Cencora

Cencora disclosed that, beginning July 1, certain volume that it serviced for Walgreens started moving outside the firm. Full-year EPS guidance of $17.75-$17.95 was reaffirmed. Shares traded down 4%.

Why it matters: The announcement comes as a surprise to us since management on multiple occasions has confirmed that Cencora's relationship with Walgreens remains stable and the firm doesn't anticipate any material headwinds from Walgreens going private, which occurred in August 2025. Walgreens is Cencora's largest customer, making up one-quarter of fiscal 2025 revenue (about $80 billion). The two share a decades-long relationship spanning Walgreens, Boots (UK pharmacy/retail chain), and WBAD (US generics sourcing joint venture). Cencora's agreements with Walgreens extend through 2029 for the US operation and 2031 for the international operation. There could be a number of reasons why Walgreens' volume started moving elsewhere. Its store closure plan—1,200 to 1,300 stores over three years from 2024-27—could have been accelerated under its new ownership, patients could have shifted to other pharmacies, or other factors could have contributed.

The bottom line: We maintain our $360 fair value estimate per share for narrow-moat Cencora as we await to hear more updates on the size and the trajectory of the volume loss. Our Uncertainty Rating remains Medium, but this disclosure does increase uncertainty. Given the size of Walgreens' contribution, any operational disruption worthy of disclosure could signal a significant impact to Cencora's near- and medium-term earnings. Though unlikely, it is also possible that guidance could be reaffirmed despite the notice, since Cencora only has one quarter left in the fiscal year and the strong year-to-date performance may be enough to offset the headwind.

We inch up our fair value estimate to $360 per share from $350 for Cencora to reflect recent cash flows. Our valuation reflects 9.9 times and 20.3 times EV/2026 adjusted EBITDA and adjusted P/E, respectively, in line with its key distributor peers.

After accounting for updated guidance from the third fiscal quarter, we model 5% and 12% revenue and EPS growth for fiscal 2026, respectively, both of which sit at the midpoint of the refreshed outlook. We expect year-over-year sales comparison to improve throughout the year as Cencora anniversaries customer losses and benefits from RCA tailwinds.

Our midcycle adjusted operating margin assumption of 1.5% reflects an improving portfolio mix from the growth of specialty assets, continued adoption of biosimilars, and durable utilization rates. Cencora benefited in recent quarters from GLP-1s, which carry high price tags but slim margins, putting pressure on the bottom line. We expect a similar trend to play out in the near term as demand for these products doesn't seem to be cooling. But we still assume midcycle gross margin that is higher than the company’s historical level due to continued adoption of biosimilars as well as investment in specialty assets. Biosimilars are bioequivalent to high-priced biologics, and the distribution of these products brings on higher margins compared with the distribution of branded and specialty drugs. As several blockbuster biologics are poised to go off-patent over the next five years, we expect many patients to switch to biosimilars, which should provide a nice tailwind for Cencora. Furthermore, Cencora has focused on bolstering its specialty asset portfolio since the firm is able to eke out higher margins from its specialty customers from extra services it provides, such as group purchasing organization participation and data and analytics offerings. Gross margin decline, which has seen downward acceleration in recent quarters, turned a corner for the first time in 2025 since GLP-1s took off in fiscal 2023, thanks to contributions from RCA, whose acquisition closed in January 2025. We previously indicated investments in the management-services space would be accretive since they generate higher margins compared with Cencora’s core distribution business, but the magnitude was much better than we had originally anticipated.

We assign Cencora a narrow moat rating because we believe the characteristics of the US drug distribution market and the unlikelihood that customers will move to a different distributor (switching costs) should uphold the company’s competitive position and continue to support economic profits for at least the next 10 years.

Pharmaceutical wholesalers fill a central role in the supply chain for prescription drugs, with over 90% of all prescription drugs in the United States going through wholesalers. While pharmaceutical distribution is their cornerstone, drug wholesalers have a complex role that extends beyond distribution and have developed essential partnerships with their customers. By contracting directly with manufacturers for branded and generic pharmaceuticals (and leveraging their substantial purchasing power), the Big Three wholesalers (McKesson, Cencora, and Cardinal Health) are able to consistently negotiate for the lowest rates on the market, typically significantly below the wholesale acquisition cost. Additionally, a full-line wholesaler will typically stock over 21,000 stock-keeping units associated with prescription drugs and negotiate with around 1,200 different manufacturers, a task less efficiently accomplished by retail pharmacies on their own.

