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

All right. Good morning, everybody. I'm Kevin Caliendo, UBS Healthcare Services Analyst, and we are very happy on day 3 of the UBS Healthcare Conference to have management from Cardinal Health. With us today, Jason Hollar, CFO; and Kevin Moran, who is Head of IR. Kevin, why don't I turn it over to you.

Sure. Thanks, Kevin. Thanks for having us here today. During this fireside chat, we will be making forward-looking statements and our actual results could differ materially from those projected or implied. For information about factors that could cause our actual results to differ from today's projections, please refer to our SEC filings on our Investor page of our website. Thanks.

Thank you. Jason, I don't know if you want to make any comments?

Yes, yes. First of all, thank you for having us here. It's great to be here, and good morning, everyone. I will make a few comments. We just had our earnings release and call 3 weeks ago. So I'm not going to be providing any new information here, But I'm going to be able to provide some color that maybe appropriate to help you out. Within that earnings update 3 weeks ago -- I'll just do a quick summary here some of the key messages that we made at that point in time. Within the Medical segment, we did update our guidance to reflect the challenging environment that, that business is operating in certainly, with the supply chain constraints, inflation, we talked a lot about as well as some of the PPE volume. Within the pharma segment, we did not make any changes to our guidance with this update, nor have any changes all year long. We continue to guide towards the mid-single-digit growth rate of earnings for that business. With that said, we did highlight that we are seeing some operational cost increases, including the impacts of inflation in that segment as well. Unlike the Medical business, we don't have the same products. Cost inflation is more focused -- entirely focused on the transportation, logistics, warehousing side of that. So less impactful. It's within the range of the guidance that we had anticipated, but nonetheless, is a component that is unique and consistent with what, of course, all of the industry is seeing. Beyond the segment updates for '22, we also provided some updates as to some of our early reads on fiscal '23. And we thought that was important just because of the impact and the importance of all the impacts in '22 on the Medical segment. We know that our investors and analysts are trying to model out how that will roll through our P&L over the course of the next year or so. And we've done a lot of that work ourselves. Of course, we're very focused on inflation within the Medical business especially. And our current expectations and understanding, presuming that inflation starts to level off -- continues to level off and begins to reduce over the next year, is that we would expect to see similar to modestly higher impacts in '23, and that's driven by the timing. If you recall, in '22, the inflation really began in a much more significant way, not until the second quarter. So it's really the calendarization, the timing associated when that came on. So that was the primary update that we provided for '23 and wanted to provide that insight. We took the opportunity to talk about other puts and takes in the organization that were clearly less impactful, but still relevant for modeling purposes. As I mentioned already, the fiscal '22 inflation impacts that do impact the pharma segment. We would expect that to continue, of course, into '23. From a year-over-year perspective, that would be most likely more impactful in the first half of the year given those costs started to ramp up in the third quarter more for the pharma segment. But then beyond that, we also had the opioid legal fees that we anticipate going in the other direction that we expect that to be favorable year-over-year, given the national settlement that has now been reached. So we have some offsetting items there that we continue to evaluate, and we'll provide more detail here this coming quarter. Beyond that, we had some other corporate items that were puts and takes. Our tax rate, we would expect to be higher in '23 just because it's been running quite low for historical measures here this year related to some favorable discrete items that we would normally not model in to continue. But then on the flip side of that, we certainly have the carryover effect of our $1 billion of share repurchases that were completed in fiscal '22 to date. That will just naturally carryover into '23. But then we also have guided towards a similar level of repurchases for '23. So approximately $1 billion is what we're currently expecting for that. And so that would round out a lot of those updates as it relates to '23. So that's pretty much the entirety of the financial updates that we provided 3 weeks ago. We, of course, highlighted the progress on the national opioid settlement. We're very pleased with the participation that we've seen there, significant jurisdictional participation. It's reflective of the 47 and the 49 states that we now have an agreement with. So terrific progress there. And beyond that and to wrap up, we continue to have confidence in our ability to drive that sustainable profit growth in the business and believe our long-term targets are achievable. So now I'm sure we can drill into a lot of those details.

Thank you. Plenty to chew on.

Yes.

Let's start with the Medical segment. It's obviously the one segment that most people have been focused on. You said year-over-year, you expect it to be more due to calendarization. But let's just talk about the things that have impacted it, if we can segment them out, whether it's been the shipping costs, whether it's been transit costs, whether it's been your sourcing versus pricing. Can you segment the things that have negatively impacted you and talk through what could deviate to make those better or worse?

