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

Good afternoon. My name is Lisa Gill, and I'm Head of Healthcare Services with JPMorgan. It is with great pleasure this afternoon that I introduce Cencora. With us today from Cencora is CEO, Steve Collis; and CFO, Jim Cleary. Steve will make a presentation and then he will join me for a little fireside chat.

Lisa, I think you and I provide continuity in this industry so I'm very proud to do that. I think I know my materials so well, but I do need the slide movers so -- but thank you, pleasure to be here. So let me just tell you a bit about Cencora. I actually landed up seeing Jamie last night. [Damie Diamond ], that's something he's like Beyonce I only need to use one word. And he said to me, Steve, I know AmerisourceBergen what is going on with Cencora? So let me tell you, we have over half of our team members outside of the U.S. Cencora is a name that is global. It translates into 7 different Latin languages. I actually have Gina Clark, who's our Chief Branding Officer, marketing, and also has other areas reporting to her. But it really is a business strategy to make Cencora an enduring brand that could work in all the different countries. One of -- it's very important to us that we integrate our services that we have one offering. It's important with so many areas including business strategy, manufacturer strategy, but we want the whole company to be orientated towards making Cencora be the best it can be. And literally, AmerisourceBergen just didn't work for that. It was hard for us to integrate companies under that name as proud as we have been of AmerisourceBergen. Also as happy as Jim was with the ABC ticker symbol, but he's got used to COR, and we're very happy with how COR is going. So let me just tell you, 46,000 team members. We have a target, we did an Investor Day in May of 2022, June of 2022. We've announced an 8% to 12% targeted long-term adjusted diluted EPS growth, which will come through operating income growth, operating income leverage and also some capital deployment. We want to have a leadership position in higher margin, high-growth businesses, including specialty. And we want to be a purpose-driven company. Our purpose is to be united in our responsibility to create healthier futures. And all of that is around Cencora and our global positioning. We have the most robust data set. It's important for us to have that data set. We talk about that a lot. If you think about all the different businesses we're in, it's very important that we manage our data and have it accessible to customers to help them improve their businesses on both the manufacturer and provider's side. So a good question for the audience is, whose customer are we? And I don't know what the answer is to that, but we have a lot of customers. We have -- we ship to over 100,000 customers a week. Many of them every day, some of them too many times a day, actually. But our customers are upstream, including biopharma, not only the large companies, but also small and emerging biopharma companies that are discovering and developing products, especially physician practices is one of the cornerstones of our business. In fact, we have two long-time friends. Raj Mantena, and Jeffrey Scott who are one of the founders of Ion. Raj helped us really understand especially physicians and practices and that's been great. Health systems has been a key area and our COO, Bob Mauch, we've really made terrific improvements in our health systems business, and we have some of the largest customers in the country, including a lot of the leading cancer centers. And then, of course, we're very well known for our pharmacy and animal health businesses. Jim Cleary, our CFO, was literally the founder of MWI Animal Health business, and we have a very good consumer health animal business, companion animal health business, and our pharmacy business is really important, both with the large companies like Walgreens and Express Scripts as well as smaller independent practices that are typically belong in Europe under our [indiscernible] label and the U.S. under our Good Neighbor Pharmacy label. So if you think about Cencora, we really want to be in the middle of pharmaceutical-based care, both on the provider side. We have our distribution footprint of the distribution footprint GPO services, which I was talking about. Somebody was asking me to explain exactly what ION and IPN do. And those are really like P&T committees that help with product adoption, with product understanding product economics, clinical understanding. We want to help throughout the product life cycle. We want to help both providers and manufacturers manage that. Regulatory and legislative support, if you look at what's going on with track and trace with the pedigree implementations, Cencora has had played such a key role in that, and we'll carry on doing that. clinical trial support on the provider side. We'll be looking to leverage data to help our providers and the community access clinical trial information for the benefit of their patients. That's a very good example of what we do. On the biopharma manufacturer side, we want to be talking to manufacturers in Phase II, looking at what their pipelines are. We have very promising companies like World Courier that can help commercialize those products, help with clinical trial logistics. Also, particularly with cell and gene therapy, it's a really important part of what you have to do. We help understand the market, health economic access, quality management clinical trial design. That's through our new PharmaLex acquisition, which I'll talk about, safety, quality, validation and also patient accrual, so