Good day, and welcome to the Cardinal Health, Inc. 2nd Quarter Fiscal Year 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kevin Moran, Vice President
21 outlook. You can find today's press release and presentation on the IR section of our website at ir. Cardinalhealth.com. Joining me today are Mike Kauffman, Chief Executive Officer and Jason Holler, Chief Financial Officer. During the call, we will be making forward looking statements.
The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward looking statements slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during the discussion today, our comments will be on a non GAAP basis unless they are specifically called out as GAAP. GAAP to non GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. During the Q and A portion of today's call, we please ask that you try and limit yourself to one question so that we can try and give everyone an opportunity.
With that, I'll now turn the call over to Mike.
Thanks, Kevin, and good morning, everyone. I'll start our discussion with a few high level thoughts on our progress so far this year and then Jason will review our 2nd quarter results and our updated fiscal 2021 outlook. I'll close by sharing updates regarding our growth areas. We continue to make progress on our strategic plan as we navigate the rapidly changing global environment. Overall, 2nd quarter operating results came in better than our expectations led by the Medical segment.
In addition, we saw some favorability including timing below the operating line, enabling us to deliver EPS growth of 14% in the quarter. Due to our solid first half performance and our improved visibility into the remainder of the fiscal year, we are increasing and narrowing our EPS guidance to a range of $5.85 to $6.10 per share. In the second quarter, we saw varying effects of the pandemic on our business. Our medical segment saw a net positive impact related to COVID-nineteen as our lab business and PPE products continue to experience strong demand. And in pharma, although the pandemic continued to adversely impact volumes, mainly in generics and nuclear imaging, areas like specialty and consumer health are recovering and performing very well.
Across the company, we remain focused on doing our part to support ongoing pandemic relief efforts. In pharma, we partnered with the CDC to act as a network administrator, enabling retail independent, small chain and long term care pharmacy customers to participate in the vaccination effort. And in medical, we partnered with the state of Ohio to support vaccine distribution through our OptiFreight Logistics business. Regarding PPE, we are utilizing our supply assurance program to manage costs for our customers and provide consistent long range supply in key product categories. We are seeing improving supply in some of these product categories such as gowns and mask, but continue to see a challenging market with exam gloves.
Looking ahead, we remain committed to supporting our customers, patients, government and communities through the ongoing challenges of the pandemic and we are ready and willing to help in any way possible. Before I provide some updates on our strategic growth areas, I'll turn it over to Jason to share more details on our Q2 and outlook for the year.
Thanks, Mike, and good morning, everyone. Beginning with total company results, 2nd quarter EPS was $1.74 reflecting a 14% increase driven by discrete tax items and strong medical results. Total second quarter revenue increased 5% to $41,500,000,000 driven primarily by sales growth from existing customers. Total gross margin was flat at 1,800,000,000 dollars SG and A increased 2 percent to $1,100,000,000 due to IT Investments. The net result for the quarter was consolidated operating earnings of 628,000,000 which reflects a modest net negative impact for the enterprise from COVID-nineteen.
The Pharma segment was adversely affected by COVID-nineteen during the quarter and this was partially offset by a net positive impact in Medical. I will discuss these segment impacts shortly. Interest and other expense decreased 33% versus the prior year to $34,000,000 driven primarily by lower interest expense as a result of prior year debt reduction as well as an increase in the value of our company's deferred compensation plan investments. Our non GAAP effective tax rate for the quarter was 13%, which reflects the impact of certain discrete items. Now a quick note on the GAAP tax impacts during the quarter.
Primarily due to the self insurance loss in our fiscal 2020 federal tax return, we will carry back and recover previously paid federal taxes at rates that were in effect at that time. As such, in the quarter, we recorded a net GAAP tax benefit of $420,000,000 associated with the recovery of prior taxes. Additionally, we have recorded a corresponding receivable of approximately $1,000,000,000 which we expect to receive within the next 12 months. Turning to cash flow and the balance sheet, we generated robust operating cash flow of $1,200,000,000 during the quarter. As a reminder, the day of the week in which the quarter ends affects point in time cash flows.
