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

Good afternoon. My name is Lisa Gill, and I'm the healthcare services analyst for JPMorgan. It is with great pleasure this afternoon that we have AmerisourceBergen. Presenting for AmerisourceBergen is CEO, Steve Collis as well as CFO, Jim Cleary. After their quick presentation, we're going to have a little fireside chat here over at the table. So let me hand it off to Steve.

Hi, everybody. We appreciate you delaying your participation in the college football final so -- and being back here with us for the first time in 3 years. And it's a pleasure to talk about AmerisourceBergen. We've had a very productive 3 years. It's not like maybe we haven't been as active in investor conferences, but we've been very active in our business. And just want to tell you a bit about the company. Of course, here, we have the cautionary note regarding forward-looking statements. I presume you've all memorized that. But I've just got 3 slides I'm going to be very briefly. I'm just going to talk a bit about the company, and then we'll do the fireside chat. AmerisourceBergen really takes our position in the channel very seriously. We are on pharmaceutical-centered healthcare. We regard pharmaceuticals as the most efficient form of healthcare. And we take our privileged position with our distribution framework and use a whole array of complementary solutions, both up and down both up and down the channel. So down the channel, providers. We work a lot with community providers, including veterinarians, community oncologists and pharmacists, smaller hospitals as well is also an important area for us. Some of the areas of expertise that we offer to providers are GPO services, financial analytics, helping with value-based care transitions, regulatory and legislative support. A lot of those smaller customers do look to companies like AmerisourceBergen to support them with initiatives. One of the things we're involved in, for example, is to help community pharmacists continue to be reimbursed for vaccinations and allow that site setting. That's a very important driver and a very important way for pharmacists to practice at the high end of this scale. And clinical trial support, both on the provider and manufacturer side is a really important theme for us. We're not a CRO, but we are -- we do, do a lot of things around clinical trials, including our very successful logistics -- clinical trial logistics business, World Courier. AmerisourceBergen has a lot of very strong portfolio companies that make up the essence of who we are. And we try under the leadership of our Chief Operating Officer, Bob Mauch, we try really work them very integrated and a very integrated offering. And one of the goals we'd have is why get into all these services, is we want to be a comprehensive set of commercialization solutions to manufacturers with our provider footpath to really help commercialize products and maximize their potential in the market. So areas that we're into are scientific and development consulting, health economics, clinical trial support, we've talked about, pharmacovigilance, data and analytics. We've really enhanced that most recently, just this month with our acquisition of PharmaLex. PharmaLex is very well known and regard these areas: safety, quality, validation and compliance, patient access, affordability and adherence services. And of course, I see here my colleague Peyton Howell, who really started AmerisourceBergen in those areas. We also have been a strong leader in specialty. We're well known for our specialty presence. We've been in those businesses since the mid-'90s, and we've retained very high market share in specialty physician services, including GPOs, but also in distribution. So that's a very strong area of focus for us. How do we continue? What's our long-term strategy to create differentiated value for our shareholders? That's what this slide is about. We invest strongly in our people and our culture. More and more, we are a leader in ESG in our industry. There's tremendous commitment from the management team and indeed from our Board in these areas. We are a purpose-driven company being united in our responsibility to create healthier futures. And AmerisourceBergen, I'd say, is really broad in ambition for pharmaceutical-based care to be the leader and to work those up and downstream channel solutions. Especially medicine and services is absolutely essential for us to continue our leadership. We're in a privileged position where we get to be learned so much from our oncology presence and relay that over to other areas. It's given us a strong foothold in specialty services and hospitals. But also because of the data and reporting and interoperability requirements that we needed to be a strong specialty provider, it's made us very strong with the COVID therapies, and it's a source of tremendous pride that all the COVID therapies AmerisourceBergen was a distributor of record for those, we continue to do that today with products like Paxlovid. AmerisourceBergen is the sole distributor working with the CDC and working with the different states and provider organizations to get those products into the market. We like to think of ourselves as a strong partner to our leading customer portfolio. Our customers are outstanding leaders in their segments, whether it's Express Scripts or Kaiser or OneOncology or Florida cancer centers or so many of the MWI, MWIAH is a key customer for us in Animal Health. So in every segment that we're in, we look for a leading customer to highlight our capabilities. And in Europe, we have Boots would be our key retail pharmacy customer. We are focused on investing in innovation to further drive differentiation. So we take our core distribution business. And a lot of that is dominated by very strong customers like Walgreens' higher-scale customers but often lower margin. And we want to complement that with higher margin, higher growth activities like the commercialization services, really based on the strong infrastructure and market access that we have. We have a very interactive discussions with our customers so that we can understand what their requirements are and how we can better meet their need. And we want to be part of the solution. We want to contribute to Rx outcomes. So AmerisourceBergen will continue on, both through organic and inorganic acquisitions to further our presence, to increase our capabilities and to really help with that differentiation. So you'll continue to see us investing in our innovation, bridge our strategic imperatives and further advance our core business through both inorganic and organic investments. So Jim will talk more about this. We do have a very strong capital differentiation policy, and Jim will talk more about that. So if you think about AmerisourceBergen, as I wrap up my prepared remarks, really think about us as a global health care leader. We are more and more of a global company. We have about half of our 44,000 people in the U.S. and half outside. We have a business like World Courier that operates in literally 70 different countries. We want to create unparalleled access, efficiency and reliability. Access is such a keyword to us; reliability, our customers, in most cases, are ordering today for what they need tomorrow for what they're going to dispense or infuse the very next day. So business continuity is absolutely important to us. Areas like cybersecurity, you see us continue to make extensive investments in those areas. We have a foundation of leadership. We've led our industry in many areas, including the transition to specialty services and also more value-based contracting with our providers where we have emphasis on making all the different segments of our customers' portfolio as profitable, and that was a very important change that we led in our industry. You should think about us as being differentiated by our unique and very experienced, high value-added services. We would think that in future, if there was a difficult predicament like the COVID experience that we've had over the last few years that we could be a unique first-world solution to the manufacturers that would be launching those vaccines or those life-saving products. That's our goal. We want to have a unique platform of distribution and complementary services in all key markets, which we are participating in. And as a public company, we are committed to sustainable long-term growth. The resilience of our industry has been pretty remarkable. The first year that I was responsible for our core drug business was 2009. And with everything that was going on in the world, we had $4 million in bad debt for a company that, at that time, was doing about $45 billion in sales. We do about almost $1 billion in sales in every working day of the year. So it's quite remarkable. We are a Fortune 10 company. And you'll see us continue to drive long-term growth by being focused on our purpose, by being focused on the culture that we represent and by adding value to the stakeholders that we serve. With that, I'm going to hand over to Jim for some more information, then we'll do Q&A. Thank you for your time.