Yes. You just referenced the most important elements. And they've been relatively consistent all year. We -- last -- a quarter ago, we had $250 million to $300 million was the expected range of the impact for '22, and we did just guide towards the higher end of that range, so nearly $300 million. And that was because of continued increases in more of the domestic transportation, given that's one of the components that is a real-time cost increase. We don't inventory that cost. But the -- prior to that, the most significant items that we referenced before were the international freight as well as the commodities, the polypropylene types of items, a lot of oil-based commodities that go into our products. And those costs rose earlier -- late last year, earlier this year. But because of the types of costs that get put into the inventory, it takes a quarter or 2 before it actually impacts our P&L. Those were not a surprise because we incurred those a quarter or so ago, and so that did not change so much our guidance. So those are the big 3 areas. We do have supply chain constraints impacting our volume of our higher-margin Cardinal brand products to kind of round out the balance of that. But it's those 3 key areas: the international freight, the commodities and the domestic freight and other warehousing costs. Those 3 buckets are the biggest buckets and are relatively equally weighting between them. So there's not any one that overshadows the others.

Now you talked on the last quarter about taking price increases, and that might offset. I'm assuming that's now built into some of this expectation that you've talked about. Take us through how price increases work for you, who accepts them, how many have been accepted, where are you able to take price increases where are you not able to? And contractually, how does that work? Because I think there's a lot of confusion. We talk to hospitals or purchasers or GPOs, and they're like, "Oh, no, we're not going to take price increases." Or, "We push back on them." So there's some confusion just about how successful that can be.

Sure. And that's why we provided a number of different data points for this last third quarter so you can understand not only where we're at, but where we are going with this. So the -- we're focused on 9 of our key product categories. And so we look at all the competitive dynamics, and we focus in on those that we feel are the appropriate ones. And that represents about 50% of our SKUs in terms of overall underlying value of commerce related to the Cardinal brand. And so we're adjusting prices on the vast majority of our customers within those SKU levels, but at different phases. And so our first wave of price increases went into effect on March 1, a subcomponent of those 9 categories, and then we have another wave of pricing going in July 1, which rounds out the remaining part of those 9 categories. We would anticipate other price increases over the course of fiscal '23, whether it's those products or a broader set. And we continue to evaluate that. We look at all the variables and determine what makes the most sense. But we do expect a broad participation with that because as our financial results show, we have significant real costs, direct costs associated with all of these products. The products I described tend to have the commodity impacts as well as the freight impacts, and so they are the ones that are impacting our cost structure the most. And we do work with both the GPOs and the customers to that conversation. We've had these pressures all the way starting back last summer, and so we're putting in the first significant wave of price increase is March 1. So we've worked with our customers to try to find a path that makes sense. I think we're all debating about exactly how long these costs were going to be in place. It's clear that if they're not permanent, they're definitely at least longer term than originally anticipated. So we are trying to thread that needle appropriately, and we feel like this is the right way to approach it. We are also working with the supply base. We incur higher costs to provide our manufacturers and vendors non-Cardinal brand products. And so we work with them for additional fees to cover those costs as well. So it's really across the board types of efforts in all areas. And to really jump to the conclusion of where we think that will be, that cadence, one of the data points that we highlighted in the third quarter earnings call that we think is an important data point is we get there's a lot of moving pieces with that, and we're just ramping up now our pricing now. So it's going to be choppy and you're going to have some various movements over the course of the next 12 months. But by the time we exit fiscal '23, it's our intent to have that gross level of cost increases, that we would offset about half that. So 50% of those costs will be covered, so getting our pricing ramped up to that level by the end of fiscal '23 at a run rate basis.

If we were thinking about the costs as being 1 of the 3 buckets that you talked about for the sort of $300 million, would that mean 50% of $100 million? Is that the right way to...

The majority of the $300 million are cost-related items. And so what I'm saying cost in that category, the only thing it would exclude is the smaller, the 4 components, which is the volume impacts the supply chain constraints. All the other 3 categories which is primarily that -- close to that $300 million.

Okay. So -- if we're thinking about that headwind, so this is really something that net-net-net as we exit fiscal '23, it should really start to...

