OK. Good afternoon, everyone. My name is Eric Coldwell. I cover pharma services and healthcare distribution for Baird, and it's a great pleasure to have Cencora with us today. This is a name that we've used repeatedly over recent years as either a best idea in the moment or a top idea for the year. I still feel that way. And not only are we generally upbeat and bullish about the healthcare distribution and supply chain broadly, but specifically incredibly impressed with the consistent performance over time from Cencora. Of course, today we have Jim Cleary, EVP and Chief Financial Officer of the company, and Bennett Murphy, SVP, and of Investor Relations and Head of Treasury. We're not going to do any formal slides. Gonna jump right into Q&A.
Jim, I told you up front, I'm gonna go right into last week, where at another event, you raised your fiscal 2024, pointed 2025. Now, this is after five raises this year, so off of a rising base. You pointed 2025 to the lower end of the LRP, still pretty close to the Street. I looked at that, and I said, "These are not overly material changes on a company that has your track record. Why even go that far? Why put out an 8-K and make those comments in advance, at an early juncture here?
Yeah, well, thanks for asking, Eric, and, before I get started, thanks also for the great research you do. Very much appreciated. You know, Bennett and I and our executive team knew that we were, you know, going to be at three conferences doing three key days of investor relations, you know, Thursday and Friday of last week, and then today, and knew we'd be asked the questions, you know, probably a hundred times in a hundred different ways. And so thought, it made sense, kind of given, what we knew about fiscal year 2025, to put out an 8-K last Thursday morning. And of course, there was, kind of three things that we covered, which we've, you know, had a chance to talk a lot about in the last several days.
First, as Eric mentioned, and we kind of led off by saying that we were gonna, once again, increase our EPS guidance for fiscal year 2024, which of course ends September 30, and we just increased it by $0.05 at the, you know, low end of the range, and at the high end of the range to $13.60-$13.70 a share. And, you know, we did that just to reflect the, you know, continued strong performance of the business that we've been talking about throughout fiscal year 2024. And then what we also importantly did is we said that for full year, fiscal year 2025, we kind of gave initial guidance for both adjusted operating income and adjusted EPS, and indicated that we'd be at the bottom end of our long-term guidance range.
And of course, you know, our long-term guidance range for adjusted operating income is 5%-8%, and our long-term guidance for adjusted EPS is 8%-12%. We feel confident that we, you know, we'll get kind of that 3%-4% from capital deployment every year. And we indicated that we'd be at kind of the bottom end of that range, so, you know, about 5% for adjusted operating income and about 8% for adjusted EPS. And we really called out two different things. And the primary thing is COVID. And I think we've done a lot of really good disclosure on COVID over the past year, and, you know, it was a real benefit for us this year in fiscal year 2024.
One of the things that we disclosed is that during the first half of this fiscal year, in our U.S. segment, operating income grew by 16%, and if we exclude COVID vaccines, it grew by 8%. So you know, COVID vaccines really had a you know, a significant impact in the first half of fiscal year 2024. And we've also previously disclosed that during the first quarter of fiscal year 2024, we earned $0.06 from exclusive COVID therapies, which was the last quarter that we earned money from exclusive COVID therapies before they went fully commercial.
And so because of, you know, the significant amount that we earned in the first half of fiscal year 2024, in particular, you know, we think that the kind of COVID operating income will go to more of a normalized level. And so that obviously impacts our operating income growth rate in fiscal year 2025. And then kind of the second thing that we called out in the 8-K regarding that fiscal year 2025 guidance is the potential loss of an oncology customer due to a recent M&A transaction that we would, you know, potentially lose in June.
And so, you know, due to those two things, COVID and that customer, we indicated we'd be at the, you know, the bottom end of our long-term guide range for both, adjusted operating income and adjusted EPS, so, you know, 5% and 8% approximately, respectively. And we also in the 8-K, just also, you know, announced that our second-largest customer from a revenue standpoint, Evernorth or Express Scripts, that we did a three-year extension of that contract to 2029 . And so, you know, we just thought it made sense to kind of put out the details on that before we did the three conferences.
That makes sense. And with... I know you probably will push back on going into too much detail on any of these individually, but you have quantified the COVID in the past with this potential customer transition after they're acquired by a competitor. If that deal does in fact go through, as it probably will, that's only a one-quarter impact to fiscal 2025, correct? That would be after June of next year. But you are saying that that is the secondary for this very minor-... compared to where Street was, very minor update, that that was a secondary consideration in terms of sizing?
