Hi, good morning, everyone. My name is Erin Wright. I'm the Lead Healthcare Services Analyst at Morgan Stanley. We're happy to have with us today, Cencora. We wanna make sure that everyone has the new name right, but that's formerly AmerisourceBergen, ticker symbol COR. But we're very happy to have you here with us today. Steve Collis, Chairman, President, and CEO; Jim Cleary, Executive Vice President and CFO. We also have Bennett Murphy in the audience as well with us today. But thank you so much for joining us. We really appreciate it, and I want to allow Steve to make some opening remarks. Thanks.
Yeah. Yeah, thank you, Erin, and thank you. We walked in here, and you had us down as Cencora already. So, we did change our name about two weeks ago, and we're very happy with the new ticker symbol. We're happy with the new name. We have our worldwide launch on Wednesday, actually. But, for us, of course, Cencora changed on August 30 when we changed the ticker symbol. We, f or those of you who don't know us, Cencora is a global prescription services company. We, and I say prescription pharmaceutical, we're very, very focused on that part and of the industry, and provide services up and down the channel, thinking about those more as integrated services.
We have definitely made a big push from a capital deployment and a operational effort into international. We bought a business called Alliance Healthcare, which has the distribution for Boots in the U.K., but many other pharma distribution businesses and also a third-party logistics business in Europe. When people think about Cencora, they might often think about our specialty distribution business in the U.S. A lot of the management's background is myself from oncology distribution business, and a lot of our other key management members, including our Chief Operating Officer, Bob Mauch, come from the services and integrated solutions business. Bob, for example, started a business called Xcenda, which is a key part of our pharmacoeconomic offering strategy.
So, we don't only serve community practices, we also serve other community physicians, such as ophthalmologists and retinal surgeons and nephrologists and neurologists. So we have a specialist. Any Part D provider, we provide a lot of services for them and have really been a key participant in the launch of biosimilars into the Part B space. We recently, the most recent acquisition, serious acquisition we've made is a minority investment in OneOncology, which is a leading community oncology practice aggregator. We are working closely with them. We have a private equity partner that we're working with as well to look at end-to-end solutions and also the learnings that we can glean from OneOncology that will really be relevant across our whole network. We also are very active in community pharmacy.
We have, in Europe, Alphega, and in the US, OneOncology—Good Neighbor Pharmacy, which is a key offering for us. Another big acquisition we made is really on our integrated commercialization solutions business, a company called PharmaLex, which is headquartered in Germany, which rather really extends our platform of services to pharma manufacturers, and that's going well. We intend to be a very strong solutions provider, not only in the U.S., but in Europe as well. Each market's different, but we have a lot of relevant learnings and a lot of launch support programs, for example. There's a lot of commonality, and this also complements our World Courier business very well, which is a key performer for Cencora.
Finally, you know, to shareholders and potential shareholders, we always talk about our long-term value proposition. AmerisourceBergen is a multi-stakeholder, purpose-driven company, but really is focused on creating long-term value for our shareholders. I think we've done a great job on capital deployment, you know, with Jim's leadership, and you will see us, you know, continuing, to be, to drive value for our shareholders and all our stakeholders in the years ahead. Now, as Cencora, Cencora, formerly AmerisourceBergen.
Great, thanks. I'll start with a broader question here, and you mentioned several of the businesses that you're in at the moment, but your business model does continue to evolve, and I think it becomes increasingly differentiated with not just World Courier or MWI or your leadership and specialty, but also in international. You know, what does it look like in 3-5 years? Are you gonna be increasing emphasis on the international side, or is there other areas that you're interested in as well? And, like, how does the evolution, especially under Cencora, look?
