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

Hi. Good afternoon, everyone. My name is Erin Wright. I cover health care services at Morgan Stanley, and welcome to you, our latest kind of Morgan Stanley Healthcare Conference here in New York. We're happy to have with us today Cencora. And with them, we have CEO -- or COO, sorry, incoming CEO. Bob Mauch; and Jim Cleary, the CFO. I would also like to call out the current CEO, Steve Collis, he's sitting in the front row here, and I congratulate him on the next steps in terms of his role in his life, and it's been great working with you and really appreciate your support over the years.

So with that, you do have big shoes to fill Bob, on that note, but I do want to speak a little bit a higher level kind of vision question here in terms of what is that high-level vision and the relevant learnings that you've already had from your extensive 10-year at Cencora and how you can best leverage that in your upcoming role before we get into the 8-K today.

Yes. Sure. Yes. Thanks, Erin. It's a pleasure to be here, especially to talk with you, Erin. So it's an honor to have the opportunity to become the President and CEO of Cencora. I have had a long tenure here working alongside Steve and Jim and the executive team. And I think the important things to think about is because of that long tenure we've worked closely on our strategy, on execution, on building the business and what you can expect from us going forward is a continuation of that execution on our pharmaceutical-centered strategy, continuing to drive efficiency throughout the supply chain, focusing on our customers and really innovating at the highest level. So I'm thrilled that Steve will remain as Executive Chair to continue our relationship and his mentorship of me. So I'm super excited to get started. It will be October 1 when that officially occurs. And Steve, thank you for the support.

And with that, I guess, let's turn it over to the big news today, too, as well in terms of you updated your near-term guidance as well as give us some initial look at next year in terms of fiscal '25, and how you're thinking about that now at the low end of the long-term guidance range. Can you walk us through, Bob or Jim, kind of the key components of that and kind of understand sort of the different moving pieces, both near term and as we go into next year.

Sure, Erin, and thanks so much for having us here. And as you all know, we issued an 8-K this morning -- early this morning before the market opened. And there were really kind of 3 things that we covered in the 8-K. The first was for fiscal year '24, we again raised our adjusted EPS guidance, and we increased it by $0.05 at both the bottom end of the range and the top end of the range. So it's now $13.60 to $13.70 per share. And the reason for that increase in guidance was continued strong performance and execution in our U.S. businesses, and then also some continued favorability regarding net interest expense. And then the second thing we did in our 8-K as we indicated that for fiscal year '25, we expect our adjusted operating income growth and our adjusted EPS growth to be at the bottom end of our long-term guidance range. And as you know, our long-term guidance for adjusted operating income is 5% to 8% and then we expect to get 3% to 4% from capital deployment. And so our long-term guidance for EPS is 8% to 12%. And again, we indicated today that we expect in fiscal year '25 to be at the bottom end of that range. And we explained the reasons why and the principal reasons why -- or the principal reason why, it has to do with COVID. And as you know, we had very strong performance in fiscal year '24 on COVID vaccines. And we indicated, for instance, that in the first half of fiscal year '24 in the U.S. segment, we grew by 16%. We grew operating income by 16% and ex-COVID vaccines, that would have been 8%. That's disclosure that we did last year. And I think we did very good disclosure on COVID throughout the last couple of years. And so a decline in what we earn on COVID vaccines to a more normalized level is really kind of a key driver. And then also on COVID, we did have some earnings in the first quarter of last year. We had $0.06 of earnings in the first quarter of last year from exclusive COVID therapies and of course, there are no longer the exclusive COVID therapies. And so those are the principal reasons why we'd be at the at the bottom end of our long-term guidance range. And then additionally, we indicated and to a lesser extent that we'll potentially not have an oncology distribution contract that expires in June as a result of a recently announced M&A event. And so those are the kind of reasons for what we said with regard to fiscal year '25. And then really, the third thing we indicated in the 8-K is that we have extended one of our largest pharmaceutical supply agreements. It's, of course, with Evernorth Health Services, which we also have referred to in our 10-K as -- of course, as Express Scripts. And we've extended that for 3 years through September 2029, which, of course, we are very pleased with.

Great. And breaking down some of the components of the guide in terms of the Florida contract, I guess, how meaningful is that in terms of the updated guidance? Is there anything incorporated into the updated guide in terms of a headwind or tailwind, I guess, from the Express Scripts contract?