That run rate should be at a sizable improvement and even the supply chain constraints. It's excluded from that reference, but when you think about it, those should be better as well by the time we exit fiscal '23. And so I would -- I think it's safe to assume the aggregate $300 million plus that we're talking about. We're talking about a run rate of 50% of that total number.

Okay. I'm definitely going to get to the run rate question coming up because this is what everybody is focused on. But I just want to go through some of the variables first. Let's talk a little bit about transportation freight costs and that impact right now. Has it gotten worse? We see gas prices -- we can optically see gas prices, right? The shipping container stuff doesn't seem to have gotten better, but tell me if it has loosened up in any way, shape or form, we'd love to hear that, the latest and greatest on that. But has there been any difference from when you guided 3 weeks ago to what's happened now? We see gas prices higher every day.

That's right. I would say that what we're seeing is choppiness and remaining stubbornly high, but nothing, I mean 3 weeks, yes, it's a short period of time. It's also a long period of time when it comes to the volatility that we're seeing here. But generally speaking, those costs that we included in our guidance were at quite elite levels. And we, again, choppy and not too surprising where we're at right now.

As investors, what should we be looking at to help gauge how things are going? Is it the shipping container cost? Is it gas prices? Is there something else?

Yes. It's a very critical question and it's why we break it down into the components because how I described it is exactly the metrics I look at. I look at our cost to ship a container. There is some publicly available data. It's not the easiest to find, but fuel prices, transportation rates and then polypropylene and commodities like that. Those 3 key buckets or items that do have some external data points that can be tracked to a reasonable degree. Those are going to be the key drivers. Of course, we have a lot of other -- we have a lot of commodities in our products, but we focus on the oil-based ones because those are the ones that have moved the most certainly. But we do use other commodities that are elevated but not to near the same extent as oil-based.

And then just to reiterate, there is a lag time in a majority of those from the spot prices that you're seeing until they actually work their way through the P&L.

How long does that take?

Is 1 to 2 quarters for everything except for -- again, the domestic transportation and the warehousing costs. Those are expensed real-time, But everything to do with the product, which will be delivering the product in terms of the international freight as well as the commodities and those types of elements are the part that would be typically 1 to 2 quarters. It depends on exactly where it's manufactured, our stock levels or things of that nature.

Got it. We've talked about you taking price increases to mitigate some of these pressures. Is there anything to do on the cost side? Like can you -- is there any streamlining to do? Is there any other thing you can do here?

Yes. I'll absolutely answer the question, but I want to reinforce that the cost increases as it relates to inflation are so great that they cannot be mitigated entirely through other measures, and the right way to approach it is through product price changes and working with our customers to favorable mix and other opportunities to drive value. So we, of course, work with the customers the best we can to find a win-win arrangement within that. But ultimately, it will have to be covered by price increases. With that said, the other initiatives are the initiatives that we talked about before. We had the inflationary pressures, but of course, the urgency to get them done are even greater. I mentioned mix. Mix across the board for Cardinal brand products is a key part of it. Also, just our contracting strategies to ensure that we have more flexibility going forward and have the ability to match the cost and the pricing more real-time than what the current contracts allow. But beyond that, within the Medical segment specifically, there's also all the work that we're doing to simplify our operating structure. We continue to look to rationalize our footprint where possible. We've talked a lot about our international footprint. We've rationalized about half of the countries that we do business in. With -- the sale of the Cordis business was a terrific enabler for that work to be done. So we also increased last year -- at the beginning of the year, our cost savings objectives to the $750 million. We recognize the need to go aggressively there. So all those things will be needed to help impact it -- benefit it. But it's got to be ultimately pricing.

Okay. One last one on the components of Medical before we talked the numbers again. The PPE was such a big issue. We've seen the price of gloves come down. It feels like the traditional N95s and gowns and stuff have some up and stable. If that's a fair commentary, do you feel that from a PPE perspective, the write-downs are done largely from your perspective? Are there inventory issues? Do you feel like that part of the business is somewhat stable now and predictable in terms of the profits?

