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

All right. Great. We're going to get started. Good afternoon, everyone. My name is Lisa Gill and I head healthcare services here at JPMorgan. It is with great pleasure that I have Cencora with us this afternoon. CEO, Bob Mauch, is going to make the opening comments, and then he will join myself and CFO, Jim Cleary, for the Q&A portion. So with that, let me turn it over to Bob. Bob?

Hi, everyone. Thank you very much, Lisa. It's a sincere pleasure for me to be here today representing Cencora. As some of you may know, this is my fourth month -- the beginning of my fourth month as the President and CEO of Cencora. And I'm just thrilled to have this opportunity to take over from Steve Collis and talk to you all today. So those of you who are investors, thank you very much. Those of you who are not, I hope within the next 40 minutes or so, we'll show you why Cencora is a good long-term place for your investment. We have the cautionary forward-looking statements. So just a minute on who we are. Cencora is a leading global pharmaceutical solutions organization with a foundation in pharmaceutical distribution and differentiated capabilities. So many of you who know us will think of us as a distributor. We like to think of ourselves as a global pharmaceutical services provider. We're executing a pharmaceutical-centric strategy. And I should say what I'm excited about continuing as the newest CEO of Cencora is continuing to execute our pharmaceutical-centric strategy to create differentiated value for all our stakeholders, driving our long-term vision, expanding our higher growth, higher-margin businesses and building on those strengths by making key investments. We have most recently made an investment in OneOncology and closed on our acquisition of RCA on January 2 of this year. So I mentioned we're creating differentiated value for our stakeholders, and that starts with our purpose. We're united in our responsibility to create healthier futures. We bring that to work with us every single day. We know that there's a patient on the end of every decision that we make, and it guides our strategy and it guides our practice. We're disciplined about our focus areas. So specialty, medicines, and services. I hope when you think of Cencora, you think of leadership in specialty. Focus on and support of community providers, something that we've done for decades, whether those are independent community pharmacies, community physicians, oncologists, retinologists that we've talked about as well as community veterinarians. Customer partnerships are critical to everything we do, and I'll address that a bit more as we go forward. And we're always looking for enhanced global access and opportunity. Our long-term guidance is 8% to 12% EPS growth -- adjusted EPS growth, and we have a scale of 46,000 team members across the globe. Some stats from fiscal '24. We'll be excited to report our Q1 fiscal '25 results in the beginning of February. But in fiscal '24, 12% year-over-year growth in revenue, 11% year-over-year growth in adjusted operating income, $3.1 billion in adjusted free cash flow, and a 15% year-over-year growth in adjusted diluted EPS. So this is what makes us special. We have an incredible position within the ecosystem of biopharma, specialty physicians, health systems, pharmacy, animal health providers, and we do that in many markets across the globe. So when you think about Cencora, you should think about an amazing portfolio of customers, an incredible suite of services that help manufacturers bring products to market and patients to access those products and a portfolio of geographies where we can implement that. So when we're thinking about innovating and being creative and driving new business, we think about that combination of customer, the service, and the geography where we can provide that. So we're very proud of these relationships. I mentioned earlier, our customer partnerships is critical -- are critical to us. And as we think about whether it's a manufacturer partner or a provider partner, everyone at Cencora is very focused on making sure that we understand their strategy, and we bring all of the resources to Cencora -- of Cencora to make sure that they can execute that strategy. We report out in 2 segments, the U.S. Healthcare segment, I'll go through first. We have strong strategic relationships with market-leading customers. Our specialty distribution capabilities and services are second to none. We benefit from favorable market trends. So we've very actively positioned ourselves to be in the areas where the market is growing, in particular, specialty pharmaceuticals, and we have a significant leadership position in animal health. Our International Healthcare Solutions segment, we're a leading pan-European wholesaler. We have significantly invested in diversifying those services beyond wholesale. So a lot of the profits that we have in our international segment come from manufacturer services. So they're enhanced by the wholesale distribution, but also manufacturer services, including 3PL. We have a premier global logistics provider in our World Courier business and a robust portfolio of downstream services as well as upstream services. So I mentioned our recent investment in OneOncology and acquisition in Retina Consultants of America. This is instructive of our strategy. It's also instructive of our capital deployment. And the MSO space is something that we're very excited about at Cencora. So we have strong multi-decade relationships with specialty physicians in distribution, also within the GPO services and the managed services organization really is the next natural step. Some people will ask, well, why are you diversifying in this area? And it's a simple answer because if you think about our business, if you think about Cencora, if you think about our industry, what we've done over a long period of time is built services and solutions that support community providers. At Cencora, we do that, at Good Neighbor Pharmacy. We do that with our veterinary customers. We've done it for a long time with our specialty physicians. And the MSO is just an extension of that. And what we love about it is the MSO is actually a growing profitable stand-alone business. So as we make those investments, we're not only helping the physicians, helping patients access those physicians, but we're adding a growing and profitable pillar to Cencora. So these are charts that we're very proud of, and I won't spend a lot of time here. But over a 5-year period, 14% EPS -- adjusted EPS growth, adjusted operating income growth of 12% on a 5-year CAGR, and our capital deployment has been significant and in the right areas, which we're very proud of. So as I wrap and as we move over to the interesting Q&A portion with Lisa, I just want to reinforce a couple of things. One, we are positioned well to continue our track record of driving long-term shareholder value. We're advancing global healthcare system growth opportunities with a significant leadership in specialty. We're innovating within the markets that we play. We have a strong foundation in pharmaceutical distribution with differentiated commercialization services, a strong financial profile with a legacy of -- with strong ROIC performance, strong free cash flow generation, and executing on our long-term guidance of 8% to 12% adjusted EPS growth. So with that, I thank you all very much for your time. And Lisa, I will join you for Q&A.

