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

Good afternoon, everyone. My name is Eric Coldwell. I cover pharma distribution and health care services at Baird, and it's our pleasure to have -- I almost said AmerisourceBergen again, Jim, it's just such an old habit; Cencora, with us today. And that is a very recent name change and ticker change. So hopefully, we do a great job of branding and marketing exercises here for the rest of the session. We have Jim Cleary with us, of course; CFO, Bennett Murphy in Investor Relations. This has been one of our top ideas for a number of years. We got back involved in the drug distribution space in February of 2020. ABC has been either a [ form of ] best idea or one of the communicated best ideas ever since that point. And we have a very long history, I think it's that ABC again, which is -- I was just going to be at it. I'm going to do it until I don't. I don't have a big formal intro, but I wanted to ask you if you wanted to jump in with any initial commentary, Jim, before we get going or should we just dive right into the Q&A?

Eric, I'll start off by making a couple of introductory remarks, I'll be brief. Thanks for the excellent job you do covering us and our industry. I'm also joined today by Bennett Murphy, who runs our Investor Relations and...

And Treasury.

Treasury functions also. And Ben will be an active participant in the meeting today. And it's great to be here as Cencora, formerly AmerisourceBergen, our new ticker symbol is cor, COR, I think a very strong ticker. And let me just kind of talk a little bit about our company. Of course, we have -- kind of our COR is in pharmaceutical distribution, which is a very good business, very good cash flow, very high return on invested capital. And then we complement that business with higher-margin, higher-growth businesses. And this is true both in the U.S. for Cencora and in our international businesses. In the U.S., of course, we have a very large, scaled, strong free cash flow Pharmaceutical Distribution business, and we complement that with higher-margin, higher-growth businesses like our -- for instance, our specialty physician services business, which has a lot of higher-margin wraparound services with our biopharma manufacturer service businesses and our Animal Health business. And then it's similar in the international space. In that segment, Cencora has a very strong Pharmaceutical Distribution business that we lead with. And again, it's complemented by higher-margin, higher-growth businesses like our leading World Courier franchise that's a leader in doing logistics for drug trials for some of the services businesses that came with alliance like the leading 3PL business that we have and by other businesses like our PharmaLex, biopharma manufacturer services business that we recently acquired. Just a tiny bit on capital deployment. This year, we'll have over $2 billion of free cash flow. We're continuing to invest in the business. We're also doing strategic M&A. We recently made an investment in OneOncology, which is a natural evolution of our specialty business. We did the PharmaLex acquisition that I talked about. We're continuing to do opportunistic share repurchases. This year, we repurchased over $1 billion of our stock, which we're very pleased with, and then we're continuing to grow our dividend each year. We're a purpose-driven company, and we're united in our responsibility to create healthier futures. And of course, we really focus on creating value for all our stakeholders, including our shareholder base.

Thank you very much for that.

Yes.

Okay. I'm going to jump right in with the topic du jour. Hopefully, we don't have to spend too much time on this. I don't think we will. But you were unique in the sector this quarter by providing some more proactive commentary on the contribution of the GLP-1, the incremental contribution of the GLP-1 class. And I'm just curious, there were product sales in this category before the last 2 quarters when they really took off. Can you help us level set at all? Is there any additional commentary you could make on level setting what the base was a year ago versus now? And then as we think about 3 drug distributors, each on a different fiscal year, each giving guidance at different points in time, so somebody who guides later for the next year or earlier for the next year is going to be in a very different position on framing the growth in this market, right, because of the spike in the last 2 quarters. I'm just curious if you could talk about what you're really thinking the growth of the revenue contribution, we'll start there and, distribution looks like?

Yes. So let me kind of give you a few metrics from a revenue standpoint at Cencora, the impact of GLP-1s. And this most recent quarter, we had very strong top line revenue growth at Cencora of 11.5% growth. And we indicated that if it were not for the GLP-1 growth, then our revenues would have grown at the same rate as our gross profits, which was 8.0% growth. So without the GLP-1s, we would have grown top line not at 11.5%, but at 8.0%. And then also another metric that we put out there was that during the quarter, we had $2.4 billion of revenue growth from the GLP-1 category during the quarter. And so I think that gives you a couple of metrics where you can triangulate there. And then I would assume that we're getting our fair share that we'd have about the same share that we have in the category, that we have across pharmaceuticals.