We ended the 2nd quarter with a cash balance of $3,700,000,000 and no outstanding borrowings under our credit facilities. We remain focused on taking appropriate action to maintain our investment grade balance sheet. Our next debt maturity is in June 2022 with approximately $1,400,000,000 coming due. By the end of fiscal 2022, we intend to reduce long term debt by that amount, though the exact timing and method may vary as we continue to evaluate the economics associated with early retirement of debt. Now turning to the segments, beginning with Medical on Slide 5.
Medical revenue increased 7% in the Q2 to $4,300,000,000 driven by a net positive revenue impact from COVID-nineteen and solid execution by our team. As we have previously discussed, we saw higher selling prices and volumes regarding PPE and higher volumes in our lab business, partially offset by reduced surgical products demand resulting from deferred and canceled elective procedures. Segment profit increased 21 percent to $236,000,000 driven by a net positive impact from COVID-nineteen and cost savings, which includes global manufacturing efficiencies. The net positive segment profit impact from COVID-nineteen was primarily due to higher lab volumes as well as increased contributions from PPE that were offset by the previously mentioned elective procedure impacts. As it relates to lab, we continue to experience a tailwind from increased demand for COVID-nineteen testing projects.
While difficult to predict, we expect this demand to remain elevated for at least the balance of fiscal 2021. Regarding PPE, we saw both higher volumes and timing favorability related to our cost mitigation efforts. As previously mentioned, we have incurred significantly higher procurement costs for select PPE products during the pandemic and we expect the timing of selling the higher cost products to vary as we continue to manage our supply assurance program for our customers. On electives, although procedure volumes continue to be choppy and still below prior year levels, 2nd quarter volumes were generally consistent with our Q1 exit rate, down mid single digits versus our pre COVID-nineteen baseline. Finally, as in the Q1, we continue to see savings resulting from cost containment measures during the pandemic.
And outside of COVID-nineteen impacts, we continue to realize benefits from our efficiency initiatives like our global manufacturing and supply chain transformation, which we expect will continue to deliver strong savings. Transitioning to the Pharma segment on slide 6. Revenue increased 4% to $37,200,000,000 driven by sales growth from Pharmaceutical Distribution and Specialty Solutions customers. Pharma segment profit decreased 11% to $413,000,000 This was driven by COVID-nineteen related volume declines in our generics program and nuclear business and was partially offset by a higher contribution from brand sales mix in the quarter. Our Specialty Solutions business continues to demonstrate resilience, both downstream with providers and upstream with biopharma manufacturers and again achieved strong overall growth in the quarter.
Also, our generics program when excluding the previously mentioned volume impact of COVID-nineteen continued to see generally consistent market dynamics. Next on Slide 8, I will review the updates to our fiscal 2021 outlook. Due to our solid first half performance and better visibility into the back half of fiscal 2021, we are raising and narrowing our EPS guidance range to $5.85 to $6.10 per share, which at the midpoint represents 10% year over year EPS growth. This improvement is driven by strong performance in our Medical segment as well as updates below the operating line. Regarding updates to other corporate assumptions, we now expect interest and other in the range of $165,000,000 to $185,000,000 with the improvement primarily driven by the impact of our deferred compensation plan adjustments.
As a reminder, deferred compensation adjustments are fully offsetting corporate SG and A and net neutral to our bottom line. We are lowering our non GAAP ETR range for the year to 23% to 25%, which reflects our year to date effective tax rate of 18% and higher expected effective tax rates in the back half of the fiscal year due to the timing of discrete items. We also now expect dilutive weighted average shares outstanding to finish the year in the range of $294,000,000 to 295,000,000 dollars Regarding the segment outlooks on slide 9, for Medical, due to the previously discussed drivers, we now expect segment profit percentage growth in the low to mid-20s and revenue growth for the year in the range of high single to low double digits. Regarding the Pharma segment, we are maintaining our current guidance ranges of mid single digit revenue growth and low single digit profit growth. To conclude, some comments on our enterprise COVID-nineteen assumptions for the back half of the fiscal year as we begin to lap the initial impact of the pandemic in the prior year.
