Great, we'll get started now. Good morning, everyone. Welcome to this session of the Leerink Healthcare Crossroads Conference. I'm Mike Cherny, the Healthcare Tech and Distribution Analyst. Much more importantly, we have Cardinal Health, CFO, Aaron Alt, and Head of IR, Matt Sims. Matt's gonna kick it off with some important comments on Reg FD, and then we'll jump into a fireside chat.
Very important. Thanks, Mike. It's great to be here. We appreciate you hosting us. Just a reminder before we get going here, we will be making forward-looking statements today, which are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied. For description of these factors, please review our SEC filings, which can be found on our investor relations website at ir.cardinalhealth.com.
Thanks, Matt. So maybe we'll just jump in, kind of, you know, a few weeks past the quarter. Obviously, a lot of moving pieces, both in terms of the fourth quarter implications and into 2025. Yeah, maybe start with that initial 2025 look that you gave us. You put a floor on earnings for next year. Obviously, there's a significant customer, from a revenue perspective, moving away. Can you give us a little bit of the underlying drivers of what you're seeing from a market basis that gave comfort in that preliminary 2025 guidance?
Sure. Well, first, thanks for having us. It's always a pleasure to be back in Texas, and Jason Hollar and I appreciate you investing in us and taking the time. To look forward, we first need to look a little bit back, and we need to understand the drivers of our Q3 performance, and indeed, the updated guide that we provided for fiscal year 2024. And it starts with our largest, most profitable business, which is now called PS&S, the old pharma business, if you will. And what we, what we saw in Q3, and indeed what we guided for in Q4, was continued strong macro, strong macro environment, right?
We saw in Q3 strong performance on brand and generics and specialty and consumer health, and that's what helped us to deliver a 4% growth in Q3, lapping a 23% growth over the prior year, and then allowed us to raise our guidance for that segment for this fiscal year, which is we raised it to 8.5%-9.5%, you know, growth for the year. Now, you started the question by asking about, you know, 25, and, you know, we were very careful to, in our earnings call, call out the fact that notwithstanding the non-renewal of a large, you know, low-margin contract, you know, that we still see good things ahead, you know, for the business.
And so we were very careful to call out that we expect to see, you know, for the enterprise, you know, continued EPS growth, but also, you know, for the pharma business, our PS&S business, we'll do at least 1%, you know, profit growth thereafter, notwithstanding the non-renewal of that one contract. And it's driven by the same factors, which we see a strong, stable macro environment. We can expect continued progress in brand. We have a strong presence in generics, very consistent dynamics. We'll talk more about that, I'm sure, as well. And really what I want you to take away is everything we've been doing to be successful in 2024 continues into 2025, and we just expect to continue to run the progress.
And along those lines, you know, just maybe starting from the growth perspective, and I know there's a couple of hot button topics I want to make sure I hit, but, you know, one of the things you didn't mention on the core pharmacy side is specialty.
Mm-hmm.
You know, I think you used last year's Analyst Day as a way to re-debut your specialty business. How is your specialty business progressing against your multi-year plan in terms of the contribution of growth and any changes you expect in terms of recent past, some launches, other pieces of specialty movement that can be positive, negative movers for the business?
Yeah, it's a great question. We're excited about our existing specialty business. As you alluded to at Investor Day, we did call out that our specialty business, that we viewed as... We assumed that it was bigger than you all thought it was at the time, and it is growing rapidly. We've been growing at least with market, if not in excess. And as Jason and I have called on a number of times, our prioritization and our focus within our, the core of our business is really about how do we continue to accelerate and enhance the specialty business? And a great sign of that will have been the Specialty Networks acquisition that we completed a couple of months ago. Specialty for us is bifurcated into really two pieces.
