Cardinal Health, Inc. (CAH) Earnings Call Transcript & Summary

So good morning, everyone. Welcome to the continuation of day 1 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the health care services analyst here at Barclays. Our next session will be with Cardinal Health. With us from the company, we have CEO, Mike Kaufmann; and also from Investor Relations, Kevin Moran is here within the video room here as well. So this will be a fireside chat. But I think, first, Mike wants to make some introductory comments. So welcome, Mike, and let me turn it over to you.

Thanks, Steve. It's great to be here. And thanks, everyone, for joining us. Before I begin, I do have to say that I will be making some forward-looking statements today. And as you know, actual results could differ materially from those projected or implied, so please look to our website for our SEC filings. Now I got that out of the way, I'm really excited about the first half of the year. We're halfway through the year, and we continue to be heads down here in the second half, executing against both our current priorities as well as making sure that we're doing the right things for the mid and the long term. As I look back at where we are through the first 6 months that we reported and talked about back in February, many of our businesses continue to demonstrate resiliently during the pandemic. I would say that's one thing about the COVID pandemic that, I think, should give people a lot of positive thoughts around drug distributors in general is the resiliency of the industry and, in particular, of our businesses, both on the Medical and the Pharma side. In Medical, we do expect to see growth in the low- to mid-20s for this year. Really, the big drivers for that, as we've talked about, is we've had a relentless focus on driving out cost and being more efficient and effective in our supply chain and in our overall cost structure, and that's going well. We also have seen some nice uptick from our lab business, which we can definitely talk about. And we've seen some increased PPE utilization during the first several months. And as we mentioned earlier in the first quarter, that COVID -- as early COVID assumptions weren't quite -- haven't played out quite as negative as we thought on our Medical business. And then on the Pharma side, we still continue to expect low single-digit growth. Pretty consistent story during the year. Volumes have been choppy, but we continue to see real resiliency in the business. So feel good about where we are after 6 months.

All right. Great. Okay. Well, with that, maybe we'll start with some questions on the Pharmaceuticals segment. So the vaccine rollout seems to be progressing faster than expected. Obviously, COVID cases are coming down. So that's certainly a positive for society overall, no doubt about it. Just curious to hear more about how this compares to your internal thought process around the vaccine rollout timing and success so far. And more importantly, with the context of your guidance for the remainder of fiscal '21, does this cause any biases to go to one end of the range or the other around the final 6 months of fiscal '21?

Yes, I'm with you. It's really exciting to continue to see the COVID cases coming down. But there's a lot of different things that we're currently monitoring. One, as you said, is the vaccine rollout. That's important to monitor. And hopefully, we'll continue to see more supply so that can ramp up. But we're also tracking the variations of the -- of COVID-19. Those are important to understand what's going on related to that. The number of people getting vaccinated is something that's maybe not talked about as much, but again, something else to be thinking about. While we might have vaccines, what percentage of folks are really going to get vaccinated and when is important. And I think lastly is the patients' desire. Even if they're vaccinated or they're not vacated, when will they want to come back into the system to actually get elective procedures done. So we continue to monitor all of those and really have been taking those all into account. And like we said back in Q2, we still believe -- we believe that -- as we said in Q2, that we should be at or near pre-COVID levels by the end of June.

Okay. All right. Great. Also just sticking with the Pharma Distribution business. So really across the board, across the whole peer group, we've had pretty good results over the last several quarters as far as just the core drug distribution operations. One thing that Cardinal does have that the peers don't is the nuclear pharmacy piece of the business. That's been a headwind. Hopefully, there's some signs that maybe that's starting to improve. I'd be curious to hear about that. And are there any other areas maybe in your Pharma business that maybe had some weakness that maybe now is also starting to improve? Maybe we'll just talk about that a little bit.