Absolutely. And yeah, also I think that's a really good point. You know, I think what we kind of when we did the 8-K, it's not really particularly different where a lot of people on the Street were. But with regard to the customer, one thing we were specific on in the 8-K is to a lesser extent. You know, the kind of primary driver was the COVID impact, and then this customer was to a lesser extent.
You know, we aren't really getting more specific than that, but just saying, you know, of course, the specialty market is a market where you know we have put a lot of emphasis, you know, both in specialty physician practices and in health systems, and really focused on growth in this market. And this is a good customer. Very, very good, but it's you know certainly to a lesser extent, and of course, we're you know very pleased also with kind of the way our relationship with One Oncology is going.
Yeah, I'm gonna definitely come back to that. Just quickly, you know, Bob's not here right now. I would ask him directly, but you do know this long-known process of your CEO transition. New guy steps in in about two weeks now, roughly.
Yeah.
A little over two weeks. Been there forever. You've known him forever. I'd love to get your take, how you've seen him evolve through the transition, which has been long planned, and just any characteristic nuances, style changes, philosophy changes that might occur as Steve hands the reins over to Bob here in a couple of weeks.
Yeah, yeah. Thank you, Eric, for asking about that. And, you know, I really look forward for all of you, who haven't had a chance to interact as much with Bob Mauch, our incoming CEO, to get to know him. You know, kind of a really fantastic person and leader, very customer focused, and I think you'll really, you know, enjoy the interactions. And I really think our board and Steve Collis have done an excellent job on CEO succession planning. And, you'll know that... You know, of course, you're aware that, Steve is, going to, become Executive Chair for a year when Bob steps into the CEO role. And of course, I'm sure you've all enjoyed your interactions with Steve over many years, and he's done, you know, a fantastic job. And, you know, Bob, you'll...
I'm confident you'll really enjoy the interactions with Bob, and you'll be really kind of pleased with him as a leader. Bob has been COO since 2022. Even before he was COO, all of the businesses reported into him for several years, and he's basically had the opportunity to run every business within the company. He sold his company, which is a market access consulting company, to Cencora in 2007, and has basically worked throughout the company since 2007. He's been involved in all the strategic decisions for several years, and I think you'll find him you know very customer focused and, you know, kind of very much bought into and a leader in our pharmaceutical-centric strategy.
Okay. You know I have somewhere around 17 questions on Walgreens, but I've been chastised not to ask 17, so I'll ask one big picture. You've, you've... Despite having a, you know, a great relationship and a, a large customer for many years now, that I think has been, overall a success. You've, at various times in the past, you've been beaten up. They're gonna sell shares, they're gonna sell Boots, they're gonna close stores, now they've, you know, somewhat negotiated in public on pricing. I know you're somewhat limited in what you can say, and I'm sort of obliged to ask this question, given what a big topic it is. But could you give us, give us your latest and greatest thinking on that relationship, that customer, and what the future might entail?
Sure, sure. I'll start out, and then, Bennett, if I miss anything, please don't hesitate to add. So, you know, of course, Walgreens is our largest customer from a revenue standpoint, an extremely important customer, and a great customer and partner. And, you know, as you know, because Walgreens has their kind of capital deployment needs, they've been, you know, selling down our shares over the past couple years. And while they, you know, technically still own about 10%, it's been pledged in variable prepaid forwards, and they've sold everything that can be sold.
And I think we've done a really good job after the first sale over the past couple of years partnering with them and being a repurchaser of you know a bunch of the stock and repurchased about $2 billion of their stock over the last couple of years, and so you know kind of we're very pleased how that process has gone. As a partner you know the level of business integration and operational integration with Walgreens is very high. You know we have contracts in place in the U.S. through 2029 and in the U.K. through 2031, and like any strong business partner we really want to partner with them to be mutually successful and look for win-win opportunities to move both our businesses forward for the long term.
One thing. I'm gonna do a follow-up.
Sure.
One thing I hear is they're gonna have to lower price. They're gonna have to cut terms. You, Cencora, are gonna have to give something. I say, why? Why would you have to give something? You've got a contract, but to the extent you work as a in a mutual relationship, if you do this before 2029, would you not also want to be on the receiving end of some benefits of that theoretical conversation?
Yeah, and, you know, let me say that I, you know, may not give you as much detail as you're looking for here, Eric, but just to say that, you know, they are such an important business partner, and we really, you know, do want them to be kind of very successful, and they serve such an important role for patients, and I think to answer your question, yes, there are opportunities where we can, you know, do things that clearly many opportunities that are mutually beneficial and that can be win-wins.
I know you've said it before, but it's always good to have people hear it. Generally, larger customers like this are lower-margin customers.
