Cencora Inc

NYSE:COR

Earnings Call Analysis

Strong Financial Performance in Fiscal 2024

Cencora demonstrated impressive growth in fiscal 2024, achieving a consolidated revenue of $294 billion, up 12% year-over-year. The U.S. Healthcare Solutions segment led this growth with a 13% increase, while the International Healthcare Solutions segment grew by 4%. The company achieved adjusted diluted EPS of $13.76, reflecting a 15% increase compared to the previous fiscal year. In the fourth quarter alone, revenue reached $79.1 billion, marking a 15% increase from the previous year, driven by robust script utilization and market strength across both U.S. and international segments.

Operational Insights and Margin Trends

Despite the revenue growth, Cencora experienced a slight decrease in gross profit margin, which fell to 3.1%, down 24 basis points year-over-year. This was primarily due to increased sales of lower-margin GLP-1 products and a lack of high-margin exclusive COVID-19 therapies during the current quarter. The U.S. Healthcare Solutions segment saw significant demand for specialty products, which bolstered operational income to $3.6 billion for the fiscal year, up 11%. Cencora remains committed to investing in its operational infrastructure to enhance efficiency and profitability.

Dividend Growth and Shareholder Returns

Cencora returned $1.9 billion to shareholders during fiscal 2024, including $1.5 billion in share repurchases and an annual dividend increase of 8%. This increase is notable as it reflects a shift from previous years' raises of around 5%. These actions affirm the company's commitment to creating shareholder value alongside its growth strategy.

Strategic Guidance for Fiscal 2025

Looking ahead, Cencora set ambitious growth targets for fiscal 2025. The company expects adjusted diluted EPS to range between $14.80 and $15.10, translating to an 8% to 10% growth rate. Consolidated revenue growth is anticipated between 7% to 9%. Importantly, the guidance excludes any contributions from the RCA acquisition, which is expected to positively impact earnings upon closure. Cencora does expect headwinds from declining COVID treatment products and potential customer loss in oncology but remains optimistic due to underlying operational momentum.

Acquisitions and Market Positioning

Cencora's recent agreement to acquire Retina Consultants of America (RCA) signifies a strategic move into the ophthalmology market, enhancing their presence and capabilities in specialty pharmaceuticals. The acquisition is forecasted to be accretive by approximately $0.35 in the first year post-closure, supporting the company’s long-term strategy to bolster its market leadership in specialty healthcare. The RCA acquisition aligns perfectly with Cencora's existing strengths and customer engagement in the specialty and community provider space.

Conclusion: Prepared for Future Growth

As Cencora heads into fiscal 2025, the company appears well-prepared for ongoing challenges in the healthcare market. Leadership remains committed to executing on its pharmaceutical-centric strategy while adapting to market dynamics, such as changing healthcare legislation and evolving patient needs. With strong financials, an emphasis on shareholder return, and strategic acquisitions, Cencora stands poised for sustained growth and innovation in the coming years.

Earnings Call Transcript 2024-Q4

[Operator]

Hello, everyone, and welcome to today's Cencora Q4 Full Year 2024 Earnings Call. My name is Drew, and I'll be the operator today. [Operator Instructions] I'll now hand over to our first speaker, Bennett Murphy. Please go ahead when you're ready.

[Bennett Murphy, executive]

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2024 fourth quarter and full year results. I am Bennet Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Bob Mauch, President and CEO; and Laz Krikorian, Senior Vice President and Chief Accounting Officer.

On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investor.cencora.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income tax.

Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K. Cencora assumes no obligation to update any forward-looking statements, and this call cannot be broadcast without the express permission of the company. You'll have an opportunity to ask questions after today's remarks by management. We ask that you limit your questions to 1 per participant in order for us to get to as many participants as possible within the hour.

With that, I will turn the call over to Bob.

[Robert Mauch, executive]

Thank you, Bennett. Hi, everyone, and thank you for joining Cencora's fiscal 2024 Fourth Quarter Earnings Call. Before we get started today, I'd like to let everyone know that our CFO, Jim Cleary, has been under the weather for the past few days after successfully and impressively completing the New York City Marathon. Jim is unable to join the call today, but he was part of preparing today's remarks, which will be presented by our Chief Accounting Officer, Laz Krikorian. We wish Jim a speedy recovery, and I know he is looking forward to engaging with everyone in the coming weeks.

It's a pleasure to be speaking with you today for the first time since assuming the role of President and CEO of this incredible company. to discuss the strong results our global enterprises delivered this year, including growing our adjusted earnings by 15%. I'm honored to take the helm of a purpose-driven growth-oriented business with an unparalleled portfolio of customers ranging from pharmaceutical companies to health care providers across continents. I'm focused on continuing to execute our strategy while amplifying the things within our culture that have made us successful.

