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

All right. Great. Start with our next session here with AmerisourceBergen. I'm Steven Valiquette, the healthcare services analyst here at Barclays. With us from the company, we have Steve Collis, the CEO; and also Jim Cleary, the CFO, up here on stage with me. And then Bennett Murphy is in the audience from Investor Relations as well. This will be a fireside chat. So I think with that, I guess we'll just dive right in.

Okay. Good.

Okay. Great. So maybe first topic here, obviously, for ABC, a hallmark of the company has been specialty drug distribution. It's been a great source of stronger-than-average profit growth for the company for a long time now and depending that could be accelerated further here over the next couple of years, potentially around biosimilar opportunity. Maybe just unpack that a little bit further. Obviously, biosimilar HUMIRA itself while it's topical for investors, I think most investors recognize by now that the drug distributors really may not have as much leverage to that particular one, just given that it's suspense more to the mail order channel, but can you just remind us of your current assumptions and EPS contribution from biosimilars overall for fiscal '23? And just any high-level color for the next couple of years beyond that might be useful as well.

Yes, Steve, thanks for being here. For those who don't know us, I think most of the people -- some of the -- half the people we've already met today. So appreciate your ongoing interest. But we're a leading health care solutions provider with a foundation in pharmaceutical distribution, and we continue to add to our core business and our market-leading customers with interesting acquisitions. We have a leadership position in specialty. And specifically, Steve, to your point, we don't break out the EPS contribution from biosimilars, but that's significant. It's been significant from many aspects. I think the adoption, particularly in oncology has been encouraging. You all know we need the headroom from biosimilars with the biologics expirations coming up to create room for new cell and gene and other therapies that continue to come out that are really remarkable. We're going to go through a period of I think, incredible innovation. So HUMIRA -- as you so correctly point out, HUMIRA is not as impactful for us because of the way the mail order channel has handled our Part D launches. But Part D launches are very important for us. And there's a good pipeline coming up in the years ahead. And definitely will continue to be a driver for our business, a driver for our -- the practices that we serve as profitability and also a drive for patient affordability. So -- and a lot of the high-quality manufacturers like an Amgen have gotten very involved in this area, and we think that that's good for the patient adoption. Anything you'd add or...

Coverage is great, Steve.

Okay. Great. So next question on biosimilars. It kind of covers maybe 2 topics or 2 questions at once. On the one hand, the company has been pretty successful on generating some extra profitability tied to biosimilars, just around the physician GPO and some of the services you provide through that particular part of your business? But also on the biosimilars for some of the big launches coming up over the next several years, I still think kind of similar to like traditional generics that you need to have some interchangeability that goes a long ways towards driving a lot of extra profit for you guys to drive market share for some of the manufacturers where if you don't have that interchangeability makes it a little bit tougher. So just give us to hear more thoughts about just the overall profitability on biosimilars. How much might still come from just the GPO economics versus the actual distribution of the products, given that some of these might be interchangeable, but still a lot of them still might not be.

Yes. So as I said previously, the [ Part B ] products are really important for us. And I think it's worth mentioning that it's not just oncology. We have areas like rheumatology, ophthalmology. Urology that we're very focused on as well and that there are going to be some interesting products. Certainly, ophthalmology is one that comes to mind immediately. And we've got a couple of promising products there and that's a big market for us as well. So it's been, as I said, a really remarkable boon for many parts of our business including ION, which focuses on physician education, contracting, and I think has been very helpful and an early proponent of the adoption of biosimilars, certainly interchangeability is more prevalent on the Part B because a lot of this is sort of -- is not chronic treatment. It's a particular treatment path or protocol that's chosen. But we have seen some of the products be interchangeable and in areas like ophthalmology. We expect that physicians and patients would be willing to do some changes. So anything else Jim, you'd add?

I just will say that it continues to be a growth driver for AmerisourceBergen. We've seen that for several years now and would expect it to continue, Steve. And of course, the interchangeability is not as important as Steve was saying, in part -- in a Part B because obviously, the physicians can make that decision. And of course, we have the ION GPO in that market also, which has been a very successful business for us.

Yes. Okay. Great. So I guess sticking with specialty, but maybe toggling off biosimilars and just coming back to just the brand opportunity. Let's not forget about that part of it, obviously. So the pipeline always seems pretty strong in biotech overall. I know it's hard to really talk about any specific drugs and ones that -- there's always a lot of hype around maybe a handful of drugs at any given time as far as revenue potential, but without getting too granular around that, maybe just give us your thoughts on just the overall current state of the pipeline for additional specialty products that you might be able to capitalize on, just maybe next 3 years versus like past 3 years. Is it similar as far as still a strong growth outlook? Has it decelerated a little bit? Is it accelerating? Just a high-level thought around that might be helpful just on kind of the brand opportunity. Just separate for the [indiscernible].

