All right. Good morning, everyone. Are my mics on? Okay, excellent. You know, thank you for joining us bright and early. We're happy to be kicking off day two of the conference here with Cardinal Health. Representing the company to my right is Aaron Alt, who's the Chief Financial Officer of the company and to his right, Matt Sims, who I think most of you know, heads the Investor Relations function at the company. Before we get started, let me just quickly introduce myself. For those who don't know me, I'm Glen Santangelo. I'm the analyst at Barclays that covers the stock. Happy to follow up with anybody. Before we get started, I just want to turn it over to Matt.
He just wants to read a quick disclaimer and then we'll jump right into the Q&A.
Well, great. Thanks for hosting us, Glenn. It's great to be here. Before we begin, just a little housekeeping. 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 a description of these factors, please review our SEC filings, which can be found on our investor relations website at ir.cardinalhealth.com. All right, let's jump in.
Okay, excellent. All right. Well, let's get started. Thank you, Aaron. Thanks.
There's a little feedback on the speaker. Great.
Try not to move. Okay, here we go. You know, I thought a good place to start off the conversation would be talking about fiscal 2Q. You know, we recently launched on the stock in December. It felt like there was some upside to the estimates to us. You know, I think in January at one of the competitor conferences, I think you raised guidance. Then on February, again, guidance sort of got bumped up again. Maybe if you could just sort of level set us and talk about the first half of fiscal 2024, how things played out, maybe what's come in a little bit better than maybe what you thought.
I don't know if there's anything that was maybe a little bit different than what you thought but I think that'd be a good place to start and then we can sorta dive right into the questions.
Well, good morning, Glenn. Thanks for having us. Delighted to be here. Indeed, you're right. We have had a strong first half at Cardinal Health, really driven by three things, strong demand, great execution and continued investment against both the short-term, medium-term and long-term objectives of the company. Let me highlight a couple of parts of that. Of course, our pharma business is the largest of our businesses, 19% revenue growth, you know, 29% profit growth. Profit growth really driven by the contributions from our specialty business, our brand business, the MSOs, strong volumes across the board, greater demand than we had anticipated. The business affectionately known as Other, which is of course the aggregation of three parts of our business, Nuclear and Precision Health Solutions, At-Home and OptiFreight.
Three well-positioned businesses that have great secular positions that are responding to key demographic trends, industry leaders. They also delivered strong profit growth, more than 50%, you know, for the quarter with strong, you know, revenue growth as well. We can't forget our GMPD business, which continues to execute against the GMPD improvement plan. They saw strong Cardinal Health brand growth, as well as strong execution against the operational excellence and the cost takeout. We were pleased to be able to have good results there. All five of our operating businesses, more than double-digit growth in the quarter, continuing the trends from, you know, the first quarter. Now, going on behind the scenes, of course, of all that is the fact that we continue to invest. We're investing in M&A through the MSOs.
We're investing in the organic growth of the company. We're investing more than we ever have before this year, last year, the year before, you know, that as well. That's coming in the distribution nodes. That's coming in the acquisition of MSOs. That's coming in technology investments that we're doing across the board. What I want you to take away is that we're doing the right things now to set the company up for profitable growth, not just this quarter, this year but next year, three year, you know, five years out. We're making those investments now as everything's going on. Lastly, of course, we did raise our guide during our Q2 earnings. You know, for the rest of our fiscal year, we raised our EPS guide to $10.15-$10.35.
We raised the operating profit guide across all three of the businesses, pharma, as well as GMPD, as well as the other business. We also commented, of course, that we've got some good news below the line. Having completed our baseline share repurchase of $750 million, we updated our share number guide as well. We did comment that we see some discrete positives coming on the tax line, particularly in Q3, so we're able to take down our tax rate for the year as well. All that led to our raising guide.
Okay, excellent. You know, so let's start by diving into the pharma and specialty distribution business. You know, I think one of the challenges for us as an analyst and I'm sure for investors, there's a lot of moving pieces here, right? You know, if we go back a little over a year ago, you did Integrated Oncology Network and then the GI Alliance and then, you know, ultimately more recently, Solaris Health. I guess, you know, what I'm trying to figure out is getting a read on underlying operating income growth, excluding those acquisitions. I'm wondering if you can give us some characterization of how the core may be performing ex those acquisitions and what may be driving strength in the core.
