Great. Good morning, everyone, and thank you for joining this session of the Leerink Healthcare Crossroads Conference. I'm Mike Cherney, the healthcare tech distribution analyst. It's my pleasure to have the Cencora management team here with me. Jim Cleary, CFO, Bennett Murphy, who heads up IR as well as Treasury. We're just gonna go into a fireside chat. It's a lot more fun than doing slides. You know, maybe just to start, you know, you've had, obviously, multi-year, really strong performance, culminating with your most recent quarter, you know, another quarter of strong pharma performance.
I think you're all in, apples to apples, if you pretend that COVID didn't exist, 11%, give or take, core growth in the first half of the year on segment operating profit. How do we think about what are the key drivers behind this, especially given this is clearly outpacing what your long-term growth value is?
Yeah, we have had a, you know, track record of very strong performance that's really been driven by, you know, strong utilization trends and also our leadership and specialty. During the first half of our fiscal year in our U.S. segment, which is about 80% of our operating income, we had operating income growth of 16%, which was, of course, you know, far ahead of our expectations. And as Michael was saying, if we kind of subtract out, we look at it ex-COVID, and that's both commercial vaccines and exclusive therapies, ex COVID, as Michael was saying, it was 11% growth.
And if we just look at it ex commercial vaccines, it was 8% growth. And so that 11% ex-COVID is, you know, very strong, and, you know, again, it's driven by just really solid execution across the businesses. And it's driven by, you know, our long-term leadership and investment in specialty, which is, you know, a fast-growing part of the market, and, it's driven from a macro standpoint by utilization trends. And so we've been, you know, kind of very pleased with performance.
A s a result of that, after the last quarter, we, you know, increased guidance for operating income by one percentage point at both the low end and the high end of the range. So on a consolidated basis, now our operating income growth that we're expecting for the year is 9%-11%, and on a U.S. segment basis, we also increased by one percentage point at the low end or the high end, and it's 10%-12% growth. And then we've also, you know, as kind of, both as a result of our performance and as a result of our recent share repurchases, we've increased EPS guidance twice during the month of May.
You know, first, when we announced earnings, we increased EPS guidance by $0.05 at the low end of the range, and then after our recent share repurchase, we increased guidance by another $0.05 at both the low end and the high end. So our EPS guidance is now $13.35-$13.55, and so we've been, you know, pleased with the execution by our team members and by the, you know, kind of our markets that we're in, in fiscal year 2024.
Well, it's May 30th, so if you wanna go for the hat trick, you still have one more day left. We are not expecting that, just to be clear. You touched a bit about some of the drivers of performance in the quarter, and I think obviously just more than the quarter, but specialty is one that's clearly stood out. Yeah, maybe give us a lay of the land now on where are the biggest pockets of both category growth and then I would say also capability services growth that's leading to the outsized performance for Cencora.
Yeah, and this is an area where, of course, Cencora has been investing and growing organically for quite some time. Our, you know, many of our specialty businesses were started by Steve Collis, our CEO, and we've had, you know, kinda long-term leadership and long-term investment in specialty. And we really kind of are strong both upstream in the services we provide to manufacturers and, of course, downstream in our distribution and ancillary services that we have for providers.
And, you know, we have strength throughout our specialty businesses and, you know, particularly in specialty physician services, where we're, you know, providing distribution and services to providers, including oncology practices. And so let me kinda go through some of the upstream and downstream services.
If we kind of look over the product life cycle from a pre-commercialization standpoint, we have, you know, a number of services that we provide, and our recent acquisition of PharmaLex is a great example of investment there, where we're doing, you know, kind of consulting around, everything from, regulatory compliance to pharmacovigilance, to a number of other areas, working with, pharma companies. And then, of course, we have our leading World Courier business, which is the leader in doing, logistics for drug trials around the world, in over 50 countries around the world.
And then, of course, when we get into, commercialization, phase, you know, we have our, leading distribution business, and we also have, a 3PL business, where we're working with manufacturers both in the U.S. and Europe on specialty, products. And then as we look at services we provide, downstream to providers, and of course, we have the distribution business, but we also have the leading GPO in the specialty physician practice area for oncologists. Where we not only do the distribution but can provide a lot of wraparound services that have a high value to the providers and to the manufacturers.
