All right, great. Start with our next session here with Cencora. I'm Steven Valiquette, the healthcare services analyst here at Barclays. With us from the company, we have Steve Collis, the CEO, and also Jim Cleary, the CFO up here on stage with me. Bennett Murphy is in the audience from investor relations as well. This will be a fireside chat. I think with that, I guess we'll just dive right in.
Okay, great.
Okay, great. Maybe, you know, first topic here, obviously for ABC, you know, a hallmark of the company has been specialty drug distribution. It's been a great source of, you know, stronger than average profit growth for the company for a long time now. Depending, that could be accelerated further here over the next couple of years, potentially around the biosimilar opportunity. You know, maybe just unpack that a little bit further. Obviously, biosimilar Humira itself, while topical for investors, I think most, you know, investors recognize by now that the drug distributors really may not have as much leverage to that particular one, just given that it's dispensed more through the mail order channel. Can you just remind us of your current assumptions and EPS contribution from biosimilars overall for fiscal 23?
Just any high level color for the next couple of years beyond that might be useful as well.
Yes, Steve, thanks for being in. You know, for those who don't know us, I think most of the people, half the people we've already met today, appreciate your ongoing interest. We're a leading healthcare solutions provider with a foundation in pharmaceutical distribution, and we continue to add to our core business and our market leading customers with interesting acquisitions. We have a leadership position in specialty. Specifically, Steve, to your point, we don't break out the EPS contribution, you know, from biosimilars, but it's significant. You know, it's been significant from many aspects. I think the adoption, particularly in oncology, has been encouraging.
You all know we need the headroom from biosimilars with the biologics expirations coming up to create room for new cell and gene and other therapies that continue to come out that are really remarkable. You know, we're gonna go through a period of I think incredible innovation. Humira, as you so correctly point out, Humira is not as impactful for us because of the way the mail order channel has handled our Part D launches. Part B launches are very important for us, and there's a good pipeline coming up in the years ahead, and definitely will continue to be a driver for our business, a driver for our practices that we serve, profitability, and also driver for patient affordability, so.
A lot of the high-quality manufacturers, like an Amgen, have gotten very involved in this area, and we think that that's good for the, you know, the patient adoption. Anything you'd add or?
Coverage is great, Steve.
Okay, great. The next question on biosimilars is it kinda covers maybe two topics or two questions at once. O n the one hand, the company's been pretty successful on, you know, generating some extra profitability tied to biosimilars just around the, you know, physician GPO and some of the services you provide, you know, through that particular part of your business. Also on the biosimilars, you know, for some of the big launches coming up over the next several years, I still think kinda similar to, like, traditional generics, that you need to have some interchangeability that goes a long way towards driving a lot of extra profit for you guys to drive market share for some of the manufacturers. Where if you don't have that interchangeability, it makes it a little bit tougher.
Just curious to hear more thoughts about just the overall profitability on biosimilars, how much it might still come from just the GPO economics versus the actual, you know, distribution of the products, you know, given that some of these might be interchangeable, but still a lot of them still might not be.
Yeah. You know, as I said previously, you know, the Part B products are really important for us. I think it's worth mentioning that it's not just oncology. You know, w e have areas like rheumatology, ophthalmology, urology that we're very focused on as well, and that there are gonna be some interesting products. Certainly ophthalmology is one that comes to mind immediately, and we've got a couple of promising products there. That's a big market for us as well. You know, it's been, as I said, a really remarkable boon for many parts of our business, including ION, which focuses on physician education, contracting, and I think has been very helpful and an early proponent of the adoption of biosimilars.
Certainly, interchangeability is more prevalent with the Part B because a lot of this is, you know, sort of, is not chronic treatments. It's a particular treatment path or protocol that's chosen. We have seen, you know, some of the products be interchangeable and in areas like ophthalmology, we expect that physicians and patients would be willing to do some changes. Anything else, Jim, you'd add?
Just will say that, you know, it continues to be a growth driver for Cencora. We've seen that for several years now and would expect it to continue, Steve. Of course, the interchangeability is not as important as Steve was saying in a Part B, because obviously the physicians can make that decision. Of course, we have the ION GPO in that market also, which has been a very successful business for us.