Great question. The simple answer is we are seeing strong demand and strong execution even within the core of the business. While we are mindful of the fact that we have done significant M&A and that the M&A is contributing on an accretive basis to the overall enterprise, M&A for our year for the growth for pharma is about 8 percentage points, you know, of the profit growth, which means that our underlying core business, including our core specialty business ex the M&A, is contributing above our long-term target, you know, during the year. We had guided pharma up to 20%-22%, you know, profit growth. If the M&A is 8% of that, you see that indeed the core is growing faster. That is, we are seeing strength in our generics business.
Of course, we see consistent market dynamics all the time, whereas volume grows, we see good news there. We're seeing strong performance in the brand business and the consumer health business that we have across the Biopharma services business. Happy to talk more about those wherever you like but we are seeing good news across the entire pharma portfolio.
You know, on your recent quarterly call, you called out the lapping of the Integrated Oncology Network deal, right? When we think about the balance of the fiscal year, I mean, we still have the tailwinds. Well, we'll lap GI Alliance and then Solaris Health will continue to be a tailwind. Any other headwinds or tailwinds we should be thinking about for the balance of the fiscal year in these last two quarters?
From a timing perspective, we guided at the start of the year that first half profit growth would be higher than second half profit growth, really driven by a couple of things. First, we can't lose sight of the fact that we onboarded $10 billion of new business in the back half of last year. There's about $7 billion of that carryover effect of that in the first half of this year. The combination of the $7 billion of growth in the first half and lapping the $10 billion will bring us down from a growth rate perspective somewhat in the back half. The second thing, as you pointed out, is indeed we are lapping the acquisitions with ION and GIA. We didn't close Solaris Health until November and that's further out.
Indeed, we are lapping the acquisitions. To my point earlier, we do continue to invest across the business. While I'm not gonna call it any one specific investment, a part of how we have provided the profit growth for pharma for the back half of mid-teens is driven by the lapping of a couple of those items as well as some of the investments.
All right. I mean, look, can we talk about the M&A strategy? Because it feels like, you know, you bought a bunch of different types of businesses, right? And, you know, you talk about the MSO platform, and that sort of gets a lot of attention. And it feels like, at least the feedback that I get from investors, is it feels like Cardinal's acquisition strategy is maybe a little bit different than your two competitors. And I wonder if you can maybe opine on that and maybe, you know, put it in perspective for us. And then, you know, how do you think about the appetite to continue to do deals at the pace with which you've done them, you know, the past couple of years?
Well, I'm thankful that the investment community has noticed the difference in strategy because it is intentional. The old business school adage, if you're running everyone else's playbook, you're doomed to failure and that's not what we're doing. We've been purposeful in identifying where are our competitive advantages, where do we have opportunities to further take advantage of the assets we already have, by virtue of adding, you know, M&A to that. We identified three years ago at our investor day that we were focused more on the other ologies, not oncology per se but the rheumatology, gastroenterology, neurology, urology, nephrology, areas like that, where Cardinal has historically been one of the strongest, if not the strongest, you know, traditional distributor in GPO.
That's where we really started our focus, while importantly knowing that we need to be relevant in oncology. You've also seen us do acquisitions in the oncology space. That is why we started our M&A journey two and a half years ago with the acquisition of Specialty Networks. Specialty Networks was originally a urology-based, you know, GPO that then moved into technology in a way which we saw as being purposefully additive, not just to urology but we could do more with it in gastroenterology, urology, nephrology, oncology, et cetera. We acquired Specialty Networks, even though it wasn't an MSO, to really be part of the backbone of the upcoming acquisitions that we were gonna be doing. We've been delighted to do that.
GIA, in gastroenterology, they were a customer of Specialty Networks from a data perspective, even though they weren't part of the GPO and they weren't part of the urology network. Solaris was a customer of Specialty Networks, even though they weren't a broader part of the network. By the way, neither of them were. They were not customers of ours from a distributor perspective. We're really building an ecosystem around the therapy areas for which Cardinal has historically had reasons to succeed, you know, in that way. We're gonna continue to lean in in those areas. We've done a number of follow-on acquisitions in urology and gastroenterology, Urology America, you have Potomac Urology.
