes to our operating income and EPS, but revenues go down. An example of that was Q2 and that it was a switch from commercial products last year to emergency use authorization products this year where we don't book the revenue. And so revenues went down year-over-year, but EPS contribution went up $0.15 year-over-year.

Yes. I know at some point, we'll stop talking about this, but I find it interesting in terms of being the microcosm of how you serve the market more so than the EPS contribution this year versus next year?

Yes. Yes, it's interesting. And we are getting a lot of questions on this, and I totally get it. And it makes sense. I also want to make the point that when we get all the questions about this that we really are saying like broad-based really good performance across our businesses now.

Yes. It wouldn't be a conversation if we didn't talk somewhere about the pacing of inflation you're seeing across your business. I know -- I think the term you frequently use is competitive stable. I think like I've heard that from both of you as well as Steve in the past numerous times. That being said, with a macro-wide focus on inflation, can you just remind everyone what happens from a broader inflationary perspective relative to the difference of how you interact on your buy side, sell side, not looking obviously for exact numbers, but more the conceptual components of what changes in terms of your interactions to drive the inflationary-deflationary environment around drugs?

Yes. Okay. So the branded inflation and generic deflation. On branded inflation, it's been -- it's really kind of consistent with what we've seen over the last couple of years. It's certainly consistent what we've been seeing. It's consistent with our expectations. And I think probably the key thing to -- the kind of the key point to make on branded inflation is that, on the buy side, 95% plus. It's actually well over 95% now of our gross margin dollars on the branded buy side up for service. And so we don't depend upon inflation for profitability. It has some impact, but it's relatively small in the scope of AmerisourceBergen. And then with regard to generic deflation, it's also in line with our expectations and in line with what we've seen over the last couple of years. And I think probably the most important point to make there is that our teams were very disciplined and proactive over the last few years of rebalancing contracts. And what I mean by that is making sure that we make a fair profit on generics, brand and specialty. So it's not overweighted to 1 type of product where we're making the profitability. And so through that rebalancing of contracts, we've really been able to manage very well through the generic deflation. And yes, I think that addresses it.

No, that hits it -- hits well for me, at least, at this point. I want to talk on manufacturer services. I know you weaved in a bit to your initial conversation. I remember when we talked today the Alliance deal, I very much remember this in my head, the first thing we talked about was the manufacturer services that Alliance brought, which was interesting since I always thought about the fact that you were acquiring a wholesale distribution business in Europe. So as you think about the various different brands and services that you already offered, what's been the experience so far with the commentary nature? What came in from Alliance on top of World Courier, Lash? I'm definitely leaving names out, but some as well?

Yes. Thanks. So that's a really good question, and it's 1 of the many things that interested us in the Alliance business. And the Alliance business is very much like AmerisourceBergen, and that it has a foundation in Pharmaceutical Distribution but it's complemented by higher-margin businesses and services. And as you'll -- as you can see from our consolidated results, when we acquired Alliance Healthcare, our operating margins on a consolidated basis went up. And the basic reason there is because actually these service businesses at Alliance are a higher percentage of operating income at Alliance than they were at AmerisourceBergen. So Alliance is overall a higher operating margin business because these services businesses are very important for them. And the largest business is Alloga, which is a pre-distribution 3PL manufacturer services business. It's a very strong business in many European countries and just a really fantastic business. And there's a lot of opportunities for Alloga and our World Courier business to work together. World Courier has been a fantastic acquisition for us that we did many years ago. It's in 52 countries around the world. It's a real leader in doing logistics for drug trials. And so to take the Alloga business and the World Courier business, there's a lot of good synergy opportunities there. There's also opportunities between the Alphega business and our Good Neighbor pharmacies. And so Good Neighbor of pharmacies is our independent pharmacy group, where we provide services to pharmacies and Alliance has a very similar business in Europe called Alphega. So there's opportunities for Good Neighbor Pharmacy and Alphega to work together. There's opportunities between the Alcura business at Alliance and the Lash business at AmerisourceBergen to work together on manufacturer services. There's opportunities for Alloga and our Animal Health business to work together. Alloga is a leader of doing pre-distribution for Animal Health products. And so there are many opportunities like that for us to work together and provide offerings to biopharma companies rather than just in the United States or just in Europe to kind of work together to provide a broader geographic offering to biopharma companies.

I think that the -- clearly, as a biopharma manufacturer looks to AmerisourceBergen, they see us as a partner from clinical through commercialization and then with significant distribution reach across Europe and the U.S.

And with regards to that, I know for a number of manufacturing services-oriented businesses, COVID has created some choppiness and volatility. Is there any expectation or thoughts around pent-up demand projects that got delayed that you think will come back and how do you think about that win rate of partnering further expanding out with your manufacture services tied to growth opportunities?

Certainly, there was some bumpiness initially, but I think the market generally worked through much of it. I think certainly, the pharmaceutical innovation needed to continue. So that was an important driver -- continued driver for our global specialty logistics business, World Courier. And certainly, we continue to look for opportunities for AmerisourceBergen's manufacturer solutions businesses to partner with biopharma as they look to -- look at entering the market.

Yes. I'll call out just an example, like 1 of the examples of kind of choppiness you could call it, but then how we responded to it to really strengthen our business would be in the World Courier business. It caused a shift from some of the logistics for clinical trials shifting to in-home. And so that's a skill set and offering that we're able to further develop, which I think will pay dividends over the long term. And then it also made international flights, which are a key part of World Courier's business and made that tougher. And so managing through that and managing that for biopharma companies is something that I think just kind of strengthens our service offering and people's kind of the value that they put on the business. It was a challenge for the business because there were just less international flights, but I think it kind of shows the value in our offering.

