Cardinal Health, Inc. ($CAH)

My name is Allen Lutz, I run healthcare tech and distribution here at Bank of America. We are very excited to have Cardinal Health here. We have CFO, Aaron Alt and VP of Investor Relations, Dave Frost. I'm going to hand it over to David quickly for a quick disclosure.

Thanks for having us Allen, and it's great to be here. Before we begin, a little housekeeping. We'll be making forward-looking statements today, which are subject to risks and uncertainties that could cause our actual results to differ materially from these 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. With that, we can get started. .

All right. I think Aaron has some opening comments.

Great. Thank you all for being here. Before we delve into the Q&A, I just want to observe that having released earnings now just a couple of days ago. We feel really good about our Q3 results, right? We delivered a strong quarter across our enterprise. Our pharma business delivered profit growth of 18%. Our other business grew effectually known as other, our 3 growth businesses, grow profit more than 30% as well, and we continue to deliver against the GMV execution and execution of the GP improvement plan, which is critical to our overall efforts. . At the same time, we also had been progressing against our investments in the portfolio, really going against the strategy that we announced at our recent Investor Day, right? You can see that in the context of us continuing to execute on the MSO integration efforts. So clearly, we closed Solaris in November. We continue to execute against that along with doing tuck-in acquisitions in support of our strong, leading GI and urology platforms. We're investing in our nuclear health business as well. Our OptiFreight business really across the portfolio, we're making -- we're having -- we're investing before we need it, so to speak, from a profit growth perspective, so that we have the ongoing cycle of profit growth as we carry forward. We raised our guidance at the same time. Of course, we raised our non-GAAP EPS from $10.70 to $10.80. So you contrast that with where we started our year back from an Investor Day guide perspective, really shows the strong growth we've had driven by both operational performance and dare say strong demand, right, really across the portfolio. So we're really pleased with that as well. All leading to a business which we believe has momentum as we carry into our Q4, as we carry into next year, which I know we'll talk about as well. really driven by resiliency, which has been developed over time and the durability of our business model, we're happy to take that wherever you like.

Perfect. Thank you, Aaron. Really appreciate all that color at the top here. On the earnings call, you talked about broad-based strength in the business. We'd love to get a sense of those utilization trends. There were a lot of things that have evolved from 2025 to 2026. IRA, maybe a little bit of change in specialty trend, benefit designs, GLP-1s. We'd love to get a sense as we went from calendar '25 to first quarter 2026, was there anything about trends or pricing growth that surprised you as we think about going from calendar '25 to the first quarter of 2026.

It's a great question because there were a lot of moving pieces, and I would describe it this way. It all leads off with strong demand, which is what we saw across the portfolio. We saw it in our core pharmaceutical business. We saw it in our Specialty business. We saw it in Biopharma Services. We saw it in each of the other businesses, we even saw it in GNPD with the Cardinal Health brand growth. And so set aside revenue for a second, I'll come back to that in a second. Strong demand really raises the tide for the entire portfolio, and we were pleased to see that enabled by the strong execution across the portfolio overall. Now specialty, in particular, has been an area of strategic focus for us, and we grew still more than 20% in the quarter and indeed, year-to-date as well. And so we're seeing good strong trends within the specialty business as going forward. Now there's some distraction in the numbers, right? The distraction is not was not unexpected for us because we have been communicating now for several quarters that notwithstanding the impact of IRA as of January 1, we expected to maintain the profitability of our business. And indeed, that's exactly what we delivered as part of that 18% profit growth in pharma. The revenue line adjusted is WAC pricing came down. And there was some impact from GLP-1s, where continue to grow, but they decelerated from the prior quarter indeed from the prior year and sequentially as well, but they still grew. And so we had a 6% contribution to our 11% growth from GLP-1s offset by a 6% decline from the WACC pricing adjustments, along with what for us is favorable in the context of LOE changes moving from brand to generics. I know one of our peers competitors has commented that, that presented a challenge in the quarter for a different business model reason. It's a positive for us when something transitions from brand to generic. We sell both sides of that. It's actually more profitable for us on the generic side so long as we're getting strong volumes, which we saw. We had consistent market dynamics in generics, and that was a key part of the delivery overall.

