Cencora, Inc. ($COR)

Okay. Good afternoon, everyone. Welcome to this session of the Leerink Global Healthcare Conference. I'm Mike Cherny, the healthcare tech distribution analyst. It's my pleasure to have with us the Cencora team, Jim Cleary, CFO; Ben Murphy who does IR, Treasury, strategic projects, and I've probably left off some stuff there. But really appreciate the team being here. We're going to jump right in the fireside. But I mean, maybe, Jim, just -- anything you want to highlight from the last quarter that really stood out relative to just the underlying growth of what's been an extremely strong trend of the business?

Yes, Michael, thanks a lot for asking and also thanks a lot for having us here at your conference. And so we had a very good quarter in our U.S. segment. In the most recent quarter, we had 21% growth in the U.S. segment. So obviously, we were very pleased with that. And then I would also have to say kind of a big call out from the most recent quarter is we announced that we were going to be buying the portion of OneOncology that we didn't previously own. And then when we announced our first quarter results, we announced that we had closed on that acquisition. And we feel really good about our MSO strategy now that we own both Retina Consultants of America and OneOncology and feel that, that will be very good for our business as we're really extending that it's really the natural evolution of a very successful part of our business, our specialty business and going from distribution to GPO and now into MSOs. So we're very pleased with the quarter, both from a financial performance in the U.S. standpoint and from the standpoint of the really strategic move that we made. And so as a result of the OneOncology acquisition, we also increased our guidance for the year, and we increased our guidance on a consolidated basis by 3.5% at the low end and the high end of the range. So we're now at 11.5% to 13.5% and by 5 percentage points in the U.S. So we're now at 14% to 16% operating income growth for the year as our guidance. And so thank you for asking that for opening, Michael.

That's great. And you touched on a couple of key themes, but a lot of it wraps around specialty, specialty distribution offerings, Specialty-as-a-Services offering, especially now with the MSO capabilities. Obviously, it's clear to see the market as a whole for specialty is healthy, but how do you view the push and pull and what you're able to out-execute on to drive the excess growth relative to the totality of your specialty services, specialty assets?

Yes. So we've been calling out for quite some time that really a driver of the growth of our business. has been the strength of our sales and specialty to both health systems and physician practices. And both of those customer groups are really driving our specialty growth. And as we talked about, one of our strategic drivers is prioritizing growth oriented investments. And so we have been and will continue to be investing in specialty and that it is, and of course, a growth part of the market and one where we've been executing very well and have a long track record in. As I said before, getting into MSOs is just a natural extension of that very successful part of our business.

And I want to get back specifically to some OneOncology questions. But specifically around specialty, you've been a longtime leader in specialty distribution oncology drugs, in particular. And so what is it that you're seeing right now in terms of underlying trends in the oncology market that both positions you to be successful, but then also sets you up to both first invest in and then consolidate with oncology?

Yes. I think Jim said it well that we've had really good long-term trends there and have good long-term outlook. As you noted in one of your notes that January was soft, particularly in the specialty side and I think a number of sell-siders attributed that to weather. But as you think about the underlying market, there's really strong key organic growth drivers from an aging population in the United States, multi-therapy treatments, new innovations coming to market, biosimilars coming to market. All those things underpin the strong fundamentals of the business, strong outlook and as we look at oncology, we certainly -- that's the largest part of the physician administered part of the market. And with our acceleration of the OneOncology MSO that gives us even closer proximity to a really important piece of the puzzle.

So maybe just a little transition there. Obviously, I don't think anyone was shocked to see the OneOncology consolidation happen. You've talked nothing but positively about the initial investments that you made in a couple of years ago. When you think about now owning the vast majority of oncology, I know there's still a small stub piece, but what are you able to do to help drive better value of that business now that you weren't able to do without the control position before?