Thank you very much, Steve. I'm Jim Cleary. I'm CFO of AmerisourceBergen. This slide shows our longer-term historical growth, and we're very focused on delivering sustainable growth. You'll see here over this period of time, 2016 to 2022, we had an adjusted EPS compound annual growth rate of 11%, and that's prior to the benefit from COVID therapy distribution. It's a little bit higher than that if we include the benefit from COVID therapy distribution. I know a lot of you probably listened-in on our Investor Day that we did in the middle of calendar year '22 and we introduced long-term guidance during that Investor Day. And that long-term guidance for adjusted EPS at the midpoint of our guidance range is 10%. And so, also double-digit long-term guidance as we look forward for adjusted EPS. This slide shows our value creation drivers. And you'll see that this really reinforces the points that Steve was just making. We have a foundation in pharmaceutical distribution, where we have leading customers across pharmaceutical distribution, and it's complemented by our higher-margin, higher-growth businesses, really kind of a great example of that is our leadership in specialty distribution. These are businesses that Steve founded many years ago that have been key drivers of our growth and also, our biopharma manufacturer services businesses, these higher-margin, higher-growth businesses will be drivers of our growth. And so clearly, we have a focus on margins and growing operating income. And importantly, we also have a focus on return on invested capital. And the distribution business is a very good return on invested capital business. And we've been averaging over a longer period of time, a 18% return on invested capital. The company has a strong balance sheet, very strong free cash flow, which enables capital deployment. One of the things that we committed to do when we did the Alliance acquisition a little over 18 months ago is to pay off 2/3 of the Alliance debt within 2 years of the acquisition, and we'll fully meet or beat that goal, and we'll make the final payment to pay down 2/3 of the debt in March of 2023. And so our capital deployment above and beyond that has been consistent. We make internal investments. We do about $500 million a year of capital investments, investing in the business, which historically has had quite good returns. We do strategic M&A and the PharmaLex acquisition, a higher margin, higher growth business is consistent with this M&A plan to add value to our business and for our shareholders. We do opportunistic share repurchases. This has been evidenced in the last year, actually, since May, we've done about $1.2 billion of share repurchases and $700 million of repurchases in the most recent quarter, and we'll maintain a reasonable growing dividend on our stock, which has been growing at about 5% a year. One of the other things that's embedded in our business is ESG. In the coming weeks, we'll be publishing our seventh sustainability report that I encourage you to read. And we actually now have 3 ESG metrics that are included in our executive compensation. And with that, we'll turn it over to Lisa for the questions.