And our most recent investment in specialty, which is really the natural evolution of our specialty business, is the approximately 35% of OneOncology that we purchased about a year ago. And we have a put call structure in place that it's you know likely that we would own the whole business within 3-5 years of the initial investment. And this is just, you know, a really terrific opportunity for us to continue the services that we provide in this market.
And it's a management services organization where we're providing, you know, both practice management services and research programs and those sorts of things for oncology practices. So we're very pleased with the growth. It's been a driver of our growth, and we're very pleased by the kind of growth that we've seen in the business, both organically and through our investments, and by the execution of our team members, and by the, you know, the vital services we're able to provide upstream and downstream.
It's a helpful reminder just of how broad the portfolio is in specialty. And I, I wanna pull on the OneOncology acquisition again for a bit, 'cause it felt like a very logical extension that I'm almost surprised it didn't happen three, five, whenever, many years ago. But why was this the right time, right company, to be the one to build on the MSO capabilities?
Yeah, and we've, you know, we have very strong relationships with oncology practices, both groups of oncology practices and individual oncology practices. And, you know, I used the term before, there was kind of the natural evolution of our specialty business to get into this, to this type of organization, this MSO that, you know, provides things like practice management services and research programs for, for, oncology practices. So everything from, you know, revenue cycle management to, to, you know, very good IT support and programs, to things, like, clinical trial management systems.
And, and so we, you know, view this as a, as a very good growth opportunity, and we had, you know, many, many year relationships with these oncology practices and these leaders. It was a new business for us, and so rather than buy 100% of it upfront, we thought the smart way to do it was to buy 35%, and we partnered with TPG that has experience with MSOs.
And so this gives us a few year period where we have three seats on the board, and we really, you know, learn the business. But due to the put call structure, we're, you know, looking forward to, you know, a few years or so out where we would own 100% of the business.
Maybe give us a little flavor, especially now, give or take a year in, about the work that you're doing as an organization. Having the three board seats helps drive strategy, but especially when I think about MSO businesses that are successful, typically they're consolidators, and this seems like a strong platform for them to consolidate. So how do you think about the role that Cencora is playing in terms of driving the growth of OneOncology ahead of the potential closure of the put call?
Yeah, we're you know very active as a board member and have you know three board seats and have you know significant ownership at 35%. And we're you know highly supportive in working with OneOncology, and they are showing good growth. And like for instance you know they added several anchor practices this year, and so they're you know capitalized in such a way that they're able to continue to grow. And we're seeing that in adding anchor practices in kind of existing states that they're in and new states that they're in, and doing a you know a very good job in attracting physicians also.
That, that's something they've done well for a number of years, right on their own. So we... You know, our board seat gives really good oversight on the governance and, you know, certainly some compliance and some of those things that need to be, you know, well established, well in place as we pivot, get closer to that put call. But they've grown quite nicely over the years. They have very good relationships with the physicians that have come into their practices, and it's good for them, for us, that there's an MSO like this in our network.
Yeah, no, it seems like a very logical expansion of strategy, so makes a lot of sense to me. Maybe sticking in specialty, but thinking about another topic is biosimilars. It feels like, you know, maybe, Jim, as long as you've been part of the company, we've been two years away from being two years away from real biosimilar adoption, but now we've actually seen some movement, more on the mail side, PBM focus, but at least growing an awareness of where you see biosimilar adoption being taken.
How do you think about, you know, A, what's embedded in your general growth views in biosimilars, and B, where you see the greatest opportunities on an overall medium-term basis on-
Yeah, I think we have seen really good adoption of biosimilars in the physician space and in the health system space. The challenge has been the PBM space. They have been slow to move patients off of the higher price product. But for the physicians and the health systems, they've moved. The physicians were very quick. Health systems, as everyone in this room knows, it can be a little bit slower. But as you know, therapeutic comparability and outcomes continue to be good, they've also been good adopters.
We've always been more optimistic about the Part B biosimilar side of the world because we've had confidence that you know-... Given the ability, the comparability of the underlying products that we thought we had confidence that physicians and health systems will move quickly. For the Part D side of the business, there's, you know, different challenges that on the PBM side. So we've always really, and the Part B side is really our sweet spot.