Oh, yeah, and I'm sorry if I didn't already call that out, but yes, yes. You know, it's you know, our you know, largest customer from a revenue standpoint, but you're absolutely right, larger customers are lower margin.
Yeah.
Yeah.
Our team put out a report here a few days ago, where we opened up a couple of conversations, primarily on revenue growth, but also profit growth in the sector and how we look at various themes that are happening in the space, and I'm of the opinion that... I've always been of the opinion that revenue growth is about the least important thing in this sector. It leads off with gross margin, OpEx, working capital management. Other things are more important when you look at sensitivity analysis and the models. That being said, optics matter at times to the Street. We think revenue growth in the space is going to return to a more normal mid-single-digit level over the next couple of years, for a number of reasons. One of those drivers, you can agree or disagree with that.
One of our drivers that we're looking at is that we're seeing some real changes in the biosimilar marketplace. In particular, we're seeing Part D drugs that are getting put onto formularies more and more frequently. Humira, Stelara, a couple of the big ones that have been in headlines recently. United came out today with some conversation on Humira. You had Evernorth recently on Stelara and on Humira as well. So you tend to get a revenue hit on those Part D conversions, but you, in theory, would not get much of a profit hit there, so margin goes up, revenue comes down, no big deal. Part B is a category where we see a number, frankly, a lot of work that you have done and other firms have done in the industry.
We see a number of potential launches for the first time in the Part B category, in fact, eight over the next year and a half. That could be pretty interesting, could it not? So couple of open-ended things here. One is just big picture on longer-term revenue growth and some of the factors in the market, like these bigger biosimilar adoption rates by the PBMs. And then, two, tell me why I shouldn't be a bit more excited about this Part B wave that is coming from Tysabri through Eylea in the second quarter of 2026. If-
It-
Yeah.
Oh, got it. Well, yeah, absolutely. And there's a lot there, and everything you said makes sense. First, I'll start out with the, you know, kind of the revenue growth piece. You know, we provide long-term guidance for operating income and EPS, and we don't provide long-term guidance for the revenue piece, because of the reasons that, you know, Eric was talking about. It just isn't as. You know, there are things that can drive revenue to be growing, at a higher rate or a slightly lower rate that don't impact gross profit or operating income as much.
And you know, one example of that is biosimilars in Part D, and the fact that you know, particularly in the mail order market, which is the lowest margin part of our business, because we're sending you know, pallets of products to a limited number of locations around the country. So it makes sense that it's the lowest margin part of our business. If a product goes biosimilar in that market, and the customer you know, even kind of sources the product on its own. For instance, in one of our big contracts, we do the brands, and they do the generics on their own, and so it wouldn't surprise us if they sourced a biosimilar product.
That would impact our revenue and something that would be fully anticipated by us and really wouldn't have much of an operating income impact, very minor. And so, you know, that's something that we, you know, kind of, fully anticipate when we talk about 2025 or we talk about the long term. And then when you-- they kind of take kind of the flip side, Part B, particularly in, you know, oncology and ophthalmology markets, really kind of, they have been a tailwind and should continue to be a tailwind, in this case, from an operating income standpoint, because of both the, you know, the distribution and, say, specialty physician services market and, the wraparound services that we provide presents good margin opportunity. And so those are, you know, kind of all things that we, anticipate in our long-term guide.
And, you know, kind of the Part B trends are the things that kind of move us up, as we do that. And, Ben, is there anything that I left out there?
I mean, there are eight in a row coming, starting, you know, the first quarter, if things play out the way they're currently expected.
And I would just say that, it's so I think IQVIA's total U.S. market sales forecast for the next five years is in that mid-single-digit range, which would align with what you're saying.
Yeah, yeah.
I think for the Street modeling distribution revenue, it's probably never been so many puts and takes. From where we sit, what we can do is we can focus on our operating income dollars, growing those, and then there's periodically some noise at the revenue line that is outside of our control. But from the Street side, you know, in the same year, trying to model, you know, insulin wide WAC cut reductions, GLP-1 significant growth.
In the U.S., the largest drug in the U.S. having biosimilar competition, and having that slight erosion a little bit later than the biosimilars came, but certainly finally happening, which is good for the U.S. healthcare system to get some of that Humira volume to go to biosimilar, and make room for more innovation in the space. So there's a lot to Jim's point, there's a lot of noise at that revenue line. For the biosimilars in general, the Part B biosimilars, and Jim obviously talked about that being the sweet spot. We've had some good ones in there, and that part of the market moves much faster to adopt because they're very focused on the drug, what's the efficacy, therapeutic comparability.
