Good afternoon, everyone. My name is Eric Coldwell. I cover pharma distribution and healthcare services at Baird, and it's our pleasure to have a-- I almost said AmerisourceBergen again, Jim. It's just, it's just such an old habit. Cencora with us today, and that is a very recent name change and ticker change. So, hopefully, we do a great job of branding and marketing exercises here for the rest of the session. We have Jim Cleary with us, of course, CFO, Bennett Murphy in investor relations. This has been one of our top ideas for a number of years. We got back involved in the drug distribution space in February of 2020.
ABC has been a, either a formal best idea or one of the, you know, communicated best ideas, ever since that point. And we have a very long history. I think I said ABC again, which is—it's just gonna be habit. I'm gonna do it until I don't. I don't have a big formal intro, but I wanted to ask you if you wanted to jump in with any initial commentary, Jim, before we get going, or should we just dive right into the Q&A?
Eric, I'll start off by making a couple introductory remarks. I'll be brief. Thanks for the, you know, excellent job you do covering us and our industry. I'm also joined today by Bennett Murphy, who runs our investor relations and,
And treasury.
Treasury functions also.
There we go.
And Ben will be an active participant in the meeting today, and it's great to be here as Cencora, formerly AmerisourceBergen. Our new ticker symbol is COR, C-O-R. I think a very strong ticker. And let me just kind of talk a little bit about our company. Of course, we have kind of our core is in pharmaceutical distribution, which is a, you know, very good business, very good cash flow, very high return on invested capital, and then we complement that business with higher margin, higher growth businesses. And this is true both in the U.S. for Cencora and in our international businesses. In the U.S., of course, we have, you know, a very large-scaled strong free cash flow, pharmaceutical distribution business, and we complement that with higher margin, higher growth businesses like our...
For instance, our specialty physician services business, which has a lot of higher margin wraparound services with our biopharma manufacturer service businesses and our animal health business. And then it's similar in the international space. In that segment, Cencora, you know, has a very strong, pharmaceutical distribution business that we lead with, and again, it's complemented by higher margin, higher growth businesses, like our leading World Courier franchise that's a leader in doing logistics for drug trials. For some of the services businesses that came with Alliance, like the leading 3PL, business that we have, and by, other businesses like our, PharmaLex Biopharma Manufacturer Services business that we recently acquired. Just a tiny bit on, capital deployment. You know, this year, we'll have, over $2 billion of free cash flow. We're continuing to invest in the business.
We're also doing strategic M&A. We recently made an investment in OneOncology, which is a natural evolution of our specialty business. We did the PharmaLex acquisition that I talked about. We're continuing to do opportunistic share repurchases. This year, we repurchased over $1 billion of our stock, which we're very pleased with, and then we're continuing to grow our dividend each year. We're a purpose-driven company. We're united in our responsibility to create healthier futures, and of course, we really focus on creating value for all our stakeholders, including our shareholder base.
Thank you very much for that.
Yeah.
Okay, I'm gonna jump right in with the topic du jour. Hopefully, we don't have to spend too much time on this. I don't think we will, but you were unique in the sector this quarter by providing some more proactive commentary on the contribution of the GLP-1, the incremental contribution of the GLP-1 class. And I'm just curious, there were product sales in this category before the last two quarters when they really took off. Can you help us level set at all? Is there any additional commentary you could make on level setting, what the base was a year ago versus now?
And then, as we think about three drug distributors, each on a different fiscal year, each giving guidance at different points in time, so somebody who guides later for the next year or earlier for the next year is gonna be in a very different position on framing the growth in this market, right? Because of the spike in the last two quarters. I'm just curious if you could talk about what you're really thinking the growth or the revenue contribution, we'll start there-
Okay.
in distribution looks like.
Yeah, so let me kind of give you a few metrics from a revenue standpoint at Cencora, the impact of GLP-1s. And, you know, this most recent quarter, we had very strong top-line revenue growth at Cencora of 11.5% growth, and we indicated that if it were not for the GLP-1 growth, then our, you know, revenues would have grown at the same rate as our gross profits, which was 8.0% growth. So without the GLP-1s, we would have grown top line, not at 11.5%, but at 8.0%. And then also another metric that we put out there was that during the quarter, we had $2.4 billion of revenue growth from the GLP-1 category during the quarter.
And so I think that gives you a couple of metrics where you can triangulate there. And then I would assume that, you know, we're getting our fair share, that we'd have about, you know, the same share that we have in the category, that you know, we have across pharmaceuticals.
