Hi. Good afternoon, everyone. Welcome to day three of the Morgan Stanley Healthcare Conference. Just real quickly for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And if you do have any questions, please reach out to your Morgan Stanley sales representative. With that, I'm Erin Wright, covering Healthcare Services at Morgan Stanley. We're happy to have Cencora with us today. With the team, we have Jim Cleary, EVP and CFO of the company. We also have Bennett Murphy, who heads up the IR efforts, so SVP of IR, our head of IR and enterprise productivity at Cencora. So thanks so much for joining us today. We're definitely happy to have you. So, I'll kick it off with some Q&A to get it started here. More recently, in the most recent quarter, you raised your fiscal '25 EPS guidance.
I think you've raised it five times since you issued it in November of last year. With the latest kind of implying that EPS growth of 14% to 15%, the EPS growth this year is helped in part by some of the acquisitions and, like, for instance, the RCA deal, but also related to significant strength in that U.S. healthcare business. So could you talk a little bit about, you know, how you continue to track ahead of your long-term goals here of 8%-12%, how we should be thinking about that earnings growth as we head into 2026, and what are some of those key headwinds and tailwinds?
Sure. Well, first of all, Erin, thank you so much for having us here at the Morgan Stanley Conference. We really appreciate it. We've had great investor meetings today. And thanks for all the work that you do on Cencora and our industry. So, you're absolutely right. We have been fortunate, and we've increased our guidance for fiscal year 2025 five times since the start of the fiscal year. And you referenced our EPS, and of course, our adjusted operating income. Our guidance is 15%-16% growth for the fiscal year. And in our US segment, which is performing particularly strongly, our operating income guidance is growth of 20%-21% for the fiscal year. And that's really been driven by the things that we've been talking about for quite some time. We've seen, you know, very good utilization trends.
We've had particularly strong performance and sales of specialty products to physician practices and health systems. And we've really just seen very broad-based strong performance across our U.S. segment and particularly in some of our largest businesses in the U.S. segment. As we look forward to fiscal year 2026, of course, we'll provide guidance for fiscal year 2026 in November when we announce our fourth quarter results. And you asked about some of the puts and takes. There's just a couple of things that I'll call out. And there's really nothing new here. It's things that we've talked about before. Of course, we've benefited in fiscal year 2025 from the RCA acquisition, and we closed that acquisition at the beginning of our second quarter fiscal year 2025. So that will be a tailwind for us during the first quarter of fiscal year 2026.
And then, of course, something that we've also called out in the past, and that is, we do have the loss of an oncology customer, where the MSO was purchased by one of our competitors. And that starts to be a headwind in the fourth quarter of fiscal year 2025. So it will be a headwind in the first three quarters of fiscal year 2026. But I'll go back to the fact that we just, you know, have had, you know, very strong performance in our US business, again, driven by the things that we've talked about for a while, the utilization trends and the strength in specialty. But, you know, this is one thing that we said on our last earnings call is, we don't expect our level of outperformance going forward to be as strong as the level of outperformance that we've had.
That's not based on anything in particular, beyond what I've talked about just now. It's just, you know, probably more of a law of large numbers more than anything else. I'll also say we do have a very high degree of confidence in our long-term guidance of 5%-8% organic operating income growth, another 3%-4% from capital deployment, so 8%-12% EPS growth.
Okay. And then to now help us bridge to your long-term growth of 5%-8% kind of, organic, can you talk a little bit about what underpins that, bridge that to kind of what you're seeing now? And next quarterly conference call potentially be a platform to talk about kind of the long-term growth trajectory and how something structurally changed across this industry and maybe some upward pressure on that.
Yeah, sure. Sure. And as I said, we do have a high degree of confidence in the long-term guide. And of course, I'll also say that we have been, you know, outperforming that for quite some time now. That's driven by the things that we've talked about today and talked about in the recent past. You know, we certainly have been helped by the RCA acquisition also, which is performing well. And you know, as you asked about, long-term guidance is something that we're always evaluating and you know, we're continuing to evaluate.
Okay, so let's go to just core utilization trends then, and they've obviously been relatively strong. You talked about that. What can continue here? What is normalized, and maybe this is a new normal in terms of utilization trends, but anything you can call out in terms of the nature of the volume utilization trends that you're seeing?
Yeah. A couple of things, and it is something that we've been seeing for quite some time now, and it's something which has been, you know, particularly strong in specialty, and, you know, we have, you know, strong specialty business across our entire business, whether it be physician practices or health systems or retail pharmacy or mail order pharmacy. It's really strong across our business, but particularly impactful from us, for us in physician practices, and health systems where we have a number of wraparound services that we also offer, and, you know, we've continued to see those trends be quite good, and, you know, talked about that on our most recent quarterly call.