Yes. Thank you very much for asking the question. And there's a few things there that I'd call out. But I think one of the key things is that now, of course, we own both Retina Consultants of America and OneOncology. So we're able to help them drive synergies between those businesses. And when we only owned 35% of OneOncology, that didn't make as much sense for us because driving the synergies earlier just would have caused us to pay more for the business. And so now that we own both, they are just very good opportunities there. And we felt that the management teams are just so strong and we'll be able to execute on these opportunities. And one of them is RCA has a leader in clinical trial sites and is involved in so many of the clinical trials in the retina market. And that's an expertise that OneOncology also has, but taking those skills from RCA and really enabling execution across our -- both of our MSO businesses is a really nice synergy opportunity. There's also back-office synergy opportunities and things like revenue cycle management IT where we can really be helpful and other things like staffing. So there's a lot of back-office synergy opportunities, too. And then, of course, long term, one of the big plays is data and analytics. And so we're able to bring by helping execute on those synergy opportunities. I think we're able to bring a lot of value not only to our company, but to the physicians very importantly and extremely importantly, to the patients. And so we're very excited on those opportunities. And one good thing about Cencora as an owner is we have very much of a long-term perspective. So we're making these investments for the long term. Thank you for the question.

And along those lines, maybe if we can just take one step further. You talked about the clinical trial capabilities, site selection. Why is that so important? And how much of the data interplay that you mentioned can further enhance the value to be a participant within the clinical trial market?

Yes. Thank you for asking that. And there's a couple of things that I would call out. One is that in that the physicians are very actively involved in the clinical trials. It enables them to be even more successful as those products are launched. And so it really gives the physicians the knowledge base to be very successful once a product is launched. And of course, it's the physicians that are making those decisions. And then I would say a second thing is that having the clinical trial sites really enhances the ability to attract young doctors coming out of fellowship programs because they just so much appreciate the opportunity, not only to practice medicine, but to participate in the clinical trials also. And as I've gone to RCA meetings, I've asked young doctors the reasons why they've joined and they all call out as the clinical trial site leadership is one of those key reasons. So it's a great -- it is a great opportunity for the physicians and ultimately for the patients.

And so I'm going to jump back to OneOncology, but maybe just sticking with RCA for a second because you have had full control ownership for longer. For everything we can see from the outside, whether just implied within the business or your commentary, it seems like that business is performing well to above your initial expectations. How would you think about what Cencora as a company has been able to do to make RCA a better business.

Yes. I would just say that it's, I think, really kind of the key thing is that we are investing for the long term. And it's -- I think if we compare ourselves to an owner that would be a financial owner owning for the short term, they can be great and do a lot of things, but we're really investing with a long-term perspective. And so things like IT systems that can really kind of help the companies be successful over the long term is -- I think, is a value that we add. One of the other values that we add is with our focus on specialty with our focus on being pharmaceutical-centric. We have the 2 different platforms. And as I said before, we're able to help them drive synergies between the different platforms.

And then one of the other things, and I appreciate you talking about the synergy dynamic and not want to get too far ahead of yourself, given the financial components. But unfortunately, for your sake, for financially, OneOncology was acquisitive in between the period of investment and consolidation. I know you know United Urology was a big deal. Should we view OneOncology going forward now as a further platform for further consolidation, either big or tuck-in small organic growth, like -- how should we think about where OneOncology expands from here relative to the space?

Sure. And what I'm going to say would be true for both OneOncology and Retina Consultants of America is both of them are leading platforms, and there wouldn't be anything of that size. But with regard to both OneOncology and RCA, I would expect to see bolt-on acquisitions over time that are, of course, highly consistent with our 2 strategies of strengthening our position in specialty and also continuing to be pharmaceutical-centric. So I would expect to see bolt-ons to those 2 platforms over time. But I wouldn't expect us to see ownership in other ologies unless they became pharmaceutical-centric over time, but it's those 2 that are really the pharmaceutical-centric ones.

Yes. The logic definitely makes sense there. Maybe turning back to some of the core distribution services. Your contracting team did a ton of work late in the year to year-end as we prepared for the first round of IRA negotiated drugs. You've come out and said you feel good about where the contracting came. Maybe can you give us a little bit of experience of why and how you were so effective and your peers have said something similar about ensuring that your contracting efforts led to the appropriate returns, appropriate unit economics for the value that you provide for the channel.

Yes. Thanks for asking. We had, of course, good foresight to know what the products were going to be, and we have a very strong strategic global sourcing team. And our goal is to maintain our gross profit dollars and we were successful in achieving our goal. And I think probably the most important thing to call out is we're very confident of our value proposition, everything that we're able to do in the supply chain from logistics to compliance and secure supply chain to managing the inventory and financing the working capital. And so as a result of that, we were able to really do a good job in maintaining our gross profit dollars.