That's why you saw, you know, Neulasta, Avastin, Herceptin, Rituxan, all get pretty good uptick, pretty early, pretty early on. Obviously, the Humira has been very delayed as the PBMs have taken a little while to come around to it. But I think that certainly, as we look at the biosimilar space, it's... That specialty business is very important for us, and it's nice to see some of that stuff occurring as well, but incremental.
Yeah. Let's stick on margin for a second and come back to GLP-1s, and again, I think that's also the biggest wild card. Do they grow 10%, 50%? These are big numbers that the variance could be pretty significant. That being said, I think hopefully, at this point, everyone knows they're extremely low-margin products relative to the rest of your book. There's a part of me that just wonders why something that's over 10% of revenue is less than 2% of earnings. It feels like there has to be a way to solve this problem. It's better than it could have been a few years ago, perhaps when the industry went through its purposeful recontracting and kind of strategic review of how it wanted to make money across the different pools, but it feels like it could still be better.
Are we still? You know, I guess if you ask it often enough, maybe you'll get a different answer. Are we still waiting for go no higher on margins in GLP-1s? Is it we have to wait for generics? Is it Victoza, and some of the older generation stuff starts going generic as it has, and then maybe some foreign markets have different patent laws, and you start getting some international hits here and there, or are we really just waiting for time and,
Yeah. So I'll answer that, and let me kind of start out by saying that I think, you know, on GLP-1s, I think we've done a lot of good disclosure like we have on COVID, because I just think it really helps to have the data to be able to understand kind of the shape of our income statement. And, and it's... And, you know, well, in our third fiscal quarter, our most recent quarter that we announced, you know, we indicated that our GLP-1 growth for the quarter was 38% year- over- year, which was $2.1 billion of growth, and it was also 30% growth over the prior quarter.
And it was, you know, a lot of growth over the prior quarter because there was better supply for us, and so our fill rates were better. And so, you know, we've kind of put out disclosure there, so you can kind of understand the impact that it has on our top line and on our margin also. And we've been very consistent in our communication that they are profitable for us, but they are minimally profitable for us. And to answer your question, I think kind of, you know, two things have to happen for it to get to, you know, kind of a more normalized level or towards a more normalized level of fee for service for us.
You know, one is supply has to catch up with demand, and that's the first thing. But I think the more important thing is, of course, that you know when there's competition at some point in time. And so as we do our internal business planning, you know, we don't you know see them getting beyond a minimally profitable level for the next couple of years, but do think that it's a long-term opportunity for us and our industry, and that fee for service and profitability will improve in the longer term once you know the two things happen, supply catches up with demand, and there's more competition.
Yeah, and I think you need. It's a phenomenon, right? Because this type of product had never gone through the retail channel, so there's some dynamics that need to be worked out between you know the pharmacy side to help ensure that they're getting appropriately compensated for the work that they're doing to support those products getting to patients, and those patients having good outcomes. Because they're complex therapies, and people are typically dealing with multiple issues, so the pharmacist is an important piece of that, of the patient journey there. So, and there need to be the appropriate economics for them that would help that too.
Do you get to a point with the category being now, well, these are my estimates, but I think the number's probably true up to something around a little over 10% of revenue. I just... Do you have to start breaking out in your guidance, what you're expecting for the category when you talk about guidance? Is that something that you think is relevant? Or I... Look, we know-
So, I think, I mean-
... we know they're low margin, so it, it's just top-line optics, but I am curious if it gets to that point.
Yeah, I mean, to date, we have normalized in our revenue results, the impact that GLP-1s have.
Yeah.
I mean, this, you know, last year and then this year, I mean, it's certainly something we can continue to give color on.
You were the first to do it, and more transparent upfront. Yeah.
Yeah, and I think, you know, I guess, do the growth rates stay the same growth rates, or do they kind of come down as, you know, as the class gets bigger, law of large numbers, that might help it be a little less of an outlier, but we'll have to see how it all shakes out.
I want to spend some time on OneOncology in particular, but I do have a question from the audience. We did touch on this upfront. I suspect you're going to hold back, but I'm gonna read the question so you can-
Sure
... you can- I've done my duty, and you can respond accordingly. So the question is, there are a range of estimates on the Street of the impact of Florida Cancer Specialists' potential loss in June of next year. People seem worried that when the headwind annualizes in fiscal 2026, so three quarters versus one, it could be a more material headwind to growth. Is there any way to help level set that thinking, or put a better, I'll just say, put a better frame on the thinking in terms of your headwind, if you will, and then, you know, how you feel about your ability to manage that in fiscal 2026.