In fiscal 2024, Cencora continued to benefit from the strength of our customer relationships, the capabilities of our business, our international footprint and the collective expertise of our team members. This year, we made important progress by investing in our core distribution infrastructure, deepening strategic partnerships, leveraging data and analytics and continuing to build on our strength in specialty. Specialty has been a key differentiator for Cencora for decades, and specialty pharmaceuticals are now everywhere across our business, an important part of almost every customer relationship. As we engage with customers, they're focused on specialty products and how Cencora can help them.

This is true for physicians, health systems, specialty pharmacies and now also for community pharmacy as patients are accessing GLP-1s locally. While GLP-1s represent economic challenges in the pharmaceutical supply chain, they are an important innovation and pharmacists handling these products are helping to drive positive outcomes for patients. particularly those with comorbidities, which is an important proof point for the industry. Pharmaceutical innovation continues to advance patient care and Cencora has the capabilities and resources to enable us to partner with our leading customers, upstream and downstream.

In fiscal 2023, we talked about how our investment in OneOncology was a natural evolution of our leadership in specialty. As the addition of a management services organization or MSO in the oncology space expanded the solutions we provide an important community provider customer base. This morning, I'm excited to talk about our agreement to acquire Retina Consultants of America, or RCA, a clear leader in the retina MSO space, which broadens our community provider relationships in a high-growth segment. In addition to being a proven established MSO, RCA has differentiated clinical research capabilities that we believe will build on Cencora's value proposition to pharma, supporting innovative new therapies and furthering our ability to contribute to better outcomes for patients.

This acquisition fits squarely in Cencora's pharmaceutical-centric strategy and furthers our ability to execute on our strategic imperatives of leading with market leaders, investing in innovation, contributing to prescription outcomes and expanding on our leadership in specialty. We've developed deep relationships with RCA's leadership over the years as we've served their practices. Their clinical excellence and focus on pharmaceutical innovation align closely with Cencora's purpose and strategy. Community providers face an increasingly complex operating environment. By aligning with Cencora, partner that supports the voice and leadership of physicians, they are better able to navigate changes advance their growth and focus on providing patient care.

Cencora's global distribution infrastructure is the backbone of our business. We continue to invest in our distribution centers to support the logistics needs presented by pharmaceutical innovation and focus on utilizing technology to create actual data and insights for our partners. In the U.S., we've made investments in our distribution infrastructure to support the increasing amount of temperature-controlled volume we handle and to increase the level of granularity on traceability and product-specific movement. Through our data-driven approach, we're focused on creating actionable insights that allow manufacturers to strengthen their processes, increase efficiencies and comply with the latest industry regulatory standards.

This is an example of Cencora's forward-thinking mindset and ability to not only adapt to industry changes but capitalize on and expand the role we play. Health care is dynamic which creates opportunities for us to leverage our growing strengths and expertise to advance clinical and business objectives of our customers. By aligning ourselves with the right strategic partners and prioritizing key markets, we're able to grow with our comers and develop innovative solutions. Listening and responding to customers is table stakes. We will actively learn understanding deeply the strategies of our partners allowing us to anticipate their needs, both opportunities and challenges they are facing now and into the future.

As an example, for our health systems customers, we have enhanced the services we provide to help accelerate pharmacy solutions by developing a unified portfolio to optimize operations, improve financial performance and expand care. [indiscernible] our enhancements is the increased support we now offer during the procurement process. These enhanced services leverage advanced analytics to provide customer transparency, opportunities to drive product and cost efficiency and evaluate and mitigate risk, all to enhance the customer experience.

Internationally, we've been strategically investing in the distribution center network of our European [indiscernible] at 3PL businesses to increase the level of automation and enhance our capabilities to improve business continuity. Outside of distribution, our global specialty logistics business continues to navigate a challenging market, operating efficiently while we continue to invest in solutions to support clinical innovation across geographies. And unfortunately, as you saw in the earnings release this morning, we took a goodwill impairment on our PharmaLex business. The business growth is not keeping up with our original expectations as the outsourced pharma services market faces broader demand challenges.

PharmaLex remains a key long-term strategic asset and our ability to differentiate our commercialization solutions with our pharma and biotech partners, and we are confident in our ability to grow the business. As the market rebounds, we are positioned as a partner of choice to enhance new product development and commercialization through a compelling suite of services from clinical trial support to regulatory, scientific affairs and pharmacovigilance, specialty logistics market access as well as our 3PL and distribution reach across continents. I'm confident in Cencora's ability to drive success across our enterprise because of the strength of our talent.

I want to take a moment to thank the Global Cencora team members who drive our business objectives, capture opportunities with our partner customers through their close collaboration and perform their work with a purpose-driven mindset. I'm honored to be working alongside and learning from each of our team members whose expertise and excellence in their work drive us forward. Our most important investment is in our people. And I've seen how diverse teams with different perspectives create the best results.

