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

Hi. Good morning, everyone. My name is Erin Wright. I'm the lead Healthcare Services analyst at Morgan Stanley. We're happy to have with us today, Cencora. We want to make sure that everyone has a new name, right, but that's formerly AmerisourceBergen; ticker symbol, a strong COR, but we're very happy to have you here with us today. Steve Collis, Chairman, President and CEO; Jim Cleary, Executive Vice President and CFO. We also have Bennett Murphy in the audience as well with us today. But thank you so much for joining us. We really appreciate it, and I want to allow Steve to make some opening remarks. Thanks.

Yes. Thank you, Erin, and thank you. We walked in here and that you had us at [indiscernible] COR already. So we did change our name about 2 weeks ago, and we're very happy with the new ticker symbol. We're happy with the new name. We have our worldwide launch on Wednesday, actually. But for us, of course, Jim and I had changed on August 30 when we changed the ticker symbol. For those of you who don't know us, Cencora is a global prescription services company. We -- and I say prescription pharmaceutical. We're very, very focused on that part of the industry and provide services up and down the channel, thinking about those more as integrated services. We have definitely made a big push from a capital deployment and an operational effort into international. We bought a business called Alliance Healthcare, which has the distribution of [ goods ] in the U.K., but many other fine distribution businesses and also a third-party logistics business in Europe. When people think about Cencora, they might often think about our specialty distribution business in the U.S. A lot of the management's background is myself, from oncology distribution business, and a lot of our other key management members; including our Chief Operating Officer, Bob Mauch, come from the services and integrated solutions business. Bob, for example, started a business called Xcenda, which is a key part of our pharma economic offering strategy. So we don't only serve community practices. We also serve other community physicians, such as ophthalmologists and retinal surgeons and nephrologists and neurologists. So we have a special -- any Part D provider, we provide a lot of services for them and have really been a key participant in the launch of biosimilars into the Part B space. We recently -- the most recent acquisition, [ serious ] acquisition we've made is a minority investment in OneOncology, which is a leading community oncology practice aggregator. We are working closely with them. We have a private equity partner that we're working with as well to look at end-to-end solutions. And also the learnings that we can glean from OneOncology that will really be relevant across our whole network. We also are very active in community pharmacy. We have in Europe, Alphega; and in the U.S., Good Neighbor Pharmacy, which is a key offering for us. Another big acquisition we made is really on our Integrated Commercialization Solutions business, a company called PharmaLex, which is headquartered in Germany, which really extends our platform of services to pharma manufacturers, and that's going well. We intend to be a very strong solutions provider, not only in the U.S. but in Europe as well. And each market is different. But we have a lot of relevant learnings and a lot of launch support programs. For example, there's a lot of commonality. And this also complements our World Courier business very well, which is a key performer in Cencora. Finally, to shareholders and potential shareholders. We always talk about our long-term value proposition. AmerisourceBergen is a multi-stakeholder purpose-driven company, but really is focused on creating long-term value for our shareholders. I think we've done a great job on capital deployment with Jim's leadership, and you will see us continuing to be to drive value for our shareholders and all our stakeholders in the years ahead. Now it's Cencora, formerly AmerisourceBergen.

Great. I'll start with a broader question here. And you mentioned several of the businesses that you're in at the moment. But your business model does continue to evolve. And I think it becomes increasingly differentiated with not just World Courier or MWI or your leadership in specialty, but also in international. What does it look like in 3 to 5 years? Are you going to be increasingly on the international side? Is there other areas that you're interested in as well? And like how does -- how's the evolution, especially under Cencora look?