Yes. And so the -- with regard to kind of the specific dollars. We really haven't kind of gotten into any more detail than what's in the 8-K. But we were very specific in the 8-K when we indicated the oncology contract that, that was to a lesser extent. The COVID driver was kind of the -- was the much larger driver there. And so -- and I think we expressed that in the 8-K through the use of the words to a lesser extent. And then we didn't reference Express Scripts as a driver either way. But of course, we're very pleased with that extension. I'm sure Bob would love to comment on that.

Yes, Erin, I think it's a really important example of how long-term strategic relationships matter. I think you'll see with Cencora that our large customer relationships are not transactional. There certainly is a lot of volume, a lot of work that has to be done to make sure that products get where they need to be with all of our large customers. But I think us being able to renew and extend this relationship is just evidence of the amazing work that our team does as well as the Evernorth-Express team that we do together and that by extending it gives us an opportunity to have visibility on the longer term and make sure that we're doing the strategic work together and give us the time to do that.

Okay. I may come back to some of the customer relationships in a second. But let's talk a little bit about underlying utilization trend. What's embedded in kind of your expectations now with the updated guidance in terms of the strength we've seen in core U.S. distribution business, like how sustainable that is and what's incorporated, embedded in your guidance?

Yes. And so we've been a beneficiary for quite some time from strong utilization trends, which are continuing. And we've talked about that, of course, we've seen it in specialty, and we've seen it in both oncology and ophthalmology in specialty, and we've seen it throughout our business. And of course, it's been driven by many things, including our pharmaceutical-centric strategy in pharmaceuticals being the most cost-effective form of care. Of course, it's driven by aging population, it's driven by innovation. And so yes, we've continued to see very solid utilization trends that are benefiting our core business, which is performing well.

Okay. And then drug pricing, any changes from a drug pricing perspective, it's been a relatively more or -- more favorable, if I want to call it that or less deflationary environment from a generic standpoint. Is your anticipation that, that continues? And I guess likewise, on the branded side, any dynamics there, whether it's IRA or otherwise, that you should be thinking about?

Yes. Erin, we really have nothing new to call out. It's kind of very much in line with what we've been saying and no updates there. We've talked about for some time, a moderation of generic deflation, and that has continued. And so of course, that's less of a headwind than it was in the past. And then from a branded pricing standpoint, it's in line with our expectations and consistent with what we've been seeing. And so no new updates there.

Okay. And then just switching to specialty. I guess the latest trends, it sounds like it's still continuing to be an area of strength for you. Can you talk a little bit about your strategies, whether it's OneOncology or otherwise and the rationale behind the structure, for instance, of that relationship, but just your overall strategy from a specialty standpoint.

Yes. Happy to take that one. So Erin, I think the important area that we're focused on is the growth in the specialty market. So there was a report by IQIVIA last year that predicted that the specialty market would grow from around $200 billion in 2023 to over $400 billion by 2028. So it's an area of focus. There's a lot of innovation, there's a lot of growth. And importantly, for us, it's an area that we're very well positioned, and we have been over decades, frankly, leading in areas of specialty distribution in oncology and services around oncology, and we'll continue to do that. Our investment in OneOncology is another step in that direction. So we have the very strong GPO presence. We have a very strong distribution presence. And what we're adding here is the MSO portion so that we're able to even more fully support those physician practices. OneOncology is a terrific partner for us, they were -- they came together in 2018. And they've grown to 350 sites in 16 states with over 1,000 providers, significant ability to attract new physicians and new practices into the MSO and even as of the last week or so, you see the addition of United Urology Group, which is another 225 or so providers that come into the OneOncology network. And in terms of the structure, we're very happy with the way we've executed on the partnership and ultimate acquisition and working with TPG. It's given us time to get to know the business to understand what will be needed as we take it over at some point. And so far, their growth has really met our expectations or even exceeded our expectations, and we're going to continue to work closely with them to continue to grow.

And just the Florida contract, I guess it will roll off at the mid-2025. Does that change anything in terms of purchasing power for you more meaningfully? I think we were calculating about a $0.25 headwind, but you can correct me if I'm wrong or right, if you want, but how do we think about other transactions that you can do, for instance, in the space?

