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

Good morning, everyone. Thank you for joining us for this session at the BofA Healthcare Conference. I'm Michael Cherny, the Healthcare Tech and Distribution Analyst. It's my pleasure to have with us the AmerisourceBergen team. We have Jim Cleary, Chief Financial Officer; Bennett Murphy, who heads up Investor Relations is also -- as well as treasury, probably some other stuff that doesn't fall into that title. But ABC team didn't bring any slides, which is great because I have tons of questions. But maybe just to kick things off, Jim, you reported earnings just last week, I think. Maybe give some of the highlights. It was a really strong quarter.

Sure. First of all, Michael, thank you for having us to your conference. We have a great lineup today of meeting with investors. So thank you very much for hosting this great conference. Yes, so we announced our second quarter of our fiscal year, our earnings last Tuesday. And we felt really good about our quarter and about our increase in guidance. So during the quarter, we had a 10% top line revenue growth. I think that really speaks very nicely to the utilization trends in our industry. And that's on an as-reported basis, on a constant currency basis, it was more like 11% to 12% revenue growth. Our ETFs for the quarter was $3.50, which was about $0.20 ahead of Street expectations, and that was driven by good operating income. And it was also driven by a better tax rate as we become a more global business. We've had some tax synergies, but we're really pleased with operating income during the quarter. And we saw really kind of broad-based strong performance, particularly in the U.S., which is 80% of our operating income, and we really saw some benefits driven by higher sales to some of our largest customers. We also saw a very good specialty products sales to both specialty physician practices and health systems. We did an increase in guidance across several of our guidance metrics. Just 1 that I'll call out is our U.S. operating income growth ex-COVID, and we increased our guidance for growth rate for fiscal year '23 from a 5% to 7% operating income growth to 6% to 8% operating income growth. So as I said, we felt very good about the quarter and about the guidance. We describe ourselves as a very resilient business. I think we've shown over the last several years the resilience of our business. One of the many good things about our business. We have a foundation in pharmaceutical distribution, and it's complemented by higher margin, higher growth businesses that we've been investing in. One of the many good things about our company as we have leading customer relationships in all of our businesses, which I talked about, benefited us during the quarter. We also have a leadership position in specialty, which has been driving our profitability growth for several years, and we recently made a very important capital deployment announcement where we're making an investment in the OneOncology business that should close probably at the end of our fiscal year. And then another thing that we've really been benefiting a trend is we have strong biopharma manufacturer services businesses that we've been investing in, which includes the PharmaLex acquisition that we announced earlier this year. So we feel very good about our results thus far during the first half of fiscal year '23. And that we have a high degree of confidence in our guidance for the full fiscal year. And with that, we'll open it up to any questions you have.

Yes. And I'm going to definitely get back to Specialty and OneOncology, but I want to just level set to on this guidance factor. You've had a let's call it, interesting start to the year. You had the annualization in the first quarter of some wage investments and other operating investments, yet still displayed great comp in the guidance, and then 2Q came and guided up. Maybe use that as a backdrop against what's been a -- seems to be improving utilization across the board. How much of that confidence is what you're seeing on the utilization side on the fact that script growth still remains at a healthy clip, we -- you'd see any hospital or med tech companies as any sector on that front. What are you seeing within your book of business that underlies that guidance increase?

Yes. So let me talk about it from two different standpoints. And you've mentioned both of these things. One is utilization trends and the other is OpEx. And so really, I think what you're probably most interested in is the utilization trends that we're seeing. And as we've commented on, those have been quite positive this fiscal year, and it's one of the key things that gives us a high degree of confidence in our guidance for the year. And as I said, we found pharmaceutical market to be a very resilient market. And then we've also seen good trends this fiscal year, really broad-based to some of our largest customers and then also in the specialty markets which, again, has been kind of our key profit -- a key profit growth driver for some time, both to specialty physician practices and sales of specialty products to health systems also. Let me talk briefly about OpEx also. We found ourselves in a position that I think a lot of companies did coming out of COVID. COVID was a benefit for us from a GP standpoint and also a benefit for us from an OpEx standpoint, our OpEx growth was lower as things like people weren't traveling. And then as we came out of COVID, we found ourselves having higher OpEx growth as people got back on the road and those sorts of things. And then we also saw some inflationary pressure on the OpEx front. We really don't -- aren't impacted by inflation as much as many businesses are because it really doesn't impact us as much on the cost of goods sold side, but it does, to some extent, on the OpEx front. And during the first quarter of the year, our operating expenses were growing too fast, and we saw that was going to happen during the second quarter of the year. And so we took some actions to bring down the rate of our OpEx growth. And then also, that's coupled with the fact that the inflation comps get easier for us in the second half of the year. So we're confident in the back half of the year that our OpEx will be growing at a slower rate than our gross profits. And so if you combine that with the really good utilization trends that our industry are seeing, those are kind of a couple of things that are driving our guidance increase. Bennett?

