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

Okay. Good afternoon, everyone. My name is Eric Coldwell. I cover pharma services and health care distribution for Baird. And it's a great pleasure to have Cencora with us today. This is a name that we've used repeatedly over recent years as a either a best idea in the moment or a top idea for the year. I still feel that way. Not only are we generally upbeat and bullish about the health care distribution and supply chain broadly, but specifically incredibly impressed with the consistent performance over time from Cencora. Of course, today, we have Jim Cleary, EVP and Chief Financial Officer of the company; and Bennett Murphy, SVP of Investor Relations and Head of Treasury.

We're not going to do any formal slides. I'm going to jump right into Q&A. And Jim, I told you upfront, I'm going to go right into last week, where at another event, you raised your fiscal '24, pointed '25. Now this is after 5 raises this year, so off of a rising base. You pointed 25% to the lower end of the LRP -- still pretty close to the Street. I looked at that and I said, these are not overly material changes on a company that has your track record. Why even go that far? Why put out an 8-K and make those comments in advance at an early juncture here?

Yes. Well, thanks for asking, Eric. And before I get started, thanks also for the great research you do, very much appreciated. But Bennett and I and our executive team knew that we were going to be at 3 conferences doing 3 key days of Investor Relations, Thursday and Friday of last week. And then today, I knew we'd be asked the questions probably 100 times in a 100 different ways. And so I thought it made sense kind of given what we knew about fiscal year '25 to put out an 8-K last Thursday morning. And of course, there was kind of 3 things that we covered, which we've had a chance to talk a lot about in the last several days. First, as Eric mentioned, we kind of led off by saying that we were going to once again increase our EPS guidance for fiscal year '24, which, of course, ends September 30, and we just increased it by $0.05 at the low end of the range and at the high end of the range to $13.60 to $13.70 a share. And we did that just to reflect the continued strong performance of the business that we've been talking about throughout fiscal year '24. And then what we also importantly did is we said that for full year fiscal year '25, we kind of gave initial guidance for both adjusted operating income and adjusted EPS and indicated that we'd be at the bottom end of our long-term guidance range. And of course, our long-term guidance range for adjusted operating income is 5% to 8% and our guidance -- long-term guidance for adjusted EPS is 8% to 12%. We felt confident that we'll get kind of that 3% to 4% from capital deployment every year. And we indicated that we'd be at kind of the bottom end of that range, so about 5% for adjusted operating income and about 8% for adjusted EPS. And we really called out 2 different things. And the primary thing is COVID. And I think we've done a lot of really good disclosure on COVID over the past year, and it was a real benefit for us this year in fiscal year '24. And one of the things that we disclosed is that during the first half of this fiscal year and our U.S. segment operating income grew by 16%. And if we exclude COVID vaccines, it grew by 8%. So COVID vaccines really had a significant impact in the first half of fiscal year '24. And we've also previously disclosed that during the first quarter of fiscal year '24, we earned $0.06 from exclusive COVID therapies, which was the last quarter that we earned money from exclusive COVID therapies before they went fully commercial. And so because of the significant amount that we earned in the first half of fiscal year '24 in particular, we think that the kind of the COVID operating income will go to more of a normalized level. And so that obviously impacts our operating income growth rate in fiscal year '25. And then kind of the second thing that we called out in the 8-K regarding that fiscal year '25 guidance is the potential loss of an oncology customer due to a recent M&A transaction that we would potentially lose in June. And so due to those 2 things, COVID and that customer, we indicated we'd be at the bottom end of our long-term guide range for both adjusted operating income and adjusted EPS, so 5% and 8% approximately, respectively. And we also in the 8-K just also announced that our second largest customer from a revenue standpoint, Evernorth or Express Scripts that we did a 3-year extension of that contract to 2029. And so we just thought it made sense to kind of to put out the details on that before we did the 3 conferences.

That makes sense. And with -- I know you probably will push back on going into too much detail on any of these individually, but you have quantified the COVID in the past with this potential customer transition after they're acquired by a competitor, if that deal does, in fact, go through as probably will, that's only a 1 quarter impact to fiscal '25, correct? That would be after June of next year. But you are saying that, that is the secondary for this very minor compared to where Street was very minor update, that was a secondary consideration in terms of sizing.

