Cencora (ABG) Risk Analysis

The healthcare industry in the U.S., as well as in the other countries and regions in which we do business, is highly regulated at many levels of government. There have been increasing efforts in the U.S. by Congress, the Executive Branch, and state and federal agencies, including state boards of pharmacy, departments of health, the FDA, DEA, Department of Commerce, HHS, Transportation Security Administration, and Federal Trade Commission ("FTC"), and by similar regulators in the U.K., the EU, and other countries, to regulate the pharmaceutical supply chain. Regulation of pharmaceutical distribution is intended to prevent diversion and the introduction of counterfeit, adulterated, and/or mislabeled drugs into the pharmaceutical distribution system, as well as ensure the integrity of products traversing the supply chain. Consequently, we are subject to the risk of changes in various laws, which include operating, record keeping, and security standards of the DEA, the FDA, HHS, various state boards of pharmacy and comparable agencies. In recent years, some governments have passed or proposed laws and regulations intended to protect the safety and security of the supply chain that could substantially increase the costs and burden of pharmaceutical distribution. At the federal level, in the U.S., the DSCSA establishes national traceability standards requiring drugs to be labeled and tracked at the bottle level, preempts state drug pedigree requirements, and requires all supply-chain stakeholders to participate in an electronic, interoperable prescription drug traceability system. The DSCSA also establishes requirements for drug wholesale distributors and third-party logistics providers, including licensing requirements applicable in states that had not previously licensed third-party logistics providers. The FDA issued a proposed rule on February 4, 2022, which, when finalized, will establish national standards for the licensure of wholesale drug distributors and third-party logistics providers. In addition, failure to comply with the DQSA requirements or with additional similar governmental regulatory and licensing requirements may result in suspension or delay of certain operations and additional costs to bring our facilities into compliance. Our international operations may also be subject to local regulations containing record-keeping and other obligations related to our distribution operations in those locations. For example, the safety features of the Falsified Medicines Directive for EU member states consists of placing a unique identifier (a two-dimensional barcode) and an anti-tampering device on the outer packaging of medicines. Pedigree tracking laws increase our compliance burden and our pharmaceutical distribution costs and could have an adverse impact on our financial position or results of operations. Several EU member states have adopted or are considering adopting laws and regulations aimed at mitigating or controlling drug supply shortages, and the EU's proposal of the Critical Medicines Act in March 2025 as well as the ongoing comprehensive reform of EU pharmaceutical legislation (referred to as the "EU pharmaceutical package") propose more stringent notification duties, mandatory stockpiling and detailed shortage prevention plans for certain drugs. These measures could require us and our partners to hold higher inventories, alter production and distribution plans, prioritize certain markets, and incur additional compliance and logistics costs, and non-compliance could result in fines, product seizures, operating restrictions, litigation, reputational harm, and loss of market access. The evolving and fragmented nature of such requirements increases operational complexity and forecasting uncertainty, and could materially and adversely affect our business, financial condition, results of operations, and cash flows. As discussed in the "Public concern over the abuse of medications could negatively affect our business" risk factor, certain governmental and regulatory agencies, as well as state and local jurisdictions, are focused on the abuse of opioid medications in the U.S. In addition to conducting investigations and participating in litigation related to the misuse of prescription opioid medications, federal, state and local governmental and regulatory agencies are considering legislation and regulatory measures to limit opioid prescriptions and more closely monitor distribution, prescribing, and dispensing of these drugs. Any failures or delays in compliance by us, manufacturers, or others in our supply chain with the DQSA and DSCSA requirements, and other chain of custody and pharmaceutical distribution requirements, including follow-on actions related to current public concern over the abuse of opioid medications, could result in suspension or delays in our production and distribution activities or have an adverse effect on our ability to manage the supply of products, which may increase our costs and could otherwise adversely affect our results of operations. In addition to the regulation of supply chain distribution arrangements, the products we sell may be subject to production, marketing, clinical or coverage restrictions through the FDA and HHS regulatory processes. For example, recent limitations on COVID-19 vaccinations and changes to pediatric vaccination schedules may have an adverse impact on the availability or access to certain products that we distribute. There can be no assurance such regulations will not have an adverse effect on our or our customers' business.