recruitment. So Cencora wants to be in the middle of the pharmaceutical life sciences cycle and throughout the commercialization period. Our U.S. health care segment is about 80% of our profits and even more of revenues. Of course, the U.S. has a lot of specialty medications. One of the benefits we have in the U.S. is that we get to service all different classes of trade. It is a little bit different in Europe, I'll talk about that. We have very favorable market trends coming out of COVID with utilization. We started doing the COVID vaccine distribution this year on a commercial basis, and that went well. We have, of course, our leadership in animal health, our leadership in community pharmacy, our leadership in community oncology and specialty pharmacies are such an important part of what we do. Cencora is particularly strong on the Part B distribution, the products that are administered in the office, and we've built up a whole practice around that. And a lot of it is cemented around our Ion and IPN GPO businesses and you should think about those as really a key adjunct to help manufacturers with their commercial policies into the market. So often when people think about Cencora, they will think about our leadership in specialty. We have a long -- a high initiative to drive innovative upstream services and downstream services to providers that are higher margin and more sticky and more differentiated. We want to prove that Cencora is a unique company with pharmaceutical-based care. Our International Healthcare Solutions segment, we did a large acquisition during the pandemic of Alliance Healthcare. That brought in about 20,000 of our team members that we have now in Europe. We are a leading wholesaler in Europe and we have a #1 position in the U.K., for example, which is actually our strongest international market. We also have a position in animal health here. When we think about Europe, we want to be doing more advanced 3PL services. I would say that the European market for 3PL and advanced logistics services is even more elevated than in the U.S., and we want to be more of a large player on that. We have a good business practices there, but we'd like to even take that more and tie the distribution into the advanced services we do in areas like World Courier and cell and gene therapy as we want to play a bigger role in distribution in Europe, including hopefully eventually into the health systems. So we want to take the practices that we've developed in the U.S. and where it makes sense, apply them in Europe. Specialty products are developing in Europe. Too many of that is taking place in acute care settings. And we think there would be a trend to do that more in alternate care settings, and we hope we can play a part of that. We also have a robust downstream product solutions, including in areas like Alphega, where we are doing practices for community pharmacy services and that's an important part of our business. And a lot of the countries we work in there are interested in doing more at the counter. And of course, we have the GLP-1s, which will drive a lot of volume through those counters. And that is a lot of clinical information that the pharmacists can interact with the patient in. So those are the areas that we are very interested in helping at the counter. Again, specialty is a theme you'll consistently hear from me, and you'll hear about it throughout our presentation. We want to be the commercialization partner of choice for the manufacturers. You can see that we continue to add to these portfolios. It's important that we do that, important that we're innovator. I've talked about logistics and 3PL services. In the U.S., we have a business called ICS that does that. And we've talked about a logo and World Courier that do more advanced services in some cases in Europe and throughout the world. A leader in specialty distribution, that has been a real mainstay of AmerisourceBergen, Cencora now, of course, Gina got it. So inventory management, so important for everybody. When you think about Cencora, just think about that we have over $20 billion in inventory at any stage, and we're turning that and thinking about that and making sure it's in the right place at the right time. And that still becomes a really important function of what we do. Other key specialty areas that we think about in the community setting are ophthalmology, urology, neurology could be a very exciting therapeutic area for us going forward as well. And we think about that and as long as the product is being administered in an office, and probably has been built through the Part B. And we believe we can have a very productive practice and a productive relationship with both the provider and the manufacturer. As a former accountant, it gives me a great thrill to be able to present some financial slides. Usually, that's Jim's job. We did $262 billion in revenue, it's about $1 billion every working day that we do. When we are forecasting about a 8% revenue improvement for next year, you're talking about approximately about $25 billion plus. It's amazing, the growth that we've had when I became CEO, we were doing about $45 billion in revenue. So it's quite amazing the growth that we've experienced. And a lot of that is because of the trends of specialty medication and some of the new leading customers that we have been able to contract even more extensively with them, do more categories with them. I said yesterday I was with a bunch of pharma executives, I said, I'm extremely proud of the $262 billion in revenue. I'm also proud of the ZAR 3.3 billion in adjusted income. Taken together, they can be a bit terrifying when you look at the numerate and the