So as we think about fiscal 2025 and the future of Cencora, we will prioritize building on our strong team to continue our track record of impressive performance. Our enterprise leadership team's responsibility is to equip our team members with resources to perform best-in-class work, and I'm committed to support them. Having been in this role for a little over a month now, I'm continuously ask what's next for Cencora. Cencora is an incredible, purpose-driven company guided by a differentiated strategy culture and a portfolio of solutions across geographies, which has allowed us to build strategic customer partnerships and consistently deliver strong results.

Thinking about fiscal 2025 and beyond, we will continue to lead with a customer-centric approach, take on an enterprise powered mindset and focus on innovation, which will ensure our differentiated value proposition remains intact and accelerates our position as a leader in health care. On the talent side, we have strong leadership, and we've taken steps to evolve the leadership team to help deliver on this focus. Adding new external hires including a new Chief Data and Information Officer as well as a new Head of Strategy and Corporate Development. We've also elevated existing commercial leaders to ensure that we continue to bring the voice of the customer to the table.

In closing, Cencora has an incredible foundation built on the strength of our strategy. We are well positioned in key services and solutions with our core and pharmaceutical distribution and complementary services for our upstream and downstream customers. Our global operations allow us to integrate our solutions across the markets we serve to create differentiated capabilities. I'm inspired by our team members priding their work and deep dedication to our purpose. We are united in our responsibility to create healthier futures.

With that, I'll now turn the call over to Laz for an in-depth review of fourth quarter and full year fiscal '24 results as well as fiscal 2025 guidance. Laz?

[Lazarus Krikorian, executive]

Thanks, Bob. Good morning, and good afternoon, everyone. It's an honor and a privilege to fill in today as Jim continues to recover. We all know Jim, so we all know he is listening to the call right now and I will try my best to do him proud. Before I turn to a review of our fourth quarter and full fiscal year results, as a reminder, my remarks will focus on our adjusted non-GAAP financial results unless otherwise stated. For a detailed discussion of our GAAP results, please refer to our earnings press release and presentation.

Throughout fiscal 2024, Cencora has demonstrated our ability to capitalize on the opportunities presented to us by our pharmaceutical-centric strategy, long-lasting customer relationships and robust solutions and the fourth quarter was a continuation of our momentum as we finished the year strong, driven by the strength of our business and execution of our team members, we delivered adjusted diluted EPS of $3.34 in the fourth quarter, representing a 17% increase compared to the prior year quarter and full fiscal year 2024 adjusted diluted EPS of $13.76, a 15% increase compared to the prior fiscal year. Turning now to an in-depth review of our fourth quarter results compared to the prior year quarter.

Consolidated revenue was $79.1 billion, [ up ] 15%, driven by growth in both reportable segments as the U.S. Healthcare Solutions segment continued to see strong script utilization and the International Healthcare Solutions segment benefited from growth at our European and Canadian businesses. Now moving to gross profit. consolidated gross profit was $2.5 billion, up 7% due to gross profit growth in the U.S. Healthcare Solutions segment. Consolidated gross profit margin was 3.1%, a decrease of 24 basis points compared to the prior year quarter due to higher growth in our U.S. Healthcare Solutions segment which has lower gross profit margin than our International Healthcare Solutions segment.

Additionally, our U.S. Healthcare Solutions gross profit margin experienced continued pressure from increased sales of low-margin GLP-1 products and a lack of sales in the current year quarter of exclusive COVID-19 therapies, which had higher gross profit margins. Consolidated operating expenses were $1.6 billion, up 7% as a result of higher distribution, selling and administrative expenses in the quarter to support our revenue growth. Turning now to operating income.

Consolidated operating income was $851 million, up 6% compared to the prior year quarter. The increase in operating income was driven by strong growth in the U.S. Healthcare Solutions segment, partially offset by a decline in the International Healthcare Solutions segment which I will discuss in more detail when reviewing the segment level results. Moving now to our net interest expense for the fourth quarter.

Net interest expense was $21 million, a decrease of 66%, driven by strong free cash flow, enabling an increase in interest income as a result of higher investment rates and investment cash balances in the quarter and a decrease in interest expense due to lower foreign subsidiary borrowings and the September [indiscernible] divestiture of our less than wholly owned subsidiary in Egypt. Our effective tax rate in the fourth quarter was 20.3% compared to 21.6% in the prior year quarter, bringing our full year 2024 effective tax rate down to 20.8%. Finally, our diluted share count was 198.1 million shares, a 3% decrease compared to the prior year fourth quarter, driven by approximately $500 million of opportunistic share repurchases in the quarter, including a $250 million share repurchase from Walgreens Boots Alliance in August as they sold all of their remaining unencumbered shares. This completes the review of our consolidated results. Now I will review our segment results for the fourth quarter, beginning with the U.S. Healthcare Solutions segment.