Well, I think the last time I saw you were at our Investor Day, and, you know, I think AmerisourceBergen, Cencora, we're very thoughtful. Of course, myself there. We're very thoughtful on, on capital deployment. So, we feel like our portfolio is very, well established at the moment, and there's lots of areas that we can add to organically. Often we'll be led by a customer, and it could be on the manufacturer side, or it could be on the distribution side, but somebody has a need to create a 3PL program or an adherence program or an access program. We often would grow, you know, that organically, and we have a lot of resources and capabilities to do it. We also have a lot of tremendous expertise in internal investments.
We did our fusion projects in Lash, for example. That's our reimbursement and analytics business. We can build internal programs as well. Of course, the people who run our businesses, who I love meeting with, and Jim, we're very close to them. I think when you've been in these businesses as long as we have, that's one of the interesting parts of our job, is looking at the strategy. And we do. We wanna always deploy capital thoughtfully. It's probably the most important things that the two of us do, but we would look to probably make more acquisitions in international areas, around the commercialization services area. We have about four or five key areas of expertise that we're looking to do.
We also are looking at, you know, regional opportunities, say, for our Alloga business, but we'll always be deployed by quality. We'll always be motivated by quality of assets, a strategic fit with our business. Does it fit our overall purpose? Does it help advance those core businesses we're in? Will it bring us closer to our key customers? And, you know, nothing on the M&A front would supersede taking care of our customers, making sure that we keep that world-class portfolio of customers that Cencora is really notable for. Some of the most prominent names in U.S. healthcare and European healthcare, and, you know, and also the role that we have with the manufacturers.
But we do have a tremendous amount of cash flow, and, that's one of—as I said, every year, we'll try to deploy that in the most thoughtful way. Of course, we have our dividend policies. You know, we usually participate a bit in share repurchases, depending on market circumstances. But, you know, we will think a lot about internal and external acquisitions as well. Jim, you wanna add anything?
I would just say it's all about, you know, our really strong foundation in pharmaceutical distribution, which is just a, you know, terrific business with, you know, very good growth potential, really strong ROIC and cash flow, and that enables us to, complement the distribution business with these higher margin, higher growth businesses that Steve talked about.
Great. And can you provide us a little bit of an update on just core drug utilization and the experience that you're seeing in U.S. core drug distribution, has been very strong. Is it sustainable? I think is the one big question that we get from investors, and what's driving the recent strength in core pharma.
Yeah, I think as we've, you know, talked about our earnings and announced earnings during the first three quarters of this fiscal year, where we've continued to have very good results, is that, you know, it's been based on, broad-based, strong performance across many of our businesses and good utilization trends in pharma. And, as we kind of, finish out our fiscal year, and, you know, we're, you know, continue to feel good about utilization trends and feel good about utilization trends for the long term, and it's really driven by, you know, three things. It's driven by demographics, which I think are well understood. It's driven by innovation, and we continue to see, you know, terrific innovation in the pharmaceutical market, including in this, this year.
Then it's also driven by value, with pharmaceuticals being the most cost-effective form of care. So, you know, I think those three things, demographics, innovation, and value, will continue to drive good utilization trends, Erin.
Then as we think about, especially in the U.S. core pharma segment and the sustainability of the strength, that you're seeing, acknowledging you're not gonna provide 2024 guidance, but you're more than welcome to at this platform, you know, can you kinda help us understand the headwinds and tailwinds as we head into 2024?
Sure. Of course, Cencora will announce our, you know, our fourth quarter results, likely in early November, and we'll provide our fiscal year 2024 guidance for Cencora then. You know, just let me talk a little bit about tailwinds and kind of things that we, you know, see in the business. You know, of course, I already mentioned the utilization trends. You know, I you know, couple that with the strong market position across our businesses, and particularly in the faster-growing specialty part of the market. And then I think we've also really demonstrated really strong execution by our team.