Well, I think the last time I saw you, we were at our Investor Day. And I think AmerisourceBergen and Cencora, we're always thoughtful, of course, myself there. We're very thoughtful on capital deployment. So we feel like our portfolio is very well established at the moment, and there's lots of areas that we can add to organically. Often, we'll be led by a customer, and it could be on the manufacturer side or it could be on the distribution side, but somebody has a need to create a 3PL program or an adherence program or access program. We often would grow that organic team. We have a lot of resources and capabilities to do it. We also have a lot of tremendous expertise in internal investments. We did our fusion projects in Lash, for example, that's our reimbursement and analytics business. We can build internal programs as well. Of course, the people who run our businesses, who I love meeting with and Jim, we're very close to them. I think when you've been in these businesses as long as we have, that's one of the interesting parts of our job is looking at the strategy. And we do -- we want to always deploy capital thoughtfully. It's probably the most important thing that the two of us do. But we would look to probably make more acquisitions in international areas around the commercialization services area. We have about 4 or 5 key areas of expertise that we're looking to do. We also are looking at regional opportunities, say, for our logo business. But we'll always be deployed by quality. We'll always be motivated by quality of assets, a strategic fit with our business. Does it fit our overall purpose? Does it help advance those core businesses we're in? Will it bring us closer to our key customers? And nothing on the M&A front would supersede taking care of our customers, making sure that we keep that world-class portfolio of customers that Cencora is really notable for. Some of the most prominent names in U.S. health care and European health care,, and also the role that we have with the manufacturers. But we do have a tremendous amount of cash flow and that's one of -- as I said, every year, we'll try to deploy that in the most thoughtful way. Of course, we have our dividend policies. We usually participate a bit in share repurchases, depending on market circumstances. But we will think a lot about internal and external acquisitions as well. Jim, you want to add anything?

I would just say it's all about our really strong foundation in pharmaceutical distribution, which is just a terrific business with very good growth potential. Really strong ROIC and cash flow and that enables us to complement the distribution business with these higher-margin, higher-growth businesses that Steve talked about.

Great. And can you provide us a little bit of an update on just core drug utilization and the experience that you're seeing? And U.S. core drug distribution has been very strong. Is it sustainable? I think is the one big question that we get from investors and what's driving the recent strength in core pharma?

Yes, I think as we've talked about our earnings and announced earnings during the first 3 quarters of this fiscal year, where we've continued to have very good results, is that it's been based on broad-based strong performance across many of our businesses and good utilization trends in pharma. And as we kind of finish out our fiscal year, we continue to feel good about utilization trends and feel good about utilization trends for the long term, and it's really driven by 3 things. It's driven by demographics, which I think are well understood. It's driven by innovation, and we continue to see terrific innovation in the pharmaceutical market, including in this year. And then it's also driven by value with pharmaceuticals being the most cost-effective form of care. And so I think those 3 things: demographics, innovation and value will continue to drive good utilization trends, Erin.

And then as we think about, especially in the U.S. core pharma segment and the sustainability of the strength that you're seeing acknowledging you're not going to provide 2024 guidance, but you're more than welcome to at this platform. Can you kind of help us understand the headwinds and tailwinds as we head into 2024?

Sure. And of course, Cencora will announce our fourth quarter results likely in early November and that will provide our fiscal year '24 guidance for Cencora then. But just let me talk a little bit about tailwinds and kind of things that we see in the business. Of course, I already mentioned the utilization trends, couple that with the strong market position across our businesses and particularly in the faster-growing specialty part of the market. And then I think we've also really demonstrated really strong execution by our team. And so as a result of those things, we think we're bringing -- we have good momentum in the business. And that gives us confidence in our long-term guidance, which is, of course, the 5% to 8% operating income growth. And so of course, there's always going to be some headwinds in the business, one that's well known that we've talked about many times is contribution from COVID treatments. And of course, as we talked about, we expect those to come down in the fourth quarter versus the fourth quarter last year when they were strong. And as we talked about, we expect those contributions to come down in fiscal year '24, which I think is a headwind that is well understood. But we feel very good about our long-term guidance. So we talked about a 5% to 8% operating income growth.

Okay, great. And so I think your peers have also been in sort of that mid-single-digit range in terms of operating profit guidance for the U.S. core pharma businesses. I mean why wouldn't you necessarily given your mix, especially with specialty and other areas? Why wouldn't you be necessarily at the higher end of that?

Yes. So let me talk about what drives that 5% to 8% growth. It's really what Steve and I both talked about. It's our strong foundation in pharmaceutical distribution, which will continue to have good growth. And then we complement that with the higher margin, higher growth businesses. It's true both in our U.S. business and in our international business. In our U.S. business. We have, of course, our biopharma services business, we have specialty physician services. We have the Animal Health business. In the international business, we have our global specialty logistics business. We have the 3PL business that came with Alliance. We now have the PharmaLex acquisition, and those are the sorts of things that enable us to have confidence in that 5% to 8% long-term guidance for operating income growth.