The three big wholesalers act as an oligopoly. They make up over 90% of the overall US drug distribution market, effectively servicing the market, and they have done so for the past 20-plus years. We anticipate most of the market to continue to be serviced by these three players over the next 10 years, with minor changes in market share among them.

Drug distributors work extremely efficiently and effectively to service their customers. Their largest customer base is chain pharmacies/stores, but they also serve independent pharmacies, hospitals, long-term care centers, and mail-service pharmacies. Most of the top 15 pharmacies by sales in the US, which make up nearly 75% of overall pharmacy industry prescription revenue, have some sort of partnership with one or more of the three big wholesalers that have lasted for many years. In 2020, approximately 85% of dispensed prescription drugs in the US were sold to retailers, which include chain pharmacies and mass merchandisers (55%), independent pharmacies (15%), and food stores (13%). The three wholesalers already have long-standing relationships with the biggest retail pharmacies.

Cencora covers roughly a third of the US drug distribution market. Walgreens, the firm’s largest customer, makes up roughly one-third of Cencora's distribution sales. Cencora also serves Cigna, Good Neighbor Pharmacy, and Kaiser, which collectively make up about one-fourth of the firm's sales. It extended its pharmaceutical distribution partnership with Walgreens through 2029. This is a mutually beneficial situation for a multitude of reasons. Walgreens is Cencora's largest customer and has been for more than 10 years. Knowledge that is gained over the years of partnership is hard to replicate with a new wholesaler. This is especially true for big retailers because we estimate that Cencora has specific coordination and management systems that could take months to develop for a new distributor. Furthermore, it is highly unlikely that a customer will get better pricing by switching from Cencora to either Cardinal Health or McKesson because the cost of time lost during a transition and restructuring phase would not make it viable for a new distributor to offer better rebates than the original distributor. Distributors also offer consulting, logistics, and data and analytics services to their customers. We estimate that Cencora offers different and customized services to its customers, especially its big retailer customers, so both the distributor and customers can work at maximum efficiency and effectiveness. We believe these services make the relationship between Cencora and its customers stickier. For customers, switching to a new distributor would mean the loss of operational expertise that they have achieved over the years of working with their original distributor. In our view, these combined reasons act as a catalyst behind big retailers sticking with their distributors and locking down their relationships with long partnerships. This can be seen from the fact that there have not been any major retailers switching their distributors during the last 10 years, and we expect this trend to continue for the next 10 years.

Cencora also sources generic drugs through its generic procurement joint venture with Walgreens. The joint venture, started in 2012, combines the purchasing power of Cencora and Walgreens to obtain strong buy-side margins from generic drug manufacturers. This is crucial for a drug distributor’s profitability because while generic drugs make up roughly 10% of wholesalers’ top line, they make up over two-thirds of their gross profit. Since there are multiple generic drug manufacturers that aim to effectively produce the same drug, they have to compete with each other to win a contract with one of the Big Three. This provides major pricing power to Cencora, compared with purchasing branded drugs, which helps them drive a significantly higher margin from generic drugs. Switching costs would entail unraveling the joint venture and result in pharmacies facing higher acquisition costs for generics, which constitute the vast majority of dispensing volume. Since Walgreens has a financial stake in this relationship, it is highly unlikely that it will stop working with Cencora and move to a new distributor, especially in the next 10 years.

Cencora distributes pharmaceutical products to nearly one-third of the industry, leading to substantial negotiation leverage with drug manufacturers.

Robust demand for GLP-1 drugs (for diabetes and weight loss) provides a strong tailwind to Cencora's top line and allows the distributor to offer other high-margin services to both manufacturers and customers.

Increasing uptake in biosimilars and patent expirations in blockbuster drugs over the next five years present opportunities for Cencora to distribute higher-margin products and lift profits.

Reimbursement pressures on pharmacy and provider customers have led to an emphasis on cost containment, pressuring Cencora's profitability.

Scrutiny from the public and politicians over exorbitant branded and specialty drug list prices could result in lower price inflation long term, pressuring Cencora's top-line growth.

Uncertainty around pharmaceutical-specific tariffs and policies such as most-favored-nation pricing could muddy Cencora's near- and mid-term revenue and earnings power.