Around the comment you made around the brand to generic conversion. Can you just remind us, do you have any large mail customer -- mail order customer that would have made a shift that could have impacted or taking volume out of your model.

No.

Good to hear. All right. So based on our math, you're growing organically in the Pharma and Specialty business above your long-term guidance of sort of this mid-single-digit plus EBIT growth. Can you talk about what is embedded in that long-term guide? And what are the reasons today that you're growing faster than that? And can you talk to the durability of that growth you're seeing today?

Sure. Let me cite a little bit of ground here. First, I should have pointed out in response to your question on first half of our fiscal year versus second half of our fiscal year, we were actually also -- we're also now lapping $10 billion of new customer volume. We took on a couple of significant -- more than a couple of significant customers in the second half of last year and the first half of this year. And so that is elevating the numbers beyond what can be expected from a long-term growth perspective. . The second thing that is in our view of the long-term guide from a pharma perspective, of course, we guide to strong demand because we can see the industry trends. We see the demographic trends. We see how Specialty is growing overall. -- but we're not going to guide to outsized demand, right? That comes and goes depending on the quarter, depending on a variety of factors. And so we guide and think about our long term, assuming the secular trends will continue, assuming the demographic trends will continue assuming our increased operational excellence and will continue as we carry forward. We do not, as we assume renewals of our customers. We aren't assuming anything losing, and we don't assume anything coming in. And that way, that would that would be adjustments here over time as well. But overall, when it comes down -- I want to come back to this, which is we believe strongly in our business momentum. We believe we have a strong business. We think we've proven it now several quarters in a row. We are executing well better than Cardinal ever has before. We're making the investments we need to, to be able to continue to deliver on that top line and bottom line growth across the portfolio, and that's what we're excited about.

I want to talk a little bit about your M&A strategy around some of the MSO assets. Your strategy is similar to your peers, but different in that some of the physician groups that you're pursuing, GI, autoimmune, neurology are a little bit different than oncology and maybe even retina, I'll probably just say oncology as maybe the main differential. But the physician groups that you're going after, a lot of them, I think 90% or the vast majority are not affiliated with an MSO. So it's a very different type of model in terms of M&A. Can you talk about the differences? Can you talk about that strategy first off? And then second, can you talk about is there less competition for those assets in the market, and is there anything else that's different that you think investors should be aware about as you think about Cardinal's strategy in that space?

We do not -- as a housekeeping matter, we do not forward guide right? So it's not part of our overall guidance. But we've been very pleased with the M&A we've done in the last couple of years. And just by -- in direct response to your question, we acquired purposely the largest gastroenterology MSO platform in the country in the form of GI Alliance. We then followed on that with the acquisition of 2 significant platforms in urology, Urology America and then we are now the proud owner of a majority stake in each of the largest gastroenterology platform and the largest urology platform and continue to do tuck-in acquisitions in each of those platforms along the way. I should point out, we closed GIA a year ago, February. So we've now acquisition. We only closed Solaris, the most recent Urology acquisition in November, and so we have not yet lapped that acquisition. So it will contribute to the positive growth as we move into the new year. But we remain very focused on continuing to build against the assets that we've acquired, right? And whether that comes in the form of tuck-in acquisitions or operating improvement. You might ask, well, why are you doing these deals here? And there's a couple of key reasons. First, Cardinal's strength has been in what's affectionately known by us as the other ologies, right? We are a presence in oncology. We have a nice strong business there. It grew in -- oncology, we grew 30% last quarter to give you a sense there. But we have the leading presence in urology and gasteroenterology. And that is consistent with Cardinal's historical strength in other ologies from a therapy area perspective. We put the community practitioner at the center of everything we do. We don't put the drug spend at the center of everything we do. And so when we're looking at acquisitions for MSOs or other assets around, what we're really building is the ecosystem to our benefit and to the benefit of the community practitioner around the data around the contracting around the back-office services around the procedure volumes around the offices, we love the diversification of revenue streams that comes from our presence in the MSOs in urology and gastroenterology. And indeed, even in ion Avista, which is our oncology platform as well. But of course, we're stronger in neurology and gastroenterology than we have been. And so our investments from a continued focus perspective, we will absolutely continue to look at smart tuck-ins in those platforms. We've done several of them, Jason talked about a couple of them in Q3. But we're also investing in the technology. We're investing in the process. We're investing in the team to ensure that when you have areas like gastroenterology and neurology, which are still fragmented, notwithstanding the fact that we own the largest platforms that we are the choice, right? The doctors want to come to us, right, not go to someone else because they can see what we're building from a platform perspective, they can see the benefit of the partnership that comes from working for us. Now there's a side benefit to this that isn't part of our deal models, but that's a very important part of our own strategy, which is if you take urology, for instance, right, it should not be lost on anyone that we were already one of the strongest, if not the strongest distributor of urology pharmaceuticals. We already had a strong presence in the MedSurg business, GNPD around servicing acute environments with Urology-related products. We're also the leading provider of at-home urology products. If you think about our Nuclear Precision Health business as well, radiopharmaceuticals, we are the leading presence in that space and many of the innovation developments that are coming in that space that we are very excited about are also urology-focused. Really what I'm trying to build here for you is a picture of an ecosystem within a therapy area, urology, gastroenterology, immuno-oncology, other ologies we're thinking about, that some of the pieces is greater than some of the pieces, I guess. I'm mixing my words there, but we see some real opportunity in parts of the portfolio helping to drive each other as we create that flywheel within specific therapy areas.