And so as a result of, you know, those things, we think we're bringing, you know, we have good momentum in the business, and, you know, that gives us confidence in our long-term guidance, which is, of course, you know, the 5%-8% operating income growth. And so, of course, there's always gonna be some headwinds in the business. One that's well known, that we've talked about many times, is contribution from COVID treatments. And of course, as we talked about, we expect, you know, those to come down in the fourth quarter versus the fourth quarter last year when they were strong. And, you know, as we've talked about, we expect those contributions to come down in fiscal year 2024, which I think is, you know, a headwind that is well understood.
You know, we feel very good about our long-term guidance that we've talked about, a 5%-8% operating income growth, Erin.
Okay, great. And so I think your peers have also been in sort of that mid-single-digit range in terms of operating profit guidance for the U.S. core pharma businesses. I mean, why wouldn't you necessarily, given your mix, especially with specialty and, and other areas, why wouldn't you be necessarily at the higher end of that?
Yeah, so let me talk about what drives that, that 5%-8% growth. It's really, you know, what Steve and I both talked about. It's, it's our, you know, strong foundation in pharmaceutical distribution, which will continue to have good growth, and then we complement that with the, you know, the higher margin, higher growth businesses. You know, it's true both in our U.S. business and in our international business. You know, in our U.S. business, we have, of course, you know, our, our biopharma services business, we have specialty physician services, we have the Animal Health business. In the international business, we have our global specialty logistics business, we have the 3PL business that came with Alliance, and we now have the PharmaLex acquisition.
Those are the sorts of things, you know, that enable us, you know, to have confidence in that 5%-8% long-term guidance for operating income growth.
Okay. One of the hot topics today at the conference, and we have several manufacturers as well, talking about this, but obesity and the GLP-1. I understand that, you know, the margin profile is less favorable, but there is an EBIT dollar contribution, just given the volume that most likely you're seeing. Do you have your fair share of that market? How should we think about, you know, margins over the longer term, as well as when you get into potential oral solids in that category? And can you talk a little bit about how that's contributing as well to EBIT dollar growth?
Yes, sure. I'll first start out at the top line, and as we talked about on our third quarter call, you know, it really is a driver of revenue growth. And this most recent quarter, I believe we had 11.5% revenue growth, and we said that that GLP-1s were a big driver of that, and if it were not for GLP-1s, our revenue growth would've been more in line with our GP growth, which was 8% during the quarter. So it's clearly a driver of revenue growth, and it's just so great to see the positive impact that it has on patients. It is unprofitable from an operating income standpoint, but as we've indicated in the past, it's minimally profitable from an operating income standpoint, but it does, of course, contribute positive EBIT dollars.
Erin, you know, I'm not going to speculate on oral solids in the market, but, you know, I'll just indicate that that we're just, you know, very pleased to be, you know, offering these to our to our customers and our customers offering them to patients. One of the other things I've, you know, talked about, it is a branded pharma product. The gross profit margins, you know, are relatively low, and the operating expenses are a little bit higher on these because of the cold chain nature, but it is, as we talked about, you know, profitable from an EBIT standpoint.
Okay, great. And then just more broadly on specialty, can you talk a little bit about trends overall in the specialty business, long-term growth and margin profile there? You know, what's feasible in terms of how, how big that business can get as a percentage of total, and, and give us an update on, on OneOncology as well?
Yeah, you know, I remember one of the things that, my predecessor said, "The next CEO," he said to the board, "The next CEO of AmerisourceBergen in those days needs to have a strong knowledge of specialty." And, of course, I was, I really was started our specialty business in 1994, and it's evolved so much. I mean, I remember when I left, when I left, the legacy specialty business to come and run, be CEO of the company, we had, like, two or three contracts at ION, and we have really developed those businesses so incredibly, not only in the oncology area, but also in the other specialties, as I mentioned. And community oncology has just become, so diverse.
Also, our specialty practices outside of the community and health systems and hospital outpatient areas are also a very important part of our practice and a differentiator. We also service a lot of the specialty, PBMs, mail order, those tend to be a strong practice because of our knowledge, our relationship, our expertise. You know, when it comes into specifically community oncology, this is the practice where I'd say, we operate them at the highest end of our distribution license, because of all the various services, we were able to offer with the platform, particularly the ION and the really excellent, distribution businesses that we have in oncology, complement us.