Okay. Great. And then, drug pricing environment, I guess, can you speak to anything new or different in terms of the generic drug pricing environment, branded drug pricing environment? Obviously, it's more of a fee-for-service type of contracting on the branded side, but any nuances there to speak to?
Yeah. It's really the same things that we've talked about for a while now. On the generic front, the moderation of generic deflation that we've been talking about remains. On the branded pricing front, it's really continued to be, in line with our, expectations. And so, in terms of kind of the pricing dynamic, there's nothing new that I would call out, Erin.
Okay. I think one of the bright spots here, oh, we do have a question from the audience.
For the core distribution business, what portion of revenue is linked to a fee-for-service contract versus almost like a margin contract?
Yeah.
What's that mix?
Yeah. So if you look at our brand buy-side profit dollars, well, over 95% of those dollars are coming through a fee-for-service type arrangement. It's something that has been a strategic focus for us and we've seen that number continue to creep north of that 95%.
Those prices are cut 50%. You don't care because it's a volume arrangement.
Nope, so let me comment on that. We have you know a high degree of confidence in the efficiency of our business and the gross profit that we charge, given our volumes and our investment in infrastructure and technology. We're a very efficient business. So, whenever there is a reduction in the price of a product, we have the ability to renegotiate the contracts. And we just feel that we're just such an efficient operator that our gross profit structure is highly justified and highly defensible. Thank you for the question.
Thank you. Let's switch gears a little bit to specialty. So, can you provide, I guess, a little bit of update on the specialty business? It's clearly been, like I was saying before, a bright spot for you. Can you talk about the gross margin profile of that business as well as kind of you are a market leader? Can you speak to what's feasible in terms of your opportunity to increase your exposure around your specialty business over time?
Sure. And that has been just such an important business for us and continues to be an important business for us. And, you know, it's where we've been investing a lot of capital also with our acquisition of the RCA MSO and our investment in the OneOncology MSO. And it's been a market space that really has been growing very nicely, and where we've been a market leader for quite some time. And it's particularly, as I said earlier, impactful for us in the Part B space and our sales of specialty products for physician practices and health systems. And it's an area where we are strong in distribution, of course. We're also strong in wraparound services like our leading GPOs in that market. And then now we've also been investing in MSOs.
And so we're increasingly providing higher value services to this very strong and important customer group, that we've been, you know, working with for decades. And so it's, you know, wonderful when we're able to, work with, doctors and practices for such a long period of time and increasingly provide higher value services.
Okay. Great. And so on that front, you recently closed your RCA acquisition. Can you talk a bit, a little bit about what surprised you thus far? Like anything in terms of to call out in terms of integration across that business, your expectations in terms of accretion, and, and, and some of, you know, the key strengths in terms of how that fits into, into Cencora?
Sure. I would say that we're very pleased with the RCA acquisition, and we're pleased with it from a financial standpoint, from a strategic standpoint, and from a cultural standpoint, and it's performed quite well from a financial standpoint. From a strategic standpoint, you know, it's a higher growth, higher margin than our distribution business, of course, and we think it's you know, exactly the sort of business where we want to prioritize and deploy capital because it just fits so well with our specialty focus, and then from a cultural standpoint, it's going along quite well, and I'll just kind of give examples. We've had a lot of the kind of their bigger internal meetings that they've had, we've hosted in our headquarters.
And it's just so, you know, great to have an opportunity to spend time with the management team and the doctors of RCA. I would say one of the things that's probably exceeded my expectations is their clinical trial site business. They're leading sites for clinical trials that the retina manufacturers are working on. One of the interesting things is, when a lot of their doctors were having meetings in our office recently, I had a chance to talk to a number of the younger doctors who had recently joined. They indicated one of the reasons that they had joined RCA was not only to practice medicine, but also to participate in clinical trials also. So it's really not just a nice part of the business.
It's also a great tool to help with the organic growth and the recruiting of top young doctors.
Okay. That's great. So I'll speak to the next one now, the OneOncology in terms of, can you discuss performance there since the deal? And can you talk about the oncology market versus other areas of specialty, some of the nuances there? And can you describe kind of the rationale behind the OneOncology relationship with TPG?