Bennett, if I could just add one thing there, and this kind of gets back to one of the things I was talking about earlier in kind of the Part B physician space with biosimilars. One of the things that we're able to really kind of help with downstream to physicians and upstream is, you know, we not only have the distribution services, but we have the leading GPO in the oncology space for physician practices. And so, you know, we're not only distributing the product, but we're doing a lot of education around the product, too, which is really valued by our downstream and upstream customers.
And I know, I know we don't talk specifically about ASP economics or anything like that, but for Cencora as a business, you're always focused on trying to lower your costs for your providers, lower your costs for your customers. But at the end of the day, it's likely more impactful, like, for, like, basis, the drug, the biosimilar conversions in the Part B versus the Part D market, correct?
Yeah, that's right. I mean, there's more service, there's more value for us to provide on the Part B side.
Turning to a recent, I guess, hot-button topic, but want to make sure we get this out of the way, is this whole dynamic of changing calculation on NADAC pricing and how it filters across the supply chain. My understanding is the first derivative impact on distributors are nothing, and then maybe we're thinking long term about some second derivative if there's some economic changes. But can you just remind us, at least relative to your business, what, if any, NADAC impact there is?
So NADAC isn't something we've talked about in a number of years, but as you know, from time to time, we get these things that pop up that keep everybody on their toes and keep all the investors in the room engaged. But I would say that NADAC is a survey with varying sample sizes and varying sample, varying sampling. So you can have deviations or distortions from quarter, from month to month, and clearly, there was a change in participation in the April timeframe that impacted that number. I think, you know, most importantly, what is it actually used for?
It is a component of state Medicaid reimbursement calculation or determining reimbursement price. So I think the key piece is for pharmacies that are serving Medicaid population, that they continue to get reimbursed properly. I think you'll see the trade groups continue to push and make sure that that continues, given the nature of the deviation.
Relatively, this doesn't, this isn't like a pricing change for your contracts at all?
No, it-
Yeah.
This is more of an exercise in surveying and sampling.
Got it. And just in terms of thinking about broad-based pricing across the market, the other potential moving piece is on IRA. You know, we're in the process of finalizing negotiations on the first 10 prices. Is there any way to think about how your business is affected, impacted by IRA? And maybe is there anything in terms of a microcosm we can look at on the recent changes in insulin pricing as a way to think about how the economic flow-through would occur for Cencora?
Why don't you take the first part, and I'll take the second?
Sure. So there's still some to be determined on the, on IRA. As you look at 2026 and the Part D side, that is really, and in most actually in both cases, it is really reimbursement. So it's not, it's not actually a, a price change so much as it is a what is the government paying change. So we'll continue to work, you know, and analyze as, as you would expect. But as you know, we're not... similar to the prior conversation, you know, reimbursement prices can be different, and, and they aren't really pegged to the, to the reference price.
And I would just say that, there are some things that I think still need to be figured out, particularly, at least one of those products in that scope was about to have or is in the process of having biosimilar competition. So and so you don't-- that could be, that could have negative impacts for just for the healthcare system. So certainly, still some things to be crystallized, but, I think, you know, Jim can talk a little bit about the WAC insulin price dynamic and as a comparison.
Yeah, I think what happened in insulin this year is a kind of really good case study and kind of the fact that we can maintain good profitability in cases where there is a deep decrease in WAC pricing. And as we all know, in the insulin product category, there were decreases, significant decreases in WAC prices this year, and our contracts have certain terms in them that if something like that happens, then we can renegotiate. And we were able to successfully do that this year. We were able to, you know, maintain economics and continued to be compensated well.
So that was a very favorable outcome for us, where we saw a decrease in WAC price, but we were able to maintain our dollar economics. We, you know, view that as a very good case study. I think the overall kind of point is that distributors are very efficient, and we, you know, very efficiently provide our services in the market and, you know, benefit the healthcare supply chain. This was just a great example that, you know, due to our efficiency, we were able to maintain our dollar profit.
... Just one last one on the distribution side. There's been, relative to the market, some elevated customer contract moves versus previous levels of headline two, which is elevated more than normal. When you think about when you go back to market now, especially with your broader service levels, with everything you're building around specialty, as you go to reengage customers on contract renewals, go to pitch for new business, has the contracting process changed at all in terms of how you go to market, what you're offering, what types of services a new customer or upselling existing customer are starting to take?