The U.S. Healthcare Solutions segment revenue was $71.7 billion, up 16% versus the prior year, reflecting strong prescription utilization trends including sales of GLP-1 products, increased sales of specialty products to physician practices and health systems and growth in sales to our largest customers all of which was partially offset by the January 1 manufacturer price reductions in certain product classes. In the quarter, sales of GLP-1 products were up $3.1 billion, representing a 55% increase compared to the prior year quarter and a sequential increase of 14% from the June quarter. Excluding sales of GLP-1 products fourth quarter revenue growth would have been approximately 10%.

U.S. Healthcare Solutions segment operating income increased by 10% to $697 million, driven by increased volumes across our distribution businesses stemming from strong utilization trends. In the quarter, we continued to see strong demand for specialty products from physician practices and health systems outpacing overall prescription market growth. Moving to International Healthcare Solutions segment.

In the quarter, International Healthcare Solutions revenue was $7.4 billion, an increase of almost 6% on an as-reported basis, an increase of 8% on a constant currency basis. International Healthcare Solutions segment operating income was $154 million, a 9% decrease on an as-reported basis and an 8% decline on a constant currency basis due to higher information technology expenses at our European distribution business and lower operating income in our Canadian business, all of which was partially offset by positive operating income results at our global specialty logistics business.

As Bob mentioned and as noted in our press release, our GAAP operating income results for the fourth quarter include a $418 million goodwill impairment relating to PharmaLex, as a result of the business, not keeping up with our original expectations as the industry experiences broader pressures due to lower demand from pharma and biotech for outsourced services. PharmaLex remains a strategic asset for Cencora and we expect the business to continue to be a key component of our commercialization services value proposition for our upstream partners. Please note that this onetime item only impacts GAAP results and is excluded from our non-GAAP adjusted results for the quarter. That concludes my discussion of our fiscal fourth quarter financials. Now I will turn to our full year fiscal 2024 results compared to the prior year, beginning with revenue.

Our consolidated revenue was $294 billion, up 12%, driven by growth of 13% in the U.S. Healthcare Solutions segment and 4% growth in the International Healthcare Solutions segment. Consolidated operating income was $3.6 billion, an increase of 11% due to growth in both the U.S. Healthcare Solutions segment and the International Healthcare Solutions segment. From a [indiscernible] perspective, U.S. Healthcare Solutions had operating income growth of 13% driven by increases in sales of specialty products to physician practices and health systems, increased sales to our largest customers and commercial COVID-19 vaccines.

As a reminder, commercial COVID-19 vaccines drove the higher year-over-year operating income growth in the first half of fiscal 2024. International Healthcare Solutions had operating income growth of 3% on an as-reported basis, driven by increases in our Canadian business, our global specialty logistics business and our less than wholly owned Brazil full-line distribution business, partially offset by foreign currency pressure and higher information technology operating expenses in our European distribution business. On a constant currency basis, the segment delivered 9% operating income growth.

Rounding out the discussion of our full year fiscal 2024 results, we generated $3.1 billion of adjusted free cash flow and ended the year with cash balance of $3.1 billion as we experienced better-than-expected quarter end receipts. In fiscal 2024, we returned $1.9 billion to shareholders through a combination of dividends and share repurchases, including $1.5 billion in opportunistic share repurchases. This morning, we announced our 20th consecutive annual dividend increase as our Board of Directors approved an 8% increase to our quarterly dividend. This is 3% higher than our previous annual dividend increases of 5% and aligns with our long-term guidance of 8% to 12% adjusted diluted EPS growth. This completes the review of our full fiscal year results. Turning now to discuss our fiscal 2025 guidance expectations.

As a reminder, we do not provide forward-looking guidance on a GAAP basis, so the following metrics are provided on an adjusted non-GAAP basis. I will also provide certain guidance metrics on a constant currency basis. We have also provided a detailed overview of guidance metrics on Slides 11 and 12 of our earnings presentation. First, I will start with adjusted diluted EPS and then provide greater detail on the components of our earnings growth and financial expectations for the fiscal year.

In fiscal 2025, we expect adjusted diluted EPS to be in the range of $14.80 to $15.10, representing growth of 8% to 10% at or above our preliminary implied guidance provided in early September due to opportunistic share repurchases in September and October and continued momentum in the business. As stated in our press release this morning, our fiscal 2025 guidance does not include the impact of the RCA acquisition, which will be incorporated into our expectations following the transaction close. As a reminder, in fiscal 2025, we continue to expect year-over-year headwinds from COVID products, including a headwind from commercial COVID vaccines in the first half of fiscal 2025, a $0.06 headwind from exclusive COVID therapies in the first quarter of fiscal 2025 and the potential June 2025 loss of an oncology customer due to its previously announced pending acquisition. All of these factors remain largely unchanged from our preliminary guidance expectations and are offset by our momentum and business initiatives. Moving to revenue.