We continue to expect utilization to be choppy and to exit the fiscal year at or near pre pandemic levels. And for the enterprise in fiscal 2021, we continue to expect a year over year net negative impact from COVID-nineteen, though less than originally anticipated due to improved medical expectations. I'll now turn it back over to Mike.
Thanks, Jason. I'd now like to take a moment to elaborate on how this unprecedented time has reinforced our critical role in healthcare and how we see this role evolving as we look toward and beyond the second half of the fiscal year. I said last quarter that we aspire to be healthcare's most trusted partner and create the greatest value for our customers, shareholders, communities and employees. We create this value by efficiently operating resilient business models, deploying capital with discipline and investing for growth, all while prioritizing the health, safety and development of our teams. 1st, as we've seen throughout the pandemic, we operate resilient business models that can address today's challenges and adapt for the future.
For example, as Jason highlighted, our lab business continues to enhance its offerings throughout the pandemic. Through our Cardinal Health brand portfolio and our distribution relationships, we supply instrumentation, reagents and consumables, enabling both independent and acute laboratories to support the health of patients. We are also enhancing our core medical and pharmaceutical distribution and product capabilities as we continue to adapt these models for the future. We are making strong progress in both segments on our supply chain work streams and generating near and long term efficiencies. For example, we began work this quarter on a new 1,000,000 square foot medical segment replenishment center near Chicago that we expect to be operational in the Q4.
This facility is the 2nd of its kind in the last year and is part of our multiyear plan to improve the customer experience, consolidate our network and increase capacity to meet customers' request for pandemic storage. We are also making strategic investments in our IT infrastructure to enhance our customer experience and digital capabilities. At the same time, we are investing in our differentiated portfolio to drive strategic long term growth in key areas and not only support, but also anticipate our customers' needs. Our investments in the areas of specialty, at home, medical services, nuclear and connected care will enable us to capture benefits from favorable industry trends and to develop specialized customer solutions utilizing our breadth and scale. Recall, I noted at a recent conference that these five businesses represent $25,000,000,000 in total revenue and together they have a double digit historical 3 year revenue CAGR.
Let me highlight a few of these areas in greater detail. In Medical Services, which includes our OptiFreight Logistics and WaveMark Businesses, we are investing in technologies to drive continued innovation that will meet the evolving needs of our customers. For example, with our recently announced TotalView analytics tool in our OptiFreight business, we are using data to help our customers drive insights and savings in their healthcare supply chain logistics management. And in WaveMark, which as a reminder is a software as a service platform optimizing supply chain and clinical workflow processes for acute care, we have seen growth in both our installations and our pipeline as we continue to go live with additional customers. WaveMark has also recently initiated partnership opportunities to explore solutions to help lab managers and supply chain leaders manage the increased demand for critical test kits and lab supplies.
As our nuclear business continues its recovery related to the pandemic, our team remains focused on long term plans to further strengthen our leading industry position. We continue to build out our center for Theranostics Advancements in Indianapolis and are excited about the pharmaceutical innovators coming on board. From supporting manufacturer development of radiopharmaceuticals to commercialization and distribution, we are working together to change the way patient care delivered. In addition, our recent customer loyalty survey results were excellent, showcasing our differentiated value proposition in the market. Our efforts over the past 6 years to transform our selling model, strengthen our world class service levels and launch new products and services are deeply appreciated by our customers and we are excited about the mid to long term future of this business.
And finally, in Connected Care, we are making additional investments in technology solutions and actionable data tools to take advantage of the double digit growth we are seeing and to enable more meaningful, cost effective and outcomes driven connections between payers, manufacturers, pharmacists and patients. Demand for these solutions continues to increase with our services currently reaching 60,000 pharmacies, 23,000,000 patients and 60 payers. We are sending more than $400,000,000 tax annually to support medication management. And in the last quarter, we have designed, developed and implemented tools to help our pharmacy customers administer the COVID-nineteen vaccine with more than 2,500 locations already engaged. We will continue to share progress in each of these growth areas and in our core capability initiatives as they materialize over the coming year.