I think if you think about the MSO landscape in oncology, in particular, the big ones are generally spoken for. So the way we see it now, it's a matter of attracting the remaining independent positions, independent practices into the preferred MSO. And again, that's why we're really excited about OneOncology. We think we have an excellent model. One of the things that is not well known about what OneOncology is that it's a model where the physician practice remains independent. So what happens is they sign a contract with OneOncology, a long-term contract, for the back-office support and the MSO support, but the practice actually remains independent. So it's the best of both worlds in a lot of ways where they get the support of the MSO, but they get to remain independent as well, and we're finding that to be very attractive in the marketplace.

Okay. And with -- under the new Evernorth relationship in terms of their own in-sourcing at CuraScript, I guess, does the new contract allow for that to happen? Or is there is there a component of that embedded in the current -- or the updated Evernorth contract?

Our contract with Evernorth really didn't change very much going forward. And I think the important component of that and CuraScript is that's always been a part of our relationship together. So Express Scripts and Evernorth have had CuraScript for a very long time, really all of our relationship. And so we've always worked closely with them on things that they would prefer to distribute themselves versus things that Cencora would distribute. So there's no change there and the partnership is strong.

Okay. Okay. And then biosimilars, as I do want to talk a little bit about that. I know your exposure is more -- your sweet spot is more in the Part B as opposed to Part D segment of that market. But can you talk a little bit about what's embedded in your expectations as well in terms of biosimilars and what that means for you from an economic standpoint?

Sure, I'll take that, or you want to take it?

Go -- please.

Yes. Look, biosimilar conversions are good for patients. They're good for health care, and they're good for Cencora. So as you said, Erin, yes, the sweet spot for us is in the Part B space. and we've seen significant adoption there of the available biosimilars. We expect that will continue as new products come to market. In the Part D space, it's we participate to a lesser extent from an opportunity. So where we would distribute the branded product is likely going to be in a lower-margin environment. And as they convert to biosimilars, it would be incrementally more profitable, but still relatively low. So we're very focused on biosimilar adoption overall because that's good for the efficiency of health care. But Part B is the area that really impacts us.

Bob, and I'll just echo one of the things you were saying. And of course, biosimilars are financially beneficial for us, particularly in the Part B area because of the wraparound services in there. One of the things that over time moves us up within our long-term guidance range.

Okay. Okay. And then as you think about, and this goes back to kind of broader customer relationships as well and just the underlying environment across retail pharmacy. We have Rite Aid that's coming out of bankruptcy. You have Walgreens that's obviously seen to have commotion, it is a partner of yours. Just how do you think about the landscape from here? You also have some DTC relationships or initiatives from some of the pharma manufacturers as well. I don't think that really changes anything from a pharmaceutical supply chain standpoint. But would love to hear your perspective on how you see this all playing out in terms of -- and how you navigate that and still play a role in that evolving retail pharmacy landscape? Sorry, that was a bigger question.

Erin, I think the most important thing in that is the value of community pharmacy to health care. So pharma -- community pharmacies are the most accessible health care destination. Many consumers, patients, all of us, family members. If you have multiple diseases, multiple comorbidities, you need a pharmacist, not just a pharmacy, and you're generally going to find that in a community pharmacy, and we see people choosing to continue to go there. Now that does in no way diminish the real challenges that are out there within community pharmacy and reimbursement being first and foremost there. So we're working hard to support our customers. With the independent customers, in particular, our Elevate Provider Network is working directly with payers to negotiate reimbursement rates, we find that were helpful in that. We have a lot more work to do, obviously, but the community pharmacies are viable. They're important. The independents continue to attract patients and stay viable as well as our larger customers. So we're optimistic about the future because of the need for community pharmacy but are not blind to the challenges and we use all the resources that we can of Cencora to try to support our customers as much as possible.

Bob, and one of the things I'll add there is, Erin, you had you had mentioned DTC and asked about that. And we do see some DTC models now, particularly with the GLP-1 manufacturers calling it out. But one thing I think, it's important to note is, of course, that's a way for them to get to the consumer and all of those DTC models that I'm aware of are going through traditional distribution. And so they will come through the wholesaler. And of course, we have a very broad-based portfolio of customers and very proud of our customer base and relationships. And one of our customers is Amazon, for instance, which is one of the models that the DTC is going through, so it will come through with Cencora.

Okay. Great. I have to ask a policy question, just regulatory dynamics. Anything on the forefront in this election cycle that you're paying attention to? I think we've already addressed a lot of the drug pricing dynamics with IRA, but is there anything more to come that you're paying attention to from the regulatory front?