Yes. We evaluate that certainly every quarter. We look at our inventory levels, where prices going, of course, the cost of our underlying product. We did reference that. We have -- part of our guidance change for the Medical business was PPE volume and the contribution from PPE. Volume impact is not a very significant impact for us. PPE is just not a category that we've traditionally made significant margins on. It's not overweighted towards the Cardinal brand product. It's more of a commodity product. And so our margins have historically been fairly low on that product. And so when you look at just the volume changes, it's not very significant. But it is a category that's had a lot of variability over the last couple of years. We know that as the pandemic started, we saw costs immediately go up, but we saw prices immediately go up as well. And so there was a couple of quarters there last year specifically -- the beginning of last year, that we saw higher than typical margins for that category. And we called that out in terms of the price/cost timing, and we indicated that as a part of our guidance for this year that we would see the opposite happen as prices would start to come down as we expected. And we've seen those prices come down fairly consistent with what we had originally anticipated. The new news that we talked about last quarter -- at the end of the third quarter, was that the demand was very weak especially at the end of the third quarter. Underlying demand for our customers continues to seem to be quite robust. So we don't see that they're using anything less in terms of the products, but their inventory levels are certainly at the best positions that they've been since the pandemic began. So there's much more sufficient inventory out there. And so we're seeing some of our customers pull back on some of their purchases, and we certainly will evaluate that. So our volumes are lower, but -- and our cost remains high relative to the product that we bought during the pandemic. And so we continue to monitor to that. And every quarter, we take a write-down, if there is one. Are we -- so we -- as we entered into the fourth quarter, there was not the need for a significant write-down. And we evaluate that each period. Our inventory is a lot lower than where it was during the middle of pandemic. So -- and we wrote down a significant amount last year. So I can't say never, and that's something we'd look at every single quarter, but it would not be at the level that we saw at the end of last year is what our expectations would be. And again, the key point there is that we evaluate that every single quarter and look at those trends.

Fair enough. So we were looking at the consensus estimates for the Medical segment. I'm sure Kevin spends time looking at where myself and my peers come out for fiscal '23 on medical. And you provided more information last quarter than you ever have in terms of forecasting, if -- the Street numbers are as disparate as they may have ever been for your company, at least since I've been following it. One way people are looking at it and saying, okay, the last 2 quarters of fiscal '22, the run rate is about $55 million a year. Should we annualize that and then maybe add on some of the benefit you might get? What's the message that you want to let people know about thinking about how to model that business? Because right now, everybody is kind of all over the place. And at some point, we're going to have to figure this out. If -- is the message we should take, those -- that $55 million run rate, annualize it, maybe grow at a nominal rate and then try to calculate how much of that $300 million you're going to get back? Is that the right way to think about it?

Yes. So the reason we provide the clarity we did, albeit in just one key category is that we saw that ourselves, that there's a lot of varying views and we wanted to highlight the most assumption that we would believe you're modeling is the impact of inflation. And we saw huge variations of how different analysts and investors were thinking about that. So with that, similar to modestly higher impact, we're guiding to a $300 million-plus type of impact related to the inflation net of pricing and the supply chain constraints for next year. So that obviously means that we're going to be at more similar levels than not, right? And we saw some estimates that had a significant reversion back to the pre-inflationary levels. And I think there were -- in some cases, we were missing that there's that 1 to 2 quarter lag. So even if costs fall dramatically by December of this coming year, we would expect a muted benefit still until we get to '24. And so that's a timing aspect we thought maybe was getting missed there. We did not provide additional key assumption updates for the rest of the business. That's not -- there will be other puts and takes, of course, but this was by far the most significant and the one that we wanted to ensure was modeled, and we will need that time for this next quarter to look at the other variables. And we already talked about PPE. That's one of the items we need to see what the ending inventory levels are and let's see what the run rate is and the volume to be able to get a better perspective on that. Again, as a reminder, longer term, we don't think that, that will be a material impact for our business as it relates to that. But there will be some quarter-to-quarter swings that will be very dependent upon exactly how we enter and exit the year.

One way people have looked at it or thought about your business is saying, in 2019, you were doing [ $650 million ] of EBIT in this business. You sold Cordis, let's take that out. We've had this $300 million impact. What's the ramp? Like is the goal to get back to $600 million, whatever the net number is, ex Cordis? Is there a ramp to get back to that number? Is that achievable going forward? Do you -- in your mind, do you think this business can once again hit $600 million -- roughly $600 million of EBIT at some point in the future?