Yeah. So, let me kind of comment on a few things there. First of all, you know, we kind of have leading customers in each of our businesses. And we have, you know, very strong customer partnerships in each of our businesses, and customer relationships that are, you know, multi-year or decades long. In terms of kind of changing kind of processes, there's nothing that I would call out right now, but this is something that we've done over a multi-year period, which I think has benefited us.
And, you know, for instance, if you kind of look across product categories, there was a period of time where we earned a lot on generics and less on brand, but we went through a rebalancing process, where now kind of we make, you know, kind of a fair profit on generic brand and specialty. And we not only went through a rebalancing process from a product front, but also from kind of a contract timing front.
So rather than, you know, kind of earning kind of low profitability in the first year and high profitability in the last year, which, you know, makes it harder to... on the, during the renewal process, you know, we kind of have contracts now, so we make a fair return over the life of the contract. And so this is something that we've worked on for many years, which makes it, you know, less likely for us to have to call out a renewal issue, which is why you haven't seen us call out anything like that in the recent past, Michael.
Stability always, always works for me. Maybe turning, you know, to parts of the Alliance business. I think one of the things that got overlooked with the acquisition was you bought a primarily, you know, European wholesale distribution business, but came with a whole suite of manufacturer services assets. I know you talked about PharmaLex before, but as you sit now, it's two and a half years, three years post-deal, like, how has the integration gone, with especially the manufacturer services assets wrapping into what you already had with World Courier and Layer and PharmaLex as well?
Sure. This is why we bought the business, right? It allowed us to expand our geographic distribution footprint into key markets in Europe. But importantly, it's a business that does a lot of the manufacturer services that are complementary to distribution that we already do in the U.S., and allows us to kind of leverage both of those strengths in the Western Europe, in the U.S. And then we also have a number of those manufacturer services in Canada. So we can do a...
Provide a differentiated service on the manufacturer service side, particularly for the things like 3PL, in across North, you know, North America and Western Europe, which allows us to be a really key partner for pharma, particularly small and mid-sized biotechs that, you know, are looking to launch products, and aren't sure which market they're going to be going into first. By working with us, we can pivot with them. You just saw an announcement by one of those small mid-sized biotechs two days ago, that to that effect.
I think that that is just it's a validation of the differentiation that we have and, and that we can provide for these, you know, small mid-sized biotechs that are bringing products to market and need a partner that can provide that can solve a lot of problems for them as they look to commercialize their products.
And Bennett, let me just build on, kind of a couple things you were saying. I think, you know, our team is doing a good job of kind of, integrating businesses like, PharmaLex and our 3PL business in Europe, and our 3PL business in the U.S., and World Courier, and the business development effort we have now to cross-sell. It's in the early innings, but I'm really impressed with the team, and I'm really impressed with the results, and so it gives me optimism for the long term.
And then one other thing I'll say that has been good with regard to Alliance is we have, you know, retained the management team, which is a strong management team. And so we have the- you know, we have that kind of legacy of knowledge, which is, which is helping with that, integration process. And it's something that is, I think, Cencora has done for quite some time.
Bob Mauch, our, incoming CEO, who will, start October first, he, he kind of came from the acquisition of Xcenda, and, I myself came from an acquisition. And so Alliance is just another kind of example of us from a talent standpoint, retaining the team, which I think helps.
Well, good timing to turn to the acquisition you came from, which is MWI Animal Health side. You know, it's an area, and you talked about on the calls, and you go and look at the K's and Q's to figure out where the growth rate is, and we've seen some recent acceleration in growth, if my math's been correct. Like, where do you see those pockets of growth coming from? And especially as we sit here now, how do you see the balance of demand between companion productional-companion production relative to the growth rate of MWI?
Yeah. So in our animal health business, our growth rate for the first half of the fiscal year for revenue is 8%, so about $2.6 billion in revenues during the first half of the fiscal year. The growth rate has been faster in the companion animal market than in the production animal market this fiscal year. But I think that, you know, thing to to kind of call out about our animal health business is it's had, you know, kind of five quarters in a row of good growth.
And so this is not just kind of a recent thing. We've seen the kind of the good growth for for you know over a year now, getting into the sixth quarter, and it's. It is, you know, business that is executing well. One of the things that enables our growth is we have a, you know, a very strong demand generation sales force in our animal health business.