Before I close, I want to thank the team here at Cardinal Health who continue to do a tremendous job adapting and responding to the changing needs of our customers as we navigate the pandemic. Finally, I will reiterate that what we do matters to our customers, shareholders, employees and communities. As we move forward, we are using our breadth, scale and expertise to provide products and solutions that create value and improve lives. With that, I'll pause to open it up for questions.
Thank We'll take our first question from Michael Cherny with Bank of America.
Good morning and thanks for all the color so far. If I can dive a little bit into the pharma headwinds, as you think about the outlook for the rest of the year, how do you think about the trajectory and the visibility on nuclear and then also the headwinds on generic and when they could recover for you?
Yes. Thanks for the question, Michael. Appreciate it. I guess, really a couple of things to keep in mind. We're really pleased with the resiliency of our pharma segment, both in the pharma main driver of any headwinds we're seeing there.
It's good so far that a lot of the things that might affect the segments such as brand, inflation, that's kind of off the table from what we've seen in January. We feel like we're executing really well on our initiatives. And also from a cost saving standpoint, we're on track. And then generics, which is always one of the could be one of the swing factors, we're not seeing anything inconsistent there from what we've seen in prior quarters. So a lot of those swing factors are really off the table when we look at the rest of the year for pharma.
But what we really see is COVID being the main swing factor. The things I would say there is that we saw a lot of choppiness in the quarter. We would expect it to continue to be choppy for the second half of the year, but we still are expecting to exit atornearpre COVID levels. And as we said, our guidance continues to be low single digit growth for the segment.
And if you could just add one point, Michael, this is Jason. In your point about continues to follow a little bit of what we're seeing with electives a little bit more than other elements of the underlying volume. So not a lot of new news there, but slight improvement sequentially.
Thank you. We'll take our next question from Robert Jones with Goldman Sachs.
Hey, great. Thanks for the question. Maybe on the medical business, I think we all understand that COVID is having significant impact across the segment. But I was hoping maybe you could help us with what you're assuming in the back half in medical, particularly on the EBIT line. It just seems on the results to date and the updated guidance, you'd have to see kind of mid-twenty declines in the back half versus the front half.
And I know there's a lot of moving pieces related to COVID. But I think at a high level, Mike, I would think as you maybe see some of the drivers of the front half potentially fade, you would obviously see the legacy kind of surgery recovery product lines pick up. Just trying to get a better sense of what you're assuming that could really drive this kind of back half decline versus what you've seen in the front half?
Yes, this is Jason. Let me start it off. Yes, like you said, we're really pleased with our first half performance. Certainly, 2 good quarters here now as well as on top of last year's double digit growth as well. And then still guiding to low to mid-20s the year, we feel very good about.
To the point about the trends first half versus second half, as we stated in the remarks, we did see some Q2 favorability as it relates to our cost mitigation efforts on certain PPE products. So that's an element that was a component of in addition to the volume strength that we saw in lab and the volume strength that we saw in PPE that drove medical to actually have a net tailwind associated with COVID in the quarter. And so that's just one thing that will continue to vary quarter to quarter as we go forward. The other item that we talked about last quarter as well is that we continue to be very aggressive with our cost control over the first half of the year here, a lot of uncertainty in the underlying volumes. And so we wanted to make certain that we had a lot of flexibility going into the second half of the year.
And then the third point I'd make is just that we do continue to make long term investments in our business, as we've highlighted as our number one capital deployment priority is to invest in our strong pipeline of organic growth opportunities. And so we always trade our level of spend in that regard as well.
Thank you. We'll take our next question from Jalendra Singh with Credit Suisse.
Hi, thank you. You mentioned a
few things you're doing to help with the vaccine rollout. I realize these programs in and of themselves aren't going to move the needle for the overall company. But just curious as to how this work might set the company up for future opportunities for you guys to participate in future phases of vaccine distribution?
Thanks. Appreciate the question. Yes, we've been continue to be involved in staying up to date and everything as it relates to the vaccine. As we've said, we are working with the State of Ohio, helping them distribute the vaccine and we're also a partner with the CDC acting as a network administrator. And so we continue to do that.