We expect consolidated and segment growth rates to be in the range of 7% to 9%, reflecting continued growth across both segments. Turning to operating income. We expect consolidated and segment operating income growth rates to be in the range of 5% to 6.5%. At the segment level, we expect U.S. Healthcare Solutions segment operating income to benefit from continued pharmaceutical utilization trends, growth in key markets and internal efficiencies, more than offsetting COVID-related headwinds and a potential loss of an oncology customer in the fourth quarter of fiscal 2025. For the International Solutions segment, operating income is expected to benefit due to growth from its key businesses and a lower information technology expense growth rate. Now moving to interest expense.

We expect our interest expense to be between $150 million and $170 million based on our stand-alone operating expectations, which do not include the potential impact from financing the RCA acquisition. Turning to income taxes. We expect our effective tax rate to be approximately 21% for fiscal 2025. Moving now to share count. We expect that our full year average share count will be approximately 196 million shares in fiscal 2025, reflecting the impact of our significant share repurchase activity over the last 12 months, including over $600 million in repurchases since mid-September.

Regarding our capital expenditure expectations, in fiscal 2025, we expect capital expenditures to be approximately $600 million, a modest increase in comparison to fiscal 2024 as we continue to invest in our business to support growth and to increase the strength of our infrastructure. As it relates to free cash flow, we expect full year adjusted free cash flow to be in the range of $2 billion to $3 billion due primarily to timing and mix. We continue to generate strong free cash flow to support our growing dividend and continue to execute our capital allocation priorities to contribute the growth of our business. This morning's announcement of RCA is an example of that as it clearly fits our pharmaceutical-centric strategy builds on our MSO solutions and hits on Cencora's strategic imperatives which are key to our past and future success.

As was stated in this morning's release, the fiscal 2025 guidance we are presenting this morning does not currently include the impact of the RCA acquisition, which will be incorporated into expectations following the transaction close. We plan to fund the transaction through a combination of debt and cash on hand. Given the recent use of cash to opportunistically repurchase shares and the use of cash in our second quarter due to the seasonality of our business, we are currently expecting to fund approximately 20% of the acquisition price for cash on hand. Upon closing, the acquisition is expected to be approximately $0.35 accretive, net of estimated financing costs for its first 12 months. Cencora is committed to maintaining our strong investment-grade credit rating and will prioritize deleveraging in the years following the transaction close.

In closing, the fourth quarter captured a strong year at Cencora. I am proud of our purpose-driven team members, the strength and diversity of our talent and our continued execution to deliver on our strategic imperatives to advance our position at the center of health care we are well positioned for continued growth in fiscal 2025 and investing to ensure we are preparing for continued success in the future.

With that, I will turn the call over to the operator to open the line for questions. Operator?

[Operator]

[Operator Instructions] Our first question today comes from Lisa Gill from JPMorgan.

[Lisa Gill, analyst]

Bob, congratulations. I talked to -- I listened to you talk a little bit about your strategy. You talked about the incredible foundation built on the strategy. the strength of the strategy of the company. Obviously, we're waking up today. We have a new president going into 2025, maybe just spend a couple of minutes talking about how you think about maybe the first year as CEO of the company. anything changing from your perspective now that we do have a new president and it looks like it will be a Congress that will most likely be Republican. So any changes there would be kind of my question is really just trying to understand how you're thinking about that. And then just secondly, I really just want to understand if we're seeing any changes from the volume changes in IRA. So you talked about strong results in the quarter around volumes. I'm just curious if you guys are seeing anything from that perspective.

[Robert Mauch, executive]

Lisa, thank you very much for the question and the kind words. I'll start with just the first 30 days or so in this new role have been absolutely amazing. Yes, I want to start with just a sincere thank you to the Cencora, our Board of Directors for having the trust in me to take on this role. And as you mentioned and as I mentioned in our prepared remarks is we are an incredibly strong enterprise and company. And what we're going to do is continue to execute. And you see in our results through 2024, the execution of both our operational strength as well as our strategic execution and that leads to the announcement of RCA today. So as I've talked about, and I want to be clear here today is our strategy does not need to change, and we will continue to execute upon that.

We're well positioned, and we think our focus areas are the right ones. However, that doesn't mean status quo or complacency. And there's a lot of work to do. It's a dynamic market. And so we are doing things in terms of amplifying strengths that we've already had.

And I mentioned we're working on our talent all the time in the enterprise leadership team. We've elevated our commercial leaders to make sure that we have the voice of the customer at the table all the time we've added new leaders in our technical and IT area as well as strategy and M&A. And we'll continue to work on enhancing our talent as we continue to execute. I think as it relates to policy in general, I think we have a long history of working through multiple administrations and congresses and different views on health care and pharma. And as we've always said, and I feel very confident about this now is we'll be at the table. We'll be working with anyone who's in charge of health policy in the United States and on a global basis, and we'll make sure that we're there to be a supportive partner. And that whatever comes our way, will be manageable and will help our customers -- pharma customers and provide our customers navigate through that. Thank you for the question.

[Operator]

Our next question comes from Michael Cherny from Leerink Partners.