This is an area that will continue to grow because that's where the investment dollars are from the pharma companies, and it's where, you know, a lot of benefits are accruing to patients. So, we, we intend to do more in Europe. We'll probably do that more through, 3PL and pre-wholesale businesses as well, but a very important pillar for Cencora is our specialty business, and you'll see us continue to evolve. I think we've shown a good history of being the leader in this space. OneOncology is a differentiator for us, probably something that I might not have anticipated a few years ago for Cencora, but, we, we did feel like this was the right time for us to really be involved from a, a management perspective and share those lessons.
This was a, is an important customer for us. We go back a long, long time with, many of the principals of that business, and some of our, key opinion leaders on our ION panels come from that business. So we know it very, very well, and, you know, we're looking forward to participating and helping, guide community oncology to, through some of the changes that we're gonna be seeing in the future, like IRA. We look forward to helping, community oncologists land well. That's an important part of our business, is the community practitioner, and, probably, you know, of course, our veterinarian business very well, also the pharmacy business, and, and of course, community oncology and community specialties in general are where we're gonna be placing a, a lot of our bet.
You mentioned at the beginning, too, biosimilars as well, and can you talk a little bit about your positioning there, how we should think about that being a growth opportunity for you, obviously on the Part B side, not Part D with Humira. But can you talk a little bit about what key therapeutic areas maybe you're looking at near term as well as opportunity?
Well, you know, often with the Part D, it's, it's, you know, it is a positive for us in terms of GP dollars, and many times we'll just try to preserve the dollars that we're making on a more expensive brand product. So it is, it is a driver for us on the Part D side as well, but, it, y ou're absolutely right, Erin. Where it gets really more interesting and it's, you know, and financially influential for us is on the Part D drugs, where we have, you know, the contracting and PBT-type committees that ION in particular has. So we're able to have a greater role and hence earn a greater margin. And I think we've been very helpful with the market access.
You know, the education about the administration of these products, the reimbursement of these products into the practices, helping manufacturers, some of them who aren't as familiar with the Part D market and the community market, how do they access those markets? How do they differentiate their products? How do they think about their ASP strategy? So we have a really good practice there. This is an important part of our business. I think you've seen such strong results for several years from the buyers, you know, in part from the buyers, some of the trends in the community setting, and you'll continue to see us be, you know, an influential performer there.
Okay, great. And then, switching gears a little bit here on the traditional or the traditional drug distributors did get caught up to some extent with some of the recent PBM news flow, particularly the Blue Shield of California contract. Moving to alternative players, can you talk a little bit about those alternative players in the space, where it is, whether it's Mark Cuban's Cost Plus Drug or Amazon? How do you fit in? Where are there opportunities for you as well as implications across the supply chain?
Well, I think it's fairly well known that we are Amazon's distributor and, you know, we like all key accounts for us, I mean, we're involved with, we try to help them, we meet with them regularly. I think one of the developments that I'm most proud about, about Cencora is that we don't just meet with customers when it's RFP time. We literally try to be very engaged in each other's businesses, and that's the opportunity that we have with the larger customers like that, to really bring them an aggregation of great ideas. What are we seeing? What are best practices? What are we hearing from our suppliers? What are the data needs? What are we hearing from our third-party network contracting? So, you know, we have a tremendous ability to help customers understand the prescription market.
Our strategy is to have the best customers and to keep them as long-term customers, and we are really obsessed with that. If there's anything we're obsessed about from the customer side, it's keeping those large customers, those key customers that help us maintain the prescription market share. So we look at the different sites of care, and, you know, we wanna be represented in all of them, and we don't work with one of the players that you mentioned yet, but, you know, as they evolve, who knows? It's possible that a company like ours could. And, you know, we wanna always be representing that prescription dollar, and I think we do.