denominator, but we manage it very, very well. We focus on our adjusted free cash flow, and we have proven that we can manage this with a 5% to 8% long-term target in adjusted operating income growth, which leads to adjusted diluted EPS growth of 8% to 12%. So our fiscal year guidance is right within that range at the top end of that range, about a 9% to 12% adjusted diluted EPS. So you should be seeing us close to $13 a share in EPS is what the guidance is. So we focus on that really, really hard. I think one of the advantages we have is if we have problems in our portfolio, which we variably have, we'll jump on that. We'll work on it. Occasionally, we'll divest of an asset that doesn't fit in. So I think we've become very good at managing the portfolio for the benefit of Cencora and our shareholders. So if you look at our history, we've had a strong history of growth that's pretty admirable. You'll see that fiscal year '18 and '19 was a little bit slower growth. We are coming out of a severe period of generic deflation. But since then, we really have had very consistent growth, leading to a 13% CAGR in adjusted EPS and adjusted operating income increasing from fiscal year '18 to '19, aided by a very accretive Alliance acquisition, in particular, which was a big -- the largest acquisition we did over $6 billion from almost $2 billion to about $3.3 billion. And I think that's really interesting on the right side. You can see how we've deployed the capital between CapEx, M&A, share repurchase and dividends, which we call a balanced capital deployment strategy. Often the internal projects are so important. The infrastructure that we have that has led us to be able to take on over the years, very large customers like Walgreens, Boots in the U.K. and we'll continue to focus on being the leading infrastructure for pharmaceutical supply chain, distribution and commercialization services. Dividends are important to a lot of our shareholders, and we increased our dividend 5% last year. And you can see that we do take some of our capital allocated to share repurchases. Last year, we did about $1 billion in share repurchases, which was definitely beneficial. So if you think about Cencora, our areas of focus are specialty medicines, community providers and really helping those providers get more scale customer partnerships with the larger customers. We have a whole practice around that. I think we're doing such a better job of that, talking to those large complicated customers we'll frequently seeing what we can do with them, seeing what further work they require from us. A global access is a theme. There are very few companies that have taken on the ambition to be global and have a global brand. And I think you're seeing Cencora be very thoughtful and planful about that and get into areas where we think we can add value and where we can impact the human capital that we deploy as well as the businesses, the manufacturers help them invest to drive innovation, leverage our infrastructure to increase efficiency. And all of this will be supported by both our distribution and provider strategies as well as our commercialization strategies of manufacturers. So we really think we have a virtuous cycle that feeds off each other. Our leadership in specialty, I've talked about a lot. And as we look at the future, we want to help be contributing to improved Rx outcomes, improved value-based care, improved efficiency of pharmaceuticals as we think the most efficient form of health care and the most effective form of health care. So the acquisitions that we did last year, if you take it against that backdrop, how did that make sense? Well, one oncology was a really big step for the company, even for myself personally, if you think about it, we've known those practices for many, many years. The two largest practices have been Cencora customers starting back over two decades. And it was a big step for us, but we looked at the changes in the marketplace. We looked at the imperatives of maintaining this very high-growth customer within the Cencora portfolio. And the opportunity to partner in a deeper basis given what we see as imperatives like value-based care, like precision medicine, like a more probably challenging reimbursement environment coming up in the future with the IRA. And we thought here was the time for us to partner with the leading practice in the community and have a different type of relationship, and we did a very unique deal with TPG, which we are proud about, and we think that it works really well, and it's been received well in the marketplace. PharmaLex is -- although it's based in Germany, it's not as well known, at over 40%, about 40% of their profits come from the U.S., a large part of World Courier's profits and status also comes from the U.S. And this has really helped us get into more commercialization services. So we were interested in it not because it was an international asset but because of the very advanced clinical quality, design type of improvements, pharmacovigilance, we're very interested in pricing and what the correct sort of pricing is on a global basis and PharmaLex allows us to do a lot more of those services. So we're happy with the positioning. We think that this is going to really help us on the commercialization services side, which feeds the virtuous cycle that I was talking about. So my final slide is really I hope that this has been a worthwhile 15 minutes for you as you look at the differentiated value at the purpose-driven portfolio that we have, as we, at Cencora invest to help drive long-term sustainable growth for our shareholders. So with that, I'll turn it over to Lisa and almost on time, Lisa.