Is the mic on? Well, thanks very much, and thanks for those comments. As we think about this conference and Steve, you've been coming for a really long time, me as well, me as well. So as we think about the conference, it's focused on innovation in both products as well as services. And if I think about the future of ABC, let's talk about how you think your role will continue to evolve. I mean you've made a number of acquisitions. What are the areas that you're most excited about?

We have this great base of -- with strong cash flow of distribution businesses. But it's really what do we do? How do we add about that? And to have the experience and the operational chops to really implement what your strategy is on. We also have a lot of new tools. I'm very proud of how the company has developed from a people perspective. When I became CEO, I talked about the company becoming intellectually confident. And truly, we have seen that vision materialize with the tremendous amount of people that are coming into the company are such a high caliber, such a high contributory nature and looking to add so much value. And we have here Leslie Donato who's our Head of Strategy. The team that works under her works in every one of our business segments and is really focused on those higher-margin, higher-growth businesses and areas like cell and gene therapy or the next extension of our specialty business and a little bit when we first heard about cell and gene therapy, for example, when the product first came on, in fact, it was PROVENGE I got really concerned about what was our role going to be because it was going straight from the laboratory to the provider and often to academic medical center type so -- where we didn't have as much role. But we've developed our health systems business tremendously. We've developed our capabilities. We did the World Courier acquisition, for example. We're looking at cryogenic storage. We're looking at liquid nitrogen containers. We're actually in our third or fourth generation of those containers. We're able to ship these therapies almost anywhere in the world. That's a very good example. Another example I can tell you is the contracting we do with Ion how much more analytical it's become, how much more focused on value-based care it's become, really adding value for those products, adding value for the patients. And AmerisourceBergen continues to develop in those areas. With the smaller customers, we have opportunities to help them aggregate, to help them act more like their larger competitors. And with large customers and large players as some of the larger pharma companies, we do have because of the interoperability because of the data and reporting we have and the tremendous market share that we have in key segments, we're able to add a lot of value to them as well and help them with a lot of market access, a lot of market awareness. And I think that this capability of AmerisourceBergen, as we look at the company under Bob's leadership, we'll continue to only grow as we look at the best practices as we look at more classes of trade in Europe. One of the areas where we think there is an opportunity in the long run is to develop into more classes of trade in Europe for AmerisourceBergen. So these are all things that really you can see get our juices flowing. And I'm confident that we continue -- are going to continue to have a strong presence in all these key markets that we've selected.

And I think Jim highlighted you spend about $0.5 billion a year and making investments in your business. With the things that you're talking about fall within that or do you need to make incremental acquisitions or other incremental investments?

Well, some of that $500 million is to grow the business and some is to keep the lights going. We have to have very important investments. But you'll see a lot of that $500 million go towards Europe, where we feel we have a little bit of a technology catch-up to make. We want to -- there's -- we have a couple of different distribution centers at Istanbul. It doesn't make sense for us to consolidate and have a more modern automated approach. So those are the sort of things we're looking at. We have a very well set systems and infrastructure in the U.S. There's not a lot of acquisitions that we feel we have to make. Some of our companies are very acquisitive oriented, particularly, PharmaLex has had a history, they've done a lot of acquisitions. So we don't want to stop them. We want to keep on them being progressive and innovative. So we have a very balanced capital deployment strategy. And of course, just to be honest, we also have to contemplate that there could be future stock sales by Walgreens, and we have all of that we keep into mind. And we're lucky because we have a brilliant CFO can manage all these things.