There's the oncology part of the business, which is about 40% of the industry, and then the other ologies are about 60% of the industry. We are historically stronger in the other ologies than we are in oncology, and I'll come back to that in a second. But really want to emphasize that, you know, applying our playbook and continue to emphasize the strength of our portfolio within the other ologies, the fact that we completed the Specialty Networks acquisition, giving us more scale, more technology, more insights in urology, rheumatology, and gastroenterology, as well as giving us the PPS Analytics platform to take what Specialty Networks and we already do well into other therapeutic areas. We really view that as an enabler of growth and improvement in the existing other ology part of the business.
Now, on the oncology side of the house, you know, the strategy that we announced back in Investor Day was to move more aggressively organically into the oncology part of the business. We have oncology customers, and what we have been doing, though, is ratcheting up our game and investing in, you know, building a platform, not duplicating what others are doing in the industry necessarily, but through Navista, you know, building a platform and a set of services in partnership with our, you know, key customers and our advisory council, which is really focused on the next gen technology, which is focused on the next gen therapeutics, which is focused on the ways that the practice can be improved outside of the clinical decision-making.
We think we have a strong role to play there, and so we're excited about the progress that we're making, on the oncology part of the business as well.
Got it. That's certainly helpful from a growth strategy perspective. We might come back to specialty, but I wanna make sure before, so we don't run out of time. A lot of questions recently, last couple of weeks, on some changes in NADAC pricing, I think causing some maybe confusion in the market... Can you just remind everyone what exactly your exposure is to changing NADAC pricing dynamics and how it does, or most cases, does not impact your business?
Right, right. Love the way you asked that question. You know, NADAC is a reimbursement model typically applied by state Medicaid agencies to largely retail independents. And there have been, there's been some stories recently about the methodology of the calculation of an NADAC changing, or indeed who the contributors into the index may be. What I can tell you is there's still a lot of questions, right? There's not a lot of answers in the industry as to who's done what to whom, and how, and how it's all gonna play out. But the important thing I want you to take away is this: we have no direct exposure to that. We do serve retail independents. They are a core, vital, important part of our portfolio.
Indeed, they're a core, vital, important part of the healthcare ecosystem. We support them through Red Oak, which has the, we have the scale, we have the technology, the data analytics, et cetera, to continue to provide access and best cost, to all, to our customers, including retail independents. So that platform, combined with the services we offer through our PSAO, and other elements where we're helping them with their inventory control, with their reimbursement, with their adherence programs, et cetera, we believe that this is just one factor in the continuing ecosystem impacting retail independents, but we are not directly impacted.
Are there anything you're seeing on the broad-based, I'll call them reference pricing, reference reimbursement dynamics? You know, this quarter, we saw across the board changes in insulin pricing and how it impacted revenue, much more so than profitability. Obviously, IRA pricing goes into effect in two years. As you think about the overall pricing reimbursement paradigm, are there any moving pieces that change the way that Cardinal operates, or should, or maybe impacts the multi-year growth targets that you have?
The short answer is no. The environment in which we operate, there are always things moving, up and down, and the stability I referenced earlier around both the macroeconomic factors, the strong prescription demand, the strength of our, Red Oak, you know, platform, the fact that we're able to manage both the buy and the sell, you know, means that, you know, across the portfolio that we manage, we have, stable, you know, margin per unit, and that. So that so long as volume is growing across our portfolio, we're able to manage that, and that's, that's part of the strength, of our portfolio in that way.
You mentioned Red Oak a few times. I think we're now 10 years since Red Oak was first formed.
Mm-hmm.
I’m still surprised personally that Red Oak and the other two buying groups are still able to generate incremental value. Can you talk maybe a little bit deeper about what Red Oak is still doing this far into the generic purchasing opportunity, and how customers, big and small, leverage Red Oak capabilities differently?
Sure. For those unfamiliar with the history, Red Oak is a partnership between CVS and, you know, Cardinal Health, where we are both, you know, shareholders in it. It has a twofold mission. The first mission is to ensure access to generic drugs, and the second mission is, is to, and to ensure low cost. And so by virtue of combining our scale with CVS's, you know, scale, we are able to go to manufacturers together through, through Red Oak. It is an independent entity, I should clarify that.