Yeah, so, you know, let me just say, that, when we filed our 8-K and said we'd be at the, you know, bottom of our operating income range and EPS range, you know, operating income range of 5%-8% and EPS range of 8%-12%, we and called out the two things, COVID and Florida Cancer. We made it clear, in the 8-K, and, you know, we've answered the question, since then, that, you know, that COVID was the primary factor, and Florida Cancer, as we described it, was definitely to a lesser extent.
Yeah.
And so, you know, I think that that's probably just the best way to describe it at this point in time. And, you know, we just, you know, have just, you know, consistently, you know, conveyed our, you know, our long-term guidance and that... And, you know, our ability to achieve it. And, Bennett, I'm not sure if you wanna add anything there. That's probably enough.
No, I think that was fulsome.
One Oncology.
Great.
I think it is great. It's gone pretty well so far. It was a little over a year since you did this deal, you agreed to partner with TPG. In 2013, or 2023, sorry, that business was growing at about a 40% CAGR since its formation. And since you announced the deal, 16 practices have now grown to over 24, and that's before the next topic, which I'll introduce in a minute. So it seems like there's been a big increase in practices joining, strong growth rates continuing. Have you seen anything you don't like in this first, what, four or five quarters since you did the deal?
Yeah, we're very pleased with the OneOncology investment. As you know, we own 35% of the company that we acquired in June of last year, so we've owned it, the 35%, over a year now. We have a put call structure in place with our partners there that makes it, you know, very likely that we'll own the company within, you know, a period of three to five years from the initial investment. They've continued to grow organically and through acquisition. Prior to the most recent announcement, OneOncology has 350+ sites, over 1,000 providers, 16 states, and we just feel, you know, a very, very good business, does incredibly important work like all the customers do in this market for patients.
And, we just feel very good about the long-term prospects there. And as you know, we've said, and you know, this area is an area where you know, we're excited by the opportunity we'll have to deploy the additional capital.
I know in the moment it's still obviously a separate entity, and you've got a, you've got a partner. They just announced that they were buying a big urology center-
Yeah
... or a group of practices. And, so that's a bit of a shift for them, expanding from oncology to urology, and it was also a pretty decently sized deal in terms of the number of practices and the role of United Urology. So that deal just closed August 20th. I don't think it does much to your numbers, but I'd love to hear your thoughts on the process, and you must have been supportive of that move. How might that tie into Cencora's future, you know, assuming that, you know, your put option, your call option is exercised here in a couple of years?
Yeah, and, just, for, you know, with regard to the current impact, you're absolutely right. Right now, we count for it on the equity method and other income. But with One Oncology, we are very excited by their United Urology acquisition. It's over 250 providers.
Yeah.
Of course, you know, prostate cancer is, you know, the second most prevalent form of cancer for men, so incredibly important work that they're doing, and I think that there's, you know, a number of synergies between One Oncology and United Urology and, you know, just, you know, very, very good for the MSO and very good for the, you know, work that we'll be able to do with patients.
You know, I just think it, I would just say it's intentional and thoughtful because of the-
Mm-hmm
... the overlap opportunity between urology and oncology, the way that, prostate cancer is treated.
Are there other ologies that you might be interested in, and would you ever consider doing something outside of this current JV?
You know, I just will say that, you know, this is a key market for us. Specialty is a key market for us. We talked a lot today about specialty physician practices. It's also been a very good market for us with health systems also, and so I think, and you know, these specialty businesses are businesses that Steve Collis started many years ago, so we'll kind of finish the talk where we started, and so I think you'll just kind of, as we look for growth over the long term, you know, specialty is definitely gonna be, you know, kind of one of the key markets that we'll be focused on with regard to growth.
Okay, last one in our few remaining seconds here, and I'm gonna put you on the spot a little bit, but I'm trying to be benign about it. I appreciate all of the transparency, the 8-K, the getting people in the right spot. You've done a great job about that, and frankly, didn't think the update was that material, personally. I also can't help but think you've beaten the last five years consistently with an average of 5.1% upside. So has anything in the world changed that would make the new Cencora different than the old Cencora? You tend to be a conservative company out of the gates. Has the world changed much, or are we still thinking you're playing the same game you've played for the last five years?
First of all, I'll-
And game in a good way, I don't mean tricky.
No, first of all, I'll take that as a compliment because I think-
Should be
... it was meant to be one for-
Yeah
... our company, of course, and I'll just say what I would've said, anytime during the last five years, you know, our long-term guide and our next year guide is our guide.
Yeah, that's fair enough.
Okay, great.
Okay.
Thank you, Eric.
Yeah, no, thanks. Great job. Thank you, guys. Everyone, please join me in thanking Cencora. Jim, Bennett, thank you.