We look at our market share, make sure that in all the key segments we're serving, that we have those leading customers, and you'll see us continue to be there. But I don't think anything really to call out right now in terms of, y ou know. When we're looking at our 2024 outlook, this isn't something that is a particular anxiety to us right now.
Okay. As we think about the drug pricing environment, though, more broadly, generic drug pricing environment, branded, obviously you're more of a fee-for-service model these days anyway, but how do we think about the economic impact to Cencora around areas like branded insulin with price cuts and those kind of dynamics?
Yeah.
Is anything on your radar screen?
It's a great question. I mean, I, I think insulin has been a product that's somewhat prominent in terms of the pricing and the rebate structure. So I, I think ultimately you have some very well-positioned, smart manufacturers that are largely participating in this market that have made adjustments and probably are. It's helpful in terms of benefit design and patient access. I mean, these are not expensive products at the net level that patients should have clear and understandable access to, so we're supportive of that. And you know, we're not here to espouse policy, but we, we're supportive, again, always of patient access, of simpler benefit design, of a fair benefit design, where the burdens are shared between all the payers in, in, in all the different settings. One thing...
Oh, also I said we're obsessed about maintaining the leading customers. We're also obsessed with the notion, which we think is very valid, that pharmaceuticals are the most efficient form of healthcare. And, you know, we're proud of the 90% of prescriptions in the U.S. are generics, and sometimes we think that the pricing is, you know, too over-leveraged towards the pricing, you know, towards the pricing of the newer drugs, the cell and gene therapies. And, you know, on the 90% of prescriptions, the U.S. gets very competitive pricing. We're obviously a part of that. And on brand drugs, we think that manufacturers are already, you know, holding the line and being thoughtful about how those products should be launched as well. Anything you'd add, Jim?
Sure. I just would say that, you know, we've had terms in our contracts for quite some time, that, if there is something like a major change in price, then, there'd be a renegotiation of the contract. And we have a, you know, very high degree of confidence in the value that Cencora provides and distribution provides. And so, you know, we do have that ability, and, we don't have anything to call out at this point in time, but, a nd I wouldn't expect that, you know, we would ever, call it out on a specific product basis, 'cause it would just be the sort of thing that would move us a tiny bit within our, guidance range. But then I'll also say that in general, branded inflation has been in line with our expectations.
As you commented on, you know, well over 90%, 95%, well, well over that is on brand products are fee-for-service. And then with regard to generic deflation, one thing that we have called out on our most recent earnings call is that we have seen pockets in generics of moderation of deflation, and that benefited us somewhat this year. And if that did continue, and if it were to be broader than pockets, if we continued to see a moderation of deflation, it would be something that would be, you know, less of a headwind for us than we faced in the past year.
We've seen pockets of inflation.
Yeah. Okay.
In certain key areas, so.
And then, you know, you've set up these guardrails, for instance, in a lot of these contracts, but what are some of the bigger regulatory changes that you're focused on, whether it's IRA or other areas, what should we be paying attention to?
Well, we certainly are. In fact, next week we have our Presidents' Club meeting. I'm actually gonna be in Washington this week and next week, so we are very active. What we largely do in Washington is advocate for our customers. I think sometimes, you know, the legislation comes out so broad, and you have to bring it down to specifics. And as you would expect, we're very focused on those community providers who sometimes don't have the resources. So absolutely, the IRA is something that we're paying close attention to. We want to create, we wanna be a part of an environment where the U.S. continues to be the leader in life sciences development. I think that's something that's, there's not enough discussion about.
But you know, as long as the reimbursement is adequate for our customers, the practitioner customers, we obviously could help navigate any changes. The chargebacks are very powerful, the contracting that we can do. Those are very powerful mechanisms which could help facilitate some of these changes if there needs to be those sort of mechanisms, depending on how pricing ends up. I think you have the different sides and, b ut to us, it's very important that the market continue to be incented to innovate.