One of the hot topics today at the conference, and we have several manufacturers as well talking about this, but obesity and the GLP-1. I understand that the margin profile is less favorable, but there is an EBIT dollar contribution, just given the volume that most likely you're seeing. Do you have your fair share of that market? How should we think about margins over the longer term as well as when you get into potential oral solids in that category? And can you talk a little bit about how that's contributing as well to EBIT dollar growth?

Yes, sure. And I'll first start out at the top line. And as we talked about on our third quarter call, it really is a driver of revenue growth. And this most recent quarter, I believe we had 11.5% revenue growth. And we've said that GLP-1s were a big driver of that. And if it were not for GLP-1s, our revenue growth would have been more in line with our GP growth, which was 8% during the quarter. And so it's clearly a driver of revenue growth, and it's just so great to see the positive impact that it has on patients. It is profitable from an operating income standpoint. But as we've indicated in the past, it's minimally profitable from an operating income standpoint. But it does, of course, contribute positive EBIT dollars, Erin. And I'm not going to speculate on oral solids in the market, but I'll just indicate that we're just very pleased to be offering these to our customers and our customers, offering them to patients. p One of the other things I've talked about it as a branded pharma product, the gross profit margins are relatively low. And the operating expenses are a little bit higher on these because of the cold chain nature, but it is, as we talked about, profitable from an EBIT standpoint.

And then just more broadly on specialty. Can you talk a little bit about trends overall in the specialty business, long-term growth and margin profile there? What's feasible in terms of how big that business can get as a percentage of total? And give us an update on OneOncology as well?

Yes. I remember one of the things that my predecessor said, the next CEO -- he said to the Board, "The next CEO of AmerisourceBergen in those days needs to have a strong knowledge of specialty." And of course, I was -- really was started our specialty business in 1994 and it's evolved so much. I mean, I remember when I left the legacy specialty business to come and run, be CEO of the company, we had like 2 or 3 contracts at ION and we have really developed those businesses. So incredibly not only in oncology areas also in other specialties, as I mentioned. And community oncology has just become so diverse. Also our specialty practices outside of the community in health systems and hospital outpatient areas are also a very important part of our practice and a differentiator. We also service a lot of the specialty PBMs [indiscernible] order. Those tend to be a strong practice because of our knowledge, our relationship, our expertise. When it comes into specifically community oncology, this is the practice where, I'd say, we're operating them at the highest end of our distribution license because of all the various services. We were able to offer with the platform, particularly the ION and the really excellent distribution businesses that we have in oncology complement us. This is an area that will continue to grow because that's where the investment dollars are from the pharma companies, and it's where a lot of benefits are accruing to patients. So we intend to do more in Europe. We'll probably do that more through 3PL and pre wholesale businesses as well. But a very important pillar for Cencora is our specialty business, and you'll see us continue to evolve. I think we've shown a good history of being the leader in the space. OneOncology is a differentiator for us, probably something that I might not have anticipated a few years ago for Cencora. We did feel like this was the right time for us to really be involved from a management perspective and share those lessons. And this is an important customer for us. We go back a long, long time with many of the principles of that business and some of our key opinion leaders on our ION panels come from that business. So we know it very, very well. And we're looking forward to participating and helping guide community oncology through some of the changes that we're going to be seeing in the future like RA. We look forward to helping community oncologists land well. That's an important part of our business is the community practitioner and probably, of course, our veterinarian business very well. Also the pharmacy business and of course, community oncology. And community specialties in general, are where we're going to be placing a lot of our debt.

And you mentioned at the beginning to biosimilars as well. And can you talk a little bit about your positioning there? How we should think about that being a growth opportunity for you. Obviously, on the Part B side, not Part D with Humira. But can you talk a little bit about what therapeutic areas maybe you're looking at near term as well as opportunity?

Well, often with the Part D, it is a positive for us in terms of GP dollars and many times, we'll just try to preserve the dollars that we're making on a more expensive brand product. So it is a driver for us on the Part D side as well. But you're absolutely right, Erin, where it gets really more interesting and financially influential for us is on the Part B drugs where we have the contracting and PMT-type committees that ION, in particular, has. So we are able to have a greater role and hence, in a greater margin. And I think we've been very helpful with the market access. The education about the administration of these products, the reimbursement of these products into the practices, helping manufacturers. Some may be familiar with the Part B market and the community market, how do they access those markets, how do they differentiate their products. How do they think about their ASP strategy. So we have a really good practice there. This is an important part of our business. I think you've seen strong results for several years. from the buyers, in part, from the biosimilar trend in the community setting, and you'll continue to see us be an influential performer there.