Sounds great. Great job on your first JPMorgan Healthcare Conference as a CEO.

Thank you. I was nervous. Hopefully, it didn't show too much.

No, it did not at all.

So in that vein, maybe just talk about what you think are the top priorities. So you've been now in the job for a couple of months. What are your biggest opportunities really in the next coming years, not just in the next several months or even this fiscal year?

Yes. Thanks, Lisa. It's a great question. We -- what I just really talked about is just the strength of Cencora. So it's interesting. You could be a new CEO and you could be coming into a situation where you have to turn something around. You have to fix a lot of things. And that comes with challenges and opportunities. And in my case, it's I think even more challenging because you're looking at an amazingly strong company and trying to figure out where we can add value. And so the first part of your question is what we need to do over the next 5 years has not changed too much, right? We have the right strategy. We have an amazing culture. We have incredible team members. We execute really well. But there are areas that we can enhance. And that's what we're really focused on is amplifying the areas that were good, but we could be better. And I'll give you one that kind of intersects productivity and digital transformation. So one of the things that we're working on is really increasing our capabilities of driving efficiency and value to our customers through digital transformation across a number of areas, but also a multiyear productivity program. So as we're thinking about the marketplace and the challenges in healthcare, we feel like we have a responsibility as a healthcare company to become more efficient every single day. And this is one of the ways that we can do it. So that's something we can amplify. But the most important part of your question, Lisa, is that we stay focused on our pharmaceutical-centric strategy. We stay focused on leading in specialty. We continue to expand our higher growth, higher-margin businesses, and we do that in a way that makes sense across geographies.

You talked a little bit about specialty, and we look at the volumes for both specialty as well as your traditional business has been incredibly strong throughout '24. When we think about the U.S. -- let's talk about U.S. to start with. But when we think about U.S. utilization, is there any key themes you would call out? I mean, obviously, we've seen GLP-1s. We've seen strength in specialty. So that would be the first part of the question. And then secondly, as we move into calendar '25, under the Inflation Reduction Act, the out-of-pocket costs will be lowered for [ grandma ].

Yes.

Do you think that drives incremental utilization as well?

Yes. Jim, I'm going to have you kind of jump in here. But -- actually, do you want to start and then I'll...

