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

Hi, everyone. Thanks again for joining us. So we're really pleased to have Cencora for our next fireside chat. So Cencora is a drug distributor and provider of pharma-focused services. With us from the company are Bob Mauch, the CEO -- President and CEO; and Eva Boratto, EVP and CFO. So I've been with us in the audience. So first, I wanted to see if you wanted to make any kind of introductory comments or whether we should just really hop right into Q&A.

Yes. Maybe just a quick word. Hi everyone, thank you very much for being here. We're in the midst of an excellent fiscal 2026. We reported last month, our third quarter earnings, which demonstrated continued growth in our areas of focus, which really are the specialty pharmaceutical areas, both in the physician part of our business as well. As in health systems, we also had the opportunity to opportunistically repurchase $1 billion in shares and expect strong year in line with our guidance, and we're very excited about the future in terms of our pharmaceutical-centric strategy and the way that we're continuing to focus the company on areas of growth in the market where the specialty area, in particular, where demographics are strong and there's tremendous pharmaceutical innovation.

Okay. Thank you. Great, yes, of course. Yes. So maybe we'll just clear through this a bit kind of off the top. I think the most recent disclosure piece of news from the company was that certain volumes related to your customer, Walgreens, that were outside of the prime vendor agreement or outside of the Prime contract started to move away from the company. Would love to just a little additional context on kind of the nature of these volumes, like why they are outside of the PV contract. And anything to kind of characterize like how typical this is or isn't as part of your business?

Yes. Sure, happy to -- I'll start and then I'll hand it to Eva. I also should have noted in the introduction that this is the first investor conference for Eva and I to do this together, which has been fun so far, and she's been an amazing addition to the Cencora team. So look forward to hearing more from Eva. Yes. So that's a part of the industry that doesn't get talked about very much. But the idea that a very large purchaser would take a small portion and have that with another distributor is not -- it's not uncommon. It is -- what is uncommon is the fact that, that would be something that would have to be discussed. And our team did a great job upon realizing we want to make sure that people didn't misunderstand the size of that relative to the overall relationship with a very small size. relative to the overall relationship. So we did do the 8-K and make sure that we provided the right level of clarity. So as I said in the beginning, it is something that happens within the industry. It's not part of our core contract, as you said, and I'll let Eva take it from there.

Yes. I think, Bob, the only thing I would add is we wanted to provide to the investor community the full factual context around that and a couple of things. One, the business began moving in July. So at the start of the fiscal fourth quarter, to -- it was contemplated in our guidance, which shows the acceleration in Q4, the guidance we provided back in August. And finally, three, as Bob said, the vast majority of our business with Walgreens is in the prime contract, not outside.

Yes. I appreciate that. And then maybe just to expand on kind of the financial component. mentioning that it's obviously it's fully contemplated. I guess, one, it looks to us like kind of the revenue guidance that's implied for the fourth quarter doesn't really stand out as looking like anything different than we might have expected kind of anyway implying a small top line impact. So I hope you can maybe touch on that thought process a little bit and whether that stands up to a reason and then as we think about the volumes, I guess, transition in starting in July, I think a natural kind of question is what's the exit rate look like? And do you have visibility to the exit rate at this point? So maybe if you could touch on both, that would be appreciative.

Yes. So overall, let me take a step back at the Q4 guide that we provided, right? It was a strong guidance. It was an acceleration from Q3 as you think about what is a key driver of our performance is underlying utilization trends, particularly in specialty. And specialty is becoming an increasing important part of our business as you think about the acquisitions with the MSOs. So we were pleased with the guidance we were able to provide. In terms of revenue and underneath, while yes, there's the Walgreens loss. In Q4, we also annualized the oncology. We've now fully annualized at the end of Q3, the oncology customer that we lost as well as we continue to benefit from the 1 oncology acquisition that we have. Additionally, in our guidance, in addition to the strength in the U.S., our international business is performing well, also driven by our World Courier and our 3PL businesses, right, World Courier really pleased with what that business has been able to do in terms of the market improving, but also the execution and then on the 3PL benefiting from the specialty, the specialty tailwind. So overall, we're pleased with the outlook that we provided, and we're focused on executing. And I would think about the wraparound of the Walgreens, you have 3/4 of that wrap around.