Okay, great. And then switching gears a little bit here on the traditional -- the traditional drug distributors did get caught up to some extent with some of the recent PBM news flow, particularly the Blue Shield CA contract. Moving to alternative player. Can you talk a little bit about those alternative players in the space where it is? Whether it's Mark Cuban's Cost Plus Drugs or Amazon, how do you fit in? Where there are opportunities for you as well as implications across the supply chain?

Well, I think it's fairly well known that we are Amazon's distributor. And like all key accounts for us. I mean, we're involved with -- we try to help them. We meet with them regularly. I think one of the developments that I'm most proud about Cencora is that we don't just meet with customers when it's RFP time. We literally try be very engaged in each other's businesses. And that's the opportunity that we have with the larger customers like that to really bring them an aggregation of great ideas. What are we seeing? What are best practices? What are we hearing from our suppliers? What are the data needs? What are we hearing from our third-party network contracting? So we have a tremendous ability to help customers understand the prescription market. Our strategy is to have the best customers and to keep them as long-term customers. And we are really obsessed with that. If there's anything we're obsessed about from the customer side, it's keeping those large customers, those key customers that help us maintain the prescription market share. So we look at the different sites of care, and we want to be represented in all of them, and we don't work with one of the players that you mentioned yet. But as they evolve, who knows it's possible that a company like ours could and we want to always be representing that prescription dollar. And I think we do -- we look at our market share, make sure that in all the key segments we're serving, that we have those leading customers. And you'll see us continue to be there. But I don't think anything really to call out right now in terms of -- when we're looking at our '24 outlook, this isn't something that is a particular anxiety touch right now.

As we think about the drug pricing environment, though more broadly generic drug pricing environment, branded. Obviously, you're more of a fee-for-service model [ \ basis ] anyway. But how do we think about the economic impact to Cencora around areas like branded insulin less price cuts and those kind of dynamics. Is there anything on your radar?

It's a great question. I mean I think insulin has been a product that's somewhat prominent in terms of the pricing and the rebate structure. So I think ultimately, you have some very well-positioned smart manufacturers that are largely participating in this market that have made adjustments, and probably it's helpful in terms of benefit design and patient access. I mean, these are not expensive products at the net level that patients should have clear and understandable access to. So we're supportive of that. And we're not here to espouse policy, but we're supportive, again, always a patient access of simpler benefit design, of a fair benefit design where the burdens are shared between all the players in all the different settings. One thing also I said we're obsessed about maintaining the leading customers. We're also obsessed with the notion, which we think is very valid that pharmaceuticals are the most efficient form of health care. And we're proud of the 90% of prescriptions in the U.S. are generics. And sometimes, we think that the pricing is too over leverage towards the pricing of the newer drugs the cell and gene therapies. And on the 90% of prescriptions, the U.S. gets very competitive pricing. We're obviously a part of that. and on brand drugs, we think that manufacturers are already holding the line and being thoughtful about how those products should be launched as well. Anything you'd add, Jim?

Sure. I just say that we've had terms in our contracts for quite some time that if there is something like a major change in price, then there'd be a renegotiation of the contract. And we have a very high degree of confidence in the value that Cencora provides and distribution provides. And so we do have that ability. And we don't have anything to call out at this point in time, but -- and I wouldn't expect that we would ever call it out on a specific product basis because it would just be a sort of thing that would move us a tiny bit within our guidance range. But then I'll also say that in general, branded inflation has been in line with our expectations, as you commented on well over 90%, 95%. Well over that is on brand products or fee-for-service. And then with regard to generic deflation, one thing that we have called out on our most recent earnings call is that we have seen pockets and generics of moderation of deflation. And that benefited us somewhat this year. And if that did continue and if it were to be broader than pockets, if we continue to see a moderation of deflation, it would be something that would be less of a headwind for us than we faced in the past.

We see pockets of inflation in certain key areas so.

And then you've set up these guardrails, for instance, in a lot of these contracts. But what are some of the bigger regulatory changes that you're focused on, whether it's IRA other areas? What should we be paying attention to?