Absolutely. And yes, and also, I think that's a really good point. I think what we -- kind of when we did the 8-K, it's not really particularly different where a lot of people on the Street were. But with regard to the customer, one thing we were specific on in the 8-K is to a lesser extent, kind of the primary driver was the COVID impact and then this customer was to a lesser extent. And we aren't really getting more specific than that, but just saying, of course, the specialty market is a market where we have put a lot of emphasis both in specialty physician practices and in health systems and really focused on growth in this market. And this is a good customer, very, very good, but it's certainly to a lesser extent. And of course, we're very pleased also with kind of the way our relationship with OneOncology is going.

Yes. I'm going to definitely come back to that. Just quickly, Bob is not here right now. I would ask him directly, but you do this long known process of your CEO transition, new guy steps in, in, what, 2 weeks now, roughly, a little over 2 weeks. Been there forever. You've known him forever. I'd love to get your take on how you've seen him evolve through the transition, which has been long planned. And just any characteristic nuances, style changes, philosophy changes that might occur as Steve hands the reins over to Bob here in a couple of weeks.

Yes. Yes. Thank you, Eric, for asking about that. And I really look forward for all of you who haven't had a chance to interact as much with Bob Mauch, our incoming CEO, to get to know him, kind of really fantastic person and leader, very customer-focused, and I think you'll really enjoy the interactions. And I really think our Board and Steve Collis have done an excellent job on CEO succession planning. And you'll know that, of course, you're aware that Steve is going to become Executive Chair for a year when Bob steps into the CEO role. And of course, I'm sure you've all enjoyed your interactions with Steve over many years, and he's done a fantastic job. And Bob, I'm confident you'll really enjoy the interactions with Bob, and you'll be really kind of pleased with him as a leader. Bob has been COO since 2022. Even before he was COO, all of the businesses reported into him for several years, and he -- he's basically had the opportunity to run every business within the company. He sold his company, which is a market access consulting company to Cencora in 2007 and has basically worked throughout the company since 2007. He's been involved in all the strategic decisions for several years. And I think you'll find him very customer-focused and kind of very much bought into and a leader in our pharmaceutical-centric strategy.

Okay. You know I have somewhere around 17 questions on Walgreens, but I've been chastised not to ask 17, so I'll ask one big picture. You've -- you've despite having a great relationship and a large customer for many years now that I think has been overall a success. You've -- at various times in the past, you've been beaten up. They're going to sell shares. They're going to sell boots. They're going to close stores. Now they've somewhat negotiated and public on pricing. I know you're somewhat limited in what you could say, and I'm sort of obliged to ask this question given what a big topic it is. But could you give us your latest and greatest thinking on that relationship, that customer and what the future might entail?

Sure. Sure. I'll start out. And then, Ben, if I miss anything, please don't hesitate to add. So of course, Walgreens is our largest customer from a revenue standpoint, an extremely important customer and a great customer and partner. And as you know, because Walgreens has their kind of capital deployment needs, they've been selling down our shares over the past couple of years. And while they technically still own about 10%, it's been pledged in variable prepaid forwards and they've sold everything that can be sold. And I think we've done a really good job after the first sale over the past couple of years, partnering with them and being a repurchaser of a bunch of the stock and repurchased about $2 billion of their stock over the last couple of years. And so kind of we're very pleased how that process has gone. As a partner, the level of business integration and operational integration with Walgreens is very high. We have contracts in place in the U.S. through 2029 and in the U.K. through 2031. And like any strong business partner, we really want to partner with them to be mutually successful and look for win-win opportunities to move both our businesses forward for the long-term.

One thing -- I'm going to do a follow-up. One thing I hear is they're going to have to lower price. They're going to have to cut terms. You, Cencora, are going to have to give something. I say why? Why would you have to give something you've got a contract. But to the extent you work as in a mutual relationship, if you do this before 2029, would you not also want to be on the receiving end of some benefits of that theoretical conversation?

Yes. And let me say that I may not give you as much detail as you're looking for here, Eric, but just to say that they are such an important business partner, and we really do want them to be kind of very successful and they serve such an important role for patients. And I think to answer your question, yes, there are opportunities where we can do things that clearly many opportunities that are mutually beneficial and that can be win-wins.

And I know you've said it before, but it's always good to have people hear it. Generally, larger customers like this are lower-margin customers.