So using that 3.5 spread in the $2.4 billion, you can somewhat triangulate where you were in the past?

I'm guessing you and your team will be able to.

Yes. And look, this is a tough one because we all know you don't talk about product-specific or manufacturer-specific margin. At the same time, it's pretty obvious this is going to be in your lower margin, lower profit contribution category. And there are some extra handling requirements here that add a little bit perhaps on the OpEx side. That being said, one of your competitors among the 3 large companies, one of the competitors was a bit more effusive about the opportunity. It sounded like they were seeing some additional opportunities in patient access, some of their value-add services that they do. It didn't feel like Amerisource -- sorry, I was going to do it again until I don't. This is what happens when you're old and tired. Cencora, didn't sound like you really saw those same opportunities yet. I'm just curious if you've done any more introspection and thought about other avenues, where GLPs could drive some additional growth?

Yes. I will address that. But also, whenever you use our old name, I'm sure it's because you've done such an excellent job of covering us, Eric, and that's the...

I won't deny, I was pretty fond of it. It was an easy ticker.

Yes. Well, we think COR is a good ticker also, and we aim to be a core holding in all of your portfolios.

And don't worry, I still call [ IQVIA ] quintile, so it's just -- it's going to happen for a while.

Okay. So on the profitability, and this is something that we've been very specific on, so the GLP-1 products are profitable for us from an operating income standpoint, though we are very specific in saying that they're minimally profitable for us. And the reason for that is that they are a specialty brand. And so as a result of that, the gross margin percentage is relatively low. And also, there are some higher handling costs because of the cold chain nature. And so they are a positive contributor to operating income, but minimally profitable. And then from a kind of access solutions standpoint, there isn't anything that we're doing at this point in time. But of course, our teams are always working on different services that we can provide for our partners. And then one of the things that we are doing is we are keeping an eye on the -- any reimbursement challenges that pharmacies are having, and this is something that we will continue to do as a company, is always advocate for our customers from a reimbursement standpoint, Eric.

Let's shift gears and talk a bit about generics and just overall broad market dynamics there. You -- we can -- Wall Street can track various individual data points. We don't get to see everything out there. But we've seen some data that would suggest the overall basket of deflation has been improving for several months, maybe even on the few quarters now. You were a bit more optimistic over the last few months and quarters. So the question is this, you talked about seeing pockets of improving pricing and generics improving for you. What are those pockets? Are they being driven by product shortages? Is it being driven by changes in the brand, comparator drugs in the market by manufacturers exiting in certain categories? I'm curious when you see these pockets, where do you see them? What tends to be a trigger where perhaps the market says we can be a little more aggressive with pricing than perhaps it was in the past?

Sure. And so we have commented on this that we've seen a moderation of generic deflation, and we've indicated that it's been in pockets. It's probably too early to call it a sea change or too early to call it a trend. Of course, if it does become a trend, it's something that definitely benefits us because as generic deflation moderates, we have less of a headwind than we've had in the past. And there is some reason to be optimistic. And you're asking what are some of the things that could be driving it, Eric, one of the things may be increased FDA inspections internationally, which could impact supply. It may be that manufacturers, and there's commentary out there for manufacturers really focused on their profitability and perhaps pruning their portfolios and focusing on higher-profitability products. There are some -- there have been some spikes in demand, which happens in certain classes. And when those spikes in demand happens, it can be -- it can have an impact in moderating generic deflation because, of course, it is a supply and demand market. And so those are the sorts of things that we are seeing. And it is too early to call it a trend, but it has had some positive impact on us in our fiscal year '23.

I'm going to come back to a couple of questions here, but I'm going to jump over now to pricing on the brand side, which I think it was somewhat recognized that over the last, give or take, year. Brand inflation at the margin was slightly more contributory. It's not a big chunk of your economics today. You've done a great job of balancing out the portfolio and changing how you work with manufacturers. But one of your peers recently made a comment that their next fiscal year's forecast does not include that same modest bump from branded pricing. I'm just curious, what's your view on branded pricing over the next year? I know you haven't formally given fiscal '24 at this point with November coming up. But what is your view?