Yes. I think throughout COVID or even going back further, you've seen consistent, as Jim said, stability. And to say it in another way, you haven't seen the type of volatility that you've seen in other parts of the market because if you don't have that same elective nature because in many cases, pharmaceuticals are the most efficient and preventative form of care, keeping people out of higher cost parts of the healthcare system, keeping them healthy. And I think as you look at -- you look at our base, you can see continued strong utilization, which, as you'd expect, with -- is driven by things like innovation, new products coming to market, and also continued growth and understanding and appreciation of the value of pharmaceuticals.

So let's pull on that thread on innovation because ABC for as long as I've covered your stock has been a leading specialty business. The specialty encompasses so much more. It's one thing to distribute the drugs, but there's a lot of wrap around. Maybe as you sit today, before thinking about the OneOncology, I want to get it specifically, but -- where do you feel that ABC has the most value add to provide continue to support what remains a high-growth specialty market?

Yes. Let me call out a couple of different areas. And then Bennett, if you want to add to that. Two areas I'll call out are different. One is on the biosimilar front, particularly in Part B, which is where we see the most benefit. We're able to really, I think, provide a lot of value, and as a result, benefit and that we have, for instance, leading oncology supply business. We have a leading ophthalmology distribution business. And then we couple that with wraparound services like our ION, GPO and the oncology market, and so as a result of that, we're really able to provide a lot of value to our customers as biosimilars have been launched in that market. And then really kind of a separate area mentioned that I think we're able to provide a lot of value with regard to innovation in the specialty market is with all of the biopharma manufacturer services we have. For instance, our World Courier business that's in over 55 countries around the world that is the leader in doing logistics for drug trials and managing the logistics part of it. And so that is -- that's been a really growth driver for us where we're able to provide a lot of value to manufacturers. And when we combine that with other parts of our business like our extended consulting business and the new PharmaLex acquisition, I think we're able to provide a lot of value when it comes to innovation and benefit from it also if Bennett, you'd like to add anything there?

Yes. I think Americas is bringing thrives in our ability to help our partners navigate complexity. And whether that's in the commercialization process from World Courier in the clinical trial side, to regulatory affairs and market access or down to our downstream partners that are purchasing a wide array of pharmaceuticals. We pride ourselves on helping our upstream and downstream partners navigate the complexity that is apparent with the regulatory nature of pharmaceutical.

And maybe to stay on that upstream idea because this is an ongoing debate on just how broad manufacturer services as a market. I mean you have traditional country search organizations, you have traditional contract manufacturers. And then you have businesses that sit within you and your peers that touch a lot of those areas but are not those entities. I'd also say that, thanks to the Alliance and PharmaLex acquisitions, you've gotten a lot bigger there quickly with other capabilities. And so what attracted you in terms of -- I'm not going to call it whole, but more just an expansion. But within -- with the Alliance capabilities plus PharmaLex, that you feel like you didn't have access to before that you feel like manufacturers were asking you to do that you weren't already.

Yes. Okay. So first, let me say that as we look at that market, there isn't any additional business capability that we need, okay? I mean, we feel like we have a broad array of services and we can provide a lot of value-added services to manufacturers. Now if I look at some of our businesses in that market, some of them are pretty tight with our distribution business. For instance, our -- we have 3PL capabilities both in the U.S. and internationally, where we'll do the pre-distribution for manufacturers. And an example of that is the Alloga business, which was one of the attractive parts of the Alliance acquisition, which is a leading 3PL distributor in those markets. And so we're not only doing the distribution to say, pharmacies, but we're also doing a lot of the 3PL pre-distribution, and that's also a way that a lot of specialty products are distributed in that market. So markets like the manufacturer services like 3PL or like our World Courier business where we're the leader in doing logistics for drug trials, that's kind of highly aligned with the distribution business. And then as we look at companies like PharmaLex that provide kind of an array of value-added consulting services. We find that to be a really good platform that we'll be able to incrementally add on to over time, I don't see anything really large, but incrementally add on to over time to provide even better breadth and depth of services. And Bennett, if you want to add there?