And I know if you've seen 1 contract, you've seen 1 contract as they're running joke across the entire supply chain. As you thought about the negotiations, especially as you prepare for the next round of drugs because this isn't a 1-year thing. How do you think about -- or what have you been informed by in terms of the first round to make sure that you keep that effectiveness to keep that managing to a dollar profit level in case?

I do like that analogy because it is accurate. Each relationship is different. And our -- we did really well, better than we thought in some places, we did in line or a little bit fine on some other ones. I think as we look at -- our value proposition is quite defendable, as Jim said. As we look at the relationships with pharma, it's very clear, where we have very clear and transparent relationships with pharma and there's very clear and transparent economics that we derive from the buy side, and that is all predicated on the value that we drive for them and satisfying the ability to reach tens of thousands of end providers with varying degrees of credit quality and also very significant efficiency and security.

Those are great points and one thing I'll add that I didn't mention before is that we do have terms in our contracts that we've been working on for years to have this term that if there is a significant change in price, then we and the manufacturers will come to the table to start to renegotiate.

Got it. And so I guess, I mean, a lot of drugs we've seen so far are more traditional small molecule drugs that fall into Part D side, 2028, you'll start to see some potential changes in the Part B side. How are you thinking about the push and pull related to any differences in the Part B side and Bennett put you on the bother -- so I know you've -- I'm going to paraphrase you, you've said specifically that you've seen so many instances of any major changes, a focus on making sure providers aren't unduly harmed. So how does that factor in the work you're doing with your pharma partners, suppliers given broader regulatory changes?

Yes. I think it's important when bifurcating between B and D to take a second and reflect that. the gross to net spread that exists in the D side right now, that gross to net spread does not really exist in the Part B side. There isn't this delta between -- there's a massive delta that exists on that side. As you think about -- so I think that has to inform your logic and how you look at what might or may not occur on that as you get to 2028, but I think certainly, the big drugs are -- will be a year beyond that. You'll have some biosimilar competition to come into place before that. And I think you'll a have a very clear as Jim said, with the manufacturers, we have a very strong value proposition. As you look at some of the things that have occurred in the last few months, I would look at the globe demo project and focus on how that is -- how that is structured to get the relative pricing to achieve the relative pricing dynamic that the government wants without an unintended consequence to community-based providers. So I think that is helpful and a proof point in that discussion.

This may have been a more relevant question 28 to 30 hours ago, but I'm still going to ask it. Obviously, there's a lot of geopolitical strike going on. Oil, other commodities have spiked meaningfully. Your business is different than some of your peers or at least areas of your business because you don't have the other businesses that have more direct logistics, but you are a logistics company at heart. Can you remind us how you work through some of the at times volatility spikes that you see up and down on various different commodities?

Yes, sure. And so with regard to oil in particular. I mean it has an impact on our business, but I'm going to say it's -- in terms of the scope of all of our operating expenses and everything we do, it's relatively minor. We do have terms and contracts where we can make adjustments for things like that in contracts. But I would say, overall, we would more lean to being very customer-centric and focused on our customers. And so those sorts of things have impacts, but given just the diversity of our business and the diversity of our expenses, any one change is relatively minor.

Thing and kind of maybe wrapping for now, at least the core pharma distribution business. There's been a lot of puts and takes. We talked about some of the negotiated drugs. I feel like generics, I don't want to say on autopilot, but it doesn't feel like there's been a lot of variability recently. Like what are you seeing across the generics market? I keep hearing the word stable, stable, stable, but why do you think that's the case? And how do you think about how the generics market evolves as we -- I think there's a decent step-up in brand generic conversions in the next couple of years?

Yes. So the answer to your question is going to be similar to the way you asked it, actually. There's really nothing new to call out. We've been talking about moderation of generic deflation for some time. And really, it's really the same as what we've been talking about for some time. And I think deflation has moderated as manufacturers have been prioritizing their portfolios. There's been an increase in inspections and those sorts of things. And so it's really consistent with what we've seen for some time. And of course, as we look out over the next several years, there's going to be very good opportunity in generics that you mentioned. And there's also going to be great opportunities in biosimilars. And what we see in generics and biosimilars will create room for branded innovation. And so that's just one just very good thing about our business and our business model is that we will continue to benefit from generics, biosimilars and innovation.