Yep. Okay, great. I guess sticking with specialty, but maybe toggling off biosimilars and just coming back to just the, you know, the brand opportunity. Let's not forget about that part of it, obviously. You know, the pipeline always seems pretty strong in biotech overall. I know it's hard to really talk about any specific drugs and, you know, ones that, you know, there's always a lot of hype around, you know, maybe a handful of drugs at any given time as far as revenue potential. Without getting too granular around that, maybe just give us your thoughts on just the overall current state of the, you know, the pipeline for, you know, additional specialty, products that you might be able to capitalize on, just, you know, maybe next three years versus like, you know, past three years.
Is it similar as far as a still a strong growth outlook? Has it decelerated a little bit? Is it accelerating? Just a high level thought around that might be helpful, just on kind of the brand opportunity, just separate from the biosimilar.
Yeah. I think there's just a lot of trends that are benefiting the specialty business. I think better diagnostics, better personalized medicine, you know, earlier detection, coming out of COVID, and that trend was continuing. You know, the patient access. AmerisourceBergen has, we always talk about our market leading customers and in specialty. We've got many tremendous customers, whether it's in urology, where we have the leading physician aggregation company there. Outside of U.S. Oncology that's owned by a competitor of ours, we have the three leading aggregators in oncology. We have these great set of customers. We have ION, which has got various programs depending on the size of practice you are, which is important.
That really does a lot of tremendous work on the contracting and education side and just a tremendous pipeline of products. We feel really good about our specialty products business. We have also, you know, with our, formerly, ASD Healthcare, very strong hospital presence. We're looking at GPOs in other areas, including, you know, urology, but also in the hospital space on the specialty products to strengthen our contracting and strengthen our pricing and education requirements for our customers. This is a, this is a tremendously important area for us. We were asked in one of the earlier groups, you know, is this still a key area of focus for AmerisourceBergen?
We could not be more emphatic that this is absolutely a core business for Cencora, where we've been a leader for over two decades. We continue to make investments. Recently, we built a specialty distribution center on the West Coast. One of the key theses, even international, is how can we bring more of our specialty knowledge and services and sort of setting different care setting skill set to the European market. One of the ways we'll do that is through our Alloga business, which is direct to pharmacy. The leading company in Europe that does direct to pharmacy programs. Looking more at those unique requirements that the specialty manufacturers will have.
You know, we have a couple of manufacturers that are interested in contracting with us on a, you know, both a European and a U.S. level. We, we think we have a lot of different ways to go at the specialty business and including just supporting our customers and our manufacturer partners with their market access and their patient requirements.
Okay, great. Final question on specialty. W e just talked about a lot of the organic growth drivers, both for the U.S. and for Europe. I think that was definitely helpful. you guys obviously have, you know, industry-leading market share within the U.S. Aside from the organic growth, you know, just curious to get your latest thoughts on whether or not there's still a meaningful opportunity for, you know, growth through acquisitions. Sounds like in the U.S., you know, I think it's been, you know, maybe less targets, you know, now than what there used to be. also just international, you know, is there maybe a greater opportunity for inorganic acquisition growth outside the U.S. within specialty as well?
Yeah. You know, first of all, we think our portfolio is pretty strong. W e did our long range guidance, and certainly within the long range guidance, we're contemplating, you know, several hundred million up to $1 billion of acquisitions a year. Specialties is a key part of our portfolio, so you could expect that we'd invest there. You know, the ways we may invest is through downstream solutions, helping our customers navigate through a market. We could be partnered more with manufacturers. I'd regard PharmaLex as a manufacturer commercialization type business. There is 30%- 40% of their business is in the U.S.
Although it's perceived to be a European acquisition, there are parts of that that we can grow in the U.S. as well, in addition to our Xcenda and Lash, key patient portfolio and hub services and pharma economic consulting type businesses. You'll see us continue to invest in those areas. We are, we look at our return on invested capital. Obviously, along with a lot of other businesses, our weighted average cost of capital has gone up a bit. We are completing the pay down literally this week of our last obligation on the, to the rating agencies for Alliance debt, and we're paying down some really, really low interest rate debt.