[Michael Cherny, analyst]

Congrats on the quarter. And Bob, echoing Lisa's comments, welcome to your new role. I know you obviously had a long time here, but congrats on the transition. Maybe if I could just dive in, I guess, 2-part question come together. First of all, I know you highlighted a number of the headwinds you have this year from a year-over-year basis. as you think about the COVID comp. Is the loss of the customer contemplated specifically in guidance, whether they leave or not? Just trying to get to the baseline growth, which definitely seems stronger than the 5% to 6.5% on underlying basis. And along those lines, when thinking about specialty in particular, given your market leadership there, how do you think about the moving pieces across the market with regards to specialty inclusive of expectations for biosimilars, the impact we're seeing from changing benefit design with IRA. Curious how that all factors into your expectations across the U.S. Healthcare segment relative to the specialty contribution.

[Bennett Murphy, executive]

Sure. This is Ben, and I'll take that. So as we look at 2025, we're expecting that the U.S. Healthcare Solutions segment operating income will continue to benefit from the pharmaceutical utilization trends that we've seen growth in key markets, including specialty, as you call out, which helps to give us a really strong base moving into 2025 or 2024. And more than I'll say related headwind as Laz talked about, including the potential loss of an oncology customer, which is factored into our 2025 expectations. What I would say you didn't necessarily specifically ask it, but I would say is that we were guiding without that headwind from vaccines. The top end of our U.S. Healthcare Solutions operating income guidance range would be 8%. So as I said, I'll say that again, just to be clear, without the headwind from commercial code vaccines, the top end of our U.S. Healthcare Solutions segment operating income range would be 8% instead of that 6.5%.

[Operator]

Our next question comes from Elizabeth Anderson from Evercore ISI.

[Elizabeth Anderson, analyst]

Bob, congrats again on your first quarter as official -- officially. Maybe talk a little bit more -- RCA and sort of how you think about sort of your MSO capabilities more strongly. It's obviously an area that you've been investing in and maybe gets a little bit less like airtime than some of your other businesses. So maybe talk about that and what is their leverageable from other strategies you currently have in sort of capabilities, that would be a little bit helpful to hear more about that.

[Robert Mauch, executive]

Yes. Thanks, Elizabeth for the warm welcome and happy to discuss such an important part of our strategy going forward. So yes, we're very interested in the MSO space. And the reason is at least twofold, but I'll give you 2. One is it's clearly in line with our support and interested in being in the forefront of the specialty pharma market, right? So where those products -- the innovation of those products are coming to market. We expect to be helpful and involved across our entire business. So across the entire portfolio of customers and geographies.

When you bring it to the specialty physicians, the MSOs are really in line with what we have done at Cencora over a decade. So if you think about how we operate, we have, in many cases, built capabilities to support community providers. And MSOs are an excellent way to support community positions. We do it in other segments, and I'll use good example. Pharmacy as an example. It's not an MSO, but it certainly is a large suite of services that supports community provider. So it's right in line with our strategy in terms of specialty focus. It's also something that's very consistent with what we've done over a long period of time in terms of investing in solutions that support those community providers. And as I said in the prepared remarks, it's not getting easier for community providers and specialty providers at all. So the need for a large at-scale support system through the MSO and through Cencora's ownership of the MSOs, we think is the best chance of making sure that, that very cost-effective site of care is there for patients when they need it.

[Operator]

Our next question comes from George Hill from Deutsche Bank.

[George Hill, analyst]

Yes. Bob, welcome to the call. I'm going to get kind of way out like look a little further out, thinking about the acquisition today and you guys present in oncology. And Bob, as you kind of look forward to like impact of the IRE changes and the impact it could have on Part B drug costs and the profitability of practices that dispense a lot of drugs. I guess, is it too early to think about that because there's still the opportunity for legislative change? Or kind of how are you guys thinking about how you support those practices given the headwinds that could come from IRI. And again, I recognize I'm talking about something that 2 years away, maybe 2 years plus, but I kind of would love any preliminary thoughts on that.

[Robert Mauch, executive]

Yes, George, thanks for the welcome, and thank you for the excellent question. So I would say it's not too early to think about that. So we have been thinking about IRA and modeling a wide range of scenarios of impact for IRA and Part B in I'll jump to the end of that as we feel that across all those scenarios, that is something that will be manageable for the providers and therefore, manageable for Cencora. Again, as you say, we don't really know what the impact will be in Part B and Part D, we're seeing that the impact is really in reimbursement and not in list price. So it remains to be seen, but we do think about it. We have a team teams of people who are always focused on these things. And as we look forward, not only with the RCA acquisition, but also our relationship with OneOncology and other customers that this is something that through innovation in the long run that this will be something that's not necessarily negative for the practices.

[Operator]

Our next question comes from Eric Percher from Nephron Research.