Absolutely. And the reason I can say that so clearly is everything that we said about inflation leads you down to that conclusion. When you look at the impacts of inflation and how we've quantified it, it's the key driver, the key distinction between where we were and where we're at right now. So as -- and then we've also provided clarity on the run rate as to where we believe that we'll get back to, again, 50% by the end of fiscal '23. We have indicated that whether it turns out to be temporary cost increases, which there's going to be an element that will be permanent, there's no doubt. But between the -- some of those costs like international freight specifically we don't think will be diselevated forever. But between that and pricing actions, we would expect to mitigate the vast majority of that impact eventually. And so that would imply that we get that all back. And of course, we're driving the business to try to get as many other offsets as possible.

Okay. We -- another question we get all the time is if management decides that this is structural and it's not going to improve for several years, would you contemplate monetizing the asset? Meaning is there -- there's obviously a private equity market for this. Medline traded at a very high multiple, granted a much different mix. They make a lot of their -- a lot more of their product than you do. But there would clearly be opportunity or interest in the business. Is it something that you would contemplate?

Well, first of all, I think it's important to just reinforce that our primary focus is we recognize we need to improve the performance of the business, very consistent with the last question. So that's where we're operating from each and every day. With that said, we are always evaluating our portfolio. We demonstrated that within the last several years. We sold our Cordis business, we sold the China business in naviHealth. We generated about $3 billion of proceeds for businesses that weren't exactly the right strategic fit for us. And we were able to redeploy that capital in a better use. When I think about the Medical business, we do have synergies with that business with the rest of our enterprise. We have a common customer set. We have, of course, your typical corporate overhead absorption that goes along with this type of business. But more importantly, we have centers of excellence that are specialists in this type of activity between our multiple different businesses. And we have expertise and cost advantages in doing so. But with that said, I think the primary message there is, as we demonstrated in the past, we always evaluate our portfolio, and we'll continue to do so in the future.

Why don't we switch to pharma? Much easier conversation, I hope. We've seen an uptick in volumes in this quarter, in particular in the last 7 or 8 weeks. We've seen better generic mix. I don't know what your guidance had assumed with that, but those are -- typically, that's a positive outcome. Is that fair to say that are you seeing similar?

Well, let me talk more broadly about volumes because there's quite a journey we've been on. It was certainly very choppy last year with impacts of COVID, but still a very resilient business. And so to the essence of your question there, we continue to see a good environment. We indicated last -- at the beginning of this year that we expected to get back to pre-COVID levels by the time we exited the second quarter, that is precisely what we did see. And then in the third quarter, we continue to see pretty very resilient types of volumes. So we're not providing any updates in that regard. It continues to be a very similar environment. And we're not seeing outliers one way or another with that.

Okay. The one topic that's come up, we hosted an expert call, it was almost a month ago now with a private company in your space -- private competitor [ Smith Drug ], who said that manufacturers on the generic side are talking openly about raising price, that their input costs are going higher. And this gentleman suggested that it could lead to generic inflation maybe by 2023, that the timing of when companies talk about doing it, to implementing it, to getting it through the purchasing consortiums and the like. Is that something that you've seen, heard, contemplated? Is that a realistic outcome?

Well, we really prefer to talk about the margin per unit. And what we consistently say is that we've seen very consistent dynamics within this space. There's perhaps a little bit more volatility than what they're typically could be. But again what we look is the difference between the price and the cost, and that continues to be very, very consistent for us. So we're not seeing any anomalies or any differences there. And whether 1 item is better for our business model than the other item, we really can't focus on just price or just cost. You have to look at both moving together. And those 2 continue to move together in a very similar way for us. So we're not seeing deviations there.

I just -- people focus on it because in 2014 and 2015, your pharma margins were north of 2%, 2.5% one quarter, I think they hit. And that's the time when generics were inflating. And I understand the pricing dynamics are different. The transparency on pricing, PBM pricing is different. But is there anything that could deviate that spread for you in terms of your profit spread per unit? Would generic inflation be a positive potentially for that?

There's just too many variables at play there to predict something like that. Again, what we're seeing and anticipating is that those continue to move in tandem with one another, and we don't see that deviating anytime soon.

Fair enough. That's helpful. What other puts and takes should we think about on the pharma side of the business for fiscal '23? I'm not asking for guidance or anything. You talked about it being very stable dynamic. But particular to that segment of the business, is there anything either Cardinal-specific or market-specific that you think would move from low single digit, high single digit or mid-single digit?