You know, our balance sheet is one of the key hallmarks of Cencora, and I think shareholders should always feel good that we are really focused on creating shareholder value, along with being a purpose-driven company and team members
Okay, great. Okay, maybe we'll toggle off of specialty and just come back to the core drug distribution business for a few minutes here. You know, I think for a lot of investors know that we've done a lot of work around the upcoming traditional ANDA generic pipeline. I know it's kind of old-fashioned and old school. We still roll up our sleeves and do some work there. Yeah, from our own analysis, you know, we think there's actually a pretty strong outlook for new first-time ANDA generic launches in 2023 versus 2022. We view that certainly as a tailwind for the drug distribution industry as a whole.
I think, from talking to you guys around that, and I think there's been maybe some balance around the contribution from that as you've kind of moved from two-tier to three-tiered pricing. Maybe just talk about whether or not you see a strong generic launch calendar as well. Just, you know, any thoughts on whether or not that moves the needle for you guys just, within the outlook for the next year or so.
Sure. Yeah. As we look at our business planning, and we look at potential generic launches over the next year. First of all, it's of course, really positive for the healthcare system. It's also positive for the distribution market and Cencora. You know, it is an incremental benefit for us. You know, I wouldn't certainly say any individual product is a major driver. As we see this, it's an incremental benefit for Cencora. As everyone knows, we've done a, you know, very good job over several years of rebalancing our portfolio, so we're not overly reliant on generics for profitability.
We make a fair return on generics, brands, specialty, biosimilars, as Steve talked about earlier, but it, you know, it, certainly is, you know, a, incremental positive for us, Steve.
Yep. Okay. Just to echo your comment there, we kind of view it the same way. You know, we see about $28 billion worth of NDA branded drugs, you know, going generic in 2023. Yeah, there's not really one big major launch that brings attention to it the way you have that, like with Humira, within biosims. There's, like, a lot of singles and doubles, and before you know it, oh my God, it's $28 billion. That's.
Yeah.
Maybe that's part of the reason why it's off the radar screen and maybe a little bit for some investors. That's helpful though, just to hear your thoughts around just, you know, as far as contribution and everything. Maybe just switching gears here, just around, you know, kind of the nuts and bolts questions around drug pricing trends. You know, I guess kind of a similar theme where the economics for drug distributors on brand price inflation nowadays are certainly not what it used to be going back 15, 20 years ago. With that being said, you know, I think the, there actually was a little bit of an uptick in the brand price inflation trend so far in calendar 23.
I think everybody knows that, you know, in January in particular is the most important month of each calendar year, and the trends are actually pretty favorable. Maybe just talk about, you know, kind of what you observed, you know, around the, you know, the brand pricing trends so far in 2023 and, you know, how that's impacting the U.S. distribution business.
Yeah. It's certainly been in line with our expectations. As I think everyone's aware, right now on the, you know, brand front, well over 95% of our buy-side dollars are fee for service. Of course, we do experience some benefit when there are price increases and we, you know, did see that in line with our expectations, Steve.
Okay. Okay. On another theme of being old school as far as tracking the, you know, generic pricing trends. That's been, you know, fairly steady over the past few quarters based on at least the IQVIA data. You know, again, I know that, it's not so much around, you know, You know, so first of all, the IQVIA data obviously is the buy-side pricing trend. Really what's most important for you guys is just the buy-side pricing trend relative to the sell-side pricing trend. Just any thoughts or observations on how that's trending so far in calendar 23 as well.
Yeah.
You know, relative to how you guys were, you know, just viewing, the contribution to the business.
Yeah. Very much in line with our expectations. We've actually had a lot of questions on this in our early meetings that we've had so far today. Of course, if there were a moderation of deflation, it would be an incremental tailwind for Cencora. You know, we do see that, you know, manufacturers have cost pressures. You know, at this point in time, I'd have to say it's, you know, fully in line with our expectations.