That's a really interesting point. I want to unpack that a little bit. As we think about the business today, is there any way to speak to maybe what I would assume it's not maybe as material right now, but the revenue contribution to some of those MSOs around urology and GI that you mentioned in GMP is GMP serving those clients in any material way? And is there any way to size that?

We've not provided specific disclosure on how any other part of our business is now interacting with the MSOs. But what I would tell you is that each of the parts of our business is asked to put their best foot forward in connection with the leadership teams of the MSOs. So we have to compete for the business. It's not a done deal if we acquire an MSO that we get to newer volume or we get the distribution volume when we get because we have to do the right thing. We have to put our best foot forward there it's not in our deal models, and we don't assume it from a business perspective. We have been blessed to on the pharmaceutical side, be able to announce that we have gained the distribution, the pharmaceutical distribution for each of guest GA and Soliris as well and the GNPD teams also put business in front of business opportunity from those teams, particularly on the ASC part of the world, which is an area where we have traditionally been strong. And so there's a fair amount of opportunity out there that we continue to mine as we carry forward.

I want to switch gears a little bit and talk about the SynXis business. At your Investor Day, I think it was maybe 11 months ago at this point. You said you expected to double the number of supported therapies by fiscal 2028. Can we just get an update on that business? How are trends there? Are you still on track to do that by fiscal '20?

We are very excited about what Specialty is doing, what Biopharma Services is doing and certainly the SynXis part of that portfolio for us has been delivering every day for us. In recent quarters, we've been able to announce the fact we've taken on several new customers, several big wins, Dupixent MyWay, for instant believe is 1 of the biggest programs in the industry. We recently picked up that business along a couple of significant oncology platforms as well and having taken on those 3. We have a large number of contracted to come on board as well. And so we're excited about what that business is doing. You might ask, well, Aaron, why is Cardinal being successful when others in the industry are exiting or selling and writing down the assets there? It's because that very investment cycle that I was referencing earlier, we've been investing ahead of need around technology and process within the hub business within SynXis. It's based in access and adherence. And because we had made those investments, we're able to serve in an efficient way that actually is good for everyone, right? Everyone is better, starting with the patient, through the physician, through the distributor through the through the pharmaceutical manufacturer. If patients get early access to the medications they've been prescribed, and they stay on the therapy the way they should, right? And what we are building and what we have built and what we are expanding rapidly in service of exceeding that very goal that we called out at Investor Day, is how do we continue to lean in so that we are the partner of choice for the pharmaceutical manufacturers around their patient access programs.

Really great to hear. And then before we leave the Pharmaceutical and Specialty business, I would love to get a sense, as we think about prescription trends in April and early May, is there anything about what you're seeing so far post quarter that's different than what you saw in the first quarter? Or put another way, the exit rate in March. How should we think about that versus what you're seeing so far in April?

