Cencora, Inc. (COR) Earnings Call Transcript

Okay, everyone. I think we are now live. Screen has switched over. So good morning. I'm Eric Coldwell, the covering analyst here at Baird. It's our great pleasure to have AmerisourceBergen with us today, one of our top ideas for the year, one of our top ideas for the end of the year and a recent note that came out, we're big fans of what's going on at the company. And over the last couple of years, have believed that the industry has been in a bit of a secular and possibly cyclical as well recovery, COVID notwithstanding. ABC has been a name we've known for a long time where, as I said, we're huge fans of the company. They like to keep it simple. It's always fun to have you guys on stage with us. So that's great. Today, Jim Cleary, CFO; Bob Mauch, Group President, will be joining us in the fireside chat. And before we kick that off, I think the company has a couple of quick comments just to get us started.

Eric, well, thanks a lot. Thanks for having us here today. Thanks for hosting this. We had really good meetings with investors prior. And so thank you for setting those up, and thanks for the great work you do on our company and industry. We're celebrating at AmerisourceBergen. In fact, we celebrated a couple of weeks ago, our 20th anniversary of the merger of Amerisource and Bergen. And as we sit here today, we feel strongly that our company is very well positioned, and we're well positioned for a number of reasons. One is we feel like we have the best customer base in the industry. We have key anchor customers in each of our business units. We feel like we have very innovative services and solutions that we offer to our customers, both upstream and downstream. It's great to have Bob Mauch on the call today. Bob will be able to talk about those. As most of you know, Bob is our -- and as Eric said, Bob is our Group President at AmerisourceBergen, all of the operating businesses reporting to Bob and then Bob reports to our CEO, Steve Collis. Another one of the reasons why we're so well positioned is our leadership in specialty distribution and services. This is the fastest-growing part of the market, and we really benefit from our leadership position in specialty and all the investments we've been making in specialty throughout the years. And then also at AmerisourceBergen, we benefit from the fact that we remain focused on creating shareholder value through thoughtful corporate stewardship. And this impacts so many things that we do. Everything from our balanced capital deployment to the way that we really focus on developing talent and leadership. We're actually back in the office on an optional basis for the first time this week. I started on Monday, and that's one of the nice things about being back in the office is being able to interact with our talent on a more personal level being here in the office. And then also another example of our corporate stewardship is our purposeful approach to ESG. And Eric, the last time you and I did a conference together was, I believe it was your ESG conference, and thank you very much for doing that. We're very focused on ESG at AmerisourceBergen. Investors, I encourage you to check out our ESG micro site to check out our fifth annual corporate stewardship report. And if any of you want to engage more specifically with AmerisourceBergen on ESG, we'd very much like to do that. I'll also briefly comment on the Alliance acquisition. That's obviously been big capital deployment for us. We feel really good about the Alliance acquisition from a strategic standpoint, it will pay long-term dividends in terms of our ability to provide upstream services to -- our services to upstream customers. We feel that there's a lot of financial benefit. We've talked about the fact that we're expecting high teens accretion from Alliance, high-teens EPS accretion in the first year, and we feel very, very good about that. Then also, we really like the Alliance team. They're very experienced management team, a lot of experience in distribution with strong alignment with AmerisourceBergen. And one notice that both Bob and I come from acquisitions. I came from MWI, which was acquired by AmerisourceBergen 6 years ago. And Bob was the founder and leader of Xcenda, which is our consulting business at AmerisourceBergen acquired in 2007. My final comment is you're obviously familiar with our third quarter results. Our third quarter results were outstanding. And I won't go into any detail on them because you're familiar with them. But I will say that as we prepare to start fiscal year '22 on October 1, we feel like we have very good visibility and confidence as we prepare for fiscal year '22. And with that, I'll turn it over to Bob.

Thanks, Jim. And Eric, thank you very much for having us today. I'm looking forward to the conversation. Just quickly, just -- I'll just add a few supporting comments to what Jim talked about in terms of our performance. I think it's important for us that everyone knows that this is very intentional in the way that we're performing in the market right now. And it really starts with our growth mindset at AmerisourceBergen and that we're tasking every one of our business units, every one of our business leaders for developing and driving growth initiatives. So with our current customers and then with new solutions. And the second thing that's really helping us perform right now is our core capability around execution. And what one would assume about a distribution company, obviously, would be good at execution, but people generally think about executing in terms of fulfillment. And the point I want to add here is that we're taking that execution excellence and capability and applying that to strategic and growth initiatives, which is helping us perform in the way that we are. Jim hit this hard, so I'll just mention it, but our people and our talent are what really make this work, and we have rigorous talent development processes for making sure that we can continue to do this over the long run. That all adds up to us being able to really interact with our customers in a way that we think is unique that builds deep strategic relationships so that we can help them grow. We grow with them. And that we diversify our profit opportunities with them by adding new services. So once again, Eric, thank you for having us, and looking forward to the conversation.