You touched on manufacturer services, some of the role the independent pharmacies are planning in terms of what you can do for them. Obviously, there's been COVID's clear winners and losers across the pharmacy side, independent pharmacies as far back as I've covered your business have been unbelievably resilient. As we come past the peak of COVID and hopefully to whatever the new normal is, have the demands or the services that your independent pharmacies want from you changed or evolved at all?

It is just a -- it's just an incredibly important part of our business and kind of that -- and if you look at the strategic imperatives that we talked about and you look at our purpose, I mean, the services we offer independent pharmacies and the important role that independent pharmacies play in the community and it's just incredibly important. And we're always -- and we're just always innovating and looking at what additional services we can provide. And I think your comment is right that independent pharmacies have just proven themselves to be just so important and resilient through the years, and we expect that, that will very much continue. And we see the same thing in Europe, the importance of independent pharmacies there and Alliance's important role.

I think they -- clearly they look to us for support in the digital, being their own digital evolutions, and that's -- we're there to be a partner for them. As Jim said, I think we've really tried to help support them as pharmacists have been a key pillar of the pandemic response on multiple continents. And I think it's really important that they continue to be advocated for -- to ensure they can continue to play that important role. We've done that along with helping their businesses.

Turning to Alliance, you can't control FX. That being said -- maybe it could be great. But that being said, Alliance seems to be chugging along roughly at the similar rate that it did under previous ownership. As you think about the moving pieces across the continent, are there any headwinds or any potential headwinds that concern any 1 way or the other? I know you don't have any Russian-Ukraine exposure in the business, but anything else tied to the broader demand set across Europe that you either worried about or even potential opportunities that you filter through the line on a near-term basis?

Yes. I think with regard to demand, we see Alliance in its businesses performing quite well. The kind of the 2 areas, and you called out 1 of them that are a little bit beyond our control, of course, are FX and then inflation in Europe. And -- but I would say that the performance there has been quite well. I mean there's been quite good. And when we look at FX, I think it's important when we kind of talk about '23 and beyond that we look at it on a constant currency basis because, of course, the dollar has been extremely strong. And then with regard to inflation, I would say that inflation levels, of course, in Europe are a little bit higher than they are in the United States. And so that has an impact on Alliance. But I would also say the management team is just very strong there on the cost front and running a very efficient business. And I've just been very impressed with the management team's ability to execute there.

And relative to inflation, it goes to the overall portfolio, anything on the logistics side, anything on the wage side that is more concerning, more pinching at this point in time as we're seeing it economy wide? So it's not as if it's a company-specific thing. But as you think about especially framing it within your guidance, what are the biggest sources of variability that you're seeing?

Yes. And so it is included in our guidance and of course, we're impacted by inflation like every company and every industry is. But I would say we're impacted less by inflation than most because pharmaceuticals are very value dense. And so in terms of our operations, in terms of fuel impact, it has less of an impact on pharmaceutical distribution than other types of distribution. It has an impact, but just not as much as it would have on other distribution that's less value dense than pharmaceuticals. And so we're -- and then also on the labor front, it impacts us also on the labor front. But 1 of the things in terms of leveraging our infrastructure, we have highly automated distribution centers here in the United States. So that impacts -- it offsets part of the labor impact. But as I look across our portfolio, you asked about the portfolio, I would say that incrementally, inflation has a bigger impact in Europe than it has in the United States now. And then if you look at our businesses in the United States, it has a little bit bigger impact in Animal Health than would have in human pharma because the products aren't as value dense. There's some bigger, bulkier products that we're distributing also it's a little broader portfolio. But overall, I think the key point is it's something that we can manage and it's reflected in our guidance.

Yes. And I think when we did initial guidance in November, we had contemplated many of those things that Jim just laid out, both in human and Animal Health and internationally. And I think that certainly, we -- it's quite impressive that we've been able to manage through that. And as Jim said earlier, last week in the earnings call, we raised guidance.

We're going to run out of time. But 1 thing I want to make sure I address Alliance was a pretty big use of capital, $6.5 billion deal. Yet your balance sheet obviously has moved back to a pretty healthy basis fairly quickly. Can you maybe just give us a sense of where -- how that cash flow generation be able to connect through? And then along those lines, especially because Alliance is a European-focused assets, a little different than your base U.S. business, how do you feel about the range of potential M&A opportunities sitting in front of you?

Yes, that's a great question, and I'm really glad that you asked it. And we feel really good about our cash flow. We're a very strong free cash flow business. Our adjusted free cash flow guidance for the year is $2 billion to $2.5 billion of adjusted free cash flow. When we announced the Alliance deal, we said that we would pay down 2/3 of the debt on that acquisition within 2 years of the acquisition, and we'll beat that by a few months. We'll pay down 2/3 of the Alliance debt by March of 2023. We could pay it off sooner if we wanted to, but the rates at which we borrowed for that deal are quite low. So we'll pay it fully -- we'll pay off 2/3 of the debt by 2023. We'll meet our commitments to the rating agencies and maintain our very strong credit ratings. And so after that, as we look at capital deployment, it will be similar to what we've done historically. We'll continue to invest in the businesses and those internal investments in innovation and other things where we get good returns, we will look at strategic acquisitions across our portfolio. We'll do opportunistic share repurchases, and we look forward to restarting that once we have the debt paid down, and we'll continue to have a reasonable dividend on our stock also.

Awesome. I see the red blinking light. I know you got a lot more coming on June 1. So we're really looking for to that. But Jim, Bennet, thank you so much for being here today.

Mike, thanks very much. Appreciate it.