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

Good afternoon, everyone. My name is Eric Coldwell, I cover pharma services for Baird. And it's a great pleasure. I've covered the distributors and Amerisource for a couple of decades now. It's always a pleasure to have this company with us, ABC, one of my favorite in the space, a very consistent performer over time relative to the chop we've seen in the overall marketplace. They may not love the definition, but I like to call them the tortoise versus the hare. Just tick shell steady eddy, goes in a straight line, a lot of fun. And I appreciate that consistency over time from you guys. With us today, Jim Cleary, CFO. Also Bennett Murphy, of course, running up the Investor Relations group. And I am going to open it up to you, Jim, to just make a couple of very quick introductory comments. But I do know there was obviously some new news yesterday. So I'm going to ask you to address the acquisition that was announced 24 hours ago, PharmaLex, and maybe do that with your opening commentary so we can get that off the table, if you will, and go into a number of other questions today.

Great. Eric, thank you very much, and I'm joined here by Bennett Murphy, our Head of IR, who does a fantastic job in our IR area, and Eric, thanks for the wonderful job you do covering our company and the industry. We sincerely appreciate it. So I'm Jim Cleary, CFO of AmerisourceBergen, and we are a leading global health care company. We have a foundation in pharmaceutical distribution, and it's complemented by higher margin, higher growth businesses and services. And I'll talk a little bit about that in the PharmaLex acquisition that we announced yesterday kind of fits right in there. It's going to be a higher margin, higher growth business for us. And we have 5 strategic imperatives, and I'll very briefly talk about them. And one of the reasons is because the PharmaLex acquisition also really kind of squarely fits within, in particular, 3 of our strategic imperatives. So our 5 strategic imperatives are lead with market leaders, examples of that would be the distribution relationship we have with Walgreens here in the U.S., with Boots in the U.K. and we really have relationships with market leaders across our businesses. Our second strategic imperative is to leverage our infrastructure and to always be increasing efficiency as we serve our customers, and we're always making substantial investments in our infrastructure and really have leading infrastructure and leading technology and automation in our field. Our third strategic objective is to expand our leadership in specialty. Specialty is the fastest-growing part of the market. It's the fastest-growing part of our business. We have real leadership in specialty. Our fourth strategic objective is to contribute to Rx outcomes in serving upstream and downstream customers. And PharmaLex is really a great example of that is we're providing manufacturer services to biopharma manufacturers upstream through the PharmaLex acquisition. And then our final strategic objective is to invest in innovation to differentiate ourselves. And so PharmaLex really fits very squarely with expand our leadership in specialty because it's really serving specialty manufacturers. It fits squarely with impacting Rx outcomes with upstream manufacturers. And it certainly fits squarely with investing in innovation to differentiate ourselves. And so PharmaLex is a consulting business that has kind of 4 consulting areas: regulatory affairs; development, consulting and scientific affairs; pharmacovigilance; and quality management and control. It really increases the depth and breadth of our biopharma manufacturer services, which is again a higher margin, higher growth business for us. It has a significant presence in Europe and also a meaningful and growing presence in North America and several other countries also. So it really rounds out our manufacturer services business, and we feel really good about it as a platform and a growth platform for us. But I've talked a lot about it, but let me just kind of very briefly comment on our business overall. I think this fiscal year, we've demonstrated really good continued strong execution. We've certainly demonstrated our resilience and strong performance across our businesses at AmerisourceBergen. One example of that is we increased our guidance, of course, for earnings on our most recent conference call. And so I think we've really demonstrated the resilience and strength of our business. And just one final thing I'll say is that ESG is a topic that's really important to AmerisourceBergen. It's something that we increasingly focus on and emphasize, and Eric, I want to thank you for the ESG conference that you guys did back in February. It was fantastic to participate in that. Hopefully, we'll be able to do that again in the future.

2 years running, and so we'll make it a third.

Perfect.

Consider it done. Thank you. And it has been a big topic for ABC for longer than most of the coverage that we have by quite a bit.

Yes. And let me just -- if I could jump to one other thing. You asked about the acquisition. And I was talking about some big picture stuff. Let me just kind of size it quickly. It is meaningful for us, but I want to put it into perspective. It will be accretive. We expect we'll close on March 1, and it'll bring about $0.15 of accretion during the last 7 months of fiscal year '23. So I just really do want to put it into perspective from a size standpoint. It was about a $1.28 billion deal, but it isn't gigantic within the context of AmerisourceBergen of course.