Red Oak is able to go to the manufacturers and ensure that we are first in line for anything which is on allocation, given our scale, and our cost structure is second to none because we are, because of the scale we have, you know, in the platform. They have a strong data analytics platform, which also allows us to see trends, that allows us to understand how the environment or the industry shifting from a purchase perspective. It also means that we have awareness of, you know, things going on in the industry, either by manufacturer or by a drug type, that help us to look ahead and understand what's coming down the pike.
And so the benefit that we, and through us, our customers are getting is really the fact that we have the access. We have the low cost, you know, position, and we're able to see around some corners, you know, coming with an ever-changing industry.
Got it. And it's really helpful. And just maybe jumping into a quick question on biosimilars. Clearly, your partner in Red Oak, CVS, has made some significant moves on the biosimilar side with Cordavis. Can you just talk broadly about, A, your biosimilar strategy, and then, B, as you think about biosimilar Humira, which I know is much more of a mail drug, but how do you think about the push and pull of Cardinal driving economics on Part D versus Part B drugs?
Yeah. Let me start, which is, I would say this, we love innovation, right? We support innovation in the industry. We want the patients to have access to the therapeutics, the right type of therapeutics in the right place, at the right time, you know, at the right cost. And whether it's the CVS platform you called out or things that, you know, we are doing, you know, either individually or with our partners, we believe that biosimilars absolutely has a role to play, in our industry as we carry forward. There are a number of different paths to get there, and the path will vary based on the position that the biosimilar is taking in the industry. But we have, we believe that we are well into that game.
It is part of the guidance that we have given already, the tailwind that comes from biosimilars, but it's still early days in the industry, I would say. And so we are looking forward to further opportunity over the course of the long term. Did I steal all your talking points, or anything you want to add?
No, I, I think that was well said. The market's still in its early innings and continuing to evolve. It's a long-term, secular type of tailwind. And so when we look out at the pipeline, even beyond our long-term horizon that we've outlined, we feel, really excited about the biosimilar opportunity, as Aaron noted, not only for our business, but for the increased accessibility and affordability for patients. So there's a number of key variables that we're continuing to track, the product attributes, the payer and PBM formulary decisions, the clinician preference. And so we stay close to our customers, close to our manufacturer partners, but we're excited about the opportunity, and we're well positioned there.
With traditional small molecule generics, there's usually some rite of passage of usually the discount comes when you have initial generic entry come and you'll break open, et cetera. Are you seeing that algorithm start to play out in any of the biosimilars you've had exposure to yet? Or is it that much of a word soup of different factors that factor into play, where we won't actually know how to think about economic contributions because you have payer decisions, formulary decisions, differences in AB substitution? I guess, how do you think about planning for your own organization and driving growth, given that it's not as simple as a straight calculation?
It's a classic supply-demand environment where we have to make choices. Our choices need to be informed by the formulary choices that others are making in the industry, and, you know, there will be winners, there will be losers. But the good news for us is that there is innovation, and because we have the right partnerships in the right way, A, we'll be ahead of that game, and B, we'll be able to supply it, because we, while biosimilars are not part of Red Oak, certainly we're very focused on how do we ensure both access and low cost.
Turning to some of the pieces of your other segment, you know, obviously, three disparate businesses that all have their own unique growth characteristics. As you think about resource allocation, think about prioritization, how do you pick and choose the best ways to push resources towards each individual business on both an organic and inorganic basis-
Mm-hmm.
-to drive growth across the board?
It's a great question. There's a lot there. Let me start by saying this: we are excited about the opportunities we have across our portfolio. We are particularly excited about some of the opportunities we have in what is now called Other because it's called Other because the accountants told us we had, we had to do it. And that references our Nuclear Precision Health business, our at-Home business, and our OptiFreight Logistics business. And for those of you that are not as familiar with the story, let me just give you the quick rundown. That Nuclear Precision Health , we have a nation-spanning network of PET and manufacturing distribution sites. We also have a significant investment in theranostics.