Yes, I think your observation is right. I mean as far as our pure Pharmaceutical Distribution business goes, I think it's tracking very similar to industry because, again, it's tracking very similar to IQVIA data, which is gathering the information from the industry. So nothing I would call out specifically to our Pharma Distribution difference. Our business that looks a lot different than what we're seeing in the overall IQVIA numbers and other numbers of data that we see. As we've said, the kind of the key things are overall volumes are down from COVID. And what we've seen is that it's been more negatively impacted generics, again, tracking towards IQVIA data, but generics seem to be down a little bit more than brand or at least the impact from COVID. We are continuing to see it to be choppy week to week. But as we've said, we still believe we'd be at or near pre-COVID levels by the end of June on pure PD. As far as the Nuclear business goes, you're right, that has been more negatively impacted, particularly in our Q4 last year was significantly impacted. It has bounced back, and we are seeing some slight -- we saw some slight sequential improvement from Q1 to Q2 on the Nuclear business. We did retain all the employees because we believe in that business over the long term and feel really good that we're able, as it continues to ramp back up, we'll be back in a very good position. We should have a very good compare in Q4. As a reminder, last year was our worst quarter for Nuclear. So this year Q4 will be a much better compare. We're also making some other investments in our Nuclear business in our Theranostics area, working with manufacturers. So we've continued to make all of those investments even during the low part of the volumes on the Nuclear business. And then our Specialty business continues to grow and come back. Each one of the ologies is a little bit different. So the mix between us and our competitors between oncology, rheumatology, nephrology, et cetera, could be a little bit different. We are seeing oncology come back faster than some of the other ones. So that could be a little bit of the difference that your overall mix difference is. But we're seeing all of them recover sequentially.

Okay. Yes. Since you did touch on the Specialty business for a moment there, obviously, that's also growing for everybody within the peer group. Just curious if you can see any opportunities to accelerate the growth in that portion of the business? I mean we also -- we've seen some of your competitors talk about some specialty drugs related to COVID specifically in the hospital setting. I'm curious how active Cardinal might have been in trying to sign some of those exclusive distribution deals previously? It may not matter now as COVID cases are coming back down, but just curious within specialty what you're looking at as far as just avenues of growth within that piece of the business?

Yes. Specialty is an interesting business. Folks lump a lot of it into like one big pile and think it kind of all the same. There's a lot of different components in there, right? There's a specialty business of the drugs that are unique going into the acute care hospitals. We compete very effectively there. We have significant share in the acute space, and we participate in all of those. There's specialty in retail. That continues to go well for us. We compete effectively in that space. And then as we talk about, there's the business that's going directly into the physician offices. We know we're a little bit smaller in that space. That's an area where we continue to focus on all of the ologies there. We compete really well. It's like nephrology and rheumatology, a little smaller in the oncology business, but again, growing in all of those. And then there's the upstream services. And again, we have different mixes. So for us, our third-party logistics business is a significant player. It's been winning at a very high rate and continues to do well, winning new customers there. We have a SciReg business that continues to compete well in the business place as well as a hub. So we continue to look at making investments in probably, I would say, first, in upstream services to pharma. We'll continue to look at opportunities there. If there was M&A to do and that was the right priority for us besides the at-home and some of the other growth businesses, upstream services, the specialty would be an area we would continue to look at if it had the right financials and the right cultural and strategic fit for us. But we -- so we see growth in all 4 areas of our specialty business. We're also continuing in that business to just look overall at our service offerings, how we focus on the customer and making sure we're doing all of the right things there. So overall, we feel good about our specialty business. Biosimilars is another area that we continue to take a look at across both retail and specialty, and that's an area where we also believe we're positioned well for growth in the future.

All right. Great. Just shifting to generics program for a moment. In last few conference calls and various presentations, you talked about maximizing all aspects of your generics program. Maybe you can just take a minute or 2 and just provide a little more color on what you're sort of planning to do incrementally as you're sort of talking about maximizing all aspects?