And there are some other areas where we are having some small touch in that area. At the end of the day, I believe that our belief is that this is one of the most important events in the country's history and that bringing the full scale of the distribution capabilities of all the distributors to the market is going to make the most sense over the long term to be able to effectively distribute and get the vaccines to folks. And so we continue to make sure that we're doing all the things to make ourselves ready to be able to participate and help out however we can.
We'll take our next question from Eric Percher with Nephron Research.
Thank you. Can we dig into the PP and E price dynamics a little bit? I think last quarter you talked about the ability to pass on pricing. In this quarter, I expect that we were going to see some input cost increases. So can you help square that with the pull forward you just mentioned?
And maybe more broadly, it's price versus COGS Q1 to Q2 and then what's assumed second half? Sure. Yes, thanks for the question. And let me just kind of step back and talk about PPE in general and try to loop in that piece as well. There's certainly the overall demand dynamic here continues to be quite strong and we are seeing certain components get a little bit more imbalance between supply and demand.
But certainly, cost remains elevated across all categories. It's probably even more extreme in terms of that supply and demand imbalance remaining in exam gloves. So we continue to see that demand just far outstripping that supply, which has created some just some supply chain inconsistencies, not only so now we're dealing with just the timing of supply, but we're also dealing with all the different timing elements of the cost increases and price increases. So it just becomes a bit of an uncertain combination of different influences that have driven some of these cost increases to be delayed then until later quarters. So overall, our key objective remains the same to make sure we're mitigating all these cost increases and working with our customers with the supply assurance program.
But the timing is going to vary as we said last quarter and we'll continue to manage that as appropriate.
Yes, the only thing I would add is that while the PPE is clearly a driver, our lab business really was a big driver for us this quarter in the medical segment, and we continue to be excited about its growth and its ability to continue to maintain that growth at least for the remainder of fiscal 'twenty one is our current assumption.
Thank you. We'll go next to Lisa Gill, JPMorgan.
Thanks very much. Good morning. Mike, I just wanted to get an understanding of how you're thinking about utilization as we go into the back half of your fiscal One, are you seeing an impact with less coughcold and flu? And then secondly, you talked about the Rx segment in the quarter having an impact due to generics. What are you seeing?
Is it more of a trend? You said branding kind of came in line or was it positive? Is it that new prescription volumes continue to be down at least based on the data we see with IQVIA? Is there anything going on with your buying group? Just how do we think about utilization and any other comments you can give us around how to think about the pharma distribution component of your business in the back half?
Yes, thanks, Lisa. A couple of things I would say. I guess, first of all, it's important to know that sequentially, there's really not a lot of difference between what we sequentially, there's really not a lot of difference between what we saw in volumes between Q1 and Q2 for our pharma business. And also I would say that all the impact that we're seeing on volumes in generics is really, from our view, just related to COVID-nineteen. So we're not seeing any other dynamics such as buying groups or other challenges like that impacting our generics program.
It's really just the volumes as it relates to COVID-nineteen. So, and as we said that we expect that to continue to be choppy. We saw a lot of up and down over the last 6 months. We would expect that for the second half of the year, but do expect to still get back to at or near pre COVID levels by the end of the year. As it relates to flu, as you know, this has become less and less of a driver in general for us.
It can be a small driver. And as far as the flu goes, we've hardly seen much at all. So in terms of vaccine distribution has been a little higher, but all of the other type of ancillary products such as the Tamiflu's and those types of things, they have been down obviously. But again, it's an incredibly tiny driver for us and was not something that is driving any of the concern or any challenges that we might be looking at in pharma, which again we just are focused on COVID.
Thank you. We'll go next to Glenn Santangelo with Guggenheim.
Yes. Thanks for taking the question. Hey, Jason, I just wanted to ask a quick question about your share count guidance and your interest expense guidance. It looks like you raised the share count guidance, but you lowered the interest expense guidance. And I appreciate the comments you made with respect to the deferred comp adjustments, but I was just curious if you're changing at all your capital deployment priorities in the near term.
And secondly to that, is a potential opioid settlement at all in consideration in your capital deployment priorities for the balance of the year?
Okay, great. So in terms of interest, let's start there. Yeah, you're right. As consistent with my comments, it's the deferred comp element is driving the guidance change. And as I highlighted, that's entirely a flip flop between interest and other and corporate SG and A.