Yes, we pay very close attention. We spend a lot of time in Washington. We have an office in Washington, D.C. and one of the incredible opportunities that we have is when we're talking to legislators and regulators, we're generally not talking to them about Cencora issues. We're talking about patient access. We're talking about reimbursement or other issues that are important to those customers. Pharmacist provider status, for example, is something that we spend time talking about in Washington to expand scope of practice for pharmacists in rural areas. So we're at the table, which is important. And oftentimes, we're educating. We're learning, we're educating, we're helping people understand unintended consequences of ideas that might seem good. I always like to say that in Washington are very bright, well-intended people but there is no way they can understand the entire spectrum of health care or the entire spectrum of the pharmaceutical supply chain. That's something that we do, and we can bring expertise to help them think through that. So IRA is something that we've been watching for a long time. And I think the way it's playing out, as we've discussed, is not something that's having a direct impact on Cencora because the discounts will go through a reimbursement rather than through a list price change, but the out-of-pocket cap is something that should be very positive for patient access and should be positive for Cencora.

Okay. And as we think about the components of both the guidance, and I want to shift gears a little bit to international here. What is kind of your thought process in terms of performance there relative to your long-term goals? And how are you thinking about some of the key drivers as, let's say, over the next 5 years, how does that international business evolve for you? What's the vision?

Sure. Well, let me start and talk a little bit about long-term guidance and those sorts of things with regard to the international business. And I'm sure there are some things that Bob would like to add. Our operating income guidance long term is 5% to 8% for both our U.S. segment and our International segment. We have very good businesses and really kind of grown our International business meaningfully since 2021. And of course, we've been in international markets for quite some time, but we've meaningfully grown the business starting in '21. And I would have to say if you look at just the wholesale part of our International business, that probably grows a little bit slower than the wholesale part of our U.S. business. But one of the things about our International business is that it has more kind of higher-margin services businesses and then the U.S. business. For instance, whether it be our 3PL business internationally, which came as part of the Alliance acquisition or whether it be the World Courier business or whether it be the PharmaLex business, those types of higher-margin businesses kind of are what enable it to grow at about the same rate as the U.S. business over the long term and have that 5% to 8% growth rate.

Okay. And we talked a lot about customer relationships, but you mentioned World Courier, for instance, and others. But part of your strategy, too, in terms of evolving, I would think would be to partner to -- with the life sciences, partner with your pharma customers. And how is that the next step in the evolution of Cencora and how does that become a bigger part of the story and the narrative because I think that that's something that's underappreciated. I mean World Courier has been great. And I think that, that's something that is a testament to what -- how you can leverage your presence in both pharma as well as -- or pharma distribution as well as being a partner in life sciences.

Yes, absolutely, Erin. And that's something that we're really excited about. So as Jim talked about, building the international footprint. So we have really good businesses in all of those markets, but we also now have the ability to go to a pharmaceutical manufacturer, large or small, and talk to them about commercialization on a global basis and in particular, in North America and Western Europe, which are key areas. In fact, there's an example of a company that we were helping with a broad suite of services, everything from health economics to 3PL and FDA registration support that they were going in the U.S. first. They had a delay with the FDA, and we were able to quickly pivot to the EU. And recently, they have gotten EU approval. We're the only company in our space that can do that. And so we will continue to build our expertise there, use that international footprint to add value to the biopharma space. Again, both large and small, and we'll continue to expand those services in a way that's helpful to the manufacturer and helps us grow our higher growth, higher-margin business portfolio.

Bob, and just one thing I'd like to add there, and I think Bob and his team have done a really good job of this is really building integrated business development that really allows us to cross-sell between the different businesses. And I was recently kind of getting an update from our team that's doing that, really focused on the cell and gene market. And while it isn't from a scale standpoint, a driver of big results at this point in time. It's just really exciting to see what we're doing kind of cross-selling businesses between, say, our consulting businesses and the World Courier business, which has such capability in those specialized shipments.

Okay. Great. And then in terms of as we think about the World Courier business in particular, just -- could you give us an update just on underlying demand trends across that business, too, in terms of what you're currently seeing?