Yes. I'm glad you asked that. It's a great question. I guess that's really a phrase I would use to think about continuous improvement. As a company, we're always looking to maximize what we're doing and improve it and especially in key focus areas. And as you know really well following us for a long time, generics is a key driver for our overall business. So that's one you got to stay focused on. No different than making sure we're getting after cost. Focusing on the customers, as we've talked about driving our growth businesses. So when we talk about maximizing generics, it's, again, there's no news here in the sense that there's a piece of it that I'm concerns not working well. It's just that any kind of continuous improvement you can make can have significant impact. So I'll give you a couple of examples. So pricing. The more competitive intel we can get, the more we can work on our data and analytics to understand when and how much we should raise or reduce price and do it more accurately and quicker and better. Those are things you can do to drive -- improve your margin rates and maybe improve your share of wallet, which also improves your overall margin dollars in the business. Red Oak Sourcing. For instance, we just had a Board meeting again last week, continues to go incredibly well. We're constantly looking to that team on what can they do new in the areas also of data and the analytics to understand the supply chain to be ahead of any potential supply disruptions and continue to keep our service level industry leading. So I feel very comfortable to say that our service levels in generics have been best-in-class over the last couple of years, and it's really because of the work that Red Oak does. And so we're constantly pushing them, how do you stay ahead of understanding what's the next item that might be out of stock and how do we move and get to the right supplier, how do we drive more competition to get to the lower cost, et cetera. So it's really about making sure all the components of that program are operating at peak efficiency because it's one of the key drivers of our overall profitability.

Okay. All right. Well, we can't have a fireside chat without at least touching on the opioid litigation topic. Obviously, I'm sure you can't say much. I'm assuming talks are still progressing. It'd be major news I think if they weren't. But just I'm curious too, though, as you think about balance sheet capacity, capital deployment, do you have certain things that are on the whole around balance sheet utilization until a potential settlement is announced? Or -- we've seen some of your competitors do some pretty large-sized acquisitions. Just curious how the interplay is between potential settlement versus what you have sort of your normal capital deployment activities?

Yes. It's definitely a fair question. I wouldn't say anything is on hold. You always have to be disciplined when it comes to capital deployment. And we continue to prioritize, and investing in our core businesses is the most important thing to do to make sure that the portfolio of business we have is operating efficiently, growing. And hopefully, organic growth is important. And then second of all, as you know, we continue to say, we believe it's important to have an investment-grade balance sheet. So that's been very, very important to us. And we don't want to do anything that would not allow us to be able to pay back debt, as we've talked about. We've talked about that next -- towards the end of next year, fiscal '22, we have $1.4 billion of debt coming due and so our goal would be to continue to retire that debt as part of our overall balance sheet improvement. And then lastly, making sure that we can return cash to shareholders primarily through dividends. So those remain our top 3 priorities. So I wouldn't say anything is on hold. But we look at making sure that we can deliver on all 3 of those commitments. And then opportunistically, we're going to look at repo and M&A. And to your point, on M&A, if we see the right tuck-in and the right acquisition at this point in time, we feel like we can do it again. If it's got the right financial metrics, the right strategic fit and the right cultural fit, we will do that. But we just want to make sure we stay really disciplined overall. But don't feel limited at this point in time, but obviously, it's an important component to think about as the opioid settlement and making sure that we can manage through that.

All right. Great. Okay. Two more questions here on the Pharma segment, and then we'll switch over to the Medical segment. First, are there any updates on your profit potential related to biosimilars, particularly through your physician GPO assets? Is this an area where you're still seeing accelerated growth? Just curious to hear more about that.

Yes, we continue to feel very good about biosimilars in a couple of ways. One is we think that we have all the assets we need to be able to work with any of the biosimilar companies and continue to launch and work with them. So whether it's supporting them from services or being able to work with them through our various GPO initiatives, we feel like we can do that and have been successfully doing that. Overall, biosimilars generally are a little bit more profitable. They're similar to branded margins in general. But when you take a look at the ability to work with them in the GPO side, it does add some incremental profit capabilities or opportunities for us on biosimilars. We feel really good about. We do see it as a tailwind going forward. It just hasn't been that large yet to be talking about it. I do think one of the biggest opportunities that we really potentially drive more value for biosimilars is really interchangeability and on the retail side. So when some of the more retail biosimilars launch and if they do get an interchangeable designation, by definition, then Red Oak will be working on those with us, which means we will be in partnership with CVS to work on those through Red Oak. And so I see those as real opportunities for us to overall improve our margin dollars. I don't think biosimilar interchangeable products will be margin percentage-wise like other generics, but I do think it's an opportunity to improve margin dollars going forward. So we'll have to see how that plays out in terms of interchangeability. But we continue to see it right now as a slight tailwind year-over-year type of a thing going forward and feel like we're positioned well, and we'll continue to keep our eyes on interchangeability to see if it becomes even more of a potential upside for us.