I can't comment on April specifically. I can offer some observations by analogy. And in our recent earnings call, we did raise our guidance, right? We raised our guidance for the pharma business, for our other -- for the 3 components of our other business as well. and I provided some good insight without giving '27 guidance on how we're thinking about the long term. And it's really driven by the fact that we continue to expect strong demand, right? The demographic trends are there. The specialty trends are there. The operational performance that we've been building at Cardinal is durable and resilient as well. And so again, while I can't comment on April, what I would observe is that we have reason to believe in our business, reason to believe in our performance, and that's why we were able to both raise our guide for the rest of this fiscal year, we're in our fourth -- fiscal fourth quarter now and provide what I hope was taken as a very positive commentary around our long-term guide. Of course, we'll provide specific fiscal '27 guidance on our August Q4 earnings call.

Then moving to the GM PD business. Oil prices have been volatile recently, having an impact on raw materials. Can you remind us how your contracting works in that business and how any changes in commodity prices like oil and resin can impact your business.

The impact of oil on us in our Q3, and indeed, what we anticipate for Q4 has been very modest, right? And that's driven by a couple of things. One, it's driven by the fact that we have some contractual protections -- given the improvements we've made to the business from a contracting perspective, from a partner perspective, from our lanes we use, how we grow about our acquisition process since COVID, right? It's a better business than it was before, and that gives us more certainty and ability to control our costs, whether it's on oil or even things like resins, which we acquire on a contractual basis, not typically on a spot basis as well. So that brings some certainty to overall picture. We pay a lot of attention to what's going on from an oil -- and from a distribution perspective, as you can manage, right? We do feel diesel and gas costs into agree, but thus far, and certainly for our Q4, we don't expect it to be material to the enterprise. And then as we carry forward, given the resiliency we've built within the model, our ability to adjust how we're manufacturing, where we're manufacturing, how we're moving our goods as well. It means that we have the flexibility to be able to optimize our cost structure, and this is all part of the overall GNPD improvement plan.

And then on the Cardinal Health branded products, growth has been really strong there. You called out a new product recently. One was the SmartFlow intermittent pneumatic compression device. As you think about new products in your private label brand, how much is that contributing to revenue growth for the Cardinal brand product? And then you made a very interesting comment that GNPD is positioned around some of the physician groups that you're acquiring. Should we think about Cardinal having a real opportunity to expand private label in areas that directly support those specialties that you have relationships with in the other segment?

Let me start with the last part of your question, the first, which is what we are seeking to do in connection with the -- both the M&A we've done and with our raising our game across our entire portfolio is to make sure that we're not leaving opportunities on the table, right? And that my comment about the ASCs was an example of that, where if you think about our GNPD business, we have a significant share in the acute environment. We have not typically been as strong in the ASC world or the physician office. Nevertheless, as we are partnering more directly with physicians or with -- who are doing procedures in ASC, it certainly -- it would seem to be a smart move to pay more attention to where do we have opportunities that we have not traditionally gone after. And so I'm signaling is we're thinking about those opportunities now in a way that Cardinal has not previously done. It all as part of this comprehensive strategy across the enterprise, but Jason Holler has led us through at Cardinal Health. And so we feel good about that. Now more specifically with -- in connection with GNPD, and David actually has come to our IR function from the GNPD business and is the real expert here for questions after the fact. What I can tell you is we remain focused on innovation because it's an important part of our improvement plan. It's in areas where we can differentiate because we have the technology. We have the experience, it's surgical, presurg, things like that. And the example you called out along with other innovations, the nutrition delivery systems, for instance, those are places where we've been able to drive nice growth in partnership with key customers of ours. And we continue to double down and investing in how can we do more of that, because we have been clear along that growing Cardinal Health brand is a part of us delivering against our GNPD improvement plan, both for this year and for the future as we carry forward. Just by way of reminder, we grew Cardinal Health brand about 5% in this past Q3, and that was after we had shifted forward in Q2, a couple of percent points of growth as well, and we grew in Q2 at 10 percentage points. Again, with some of that growth shifted between quarters. And so we feel really good about the Cardinal Health brand revenue growth over the course of the last 5 quarters, actually.