You gave us a couple of extra minutes. It's all good, you can come sit with us.

So Steve, I think the first question is really for you. You've highlighted your ability to support specialty drugs through the development as well as commercialization life cycle with acquisitions like PharmaLex that you just talked about. When you look at the coming years, how well positioned competitively do you think you are to continue to grow in specialty? would be the first question. And then secondly, and my guess would be some of this happens here. How do you communicate your value proposition to some of the manufacturers?

So I think we just have really vast knowledge and great capabilities. If you look at the data set that we have, I think that that's very interesting. For example, we are able to take the relationship we have with community oncologists in certain cases, intersect that into clinical trial data and look at how we can access patients in the community setting for manufacturers. That's a real gating factor to be able to drive investment to drive trials for manufacturers. So that's very important. We can also help them manage their business better from a financial point of view. So we think it's really important that we carry on being that leading commercialization partner. There's obviously opportunities to add to that portfolio. It's important for us that we continue to innovate. We have a lot of expertise on the pharma side. Many times, we've done more launches of products in the specialty area than anybody else, including some on the manufacturer side. So there's a tremendous amount of expertise we have. I think what's really intriguing is how we'll apply that on an international basis. So when we bought Alliance, I said one of my stated goals was that if there ever was a situation like COVID again, than in the first world countries where we are evident, where we are present, that we could do a global launch. And I think something like that is pretty interesting. We have got some companies that don't really have the bandwidth to do European launches that are saying to us, really help us launch in Europe. And as a second step, once they've done their U.S. launches. And we also have some really extensive partnerships with companies that we are doing so much more than you'd expect a traditional distribution company. And I think some of those case studies are going to be very, very interesting and validating of our thesis that we can help drive commercial success for a product.

In your comments there, you said that we have capabilities today, but it also sounded like there's other capabilities that you think you could potentially add to the offering. Are there things we should be looking out for?

Look, I think there's so many areas in this that we'll carry on investing in. I think we also are able to do things through internal investments. A great example is World Courier. We were able to really innovate in the cell and gene therapy area. We have these logistics pathways using very protective mechanisms for these products. We actually, if you go to our Heathrow distribution side, you can see four generations of different transportation methodologies. The latest one is called Cocoon that we used to transport these products. So we continue to innovate, I think the internal investments we're making and whether it's in clinical trials or whether it's in community pharmacy to look at adherence programs that reimbursement type programs at helping them understand their business are remarkable and often provide us the best return and we'll carry on doing that. As far as acquisitions go, we want to look at quality. The first thing starts off with the culture of the company. Is it going to be a good fit for us? And then we look at, often compliance is very important for us, financial performance and then how does it fit into the capabilities. So we are very interested. I think we've done more acquisitions than anyone in our industry and amongst our peers in the last few years. And we'll continue to be thoughtful about that. And I have Leslie sitting here, who heads up our corporate development and strategy program. And Believe you me, they're active. They're always looking, we're always interested, and she has a really able team, and they partnered very well with the businesses and some businesses are very interested in acquisitions. Some aren't that interested. But we look at the marketplace and we stay very involved. Jim, do you want to make any comment on that?

Sure. I'll just say with regard to the growth of our specialty business, one of the things that's been driving the growth for the last several years and will continue to drive growth is a role we play in biosimilars, and we've seen very good growth in biosimilars, particularly in Part B in oncology, and we're seeing it in ophthalmology also. And given the role that we can play with our wraparound services, including education and those sorts of things, is one of the nice growth drivers for us in the specialty business.

Jim, you gave us a detailed guidance in November. For those that don't know, their fiscal year end is September, so we're in fiscal 2024. As we look back to when you gave that guidance and as we sit here today, have any of the headwinds or tailwinds changed in any way? Or has any of the utilization trends in the month of December changed since we last spoke?