So there's no net EPS change associated with that. And of course, interest rates, although low, we have a substantial part of our capital structure fixed. So we just don't see a lot of variation as it relates to where rates have been. And so then I'm sorry, there are 3 parts. What's the second part?
Share count. Okay. So then the share count, we're still within the guidance range of what we had before. It is slightly at the high end to your point. As you can see, in the Q1, we didn't do any share repo.
We didn't do any in the Q2 as well. But the high end of that share count would imply no repo. The low end of this new range would be moderate modest amount of repo. So that's what's baked within that assumption. As it relates to the capital deployment, certainly we haven't changed our priorities.
Of course, we work within those priorities. And just to reinforce that, we continue to invest in our business 1st and foremost as we are really confident with that strong pipeline of organic growth opportunities. And you saw that this quarter with the medical, global manufacturing and supply chain work, we're making some great progress there and we want to continue to feed those activities. The other point that I referenced in my commentary is consistent with the 2nd priority, which is to maintain our strong investment grade balance sheet. So I did highlight that we intend to reduce our debt by about $1,400,000,000 as it comes due at the end of our fiscal 'twenty two, and we think that's consistent with that priority.
And then of course, we return the cash to shareholders primarily through the dividend as our 3rd priority. After that, it is repo and other bolt on strategic M and A, but we'll continue to look at that opportunistically as we get more confidence on variables such as opioids is certainly one of the elements we look at all the time. And as our confidence increases, we make more progress understanding what the framing of that looks like. Then we'll continue to evaluate if we can be more aggressive on any of those other components. But we continue to balance all those each and every day.
Thank you. We'll take our next question from George Hill with Deutsche Bank.
Hey, good morning guys and thanks for taking the question. I kind of wanted to go back to Eric's topic a little bit on PPE pricing. I was wondering if you guys would be willing to kind of call out the positive impact of pricing in the first half of the year. And Mike, I guess I'd be interested in your commentary on how long pricing stays elevated. Do we think this is the new normal or at some point in the future, are we going to have to worry about PPE price deflation?
Yes. So let me start at least with that first part. We're not going to break out explicitly the pricing separately. First of all, it's just really important to highlight that the pricing is meant to cover that cost increase. And so that's what we're balancing there.
We did, however, say in our last guidance update in Q1 that the vast majority of that revenue guidance increase for medical was due to pricing, which was due to that cost that was increasing. With this update, it's definitely more balanced, more weighted towards volume increases in the lab business, as well as volume increases in PPE and then to a lesser extent, any type of price changes. So it's I would just go back to the last guidance increase and it gives you a better understanding of what that TPE pricing dynamic is being driven by.
Yes, the only thing I would PPE comes down, our revenue will come down, but again, our goal has always been to maintain margin dollars and work with our customers on an insurance program. And so you shouldn't think about declining PPE costs necessarily being a headwind for us other than revenue. And as Jason said, but the timing of when you have the actual sale price and the cost that they flow through that can create a little bit of lumpiness in the recognition.
Thank you. We'll go next to Ricky Goldwasser with Morgan Stanley.
Yes. Hi, good morning. So two questions here. 1 on the Pharma Distribution segment, when we look at the implied growth for second half, EBIT is growing faster than revenue. Now clearly, there's some easy year over year comps versus the same period last year.
But as we think and I know that it's too early
to think
about 2022, but really if we think about its different drivers, that expectation generic volumes are going to come back and nuclear, which is higher margin, is it sustainable for us to think that we could also model EBIT continuing to grow faster than revenues for the distribution segment? And my other question was just if you can give us a quick update on opioids and where we stand.
Sure. As far as I'll just cover the opioids quickly. As I've said in the past, it continues to be, as you know, complex negotiations, a lot of moving parts, but we're continuing to make progress there. As far as on the pharma guidance goes or thoughts there, we obviously we can't talk about it at this time 'twenty two, but you're right on those components. First of all, we would expect if we exit at or near pre COVID levels that our nuclear business would continue to improve sequentially as goes forward.