Yes. And I'm sorry if I didn't already call that out. But yes, yes. It's our largest customer from a revenue standpoint, but you're absolutely right, larger customers are lower margin.

Yes. I put out a -- our team put out a report here a few days ago where we opened up a couple of conversations primarily on revenue growth, but also profit growth in the sector and how we look at various themes that are happening in the space. And I'm of the opinion that -- I've always been of the opinion that revenue growth is about the least important thing in this sector. It leads off with gross margin, OpEx, working capital management. Other things are more important when you look at sensitivity analysis in the models. That being said, optics matter at times to the Street. We think revenue growth in the space is going to return to a more normal mid-single-digit level over the next couple of years for a number of reasons. One of those drivers, you can agree or disagree with that. One of our drivers that we're looking at is that we're seeing some real changes in the biosimilar marketplace. In particular, we're seeing Part D drugs that are getting put on to formularies more and more frequently, HUMIRA, Stelara, a couple of the big ones that have been in headlines recently. United came out today with some conversation on HUMIRA. You had Evernorth recently on Stelara and on HUMIRA as well. So you tend to get a revenue hit on those Part D conversions, but you, in theory, would not get much of a profit hit there. So margin goes up, revenue comes down, no big deal. Part B is a category where we see a number -- frankly, a lot of work that you have done and other firms have done in the industry, we see a number of potential launches for the first time in the Part B category, in fact, 8 over the next 1.5 years. That could be pretty interesting, could it not. So a couple of open-ended things here. One is just big picture on longer-term revenue growth and some of the factors in the market like these bigger biosimilar adoption rates by the PBMs. And then two, tell me why I shouldn't be a bit more excited about this Part B wave that is coming from TSR through ELA in the second quarter of '26.

Got it. Got it. Well, yes, absolutely. And there's a lot there and everything you said makes sense. And first, I'll start out with kind of the revenue growth piece. And we provide long-term guidance for operating income and EPS. And we don't provide long-term guidance for the revenue piece because of the reasons that Eric was talking about. It just isn't -- as there were things that can drive revenue to be growing at higher rate or slightly lower rate that don't impact gross profit or operating income as much. And one example of that is biosimilar and Part D and the fact particularly in the mail order market which is the lowest margin part of our business because we're sending pallets and products to limited number of locations around the country. So it makes sense that it's a lowest margin part of our business if a product goes biosimilar in that market and the customer even kind of sources the product on its own. For instance, in one of our big contracts, we do the brands and they do the generics on their own. And so it wouldn't surprise us if they sourced a biosimilar product. That would impact our revenue and something that would be fully anticipated by us and really wouldn't have much of an operating income impact, very minor. And so that's something that we kind of fully anticipate when we talk about '25 or we talk about the long-term. And then when you kind of flip side Part B, particularly in oncology and ophthalmology markets really kind of they have been a tailwind and should continue to be a tailwind in this case from an operating income standpoint because of both the distribution and say specialty physician services market and the wraparound services that we provide presents good margin opportunity. And so those are kind of all things that we anticipate in our long-term guide and kind of the Part B trends are the things that kind of move us up as we do that. And Ben, is there anything that I left out there?

I mean there are 8 in a row coming starting the first quarter if things play out the way they're currently expected.

So -- and I would just say that it's -- so I think IQVIA's total U.S. market sales forecast for the next 5 years is in that mid-single-digit range, which would align with what you're saying. I think for the Street modeling distribution revenue, it's probably never -- they never -- there's never been so many puts and takes. From where we sit, we can -- what we can do is we can focus on our operating income dollars, growing those. And then there is periodically some noise at the revenue line that is outside of our control. But from the Street side, in the same year trying to model insulin [ whack ] cut reductions, GLP-1 significant growth. The U.S. -- the largest drug in the U.S. having biosimilar competition and having that erosion a little bit later than the biosimilars came, but certainly finally happening, which is good for the U.S. health care system to get some of that HUMIRA volume to go to biosimilar and make room for more innovation in the space. So there's a lot -- to Jim's point, there's a lot of noise at that revenue line. For the biosimilars in general, the Part B biosimilars, Jim obviously talked about that being the sweet spot. We've had some good ones in there. And that part of the market moves much faster to adopt because they're very focused on the drug, what's the efficacy, therapeutic comparability. That's why you saw like Neulasta, Avastin, Herceptin, Rituxan all get pretty good uptick pretty early on. Obviously, the HUMIRA has been very delayed as the PBMs have taken a little while to come around to it. But I think that certainly, as we look at the biosimilar space, it's -- that specialty business is a bit important for us, and it's nice to see some of that stuff occurring as well, but incremental.