I mean, we've seen incredible examples with the GLP-1s of innovation, and, you know, I actually, was, ended up, having a dinner the other night with a bunch of payers and pharma companies, and we had a tremendously interesting discussion about, in the long run, what are the benefits gonna be from the cardiac benefits, the weight loss, you know, better management of diabetes? And you could really be seeing something profound here. I mean, truly profound from a healthcare societal perspective. So I think that's exciting as well, and we don't want to discourage that.
I have about five questions on international, so I'll combine it into one.
Okay.
But can you just give us an update on the international business, macro dynamics, anything else you would call out, especially as, anything from the quarterly progression standpoint that we should be thinking about, too?
Well, last year, this time, Jim and Laz and Bennett were spending, you know, hours educating me on all the currencies, because last year was, it was volatile. So we learned to, you know, we learned to adjust to that, and, it, it's been a bit better this year, particularly in the bigger markets we're in. But, you know, we have a strong distribution businesses in Europe and including, in countries like Turkey, where we tend to be number 1, 2 , 3. We have a very pivotal relationship with Boots in the UK, which enables us to be, by far, the leader there. Also, in third-party logistics, we have a wonderful business called All oga, and we're well represented in countries like Norway, Netherlands, Spain.
We have very strong businesses in those countries as well. What we've tried to do is what we've done in the U.S., is to have that strong specialty presence, the knowledge of specialty, the commercialization services businesses, hence, PharmaLex. So you'll see in Europe, I believe, a continuation of the theme we've had in the U.S. of growing to our areas of strength, adding those services. Our goal, you asked about, you know, in five years' time, where would we be? Our goal is really to be much more influential in the overall distribution of specialty products into European markets, including hopefully even the hospital businesses, not, and to do more specialty at the retail counter. That's a key trend that we've seen from some of the European countries, like France, for example. They're very interested in that.
And then the integrated services with the manufacturers. And our hope is, if there's a new significant launch, Cencora is the best-positioned company to service that launch in many, many countries, that, that are important to the manufacturer. So we think that that could be something really magical there. And we continue to have profitable, well-performing businesses there. Alliance, the legacy Alliance, has done very well in the over two years since they've been with us.
Okay, great. And then, on Animal Health, can you talk a little bit about? I have to ask on Animal Health, so.
I'm the least expert on the podium here about Animal Health, so.
Jim, I know you are an expert.
Yeah, we, you know, we had a very good June quarter in Animal Health and saw good growth in both the companion animal market and the production animal market. And, you know, we had started to see good performance there in the March quarter, and then had even a better quarter in the June quarter. In the companion animal market, I have the sense that, you know, vet visits are starting to get better, and I, i n the production animal market, you know, while cattle numbers are down, you know, cattle are worth a lot, and so it makes a lot of economic sense to treat sick cattle.
I was pleased to see the improvement in performance the last couple of quarters there and feel, you know, very optimistic about the, you know, long-term prospects in the animal health market, you know, as a result, of course, of the, you know, the continuing very strong human-pet bond and the importance of feeding a growing, hungry world.
Okay, great. Lastly, anything to mention in terms of the quarterly cadence here as we head into the fourth quarter? I know you're not talking really about 2024, but just anything to call out.
Yeah, you know, there's really nothing, you know, major to call out that we haven't already talked about. You know, we'll see COVID treatment contribution, you know, come down significantly versus the fourth quarter of last year, which we've talked about. And from, as Steve was talking about recently, from an FX standpoint, with regard to the, you know, pound and the euro, the dollar was, you know, really very strong in the fourth quarter of last year. And so, you know, the weaker dollar in the fourth quarter of this year versus the pound and the euro benefits us a bit.
Okay. All right. Thank you so much. I really appreciate the time.
Thank you.
Thank you, Erin.