Well, we certainly are. In fact, next week, we have our Presidents' Club Meeting. I'm actually been Washington this week and next week. So we are very active and what we largely do in Washington is advocate for our customers. I think sometimes, the legislation comes out so broad and you have to bring it down to specifics. And as you would expect, we're very focused on those community providers who sometimes don't have the resources. So absolutely, the IRA is something that we're paying close attention to. We want to create -- we want to be a part of an environment where it's the U.S. continues to be the leader in life sciences development. I think that's something that's -- there's not enough discussion about. But as long as the reimbursement is adequate for our customers, the practitioner customers, we, obviously, could help navigate any changes. The charge back is a very powerful, the contracting that we can do. Those are very powerful mechanisms, which could help facilitate some of these changes, if there needs to be those sort of mechanisms, depending on how pricing ends up. I think you have the different sites. But to us, it's very important that the market continues to be incented to innovate. I mean we're seeing incredible examples with the GLP-1 of innovation. And I actually was ended up having a dinner the other night with a bunch of payers and pharma companies. And we had a tremendously interesting discussion about, in the long run, what are the benefits going to be from the cardiac benefits, the weight loss, better management of diabetes. And you could really be seeing something profound here. I mean truly profound from a healthcare societal perspective. So I think that's exciting as well, and we don't want to discover that.

I have about 5 questions on international. So I'll combine into one. But can you just give us an update on the international business, macro dynamics? Anything else you would call out, especially as anything from the quarterly progression standpoint that we should be thinking about, too?

Well, last year this time, Jim and [ Laz ] and Bennett was spending hours educating me on all the currency because last year it was volatile we learned to adjust that, and it's been a bit better this year, particularly in the bigger markets we're in. But we are -- we have a strong distribution businesses in Europe and including in countries like Turkey, where we tend to be #1, 2, 3. We have very pivotal relationship with Boots in the U.K., which enables us to be, by far, the leader there, also in third-party logistics. They have a wonderful business called [indiscernible]. And we're well represented in countries like Denmark, Norway -- sorry, Norway, Netherlands, Spain. We have very strong businesses in those countries as well. What we've tried to do is what we've done in the U.S. is to have that strong specialty presence, the knowledge of specialty, the commercialization services businesses, hence, PharmaLex. So you'll see in Europe, I believe, a continuation of the theme we've had in the U.S. of growing to our areas of strength, adding those services. Our goal, you asked about in 5 years' time, where would we be? Our goal is really to be much more influential in the overall distribution of specialty products into European markets, including, hopefully, even the hospital businesses, and to do more specialty at the retail counter. That's a key trend that we've seen from some of the European countries like France, for example, they're very interested in that. And then the integrated services with the manufacturers. And our hope is if there's a new significant launch, Cencora is the best positioned company to service that launch in many, many countries that are important to the manufacturers. So we think that, that could be something really magical there. And we continue to have profitable, well-performing businesses there. Alliance, the legacy Alliance has done very well over 2 years since they've been with us.

And then on Animal Health. Can you talk a little bit about, I have to ask on -- I'm the least expert on the podium here about animal health. Jim, I know you are an expert.

Yes. We had a very good June quarter in Animal Health and saw good growth in both the companion animal market and the production animal market. And we have started to see good performance there in the March quarter and then had even a better quarter in the June quarter. In the companion animal market, I have the sense that visits are starting to get better. And in the production animal market, while cattle numbers are down, cattle are worth a lot, and so it makes a lot of economic sense to treat sick cattle. And so I was pleased to see the improvement in performance the last couple of quarters there and feel very optimistic about the long-term prospects in the animal health market as a result, of course, of the continuing very strong human pet bond and the importance of feeding a growing hungry world.

Okay, great. And then lastly, anything to mention in terms of the quarterly cadence here as we head into the fourth quarter. I know you're not talking really about 2024 but just anything to call out.

Yes. There's really nothing major to call out that we haven't already talked about. We'll see COVID treatment contribution come down significantly versus the fourth quarter of last year, which we've talked about. And from -- as Steve was talking about recently from an FX standpoint with regard to the pound and the euro, the dollar was really very strong in the fourth quarter of last year. And so the weaker dollar in the fourth quarter of this year versus the pound and the euro benefits us a bit.

All right. Thank you so much. I really appreciate the time.

Thank you.

Thank you, Erin. Thank you.