Yes. Let's stick on margin for a second and come back to GLP-1s. And again, I think that's also the biggest wildcard. Do they grow 10%, 50%. These are big numbers that the variance could be pretty significant. That being said, I think, hopefully, at this point, everyone knows they're extremely low-margin products relative to the rest of your book. There's a part of me that just wonders why something that's over 10% of revenue is less than 2% of earnings. It feels like there has to be a way to solve this problem. It's better than it could have been a few years ago, perhaps when the industry went through its purposeful recontracting and kind of strategic review of how it wanted to make money across the different pools, but it feels like it could still be better. Are we still -- I guess if you ask it often enough, maybe you'll get a different answer. Are we still waiting for Go here on margins in GLP-1s? Is it we have to wait for generics? Is it Victoza and some of the older generation stuff starts going generic as it has and then maybe some foreign markets have different patent laws and you start getting some international hits here and there? Or are we really just waiting for time and...

Yes. So I'll answer that. And let me kind of start out by saying that I think on GLP-1s, I think we've done a lot of good disclosure like we have on COVID because I just think it really helps to have the data to be able to understand kind of the shape of our income statement. And it's -- in our third fiscal quarter, our most recent quarter that we announced, we indicated that our GLP-1 growth for the quarter was 38% year-over-year, which was $2.1 billion of growth. And it was also 30% growth over the prior quarter, and it was a lot of growth over the prior quarter because there was better supply for us, and so our fill rates were better. And so we've kind of put out disclosure there, so you can kind of understand the impact that it has on our top line and on our margin also. And we've been very consistent in our communication that they are profitable for us, but they are minimally profitable for us. And to answer your question, I think kind of 2 things have to happen for it to get to kind of a more normalized level or towards a more normalized level of fee-for-service for us. One is supply has to catch up with demand, and that's the first thing. But I think the more important thing is, of course, that when there's competition at some point in time. And so as we do our internal business planning, we don't see them getting beyond a minimally profitable level for the next couple of years, but do think that it's a long-term opportunity for us and our industry and that fee-for-service and profitability will improve in the longer-term once the 2 things happen, supply catches up with demand and there's more competition.

Yes. And I think you need -- it's a phenomenon, right, because this type of product had never gone through the retail channel. So there's some dynamics that need to be worked out from the -- between -- on the pharmacy side to help ensure that they're getting appropriately compensated for the work that they're doing to support those products getting to patients and those patients having good outcomes because they're complex therapies and people are typically dealing with multiple issues. So the pharmacist is an important piece of that -- of the patient journey there, and there need to be the appropriate economics for them that would help that, too.

Do you get to a point with the category being now -- well, these are my estimates, but I think the numbers probably true up to something around a little over 10% of revenue. I just -- do you have to start breaking out in your guidance what you're expecting for the category when you talk about guidance? Is that something that you think is relevant? Or look...

I mean they're low margin.

So it's just top line optics, but I am curious if it gets to that point.

Yes. I mean to date, we have normalized in our revenue results the impact that GLP-1s have. I mean this last year and then this year, I mean, it's certainly something we can continue to give color on.

You were the first to do it and more transparent upfront.

Yes. And I think -- I guess, do the growth rates stay the same growth rates or do they kind of come down as the class gets bigger, law of large numbers, that might help it be a little less of an outlier, but we'll have to see how it all shakes out.

I want to spend some time on OneOncology in particular, but I do have a question from the audience. We did touch on this upfront. I suspect you're going to hold back, but I'm going to read the question so you can -- I've done my duty and you can respond accordingly. So the question is there are a range of estimates on the Street of the impact of Florida cancer specialist potential loss in June of next year. People seem worried that when the headwind annualizes in fiscal '26, so 3 quarters versus 1, it could be a more material headwind to growth. Is there any way to help level set that thinking or put a better -- I'll just say, put a better frame on the thinking in terms of your headwind, if you will, and then how you feel about your ability to manage that in fiscal '26?