And to be clear, you had already embedded capital deployment into your Investor Day back in, I think it was June and then also mentioned that on the last update call. So this is as expected, regular way, well foreshadowed.

Yes. Yes. We indicated when we gave initial guidance on our Investor Day for fiscal year '23 that we're expecting 5% organic growth in operating income in fiscal year '23 and then an incremental 3% from capital deployment. So EPS, we're expecting to grow at about an 8% rate, and this acquisition contributes to that 3% as part of that 3% from capital deployment.

That's great. You did another acquisition announced a while back, closed, what, 5 quarters ago roughly now, Alliance Healthcare. Your first announcement came in a period where the world changed quite a bit after that. Interest rates go up, challenges in Europe, et cetera, yet you put up some, I think, truly amazing growth rates and performance, all things considered, especially given the environment. Could you talk a little bit about those macro headwinds? And here you are just, again, a little over a year past completing that deal. Can you talk about the integration status and how Alliance continues to fare in Europe? And to the extent, I don't believe it really does integrate with PharmaLex that much, but I want to double check on that and get your comments on that as well.

Sure. Well, there's a lot there. And so I'll talk about the Alliance business and the successful integration and first year results. I'll talk about some of the -- I'll talk about some of the macro stuff going on, and then I'll also talk about how we would integrate with PharmaLex in our manufacturer services businesses. So we closed on that deal on June 1 of our fiscal year '21, and the integration has gone quite well. We delivered high teens percent EPS accretion in the first year that we owned the business. The management team there has performed very well. We're very pleased with the management team, and there's a very good cultural fit. Again, just like AmerisourceBergen, the Alliance business has a foundation in pharmaceutical distribution, and then it's complemented by higher margin, higher growth businesses. In fact, the percentage of kind of these higher-margin, higher-growth businesses at Alliance is a higher percentage of operating income than it is at the legacy AmerisourceBergen. So it really kind of fits very squarely with our long-term vision. Some of the macro stuff that you talked about, of course, a couple of things that we are facing in Europe is inflation in Europe. That is higher, as we all know, in Europe than it is in the United States. And so that has been an impact. But the Alliance team is actually really good at offsetting cost pressure and being kind of very efficient in that type of environment. We also have experienced some FX pressure as the dollar has strengthened significantly over the past year. And so that's really been a factor also. And when we report this upcoming quarter and when we report next fiscal year, we'll be reporting our International Healthcare Solutions segment on an as-reported basis and on a constant currency basis, so we can indicate how it's doing on a constant currency basis. And then we do think that Alliance will have good commercial synergy over time with the PharmaLex business, which I believe is the last thing that you asked about. One of the businesses at Alliance, for example, is the Alloga business, which is really a leading third-party logistics health care business, serving manufacturers in the European market. And if we take PharmaLex's services it provides for manufacturers, combined with the Alloga 3PL services, combined with AmerisourceBergen's World Courier business, which is a leader in doing logistics for drug trials, really the cross-selling and synergy opportunities over time should be quite good.

And one of the fears, since you brought up the World Courier, it's really great performance to date. It's been a real shining star. I think there was a lot of concern with both the geopolitical challenges in Eastern Europe and then the higher energy costs, the challenges with freight. I think the initial Street response was World Courier is going to suffer. It's been quite the opposite. Can you just talk quickly about what's been driving the strong performance at World Courier?

Yes. World Courier really is a market leader in -- and what we do there, and it's a leader, and as I said before, doing logistics for drug trials. This is something that is highly valued by manufacturers. We also have kind of at-home capabilities at World Courier to deliver to the patients. And so kind of that specialized service on a global basis, particularly. And World Courier is in 52 countries around the world. And at times where international travel and international flights were challenged, manufacturers put a lot of value on the World Courier service. And it's an area where -- it's a part of our business where customers were really willing to pay for the quality and reliability of that service. And so World Courier has performed quite well in this macro environment. And we would continue for it to -- we would continue to expect it to perform well and we'll continue to make investments in that business.

That's great. I'm going to shift to core U.S. pharma or legacy -- not sure what core really is anymore, because you've shown so much traction outside of just traditional drug distribution. But what people think of as your legacy business. You've shown a lot of growth recently in mail. You've won some new business there. There's a large account coming in, in December that you've taken from one of your competitors. What are you seeing in the mail trends? And how do we think about margin as we go into calendar '23 with the new TRICARE program coming online? I know it will be billions of revenue, but typically, these are lower-margin contracts. Are you comfortable talking about that, the implications of it and maybe cash flow implications as well because sometimes those businesses bring a better cash flow profile?