Yes. What we've seen overall in the pharma outsourcing space is a slowdown in terms of the amount, I think clinical trial volume is a metric of that. So from 2021, which is the peak, to now that's down about 20% kind of on a macro basis, it's recovering and beginning to grow again. And what we've seen with World Courier, we did call it out recently as a -- in our last quarter where they had a bit of a slowdown due to those trends. But as we go forward, it's an incredibly strong business. It's well positioned. It's the leader in clinical trial support for cell and gene, for example. So we expect that will continue to grow, and we have that as part of our expectations for '25 and beyond.

And you mentioned cell and gene therapy. And I think you recently had extended kind of relationship partnership initiative with Walgreens as well on that front. Can you talk a little bit about just the Walgreens relationship in general, where that stands today? Does anything change in terms of how you implement your kind of strategic vision when they're going through obviously some changes at their end?

Walgreens is an incredibly important partner for Cencora. It's a strong relationship, over a decade long, a strong relationship. We support WBA in Europe. We're the primary distributor for Boots we're the -- obviously, the primary distributor for Walgreens. We source generics together through WBAD. So we are always working together to make sure that we can create value, ideally new value together. So we're committed to their success for sure. And I think it's a partnership that is valued by both parties.

Okay. And then I think everyone won't let me walk out of this room without asking about Animal Health. So I do have to ask. What's the status in terms of underlying demand trends across growth production animal and companion animal and opportunities you see, whether it's innovation across the space or otherwise, as you're thinking about growth across in MWI?

Yes. And so our Animal Health business is performing very well in the animal health market. We -- during the first 9 months of this fiscal year, we have top line revenue growth of 7%, which I think is probably above the market for that period of time. And if you kind of -- and actually, so I would attribute our success to just very good execution by the team. It has been driven a bit by kind of an additional product that we have, but it's been just overall like really good execution by the team. And in terms of the market, I think in the market, based on the data I've seen, it still shows that vet clinic visits are down a bit. I think the market is up, but it's due to price. And then -- and that's in of course, in the companion animal market. And then in the production animal market, kind of cattle numbers are at record lows. But I think they should start to rebound now, particularly with good moisture we've had this year, and cattle prices are very high. So of course, people really want to spend to keep their cattle healthy. And so overall, I think the market has been just okay, but probably is in a position to start to rebound. And I think that our 7% growth has been above market due to execution by our team.

Okay. And then as we kind of model out and you gave us obviously the high-level guidance today for 2025, but anything to think about, we can all kind of map out the COVID dynamics. But in terms of first half versus second half and in terms of the fiscal '25 or any other moving pieces we should be aware of?

We are advanced in our planning for the year, but we haven't fully completed our plan for the year, and we're certainly not doing quarterly guidance or anything like that. Of course, we said we'd be at the bottom end of our long-term guidance range. But I would say -- and of course, we called out the COVID, we called out that contract. But I think really the important takeaways here, and we just finished 2 days of presentations from our businesses is that our core business is performing quite well, return on invested capital is great, and we're seeing -- it's being -- the performance across our core businesses are being driven by strong utilization trends. Very good execution, particularly in the U.S., and we talked a lot about International, but the U.S. is, of course, 80% of our operating income. We're really benefiting from our strength in specialty. And so kind of a number of the things, Erin, that we've been talking about for quite some time that's been driving our success are continuing.

Okay. Lastly, in the last couple of minutes here. I did want to ask about kind of just capital deployment in terms of all the things you kind of talked about, where the focus lies, whether it's on buybacks and whether it's M&A, where that M&A priority lies as well? And is there a robust pipeline that you're looking at?

Yes. And so we will continue, as we have in the past, to have balanced capital deployment. And of course, we'll continue to invest in our business, which always has the highest return on invested capital. And we've been spending about $500 million a year on CapEx. That may come up a bit due to investments in technology and distribution capabilities as we grow. We'll continue to do strategic M&A and our last 2 deals that we've done have been in specialty, which is a great growth business for us and in biopharma services, which is higher margin, higher growth. We'll continue to do opportunistic share repurchases and we bought back $1.2 billion of shares per year for the last 2 years. And I think -- and we're very successful in buying back stock from WBA as they were selling shares. And then we'll continue to grow our dividend each year also.

And just because I have some extra time, on contract renewals, anything coming up. You just renewed obviously Evernorth. Anything coming up for renewal as we think about -- or that's contemplated in that 2025 guide?

We have nothing additional to call out on that front, Erin.

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

Thank you.