Yes. We pride ourselves on being the entity that can support large and small biopharma pharma through the commercialization journey through these various points in the cycle of advancing a product to the point of approval and then actually getting their product into the market. And there's a natural transition there from those services to then actually physically getting the product into the hands of the patient ultimately downstream.

So maybe now as a backdrop, let's turn to OneOncology. Unique transaction, both from a type of asset you bought, obviously, one of your peers has something similar, but very natural evolution, but also from the structure. So maybe we'll start on the type asset first. As far as we know, you're the largest oncology distributor by our guestimates, I know it's our best work, but we do we can. What do you think that you bring to the table from the whole wraparound services to oncology, which I know has always been a partner of yours a customer that can make their business better while also adding to the overall growth rate and quality and value of ABC?

Yes, I'll start and then I'll ask Bennett to add, and then we'd like to get into the structure also if you have time. But yes, so we feel just very good about our presence in the oncology market. As I've talked about, we have a leading oncology supply business. We have a leading GPO in the oncology market. And we feel like this investment is a great next step for us. We will have a leading managed service organization, helping these oncology practices, managing the administrative and the support parts of their businesses. And these are very important business partners for us their on-call in practices that we have very long-term relationships with and kind of helping them manage these parts of their businesses. We feel it's just a very important value add. And given the growth that there has been in this market, we think it will be one of the fastest-growing parts of the market over the intermediate and long term, we feel it's a very good and logical space for our company getting to. And I'm not sure if you'd like to add at all.

No, I think it's a natural evolution of our position in specialty for a long time. We've talked about the importance of our specialty distribution into both physician practices and health systems and the ability to be able to offer this complementary -- these complementary capabilities, as I said, a natural evolution of our position in that market.

So that brings me because I want to certainly make time to the structure of the transaction, unique in the sense that you make a minority investment with numerous opportunities to consolidate over time. I guess what was the rationale behind that? I have some guesses and what is having a partner and a financial partner bring to the table, especially for what should be an asset that has the ability to continue to grow organically and organically on its own?

Yes. And so we felt that this was the smartest way for us to get into this business. While we do have exposure to the market, we had never owned a business like this in the past and have never managed a business like this in the past. And so we feel it was really smart for us to have a partner that does have experience in these types of businesses. And this really gives us the opportunity to really learn the business and then it gives us the opportunity to own a lot more of the business, whether it be in the next 3 to 5 years. And so we felt that from a management and learning standpoint, it was the right way to do it. We also felt it was a capital efficient way to do it. And so there were kind of a number of things that drove our thinking. We also think this structure will allow the business to grow nicely over the next few years.

And so I guess as a minority investor, but one with a financial partner, so you're bringing operational test and might an experience that they don't have. So, what will be the interaction once the deal closes in terms of how closely beyond the commercial relationship you already have that you'll be working with them as they drive their strategy alongside you.

Yes. And so I think we bring a certain knowledge base to it. I think our partners bring a real knowledge base to it also. And so we have a financial partner that has a good deal of experience in these types of businesses. And then also, we'll have the physician and management team that will be meaningful owners of the business, and we'll have a lot of incentive to drive the success. And so I would imagine that this business will continue to grow at a nice pace over the next few years. And of course, we'll have representation on the board and we'll have active involvement because this is a very important investment for us. And -- as we talk about AmerisourceBergen, we advance health care and really feel very strongly about our role in health care, and this is just a great next step for us.

Turning to -- back to, let's say, the core distribution side, there's never any debates on pricing. We touched on volumes and the volume strength and pricing takes on so many different comments. Let me start on generics and the whole dynamic of where you sit in the middle in your spread pricing and data points that we get that might be one side or the other that don't necessarily, paint the complete picture. What do you see in terms of the biggest push and pull factors on that generic spread on your relationship with the manufacturers relationship with your pharmacy customers? And I guess, qualitatively, because I don't want to -- not going to ask the numbers, but what do you see changing or evolving over time? Or do you not?