[Eric Percher, analyst]

Again, congrats to Bob. And I want to get a bit more specific on the specialty trend I think we're hearing from payers that they're seeing a 3Q uptick and some of it is attributed to Part D. We also heard about commercial and seeing in specialty pharmacy. My question is, are you seeing an uptick in Q3 versus first half where you're serving specialty pharmacies, we tend to think of that as lower-margin specialty. And then you called out strength in specialty distribution, a higher-margin piece with providers and health systems. You've called that out in Q1 and Q2. Is there an acceleration you saw in 3Q? Or is that simply a continuation of the trend?

[Bennett Murphy, executive]

No. I would say -- and once again, this is Bennett of course, I appreciate you using calendar quarters in your question, but I'll refer to a fiscal quarter answering that -- the fourth quarter, we saw similar trends as we saw throughout fiscal '24 and honestly, for the past several years. So we've had the specialty market, particularly for physicians and health systems has been key component of -- a key driver of our growth for a while. It's a really important segment. It's a part of the market where we play a really important role and add a lot of value. But no, we are not representing this as a deviation. It's a continuation of the good trends that we've seen for a while.

[Operator]

Our next question comes from Dan Grosslight from Citi. I'll move on to the next question from Stephanie Davis from Barclays.

[Stephanie Davis, analyst]

Bob, official congratulations on taking the seat. I want to dig in a little bit more on the RSA transaction as it's a sizable move into other ologies outside of kind of your core focus -- so with that in mind, can you walk us through your specialty road map, any other verticals to watch or any opportunity on the checklist such as RCA's clinical trial strength that you're hoping to kind of shore up.

[Robert Mauch, executive]

Stephanie, thank you for the question and for the congratulations. Yes. So when we look at specialty expansion beyond oncology, we're looking for a couple of things, looking for continued growth and innovation in that market and also the Part B components that are there that we can support. So the obvious one for Cencora is oncology, and that's where we've been for a very long time. And I'll also note, we've been a leader in retina for a very long time, but I'll come back to that. But then you saw that we added urology as part of of on oncology.

So we do have a view and a strategic approach to where we would look at other specialties that would fit. And certainly, retina is one. And again, we have a long history, a leading role in the retina specialty distribution space. We have a real belief in the junior growth and innovation in that market. RCA is best-in-class. They are world-class clinicians, world-class researchers, and we feel really good about the decision to expand our investment in retina.

[Operator]

Our next question comes from Kevin Caliendo from UBS.

[Kevin Caliendo, analyst]

Bob, again, congrats. I want to take this a little bit further on the RCA stuff because there's been a lot of oncology deals done recently. It feels like there isn't maybe as much opportunity there. You are already a leader in retina, as you said, is this a stepping stone is ophthalmology going to be the next sort of roll up for you? Like how big is the opportunity here relative to what was the opportunity in oncology. And is there anything to maybe read through in terms of expectations around biosimilars in this space? Or any other like is there analysis done where you're looking at the growth of the market or the drug opportunity in that market evolving favorably for you is also a reason to get into this?

[Robert Mauch, executive]

Yes. Thanks, Kevin, for the excellent question. Yes, as it relates to RCA, what we've said in the prepared remarks, and I'll just repeat now is RCA is the market leader here. So we're investing in a platform in retina that we expect to continue to grow. They will grow by adding additional physicians and they will grow through the second part of your question is we do have a strong thesis on the strength of the pharmaceutical pipeline in retina. And that includes biosimilars coming to market but also new innovation that will be coming that will help improve patient outcomes. And again, this is where the clinical excellence of RCA is really important and also the clinical research capability they have because RCA is not only treating the end patient at very large scale. But they're also a very key player in making sure that the clinical trials are done and that the patients have access to those trials and therefore, getting those newer products to market.

[Operator]

Our next question today comes from Eric Coldwell from Baird.

[Eric Coldwell, analyst]

Well, I had a bunch of RCA questions, too, but I'll try to make those brief. Just quickly on ophthalmology specialty products or maybe the category overall. You're half of one of the leading manufacturers distribution volume. Is that a similar share across the entire market or are you half of the specialty market in ophthalmology?

[Bennett Murphy, executive]

Yes. So as Bob said, we are a leader in that space and that is a part of the market that we've been in for a long time. And we feel really good about not only our position and the fact that we have really no RCA quite well because they've been a customer for some time. And as Bob said, they're a leader in the space. And just to repeat, it's a market that while I know that there's been a lot of focus on oncology. But for Cencora, retina and ophthalmology have been a key driver of growth along the way as well.

[Operator]

Our next question comes from Erin Wright from Morgan Stanley.

[Erin Wilson Wright, analyst]

Could you speak a little bit to World Courier, just give an update on fundamental demand trends across that business and customer base? And then, yes, going back to sort of a little bit of an RCA question related is on how do you balance investments in terms of MSO type of investment versus a more direct relationship with like biopharma and life sciences partners partnerships. I know it's all kind of intertwined, but curious kind of how you think about that. And then just 1 quick 1 on just customer relationships. Just your guidance for the year. You addressed COVID and FCS, but you recently renewed your Express Scripts, Cigna contract. How would you characterize the relationship there? And any sort of changes in as well as your relationship with Walgreens?