Yes. So thanks for raising that new contract, which is Department of Defense contract. And I would say, overall, as we look at the mail part of our business, it's a high volume, meaningful revenue part of our business. Typically, mail has lower margins than other parts of our business because typically, these are very large shipments that are going out to relatively few locations. And so the numbers of orders would be fewer and the margin is a bit lower, but the cash flow is typically quite strong in that category. And so the returns on invested capital are good. And so it is a growing part of our business.

And the only other thing I would add is it's really -- the change the characterization is the DoD is our customer. So essentially, I would put it as we're doing more business with our existing strategic customers, and that's -- I'd put it more in that bucket than that was laid out.

Fair enough. The next topic, again, sticking with U.S. pharma distribution. On one hand, you and one competitor, in particular, and I think the industry at large have worked very hard in recent years to diversify your profit streams and balance them out across various categories, whether it be brand specialty, OTC, generic and the like. So on one hand, I want to ask this question about biosimilars, and when biosimilars something you've been talking about them, we've been hearing incrementally positive things from the industry. But on the other hand, I'm a bit reluctant to go too far because it feels like that same thought process of diversifying profitability across all categories would likely be embedded in your first thought process with biosimilar contracting as well. So I don't want to make too big of a deal out of it, but I am very curious on the biosimilar update and how you see that going.

Sure. So in the contract rebalancing process that you're talking about is something that's really important for our full line distribution business that dates back to over a 5-year period of our commercial teams going back and really making sure that we're getting sufficient profitability across the classes of drugs. That is really something that's more in the full line side as opposed to the specialty part of the business. So the specialty physician services part of the business where the Medicare Part B drugs go where the sweet spot Part B biosimilars really go. That is where we've seen a lot of traction. Going back to early 2020, we would have been talking about biosimilar traction on the May earnings call 2020 if we didn't have to spend the entire call talking about what COVID could mean. But we really started to see traction there. Our customer base was early utilized as of biosimilars. Wherever biosimilar goes is going to be incrementally better for us, which is good for -- certainly good for economics. It's also good for the health care system, for biosimilars to come in and take -- and create more headway for the innovation coming. And so the same is true that we've been talking about biosimilars for years back that the Part B spot is the sweet spot. And we've seen that good traction over the last couple of years and continue to expect that to grow in the coming years.

Sticking on the same vein of questions, your performance has been very -- especially in a COVID world, it's been incredibly stable in drug distribution. And I think maybe it's lost perhaps on some people that generic's deflation has actually been fairly notable the last couple of years, and yet you're putting up good numbers. I think there's been an overarching concern that if generic deflation becomes more pronounced, it's a huge headwind. If we go back to more moderate deflation or, hard to see it, but even inflation, again, like we had 6, 7 years ago that, that would be a huge profit upside driver. Talk to us a little bit about the generics and what you're seeing on deflation. I think to the extent you're comfortable saying anything about how generic deflation has stacked up against your expectations and how you've performed against that would be great.

Yes. Sure. I'll comment a little bit on that. And I'll start off by briefly repeating something that Bennett just said. Our teams really did a great job a few years ago or so in rebalancing contracts. And there was a point in time that we over-relied on generics for profitability. But we went through a rebalancing effort. So we make a fair return on brand, generic and specialty. And so that was an important process that we went through. But of course, generics still are a really important part of our business model. And we have been experiencing generic deflation for quite some time. And as we do our business planning, we expect for generic deflation to kind of remain in the same general area where it has been. Of course, if generic deflation does moderate, it would be a meaningful positive for AmerisourceBergen and for our industry. But as we do our business planning, we anticipate that it will stay in generally the same range that it has been. And I think manufacturers out there were kind of tracking as they see their cost increasing, will they be able to pass that on? So that's just kind of one of the things that we're tracking as we're looking at the market. Anything, Bennett, that you'd want to add?

As more and more investors come back to the story to the industry. I think it's a really important element to understand is because of that portfolio rebound or the customer rebalancing process that we underwent, and our leadership in specialty, we've had really consistent performance over the last several years.