Yeah, sure. So, let me start by saying that, when you see Cencora kind of focus on a business or make an investment, everything that we do at Cencora is pharmaceutical-centric. And so, I say that because as you look at our investments in MSOs, where we've really invested in the two product categories or the two parts of the market that are most pharmaceutical-centric in MSOs, oncology and retina, and so that's kind of the strategic rationale for entering those two very important platforms for us. And, of course, oncology has been, you know, the largest and fastest growing part of our specialty business for quite some time. Again, a lot of the key doctors at OneOncology, we've had decades-long relationship with their practices, and so it really was kind of the natural evolution of our specialty business, and you asked about the relationship with TPG.
We presently own 35% of OneOncology, and made the investment with a private equity firm and with the doctors. And we have a put-call structure that, you know, we're likely to own all of the business. And under the put-call structure, that, you know, could be between, you know, June of 2026 and June of 2028.
Okay. Great. And then, can we talk a little bit about drug pricing dynamics again, a little bit on MFN and mostly biosimilars? Do you think that, you know, how do you think about the implications about, you know, potential changes there from an MSO perspective and then across your kind of core distribution business?
I think what's critical is that there's no desire to go after the independent community provider. And clearly there's a governmental focus on relative pricing between the U.S. and other developed world countries. But as we continue to engage in D.C. as we've done for a decade plus on the importance of political constituents understanding the potential unintended consequences of changes and how they could impact the community provider setting, we have very good relationships and understanding there. And it's been a valuable relationship both ways to really help inform some approaches to understanding and digesting potential policy changes.
So, what could you do to offset, I guess, any sort of, you know, potential cut to, you know, you're doing buy- side on ASP+6? Like, what if, you know, things change in terms of, you know, the provider fees or other?
Yeah. So I think, I mean, this is a topic that's come up, off and on for years. And the way that kind of always approach it is whatever the, whatever if there is a change, the key is that the provider is made whole and that there isn't some hole to fill. And that whatever the mechanism is, whatever the change is, is the key to keep the provider whole.
Okay. And then let's talk a little bit about biosimilars, the opportunity across your broader business, but how it plays a role potentially in some of these MSO deals that you're doing, you know, RCA being a leading kind of prescriber of Eylea, for instance. Like how does this all kind of, how is this all incorporated across the different components of your business on the distribution side?
Yeah. I think, you know, what Cencora has done is taken a very strategic approach to where we think it makes sense for us to own MSOs, and that is the pharmaceutical-centric specialties. We have customers across all specialties, across all oncology. But in terms of where we think it makes strategic sense for us, you know, the oncology and the retina space are particularly strong from a pharmaceutical orientation in terms of the way that care is typically delivered and where most of the MSO profitability comes is derived from. So those are the strategic focuses for us. And we think that that's where there's a lot of opportunity and such and aligned incentives in the long term for us.
The one thing that I'll add is that biosimilars have really been a, you know, a tailwind for us in the specialty business for quite some time and continue to be one. It was first initially in oncology and now in retina also.
Okay. Great. And then we were recently, or we recently had a discussion today, actually, with one of your partners, Cigna. And we talked a little bit about CuraScript. They've highlighted CuraScript as well, but you obviously still have a strong relationship with them and a partnership with them. Can you talk a little bit about, you know, how much, I guess, in terms of do you see a risk in terms of Cigna taking on more of that business in-house at this point?
So what I would say is, you know, thinking about that CuraScript business 10-15 years ago, this dynamic has been there throughout. A very good, a good partner for us in the mail order pharmacy channel. The dynamics that have been talked about when a product moves from brand to generic or innovator to non-innovator, those dynamics have been there throughout. I think they're in greater focus now given that, you know, Humira is such a large product for the mail order channel. But it's not a, it's not a new dynamic. None of it is really a new dynamic for us. It's a continuation of how that has worked commercially, and we navigate that partnership.
Okay. All right. Nope. That sounds good. Can you talk a little bit about, okay, other partner that you have, Walgreens? Can you speak to kind of the nature of the relationship with Walgreens now? Do you anticipate any sort of changes in that relationship with any sort of, well, with the official change in control?
Sure. We have a contract with Walgreens through 2029, and we have a contract with Boots through 2031. Of course, now those contracts are with two different companies, Walgreens and Boots, and we have, you know, a very strong and highly integrated relationship with Walgreens and Boots. Given the amount of distribution that we do with Walgreens and Boots, our operations between the companies is, as I said, you know, very highly integrated. It's a relationship that is very important to us and is strong. Thank you.
Okay. And then other contracts that might be coming up for renewal? Anything you wish to be aware of?