Those are some of the ones we've announced but there's a series of tuck-ins that go with those as we seek to increase the scale of those MSO efforts. Indeed, as we seek to along with the scale, really bring the operational excellence and the ways that we can create value for the community physician. Because I wanna emphasize, the other thing that we think we're doing different is we are starting with not with, you know, what can they do for Cardinal. We're starting with what can Cardinal do for the community physician. Because as you think about the regulatory environment in which we're working, right, it's all about how do we ensure that patients have access to care? How do we ensure that healthcare costs, you know, come down? How do we ensure that innovation is accessible, right?
We believe that we can be a productive participant in that and indeed, someone who's really supporting that effort by leaning in with the MSOs, by ensuring that we're bringing our scale in purchasing, our scale in contracting, our scale in distribution, et cetera, to the table. That's why we believe that the doctors are excited to partner with us from an MSO perspective. Now, where to from here, we benefit from a strong balance sheet, right? We have a disciplined capital allocation framework and of course, we'll continue to look at M&A while at the same time investing every dollar we can into organic growth, protecting our own balance sheet and also fulfilling our commitments to return capital to shareholders.
Okay. Maybe just a couple of quick questions on the core, back to that. I mean, how do you see any sort of volume volatility related to the macroeconomic conditions, shifting labor markets? You're starting to see a lot of layoffs getting announced. You're starting to see any sort of issues arise on the volume side?
Yeah, I can only point to our update to guidance again, which is in the first half. We saw a strong demand really across the portfolio and indeed, we raised our guidance at our Q2 earnings call and part of the raise to that guidance was the fact that we actually raised our internal expectations of demand, you know, for the back half of the year. Notwithstanding what's going on in the Middle East, notwithstanding, you know, corporate restructurings, notwithstanding, you know, changes to the regulatory environment, changes to healthcare coverage from the federal government, we continue to see strong healthcare demand, which makes sense to us, right? The demographics are in favor of the industry and that the American patient, we're all getting a little older and indeed, we're all taking better care for ourselves.
With the access that we're increasingly having to new therapeutics, we believe that we're in a strong demand environment.
Okay. All right. Maybe just shifting gears over to sort of the LOE pipeline sort of coming up. We hosted a panel yesterday with a consultant that we use in the space and one of the comments that he made is, if we look over the next sort of five years, he's expecting $200 billion-$300 billion of patent expirations in terms of total dollar amount over the next five years. That sort of compares to about $100 billion over the last five. No matter how you slice the data, it feels like we're about to embark on an uptick in sort of LOE activity and that's coming from a range of specialty to sort of complex generics.
Could you maybe talk about, you know, how Cardinal is positioned to take advantage of that, if you believe that's to be the case? I guess maybe more broadly, do you see that uptick on the horizon then? Do you think that, you know, Cardinal benefits just from its position in the supply chain?
We do benefit. We do see the opportunity and we are excited about what it can do both for our business and for the healthcare community, given the LOE that's coming. A couple additional thoughts. First is, we have had for many years, a strong collaboration with CVS in the form of our Red Oak Sourcing relationship. We believe that Red Oak is the number one sourcer of generic products around the world and that means that Cardinal has first access and best costs in the generic space. That is saying something, you know, given the relative scale. We believe that Red Oak is a competitive advantage for us and for CVS in that way. As we look at the LOE that's coming down the pipeline, you're right, there is a significant surge of LOE coming.
I'm not gonna comment on any particular generic good coming but I will observe that we make more money, typically on the generic goods. The revenue line is much smaller, of course, given the pricing but we make more profit on that on the absolute scale, you know, basis. We're excited about the generic trends, you know, that are coming and the opportunity it presents, you know, for all of us.
Are you more excited about the small molecule orals, the complex generics or the specialty? Is like one class of those drugs, you know, better for you in terms of this trend?
They're all part of the ecosystem. I mean, the small molecule has been around for a long time. I think the more complex, the biosimilars, I get questions a lot about as well. That is all part of the pipeline of what's coming and the economics are different based on how the various players address them. We see it all as opportunity. I'll use biosimilars as an example. We've been talking about it now for several years. That market is in early innings. It has not yet become, I think, that which everyone aspires for it to become from a utilization or an economic, you know, perspective. There's opportunity there for the future. Similarly, as more LOE comes through, we're gonna continue to optimize that, you know, for the portfolio.