For sure. I probably can't escape without asking about COVID therapeutics. You've been a leader in relationship and engagement with manufacturers. You've won a lot of deals that where a commercial decision was made, you seem to fight well above even your body weight in terms of the relationships COVID therapeutics broadly. You've guided to $0.60 in the U.S. and $0.10 internationally for the fiscal '22 outlook of an earnings contribution from COVID-specific therapeutics. On the last quarter's call, you said that if, at that point, if current volumes continue at a similar pace, you might wind up a couple of cents below that $0.60 range for the full fiscal year. And then adding to that, we then saw a report that paxlovid demand in July was more than all prior months combined, up 37% month-over-month, and it felt like things were really taking off again. So a lot of I'm throwing at you. I'm curious where do you stand if you can provide an update on COVID Therapeutics, if you have any current market thoughts? And then I think just for those who may be newer to the story, if you have any sense on fiscal '23 or at least talk about how you've framed the '23 outlook in the past for some comparison.

Sure. There's a lot there, and I'll try to cover it all. But I'll start by taking a step back and saying, our company's purpose at AmerisourceBergen is we are united in our responsibility to create healthier futures. And we've just been really pleased to be able to play the role that we've been able to play in distribution of the COVID therapies. And we've been the exclusive distributor of the number of the COVID therapies. And of course, there is a lot of products there. There's the orals that are sold under emergency use authorization now, but there's a lot of products we've been distributing. As you said, our guidance this year is for $0.70 of EPS from COVID therapy, $0.60 in the U.S., $0.10 internationally. And we did indicate on the last earnings call that it might be a couple of pennies less than that. But it is hard to predict what the sales are going to be on a month-to-month basis, on a week-to-week basis. As you can understand, it varies. So as a result of that, we've committed to just being very transparent on it. And every quarter, indicating what our EPS contribution from COVID therapies is in that quarter and year-to-date and what our expectations is for the balance of the year. And we saw that jump in July. But as I said, it's hard to predict and it can kind of go up or down from month-to-month or up or down from week-to-week. And so as a result of that, we'll just continue to be transparent. And another thing that we've said is that as we look at fiscal year '23, we think it could be less than half of the contribution in fiscal year '23 as it was in fiscal year '22. So $0.70 in '22, and it could be less than half of that in '23. So that's how we're thinking about it internally. But I think the most important thing is -- or one of the important things is we are -- we'll continue to be very transparent on it and that it is hard to estimate. And I guess, the most important thing is we're just like really pleased that we can serve in this vitally important role.

And I think one of the things that's probably underappreciated externally is, throughout the pandemic, we leveraged our expertise and capabilities, looked at our data and analytics and found ways to be of use. That's how we got into this business, right? That's how we ended up with a seat at the table and then being able to support this important COVID work. So as you look at AmerisourceBergen, our investments in our infrastructure, investments in our capabilities, we're making sure that we're turning that -- those capabilities into value and increasingly looking at that one of those outputs of this recent work is continuing to be the government as a customer. And I think that as you look at AmerisourceBergen, you can have confidence that we're -- as we're investing in ourselves and our innovation, we are looking at ways to create more commercial value.

I wasn't going to ask you, but I just can't help myself. I've seen some headlines on Monkeypox recently. I can't imagine it's going to be the same, directionally, the same kind of impact or even a huge impact, but I'd love to get your thoughts. You've had some activity there as well.

Sure. There are always a number of things that we do that never rise to the public forum discussion. But I think that whether it's Monkeypox or even COVID treatments, we leverage our capabilities well, whether it's World Courier moving Monkeypox vaccine from one country to another or currently working with the government to support the efforts for Monkeypox vaccination in the United States.

You've talked about PharmaLex, we've talked about Alliance Healthcare. Historically, maybe Amerisource more of an organic company than some of your competitors, a little more methodical in its process. You have also, maybe to a little lesser fanfare, you've also divested some businesses recently, U.S. Bioservices and pro forma. Could you talk about the thought process behind the divestitures? And what is, if anything, what does it signal about your capital allocation and your growth strategy going forward?