And moving to the other segment. I want to talk about the nuclear precision business. You're lapping really robust growth in the Theranostics business that you experienced a year ago, or I think growth was north of 30%. But the pipeline, you talked about many products in the pipeline. So it seems like the momentum is still really strong there. How should we think about the expected growth rate of the nuclear business exiting your current fiscal year?

I love the other businesses. All 3 of them have no favorite children. But what I would tell you is from a -- the businesses we've actually now affectionately know is other Nuclear is a business that excites all of us because we are -- we have the leading market position. We are across the full value chain, across the businesses. And we only need a handful of the therapeutics coming down the innovation pipe to be successful for us to hit our plans. And you referenced the 70 that I had called out before. If you have more than a handful of that 70 over the next couple of years, that gives you a sense of why we're excited about the potential of the Nuclear Precision Health business. Now a little bit of further contextual reference points. A couple of quarters ago, we actually announced that we were investing $150 million to further expand and build out our PET network, right? And that's an important investment on our part because as that business evolves, we are increasing moving from what has been heavy SPECTS to much more have heavier volume and revenue in the PET and theranostic space. And you were referencing the Theranostics volume, it's both a diagnostic any therapy. We're excited about what we're seeing really across therapy areas and doing that, but now I'm going to take you all the way back I think back to my comments about urology because significant part of the innovation coming. And indeed, a good part of the business right now is also tied to urology and so it creates a further ecosystem of opportunity within Cardinal both for the nuclear precision health business, but then also in service of Soliris, right? The urology platform and also in partnership with other parts of the business that I haven't talked yet about in this presentation, if you think back to our first acquisition of specialty networks, right, which was focused on GPO, RWE, very data-intensive. Now that nuclear is partnered with specialty networks, we can actually drive even further goodness for Cardinal.

And then moving on within the other segment, OptiFreight Logistics, really strong growth and our checks on that business have been really positive. Can you speak to what is the industry growth rate within that business? And if Cardinal is growing faster than the market, where are you taking share?

We haven't provided a specific guide on industry growth rates on OPTI as yet. We have guided that, that business is going to grow dramatically as well. And we are taking share with an OptiFreight because we are the market leader in providing the logistics services that the acute environments and indeed now the pharmacy environments are after, right? And so as we have built out our technology suite around that, we are saving our customers, particularly in the acute space, a significant amount of money. It becomes obvious to them as to why they should be partnering with us in the OptiFreight space because they can see the savings on their own bottom line coming from partnering with us. It's a smaller part of our business from a revenue perspective. It's probably the smallest part. It is the smallest of our 5 reporting units in that way, even though it reports into our other segment in that way. But we're very pleased with both the business performance and the opportunity it presents for us.

And then moving on to the LRP, you made a lot of comments about the LRP and maybe a preview to some of the qualitative items that could impact fiscal '27 on the last earnings call. How should we think about the biggest swing factors to achieving your LRP in fiscal '27?

So I'm going to speak to the long term because, of course, I haven't provided fiscal '27 guidance, but there are a couple of things which are true about the long term, which are equally true of '27, which is we believe the trends are in our favor, right? Demographic trends, none of us are getting any younger, well, I feel like I'm getting younger, but you all be the judge of it. At the same time, specialty trends, people are taking better care of themselves. Again, as we age and that is helpful to our industry and our business model overall. The market-leading positions we have now will continue into next year in the LRP, and that's true across each of our businesses, and so we're excited about that. Similarly, we feel great about the operational execution we've built. We are performing better than ever before. Our service levels are higher than they ever had been across key parts of our portfolio. And what that means is, first, we're not leaving sales on the table, right, because we can actually serve the demand. But importantly, and this goes back to some of our earlier conversations about new customers, right? We have gained a number of significant new customers and aspire to gain additional new customers over time because they come to us because our service level is great and better than our competitive set, right? That is we have at least one customer who's been very public about the fact that why they transitioned to us and away from their incumbent is because we were serving -- they knew we would serve them better indeed that. So we are very focused on continuing that operating environment as a reason for why we'll be successful over the long term as well as in the short term in fiscal '27. Now it's also the case in fiscal '26 that we had some below-the-line benefit, right? And you haven't asked me about capital allocation or tax yet. Let me get out of the table before we run out of time here. We did see some nice benefits in our fiscal Q3 this year, some below-the-line benefits, really driven by the continued share repurchase we've done and tax benefits we saw in the quarter and the year. We had about a 10% tax rate in Q3. That was driven by some -- us realizing some multiyear benefit, also benefit in the quarter from our tax rate. And we're really focused on ensuring that our tax opportunity is durable over time. And so I wouldn't view the tax -- the updated guidance we've given for fiscal '26 at about the 19%. That's not -- that shouldn't be a challenge for us as we move into '27 because we continue to execute on ensuring that we have durable tax opportunities as we carry forward. And of course, in the context of capital allocation as we continue to do share repurchase, both that, which was part of our road map, the $750 million commitment we made. And now that we've exceeded that in Q3 was us announcing that we had already done $1 billion in the year, that is further reason for us to be able to deliver against our commitments.