Sure. Sure. I'll handle the first part, Bob. Hi, everyone. I'm Jim Cleary, CFO of Cencora. Great to see you all today. And so, Lisa, when we announced the RCA acquisition, we increased our guidance by $0.35 at the low end of our guidance range and by $0.35 at the high end of our guidance range. And we really attributed that to 2 things. One is the RCA acquisition. And the second is, of course, what you were just asking about, kind of the strong utilization trends that we've been seeing. And so of the $0.35 increase in guidance, about $0.26 of that was due to the RCA acquisition and about $0.09 of that is due to the continued momentum that we're seeing in our U.S. business. And of that $0.26 of RCA, we had said would be $0.35 for the full year net of interest. And so $0.26 is a 9 months contribution. And to get to your question, the $0.09 we're seeing from continued momentum in the U.S. business, it's really the things that we've been talking about for quite some time. We're seeing solid utilization trends, and they're really broad-based utilization trends that we've been calling out for some time in our business. And then also, we're seeing continued strong sales of specialty products to physician practices and health systems. And that growth that we're seeing there is greater than the overall market growth. And so those are kind of 2 of the things that we're seeing in the U.S. segment, which are driving our results and causing us to increase guidance when we did that update.

Yes. And Lisa, on IRA and the out-of-pocket costs, anything that we see in benefit design, whether it's government or commercial that increases access to pharmaceuticals is going to be a good thing for our business. It's going to be a good thing for patient outcome. So I hope certainly that we see increased utilization from that. It's not something that we would necessarily see in our numbers or see as a driver, but it certainly would be a positive.

Just kind of shifting to generics. Generic pricing has been pretty stable the last couple of years. One of your partners from a generic procurement perspective, Walgreens, talked about perhaps seeing better procurement of certain products, and I would assume they're talking about generic. Can you maybe talk about those dynamics right now in the marketplace, around procurement? There's been NADAC pricing, and that's now shifted to where CMS will put that out quarterly, right? So we'll have less fluctuation. But in general, what are we seeing on the generic procurement side? And what opportunities or incremental opportunities do you see?

Yes. I think most importantly, we're seeing a real stabilization in the generics industry, which is such an important part of the entire supply chain. So that's a positive, and we're seeing that in less deflation. We're seeing that in less shortages in many cases. So that's important. And when it comes to procurement, it's really a matter of just making sure that partners are working together to get the highest quality products for the lowest price. I don't think that's something that's ever one and done, right? So I think that's something you always have to work at. You have to make sure you have the right partners, again, highest quality that can provide the supply at the right price. So it's something that we work hard at Cencora, and we also work, obviously, with WBAD and others on that.

When I think about your -- you just closed the RCA deal. You did United Urology. So moving a little bit away from oncology, which is where you've started in specialty. When I think about the other ologies, what other incremental opportunities do you see? And how do I think about those MSO agreements going forward?

Yes. Okay. That's a great question. So oncology is definitely the largest and a significant focus for us over a long period of time. And OneOncology is a fantastic platform. They're doing really well and growing. Also, retina has been a big part of our business. We haven't talked about it as much, but we also have a long-term significant GPO and distribution relationship with physicians and manufacturers in retina. We like those 2 spaces because they're pharmaceutical centric, they're physician administered, they're Part B, and there's significant innovation in the space as well as biosimilar introduction in the space. The urology tuck-in at OneOncology is an area where we just saw that as being really synergistic. So as cancer rates increase in the urology space, that partnership between a urology practice and an oncology practice is very natural. So there's synergy there. Having said that, we don't see other specialties that have the same makeup as retina and oncology. So that's where we will continue to focus. Now as we look forward, there could be other specialties. There could be other innovations in the pharma industry that create something in another area. But right now, that will be our focus. We'll continue to look forward. And as those opportunities present themselves, we'll assess them. But as of right now, oncology and retina are the focus.

You mentioned -- or you touched on biosimilars. And I think a lot of times, investors are trying to figure out how do we think about biosimilars compared to like a generic type of margin? And maybe this question is for you, Jim. When we think about biosimilars and we think about that shift towards a biosimilar versus a traditional branded product, especially on the specialty side where you have maybe more of an opportunity to influence what drug the doctor is using in their private practice. Is there a rule of thumb as to how to think about the margin on a competitive drug like a biosimilar versus a traditional brand?