But I wanna leave you with the point that like you were looking at the, you know, LOE pipeline, it's not coming as much, you know, this year or next year. It's in the back half of the five-year period you were calling out. But we do think it's a good trend supportive of our industry and our company.
Just back to the comments you made on Red Oak. One of the other things that we, you know, we've sort of come to the conclusion based on some work we've done with some consultants, is it kind of feels like generic pricing has gotten, I'll call it less bad relative to maybe where it was a few years before that. I'm just kind of curious, are you seeing that trend, like when you compare 2025 into 2026 versus maybe 2022, 2023, 2024? Does it feel less bad to you now versus a couple of years ago?
Yeah. We don't actually talk about our business in the same way as some of our peers do. As you look back through our earnings call commentary on the generic, you know, part of our portfolio, what I want you to notice is if we're talking about consistent market dynamics and we're talking about volume growing, that's a very positive sign. Consistent market dynamics for us is the code words for, you know, we're managing our portfolio to average margin per unit. If that is consistent really across the basket, that means that we're not having to deal with or we have successfully dealt with across the portfolio any rise and fall on a particular item or unit in that way. As long as I've been at Cardinal, every quarter it's been consistent market dynamics and growing volume.
We have not, you know, commented, you know, on anything other than that. It's really part of our guidance is that continuing on. Again, driven by the scale we have through Red Oak and just how we manage the business.
Maybe just, you know, segue in that conversation to the branded side. One of the concerns that we got, you know, later in the year and heading into the new year was the concern around the IRA pricing and some of the reductions we were seeing on the branded side or scheduled to see in 2026 and 2027. You know, investors ask the question a lot, do you feel like the distributors have adequately renegotiated their fee for service contracts in anticipation of those price reductions? Any sort of commentary to investors in terms of, you know, how well you feel Cardinal's prepared or how well those negotiations have gone to make the company whole for this price erosion that we're seeing?
I appreciate the question and I will observe a couple of things. One is we expressed confidence for months in advance of the 2026 IRA changes that we expected to retain the economics with our branded manufacturer partners, notwithstanding changes to WAC or other choices that would be made. You know, there was some skepticism on that but the good news is we actually put it in the headline of press release last time around. I believe that indeed we maintained the value of our economics. Here's the simple reason why. We are the backbone of healthcare and that we are buying things from, you know, thousands of manufacturing sources and distributing to tens of thousands of customers, you know, every day, right? We get a 1% margin on that overall.
There aren't many that wanna do that for those returns. It would require a fair amount of investment to replicate what we and Cencora and McKesson, you know, do in that way. We're very clear with the manufacturer community what it would cost them to try to replicate us. We give them that choice every year when we negotiate our contracts and they have thus far not taken us up on that opportunity. We continue to express confidence as it relates to 2027 IRA. Indeed, as we talk about 28 and other regulatory change where, you know, the words on the contract may change, the individual provisions may evolve, at the end of the day, we will be compensated for the services that we provide because we are an essential part of the American healthcare ecosystem.
We only got three or four minutes left, so I'm gonna do a little rapid fire here. Can we talk about the other segment? I mean, some of these businesses, the at-Home Solutions, OptiFreight, Nuclear, I mean, this is 20% of the operating profit of this company now and growing at an exorbitant rate. You know, some of that has been fueled by M&A but you're seeing decent organic growth. How should we think about how Cardinal prioritizes those businesses from an investment perspective? Help us think about the durability of some of the recent trends that we've seen in that business.
From an internal perspective, those businesses are anything but other, right? They are small relative to pharma and so from an accounting perspective, they aggregate together into other. I affectionately know them as other and we are investing in those businesses for the long term. We expect double-digit profit growth on an organic basis from each of those businesses as we carry it forward. Whether we're investing in $150 million into the PET network within nuclear or investing in the advanced theranostics capabilities within, you know, the nuclear business or investing in the technology and the capabilities within OptiFreight Logistics or investing in automation, new distribution nodes, et cetera, within at-Home to bring that cost down as we seek to optimize that business, you know, we are leaning in with each of those businesses.
