Cencora (NYSE:COR) Q4 2023 Earnings Call Transcript

With regard to generic deflation, generic deflation has moderated in recent months in certain pockets of the market. So it was less of a headwind for Cencora in fiscal year ’23 versus prior years. And so that was, of course, positive for us. If deflation were to continue to moderate more broadly across generics, it would continue to be less of a headwind for our business. I’ll say that from a supply and demand dynamic standpoint, it remains generally in balance, and we work closely with manufacturers to understand their supply and availability of product given shortages in certain areas. But as you know, our business model is not as reliant on generic pricing as it once was in the past. Several years ago, our leadership recognized the need to have more balanced profitability across the portfolio of pharmaceuticals, so we’ve rebalanced some contracts to make sure that Cencora receives fair compensation for the value we provide across brand generics and specialty, which has been key, especially as the market continues to shift to include more specialty products.

And Steve, do you have a follow-up there?

Steve Collis: Yes. Just a couple of things. I just want to say, in terms of anticipated any reforms, as we know, the best of our knowledge, most of the pricing concessions would take place below the WAC line. So that’s what we anticipate at the moment. Just then, Jim, on GLP-1s, I’d say they are clearly most impactful on the top line and an incredible example of the innovation in our industry and the patient impacts. We expect continued growth in this category. But again, they are a much more meaningful revenue growth driver than operating income driver, but important part of our portfolio. The last thing I’d say is that we continue to advocate and help our community pharmacies to obtain adequate reimbursement on those products. So thanks for the question.

Operator: Our next question comes from Daniel Grosslight with Citibank.

Daniel Grosslight: I want to stick with guidance here. And really relative to your longer-term outlook, which I know hasn’t been updated in a few quarters. But you’re operating now on an adjusted constant currency basis at around 8% to 10% AOI growth versus your longer-term guidance of 5% to 8%, and that’s coming off after a pretty strong fiscal ’23 as well. So I’m curious, is there anything, I guess, looking out longer term that would cause that growth to step down perhaps in fiscal ’25 and beyond? Or are you in kind of a secularly stronger market than you were when you initially gave that longer-term growth outlook?

Jim Cleary: Yes. So let me start off, and I’ll talk about our long-term guidance. And as you know, our long-term guidance, it contemplates operating income growth of 5% to 8% and EPS growth of 8% to 12%, normalizing for exclusive government-owned COVID products and foreign exchange. This — we are assuming we’ll be able to grow 5% to 8%. And each of our segments and capital deployment contribution will be 3% to 4%. Our guidance is higher than that. As you know, in fiscal year ’24, as we called out, as you mentioned, on a consolidated adjusted operating income growth basis, it’s 8% to 10% constant currency ex-COVID. And there are a number of things that are driving our guidance and fiscal year ’24 and a number of things that drive our long-term guidance.

And one thing I think to keep in mind is that the kind of the second half of our fiscal year ’24, it compares to 2 quarters of particularly strong ex-COVID growth, including 15% growth that we had in the third quarter of fiscal year ’23 and then the 14% growth we had in the most recent quarter. But we have really good confidence in our long-term growth capability, and it will be driven by the things that’s been driving our recent growth. It’s the growth of our higher margin, higher growth businesses, including specialty distribution and our commercialization services business. It’s continued strong utilization trends. It’s drug pricing and those sorts of things. And so we have good confidence in our fiscal year ’24 guidance and very good confidence in our long-term guidance.

Operator: Our next question comes from the line of Allen Lutz with Bank of America.

Allen Lutz: Steve, you spoke about the recent conference that you attended with the Good Neighbor Pharmacy customers. And our work suggested you’ve been growing the number of pharmacies under that brand pretty nicely over the past few years. I’m curious with some of the headwinds we’re seeing for companies like Walgreens, can you talk about the current state of the independent pharmacy market and what you’re seeing there?

Steve Collis: Yes, thanks for the question. Our community pharmacies always differentiate themselves with their resilience. And broadly speaking, they hold up well. Around 20%, 21% of market share. And they’ve been in that place for several years now. I think with product innovations like GLP-1s and more people doing their vaccine and COVID shots at the pharmacy, it does give an opportunity. Labor and access to pharmacists is probably easier on a more macro level on a smaller basis. And often, some of those pharmacies are in smaller communities, they’re very active in those communities. And also, some play a key role in access to underserved communities as a leading health care provider in those communities. So we’re proud of our partnership with them.

You mentioned growing. And I would say that we do that through our relationships with our buying groups, that we are, I believe, are leaders in the space. And it’s a fascinating space for us and one that we’ll continue to invest in. Thanks for the question.

Operator: Our next question comes from George Hill with Deutsche Bank.

George Hill: Yes. And Jim, kind of a question at a high level as you look out to earnings — operating earnings growth in 2024. Would just love to hear you talk about growth in the specialty business versus what we think of as the regular way, retail store drug wholesaling business. And maybe I would love to hear you talk about margin growth in manufacturer-facing services versus retailer-facing services. And just kind of like where are the pockets — like when we look at the kind of composite growth targets, kind of where are the pockets of strength and kind of where are the pockets of kind of performance that’s closer to the core?

Jim Cleary: Yes. And so as we look at growth opportunities, as you called out, specialty is a key driver of growth for us. And after I talk, I’ll ask Steve to talk about it also because, of course, he was the founder of all those businesses. And we’re seeing very good growth in and with — in the specialty market with regard to specialty physician services and physician practices. We’re seeing good growth with health systems also, and there’s so much innovation that’s going on in the market. It’s really a long — it has been, and we think it will continue to be a long-term tailwind for our business. The innovation in that market and the capabilities we have, including all of our wraparound services that we offer. And then just — and one example of our belief there is the investment that we’ve made in OneOncology.

And then with regard to our commercialization services business, our manufacturer services businesses that are higher margin, we are continuing to make investments there and continue to see very good opportunities. And in addition to specialty, it will really continue to be a focus area for us, driving our growth over fiscal year ’24 and the longer term. Steve, are there any things you’d like to add?