Yes. And so I would say that brand inflation has been in line with our expectations. It is less. And so it's -- I would say, it's been in line with our expectations. And as I'm sure you're well aware, well over 95% of our brand buy-side dollars are fee-for-service. And so we aren't as reliant on brand inflation as we would have been at one point in time. But yes, I just have to say, it's generally in line with our expectations.

Would it be possible that one of your competitors -- given how mature this industry is, is it still possible that one of your manufacturers or maybe, at various times, all of you have slightly different relationships with manufacturers, where perhaps somebody could have just been in a special situation to get a little extra economics that you might not have naturally played in? Is that still happening in the market these days?

I wouldn't call it extra. You could call it different, right?

Different, okay.

So I mean, we've actively, over the last 6 years, gone from being reliant -- having a bigger portion of our profit derived from that to actively move that percent up. And there was -- it was almost like a quarter-to-quarter progression, an update of 5% as we went. And I think we like that fee-for-service model that's helpful. It's predictable. It makes sense for a lot of parties involved. Could there be some differences possible? We wouldn't be able to comment on it.

Last one I want to hit on with generics before moving on. One of the topics that does come in from time to time is the group has taken so much market share and penetration over the last 3 decades plus. You had this big move towards generics, 88%, 90% of all the scripts in the country at this point. You've all aligned with buying partners in some various fashion partners of scale. What's left beyond just riding the wave of new introductions and executing well and leveraging whatever growth you get? Are there still incremental opportunities in generics to increase adherence programs or cut back on discounting or add additional services? Are there more opportunities to continue to grow beyond just participating in the market as it unfolds?

And so the market, overall, is mature and stable. But of course, we're always focused on the sorts of things that you're talking about and kind of working very closely with our customers to make sure that we have not only the right pricing but equally as important, all the right services to make sure that we reduce leakage and maintain our share and have opportunity to grow share. Like we have -- I'll just use as one example. We've got a number of services with independent pharmacies that we are always providing to increase the loyalty of our customer base, which helps to increase compliance and share. And so that would be everything from business coaching to our Elevate PSAO, to helping them with their front of store, helping them with private label brands. So there's kind of -- whether it be with that customer group or other customer groups, we're always working on things to reduce leakage and increase share there, Eric.

I want to hit on cell and gene therapy quickly. I realize that individual products and perhaps the market overall are still a pretty small piece, but it's such a big part or has been such a big part of the conversation for a few years now. And you've been involved here for a long time, especially in your -- the way I think of it in your specialty logistics businesses, in particular, the cold chain handling and the real-time services you provide there. I guess a couple of questions here. First off, can you talk about the new innovation hub? This is what, April news, if I remember, maybe a little earlier than that. And then you also had -- and again, very specific, but it's public that you put out the Crystal Bioscience deal. I'm just -- can you talk about what you've done there and maybe use that as an anecdote for how you can help manufacturers in the cell and gene therapy market?

Yes, sure. I think your anecdote is good, right? So it's a good way of characterizing it on an individual manufacturer announcement. But I think as you think about it, we're being very intentional in how we go to market with the differentiated assets that we have to ensure that we are at the forefront of the cell and gene market as it begins to crystallize in the coming years, whether it's specialty logistics that we provide through World Courier, 3PL, patient access, market access, regulatory affairs -- regulatory consulting. We have a differentiated set of capabilities, and we're really being intentional how we go to the small-, mid-size biotech and even large pharma and how we can be a solution provider for them as they navigate the complexity of commercializing cell and gene therapies.

I was at a CRO last week, and one of the topics that came up, they have a central lab, and they said that they're still seeing increases in transport and freight cost. And this ties in a little bit to what you do with MWI, but also specialty logistics, overall. Can you give us an update on MWI and what you're seeing in terms of demand across -- whether it's specialty, cell and gene therapy, clinical trials? I just don't want to leave that business out because I feel like it's been such an interesting part of the ABC diversification story over time and some of the extra services that you provide.

Okay. And which is the business you're in...

I said MWI, World Courier. If I said MWI because I think of you coming from MWI and what I'm looking at you.