And then you're kind of leading right into my next question on capital deployment. Your leverage ratio of 3x, it's in the middle of your target of 2.75 to 3.25x. How do you think about the outlook for capital deployment over the remainder of this year? Your stock has moved around a lot. Does the change in your share price impact the packing order of the different options that you have there?

First, let me observe that we have generated strong cash flow each of the last couple of years, right? And we actually raised our adjusted free cash flow guidance for the year on our most recent earnings call. We started the year, I think, about $3 billion. We're now up to $3.3 billion to $3.7 billion from an adjusted free cash flow for the year. That presents us with opportunity. One thing which hasn't changed in adjustments and 1 thing that is equally true as we carry forward is our disciplined capital allocation structure. First, invest every dollar we think we should into the business, and that's about $650 million this year from a CapEx perspective. We're on track with that. Second is defend the balance sheet if we need to do anything to get within our leverage ratio. We -- as you pointed out, we're at 3x the Moody's leverage ratio. And so we don't need to do more there, which then takes us to the next category, which is the table stakes return of capital to shareholders, we've done that. We did the $750 million. Indeed, we've leaned in and done now $250 million more in our third quarter. which then puts us in the opportunity and of, is there more investment to make? Is there more M&A to do? Or is there more opportunity for returning capital to shareholders? And while I'm not here at to announce anything in particular, what I would observe is that we have been consistent in saying we're going to do exactly what we said we're going to do. We're going to remain loyal to that disciplined capital allocation opportunity. We're going to find the highest and best uses of the cash -- the strong cash that our business is generating, and I look forward to talking more about that as we carry forward.

I want to sneak 1 last question in here. You raised the free cash flow guidance, as you mentioned. And that's despite all the different dynamics going on in the business, the IRA WAC price reductions, GLP dynamic. I guess, what are you seeing in the business that allowed you to raise that free cash flow guidance because I think that was pretty notable this past quarter.

Yes. We have been very careful to convey confidence in connection with the IRA changes that happened this past January and indeed, confidence in connection with the IRA changes that will come in the next -- this next January as well. And that is true both in connection with the income statement and the cash flow, right? We have been around for 50 years, right? We have seen a lot of changes in business models. We negotiate our contracts, suppliers and customers on a regular basis. In some cases, it's every year, in some cases, it's every 18 months, in case it's 2 years. But what I'm trying to convey is that we look at these negotiations in the context of any regulatory change as an all-in conversation. It's not 1 line, it's every line. And what that means is we're actually able to get ahead of it as we have done and as we will to ensure that we are being compensated for the services that we're providing and to ensure that we are generating the cash flow necessary to support the business model that we've built up over time. And so we feel good about the fact that in the quarter that the IRA changes happened we delivered 18% profit on a raised our guidance and we then also raised our adjusted free cash flow guidance, and that's the that's the signal I would give you about why I believe in the strength of our business in the durability and resiliency of our model and why we believe there is good things ahead for Cardinal Health.

Yes. That's great. It looks like we're out of time here. Aaron, David, thank you so much for the time, and thank you, everyone, for joining us.