Both our business and our customers' businesses may be adversely affected by laws and regulations reducing coverage or reimbursement rates for pharmaceuticals and/or medical treatments or services, changing the methodology by which reimbursement levels are determined, or regulating pricing, contracting, and discounting practices with respect to medical products and services. Additionally, on occasion, price increases and pricing practices with respect to certain brand-name and generic pharmaceuticals have been the subject of governmental inquiries, national, federal and state investigations and private litigation. Any law or regulation impacting pharmaceutical pricing or reimbursement, such as pricing controls or indexing models at a national, federal or state level, could adversely affect our operations. In the EU, many governments provide or subsidize healthcare to consumers and regulate pharmaceutical prices, patient eligibility, and reimbursement levels in order to control government healthcare system costs. For example, in most EU member states, the government often regulates pricing of a new pharmaceutical product at launch through direct price controls, international price comparisons, and controlling profits and/or reference pricing. Some European governments and statutory health insurers and payers have implemented or are considering austerity measures to reduce healthcare spending, such as price volume discounts or tiered rebates, cost caps, regulated wholesale margins, cost sharing for increases in excess of prior year costs for individual products or aggregated market level spending, outcome-based pricing schemes, and free products for a portion of the expected therapy period. The new EU Health Technology Assessment (HTA) Regulation 2021/2282 became applicable on January 12, 2025 and aims at harmonizing HTA processes across EU member states, including by conducting joint clinical assessments of new drugs. The outcome of such joint clinical assessments is expected to influence national reimbursement decisions. All of these measures exert pressure on the pricing and reimbursement levels for pharmaceuticals and may cause our customers to purchase fewer of our products and services or influence us to reduce prices for our services. In the U.S., the Affordable Care Act ("ACA") included numerous reforms broadening healthcare access and changing Medicare and Medicaid reimbursement, pricing, and contracting for prescription drugs, including changes to the Medicaid rebate statute. We cannot predict the impact of any efforts to change or repeal any provisions of the ACA or that of any other healthcare legislation and regulation. In addition, current federal ACA premium subsidies are set to expire at the end of 2025 which, unless renewed, may contribute to increased premiums and/or loss of healthcare insurance coverage for certain patients. These outcomes could produce greater financial strains on our business and our customers (e.g., through increased uncompensated care) and could adversely affect demand for our products and services. The federal government and state governments could take actions that impact Medicaid reimbursement and rebate amounts or the cost of drugs. Any reduction in the Medicaid reimbursement rates to our customers or changes affecting manufacturer rebate liabilities may indirectly impact the prices that we can charge our customers for multiple source pharmaceuticals or our distribution relationships and cause corresponding declines in our profitability. There can be no assurance that recent or future changes in Medicaid prescription drug reimbursement policies will not have an adverse impact on our business. Among other things, the removal of the ceiling on manufacturer Medicaid rebate amounts, effective January 1, 2024, has led to WAC price reductions and affected manufacturer price increases for certain products. The Inflation Reduction Act ("IRA") made significant reforms affecting prescription drug pricing and reimbursement. These reforms include: (i) manufacturer inflation rebates on drugs covered under Medicare Part B and Medicare Part D, to the extent such products' prices increase faster than the rate of consumer price inflation; (ii) limits on Medicare Part B and Part D patients' cost sharing for insulin; (iii) Medicare Part D benefit redesign, including replacement of the "coverage gap discounts" that pharmaceutical manufacturers previously paid with new mandatory manufacturer discounts applicable during all phases of the Part D benefit after satisfaction of the deductible; and (iv) federal price negotiation of "maximum fair prices" for certain "selected" high-expenditure drugs under Medicare Parts D and B, applicable beginning in 2026 for Part D drugs and 2028 for Part B drugs, under which maximum fair prices must be made available to pharmacies, physicians, and other entities dispensing or providing drugs covered under Medicare Parts D and B. Although the primary effects of the IRA reforms will be felt by manufacturers, these changes may impact our customer pricing structures, our manufacturer distribution relationships and revenue, our customers' billing processes and reimbursement amounts, the market shares of competing products, and drug prices more generally (including outside of the Medicare context). Among other issues, the mechanisms by which maximum fair prices will be made available to pharmacies, physicians and other purchasers of selected drugs, and our associated role and responsibilities, remain to be determined. CMS has