Yes. So let me just say that when we filed our 8-K and say we'd be at the bottom of our operating income range and EPS range, operating income range of 5% to 8% and EPS range of 8% to 12%. We called out the 2 things, COVID and Florida cancer. We made it clear in the 8-K and we've answered the question since then that COVID was the primary factor. And Florida cancer, as we described, it was definitely to a lesser extent. And -- and so I think that that's probably just the best way to describe it at this point in time. And we just have -- just consistently conveyed our long-term guidance and our ability to achieve it. And Bennett, I'm not sure if you want to add anything there. That's probably enough.

No, I think that was fulsome.

OneOncology. Great. I think it is great. It's gone pretty well so far. So it was a little over a year since you did this deal. You agreed to partner with TPG. In 2013 -- 2023, sorry, that business was growing at about a 40% CAGR since its formation. And since you announced the deal, 16 practices have now grown to over 24%, and that's before the next topic, which I'll introduce in a minute. So it seems like there's been a big increase in practices joining, strong growth rates continuing. Have you seen anything you don't like in this first, what, 4, 5 quarters since you did the deal?

Yes. We're very pleased with OneOncology investment. As you know, we own 35% of the company that we acquired in June of last year. So we've owned it the 35% over a year now. We have a put call structure in place with our partners there that makes it likely -- very likely that we'll own the company within a period of 3 to 5 years from the initial investment. They've continued to grow organically and through acquisition prior to the most recent announcement, OneOncology is 350-plus sites, over 1,000 providers, 16 states. And we just feel very good business does incredibly important work like all the customers do in this market for patients, and we just feel very good about the long-term prospects there. And as we've said, and this area is an area where we're excited by the opportunity we'll have to deploy the additional capital.

I know in the moment, it's still obviously a separate entity and you've got a partner. They just announced that they were buying a big urology center or a group of practices. And so that's a bit of a shift for them, expanding from oncology to urology. And it was also a pretty decently sized deal in terms of the number of practices and the role of United Urology. So -- that deal just closed August 20. I don't think it does much to your numbers, but I'd love to hear your thoughts on the process and you must have been supportive of that move. How might that tie into Cencora's future, assuming that you put option -- your call option is exercised here in a couple of years?

Yes. And just with regard to the current impact, you're absolutely right. Right now, we count for it on the equity method and other income. But with OneOncology, we are very excited by their United Urology acquisition. It's over 250 providers. Of course, prostate cancer is the second most prevalent form of cancer for men. So incredibly important work that they're doing. And I think that there's a number of synergies between OneOncology and United Urology. And just -- so very good for the MSO and very good for the work that they'll be -- that they'll be able to do with patients.

Yes. I think I would just say it's intentional and thoughtful because of the overlap opportunity between urology and oncology, the way that prostate cancer is treated.

Are there other ologies that you might be interested in? And would you ever consider doing something outside of this current JV?

I just will say that this is a key market for us. Specialty is a key market for us. We talked a lot today about specialty physician practices. It's also been a very good market for us with health systems also. And so I think -- and these specialty businesses are businesses that Steve Collis started many years ago. So we'll kind of finish the talk where we started. And it's -- and so I think you'll just kind of -- as we look for growth over the long-term, specialty is definitely going to be kind of one of the key markets that we'll be focused on with regard to growth.

Okay. Last one in our few remaining seconds here, and I'm going to put you on the spot a little bit, but I'm trying to be benign about it. I appreciate all of the transparency, the 8-K, the getting people in the right spot. You've done a great job about that. And frankly, I didn't think the update was that material personally. I also can't help but think you've beaten the last 5 years consistently with an average of 5.1% upside. So has anything in the world changed that would make the new Cencora different than the old Cencora? You tend to be a conservative company out of the gates. Has the world changed much? Or are we still thinking you're playing the same game you've played for the last 5 years?

Well, first of all...

And game in a good way. I don't mean tricky.

No, first of all, I'll take that as a compliment because I think it's meant to be one for our company, of course. And I'll just say what I would have said any time during the last 5 years, our long-term guide and our next year guide is our guide.

Yes, that's fair enough.

Okay. Great. Thank you, Eric.

Yes. No, thanks. Great job. Thank you, guys. Everyone, please join me in thanking Cencora. Jim, Bennett. Thank you.