Cencora, Inc. Q2 FY2022 Earnings Call

Welcome to the Amerisource Bergen Corporation Fiscal 2022 Second Quarter Earnings Call. My name is Adam, and I'll be your operator today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star 1 on your telephone keypad. I will now hand you over to Bennett Murphy, Head of Investor Relations, to begin. So, Bennett, please go ahead when you're ready.

Thank you. Good morning. Good afternoon. Second quarter results. I'm Bennett Murphy.

As a reminder, if you'd like to ask a question today, please press star followed by 1 on your telephone keypad now.

Our first question today comes from Elizabeth Anderson of Evercore. Elizabeth, please go ahead. Your line is open.

Hi, guys. Thanks so much for the question and all the color on the quarter. I guess in terms of I heard what you said about the contribution from COVID therapies in the quarter and the sort of unchanged expectations for the full year and sort of seeing that as a pull forward. Can you maybe in a little bit more detail talk us through the other puts and takes as you sort of see things progressing in the back half of the year? Thanks.

Yeah sure thanks a lot for that question and I'll start out by saying that we're really pleased that we're able to increase full-year guidance of three key metrics consolidated operating income and US healthcare solutions segment operating income and EPS and also note as I said that we would be increasing our operating income guidance the international healthcare solutions segment if not for the negative impact of foreign exchange and you know the reasons for the increase in guidance were the stronger than expected performance in several businesses. As I said, the increase in FY22 guidance is not due to the important COVID treatment distribution work that we're doing. That contribution from COVID product distribution was higher than expected in the second quarter, but we view that as a pull forward and our full-year expectations from COVID product distribution are largely unchanged, around $0.60 in the U.S. and $0.10 internationally, so $0.70 on a consolidated basis, which was about what we were expecting three months ago when we provided guidance a few months ago. And so what we're seeing in the U.S. healthcare solution segment is an increasing guide due to broad-based performance across several businesses, and we expect that to continue.

From J.P. Morgan, Lisa, please go ahead.

Lisa Gill of J.P. Morgan, your line is open. Please ask your question.

Good morning. Thanks for all the detail, Jim. I just want to go in a little bit deeper on a couple of things that you talked about. One, when you talked about specialty to the physician office, are you seeing uptake in biosimilars, and is that helping to drive the profitability? Secondly, we've heard some rumblings around some product shortages on the generic side, clearly China shut down once again. Are you seeing any type of inflationary environment on the generic side that's helping to drive the numbers at all? And then just lastly, when you call out the 70 cents, how do you think about that for 23? Are you calling that out for us? So do you think it repeats itself in years going forward, or should we think about that as

at a one-time here in 2022 okay so there are i think three things there biosimilars and then i think drug pricing and then kind of the 70 cents on covid therapies and what we would expect for the for the future so you know in biosimilars it's you know clearly it's been benefiting us and our specialty businesses and particularly our specialty physician services businesses and we expect there to be you know continued growth and benefit there biosimilars as we mentioned particularly in that part of the business are a profitable part of the business for us with strong margins and so the you know trends and benefits that we're seeing there are you know quite positive and we expect it to be enduring with regard to drug pricing overall and I think your question was mostly around generics is there's really nothing new to call out you know overall the deflation rates are relatively in line with the last couple of years we expect that to continue throughout our fiscal year from a supply and demand standpoint supply and demand dynamics remain generally imbalanced and as we talked about a really important point is that our business model is not as reliant on generic pricing as it once was in the past our leadership team has done a very good job of rebalancing contracts to have balanced profitability across the portfolio of pharmaceuticals including brand generics and specialty to make sure we've received fair compensation and all those areas so really kind of nothing new to call out on the pricing side and then with regard to the 70 cent benefit from COVID products of course 60 cents of that is COVID questions from Charles Ray from Cohen