Yeah. There's nothing that we've called out and really frankly, the only thing we've called out is, of course, the oncology customer where the MSO was acquired by one of our competitors. But other than that, there's nothing on the new contract front that we're calling out at this time.
Okay. And then, I want to switch back to kind of regulatory dynamics too in terms of, you know, potential pharma tariffs as well as IRA impacts, some of these DTC initiatives. I think most of that's for like smaller cash pay businesses. But can you talk about, you know, what's on your radar screen on that front? What are you paying attention to and what could be more meaningful in terms of positives or negatives, from a regulatory standpoint?
Yeah. And you helped us out by answering the question as you went, which is always very helpful. But I think that you're right. I mean, as you think about DTC, or if you look at the language, if you look at the discussions, it's really a focus on addressing parts of the market that are underserved, whether it's cash pay or it's parts of the market that, you know, for certain products, they, you know, they may not have a primary care physician, and manufacturers are trying to fill that gap with telehealth partnerships that have a knock-on relationship with a digital pharmacy that's then typically supported by a distributor. As you think about tariffs, you know, nothing new to call out there. We kind of continue to watch and monitor.
As you think about what we focus on most primarily is just sustainability of supply, not having any disruptions along those lines. And I think we've done a good job of that, and we've stayed close to our partners to make sure that we have good visibility into their pipelines and their ability to support and really navigate any potential change that comes.
And what about IRA and sort of utilization? Are you seeing any flow through in terms of utilization trends, behavior trends in terms of payer redesign or implications from a drug pricing perspective on an IRA? I think it's different in terms of the structure and nature of those contracts, but if you could describe that, that'd be great.
Yeah. It's really not something that we see so much directly impacting the parts of the business that we talk about frequently, like the specialty distribution and the health systems and the physician customers. Where you most likely see it directly is in the payers' part of the world where they control a lot of the PBMs and the mail order pharmacies, and certainly they've talked a lot about that, and the fact that, you know, some of the out-of-pocket caps have made people use more of those types of drugs. But it is really a Part D as in dog type phenomenon. It's happening in parallel to Humira going biosimilar. So there's not as much, you know, top-line visibility into it, from where we sit.
But certainly the payers have had more direct focus on that part of the business.
It probably is one of the several things that is impacting the utilization trends.
A somewhat selfish question here, but I do have to ask on animal health, if that's okay. So can you speak on recent trends across the animal health sector in terms of demand trends, companion animal versus livestock? Are you seeing some of the innovation that's coming through? And we've heard from a lot of the animal health companies at this conference alone, you know, really stepping up from an innovation standpoint. How is that flowing through to you in terms of new opportunities in categories like dermatology and categories that, you know, you didn't have access to before?
Yeah. Thank you for asking the question. And I'll talk a little bit about our animal health business. It's really been performing quite well. The most recent quarter, it grew at 7% and has kind of been averaging around a 6% growth rate. So it is, you know, definitely outperforming the distribution market and gaining market share. And one of the reasons is, just like throughout Cencora, we lead with market leaders, and we have a lot of the leading animal health providers as customers. And, you know, our companion animal business is growing faster than our production animal business. Both are growing. And we, I would say overall, you know, the market has been good. But, you know, it has been, you know, a little soft for a period of time.
I think that, you know, it still has some of those challenges in both the companion animal market and the production animal market. Our performance, you know, continues to be quite good. We are really excited by the innovation because of course, what's really going to continue to drive that business over the long term is the human-pet bond and then the really strong innovation that we see from manufacturers also. Thank you, Erin.
Great. Great. So I want to switch gears though to the international part of business now. Let's take a higher level approach in terms of some of the key moving pieces because I think that's important here in terms of how we're thinking about kind of even near-term as well as longer-term dynamics there. But can you talk about what's influencing AOI growth currently across the international segment? What gets us back to that recovery in the fourth quarter? And yeah.
Yeah. Yeah. Thanks. Thank you for asking that question. And of course, at Cencora this year, we've really been outperforming in the US business with, you know, our guidance is 20%-21% adjusted operating income growth, but we've had an adjusted operating income decline in the international business, and it's really been driven by our global specialty logistics business, which is a leader in doing logistics for clinical trials, and our global consulting services business. And both of them have been impacted by subdued levels of clinical trials. There are some green shoots and some data the last couple of months that perhaps that's improving from a market standpoint. I'm talking now. And so that's a business which we do expect to stabilize. And you know, one of the reasons we expect it to stabilize is that the comps become easier for that segment now.