Okay, great. Okay, next topic here, just on the, you know, COVID-related products. You know, given the size of the earnings base for ABC now, it's, you know, kind of a rounding error at this, or not a rounding error, but just, you know, sort of a, you know, just a smaller number as far as the contribution around the, you know, $0.05-$0.10 somewhere in there, I think was contribution here more, more recently. Just give us an update on, you know, the trends you're seeing on just the COVID-related products, you know, and again, how that's tracking relative to, you know, again, what you kind of built in for the outlook within fiscal 23.
Well, I'll start off just to say that we do expect that a lot of the products will transition towards, you know, regular, you know, in, in the industry, sort of service. You know, vaccines are a little bit different than other pharmaceuticals in that the channel's so broad. We expect that they will be administered hopefully in retail pharmacies. That's something we continue to advocate for. You know, also they will anticipate they will be administered in physicians' offices and, you know, clinics. We have some of that business, of course, through Walgreens significantly, but, you know, the market share would not be as high as we have in a traditional, you know, pharmaceutical product or traditional specialty product that would transition.
You know, the emergency use authorization products, which AmerisourceBergen has had literally, I wanna use the word a lock, but we were, you know, successful in obtaining exclusive distribution and, you know, often not even distribution, but just stocking and logistics facilities with the CDC. We, you know, some of that we expect will come to an end, because, you know, the government has declared an end to the sort of emergency period of COVID.
You know, we, it's something that I think Jim and Bennett have done a good job of calling out because it's a little bit unpredictable. I think we do a terrific job of forecasting, you know, where our earnings are gonna be for, you know, $250 billion plus company. We really come very close, then we have some of those puts and takes. This is one that's been a bit more unpredictable for us, is what's gonna happen with the COVID therapies. In some cases, it's been fairly meaningful because we do have some of that exclusive distribution even where we don't take title to the product. You know, it's something that we think we've done a great job of being transparent about.
Jim, I think the second part of the question was yours.
Sure. I'll just briefly state that, as you know, our current guidance is EPS contribution from COVID therapies of $0.25-$0.30 for fiscal year 2023. We will continue to call out on a quarterly basis what the EPS contribution is from COVID therapies for that quarter. Whenever we update guidance, we'll do it also on an ex-COVID basis. You know, Steve was saying it's a little bit hard to predict what the contribution is going to be from quarter to quarter, so we'll continue to call that out, Steve.
Okay. Also maybe somewhat tied into that, obviously, with, you know, you mentioned the PHE coming to an end. Now you have, you know, potential kind of broader commercialization of COVID vaccines, you know, maybe at some point this year or later. You know, either way, just, you know, just can you remind us if you have any assumptions around that that are built into commercialization, and could that still be a modest tailwind for you guys? Or do you see it, you know, not being that material the way it stands right now?
No, we don't have any assumptions. We don't have any assumptions built around that. We'll certainly think about it as we start looking at our 2024 plan, you know.
Okay. Okay. TBD on that. Okay.
Yeah.
All right. That keeps it simple. Okay.
I don't see that it's being. You know, it's hard. There's very few. I mean, I remember Sovaldi was, you know, a specific call-out because that was just so significant, particularly in the first year or two. We had Remdesivir in the beginning of the pandemic. Other, you know, and then, of course, the Oxaliplatin. You know, this is my long history, right? Nearly 30 years in the business. I mean, it's so few actual products, you know. We're not really a product company. We're more of a services and contracting company. It's. But of course, we do go by the industry. We're a good microcosm and a representation of the industry.
Yep. Okay. Okay. Maybe.
You know as well as I do, so.
Yep. All right, last question here, just around the core drug distribution business. Obviously the, you know, macroeconomic outlook is, you know, still top of mind for a lot of investors right now. The good news is that, you know, pharma overall, obviously, you know, defensive type business. For the most part, the, you know, the growth trends are intact, but seems like it's, maybe having a different impact on the stock. We'll maybe save that discussion for later as far as the stock impact. Just remind us again, you know, are you seeing any impact on the business one way or the other from just the macro outlook? Maybe also tied into that, just any updated thoughts on just, you know, inflationary labor cost impacts and how you guys are managing that as well?