[Bennett Murphy, executive]

Sure. So you rallied off a couple there, and I'm going to try and make sure that we hit them all. I'll start with the Express Scripts one, no change there, a continuation of a good relationship with them. road courier, that market continues to have some softness stemming from clinical trial development. But that being said, still, it's a good growing business, and you saw that in the quarter. I'll stop and push -- hand it over to Bob to talk a little bit about the Walgreens relationship.

[Robert Mauch, executive]

Yes, happy to. And Erin, I'll probably touch on the broader kind of biopharma focus there for a second year because it leads on to a World Courier. I'll emphasize the point that Bennett made. World Courier is a terrific business, a leading business, and it leads in clinical trial logistics. So to the extent that clinical trial volumes continue to be down, even though they're beginning to grow, they're still down significantly from a peak in 2021. We feel great about the business. And as I said in the prepared remarks, we're very well positioned as that market comes back both in World Courier and PharmaLex.

Walgreens is a critically important strategic partner to us. We've had a long productive history together which continues. And we -- as we've said for a long time and continues now, we spend a lot of time with the Walgreens team. I would say continuously. And during that time, we're talking about what are things that we can do together to drive our businesses forward. How can we create more efficiency, what are new programs that we can develop together that are helpful to both company. So we're very engaged in that. We're committed to making sure that for Walgreens and for all of our customers, one of the things that I tried to be intentional about saying is that our intention is to really understand the strategies of our customers and then align the resources of Cencora to support those strategies. And so that's true for Walgreens and our other customers as well.

[Bennett Murphy, executive]

[indiscernible] and you did run off a bunch of there. So I want to go back to one you asked about this versus biopharma services. I think if you go back and look at our past disclosures and past discussions on the strategy and our strategic focuses, we've always talked about looking for ways to build on our strength in specialty and to add to our services and solutions and for manufacturers. And that was clearly exemplified by our OneOncology and also our acquisition of PharmaLex, which remains a key long-term asset for the business. And I would say that RCA really hits on both of those in that, certainly, it helps build on our leadership in specialty, but it also helps build on our value proposition to pharma given the clinical research work that they do.

[Operator]

Our next question comes from Allen Lutz from Bank of America.

[Allen Lutz, analyst]

There was a really nice revenue acceleration quarter-over-quarter. And Bennett, you mentioned that it didn't seem like that was coming from specialty accelerating. So I guess the assumption that we have here is that that's mostly driven by GLP-1s. But is there anything outside of that piece that's worth calling out around that sequential acceleration in top line growth in the U.S. health care business. .

[Lazarus Krikorian, executive]

Allen, this is Laz Krikorian. So we definitely talked about GLP-1s. We continue to see strong growth in the GLP-1 class, sales of those products in the quarter increased 55% year-over-year and 14% on a sequential basis. with respect to specialty products and distribution, we continue to see strong growth rates there as well, and they certainly were continuing to drive our top line growth.

[Operator]

Our next question comes from Charles Rhyee from TD Cowen.

[Charles Rhyee, analyst]

Yes, kind of an RCA question, but maybe more broadly about the MSO strategy. Obviously, Senator Warren had written a letter kind of expressing some concerns about distributors owning group practices or [indiscernible] MSOs. Can you talk about sort of you're talking about and your response? And then secondly, maybe what is the real benefit to owning the MSOs for you beyond just the distribution? Is it really just a services business that you want to provide 4 physicians. Maybe just expand on sort of that aspect of it.

[Robert Mauch, executive]

Yes, thanks. This is Bob. I'll take I'll take that. Good questions. First of all, I'll start with we have utmost respect for the process that any governmental agency will go through to look at this and any senators who want to weigh in, we're happy to participate and be helpful there. As always, that's our orientation to these. To your question specifically, though, is we view the MSO model as a way to really support community providers. And as I said earlier, that's core to what we've done over decades. The community providers are generally a cost effective -- a more cost-effective side of care. They are also, in many cases, more accessible to patients. So we believe our ownership and participation in the MSO space at the end of the day, enhances patient access, enhances cost effectiveness of health care and allows Sancora to continue to support these very important providers.

[Operator]

That concludes our Q&A session for today. I now hand back over to Bob Mauch for closing remarks. Thank you.

[Robert Mauch, executive]

Thank you very much. Thanks all for the excellent questions. and for the kind welcome. Again, I'm honored to be in this position. It's an incredibly strong company with an amazing culture, an incredible portfolio of customers services and geographies, we're very well positioned, and we're going to continue to execute both operationally and strategically. So thank you all very much for your time.

[Operator]

Thank you all for your participation on today's call. That concludes the call. You may now disconnect your lines.