Charles please go ahead your line is open yeah thanks for taking the

questions if I could just follow up you know Jim on the to COVID at least in you self-care if we think about the remainder of the 60 cents I think you did about 10 cents in the first quarter we talked about the 22 cents here should Is that more weighted here into the June quarter, or are you thinking about it more evenly through the rest of the year? And was the benefit mostly in January? I think Omicron really peaked in January and then really kind of tailed off. What are you seeing here? And how is that demand given that when you look, testing volumes have been falling, even Even though as cases rise a bit, you know, there's not as much people finding out whether they have COVID or not, you know, how does that impact how you get treatments out to

Yeah. Great questions. So, you're absolutely right in the numbers, we've made 32 cents in the U.S. from COVID treatments in the first half of the year, which was 22 cents, the most recent quarter, and and 10 cents in the first quarter and our expectation is 60 cents for the year as we you know look at volumes in the back half of the year a significant amount of the volume is the government owned antivirals which have become increasingly available and yet we did see good volume you asked about the month of January we did see good volume during the month of January during But as the antivirals have increasingly become available and there's, you know, actions to increase access for those products, you know, we would kind of expect to see sales throughout the year. And our current estimates are that, you know, it's not like it's weighted towards the third quarter or the fourth quarter. It's roughly equal in both the quarters.

Thanks for the question.

The next question is from Stephen Valiquet from Barclays. Stephen, your line is open, please go ahead.

Great, thanks, good morning.

So just regarding the success over the past year or two of your physician-related GPO operation, is there any update on the, or change on the percent share of the per unit economics that are flowing to ABC from the specialty drug procurement you're doing for your physician customers? Or is the status quo on the profit algorithm? And also, is that contribution still growing meaningfully year over year? I just want to get a little more color around that.

Yeah, Steve, we're kind of all scratching our heads here. So, definitely, you know, there's more oral products, of course. You know, there's more cell and gene therapy treatments. There's, of course, personalized medicine treatments coming in into oncology. But, you know, our proposition for physicians remains very consistent. You know, our market share, we are with a lot of the leading companies. We have tremendous presence with a lot of these aggregator companies who have been working with Amerisource Bergen. Often before they became aggregators, the formative platform oncology practices have been, in many cases, our customers for a long time or in one or two cases came back to us as they really entered into extensive growth plans we should not we should definitely mention biosimilars which has been helpful for our customers mix our mix and our important creative headwind headroom for new products to come to market and certainly have been very influential ion has been very influential in helping a physician adoption and patient adoption of those products. So, you know, we also are expecting our Part B business to keep growing. It's not only in oncology, but in our Bessie Medical, which does the non-oncology physician-administered products. There's strong growth trends in all those segments. Jim, anything you'd add? I think that covers it well, Steve. Thank you.

The next question is from Eric Percher from Neferol Research. Eric, your line is open.

Thank you. I want to expand on the question relative to COVID ongoing benefits, and so I appreciate that you're giving us exact detail on the impact. Are you giving that in part because the expectation is that the impact going forward is likely to head toward zero, or what are your thoughts on post an emergency period if we see products perhaps that you've represented moving back into the channel and vaccines becoming part of the channel what is the that is the COVID impact potentially material

moving forward yeah so let me let me take a first crack at that the reason why we're being so transparent Eric is because to a large extent it's beyond our control of course we play you know a really important part in the supply chain and doing the logistics and providing the access that's certainly under our control, but in terms of the operating income contribution, it's something that it's more difficult to predict than many aspects of our business that we've been planning for years. And so we've provided the 70 cent benefit, 60 cents, of which is the treatments in the U.S., specifically because it is a number that is kind of hard.

The next question is from Eric Caldwell from BERT. Eric, please go ahead.

