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

Let's jump off that specialty MSO, both came up in that response. And clearly, this has been a pretty big transformation in what the industry in total went after over the last roughly 2 years, 2 to 2.5 years is when you and 1 of your competitors really started to step on the gas. McKesson, obviously, had been here for a long time, but they too have been more acquisitive and more more focused on building out their MSO we went out on a little bit of a limb. I drove Bennett and Melissa crazy for a couple of months with probably the most phone calls and e-mails I've ever given them. But we put out a deep dive, our best guess on what your MSO looked like, and I won't bore everyone with the details, but in that report, I forecast that based on the growth rates and the momentum that you had, we thought that perhaps that business could get to perhaps in the ZIP code of 10% double-digit contribution to profitability in fiscal '27. The great thing about writing a report is you expose yourself to the street and you never really find out if you're right, unless the management team says you're right or you're wrong. I guess I'm curious, you had a chance to look at that perhaps how far off are we? And if you are getting towards double-digit profitability percent of profitability. Is the business managed in such a way that this could actually become a carve-out segment, a reportable segment as we go into the next year, the next 2 years as it hits that, at least threshold of materiality on percent. It also depends on how you're running it and how you're managing it if you're going to break it out. But I'm curious, is this something that could become broken out over time.

Yes, Eric, I'll give you a couple of thoughts, and then I will quickly hand it to Eva for anything '27 or reportable segments. But the background, the thesis that you're talking about is in line with how we see things. And we do believe that the MSO part of our business will perform well, will be an important part of our business. We've set off on one of the things that we love about the MSO is that it's the next natural extension. It's purpose is to help the physicians care for patients. That's right in line with our purpose. We stay far away from any clinical decision-making and they have complete clinical autonomy to do that. And it's also a profitable and growing business on its own, which is terrific. So you do see this driver, and you see mix improving within our business over time. Again, that's the market is moving in that direction and then also how well we're positioned there. Either you want to add.

Eric, can I go to your point on disclosure, I'm going to make it a little more broad than a segment around disclosures you've heard Bob talk a lot about here, right, the importance of specialty, the MSO acquisition. So that as that part of the business becomes a larger part of our business, a faster-growing part of our business. We've recognized the importance of thinking through our disclosures for our investors. Tthe transparency a unlocks greater appreciation, I think, for the growth and the growth opportunities in Still's confidence we've been deploying capital against this, right? So also being more transparent there. So we're going to be thoughtful about that, the right metrics, the right mechanism to do that. But as we head into 2027, it's something that's really top of mind for us.

And sort of a segue somewhat correlated, you you could say it's not bad luck to me, it looked like bad luck that your 2 competitors did a number of acquisitions of MSOs where the underlying practices were your distribution customers or -- and/or GPO customers as well. Really just a confluence of events in a short period of time that had some impacts, both optical and I guess, real. Those transitions are annualizing in a pretty linear fashion from last quarter over the next couple of quarters. Is there anything left in the market that you see in terms of renewals, when your competitors recently came out and said it sees a consistent customer base over the next year? I'm not really hearing in the next but for your 2 competitors, 1 big shared contract. I'm not really hearing about a lot of churn in the market or other activity. It seems like some of the MSO acquisition activity has slowed down now as companies digest what they've done you're still waiting on ISO. But other than that, is there a reason not to think that there's going to be more stability in the market and optically for you? I know tough comps against the core business last year, but annualizing the distribution transition of a, Solaris. I mean was -- it feels like things are going to be smooth commerce sailing, if you will, a little smoother. Is that a fair assessment?

Yes. I'll hit a few pieces of that, Eric, and a follow up if I don't get renewed. I mean, one part of what you're describing, which is not necessarily the the flow-through of the economics, but it's really strategic discipline. And one of the things that we've been really focused on the last couple of years is focusing the portfolio. So that's deploying capital in the MSOs but into what we would say are the right MSOs, right? So that's going to be retina in oncology pharmaceutical centric and also deprioritizing some businesses. So when you're looking at a customer that's in the market, that doesn't necessarily fit your strategic thesis from an MSO standpoint, you'd love to have them as a customer as a distribution customer, but don't fit your strategic thesis. It takes some discipline to sit on the sideline and allow that to happen. So I'm proud of the team in that we were able to do that. And yes, it takes some time to transition. But over the medium and longer term, we think that will pay dividends. The second point there, which aligns with where you're going is, we will continue -- I'll just speak for us. Cencora will continue to add to our MSOs, but they're small additions. So they're small groups of physicians, they're individual physicians coming and we're being very successful in both RCA and in one oncology but they're not things that get headlines. And they're not -- they're out on the tail. They're the independent physicians or independent practices that are not part of an MSO that are choosing to join our MSO. So it's not really competition between our peers, which is good. And then the third piece is, which is kind of the overall market stability. And as you know, I've been in this industry for a very long time. And the market continues to be appropriately competitive but stable. And we still don't see a lot of movement around it, and I don't expect that would change.