Thanks guys for the nice setup there. And I know, Bennett also and Jim, you both work a lot on the ESG side. So we're always excited to help coordinate any calls or meetings you want on that front as well. Yes. So look, I'm going to jump right to the chase. Maybe we can do a bit of a fire around -- a fire drill here on a number of questions. I have so many. But I think, first and foremost, coming off of the calendar second quarter call, I agree with you as the results were outstanding, but I felt like I was listening to different companies this quarter when the 3 large players reported. You and McKesson seemed to be on the same page and then there was the other guy who seemed to be up maybe a bit off on an island. And the big topic, I think, at least in the short term, was Cardinal blaming their poor EBIT performance in pharma on customer renewals, which frankly hasn't been a big topic for us in recent last couple of years, and we thought looking forward. So cutting to the chase, what are you seeing on the renewal front? Is your experience perhaps different than theirs? Is there something we should be watching out for in renewals? Just any general comments on that would be great.

Yes. I would say, Eric, that there is nothing to call out that's new or different on the contract front for AmerisourceBergen. Actually, one thing that I will note as everyone is aware, we did recently extend the contract with our largest customer, Walgreens, for 3 years through 2029. And at the same time, as part of the acquisition of Alliance, we entered into a 10-year agreement with Boots through 2031. And for years, we focused on -- and this has been a big part of what Bob and his lead team have done. We focused on aligning ourselves with the right strategic partners. So we have a strong portfolio of customers with key anchor customers in each of our segments.

So everyone knows your -- I think everyone knows that you're very well exposed to generics and biosimilars and specialty and some of the higher margin and higher growth categories. It seems like pricing in some of the exogenous market factors have had a little bit less of an influence in recent years than in the past based on what was going on, on the pricing side, and that would include branded drugs. Your contracts have changed. I think you've evolved many times over the last few decades that I've known you, and it feels like there's been another evolution here in the last couple of years that maybe pricing is just not as important as it used to be, but would love to get some detail on how contracts have changed and any anecdotes you could share with us would be great.

Okay. Eric, I'd be happy to take that one. And you're right, I think when we look back to 2016, let's say, when really the generic market began to change in a meaningful way, there weren't a lot of new launches and there are lots of players in the market, and we started to see the deflationary trend. We've acted quickly and decisively to get out in the market and get with our downstream customers and talk about how this is a real changing dynamic, and we need to work together to work through it. And so what we've done over really, a couple of cycles now is worked with our customer base to make sure that we're not and they're not too overly dependent on any one category of products. And again, if we go back, it was basically just branded generic, and there was so much value being created in generics. The generic value was subsidizing the brands, and that wasn't something that was going to be sustainable. So what we have worked really hard to implement is something that's more balanced. So our expectation and our customers' expectation is that we earn a fair return on each of the product categories. So that's generics, it's OTCs, it's brand, it's biosimilars, and it's specialty brands. So in all of those categories, we don't want our relationship with the customer to be overly dependent on any of those. So as their business changes, as mix changes, they're not getting concerned about the contract. We're not getting concerned about the contract and that we earn a fair return throughout the life. So it is something that you're seeing, Eric, and it's very intentional and it is why, even though generic deflation persists a little bit up and down from here to there, but we've redesigned our contracting strategy to deal with that and mitigate in a way that works for us and works for the downstream customers.

That's great. I'd be remiss not to just sit on the current environment. Obviously, big hospitalizations, COVID case count spiking again. We're seeing some health systems pull back on electives and procedures that aren't emergency cases. What are you seeing from this, if anything, at this point, not just in U.S. pharma, but across World Courier, MWI, your other segments? And then as a tangent to that, I know you recently made some comments on the COVID therapeutic exclusive deals that you benefited from this year. You expected those to be down a little bit as we exited the year. But I have to think that the courts might be reversing back to a little more favorable or less [ disfavorable ] than perhaps what you were thinking a month or 2 ago.

Why don't you handle the first part of that and then I'll handle the COVID therapy.