Using that 3.5 spread and the $2.4 billion, you can somewhat triangulate where you were in the past.
I'm guessing you and your team-
... will be able to.
Yep, and... Look, you know, this is a tough one because we all know you don't talk about product-specific or manufacturer-specific margin. At the same time, it's pretty obvious this is gonna be in your lower margin, lower profit contribution category. And there are some extra handling requirements here that add a little bit perhaps on the OpEx side. That being said, yeah, you know, one of your competitors, among the three large companies, one of the competitors was a bit more effusive about the opportunity. Sounded like they were seeing some additional opportunities, in patient access, some of their, some of their value-add services that they do. It didn't feel like Amerisource-- Sorry, gonna do it again. Until I don't. This is what happens when you're old and tired.
Cencora didn't sound like you, didn't sound like you really saw those same opportunities yet. I'm just curious if you've done any more introspection and thought about other avenues where GLPs could drive some additional growth?
Yeah, I will address that, but I'll say whenever you use our old name, I'm sure it's because you've done such an excellent job of covering us, Eric, and that's the-
I was fond. I won't deny, I was pretty fond of it. It was an easy ticker.
Yeah. Yeah.
Well, we think COR is a good ticker also, and we, you know, aim to be a core holding in all of your portfolios.
So-
The, um-
Don't worry, I still call IQVIA, Quintiles.
So it just... It's gonna happen for a while.
Okay. So on the profitability, and this is something that we've been very specific on. So, you know, the GLP-1 products are profitable for us from an operating income standpoint, though we are very specific in saying that they're minimally profitable for us. And, you know, the reason for that is that, you know, they are a specialty brand, and so, as a result of that, you know, the gross margin percentage is relatively low. And it also, you know, there are some higher handling costs because of the cold chain nature, and so they are a positive contributor to operating income, but minimally profitable. And so, and then from a kinda access solutions standpoint, there isn't anything that we're doing at this point in time.
But, of course, you know, our teams are always working on, you know, different services that we can provide for our partners. And then, you know, one of the things that we are doing is, we are, you know, keeping an eye on the, you know, any reimbursement challenges that pharmacies are having. And, you know, this is something that, you know, we will continue to do as a company, as always, you know, advocate for our customers from a reimbursement-
Right
... standpoint, Eric.
Let's shift gears and talk a bit about generics and just overall broad market dynamics there. We can, Wall Street can track various individual data points. We don't get to see everything out there, but we've seen some data that would suggest the overall basket of deflation has been improving for several months, maybe even a few quarters now. You were a bit more optimistic over the last few months and quarters. So the question is this: You talked about seeing pockets of improving pricing and generics improving for you. What are those pockets? Are they being driven by product shortages? Is it being driven by changes in the brand comparator drugs in the market, by manufacturers exiting in certain categories? I'm curious, when you see these pockets, where do you see them?
What tends to be a trigger, where perhaps the market says: "You know, we can be a little more, a little more aggressive with, with pricing than perhaps it was in the past?
Sure. And so, you know, we have commented on this, that we've seen a moderation of generic deflation. And we've indicated that it's been in pockets. It's probably too early to call it a sea change or too early to call it a trend. Of course, if it does become a trend, it's something that definitely benefits us because as generic deflation moderates, we'll have less of a headwind than we've had in the past. And, you know, there is some reason to be optimistic. And you ask, you know, what are some of the things that could be driving it? You know, Eric, one of the things may be increased FDA inspections internationally, which could impact supply.
It may be that, you know, manufacturers, you know, there's commentary out there from manufacturers really focused on their profitability-
... and perhaps pruning their portfolios and focusing on higher profitability products. There have been some spikes in demand, which happens in certain classes, and when those spikes in demand happens, it can be, it can have an impact in moderating generic deflation because, of course, it is a supply and demand market. And so those are the, those are the sorts of things that we are seeing. And, you know, it, it is too early to call it a trend, but, you know, it has had some positive impact on us in our fiscal year 2023.
I'm gonna come back to a couple of questions here, but I'm gonna jump over now to pricing on the brand side, which I think it was somewhat recognized that over the last give or take year, brand inflation at the margin was slightly more contributory. It's not a big chunk of your economics today. You've done a great job of balancing out the portfolio and changing how you work with manufacturers. But one of your peers recently made a comment that their next fiscal year's forecast does not include that same modest bump from branded pricing. I'm just curious, what's your view on branded pricing over the next year? I know you haven't formally given fiscal 2024 at this point, with November coming up, but what is your view?