Then also, some of the signs we are perhaps starting to see in the market. The one final thing I'll say is to put it into perspective: at Cencora, 85% of our operating income is in the US segment, 15% of our operating income is in the international segment. But of course, we are, you know, very focused on the turnaround in the international business. I will say that the distribution business, the core distribution business there is fine. And for instance, in the most recent quarter, our top-line growth was 10%, but we had a decline in operating income, which is, of course, driven by the manufacturer services businesses that I talked about.
Okay. Can you talk a little, go into a little bit more detail on World Courier too, just exactly what you're seeing? We've obviously seen some volatility across CRO, clinical trial activity. What's your outlook on kind of fundamental demand trends, biotech funding environment, that kind of stuff in terms of the key drivers across the World Courier?
Yeah. Thank you for asking that follow-up question, Erin. World Courier has been an excellent business for us for a decade plus. And as I said, it's a leader in doing logistics for clinical trials. It, you know, has had a weak year for the reason that we both just talked about now, but it's a business that we have a lot of confidence in for the long- term. And, you know, we always like to have businesses that are market leaders in markets that we believe will return to good growth over the long- term.
Okay. And PharmaLex, what's your current view in terms of the business and the pharma services market more broadly? What's more to do on this front? And you talked about it being, you know, I guess 15% of earnings for you. Like, is that, you know, just the portion of, you know, is that an area that you want to build upon? And what do you think the proportion of your business is going to be international longer term?
Yeah. Thanks. So, our global consulting services business, as I said earlier, has underperformed. And it's really kind of driven by what we've just talked about, the subdued levels of clinical trials. It's something that, you know, we're very focused on the turnaround there. But I'll also say kind of one thing I'd like to add is that Bob Mauch, our CEO, he's coming up on his one-year anniversary as CEO. And of course, he was COO before being CEO, and he's run basically all the businesses at Cencora at one time or another, and joined the company in 2007 when he sold his market access consulting business to Cencora. He's really established four strategic drivers. And one of the four strategic drivers that Bob has established is prioritizing growth-oriented investments. And I think this gets to the question that you were just asking.
What that means is we're being very intentional as we look across our portfolio, which of our businesses have the best long-term growth potential. That's where we're really prioritizing our investment dollars, Erin.
Yeah. I think I asked the question on the last conference call because you kind of mentioned the word de-emphasizing. But is there anything that are you taking a hard look at all different parts of your business to understand kind of what areas that, you know, you know, may not be a part of kind of Cencora longer term?
Yeah. I'll just say that, you know, we are being very intentional in looking across our portfolio and will be prioritizing our growth-oriented investments.
That's fair. That's fair. So, sort of along those lines, but kind of opposite the capital deployment, can you talk a little bit about the priorities here, M&A environment, you know, update on sort of the, what the pipeline looks like? Is there enough MSO, MSO deals to do out there, or, or focus on deleveraging too?
Yeah. Sure. So one of the great things about Cencora and our industry is we have strong free cash flow. And so capital deployment is a very important part of our business model and will continue to have balanced capital deployment. We'll continue to invest in the business through CapEx. And our CapEx has been increasing. And the reason why it's been increasing is because the volumes have been so strong in our business. We've been making investments in infrastructure because of the higher volumes that we've seen. And we're also investing in key technologies. And digital transformation is one of Bob's other strategic drivers. And so we're investing in the business through CapEx. We'll continue to do strategic acquisitions. A lot of that is spoken for in that we have the put call on the other 65% of OneOncology.
And then we think our MSOs will have over time good bolt-on opportunities also. We'll continue to do opportunistic share repurchases. And then we'll grow the dividend over time also. And we most recently grew the dividend at an 8% rate to make sure that it was in that 8%-12% long-term guide that we have for EPS growth.
You mentioned investments in technology. Perspective.
Sure. And so, as I said, digital transformation is one of kind of the four strategic drivers that we're focused on. And we're doing it across the business. And I'll just kind of talk about some of the things that we're doing in the finance area. Like, right now in finance, and I'll use general numbers here, you know, in the FP&A area, we spend about 80% of our time generating reports and 20% of our time partnering with the business. And we really want to flip that through digital transformation. So we spend 20% of our time generating reports and 80% of the time partnering with the business to grow the business. And I'll just use one specific example in finance, in internal audit, which is an area which is, of course, data-rich. We are increasingly using AI in our internal audits.
This year we've committed to make at least one of our internal audits done completely through AI, and of course, it'll always be reviewed by the, you know, professionals and leaders in that department, but it's just one of the many examples.
Okay. That's great. That's good to hear those examples, and thank you so much for the time. I appreciate the discussion.
Thank you, Erin.