They report directly to our CEO. They have access to capital they've never had before because we believe they are a differentiated part of our portfolio that we can drive growth on. Importantly, we also believe that each of those businesses can be supportive of and support the other parts of our portfolio. Part of what we're building is not how do we optimize five discrete businesses or the number of businesses below them but how do we optimize them in a way where they are supporting each other and creating more and offering us more opportunities for value creation across the portfolio.
Can we talk about Global Medical for a second? I mean, the company's been pulling costs out of that business. How much more opportunity is there to restructure and pull costs out?
We are really pleased with the progress in the GMP business over the course of the last couple of years. If you go back to our investor day three years ago, what we commented was, as we think about sources of shareholder value creation, right? What we could see at that time was we had a specific plan, the GMP improvement plan, led by growing the Cardinal Health brand, led by optimizing the cost structure, you know, led by a better customer service. You know, the core operational elements to make us the partner of choice. If we could execute against that plan, we could see that we would create more shareholder value by doing that than other alternatives we were discussing.
That continues to be the case, where we've now had a couple of quarters of good, well, a couple of years of good results against that plan, a couple of particular quarters. The fact that we raised guidance for GMP this quarter, I hope isn't lost on anyone. They continue to find ways to take cost out. We've certainly had some good results from a Cardinal brand perspective and we continue to lean in to drive success there.
Okay. A couple of financial questions. The leverage on the business, 3.2x. How comfortable are you? Do you feel like that's sort of the right number, you know, given all the M&A that we've seen? How active is the company sort of searching for M&A activities, you know, at the current time? Just given, you know, what you and all your competitors have done, are you starting to see upward pressure on acquisition multiples that maybe you're seeing in the marketplace?
Yeah. We have a disciplined capital allocation framework, which the most important word is disciplined and we hold ourselves accountable to doing exactly what we say we're gonna do. First thing we're gonna do, of course, is invest $600 million-$650 million organically in CapEx into the business every year. We have plenty of investments. We have internal competition for that capital and that keeps us honest internally. We've protected the balance sheet by bringing leverage down. As you called out, we've completed our baseline share repurchase of $750 million. After that, it's additional capital for either further M&A or incremental return of capital to shareholders. We have those options in front of us. As I said before, we've got a strong balance sheet. We 're in a great cash position.
We're gonna generate $3 billion-$3.5 billion, you know, of adjusted free cash flow this year and $10 billion over a couple of years. What I love is it gives our management team choices, right? We continue to be active in the M&A market for the right opportunities at the right price at the right time. Having acquired platforms within urology and gastroenterology, we don't have a need to pay a high multiple for more platforms in that space. What we will be interested is lower multiple, tuck-in, highly accretive, you know, acquisitions in that space. We can't forget other and the three businesses there or other parts of the portfolio where we will lead and support. If we don't see those deals, then we will do what we said, which is return incremental capital to shareholders.
Right. That's what I was gonna ask. If you can't find the deals, it's fair that you're gonna go above the baseline share repo that you already completed through the first two.
We always have that option to do that. It's part of the discipline we're applying through the capital allocation framework.
Okay, well, we're out of time. What I wanna do, I mean, it sounds like there's a lot of things going in the right direction. Maybe I wanna give you a minute just to sort of tie it all together. If there's any message you wanna leave the investors with here today. Just as part of that, is there anything that sort of keeps you up at night? Anything you're concerned about? Anything you're watching a little bit closer about? I wanna give you the sort of last word to close it out with you.
Yeah. You know, there's no escaping the fact that we're operating in a dynamic environment, economic, you know, regulatory, you know, business, it's as well. What I sleep well as a result of is the fact that we have a business that's got momentum. We've got a great management team that works very well together, that is able to grab the strands of our business, has great relationships within the industry. We have been able to drive growth across the entire portfolio, both from operational execution, importantly, as well as a result of demand. As we carry into future quarters, we're of course carefully monitoring changes that are out there.
With us being the backbone of the healthcare industry, as Jason would say, the beginning, the middle, and the end, increasingly across our portfolio, we have high hopes for Cardinal Health.