Sure. And part of the reason that we focused on some of the operational cost inflation elements and the opioid legal cost was in part related to how we saw some of the models being built and wanting to make sure that we had an open dialogue around where some of those key assumptions are. But those are also some of the more significant puts and takes that we would expect this coming year. We'll always have other variables. We haven't talked much today about just the growth businesses in general. That continues to be something that we both invest into as well expect more growth out of. So we have puts and takes on both sides of that, and we'll get into those types of items in a lot more detail, as we get into our guidance next quarter. But we wanted to really highlight those items that we think there was a bigger chance that people modeling them wouldn't have precisely right.

We always talk about the inflationary cost on the medical side. Is there a transportation fuel costs? I know that's all done on plane -- or almost drugs are done on planes. But you still are doing last-mile delivery and the like, how do we think about fuel costs and transportation costs impacting the pharma segment?

Yes. Yes, it is -- to your point, it's just on the back-end delivery of those products. So it's -- it does not impact our actual product cost as to delivery part of that equation. And that's a relevant item. We did call that out as a part of the third quarter year-over-year changes. And we indicated that as a part of our updated guidance, that it's still within the range, but that was one item that was higher than what was expected at the beginning of the year. And something we, of course, monitor and track very closely. It's why we have other cost reduction actions in place. It's -- the pharma business is a component of the $750 million cost reductions that we have as an enterprise. That's why we need to continue to be aggressive there to offset as much of that as possible. And the pricing dynamics are entirely different within the pharma business, but there are opportunities within that large segment as well that we continue to employ also to be able to pass on where it's appropriate.

The $750 million, have you ever broken it out between medical and pharma? .

I don't believe we've broken it out in any specific way. But I think one way to think about it is as a whole enterprise program. When you think about the economic activity, it is overweighted towards the medical segment. We have the manufacturing, more of the sourcing, more of the transportation and logistics, there's more of that type of economic activity, more of the input costs that are the opportunity to take out costs. And so that's clearly an overweighting of the results we've had to date and future opportunities as well.

If we were to think $750 million, how much of that do you think actually ends up hitting the EBIT line? I mean so much of it is just offsetting pressures. But some of it, I'm assuming you think will end up as a positive good guy.

Well, first of all, it's important to recognize that we started this 3 years ago, so we're a good way into it. And to your point, given the -- what happened with the generic pricing early on in this program, that's part of the reason why we needed to do this. But also part of it is to mitigate these other items within Medical. So we -- our objective is for some of this to certainly hit the bottom line. But with the challenges that have occurred last couple of years, certainly, that's been covering some of those shortfalls.

This leads to be an interesting question because we've seen one of your competitors put out long-term targets, and their stock benefited from that at their Analyst Day. Another company is going to have an Analyst Day next week where I think they're going to provide long-term targets as well. You're sort of in this place now. I know fiscal '23 is coming and you guys have been dealing with maybe a lot different issues than your peers have. But is there a thought that maybe we're going to reestablish some new longer-term targets once you get through the 2023 guidance?

Well, earlier this year, we did provide some elements of the long-term targets in terms of low to mid-single-digit growth for the pharma business and mid- to high single-digit growth for the Medical segment, culminating in a total earnings per share and dividend growth of double digits. So those are how we started that conversation, and we recognize the need to provide some more detail behind that and how we get there. But it's a lot of things that we've already talked about today. The key is -- within that is we referenced that it's over a normalized period. So for example, back to the inflation, both down and up, we would not expect that to be covered by something like that, but the core part of our business, again, probably lower growth in our core distribution businesses. But for each segment, we have growth businesses that we would expect to be at the high end of that range. That brings up that overall average. And then, of course, we have strong cash flow that would continue to drive capital deployment improvements, both ongoing interest reduction, as it relates to lower debt. And of course, our share repurchases being a key driver of earnings per share growth as well.

And I think people want to know what the baseline is off which to grow. That's obviously the fiscal '23 number. And the other question we get a lot of times is -- and not that you get penalized for this, but I think there's -- we've seen other companies invest more in the faster-growing segments, the specialty on the pharmaceutical segment. I think there's this perception, whether it's a reality or not, that your peers may have more exposure to a faster-growing segment and thus, might give them -- give that business a higher multiple than they give yours. Take us through, is there an opportunity to invest and grow the specialty business on the pharma side? Is that strategically something you're thinking about? Is it -- would you want to redeploy capital to that?