proposed a mechanism under which manufacturers would issue rebates or credits to effectuate the maximum fair prices to pharmaceutical purchasers, directly or indirectly through a third-party clearinghouse, but has left open the option of manufacturers utilizing distribution mechanisms such as chargebacks. Manufacturers are required to choose their methodology for price access compliance by December 2, 2025 for the first year of maximum fair pricing implementation starting January 1, 2026. More broadly, the law contains reimbursement and pricing incentives intended to promote biosimilar introduction and competition which may affect our customers' selection of products. Each of these considerations, as well as other issues that may arise in connection with the implementation of the IRA, may adversely affect our operations and profitability as well as our customers' operations, profitability, and cash flow. In addition, at least eight federal lawsuits have been filed by manufacturers seeking to invalidate the negotiated drug pricing features of the IRA. To date, none of the manufacturers has prevailed in such litigation, but some cases may proceed to appellate review. The uncertainties associated with this litigation may create disruption with respect to both implementation of the law and pricing practices. OBBBA, enacted in July 2025, includes a number of provisions that may affect access, coverage, and payment for medical products and services. For example, the legislation: (i) implements work requirements for certain Medicaid patients to maintain eligibility and expands cost-sharing for certain Medicaid-eligible individuals; (ii) allows Medicare payment cuts to certain hospitals and other providers to take effect; and (iii) tightens eligibility standards for ACA exchange subsidies. These provisions may impact the financial stability of our customers, and may limit coverage or payment, and therefore affect demand, for our products and services. In addition to legislation affecting coverage and reimbursement, federal agency rules governing reimbursement and pricing programs may impact our business. For example, our businesses also sell specialty and other drugs to hospitals, specialty community physician practices (including oncology and retina specialists), and other providers that are reimbursed under Part B of the Medicare program. In November 2023, CMS finalized a retrospective refund rule that provides for lump-sum refund payments totaling approximately $9 billion to be made to affected 340B hospitals and requires budget neutrality for the hospital outpatient payment system as a whole, reducing Medicare payments to all hospitals for other hospital outpatient services by 0.5% for calendar years 2026-2040. However, in July 2025, CMS issued a proposed rule which (i) would accelerate the recapture of refund amounts by ten years by increasing the payment reduction for other outpatient services to 2.0%, and (ii) proposes a new survey of hospitals' 340B acquisition costs, which could be used as a basis for future Part B or other program payment reductions. There can be no assurance that the corresponding offsets, or other recent or future rules established by CMS will not have an adverse impact on our business. In addition to the proposed Part B payment changes in the hospital outpatient context, CMS also finalized a separate rule in October 2025 which may affect the manner in which manufacturers calculate the average sales price ("ASP") for their drugs, which is used to determine Medicare Part B payment amounts. Under current law, "bona fide service fees" ("BFSFs") paid by manufacturers, including but not limited to distribution service fees paid to wholesalers, generally do not affect ASP calculations. The final rule would, among other things, tighten the standards for the BFSF exemptions by requiring certifications that fee recipients will not pass fees through to downstream customers or clients. These changes could result in reduced Part B payments for specialty products to our customers, and some manufacturers may seek to implement alternative pricing or contracting structures for their service fee relationships with wholesalers, providers, and other entities. There can be no assurance that such outcomes will not have an adverse impact on our business (especially the practice management and physician specialty network organizations that we have recently invested in or acquired). Further, even where a government entity does not affirmatively change drug price regulation standards, other parties in the drug manufacturing and distribution system may change their interpretation or approach to implementing or complying with those standards in a manner that may adversely affect our business. For example, the 340B drug discount program requires manufacturers to provide discounts on outpatient drugs to "covered entity" safety net providers, and there are significant ongoing disputes and emerging developments relating to that program. First, previous Health Resources and Services Administration ("HRSA") guidance has allowed covered entities to dispense 340B discounted drugs through arrangements with multiple "contract pharmacies." Beginning in 2020, numerous manufacturers announced initiatives that inhibit or limit covered entities' ability to use any, or multiple, contract pharmacies, place conditions on the use of contract pharmacies, or direct us not to honor 340B discounted pricing requests on orders to be shipped to contract pharmacies (or the manufacturers may not honor chargebacks