And so whether it is in, you know, oncology or cardiology or neurology, right, we have a pipeline of theranostic drugs on both in the distribution network already and coming that we think that we are excited about to provide us with great growth opportunities at a margin rate, which is accretive to our overall portfolio. And so we are doubling down and investing in the Nuclear Precision Health business, both to expand the network, but also to support the manufacturers in bringing innovation, you know, to that marketplace.
Similarly, you know, from an at-Home perspective, the at-Home business has been kind of hidden away in our old, you know, med segment as well, but it is on trend from a macro perspective because, of course, healthcare is now moving increasingly into the home as an American consumer ages, and we have a strong presence across multiple categories there, and we're investing in the at-Home by really doubling down in categories that are important to our patients, as well as categories that are profitable for us. We're investing in, again, our network. We've announced a new location, the new distribution nodes in, you know, South Carolina, Ohio, and most recently, Texas.
And at the same time, given the importance of efficiency, given our overall margin structure, we are investing heavily in technology and automation within that business as well, so that the customer has a easy journey to place the order, and we can get it to them as fast and efficiently, you know, as possible. Leaving our OptiFreight Logistics, you know, business, which is, you know, our customers, we have more than 1,000 customers who are on our OptiFreight platform, and what they're really looking for is they're looking for value, they're looking for expertise, and they're looking for technology, and we're an industry leader and be able to provide them both in performance and the cost efficacy on how they move items around their own networks and indeed into their network and out of their network.
That's a lesser-known part of our portfolio that we're quite excited about. It's more of a technology play than a core, a traditional distribution play in that way. Now, we are allocating resources to those three businesses. We were purposeful back in January in announcing a resegmentation of our enterprise to bring transparency, visibility, and importantly, accountability in those businesses. All three now report separately, directly to our CEO. With that reporting, and becomes that visibility and transparency, as well as, the commitment to investment in the right way at the right time. And I hope what you can take away from how I describe the investments we are making is we are being purposeful, investing in all three of those businesses. I want to zoom out for a second, though, because our future is not just about the other businesses.
Our future is really tied to continuing to invest and do the right things across pharma as well, as well as GMPD. And so if we go back to your question earlier on specialty, you know, we are doubling and tripling down on the technology we're building within specialty, how our network is set up to efficiently move products, you know, within specialty, and of course, M&A. You know, we have been clear since our Investor Day that we are particularly focused on M&A, within the specialty area, and indeed, we did that with the Specialty Networks acquisition. But with the resegmentation this past January, I hope you also caught that.
We broadened our aperture modestly, which is for the right deal at the right time, on the right terms, we will also consider M&A to be additive to our Nuclear Precision Health , our OptiFreight Logistics, and our at-Home, you know, businesses as well. What did I miss? Good? Okay.
I want to come back to some of the nuances of those businesses, but just on that M&A side, and especially against the balance sheet, you've been doing a lot of buyback, but you know, prior to the Specialty Networks deal, I think you were at or close to net cash. You know, as you think about the priorities for growth from here and M&A, is anything changing about your hurdle rates, given that these three assets and then other have a little more growth characteristics than what would have been a legacy, you know, obviously long ago, traditional pharma-oriented deal?
Yeah, I guess I would answer it this way: We are big believers in telling you what we're gonna do, you know, doing it, reporting back, and then going out and repeating that cycle. And from a capital allocation perspective, our biggest, our highest priority is investing in the business organically. We view that's where we can really provide the return. And so from a use of our cash perspective or indeed on where we go from here, we continue to double down on investing in the portfolio, and we had guided that we would spend at least, you know, the $500 million we are this year as we carry forward into 2025 as well. And we're not backing away from that, notwithstanding, you know, changes in customer contracts, et cetera.
Following that, we have a commitment to protect our balance sheet, and we have a very strong balance sheet. We're BB B. We've got three positive outlooks from the rating agencies, and indeed, as we move into this coming year, we've already talked about the fact that we expect to be well within towards the bottom of the from a positive way, you know, the rating agency guidance on what's necessary to preserve our rating. But we have a lot going on as well, and one of the things we have going on is both the return of capital to shareholders. We bought back $750 million of shares this year. We'll pay about $500 million of dividends this year.