Yes. I think there's just a lot of trends that are benefiting the specialty business. I think better diagnostics, better personalized medicine, earlier detection coming out of COVID, and that trend was continuing. And the patient access to AmerisourceBergen has -- we always talk about our market-leading customers. And in specialty, we've got many tremendous customers, whether it's in urology, where we have the leading physician aggregation company there. Outside of U.S. Oncology that's owned by a competitor of ours. We have the 3 leading aggregators in oncology. So we have these great set of customers. We have ION, which has got various programs depending on the size of practice you are, which is important. That really does a lot of tremendous work on the contracting and education side and just a tremendous pipeline of product. So we feel really good about our specialty products business. We have also -- with our formerly ASD Healthcare, a very strong hospital presence. And we're looking at GPOs in other areas, including urology, but also in the hospital space, on the specialty products to strengthen our contracting and strengthen our pricing and educational requirements for our customers. So this is a tremendously important area for us. We were asked by one of the earlier groups. There is still a key area of focus for AmerisourceBergen and we could not be more emphatic that this is absolutely a core business for AmerisourceBergen, where we've been a leader for over 2 decades. We continue to make investments. Recently, we built a specialty distribution center on the West Coast. And 1 of the key thesis even international is how can we bring more of our specialty knowledge and services and sort of setting different care setting skill set to the European market. So one of the ways we'll do that is through our logo business, which is direct to pharmacy, the leading company in Europe that does direct to pharmacy programs, but looking more at those unique requirements that the specialty manufacturers will have. And we have a couple of manufacturers that are interested in contracting with us on both the European and the U.S. label. So we think we have a lot of different ways to go at the specialty business and including just supporting our customers and our manufacturer partners with their market access and their patient requirements.

Okay. Great. So final question on specialty. We just talked about a lot of the organic growth drivers, both in the U.S. and for Europe. So I think it was definitely helpful. And you guys obviously have industry-leading market share within the U.S. But aside from the organic growth, just curious to get your latest thoughts on whether or not there's still a meaningful opportunity for growth through acquisitions. It sounds like in the U.S., I think it's been maybe less targets now than what they used to be, but also just international. Is there maybe a greater opportunity for inorganic acquisition growth outside the U.S. within specialty as well?

Yes, first of all, we think our portfolio is pretty strong, but we did our long-range guidance. And certainly, within the long-range guidance we're contemplating several hundred millions up to $1 billion of acquisitions a year and specialties is a key part of our portfolio. So you could expect that we'd invest there. The ways we may invest is through downstream solutions helping our customers navigate through a market. We could be partnered more with manufacturers. I'd regard Pharmalex as a manufacturer commercialization type business. There is 30% to 40% of their businesses is in the U.S. So although it's perceived to be a European acquisition. There are parts of that, that we can grow in the U.S. as well. In addition to our Xcenda and Lash, a key patient portfolio and hub services and pharma economic consulting type businesses. So you'll see us continue to invest in those areas. But we are -- we look at our return on invested capital obviously, along with a lot of other businesses, our weighted average cost of capital has gone up a bit. We are completing the paydown literally this week of our last obligation on the -- to the rating agencies for Alliance debt and we're paying down some really, really low interest rate debt. But our balance sheet is one of the key hallmarks of AmerisourceBergen. And I think shareholders should always feel good that we are really focused on creating shareholder value, along with being a purpose-driven company and doing the right things for our communities and team members.

Okay. Great. Okay. Maybe we'll talk a lot of specialty and just come back to the core drug distribution business for a few minutes here. So I think for a lot of investors know that we've done a lot of work around the upcoming traditional ANDA generic pipeline. I know it's kind of old fashioned and old school. We still roll up our sleeves and do some work there. From our own analysis, we think there's actually a pretty strong outlook for new first-time ANDA generic launches in 2023 versus 2022. And maybe that certainly as a tailwind for the drug distribution industry as a whole. But I think if we're talking to you guys around that, I think there's been maybe some balance around the contribution from that as you've kind of moved from 2-tier to 3-tiered pricing. But maybe just talk about whether or not you see a strong generic launch calendar as well. And just any thoughts on whether or not that moves the needle for you guys just within the outlook for the next year or so.

Sure. Yes. As we look at -- it's our business planning, and we look at the potential generic launches over the next year. First of all, it's, of course, really positive for the health care system. And it's also positive for the distribution market and AmerisourceBergen. And so it is an incremental benefit for us. I wouldn't cause any -- I wouldn't certainly say any individual product is a major driver. But as we see this, it's an incremental benefit for AmerisourceBergen. And as everyone knows, we've done a very good job over several years of rebalancing our portfolio. So we're not overly reliant on generics for profitability. We make a fair return on generics, brands, specialty biosimilars, as Steve talked about earlier, but it certainly is an incremental positive for us, Steve.