Yeah, and so, I would say that brand inflation has been in line with our expectations, and it is less, and so it's, you know, it's, yeah, it's—I would say it's been, it's been in line with our expectations, and as I'm sure you're well aware, you know, well over 95%
Of our brand buy-side dollars are fee-for-service. And so, we aren't as reliant on, you know, brand inflation as we, you know, would've been at one point in time. But yeah, I just have to say it's generally in line with our expectations.
Would it be possible that one of your competitors... Given how mature this industry is, is it still possible that one of your manufacturers, or maybe at various times, all of you have slightly different relationships with manufacturers, where perhaps somebody could have just been in a special situation to get a little extra economics that you might not have naturally played in? Is that still happening in the market these days?
I wouldn't call it extra. You could call it different.
Different.
Right.
Okay.
So, I mean, we've actively, over the last six years, gone from being reliant on having a bigger portion of our profit derived from that-
Yeah
... to actively move that percent up, and there was, it was almost like a quarter-to-quarter progression update of 5% as we went.
Yeah.
And I think, we like that fee-for-service model. That's helpful. It's predictable. It makes sense for a lot of parties involved. Could there be some differences? Possible, but we wouldn't be able to comment on it.
Last one I wanna hit on with generics before moving on. One of the topics that does come in from time to time is, you know, the group has taken so much market share and penetration over the last three decades plus. You had this big move towards generics, 88%-90% of all the scripts in the country at this point. You've all aligned with buying partners in some various fashion, partners of scale. What's left beyond just riding the wave of new introductions and executing well and leveraging whatever growth you get? Are there still incremental opportunities in generics to increase adherence programs or cut back on discounting or add additional services? Are there more opportunities to continue to grow beyond just participating in the market as it unfolds?
Yeah, the market overall is mature and stable.
Yeah.
But of course, we're always focused on the sorts of things that you're talking about and kind of, you know, working very closely with our customers to make sure that we have, you know, not only the right pricing, but equally as important, all the right services to make sure that we reduce leakage and, maintain our share and have opportunity to grow share. Like, we have a number I'll just use as one example, we've got a number of services with independent pharmacies that, that we, are always providing to increase the, you know, loyalty of our customer base, which helps to increase compliance and share. And so that would be, you know, everything from, you know, business coaching to our, Elevate PSAO to, you know, helping them with their front of store or helping them with private label brands.
So there's kind of, whether it be with that customer group or other customer groups, we're always working on things to reduce leakage and increase share there. Eric?
I wanna hit on cell and gene therapy quickly. I realize that individual products and perhaps the market overall are still a pretty small piece, but it's such a big part or has been such a big part of the conversation for a few years now. You've been involved here for a long time, especially in your, the way I think of it, in your specialty logistics businesses, in particular, the cold chain handling and the real-time services you provide there. I guess a couple of questions here. First off, can you talk about the new innovation hub? You know, this is what? April news, if I remember, maybe a little earlier than that.
April.
And then, you also had, and again, very specific, but it's public, that you put out the Krystal Bioscience deal. Just, can you talk about what you've done there and maybe use that as an anecdote for how you can help manufacturers in the cell and gene therapy market?
Sure.
Should they be? Yeah.
Sure. I think your anecdote is good, right?
Yeah.
It's a good way of characterizing it on an individual manufacturer announcement.
But I think as you think about it, we're being very intentional in how we go to market with the differentiated assets that we have to ensure that we are at the forefront of the cell and gene market as it begins to crystallize in the coming years. We, you know, whether it's the specialty logistics that we provide through World Courier, 3PL, patient access, market access, regulatory affairs or regulatory consulting, we have a differentiated set of capabilities, and we're really being intentional how we go to the small, mid-sized biotech and even large pharma, and how we can solve the or be a solution provider for them as they navigate the complexity of commercializing cell and gene therapies.
I was at a CRO last week, and one of the topics that came up, they have a central lab, and they said that they're still seeing increases in transport and freight cost. This ties in a little bit to what you do with MWI, but also specialty logistics overall. Can you give us an update on MWI and what you're seeing in terms of demand across, whether it's specialty, cell and gene therapy, clinical trials? I just don't wanna leave that business out because I feel like it's been such an interesting part of the ABC diversification story over time and some of the extra services that you provide.
Okay, and which is the business you're-
I said MWI.
Okay.
World Courier.
Okay.
If I said MWI-
Yeah
... I just, because I think of you coming from MWI-
Sure, sure
when I'm looking at you.
Yeah.
Yeah.