Next year, we're committed to $500 million of dividends and $500 million of share repurchase, just as baseline, but also considering M&A, right? And so, really, to answer your questions, we think about how all those pieces come together. We do have strong cash balances. We are leaning into the business as we carry forward. This is a long-term play, you know, for us, and we're gonna take advantage of the cash we have on hand, the liquidity position we have. You know, given Optum and given what I talked about at quarterly earnings, about some of the Q1 dynamics, we may well add some additional liquidity in the short term, but we are doubling down for the future.
Yeah.
So how did the ROC... Yeah, we haven't provided our ROC across each of the businesses, and so I can't. I'm not gonna do that today. What I will tell you from an attractiveness perspective is that given the relative margin profile, if we find the right deal with the right scale within any of Nuclear, at-Home, or Opti, it would be additive to our ROC from a portfolio perspective. You also have to take into account that some of our businesses actually have net working capital implications for ROC, which throws the... Sorry, negative working capital, which throws the equation off.
Okay, thanks. Turning back to some of the dynamics of the segments, maybe I'll start backwards from your description of OptiFreight. As you think about the dynamics of customer demand within OptiFreight, especially now that it's newer from a kind of public details perspective, how durable, predictable, cyclical should that business be? Like, is this something where the recurring revenue level is high? What do customers-- how do they contract with you from a timing perspective?
Mm-hmm.
You know, these are third-party logistics type businesses, so curious how we should think about the cadence of how this business should generate growth for you?
Sure. OptiFreight has been a consistent performer, a consistent grower across the portfolio, and it's driven by the broader set of relationships that we have and the broader expertise that we have. As a distributor ourselves, who partner with, you know, acute care environments, ambulatory care environments, with the pharmacy environments, and the list goes on, right? We understand because we have to do it ourself how hard distributional logistics can be.
This business, which has been in our portfolio for several years, it brings technology platform, our TotalVue platform, you know, to each of those providers and allows them to not just rely on a third party, but actually see the insights of how is their operation running, where do they have efficiency operation, where they have efficiency opportunities within their portfolio, and then we partner with them to take some of the heavy lift off of them so that they can do what they do best, and our OptiFreight business helps them to perform, to really drive efficiency in their own logistics operations, you know, as we carry forward. We've seen great pull and adoption within that business when people come to realize, you know, what TotalVue can do for them.
On Nuclear, especially the PET manufacturing, this is a business that was obviously meaningfully impacted during COVID.
Mm-hmm.
I think, correct me if I'm wrong on the way this is framed, but you basically continued to run the business through COVID as if demand was the same, just given the startup slowdown costs. Where is the business now from a utilization perspective? Is it back to pre-COVID levels, and how does that factor into the way your margins should progress in this segment going forward?
Yeah, the way I would think about it is that of given the nature of the business, as consultations or medical procedures waned during COVID, as they did, of course, that business then it did as well. But we all know that the healthcare trends have reversed post-COVID as well, and utilization and procedures is now growing, right? And so with that growth, even without innovation, right, we would be rising with that tide. But importantly, the business is actually bringing innovation, you know, in the areas I called out before, you know, neurology with Alzheimer's tests, right, oncology, cardiology. And because we're expanding the, you know, portfolio of products through theranostics in particular, we view it as a great growth engine for our future profitability.
And then just on the at-Home side, as you think about the range of services, are there any pockets of growth that have been more appealing, choppier in terms of types of services, type of products that customers are asking for you?
You know, it's we are still on a voyage of discovery to agree as to, as to how to continue to dig deep and optimize across that portfolio. There are parts of the portfolio, like glucose monitoring, where we are strong. There are parts of the portfolio where we're watchful and we don't play currently, which is the more the heavier durable medical equipment, if you will. And so that is a part of the strategy that we are continuing to evolve as we invest in the business to really identify the path forward. We'll talk more about that at our Q4 earnings call when we talk about the strategy for fiscal 2025.