Okay. Final question on Pharma. Just curious on the political front. Anything topical around drug price reform under the new administration that you're focused on that may impact your core business either positive or negative?

Yes. It's hard to say. It's still a little too early to know where things will play out. As you know, the good news is well over 95% of our drugs -- our margins on the branded side are not contingent to inflation anymore. So as far as legislation that may cause branded manufacturers to change WAC prices, the majority of that -- the vast majority of that impact has been obviously muted, by the way, the DSAs are now not really focused on inflation or the overall working of those. And so as we work through with the manufacturers, we also have had real success with some of these branded items launched as kind of branded similars where they've launched the brand equivalent at lower prices. We've been able to work through manufacturers already and demonstrate that as they change their WAC prices, we can work through that to be able to be fairly compensated. So it's always hard to say what the next type of legislation might be or that. But when you look at either the impacts of inflation or the success we've had working through these changes with Pharma, they've been great partners, and I believe we can continue to work through those over the mid to long term.

All right. Great. So on the medical side. So we're viewing the reduction in COVID cases and COVID-related hospitalizations as net positive for this segment of your business overall. So it should pave the way for greater elective procedures and non-COVID hospital utilization. So I guess the first question is, are you seeing any evidence in your order flow that COVID vaccinations and case count reduction is translating into an immediate pickup on non-COVID utilization. How is that tracking right now? Maybe get a quick update on that first.

Yes. It's a couple of things I would say. There's a lot of moving parts in Medical. Clearly, the more comfortable people are willing to come back into the hospital to be treated and electives ramp-up, that would be a net positive for us if we continue to see us get back or faster to pre-COVID levels. But there's also a lot of other moving parts in the Medical segment related to things such as the lab business which has been elevated because of testing. We continue to believe that it will stay elevated, but probably not at the same levels, the peak levels that it was at during the height of COVID. So we have to think through what is going to be the impact of that over the rest of the year. And obviously, when we come out with '22 guidance, we'll have some thoughts on that. We continue to look at the impact in other areas of our business, too. As far as PPE, again, we believe it will remain elevated, but probably not near where it was at the peak, our expense initiatives where we're driving on those and how we'll continue to drive those. So there's a lot of moving parts on the overall profitability. But at this point in time, all that stuff, again, as I go back to what we said in Q2, we still -- we would expect to be at or near pre-COVID levels by the time we exit the year in Medical, too.

Okay. All right. Great. Yes, I was going to touch on the COVID testing, which you already sort of hit on. I forgot whether or not, is that just a straight up distribution product for you? Are you involved in any sort of either putting kits together or some quasi manufacturing component on the COVID testing? Or is that just a pure distribution product for the company?

Well, overall, in COVID, it impacts us in a couple of different ways. As you know, first of all, obviously, the PPE that we both source and manufacture, we also manufacture syringes. So we have been obviously selling more of those. In the lab business, we're selling more of the reagents, the testing equipment. But we don't lay hands on folks that actually draw any other -- do any of the testing, but we are providing the folks that do the testing with both medical products. We are one of the largest kit assembling businesses in the world when it comes to medical products. So there are probably some kits that are COVID related that are being impacted in a positive way. So it's got different impacts across our business.

Okay. Got it. All right. Well, with that, I think we're out of time. So I certainly would like to thank Mike for his time today, and everyone enjoy the rest of the conference.

Take care, everybody. Thanks, Steve.

All right. Thanks.