That's great. I'm a lifetime R&D services. Junky covered Cencora for as long as you've been in health care, I think. And one of your competitors just made a bigger more direct bite into the space with an acquisition of a mid-tier, let's call it, a mid-tier hybrid CRO, CSO -- you have a lot of businesses in and around R&D support. If we want to broadly call it biopharma services, it's a different angle on biopharma services, but you're a huge player in clinical trial logistics management, you you still have some pieces left of the Pharma ex acquisition. Your MSOs have SMO, maybe some CRO hybrid businesses within them. And research has been highlighted repeatedly by you and your peers as a big growth opportunity. So it's a big market. It's a recovering market. Things have been getting better in that space over the last 12-plus months after a bit of a downturn. But long haul, it's a business that has over decades, become a much larger marketplace, an opportunity to that end, you talked about sitting some things out. Would you set out going down the path of maybe getting even closer to R&D through M&A? Or would all of your investment that you're talking about and your growth that you're talking about taking R&D, taking what you have in one of your MSO platforms translating that maybe to the other one a bit more should we think that no Cencora actually could be in the market at some point for an actual asset to complete the spectrum of R&D services.

Yes. Let me start there with how the clinical trial support services that we have, which you described so accurately connect to our pharmaceutical-centric specialty focus. So we do believe it's important for us to support clinical trials and clinical research. We have best-in-class global clinical logistics. So for any of you who don't know if there's a clinical trial going on anywhere in the world, cell therapies, gene therapies, other complex therapies that require very advanced transport of products or tissues, we're very likely involved in that trial, and that's our World Courier business, which is best in class. And that given the R&D portfolio, that's very likely going to be driving the specialty strategy. Secondly, we have these physician networks now in the MSOs. And we talked a lot about the capabilities that RCA has in terms of supporting clinical trials. And we think that's very important for patient care for patient access. It helps recruit physicians. It's also a good business within the MSOs. Having all of that -- we like the way we're playing in this space. And said another way, I don't think that -- if we owned a CRO that we would be a better site management organization or that we would be a better global logistics provider. So the spaces that we play are spaces that we feel like we can lead and don't see the need to be a CRO. We want to support the CROs, and we want to support of the manufacturers and making sure that they can get their trials done, get patients accrued into those trials. And we think that's the right place for us right now.

Are there adjacencies that are of interest on the M&A side, not just the little tuck-in MSO, even 1 physician at a time or 1 small practice at a time. Are there areas that you are particularly interested in to complete the biopharma service spectrum of what you do today?

Yes, I'll start and maybe you can kind of hit capital deployment as part of that. So Eric, we have pretty significantly deployed capital to our primary focus area and investing in the MSOs over the past few years was exactly the right thing for us to do for our business in the short, medium and long term. frankly, we're going to stay focused there. So that's not a priority for us right now. So the priority for us is is continuing to tuck in with MSOs. That's where the growth opportunities are. Now we're going to be open-minded and active, but having another adjacency is not on the priority list right now. You want to add anything?

Sure. Just broadly on capital deployment, Eric, what I would say is there are no changes to our priorities, right? Number one, of course, investing in the business and growing the business. Bob's been pretty clear here today around M&A, right? We'll focus on the tuck-ins, the things to enhance our portfolio, opportunistic share repurchase, which we which we did last quarter, the team did in a really smart way. And finally, I'd say growing our dividend consistent with earnings growth, while maintaining our strong balance sheet, right? We generate a significant amount of cash and we'll look to deploy in the optimal way to drive TSR.

Not my favorite topic because there's only so much you can say, but it is very relevant from a Wall Street stock-picking perspective. Recently, headlines hit your largest long-term and long-term partner, Walgreens was shifting some distribution. I think this topic has been absolutely explored. You've made some other comments even this week at another event on the topic. So I don't want to rehash all of that. But -- to be clear, it was in your guidance. It started impacting this quarter. This quarter's guidance is great. This kind of stuff happens all of the time. We don't always see it. It became topical because of the nature of the relationship. I really want to come at it from a different angle, which is understanding that large customers, large partners oftentimes do use other vendors or they switch for whatever reason, what would have been that reason was -- I don't know how much you can share with us, but what -- was it a business that you weren't well set up to do? Was it something you didn't want to do? Did somebody else just offer a heck of a good price, like what actually drove -- even if it was a tiny sliver outside of the prime vendor relationship, what actually drove the decision not to just stay with you.

Yes. I can't get into that -- I can't give you the specifics of any specifics of that. But I do think it's important to reiterate some of the things you said. I mean, this does happen, right? It wouldn't be something that would be talked about if it didn't come out in a research report. I mean, I think our team did a fantastic job of recognizing that, that report was not necessarily being interpreted in for the scope that it was and there could have been an overreaction. So we did what we needed to do to give the -- our investors the the information that was going to be most when you think about Cencora and Walgreens, I think it's really important to think about the history of the relationship the amount of work that we do together, the amount of integration that we have together. And they have a terrific team. And as far as we can tell, they seem to be focused on the right things. We're talking or working together. So again, these things happen, and I can't comment on the specifics, but we -- we like our portfolio of customers, including Walgreens.

And there's no reason to anticipate any kind of a more material or notable change from here till at bare minimum 2029 or 2031 when the existing contracts mature. Is that a fair statement?

Yes. As you said, we have a contract in the U.S. through 2029 and '31 in the U.K. with boots, and we expect to continue to support them throughout that time.

That's great. I'm not going to try to squeeze 1 more in with 12 seconds. So I'll just say thank you again for being here. It's wonderful to see you, and it's great to have you back. We overlapped briefly many years ago, but welcome back to health care. Welcome to a great company Eva.

Thank you.

Thank you very much. Everyone please join me in thanking the company for being here with us today.