Sure. And first, let me quickly comment again on our guidance and Steve briefly mentioned this up on the slides. When we gave guidance in early November for our fiscal year '24. We indicated that our adjusted operating income growth would be in the 8% to 10% range, and that's excluding exclusive COVID products and also on a constant currency basis, and we indicated that our EPS guidance would be $12.70 to $13, which is 9% to 12% growth, excluding the exclusive COVID products. And when we gave that guidance, of course, it's based on a number of assumptions. And as I look at our business, one thing that Steve and I talked about during that call is just kind of how we're seeing broad-based strong performance across so many of our businesses. We're seeing strong utilization trends, again, broadly across our businesses. We are seeing -- continuing to benefit from leadership in specialty. Other things that we're seeing is we've done a lot of work over the past year on the OpEx front. And that kind of enables us when we see the strong utilization and volume trends and the work we've done on the OpEx front, it gives us some opportunity for operating leverage in our business. And one of the other things I'll just quickly comment on is branded inflation and generic deflation, we get a lot of questions on that at these conferences. And in our guidance, we assume branded inflation and generic deflation kind of comparable to what we've seen the last couple of years. And with regard to branded inflation, we expect it to be in line with our expectations. And with regard to generic deflation we've been talking for the last several months, that we've seen a moderation of generic deflation. So it's less of a headwind, and that's favorable for us if that continues to be the case. And so given all those factors, we feel very good about our businesses opportunity and our team members' opportunity to execute and deliver on our guidance.

You've had very strong utilization when I look at your numbers. Double-digit growth, even excluding GLP-1s that have contributed to that growth. When I think about, for example, GLP-1s specifically, I think that Cencora has been the most transparent company when we think about, one, breaking out the revenue. And then two, really discussing the margins. And so as we think about GLP-1s and the growth in GLP-1s, you have talked publicly about the fact that they carry a lower margin. but the opportunity for that margin to get better over time. So can we maybe just spend a minute and talk about two things as it relates to that category: One, the expectation for growth in that category as we move into 2024. And then two, I think that part of it is the cold chain handling rate how quickly you need to get the prescription to the pharmacy because of the time line. But are there other things that can improve from a margin perspective as we move forward?

Sure. And so during the most recent quarter, we indicated that our revenue growth was almost 13%. And if we exclude GLP-1s, our revenue growth was 10% and so I think that really speaks to the strong utilization trends and even without GLP-1s, our revenue growth was 10%. So you can see that they are driving a lot of top line revenue growth. We've also indicated that GLP-1s are profitable for us but not as profitable as some other products. in part due to the margin and in part due to the handling costs, but that's something that we'll always continue to work on over time. And then I'll repeat one thing I said earlier, kind of -- given the scale of our business and given the efficiency of our business, as we see these kind of double-digit revenue growth that we saw this most recent quarter, we can also start to see some operating leverage in our business.

And going back to that 10% growth because that's clearly better than what we're seeing in IQVIA data, so you're growing above the market. Are there pockets or areas of growth that are really driving that outperformance?

It's -- as Steve and I have talked about, it's broad-based across our businesses. I think we benefit from leading customer relationships across all of our businesses. And one of the other things that we benefit from, of course, is our leadership in specialty is such a fast-growing part of the market.

Great. And I think that, Steve, you made the comment that branded inflation coming in line or maybe Jim, you made the comment of branded inflation coming in line with expectations or what we've seen in the last few years. And I know you rely a lot less on branded price inflation than you did many years ago. But if I think about that and I think about branded inflation, what are some of the things for us to think about when we think about the distribution model. We understand that your pricing is still based off of the [indiscernible] sale price, right? So pricing does have some level of an impact. And so should I think like mid-single digits is the right way to always think about [drug] price inflation?

Well, we're going to have the [ high rate ] that could conceivably change things. So -- but I think there's a lot of orders still to go under the bridge for that. But the other thing that is really important about our business and our competitors, our peers as well, is that we bill at the gross level. And so the rebates happen after us. So if you think about even the GLP-1s, the reported numbers that we're doing are very high compared to the net numbers. But yes, look, when we think about a 9%, 10% revenue growth that we've been reporting in the fourth quarter, a bit higher than that actually but even net of GLP-1s. It's obviously having a robust pricing environment having some level of inflation is beneficial to that. And you don't see it in other countries as much though.

And you talked about across all customer categories. And I think over the years, many times, investors are concerned about what's happening with the independent market. And we know you have a very strong offering, more than 4,000 good neighbor pharmacies where, for those of you that don't know it, it's opportunity almost where you bring those pharmacies together collectively to help them to negotiate price to bring in different services from Cencora, right? Private label branding, et cetera. But as we think about the independent pharmacy, has anything changed in your view post-COVID? My understanding is that we've seen more closings of independent pharmacies post-COVID than we saw pre-COVID.