Yes. The World Courier business has been such a successful business for us. And as I'm sure all of you are aware, it's a leader in doing logistics for drug trials. It's all around the world. And our business partners, manufacturers kind of really rely upon it for those -- and while it's in the U.S. also, in particular, for the international shipments and doing the logistics for drug trials. And it's a business that really has a lot of need opportunities in the future also and helping us be a leader, being one of those services that Bennett talked about. Being helping us be a leader in the cell and gene space is one of the things that we're -- is one of the opportunities that it creates because it does have such expertise in those really critical cold chain shipments.

OneOncology. Street was very excited about this news a few months back. I think it was your presence in specialty overall for standing what, 3 decades plus now, has been a great growth driver for the company, a really interesting differentiation. And now you're moving a little closer to the community oncology world, I mean, through an investment upfront, a partnership, JV upfront. But I'm hoping you can talk a little bit about what you're seeing now that you have a more formal stake with that previous partner, customer of yours. And then as an add-on to that, it's early still, but if you found additional opportunities to work with them. I mean, you were fairly, by my understanding, penetrated with the service side. But are you finding additional opportunities to work with them?

Yes. And so I'll start out. And then Bennett, please feel free to add. So OneOncology investment we've made this year, we are a minority owner in the business. We have partners, including the private equity firm, TPG and the physician management owners of the business. And it's really a -- the investment there in the strategy is really a natural evolution of our leading specialty franchise. And our specialty business was started by our CEO, Steve Collis. And of course, we're the leader in things like oncology supply, which is the distribution business to community oncology practices. And then, of course, we have the ION GPO, the leading GPO in that market. And so getting into this managed service or organization, the OneOncology business to provide these practiced management services for community oncology practices is really the natural evolution of the business. And we're very excited about it, and we're kind of actively working with them on kind of additional ways that we can add value there. And it's something that will, of course, benefit OneOncology, but really benefit all of our community oncology practices, is we're able to kind of increase our knowledge base and provide additional services. And Ben, if there's anything you'd like to add?

I think that's well said. It's an additional service. So it's another solution that we can add to our capabilities for community oncology that are looking for this type of solution that allows them to continue to run their business rather than the alternative of potentially selling into a [ system ]. This allows them to be a part of a physician-led organization that is like-minded.

So I noticed -- and this is them, not you, but they recently partnered with [ Verily ] on a CTMS system. They're talking a lot about expanding their oncology research platform. You have a number of capabilities wrapped around clinical trial support. And I'm curious, do you see yourselves -- I know this was a topic that came up at 6 years ago, maybe that you were maybe a little more interested at the time in CRO, clinical research, clinical trial support. You do a number of fringe things today. You've done PharmaLex. Is there any kind of a clue or a signal here that may be Ameri -- God, I almost said it again, Cencora is maybe thinking about going in that direction a bit more formally than you have even today?

Yes, sure. Let me start out and then Ben could add. So clinical trial enablement and working with OneOncology and the community oncologist there and with our upstream manufacturer partners, I mean there likely could be some opportunities there, where kind of we can have services that operate there kind of at the core, in the center and work with both the community oncology practices, OneOncology and others and the manufacturers on things like clinical trial enablement.

I want to talk in the last few minutes. And if anybody has a question, please feel free to send into the iPad. You have -- there have been a lot of moving pieces in the last few years, ups and downs with COVID, international FX, the list is pretty enormous, plus mix shift in the products that are hitting the market and what's growing. You've done a great job with margin, given that incredible landscape. OpEx over the last year was technically down 1 basis point, I think, as a percent of revenue, but pretty much held in line until the last quarter where it showed a little more improvement, looked a little better. And you sound pretty upbeat on OpEx. Can you talk to us about what the opportunity is here because in a 2.2% of revenue, 2.19% the last year, that's a basis point really matters on a business of this size, so...

Sure, sure. And we felt for a couple of quarters that our OpEx had been growing at a little bit too fast rate. And we recognize that as we entered the calendar year. And so we took some actions, starting in January through April, to really become more efficient because efficiency is such an important part of our business model. And so we took some actions there and really saw the benefits from it starting in our fiscal third quarter, the June quarter. And that was a result of one of the actions we took. And also, the inflation comps got easier for us. We saw kind of inflation starting in like February of '22. And so kind of once we anniversaried that when we were in the June quarter, those comps were easier for us. And so kind of efficiency is such an important part of our business model and important in addition to quality, of course. And so we felt it was important to take those initiatives.