You know, the World Courier business has been such a successful business for us, and as I'm sure all of you are aware, you know, it's a leader in doing logistics for drug trials. It's, you know, all around the world, and our business partners, you know, manufacturers, kind of really rely upon it for those... And in part, well, it's in the U.S. also, but in particular for the international shipments and, you know, doing the logistics-
... for drug trials. And it's a business that, you know, really has a lot of neat opportunities in the future also, and helping us be a leader, you know, being one of those services that Bennett talked about, and helping us, you know, be a leader in the cell and gene space is one of the opportunities that it creates because-
Yeah
... you know, it does have such expertise in those, you know, really critical cold chain shipments.
OneOncology. The Street was very excited about this news a few months back. I think it was your presence in specialty overall, spanning what? Three decades plus now, has been a great growth driver for the company, a really interesting differentiation, and now you're moving a little closer to the community oncology world. I mean, through an investment upfront, a partnership JV upfront, but I'm hoping you can talk a little bit about what you're seeing now that you have a more formal stake with that previous partner, customer of yours. And, and then as an add-on to that, it's early still, but have you found additional opportunities to work with them? I mean, you were fairly, by my understanding, fairly penetrated with the service side, but-
Yeah
... are you finding additional opportunities to work with them?
Yeah, and so, I'll start out and then, Bennett, please feel free to add. So, the OneOncology investment we've made this year, we are a minority owner in the business. We have partners, including, the private equity firm TPG, and the physician management owners of the business. And it's really the investment there and the strategy is really a natural evolution of our leading specialty franchise. You know, our specialty business was started by our CEO, Steve Collis, and of course, we're the, you know, leader in things like oncology supply, which is the distribution business to community oncology practices. And then, of course, we have the ION GPO, the leading GPO in that market.
So getting into this managed service or organization, the OneOncology business, to provide these, you know, practice management services for community oncology practices is really the natural evolution of the business, and we're very excited about it. We're, you know, kinda actively working with them on, you know, kind of additional ways that that we can add value there. It's something that will, you know, of course, benefit OneOncology, but really benefit all of our community oncology practices as we're able to, you know, kinda increase our knowledge base and provide additional services. Bennett, if there's anything you'd like to add?
I think that's well said. It's an additional service, so it's another solution set that we can add to our capabilities for community oncology that are looking for this type of solution. Allows them to continue to run their business rather than the alternative of, you know, potentially selling into a health system. This allows them to be a part of a physician-led organization that is like-minded.
So I noticed, and this is them, not you, but they recently partnered with Verily on a CTMS system. They're talking a lot about expanding their oncology research platform. You have a number of capabilities wrapped around, clinical trial support, and I'm curious, do you see yourselves... I know this was a topic that came up, what? Six years ago, maybe, that you were maybe a little more interested at the time in CRO, clinical research, clinical trial support. You do a number of fringe things today. You've done PharmaLex. Is there any kind of a clue or a signal here that maybe Ameris... God, I almost said it again. Cencora, is maybe thinking about going in that direction a bit, more formally than you-
Yeah
... than you have even today?
Yeah, sure. Let me start out, and then Bennett can add. So, you know, clinical trial enablement-
Yeah
... and working with, OneOncology and the community oncologists there, and with our, upstream manufacturer partners, I mean, there, you know, likely could be some opportunities there where kinda we can have services that, you know, operate there kind of at the core and in the center and, and work with both the, community oncology practices, OneOncology and others, and the manufacturers on things like clinical trial enablement.
I wanna talk in the last few minutes, and if anybody has a question, please feel free to send in to the iPad. You have, there've been a lot of moving pieces the last few years, ups and downs with COVID, international, FX. The, the, the list is pretty enormous. Plus, mix shift in, in the products that are hitting the market and what's growing. You've done a great job with margin, given that, that incredible landscape. OpEx over the last year was technically down one basis point, I think, as a percent of revenue, but pretty much held in line until the last quarter, where it showed a little more improvement.
Yeah.
Looked a little better. You sound pretty upbeat on OpEx. Can you talk to us about what the opportunity is here? Because in a, you know, 2.2% of revenue, 2.19% the last year, that's a basis point really matters on a business of this size, so.
Sure, sure, and we felt for a couple of quarters that our OpEx had been growing at a little bit too fast a rate, and we recognized that as we entered the calendar year. And so we took some actions starting in January through April to really become more efficient, because efficiency is such an important part of our business model. And so we took some actions there and really saw the, you know, benefits from it starting in our fiscal third quarter, the June quarter. And that was a result of, one, the actions we took, and also the inflation comps got easier for us. We saw kind of inflation starting in, like, February of 2022, and so kind of once we anniversaried that, when we were in the June quarter, those comps were easier for us.