And then just last 1 on this topic, and it's kind of a question of the day really across all the distributors because there are some major near-term renewals and ones that are even more closer proximity and time line than really yours is. But obviously, Walgreens itself has been going through a period of fairly dramatic change, I guess, how should the investment community think about this relationship and what it might look like over look at the next 5 to 10 years potentially for the new Walgreens?

Yes. Thank you for the question. I think to look at it first is to realize it's a strong long-term strategic relationship, right? And that is true over multiple generations of leadership at Walgreens. So that doesn't change. It's an important customer to us. Obviously, we're a very important partner to them and the fact that we are servicing every 1 of their stores every single day over a long period of time. So the relationship is strong. The relationship is important. And I'll go back to the strategic part because whether you're talking about Walgreens and Cencore or other parts of the market, these large relationships are generally long-term strategic relationships. And I think that's foundationally how we all should look at them. And we feel really good about our relationship with Walgreens, we feel good about the team that's there, and we expect to have a long-term relationship with them.

Okay. Great. And then maybe to kind of touch on the organic growth trajectory of the U.S. health care business over the past couple of years. I mean, we had a calendar 2025 for you that was obviously incredibly strong. There's a bit of deceleration in calendar Q1. And then you've seen pretty significant rebound since I think 1 thing the market struggles with a little bit. It was kind of like what are the key factors we should be monitoring kind of explain the quarter-to-quarter variability and organic growth. So I guess, what are some of the factors that have been influencing the growth rates above and beyond sort of the long-term expectations? And how are you thinking about that going forward?

Yes. I'll start going back to 2025, and it wasn't here, but as I've studied, right? The 2025 utilization trends were outside of our long-term growth algorithm. And I think as the company said at that time, expected them to moderate more in line with our expectations. So I'll put that off to the side in terms of 2025. In 2026, fiscal Q2, calendar Q1 had some unique dynamics affecting the quarter, particularly in January and February, there were some real pressures. I think you also saw it not just in our data, but in the IQVIA data as well. That rebounded at the end of fiscal Q2, and we saw that rebound stabilized consistent in Q3 and consistent as of our earnings call. I think 1 of the reasons why revenue is in part of our long-term growth algorithm is this volatility, right? And we're focused on managing through that and delivering the operating income growth as we've outlined. Underlying, I think important utilization. I said this earlier, is an important aspect of our algorithm and particularly in specialty, and we think there are healthy tailwinds to those trends as we look forward.

And then to kind of go into the different subcomponents of the business. If you look about generics, it's really been like a much more healthy part of the market than really it had been maybe going back 10 or 15 years, and there's been a lot less volatility there. But I'd love to hear a little bit about how you're thinking about the generic franchise over the next couple of years. There's obviously some material loss of exclusivity opportunities. What do you think happens there as we forecast that maybe 1, 2, 3 years?

Yes. Look, the generics, loss of exclusivity, the generic market is something that is important for the for the overall market, right? So as products mature, whether it's a small molecule generic or biosimilar, as the products mature, they have an opportunity to go to generic format. That's good for our business in both cases. I will caveat that kind of as you kind of did more of the historical perspective, there was a time when generics were a larger part of the profitability growth in the model. And as we've rebalanced contracts over a long period of time, that is less so. So still very positive, and it's excellent for our business, but it wouldn't be the significant upside that we might have seen 10 years ago and that we've taken some of the upside out, but we've also taken some of the downside out from that deflation that we've experienced.

And as we think about some Part B biosimilars, I guess, how do we think about potential contribution from biosimilars? Obviously, we follow your biosimilar report quite closely. We see things like additional EYLEA biosimilars or first biosimilar launches for drugs like SIMPONI as an example. I guess how is the company thinking about that? And maybe how the cadence of biosimilar opportunities looks relative to the past couple of years that have influenced the numbers?