So you laid out detailed guidance in November for fiscal '23. Reflecting back on that commentary, as we think about some of the headwinds and tailwinds, anything that you'd call out today that is nuanced in any way versus what we heard in November?

Yes. I don't have anything major to call out today. We'll be fully updating guidance when we announce our first quarter fiscal results on Wednesday, February 1. But I will say we feel very good, as Steve talked about in his opening remarks about the resilience of our business. We feel very good about utilization trends, our leadership in specialty, the capital deployment that we've done year-to-date. We have talked about -- but one of the things that's more difficult to predict in our business is COVID therapies. If I go back to fiscal year '21, ancient history, we had a contribution of about $0.30 and then in '22, we had contribution of about $0.72. And our guidance for this year is $0.30 to $0.35 and then that's a harder number to predict. Every quarter, we'll be very transparent to say what we made from COVID therapies in the current quarter versus the same quarter in the prior year. But as I said, we feel overall very good about the resilience of our business and utilization trends.

And just on utilization trends, just to remind people, we've talked a lot about flu and flu trends. If I remember correctly, for the drug distribution model, when we saw Tamiflu become generic, that was a great flu type of event. But generally speaking, flu is just kind of -- it's okay for you, right? Any incremental script is good, but it's not like it's a big tailwind. Is that the right way to think about it?

It's not a big tailwind. Look, a busy flu season like this year helps get more patients into the stores. So there's a tailwind from that, but they're not very expensive products and not that big. And bear in mind that we have a fairly wide range of guidance, so we can work within that range quite well. Not that important.

Yes. Over the years, Steve, you and I have talked about your ability to support specialty drugs through development, commercialization, like the whole lifecycle. When I think about the acquisition of PharmaLex, right, when we look at the coming years and when you think about your positioning around this, can you maybe just talk to us a little bit more about how PharmaLex fits in and what you see around this opportunity, again, going from commercialization, early product development all the way through commercialization and how you help your customers around this?

Well, first of all, the private equity market has been kind of difficult for us to participate in a lot of the commercialization top services market. So we felt like this was within a range where it was affordable. And we -- our finance committee of our Board is very focused on returns. And so it's not just strategy. We have to get good financial returns for our shareholders. And the companies with strong balance sheets and cash flows like ours, we think are coming into a really strong position over the coming years as we head into a much more recessionary times. And I heard your Chairman debating whether there is going to be a recession or not, but let's just assume there's going to be a recession. It's hard to imagine it's not going to be on Europe, but we're very well positioned. In the '90s, so really us -- we started a special group in '93, '94 and then in '96, we bought 2 distribution businesses by '96 and '98. And then we added in the Lash Group, and we added in Xcenda, and we added in all these different commercialization services businesses. With Alliance, we have a very good footprint of business, which has got a good mix of high-margin, high-growth businesses. And then we're taking that capability and you add like something like a PharmaLex, where we have strong talent coming in, we're really focused on what else can we do with the manufacturers. And we want manufacturers to think of AmerisourceBergen as their first solution when they commercialize products. So it's an outstanding acquisition, if you look at it in terms of the quality reporting, the product lifecycle management, helping with submissions, helping with statistics, data analysis, all of these areas that they're doing in some countries that they're in, 30% of the business is in the U.S., and we believe we can help them there. But it's going to strengthen our overall relationships with pharma. And often, the pharma relationships are what leads to downstream relationships and leads to strength. And in some cases, we think we can help the actual health systems and the governments of the countries. There's some rules that we're seeing, for example, in France, that just makes no sense. They absolutely -- so we want to try help. We're going to participate in all the forums, the trade associations, et cetera, and AmerisourceBergen strongly believes in participating in the industries that we have key presences in. So I'm excited about that. I think the knowledge we have, especially in the U.S. is very replicable. I was talking to a manufacturer that's interested in a new therapeutic area and was looking at what we could do for them in the physician space. And I said we're not in that space now, but we haven't had the right drugs. If they have the right drugs, we can build it for you. If they have the right drugs and if there's complementary services around that, AmerisourceBergen can add to that. Jim, you wanted to add something?