And so, you know, kinda, efficiency is such an important part of our business model and important, in addition to quality, of course. And so, you know, we felt it was important to take those initiatives.
So what's the outlook? I mean, a lot of changes here, right? You have FX going in the other direction now versus where it was a year ago, perhaps. You have, you have this, this GLP-1 growth at a different margin profile. At the same time, maybe generics looking a little better. There's so many moving pieces. What is your long-term thinking on all else constant, assuming no major structural change in what the company goes after, no new acquisition, let's say, where do you think OpEx can go over time, and how are you gonna manage it?
Okay, that's a really good question, and there's a lot of moving pieces.
But I'll be pretty brief and just say that over the long term, having OpEx grow slower than GP is very important to us, and that, of course, will have operating income benefits. But I will say that there's always moving parts. For instance, like if COVID treatments come down, they're high margin, or if GLP-1s go up, they're low margin. So things like that can increase our GP percentage from time to time. But once you normalize for those sorts of things, I think you'll consistently see OpEx growing slower than GP. But one other thing I'll say, what's really important to us is also growing operating income dollars, and that's one thing we're always focused on, growing operating income dollars.
Your long-term guidance for both the U.S. and international segments are a 5%-8% AOI growth-
Absolutely, yes.
On a normalized basis, and-
Yes, yeah, 5%-8% operating income growth, ex-COVID constant currency. Yeah.
So I mentioned MWI earlier, so I'll come back to it and actually ask you about MWI. It felt like production and perhaps the companion market were doing a bit better recently. I mean, there was that big spike with COVID. Everybody went out and got a dog, and a frog, and a turtle, and now there was maybe a bit of a backlash after that. I'm curious what your overall dynamic is in MWI today.
Yeah, you're, you're absolutely right. Our... I'll talk about calendar years now. Calendar year 2021 was very strong in the companion animal market, as during COVID, you know, people went out and got pets and brought them to the veterinarian. Calendar year 2022 was a tougher comp-
... and that, you know, we saw that for us in the December quarter. Then for us, the March quarter improved, and then the June quarter improved again and was quite a good quarter for us in both the companion animal and production animal space.
Is it? Do you have any sense on why? Is it just a recovery from the hangover post-COVID, or is there something more going on in the marketplace?
I think it was two things. One, it was a recovery, and so the comps were easier, and then the second thing is it's just, you know, a very good market for the long term that's really driven by, of course, the human-pet bond and, you know, the importance of feeding a growing, hungry world.
Jim, I have to ask you, and Bennett as well, with your role in Treasury, well, can you give us an updated thought on capital deployment? The attractiveness of interest rates today and holding cash perhaps a bit longer versus keeping debt levels low and your high quality, you know, agency ratings, stock buybacks, M&A, just what-- how does it all fit together right here, right now?
Yeah, it's balanced capital deployment, and it's great to work with Bennett now that Bennett, Bennett also has, you know-
... the treasury responsibility in addition to IR as a business partner in this front, and we actively work together on it. And it's really, you know, continuing to invest in the business, which always has a good return. It's strategic M&A, and we've shown this year, you know, we've really kind of focused that on our leading specialty franchise and biopharma manufacturer services. It's higher margin, higher growth. It's opportunistic share repurchases, and of course, you know, this year we've repurchased over $1 billion of stock, which is, of course, good for all our shareholders. And then to have a reasonable growing dividend that for the last several years we've been growing at about 5% a year.
Yeah, and I think we appreciate and value having a strong balance sheet, and as always, we remain committed to being investment-grade with the rating agencies.
Okay, any last comments? We have 22 seconds. I don't know if you wanna make a final comment, and I'll check for the audience as well.
Thanks so much for having us here as Cencora.
Yes.
And, we'd be happy to answer any questions anyone had.
Well, maybe you can open practice management, and I'll seek speech therapy on getting your name right in the future. It's after a couple of decades, it's pretty hard not to say the old name, but still the same culture and the same core, and I really appreciate you being here. You've been a pleasure to cover over all these years.
Thank you, Eric.
Thanks, guys. Okay, everyone, please join me in thanking the team from Cencora. I wanna make a quick introduction. Coming up next, we have BioMarin, Twist Bioscience, Oculis, and Cytrellis, I believe. It's small print, but I believe it's Cytrellis in the private room. Thank you.