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

Great. We'll get started now. Good morning, everyone. Welcome to the session of the Leerink Healthcare Crossroads Conference. I'm Mike Cherny, the health care tech and distribution analyst. Much more importantly, we have Cardinal Health CFO, Aaron Alt; and Head of IR, Matt Sims. Matt is going to 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. So 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 a 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 a few weeks past the quarter, obviously, a lot of moving pieces, both in terms of the fourth quarter implications and into '25. Maybe start with initial '25 look that you gave us. You put a floor in 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 what you're seeing from a market basis that gave comfort in that preliminary '25 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 '24. And it starts with our largest, most profitable business, which is now called PS&S, the older pharma business, if you will. And what we saw in Q3 and indeed what we guided for in Q4 was continued strong macro environment, right? We saw in Q3, strong performance on brand and generics and specialty and consumer health. And that's what helps us to deliver a 4% growth in Q3, lapping the 23% growth of the prior year and then allowed us to raise our guidance for that segment for this fiscal year, which is the -- we raised it to 8.5% to 9.5% growth for the year. Now you started the question by asking about '25, and we were very careful to, in our earnings call, call out the fact that notwithstanding the nonrenewal of our large, low-margin contract, that we still see good things ahead for the business. And so we were very careful to call out that we do expect to -- we expect to see, for the enterprise, continued EPS growth, but it also for the pharma business, our PS&S business, we'll do at least 1% in profit growth thereafter, notwithstanding the nonrenewal 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 '24 continues into '25, and we just expect to continue to run the progress.

And along those lines, just maybe starting from the growth perspective, and I know there's couple of hot button topics I want to make sure I hit. But one of the things you didn't mention on the core pharmacy side is specialty. I think you used last year's Analyst Day is a way to re-debut your specialty business. How is your specialty business progressing against your multiyear plan in terms of the contribution to growth? And any changes you expect in terms of recent launches, other pieces of specialty movement that can be positive/negative movers for the business?

Yes, 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're been growing at least with market, if not in excess. And as Jason and I have called out 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 2 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 to back that in a second. But I really want to emphasize that 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 with 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, the strategy that we announced back at 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 building a platform, not duplicating what others are doing in the industry necessarily. But through Navista, building a platform and a set of services and partnership with our key customers in 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. It's certainly helpful from a growth strategy perspective. We may come back to specialty, but I want to make sure before -- so we won't run out of time. A lot of questions recently the last couple of weeks on some changes in NADAC pricing, I think causing some confusion in the market. Can you just remind everyone what exactly your exposure is to changing data pricing dynamics? And how it does or, in most cases, does not impact your business?

Right. Right. I love the way you asked that question. NADAC is a reimbursement model, typically applied by state Medicaid agencies to largely retail independents. And there's been some stories recently about the methodology of the calculation of 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 going to 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 core, vital, important part of our portfolio and indeed, they are core, vital and important part of the health care ecosystem. And 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 our customers, including retail independents. So that platform, combined with the services we offer through our PSAO and other elements, where we're helping 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 independence, but we are not directly impacted.

And are there anything you're seeing on the broad-based, I'll call them, reference pricing, reference reimbursement dynamics. This quarter, we saw across the board, changes in insulin pricing and how it impacted revenue much more so than profitability. Obviously, IRA pricing doesn't effect in 2 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 multiyear growth target 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 platform, the fact that we're able to manage both the buy and the sell, means that across the portfolio that we manage we have stable 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 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. And I'm still surprised personally that Red Oak and the other 2 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 Cardinal Health, where we are both shareholders. And it has a twofold mission. The first mission is to ensure access to generic drugs. And the second mission is to ensure low cost. And so by virtue of combining our scale with CVS' scale, we are able to go to manufacturers together 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 in the platform. They have a strong data and analytics platform, which also allows us to see trends to allow us to understand how is the environment or the industry shifting from a purchase perspective. It also means that we have awareness of 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 position and we're able to see -- run some corners coming with an ever-changing industry.

Got it. It's really helpful. And just maybe jumping into a quick question on biosimilars. Clearly, the partner Red Oak, CVS has made some significant moves in 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 male drug, but how do you think about the push and pull of Cardinal driving economics on Part D versus Part B drugs?

Yes. 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 and the right time at the right cost. And whether it's the CVS platform you called out or things that we are doing, either individually or with our partners, we believe that biosimilars actually 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. We -- 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 your talking points or anything you want to add?

No, I think that was well said. The market is 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 price and 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.

And with traditional small molecule generics, there's something like right of passage of given the discount comps when you have initial generics [ as they're coming you're break open ], et cetera. Do you -- are you seeing that algorithm start to play out in any of the biosimilars you've got exposure to yet? Or is it that much of like 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, [ foray ] decisions, differences in AV substitution. I guess how do you think about planning for your own organization driving growth, given that it's not as simple as a straight...

It's a classic supply-demand environment where we have to make choices. Our choices may be informed by the formulary choices that others are making in the industry. And there will be winners, there will 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 -- similar -- while biosimilars are now 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, obviously, 3 disparate businesses that all have their own unique growth characteristics. As you think about resource allocation, you think about prioritization, how do you pick and choose the best ways to push resources towards each individual business on both inorganic and organic base 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 accounts tools 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 manufacturing and distribution sites. And we also have a significant investment in theranostics. And so whether it is in 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 and bringing innovation to that marketplace. Similarly, from an at-home perspective, the at-home business, has been kind of hidden away in our old Med segment as well, but it is on trend from a macro perspective because, of course, health care is now moving increasingly into the home as the 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, in our network. We've announced new locations and new distribution nodes in 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. And so that the customer has an easy journey to place the order. We can get it to them as fast and efficiently as possible, leaving our OptiFreight Logistics business, which is 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, in both the 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 traditional distribution play in that way. Now we are allocating resources to those 3 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 3 now report separately directly to our CEO. With that, reporting comes 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 3 of those businesses. I'll 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, we are doubling and tripling down on the technology we're building within Specialty and how our network is set up to efficiently move products within Specialty. And of course, M&A. 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 businesses as well. What did I miss? Good. Okay.