Yes. So it's something that we are very focused on our capital deployment with other priorities. But within M&A, we have highlighted the opportunity for bolt-on acquisitions. If we were to do bolt-on acquisitions, it would be very much focused on our growth areas. And I think specialty would be right in that sweet spot of where we would look. There's just not a lot of opportunities in the downstream side of that. Upstream, there's certainly a tremendous number of opportunities to be able to provide more of the services side of specialty. But downstream, the -- we are very sizable, as it relates to the specialty distribution of our business. It is not at the same size of our competition, so there is a difference between that mix of earnings and that greater growing part of the business. But that is why we're investing organically in our biosimilars business, the cell and gene therapy. There's a lot of organic growth that we still have opportunities to drive. But for the time being, from an M&A perspective, it would have to be limited to the upstream piece.

Fair enough. Biosimilars is a topic everybody wants to talk about. I think most of our audience understands that maybe HUMIRA is not going to be a great opportunity necessarily for the traditional distribution channel. It's probably more of a PBM opportunity. But are there -- are you agreeing with that? Or... .

Well, there's still so much to play out with this. I mean, it's a growth opportunity for us. It's absolutely expected to be a tailwind for us for the foreseeable future. It's a key part of when we think about the growth businesses. This is a part that we anticipate being a tailwind for us. And I think we're well positioned, both again, upstream and downstream to provide value to both the manufacturers as well as those that are receiving the product and services. So I -- we don't really know exactly how that will all play out, but there's an opportunity for value to be created by being a part of that ecosystem, and we're well positioned for a long time to come with the nice tailwind.

So when you're saying that, were you talking about biosimilars in period or just HUMIRA?

Both. Both. I think it's a very generic statement, and it was intended to be.

Fair enough. I think we're all trying to figure out how certain biosimilars as they come to market, whether it's EYLEA might be bigger opportunity ultimately than HUMIRA potentially, just given the distribution channel that is...

Yes. And there's going to be a lot of gain through that goes into that and there's going to be winners and losers in terms of the exact process. The key is the breadth that we bring to this and the capabilities will allow us to play and be opportunistic when it makes sense.

One question we've had as your partner, CVS, has -- is looking to expand or potentially investing more in the provider side of their business. It's not a secret. They've talked openly about that. Is that an opportunity for you given you have a Medical segment as well? I know you don't do last mile medical distribution, but if CVS is doing it in their stores, is that an opportunity for the Medical segment? .

Well, I'll just say that we have a lot of relationships of the business with CVS already. Obviously, a very large customer, a partner with Red Oak Sourcing. We've proven that we can work together very, very well in a win-win relationship. And so we'll always be wanting to return any and all phone calls that come with that customer and bring our own ideas to the table. But I'm not going to go into specific types of actions.

Fair enough. We had a question about your nuclear business. This kind of popped up a little smile on your face, I think you know what we're asking. But there was talk about a shortage of contrast agent, I believe, coming out of China. You obviously have a very large nuclear business. Is this in any way impacting you guys? Or if you've heard about this? That's only come up in the last couple of days.

Yes, yes. We've heard about it. We've had some questions ourselves. It is not a direct issue for us. We have a breadth of products that we provide for these types of needs. So we have alternative radiopharmaceutical products that can be utilized. So we don't believe that this will be an adverse impact to our business. And so we're [indiscernible] done in the same place.

Fair enough. Another question from the outside. Do you -- when you look at the pharma growth long term, it doesn't really imply much in terms of margin change, meaning it sounds like the top -- your EBIT growth is going to match your -- the revenue growth. Is that a fair way to think about it? Or...

No, I think revenue growth will be higher than EBIT growth. Just by the nature of the brand, margins are lower and that will be a higher revenue growing impact. So I think there's going to be a mix element there. We focus on the underlying profit growth. And of course, the cash flow that goes along with that as well.

Great. Okay. That's helpful. Well, gentlemen, that's it. And if there's any other final messages or any other comments, anything that we missed?

I don't think we missed about reinforce one more time. We're very focused on, especially the challenges that we're seeing in the Medical segment. We recognize the importance there of getting that business back to where it once was, very, very clearly stated here today. And then, of course, we're very focused on diligent capital deployment in a very productive way with the lens of our shareholders. As we make those decisions and, again, have confidence in the sustainable growth of the business.

Well, Jason, Kevin, thank you guys very much, and thanks, everybody, for joining us this morning.

Thank you.