I think that covers it.

Okay. All right. I think he was telling me I need to move on. On to the next.

So when we think about -- you touched a lot on Europe here, but there is that concern as you talked about from a macroeconomic perspective. I guess, really just 2 questions. You talked a little bit about what you know in the U.S. and what you can bring to Europe, but we have seen others try to make changes in Europe, and it's more difficult than they had anticipated. So just 18 months into owning Alliance, are you finding that it's difficult to make these changes or do you feel like that it's more open, maybe some others have kind of pushed things forward? I'm just curious as to how you're thinking about those opportunities.

Yes I'm really happy to have that question. So first of all, we have to say that AmerisourceBergen's balance sheet was in such a strong shape at that time. We're able to really pay half cash and half borrow at very competitive rates, and we have that locked in. And actually, by the end of next -- this fiscal year, we'll almost have the debt completely paid off right, Jim?

Yes.

I think March next year, we completely have the debt paid off. So that gives us a $6.5 billion acquisition with hundreds of millions of dollars in free cash flow and earnings that we've paid off essentially within 3 years. So that put us in a very strong position. I have to start off with that. But we had -- we inherited a business that's operating very well. That's got a key presence is #1, 2 or 3 in all the markets that they operate in. And we're learning all about the different systems, for example, in Norway, the Netherlands, we operate retail stores as well, but generally, we like to rather be in pure distribution. Those countries and those markets are so small that it's just the way that wholesale and retail have worked together in those sort of environments. On a synergy perspective, we didn't overburden our model because it was so accretive. And we knew that those synergies, as we've said, we have to make a lot of investments in Alliance because you need strong systems and you need integrated systems to be able to do these complex services. So we're on our path to do that. We knew that it wouldn't be easy and then we've had COVID and supply chain. And who would have ever imagined would be hard to buy service, things like that so. But we feel really blessed also, we've been able to do things like shared service centers and a lot of tax and financial structuring, which has given us tremendous benefits. And some markets have been stronger. Our Turkish business, for example, is a great business. We're doing a bit better in Spain, and we've modeled in lots of places that we're proud about but we've inherited a strong team that is very P&L focused. And I think we're going to be a strong player in Europe for decades to come.

As we think about your relationship with WBA, and we continue to see them exit portions of the ownership stake in ABC and you've really been right beside them buying back stock, which I think the market has appreciated. When we think about capital deployment, you talked about paying down the debt, we've talked about share repurchase. Outside of the WBA activity, how are you thinking about capital deployment today and priorities for this year? Yes.

It's -- if we exclude the WBA repurchases, it's really kind of very consistent with what we -- the way we viewed capital deployment for many years. It's always reinvesting in our business to strengthen our business, strategic M&A and PharmaLex, which Steve talked about is a great example of that, which is highly aligned with our strategy of pharma manufacturer services and growing higher-margin, higher-growth businesses. Our reasonable growing dividend that we've been growing at about 5% a year. And then also, we'll -- if WBA decides to sell additional shares, we'll continue to look at it as an opportunity to partner with them and potentially repurchase shares just as we did in the most recent quarter where we purchased about $700 million of shares from WBA.

So it sounds like outside of purchase the repurchases, in general, and WBA and paying the dividend is falling paid down the debt. It doesn't sound like you're looking to do any other kind of M&A activity in the recent time?

We don't feel like we have any compelling gaps. I think we'll always be opportunistic. We're active in the market. As I said, Leslie's got a lot of young people that are very connected in the marketplace and are out there and talking to people. And a lot of our business owners, we have Rich Tremonte here, who's really responsible for all our U.S. provider businesses. A lot of people like him are very interested in growing their business, not only organically but inorganically. And we're going to be active in the marketplace, I mean, we think we have the operational chops. We have a much stronger integration path. I remember the old acquisition model that Cisco had where everything was like mechanized. I don't think we're ever going to be like that, but we have a strong perspective on how we integrate businesses and the culture that we expect and the way that we expect that our managers will behave. And we also have a lot of people in the company that really understand our culture and we know that our culture works for our business, the culture of being very customer-centric, of being very close to your associates, being very involved in your business. All these are hallmarks of AmerisourceBergen and our purpose-driven culture.