Healthy trends, I'd like to hear that. And I guess, one other question on this front. The discussion doesn't come up a ton anymore is on the generic sourcing side. It's now been, I think, 12 years since you created a very sizable buying group. What do the new activities look like? Or are there new activities? Or is it just simply you have a mature business that has massive scale, and you just leverage it as best as you can?

Yes, I think, I mean, you just stated it correctly, it helps us maintain our competitive purchasing as you'd expected.

I'm trying not to lead the witness here, but sorry.

So I would appreciate you keep doing it. Especially if you say the things I want to say.

So I'm going to start now with shorter question open-ended. But let's turn to some of the strategic review of assets in particular MWI. Why is Covetrus the right home for MWI?

Yes. First, let me take a step back and say in November, when we announced our fourth quarter fiscal year results and the guidance for the first quarter, we indicated they were setting up a group of businesses in other. So we have our U.S. segment, our International segment, and then we set up other and the businesses in other are very good businesses, but they don't bring competitive advantage to the balance of the enterprise, and they could be even more successful if they were with partners kind of focused on the business where they're particularly strong. And so MWI has great business and by far, the largest business in other -- and we looked at strategic alternatives and we have entered into a transaction with Covetrus. And it really, I think, will be good for the overall animal health ecosystem because MWI has a very good presence in supply chain. It has very good customer relationships in both the companion and production animal market. It has production animal technologies and Covetrus has very good companion animal technologies. And so I think when you put those businesses together, we'll be able to drive a lot of efficiency and drive affordability in the animal health marketplace, which is important.

And you pursued a unique structure of the transaction. I mean, sure you evaluate a lot of different things, but you have a cash position, but then also some ongoing equity in the business. And so as you think about the strategic nature of the structure, what made it appealing to you to make sure that you keep an ownership position in the business going forward?

Yes. And so the deal structure that we have in place is the selling price is $3.5 billion, and it's really a merger because we'll get $1.25 billion in cash, $800 million of preferred stock and then have 34% of the common stock of the remaining business, and we have 2 private equity firms as our partners that will own the rest of the business who were previously owners of Covetrus and have a great understanding of the business and the market. And we felt that this was really the best alternative for the business to create a company that's going to be very strong in the animal health ecosystem that will really be able to benefit the upstream and downstream customers. And we feel like it's a very good financial opportunity for us as a result of the cash and the preferred stock and the common equity that we'll be able to make a profit on over a period of time.

This is a very quick turnaround from announced creation of this other segment to the MWI transaction, I can't say I'm shocked, given I agree with you on the quality of the business. How are you thinking about the pacing of any potential evaluations of the other assets that currently sit within other? And how do you balance that against fluctuations in performance that -- some of which are macro-driven versus performance driven?

Sure. So there are 3 other businesses that are smaller in other. And they're very good businesses. And one of them, for instance, we are now accounting for as an asset held for sale. And it is -- and I would expect that we would make progress on those over time because, again, they're very good businesses. But obviously, they're going to be slower than what we did in the Animal Health business. But it's something that we are focused on and I believe make good progress on.

Okay. And for some of the remaining assets that don't sit within other, I know mostly within international on the pharma services side, whether it's World Courier or some of the other businesses, what have been some of the puts and takes on demand curves on those businesses given some of the strategic reprioritization we've seen -- on the by pharma companies on businesses that impacted pharma services capabilities.

Yes. So I'll make a couple of comments there. Our Global Specialty Logistics business, which is the World Courier business, has been a great business for us for over a decade. As we talked about last year, it had a tougher year last year as there were some softness in its market. But as a management team, I think they've executed very well, and we talked about on our first fiscal quarter that we've really seen volume growth and start to see profitability growth. And so we're pleased with the execution there. On the World Courier business. And then the kind of some other businesses in international, the manufacturer services business, probably our area of strength would be in 3PL in Europe, where a lot of the specialty products go to 3PL. So that's a key business for us. Anything else that you...

I think that was good.