Got it. I will not try to get ahead of myself beyond any of the preliminary fiscal 2025 color. Turning to GMPD, you know, this was, to me, the most interesting spike out the resegmentation, given the macro operational improvements that you're really focused on. Yeah. Where, if, if you had to judge yourself across the curve of the journey, like, where are you in terms of your ability to capture that pathway towards the eventual $3 million of fiscal 2026 EBIT?
I have both a quantitative answer and a qualitative answer to that.
I like both.
The quantitative answer is when we do what we said we're going to do and deliver $65 million of profit, you know, this year, we will be halfway there, because we will have come from a $-165 million, and we're on our way to a $300 million over the four-year period, and so that's the quantitative answer. And we reaffirmed that guidance during the-
Yes
... our Q3 earnings call, and so we have every expectation that the team will deliver on that. From a qualitative perspective, what I'd tell you is, we are very impressed with what the team has done, right? In the face of a challenging situation from a couple of years ago with COVID, with the shutdown of the international supply chain, with all of the various cost changes from an inflation perspective, and the team has been relentless in pursuing the inflation mitigation plans. That was the single biggest part of our medical improvement plan and now our GMPD improvement plan. And they have delivered on that such that by the end of this fiscal year, we expect to be exiting about 100%, you know, mitigation on that inflation piece of it.
And that ain't easy, right? That comes with, I'm back in Texas, so my language is changing. Sorry. It's coming with changes to our contracts, it's coming through changes to our supply relationships, and so we're really proud of the team on that. And that benefit will continue, certainly in the first half of fiscal 25, because we're lapping quarters that didn't have all of that benefit previously. Cardinal Health brand is the second biggest part of the turnaround plan, and we've seen good growth there. I hope you've noticed in our earnings call the fact that we have seen a, well, first a change in trend, then 2% revenue growth, then 4% revenue growth.
Some of that's driven by the growth of the Cardinal Health brand as well, and that's a higher profit margin part of our portfolio. That needs to continue as we carry forward, but that was always expected to be later in the cycle just because it takes time to invest in and grow that part of the portfolio. And then lastly, simplification, which is the team has been relentless on how do we optimize our cost structure so far, and they have many good ideas still on the table of how do we simplify, you know, the countries we operate in, how we operate in the countries, who our partners are, what our overall SG&A looks like, how do we optimize our distribution network overall?
There's a lot more to do, but that team can be, and we are very proud of the progress they've made, you know, so far.
Obviously, there's stuff that's within your control that seems to be progressing, stuff that's not within your control that you react to. And, you know, it's been a couple of weeks since the White House proposed small pocket of China tariffs on products that you're still insourcing. Any additional color you can give us, A, on those tariffs, or B, if not, on the recontracting side, if there's any changes in variability that you'll see now when situations like tariffs, sourcing costs, change-?
Yeah
... unexpected ways.
It's a great question, and we are watching the situation very carefully, as you can imagine. A couple of points just to be aware of: We don't do any own production within China.
Right.
So we don't have any sites that we run ourselves there as a manufacturer. We do have modest exposure to China, from a portfolio perspective, where others are in manufacturing for us. But we take some comfort from what I was referencing earlier in that we've changed the nature of our contracts such that when we get incremental costs in the form of tariffs or otherwise, we are much, much more flexible contract structure, we're able to pass the costs on so that we aren't left holding the bag. I will also point out, though, that because we are a global manufacturer with strong relationships elsewhere, we do have the ability to be more tactical than we did around where are people producing for us.
That's important from a flexibility perspective, and there are some categories where this may present some opportunity where, for instance, one of the categories targeted by, you know, the administration is actually the syringe manufacturing. And we produce syringes of various types, you know, in the U.S., and we have the opportunity to expand some production there to help the healthcare ecosystem out, you know, as we push ahead.
Awesome. Well, we're about out of time, so I mean, Aaron, Matt, thank you so much for joining us. Really appreciate it.
Always happy to be here. Thank you.
Thank you.