Okay. That sounds great, Jim. So Eric, in terms of the trends, we're seeing the health care systems hold up well, right? So clearly, there's a Delta variant surge out there. Clearly, in certain areas, there are real challenges within the health care systems in terms of ICU beds and other access. And in pockets, they do have to limit the elective procedures while that's going on. But on average, kind of on the whole, we're seeing that the providers, both physician practice providers, hospital providers and the pharmacies have always worked through this and the veterinarians as well, that they're able to manage through it. It's certainly difficult when there's a lot of COVID in the area, but they're managing to see their patients. They're managing to make diagnoses and get people on treatment. So hopefully, not too long winded, but we are seeing the trends really hold up kind of the recovery trends hold up, and we've got to watch -- certainly got to watch for Delta or other variants. But I think the health care system overall has learned how to operate in a new environment here.

Yes, Bob, I think that's a really good point that hospitals and physicians have learned how to manage during the COVID environment. And we've seen really throughout COVID, Eric, how resilient our businesses are. And in many cases, that resilience transition to strength as you've seen in our operating results. Let me answer your question on COVID therapy trends. We do distribute the antiviral and antibody therapies and the sales of the therapies in general move in line with hospitalizations. So of course, as of late, as hospitalizations have increased, the sales of those therapies have increased also, moving in line with hospitalizations. We do no longer have exclusivity for the major therapy that's been commercially used and sold in the hospital setting, so we'll no longer have the benefit of exclusivity. But as you noted in your question, sales of that product have increased as of late with hospitalizations.

Great. I want to hit on Good Neighbor Pharmacy. You just ranked #1, brick-and-mortar retail pharmacy for the fifth consecutive year, 10 out of the last 12. What is the secret sauce here? And I think more importantly, how does -- what's the takeaway with your strong traction with GNP over the years and the high customer satisfaction scores. What does that do for you and the rest of your customer base? So I mean I would think there would be benefits as you take those learnings and experiences and help share those with other accounts that aren't part of GNP. And then finally, pharmacies are increasingly being seen as more of a health care destination. I'm curious what kind of investments you might be making to help support pharmacies on their mission to move more towards some level of actually being a health care destination, not just a retail pharmacy operation.

Great, Eric, I'm happy to take that. And I want to point out first the secret sauce is the pharmacists and the pharmacy owner, right? So those professionals, those business owners have the ability to create a differentiated relationship with their customers and with their patients. And what we have the privilege to do is to amplify that, right? So these are independents. So they have the relationships in their communities and what AmerisourceBergen has the ability to do is really amplify the story of Good Neighbor Pharmacy and that relationship and importantly, the clinical outcomes that come from that relationship. So that's I think -- that's what we're doing well, right? We're not different from our broader story around our portfolio of customers. We're working with independent pharmacy customers who have a mindset to continue to grow their business and serve their communities. And then we bring those wraparound services to help them do that well. We think that helps them provide a better customer experience or patient experience. And it also helps them financially because in addition to Good Neighbor Pharmacy, Eric, as you know we have our Elevate Provider network, which is the contracting vehicle for that group of independent pharmacies with the PBMs and other payers. So what we're finding is that those Good Neighbor Pharmacies who are with us utilizing our services, both marketing and clinical services and the reimbursement services are actually growing above their peers. So they're getting more people in the stores. They're filling more prescriptions, and they're doing that in a higher profit, and we're really happy about that. So that's part of the story of why the stores want to be with us. The good -- the J.D. Power award is really about what consumers saying. And so again, we think we're delivering that service to the store to the store owner in a high-quality way, and that allows them to take care of their patients. I'll just add one specific. We have a really interesting digital marketing program that is being utilized right now. And it's a good example of something that a small business couldn't really do on their own. So we're bringing large corporate scale digital marketing capabilities to individual store owners through Facebook and Google and others and really the highest state-of-the-art digital marketing, and we're seeing real store traffic generated from that. So that's one example. I'll try to hit your last question quickly there, Eric, too. So we are -- as I said, we have a base of customers who are interested in growing and serving their communities and their patients. And one of the key areas where we're helping them expand their clinical presence. And it's not necessarily new services, which I know was kind of the -- maybe the essence of your question, but maybe I'll take it in a slightly different direction, which is around value-based contracting. And we're helping them join networks and have access to contracts that will actually pay them for providing clinical services and not just for filling a prescription. That's really important for the future of community pharmacy and frankly, for all providers, and it's really starting to get traction. And we're right in the middle of that, helping our pharmacies participate in that, and we think that will help them continue to serve their communities.