You want to start?
Yeah, sure. Let me talk from the macro standpoint, you know, both Steve, from a revenue standpoint and an OpEx standpoint, because I think there are components of both of those in your question. You know, we continue to see utilization trends to be very good and in line with our expectations. You know, we've been talking for the last few years now how resilient our business is in spite of anything that may be happening on the macro front, which I think is one of the, you know, one of the great things, as you all know, about our industry. And I think from an OpEx standpoint, from an inflation standpoint, you know, and this is something we've talked about before. You know, we kind of saw inflationary things start to happen in like February of last year.
The first quarter was a tougher comp for us from an OpEx standpoint. The first fiscal quarter, and as we talked about, the second fiscal quarter is still somewhat of a tougher comp. From a comp standpoint, it gets easier in the back half of the year. Also, of course, you know, this is something that's very important to Cencora. You know, we take actions to make sure that we're doing well on the OpEx front. We feel overall kind of good about where we're gonna be from an OpEx standpoint for the fiscal year, Steve.
Okay. Okay. Also just on macro, again, thinking about that outside the U.S., you know, how much does that impact, you know, your growth strategy and some of your initiatives for outside the U.S.? Does it give you pause in any way, or does it create more opportunity? Just kind of thinking about the puts and takes outside the U.S. for macroeconomic as well.
Utilization trends we continue to see in line with our expectations. I would say, from an international standpoint, probably from the OpEx standpoint, it's a little bit better than we would have expected at the beginning of the year, just 'cause I think it's been a warmer winter, and so things like energy costs have been a little bit better than expected.
Okay.
We have, you know, our largest market's the U.K. We've seen some firming of some pricing there and, you know, our largest customers progressing really well coming out of pandemic. Tourism coming back, Dave. You know, overall, we just had our three-year planning board meeting. In March, we do our strategic planning board meeting and, you know, we really officially ended our integration period of Alliance. It's the biggest acquisition we've ever done, over $6.5 billion. You know, I would say the board gave us high marks on how well that's all gone and how well we've achieved the objectives that we set out when we announced the acquisition about two years ago.
Okay, great. Okay, we got another maybe minute or so here. Just a couple other random topics quickly. You know, just on the veterinary distribution business, maybe just touch on the key variables impacting the growth in fiscal 2023, and both on the companion animal and the production animal sides of the business.
Yeah, I would say probably the, kind of the key variables driving growth there is just. We've talked about both these things, capacity in veterinary practices and staffing level at veterinary practices. We've seen some lower staffing levels there, which were negatively impacting growth rates. Drought and herd size in the production animal business was negatively impacting growth rates, and we saw the impact of those things in the most recent quarter. I will say as we look long term, you know, we feel, you know, very good about the market and very good about our business and ability to grow that business.
Okay. Final real quick one, just on kind of share buybacks. You know, on the one hand, obviously, there's been some Walgreens transactions and that, you know, maybe altered your strategy a little bit on share buybacks over the past, you know, year or so. Also now with the stock coming, you know, kind of way down from where it was. I mean, just any updated thoughts you have on just capital allocation and share buybacks and, you know, how that ranks within some of the priorities, I guess.
Yeah, sure. You know, of course everyone's aware we, from a capital deployment standpoint, we invest in the business, we make strategic acquisitions, we do opportunistic share repurchases, and we have a reasonable and growing dividend on our stock. From the standpoint of opportunistic share repurchases, we've had great opportunities in the December quarter. We bought back $700 million from WBA, as WBA, our largest shareholder and customer, sold stock during the quarter. We just viewed that as a great opportunity to partner with them and repurchase a portion of the shares.
You know, as we look to the future, as we've said many times, if WBA does decide to sell additional shares, we would look at it as an opportunity to partner with them and be a purchaser of a portion of those shares.
Great. Okay. All right. Well, with that, I think we're a minute or two over, so appreciate you guys entertaining all the questions. Thanks for your time today, and enjoy the rest of the conference.
Thanks, Steve. We'll see you later.
Thanks.