Thank you very much. My question, I feel like I'm already going to stumble over it before I start. There's a fair number of moving pieces with International, but I just want to confirm you have an incremental $80 million profit headwind from International due to FX. You're going to sell Pro Pharma, which will have an additional modest headwind to profit at some point in the second half. At the same time there was a one-time favorable manufacturer adjustment that partially offset those headwinds and overall you're maintaining guidance. What I'm trying to get to is what is the net EBIT headwind you're eating between the three items FX, manufacturer price increase, one-timer, and pro pharma cell. What is the net headwind you're eating to maintain the annual guidance for the full year? And so again let me give you some

of the some of the component parts as I said our assumption and guidance is that the April FX rates hold for the balance of the year and that if we look at that on a constant currency basis it would you know have an impact that's north of 80 million dollars on a constant currency basis and so that that causes us to indicate that while we're maintaining guidance range, that causes us to be at the low end of our guidance range. The manufacturer price increase, which was in-

The next question is from George Hill from Deutsche Bank. George, your line is open. Please go ahead.

Good morning, guys. And I'm going to follow up Eric's question on another question from International. I guess particularly in manufacturer solutions, could you talk about what specifically is driving growth in international manufacturer solutions, and I'd be interested if you could comment on how the profit mix has changed between the core regular way wholesaling business in Europe, which we think continues to be under pressure, versus profit streams that are derived from providing services to manufacturers.

Yeah, sure. So that's one of the things that really attracted us to Alliance is the high margin, higher growth businesses for instance the aloga business is a you know very strong 3PL business in many parts of by Europe and so just like America's worth Bergen kind of our you know our largest business is the wholesale distribution but it's going to be got market leadership there but it's really strengthened by these higher margin higher growth businesses and you know also in international of course we have the World Courier business which is a very strong business doing logistics for drug trials so we do see very good opportunities and and that's one of the kind of synergy work streams that we're actively working on is for instance World Courier and a logo and things we can do together to make our offering even stronger so I guess probably kind of the key point to make is these higher margin higher growth manufacturer solutions businesses and they're you know a key part of our international strategy and something that we would expect to continue to grow and that's one of the things that you know if you look at our recent performance as we've been focusing in on that and after we've made the Alliance acquisition it's one of the things that's been enhancing our gross profit margin and our operating

income margin and just generally I would add that you know a large health care is performing well we continue to be very impressed and I think all very compatible culturally with it their management team and you know we getting to know all the countries well we slowly getting to visit all the countries or at at least meet with the management teams. And as Jim mentioned, some of the greatest energy opportunities we have are looking at the manufacturer services area. Obviously, Amerisauce Bergen has a lot of interest in health systems and especially products. And also, I think in Europe, you're going to see some changes in where products get administered, and sometimes we can also see us be very...

The next question is from Michael Chaney from Bank of America. Michael, your line is open. Please go ahead.

Good morning and thanks for the questions. I know you had touched base or there's some questions around the pricing dynamic. You mentioned the comments relative to drugs and inflation. I'm curious what you're seeing on some of the cost sides on inflation, whether it's your own wage employees or in particular some of the dynamics on the shipping side and freight. Is there anything either that you saw in the quarter or baked into the guidance outside the norm of expectations relative to wage inflation, wage pressure, logistics, pricing, inflation pressure, anything that you can point out to us?

Yeah, you know, what I'll say is that higher labor and transportation costs, they continue to be embedded in our guidance and they have been embedded in our results the last couple of quarters. Amerisource Bergen is impacted by higher labor and transportation costs, but less so than most businesses because of the value density of our products. And so, you know, we are certainly seeing it and experiencing it. It's all businesses do now, but, you know, it's something that we're able to manage, and it's fully reflected in our guidance. And I think that our teams are, you know, doing a terrific job of managing these costs.

for today. We are very proud to reflect these results, to record these results which reflect our strong momentum as we finish half of our fiscal year 22. Amerisource is really relishing our role as a global healthcare solutions leader that is clearly leveraging our commercial strength and intellectual confidence to continue to deliver, to continue to create. Thank you for your attention.

Ladies and gentlemen, this concludes today's call. Thank you very much for your attendance. you may now disconnect your lines.