where such discounts are extended to contract pharmacies). While HRSA and the federal government are no longer challenging these manufacturers' policies, a number of states have enacted legislation that would restrict such policies, and these new laws are the subject of ongoing litigation by manufacturers. To date, the states have generally prevailed in these actions in the lower courts, except that manufacturers have prevailed in litigation challenging West Virginia's law, and several of these cases are now pending in the federal appellate courts. Our customers include covered entities and organizations with significant participation as contract pharmacies, and the unavailability of 340B discounts through contract pharmacy arrangements may adversely affect such customers and, therefore, could adversely affect our business. Second, and relatedly, HRSA has finalized a rule that allows 340B program covered entities to bring administrative dispute claims against manufacturers for alleged 340B overcharges, including overcharges relating to contract pharmacy limits or other matters. A few covered entities have filed claims, and one decision has been issued in favor of a manufacturer based on the outcome of parallel federal court litigation described above, but such proceedings are otherwise in their early stages. While wholesale distributors are not parties to these proceedings, it is possible that either manufacturers or covered entities may seek data relating to underlying claims, which could indirectly increase our operational costs. Third, manufacturers have proposed to implement rebate programs (in lieu of up-front discounts administered through wholesaler chargebacks) to alleviate some of the effects of the 340B price rule changes. The federal government refused to approve such proposals, and manufacturers have challenged these refusals in federal court. To date, the government has prevailed in all of these challenges in the lower courts, which have held that the agency has discretion to approve or disapprove rebate models, but one matter was remanded to the agency and other manufacturers have appealed these decisions. However, on August 1, 2025, the U.S. federal government announced that it would consider applications for a limited 340B rebate model on a demonstration basis, available solely for drugs that are subject to "negotiated pricing" under Medicare beginning in 2026, and HRSA subsequently announced that it had approved pilot 340B rebate programs for nine of the ten drugs subject to negotiated prices. We cannot predict whether manufacturers will continue to propose rebate programs, the outcome of potential enforcement actions or litigation relating to those approaches, the effects of potential rebate models approved under the August 1, 2025 notice, or the potential for rebate models to expand beyond the products that are subject to negotiated pricing. Like the contract pharmacy restrictions, the rebate model described above may limit access to 340B pricing to covered entities and may also supplant 340B chargeback mechanisms that we administer, which could adversely affect our business and the business of our customers. The federal government may adopt measures in the future that would further reduce Medicare and/or Medicaid spending or impose additional requirements on healthcare entities, including entities we manage or with which we are directly engaged through our recent MSO acquisition and investment. Any future reductions in Medicare reimbursement rates or modifications to Medicare drug pricing regulations, such as ASP calculations, or the extension of IRA pricing reforms to commercial health plans, could negatively impact our and our customers' businesses and their ability to continue to purchase such drugs from us, or could indirectly affect the structure of our relationships with manufacturers and our customers. In addition, as noted, broader health policy changes, such as those contained in the OBBBA, may affect eligibility for and access to insurance coverage, eligibility for participation in the 340B drug pricing programs, and other reimbursement matters that may have adverse impacts on our cash flow and on our customers. We can provide no assurances that future Medicare, Medicaid or other insurance payment or policy changes, if adopted, would not have a material adverse effect on our business. Finally, federal and state governments may adopt policies affecting drug pricing and contracting practices outside of the context of federal programs such as Medicare and Medicaid, which may adversely affect our business. For example, several states have adopted laws that require drug manufacturers to provide advance notice of certain price increases and to report information relating to those price increases, while others have taken legislative or administrative action to establish prescription drug affordability boards or multi-payer purchasing pools to reduce the cost of prescription drugs. If such programs were to proliferate, they have the potential to create significant channel disruption, with manufacturers seeking tighter controls for product access at the state level to ensure availability within each state rather than enabling arbitrage across state lines. There can be no assurances that future changes to drug reimbursement policies, drug pricing and contracting practices outside of federal healthcare programs, or to government drug price regulation programs, such as the Medicaid rebate, ASP, or 340B program, will not have an adverse impact on our business.