So what's the outlook? I mean, a lot of changes here, right? You have FX going in the other direction now versus where it was a year ago, perhaps. You have this GLP-1 growth at a different margin profile. At the same time, maybe generics looking a little better. There's so many moving pieces. What is your long-term thinking on all else constant, assuming no major structural change in what the company goes after, new acquisition, let's say? Where do you think OpEx can go over time? And how are you going to manage it?

Okay. That's a really good question, and there's a lot of moving pieces, but I'll be pretty brief and just say that over the long term, having OpEx grow slower than GP is very important to us. And that, of course, will have operating income benefits. But I will say that there's always moving parts, for instance, like if COVID treatments come down, they're high margin or if GLP-1s go up, they are low margin. So things like that can increase our GP percentage from time to time. But once you normalize for those sorts of things, I think you'll consistently see OpEx growing slower than GP. But one other thing I'll say, what's really important to us is also growing operating income dollars. And that's one thing we're always focused, on growing operating income dollars.

And your long-term guidance for both the U.S. and international segments are 5% to 8% AOI growth?

Absolutely, yes.

On a normalized basis?

Yes, yes, 5% to 8% operating income growth ex COVID constant currency, yes.

The -- so I mentioned MWI earlier, so I'll bring -- I'll come back to it and actually ask you about MWI. It felt like production and perhaps the companion market we're doing a bit better recently. I mean there was that big spike with COVID. Everybody went out and got a dog and a frog and a turtle and now -- there was a bit of a -- maybe a bit of a backlash after that. I'm curious what your overall dynamic is in MWI today?

Yes, you're absolutely right. I'll talk about calendar years now. Calendar year '21 was very strong in the companion animal market. Just during COVID, people went out and got pets and brought them to the veterinarian. Calendar year '22 was a tougher comp. And that -- we saw that for us in the December quarter. Then for us, the March quarter improved and then the June quarter improved again, and it was quite a good quarter for us in both the companion animal and production animal space.

Is it -- do you have any sense some, why? Is it just a recovery from the hangover post-COVID? Or is there something more going on in the marketplace?

I think it was two things. One, it was a recovery, and so the comps were easier. And then the second thing is it's just a very good market for the long term that's really driven by, of course, the human pet bond and the importance of feeding a growing hungry world.

Jim, I have to ask you, and Bennett as well with your role in Treasury, can you give us an updated thought on capital deployment, the attractiveness of interest rates today and holding cash perhaps a bit longer versus keeping debt levels low and your high-quality agency ratings, stock buybacks, M&A? Just how does it all fit together right here right now?

Yes, it's balanced capital deployment. And it's great to work with Bennett. Now that Bennett also has the Treasury responsibility in addition to IR as a business partner in this front, and we actively work together on it. And it's really continuing to invest in the business, which always has a good return. It's strategic M&A, and we've shown this year, we've really kind of focused that on our leading specialty franchise and biopharma manufacturer services that's higher margin, higher growth. It's opportunistic share repurchases. And of course, this year, we've repurchased over $1 billion of stock, which is, of course, good for all our shareholders, and then to have a reasonable growing dividend that for the last several years, we've been growing at about 5% a year.

Yes. And I think we appreciate value of having a strong balance sheet. And as always, we remain committed to being investment grade with the rating agencies

Okay. Any last comments? We have 22 seconds. I don't know if you want to make a final comment, and I'll check for the audience as well.

Thanks so much for having us here as Cencora, and we'd be happy to answer any questions anyone has.

Well, maybe you can open practice management, and I'll seek speech therapy on getting your name right in the future. It's after a couple of decades, it's pretty hard not to say the old name, but still the same culture and the same core, and I really appreciate you being here. You've been a pleasure to cover over all these years.

Thank you, Eric.

Thanks, guys. Okay. Everyone, please join me in thanking the team from Cencora. And I want to make a quick introduction. Coming up next, we have BioMarin. Twist Bioscience, Oculus and Cytrellis, I believe, it's a small print, but I believe it's Cytrellis in the private room. Thank you.