Yes. Let's start with Part B. So Leo biosimilar that you gave is a good example of our future additional biosimilars. That is a tailwind to our business. So as products go biosimilar within the Part B space, which is where we have a significant wraparound services with those physician practices. So specialty distribution, the MSO, the GPO analytic services that we're providing to the practices and the manufacturers that really allows us to help the biosimilar gain market traction even more quickly. And we've seen over a long period of time that the physicians in the Part B space, in part due to the services that we're providing, get comfortable with about similar more quickly, they begin using it and therefore, we have that adoption, which again, from a profitability standpoint, it is net positive for core, it's a tailwind.

Okay. And then if we think about GLP-1 has obviously been like a huge contributor to top line growth over the past few years. But I think like the message across the industry overall is the economics on these drugs have been pretty limited relative to maybe the rest of your business. I guess how should we think about that? Maybe as you've seen maybe the mix of drugs potentially change over the next couple of years? Like why shouldn't this be a business that eventually the industry can maybe earn a little bit better economics on?

Yes, I'll start, Bob, and if you need to add anything. Overall, I don't think there's an analogy model out there for the GLP ones, right? The robust growth and the continued growth. And we saw that on the top line. And in Q3, right, 25%, $2.3 billion of growth. And as you said, the profitability is modest. And we don't expect that to change in the near term as you look at the distribution of those. Overall, from a growth perspective, 1 would expect at some point, the law of large numbers comes into -- comes into play here as well as any pricing actions Pharma decides to take. But what we've seen to date and what we continue to see is the innovation that's coming is bringing broader market access, right, with some of the direct-to-consumer programs as well as the innovation from a performance perspective. So we'll see. But from a profitability perspective, we don't expect a change in the near term.

Okay. And then to -- just to touch on the IRA. I mean I think the company has like been pretty clear that in terms of the drugs that were selected for 2026, and you've been able to maintain economics. I assume at this point, you're probably well on the way to conversations around 2027. I guess how should we be thinking about 2027? Is there any reason to think that the ultimate outcome has any real variability around it compared to maybe what you're able to generate for 2026?

We assume that there's not a change. So that the success that we've had working with the manufacturers continues, but a couple of points for context. I think one, as it relates to IRA. An IRA product doesn't necessarily mean a whack reduction. And so most of them have taken reductions they all haven't. And then there are other products outside of that -- outside of the IRA who will take less price reductions from time to time. And the important thing to think about is just the relationship that we have with the manufacturers and the services that we provide. Because we will tend to talk about -- we always have the opportunity to go and have a conversation, right? We can talk about the value that we're providing. But really, the proof is in the pudding, and this goes back several years. But we've been answering the question about WACC reductions for many, many, many years before they actually were happening and what we said at the time was we were confident that the services that we provide would be valued by the manufacturers and that we would be able to maintain that value. Then when we saw the insulin reductions, that was true. And I think people would say, well, maybe that was a one-off. That was kind of a unique case. But then over the past year, as you said, we were able to talk to the manufacturers and discuss the value of the services that we provide. And it's everything we tend to think about the delivery that we do. But it's also where Brian the product, we're warehousing the product, we're ensuring the product. We're taking on the AR risk for the product. We're managing the inventory for the manufacturer. We're providing data services to the manufacturers. So there are significant things that we do for those fees that are important. And so we've seen that validated over many proof points at this point, and we expect to continue to work closely with the manufacturers and having that success continue going forward.

Maybe to pivot to 1 oncology, you completed the acquisition of the majority of the remaining equity interest earlier this year. I would love to just get an update on the financial performance of that asset what a top line and earnings growth look like at the moment? And what changes operationally, if anything, now with the greater control that you have?

Yes. So overall, 1 on oncology is performing really well, right, slightly better than we expected. We continue to expect it to be net neutral to earnings over the first 12 months. That assumption remains based on current performance trends. But on an exciting note, right, there are tremendous opportunities as we look at 1 oncology platform and RCA to expand value pools, right? We've spoken about the clinical research side, the clinical trial side is an important part of the RCA model, whereas in 1 oncology to date, it's not. That's an opportunity. There are opportunities to expand the back office services we provide the revenue cycle. So as the teams are working, they're really focused on driving the growth and enhancing those areas of opportunities.