Sure. So I'll talk a little bit about it, and I'll talk about it in the context of our strategic planning process. We have a very rigorous strategic planning process to look at our existing businesses and to look at where we want to compete. And that process, of course, led us to the PharmaLex acquisition that I talked a lot about, and I think I explained the strategic rationale behind it. We did divest 2 businesses in the last year. And the reason that we did is they didn't fit kind of squarely into what we were trying to do strategically. And it also comes down to ability to win. Ability to win is an important part of our analysis, and I'll use a small example, the business in Brazil that we sold, it was a very good business, but there were a couple of competitors there who had been consolidating the market, and that they had consolidated a lot of the market. We didn't feel that -- while we had an excellent business with an excellent team, we didn't feel we had a strong and compelling in ability to win. So we sold to 1 of the consolidators there. So that's the type of thing we'll look at doing from time-to-time. And then from a capital deployment strategy, it's very consistent. It's continuing to invest in the business to modernize our assets and a lot of investments in technology. It's strategic acquisitions, and the PharmaLex acquisition is one example of that. It's opportunistic share repurchases, which we'll continue to do. And it's maintaining a reasonable dividend that grows.

Well, since you brought up capital deployment, I'm going to jump to more towards what I would typically ask near the end. And of course, I came into this thinking over $3 billion of cash, over $2 billion of cash flow, even better cash flow ex-opioid settlements, I mean, some really amazing numbers recently. Bottom line, what were you going to do with all of that now we just found out where about $1.3 billion is going if I've got that data right from yesterday. So I am curious about share repurchases, though. And tied into that is this unfortunate circumstance where you have a great customer relationship with a customer that owns some of your stock, and they did a distribution a few months ago. It felt like maybe that would change your capital allocation policy to be more stock buyback if we saw subsequent events from Walgreens distributing. I'm curious if that's not too bold if I could ask you to go down that path and talk about your strategy there.

Sure. Absolutely. First of all, we have a very strong relationship with WBA. It fits into our first strategic imperative, which is lead with market leaders. Of course, we have a contract in the U.S. that goes through 2029 and a contract with Boots in the U.K. that goes through 2031. So a very strong customer relationship. And with regard to the potential that WBA may sell some shares, if they were to sell some shares, we would look at it as an opportunity to collaborate with WBA in that process and to repurchase some of the shares. And that's something that we would continue to plan to do. And of course, we announced an acquisition yesterday, but we would still have capacity to be able to repurchase shares.

I think other than analysts and investor hormone levels going up or down, really, the only thing that changes that would be accretive because those shares are already embedded in all expectations. So and that did feel like it may be a bit of a shift because before it felt like debt reduction on Alliance was a big focus. M&A was a bigger focus. And it did seem like after the May announcement from Walgreens, you got a little more aggressive on the buybacks.

Yes. And I will say we're -- our relationships with the rating agencies are excellent, and we're well on track to meet our commitment to pay down 2/3 of the Alliance acquisition debt by March of 2023. And then, of course, you have our capital deployment objectives that I went through just a couple of minutes ago.

When you think about the portfolio, and again, coming back to the growth, the organic plus inorganic growth and the last deal announced PharmaLex. What, big picture, what's -- if you feel like is there a whole? Is there some category? It doesn't feel like that to me. I'm not suggesting that there is. But do you see something out there that may look more interesting to you that it's just we need to supplement this business or there's a business we could get into that we aren't in? Is there something that really stands out as interesting? Or is it more as a ticket as it comes with opportunities like what's presented yesterday?

Yes. Well, I think we'll be very strategic in our thinking. But I will say we don't feel like we have a whole. And I talked about 1 of our strategic imperatives, which is to expand our leadership in specialty. That's such an important growing part of the market in an area, in particular, in our Specialty Physician Services business where we have such a strong presence. That's kind of an area where we'll continue to invest and continue to lead. And then when I look at our biopharma manufacturer services, we certainly have the depth and breadth there, and we certainly expanded upon that with the acquisition. And I looked at our other businesses, including our Animal Health business and many other businesses that I haven't commented on. I don't feel like we have a whole. But 1 comment I will make is I kind of sit here today and look at volatility in the macro environment on days like today. I'm very focused on our business and one just thing that I just really get reminded of is just how resilient our business is. And even in these kind of volatile macro types of environments, we just have a very resilient and strong business at AmerisourceBergen, and I think a very important purpose.

Great. Well, Jim, Bennett, thank you so much. Everyone coming up in our next session, we have InMode in this room in session 1, PTC Therapeutics and LEXEO Therapeutics in the other 2 rooms. So I would like everyone to join me in thanking AmerisourceBergen for being here today, and we look forward to seeing you in the next session. Thank you very much.