And we have a lot of confidence in that business. As you know, I highlighted it in my comments around not only how they're performing well in the current situation, but also the investments we've made to be able to see growth in that business over the mid and long term on the in the Theragnostics space. And then again, as far as generics go, yes, the main reason that we have seen that our generic volumes are off is because of COVID. And so rest of the program continues to be as we expected. We continue to see that program, All the various components that we have in it are essentially working as we expected with just COVID being the driver.
So again, as COVID begins to be less and less of an impact, we would expect to see our volumes on our generics program to grow.
Yes. The other thing I'll add is relative to the nuclear comment, Ricky, as it relates to the revenue and margin balance there, I think you're on the right point that as we talked, especially in Q4 of last year, when the volumes were declining quickly, nuclear is a high margin business. It is also a high fixed cost business. So it creates a very high contribution margins that we saw certainly create a headwind in that 4th quarter. And so as we anniversary that in this Q4, especially if our guidance is accurate with the at or near pre COVID levels by the time we exit the fiscal year, then you would expect there to be, for that piece of it, an improvement in earnings relative to revenue as one of the key components that probably needs to be plugged into your model to make that whole thing make sense.
Thank you. We'll take our next question from Charles Rhyee with Cowen.
Yes. Hey, thanks for taking the questions. Just on the pharma side, can you talk about biosimilars and to the extent that they've had an impact, commentary from some of your peers would suggest that it's starting to become a more meaningful contributor. Just wanted to get a sense within in the pharma segment, how much that's having an impact? And then, yeah, that's basically it.
Thanks.
Yeah. Biosimilars continues to be an area we're also excited about. We are seeing positive contributions from biosimilar. It just doesn't it's not at the level to be calling it out as necessarily a driver at this point in time, but it's something that we do continue to participate in. We're very well positioned to be able to help manufacturers and customers with biosimilars, and we do see that as something that should be a tailwind for us as we look forward going forward.
Thank you. We'll take our next question from Steven Valiquette with Barclays.
Great. Thanks. Good morning, everybody.
So I
think in the Pharma segment, we're all just kind of looking at the trend line where the segment operating profits grew 1% year over year back in the fiscal Q1, but then they were down 11% here in fiscal 2Q. And you mentioned that the nuclear pharmacy headwind was actually a little bit less in the December quarter. And I think you said in the Q and A that for the generics, you're not seeing anything inconsistent there from what you saw the prior quarter despite the COVID impact on generics. So I guess just the question is, is there anything else you'd call out that may have gotten a little bit worse sequentially in that segment? Or is it just maybe there was something else that made the comp a little bit tougher in the December quarter that we overlooked?
Just want to get more color on the decline in profits in fiscal 2Q versus fiscal 1Q? Thanks.
Yes. As Mike mentioned earlier, we saw very consistent type of performance in a number of categories sequentially Q1 to Q2. And we talked about the COVID impacts, we talked about generics in general, the consistent market dynamics. So you do need to go back to look at the Q2 of the prior year, where that's where the generics program overall was fairly strong and we talked at that point about not only volume, but some mix impacts that were going on at that time. So, I think it's very much a comp as well as consistency within quarter to quarter sequential.
Thank you. We'll take our next question from Elizabeth Anderson with Evercore.
Hi, guys. Good morning. I was just going to ask about the different in terms of your home health business, can you talk about how that has been performing in the quarter and then maybe sort of your expectations as we like move through the rest of COVID and beyond?
Yeah, we continue to be very pleased with our at home business. We're continuing to see growth in overall number of customers that we're serving, the types of product lines that we're working with and driving our mix, all of those types of things getting after our cost structure. We are making some large investments in our IT systems that will be going online here. So a little increased SG and A as we drive to improve our systems there to be able to improve the customer experience, and as we grow, be able to do it more effectively. But it's a business that we continue to remain very positive on.
We believe the trends are continue to be in our favor in that business and being one of the leaders in that space, I think enables us to invest in various activities and opportunities to continue to grow that business.
Thank you. We'll take our next question from Eugene Kim, Wolfe Research.