And then how is Alliance doing organically? I mean it's -- I know there's been a lot of FX fluctuations, which are out of your control. But how are you seeing the performance of the business and it's been a few years on since you acquired it. What have been some of the results of global sourcing, other efficiency capabilities that you brought to the Alliance?

Sure. And so Alliance is, of course, our international distribution business. And it's in several countries throughout Europe and a developing country also. And probably the area of strength has been in kind of 3PL and growth in specialty markets through 3PL distribution. We also have a leading share in the U.K. where we're the distributor for boots in the U.K., like we're a distributor for Walgreens here in the U.S. We did have a down quarter the most recent quarter in international. And really, the driver there was in a developing market economy in the prior year, there had been a meaningful price increase in October. And in this year, and so we got the benefit for a full quarter in the first fiscal quarter last year. And then this year, that price increase was at the very end of December. So we just got a week or 2 of benefit there.

Comps, yes. Because you mentioned Walgreens, we don't get into economics on contracts. That's not I'm going here. But obviously, they're no longer public. We do our best to track what they've been doing. As a newly owned entity within Sycamore, like has anything changed about your relationship? You have a really long-standing contract that we don't hear about as much from them anymore. But anything changed in terms of the way that you're working with them, given that they seem to have stopped their store closure pathway for one?

Yes. What I'll say is Walgreens is a very important partner we have a contract through 2031. And we want Walgreens, of course, to do what's best for the success of their business. And so for instance, on the store closure, point. They've announced that they're closing stores, and we want them to do what is best for their business. And I'm sure when they do close stores, it will be underperforming stores. And so we're just highly supportive of what actions they're going to take that's best for their business.

Got it. Anything to call out of note on the contract renewal side? I mean, Walgreens goes for a while, a couple of your other ones go for a while. Anything notable that you've seen and especially as you've thought about adjusting contracts or long-term renewals, anything about the IRA discussions you're having on the pharma side that's been translated into the ability to work more closely with your customers on the distribution side?

No. I think we're always looking for ways to do more with our existing customers. That's the best -- that's a really strong return there. I think as we talk about -- as we have talked about for going on 10 years now. The rebound of customer contracts is something that we started about 10 years ago and worked across that to make sure that we're getting the right level of profitability across the classes of drugs so that we can grow as our customers grow. And certainly, that's something that we would continue to ensure as mix evolves and as our customers continue to grow.

And along those lines, I think there's been at least 3, 4 cycles in my time covering distributors calling for the death of independent pharmacies. Last time I checked, the independent pharmacy market, it's not dead. What are you seeing in terms of behavior activities from your independent pharmacy customers? I know you're strong provider, partner with them? And are there any changes in terms of what they're asking you to do given some of the market machinations? I'm thinking anything regarding GLP-1s and their financial impact from GLP-1s, where you're able to further help them with additional services?

No. I think, honestly, I think it's an underappreciated part of our industry is that we have contributed to the sustainability of independent pharmacies across the United States. I think we've been -- there's been other industries where we haven't seen that type of dynamic. I think we've continued to evolve and bring services and bring purchasing scale to allow them to continue to benefit as they grow. The biggest things that have changed on that market over the last 5 to 10 years is it's not one for one in terms of -- generally, it's not always one pharmacy, one owner. In some cases, it's one owner with several pharmacies because they're leveraging the different services and solutions that their distributor provides them, and it helps them to sought to serve the local community, but have the right level of profitability by having a multiple store footprint by leveraging some of those services and solutions. So I think it's something that is an underappreciated social benefit of the distributors and retail pharmacy across the U.S.

Last question for me here. I know we've never talked about unit economics on a specific drug class, but tying back to GLP-1s, given the mass growth of the market, you've been very transparent in both, a, giving us revenue from GLP-1s and b, noting that it's a immaterial profit contributor. Is there anything about the market development that could make this a more profitable industry before we get to potential generics?

Yes. So it is -- we've been consistent in our commentary that while it's a big growth business for us, and it is profitable for us. It's minimally profitable. And we don't expect any change, certainly in fiscal year '26. There might be some point down the road where there's more competition in the market and it's more profitable then, but we're certainly not calling that for any time soon.

Consistency works for me.

Okay. Thank you, Jim, Bennett. Thank you so much for being here. Appreciate it.

Thank you.