Got it. Great check-in there. You know, we're gonna run low on minutes, but another. You mentioned earlier the increase in guidance from the Walgreens related share sale buyback. You know, this is obviously the largest purchase you made of shares that they've sold in the last few iterations. So maybe give us a little bit of rationale on the why the elevated level. I know the balance sheet obviously has gotten meaningfully de-levered in post-alliance pay down, but how do you think about the signal that this is sending relative to your cash availability and other capital deployment opportunities?
Yeah, thank you for asking the question. And, Cencora has, you know, balanced capital deployment. And one of the great things about our business is our free cash flow. This year, our adjusted free cash flow guidance is approximately $2.5 billion. That's after capital expenditures. It's approximately $3 billion before capital expenditures, and then we put about $500 million into capital expenditures. A lot of that's IT sorts of things, which, you know, and those kind of CapEx typically have very good return on investment.
And then we're doing strategic acquisitions, such as, you know, the OneOncology investment or the PharmaLex investment, you know, centered around specialty and higher margin, higher growth manufacturer services. And then really the third thing is opportunistic share repurchases. And, this most recent purchase from WBA is a, you know, great example of opportunistic share repurchases. It. We have bought a little bit more than we have in the past iterations, and just, you know, we felt it was opportunistic.
And as a result of that, and we brought our share count down, we increased our EPS guidance, as I said, at the same point in time that we bought back the shares. And I think one of the great things that we've been able to accomplish over the last couple of years is WBA's ownership has come down, from 28% to 12%. If you net out all of the shares that have been pledged in variable prepaid forwards, where the banks have sold most of those shares, and if you net those out, it's actually approximately 2% ownership.
I think we've done a really good job managing through that process, consistently buying back stock, which is, you know, very consistent with our capital allocation, kinda statement of opportunistic share repurchases. Just very briefly, the fourth component of our capital allocation is a reasonable growing dividend, that we've been increasing our dividend every year.
I appreciate that, and, you know, like, counting down to zero is always a fun exercise if and when we get there. But you did mention the $500 million of investments, and maybe I think sometimes people miss some of the targeted IT that you and your peers are rolling out, not just internally focused. You know, I remember the ERP implementation a couple years back.
Yeah
B ut other ways to do it on a growth basis. Can you maybe just talk about some of those targeted investments and where you see the opportunities to use IT as an outbound advantage versus simply an inbound efficiency tool?
Yeah. And so, that's a great question. So we spend about $500 million a year in CapEx, and I'd kind of put it into two categories. One would be kind of run the business, and the other is growth and innovation. Run the business would be, you know, kind of infrastructure sorts of things and IT sorts of things. Then, we're always looking at, you know, new initiatives around growth and innovation. And if we kind of look in both those categories, IT sorts of investments would be kind of a big example.
One example that I'll call out, where we've kind of completed the investment is, kind of the initials are, DS, Drug Supply Chain Security Act, or we call it secure supply chain internally. And this is, something where, you know, we're able, once we implement this, to be able to, electronically, track product at the package level, which is just kind of one more investment we're making. It has a big IT component that's, you know, kind of, a regulatory compliance investment, but it also kind of differentiates, you know, the main companies in our industry that we're able to do these sorts of things.
One thing that kind of continues to differentiate our industry to be able to provide this sort of service, not only kind of upstream to manufacturers, but also, you know, kind of to benefit the healthcare supply chain, which is what we're all about.
Last really quick question. You know, I'm now old enough to remember the last time you went through an internal CEO transition, which feels like a long time ago, with Steve being the last man standing in the space. Now you're in the process of another one. How is Bob preparing for the job and moving up in the seat to take over the CEO role?
Yeah, Bob is incredibly prepared to do this. He has a background in pharmacy. He's a pharmacist. He's a PhD in the area. He sold his company that he founded to Cencora in 2007. He's run all the businesses within Cencora. He's been COO for a period of time now, but even before he was COO, he was running the businesses. And so Bob is incredibly prepared to do this. He's been on the executive management committee, been actively involved in setting strategy for the company for some period of time now. And then, of course, also, Steve Collis will be staying on October 1st, and becoming executive chair.
Awesome. Well, Jim, Bennett, thank you so much for joining us and filling us in on the story.
Thank you, Michael.