Thank you and good morning. I would like to get some color on cost savings benefit in the Medical segment. And can you maybe quantify the benefit you saw for the quarter and share how much of that savings are more temporary in nature? And also if you are expecting those temporary savings to come back in the back half? Thank you.
Yes. So within the quarter, we called out 2 key items. 1 is this topic, cost savings as well as in the COVID impacts. And they were both the most significant items that are driving our year over year performance. So in terms of the order of magnitude, you should think of that as a large driver of this performance and consistent with that other driver.
How we break out our cost savings is that they would by their nature be largely permanent. Anything that's temporary and only because of COVID or COVID related matters, we would put into the COVID bucket. So, we do see this as continuous improvement and deep into our DNA and that we aren't just squeezing out costs temporarily, but truly transformational foundational elements. It's within our SG and A expense, it's
remember that because of some of the strong performance we've had in medical and in the business in the first half, there are some areas in medical expenses where we are investing in the business as we've talked about from a capital standpoint. I just mentioned the IT business in the at home and we're also looking at some other areas. So we are ramping up some of our expenses that in the area of making investments and growing the business over the mid to short term. So we would expect them to be a little higher in the second half, but to our $500,000,000 5 year goal, those are seen as permanent expenses that come out. But what we're talking about is ramping back up the type of investments based on how we feel strongly about the performance of the business for the full year.
Thank you. We'll take our next question from Eric Coldwell with Baird.
Thanks and good morning. We've been hearing a lot about stockpile as a service or storage as a service in medical and perhaps even in certain areas of pharma or therapeutics, mission critical items that are often in short supply. I'm just curious, it sounds like you're doing some similar things here. And I'm curious what the model looks like with that business. Is this more like a 3PL fee or how exactly does that work?
When does the customer buy the product from you? How are you compensated for the facilities, the capital cost, the storage, etcetera? Thanks.
I think a couple of things. First of all, the last thing you said is important is that we would intend to be properly compensated for that to make sure with any investment or working with customers to make sure that the services that we provide, we're getting compensated for, not only from an income statement, but appropriately looking at our balance sheet and the return. So that's important to know. To give you specifically on how it would work, that's a little more complicated, because I think it's we're going to see inventory changes across the supply
changes in the way that probably
the manufacturers work and the amount of supply changes in the way that probably the manufacturers work and the amount of inventory they're carrying to be able to get through these types of things. The location of our supply chain and where we the percentage of what we self manufacture versus what we source, we continue to increase our capacity, for instance, to manufacture our own drapes and gowns. So the ability to ramp that up, store inventory and managing it that way would be 1. And then as I mentioned, we are building some larger distribution centers. So we have the capacity to do that on our end, both to make sure our service levels are where our customers expect them to be, but also in certain cases, carry that inventory for customers.
But I also believe that customers are looking at what they warehouse and don't warehouse and that mix of what they warehouse may be more towards these PPE related items versus other ones and that can create some different opportunities for us to work with them. So I do think the entire supply chain will adjust over the next couple of years as it relates to inventory, but the important thing to note is that as we work with our customers on this, we would and suppliers, we would expect to get compensated from both order to provide that type of service.
Thank you. And we will take our final question from Brian Tanquilut with Jefferies.
Mike, just a question on the vaccine distribution side. I know you said you're taking care of small chain pharmacies and the independents. So is there any sort of sizing that you can put there or in terms of like what your clients are thinking in terms of the percentage of overall vaccinations that they will get as a group?
Yeah, at this point in time, it's as you know, it's state by state. It changes on a weekly basis. So I don't really have any good insights on how to help you on that. I would tell you that we continue to be there for our customers. We're going to continue to help them be ready to do it.
It's not a driver at all for our financial statements one way or the other. So from a financial driver, it's not material, but it would be really hard for me to even give you anything there because of the choppiness of the amount of vaccines that we're seeing state by state.
Thank you. That will conclude our question and answer session. At this time, I'd like to turn the call back over to Mike Kauffman for any additional or closing remarks.
Yes. I really want to thank everybody for joining us this morning. And on behalf of all of us at Cardinal Health, I hope you and your families are safe and well, and we look forward to speaking to all of you again soon.
Thank you. That concludes today's call. We appreciate your participation.