Yes. And just to echo your comment there, we kind of view it the same way. We're -- we see about $28 billion worth of NDA branded drugs going generic in '23. Yes, and there's not really 1 big major launch that brings attention to it the way you have that like with HUMIRA within BioSim, there's like a lot of signals and doubles and before you know, oh my God, it's $28 million. So that's a part of the reason why it's off the radar screen and maybe a little bit for some investors. But that's helpful just to hear your thoughts around just as far as contribution and everything. Maybe just switching gears here, just around kind of the nuts and bolts questions around drug pricing trends. I guess kind of a similar theme where the economics for drug distributors on brand price inflation nowadays are certainly not what it used to be, going back 15, 20 years ago. But with that being said, I think there actually was a little bit of an uptick in the brand price inflation trend so far in calendar '23. I think everybody knows that in January, in particular, is the most important month of each calendar year and the trends are actually pretty favorable. Maybe just talk about kind of what you observed around the brand pricing trends so far in '23 and how that's impacting the U.S. distribution business.

Yes. It's certainly been in line with our expectations. As I think everyone is aware, right now on the brand front, well over 95% of our buy-side dollars are fee for service. But of course, we do experience some benefit when there are price increases, and we did see that in line with our expectations, Steve.

Okay. Okay. And on another theme of being old school as far as tracking the generic pricing trends. So that's been fairly steady over the past few quarters based on at least the IQVIA data. Again, I know that it's not so much around what's the -- just the pricing -- so first of all, the IQVIA data, obviously, is the buy-side pricing trend everybody. What's most important for you guys is just the buy-side pricing trend relative to the sell-side pricing trend. But just any thoughts or observations on how that's trending so far in calendar '23 as well relative to how you guys were just viewing the contribution to the business.

Yes, very much in line with our expectations and we've actually had a lot of questions on this in our early meetings that we've had so far today. And of course, if there were a moderation of deflation, it would be an incremental tailwind for AmerisourceBergen. And we do see that manufacturers have cost pressures. And -- but at this point in time, I'd have to say it's fully in line with our expectations.

Okay. Great. Okay. Next topic here, just on the COVID-related products. Given the size of the earnings base for ABC now, it's kind of a rounding [ error ] at this -- not around here, but just sort of just a smaller number as far as the contribution around the $0.05 to $0.10 somewhere in there. I think it was contribution here more recently. But just give us an update on the trends you're seeing on just the COVID-related products, and again, how that's tracking relative to, again, what you kind of built in for the outlook within fiscal '23?

Well, I'll start off just to say that we do expect that a lot of the products will transition towards regular in the industry sort of service. Vaccines are a little bit different than other pharmaceuticals in that the channel is so broad. So we expect that they will be administered. Hopefully, in retail pharmacies. That's something we continue to advocate for. But also, they will anticipate they will be administered in physician's offices and clinics. So we have some of that business, of course, through Walgreens significantly. But the market share would not be as high as we have in a traditional pharmaceutical product or traditional specialty product that would transition. The emergency use authorization products, which AmerisourceBergen has had literally -- I want to use the word a lot, but we were successful in obtaining exclusive distribution and often not even distribution, but just stocking and logistics facilities with the CDC. Some of that we expect will come to an end because the government has declared an end to the sort of emergency period of COVID. But we -- it's something that I think Jim and Bennett have done a good job of calling out because it's a little bit unpredictable. I think we do a terrific job of forecasting where our earnings are going to be for $250 billion-plus company. We really come very close. And then we have some of those puts and takes. And this is one that's been a bit more unpredictable for us is what's going to happen with the COVID therapies. And in some cases, it's been fairly meaningful because we do have some of that exclusive distribution even where we don't take title to the product. So it's something that we think we've done a great job of being transparent about. So Jim, I think the second part of the question was yours.

Sure. I'll just briefly state that, as you know, our current guidance is EPS contribution from COVID therapies of $0.25 to $0.30 for fiscal year '23. We will continue to call out on a quarterly basis what the EPS contribution is from COVID therapies for that quarter. And whenever we update guidance, we'll do it on a -- also on a ex-COVID basis. And Steve was saying, it's a little bit hard to predict what the contribution is going to be from quarter-to-quarter. And so we'll continue to call that out, Steve.

Okay. And also maybe somewhat tied into that. Obviously, you mentioned the PAG coming to an end. Now you have potential kind of broader commercialization of COVID vaccines, maybe at some point. this year or later. But either way, just -- can you remind us if you have any assumptions around that, that are built into commercialization? And could that still be a modest tailwind for you guys? Or do you see it not being that material the way it stands right now?

No, we don't have any assumptions.

We don't have any assumptions built around that. So we'll certainly think about it as we start looking at our 2024 plan.

Okay. Okay. So TBD on that. Keeps it simple.