Sure. Let me generally talk about that, Lisa. And biosimilars have certainly been a tailwind for us in the Part B space and the specialty physician practice space, and we've been calling it out for quite some time that it's been a tailwind in the oncology market. And now with the investment in RCA and through our retina distribution business, we'll also start to see biosimilars be a tailwind in the retina space. And it is attractive business for us because we do see margins that are higher than they are on branded products. And of course, the prices are higher than they are on generic products. So it certainly has been a good business for us and one where we can provide a lot of value to specialty physician practices because not only, of course, do we have the distribution business, but we have the GPO business also.

Yes. And I think just dovetailing on that, I know you have a lot more services that you provide to those physician offices than just GPO and procurement and distribution. But maybe just spend a minute talking about some of that. And I -- many of you may have seen the nice sign that you had across from Union Square around the opportunities with Cencora.

Yes. That's right. Yes. It's a big area for us, Lisa, not only with the physicians, but also with the biopharma manufacturers. And we have a significant presence in helping manufacturers get products to market. So it could be understanding the cost effectiveness of the product before they try to have formulary placement, it could be your reimbursement program, certainly, the pharmacovigilance program that they will need. So we're continually investing and building those types of businesses that are higher growth, higher margin, needed by pharma, valued by the providers, and we think that will be a continuing opportunity for us as we go forward.

Is there a way to size that business today, Jim? Like if I think about, it's x percent today and you can go to y?

When we do our segment reporting, of course, we do it on a U.S. basis and an international basis. U.S. is about 80% of our operating income. International is about 20% of our operating income. We don't specifically break out the global pharma services businesses. But what I will say is they definitely fall into the group of businesses that we refer to as higher margin, higher growth. And so we do expect those businesses to have nice growth over time, as Bob was talking about.

Beyond the Q1 comp impact for COVID vaccines, is there anything else we should consider as we think about the cadence of earnings throughout fiscal '25?

Sure. Yes, we feel very good about our fiscal year '25. A couple of the things that I'll talk about, as you've started to mention, Lisa, is we were very successful in helping bring COVID vaccines to market. And COVID vaccines will be a headwind for us in the first half of fiscal year '25. And the way that we size that is when we gave our initial guidance, we said that our operating income growth in the U.S. in fiscal year '25 would be 5% to 6.5% growth. And without the COVID commercial vaccine headwind, that would have been 5% to 8% growth. And so that's a bit of an impact on us. And then also, we're lapping our final quarter of exclusive COVID therapies. We realized $0.06 from exclusive COVID therapies in the first quarter of fiscal year '24, and we'll no longer have that operating income from exclusive COVID therapies. So there will be a $0.06 headwind there. And then also, we'll have a potential headwind in the last quarter of our fiscal year because of the potential sale of an oncology customer that went through -- that is going through an M&A transaction. But I'll say all of that is reflected in our guidance. And all of that is fully offset by the momentum that we're seeing, particularly in the U.S. business that I talked about earlier.

Great. '24 was a year where we did see some switching of drug distribution relationships, although they're very minimal, right, I mean, when we think about that. But when we think about that, there's always questions that we get about the competitive marketplace and could we have a new entrant come in and get into the drug distribution world or even when we see large contracts that come up from time to time. Is there anything you would call out specifically around the competitiveness of the marketplace and if there's been any changes?

Yes, there really haven't been changes. I think, to your point, it's minimal. There are headlines certainly, but it's minimal. Our industry, and I would like to think Cencora took a leadership role and this has really worked to modify the business model in a way that it makes switching less attractive, honestly. So we've talked a lot with folks in the room and you and others about how we've rebalanced our pricing, and there's less variability there. One of the things that we talk less about is that there was a time when you got a new contract, the margin was very low.

Right. And it expanded over time.

And then expanded. So at that time period, there was an opportunity for someone to come in and really undercut you. Well, we have really…

Changed that.