But I don't think -- I don't see that as being -- it's hard. There's very few. I mean I remember [ Sovaldi ] was a specific call out because that was just so significant, particularly in the first year or 2, but -- and we had remdesivir in the beginning of the pandemic. But -- and then, of course, the [ oxaliplatin ]. But this is my long history, right, nearly 30 years in the business. I mean it's so a few actual products. We're not really a product company, we're more of a services and contracting company. So it's -- but of course, we do go by the industry. We're a good microcosm and representation of the industry. So...

Yes. Okay. Okay.

You know as well as I do. Yes.

All right. Last question here just around the core drug distribution business. So obviously, the macroeconomic outlook is still top of mind for a lot of investors right now. And the good news is that pharma overall, and obviously, defensive type business. So for the most part, the growth trends are intact, but it seems like it's maybe having a different impact on the stock, but we'll maybe save that discussion for later as far as the stock impact. But just remind us again, are you seeing any impact on the business one way or the other from just the macro outlook? And maybe also tied into that, just any updated thoughts on just inflationary labor cost impacts and how you guys are managing that as well.

Yes, sure. Let me talk from the macro standpoint, both, Steve, from a revenue standpoint and an OpEx standpoint because I think there are components of both of those in your question. We continue to see utilization trends to be very good and in line with our expectations. We've been talking for the last few years now how resilient our business is in spite of anything that may be happening on the macro front, which I think is one of the great things, as you all know about our industry. And I think from an OpEx standpoint, from an inflation standpoint, and this is something we've talked about before. We kind of saw inflationary things start to happen in like February of last year. And so the first quarter was a tougher comp for us from an OpEx standpoint. And as we -- the first fiscal quarter, and as we talked about the second fiscal quarter is still somewhat of a tougher comp. And then from a comp standpoint, it gets easier in the back half of the year. And then also, of course, this is something that's very important to AmerisourceBergen and we take actions to make sure that we're doing well on the OpEx front. And so we feel overall kind of good about where we're going to be from an OpEx standpoint for the fiscal year, Steve.

Okay. Okay. And also just on macro, again, thinking about that outside the U.S., how much does that impact your growth strategy and some of your initiatives for outside the U.S.? Does it give you a pause in any way? Or does it create more opportunity? Just kind of thinking about the puts and takes in the U.S. for macroeconomic as well.

Utilization trends we continue to see in line with our expectations. And I would say, from an international standpoint, probably from the OpEx standpoint, it's a little bit better than we would have expected at the beginning of the year just because I think it's been warmer winter. And so things like energy costs have been a little bit better than expected.

We have our largest markets in U.K., we've seen some firming of some pricing there and our largest customers progressing really well coming out of pandemic. So and tourism coming back there. So overall, we just had our 3-year planning Board meeting. We do -- in March, we do our strategic planning Board meeting. And we really officially ended our integration period of Alliance. It's the biggest acquisition we've ever done over $6.5 billion. And I would say the Board gave us high marks on how well that's all gone and how well we've achieved the objectives that we set out when we announced the acquisition about 2 years ago.

Okay. Great. Okay. We've got another maybe a minute or so here, just a couple of other random topics quickly. Just on the veterinary distribution business, maybe just touch on the key variables impacting the growth in fiscal '23 and both on the companion animal and the production animal side of the business.

Yes. I would say probably the kind of the key variables driving growth there is just -- and we've talked about both these things capacity in veterinary practices and staffing level at veterinary practices. We've seen some lower staffing levels there, which were negatively impacting growth rates. Drought and herd size in the production animal business was negatively impacting growth rates. And we saw the impact of those things in the most recent quarter. I will say, as we look long-term, we feel very good about the market and very good about our business and ability to grow that business.

Okay. Finally, real quick one just on kind of share buybacks. On the one hand, obviously, there's been some Walgreens transactions and that maybe altered your strategy a little bit on share buybacks over the past year or so but also now with the stock coming kind of way down from where it was. I mean just any updated thoughts you have on just capital allocation and share buybacks and how that ranks within some of the priorities, I guess?

Yes, sure. Of course, everyone is aware, we -- from a capital deployment standpoint, we invest in the business. We make strategic acquisitions. We do opportunistic share repurchases and we have a reasonable and growing dividend on our stock. And from the standpoint of opportunistic share repurchases, we've had great opportunities in the December quarter. We bought back $700 million from WBA. WBA is our largest shareholder and customer sold stock during the quarter, and we just view that as a great opportunity to partner with them and repurchase a portion of the shares. And as we look to the future, as we've said many times, if WBA does decide to sell additional shares. We would look at it as an opportunity to partner with them and be a purchaser of a portion of those shares.

Great. Okay. With that, I think we're a minute or 2 over. So I appreciate you guys entertaining all the questions. Thanks for your time today, and enjoy the rest of the conference.

Thanks, Steve. We'll see you later.

Thank you.