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

Okay. Thanks, everyone, for joining us today. Really pleased to have Cardinal Health here to join us. Cardinal Health, as you know, is a drug distributor, a provider of pharma-focused services and then operates some other interesting businesses outside of the pharma domain as well. With us from the company, CFO, Aaron Alt. Thanks for joining us; and David Frost, from Investor Relations. I believe David wants to read a prepared statement, and then we can go right into the discussion from there.

Perfect. Yes. Thanks for hosting us, Steve. It's great to be here. And as you mentioned before we begin, a little housekeeping. We will be making forward-looking statements today, which are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied. For a description of these factors, please review our SEC filings, which can be found on our Investor Relations website at ir.cardinalhealth.com. All right. Let's get started.

If I could give a couple of introductory remarks. So good morning, I see many familiar faces in the room. Good to see you all again. I'm looking forward to the cross-examination that will ensue over the course of the rest of today, knowing this crowd. I smiled as Steve was talking about our business because no doubt you've heard Jason Hollar and I now describing our business a little bit differently, which is we view our -- the portfolio we have and we're evolving to as being the beginning, the middle and the end of the health care ecosystem and we believe that we have an increasingly important and relevant role to play across the full spectrum of American health care. Now those of you that are paying attention to our business and our story know that we just delivered Q4 results, which were very strong, right? And they ended -- they capped a year for fiscal '26 for us, which was also very strong, driven by a couple of key parts of our business, certainly, the specialty business, which grew at double digits. We surpassed $50 billion in the year in specialty. That's a key sign of progress against our strategy. Our generics business was quite strong as well. But really, what we saw was strong demand across our entire portfolio in Q4 and indeed over the course of the year. Indeed, we saw outsized demand in the first half of last year as well. And so I want to be reflective of the fact that we have just released excellent results capping our fiscal '26. We also issued guidance for fiscal '27, which is above our long-range guide from an EPS perspective. If you think back to our Investor Day, our Investor Day EPS, adjusted EPS guide, I guess we call it non-GAAP here is 12% to 14% growth, and we guided fiscal '27 at 13% to 15% growth, driven by a couple of assumptions I'm sure we'll talk about, so I won't drain them now. But just to call out the fact that we are expecting a very positive year in fiscal year '27. That's partly because we're executing on the strategy we laid out. First Investor Day 3 or 4 years ago, most recent Investor Day, the strategy hasn't really evolved. We're doing what we said we would do, executing against it and reporting back, strong operational momentum. Service levels are at their highest levels ever across our businesses. We're executing against the integration on the MSOs that we've acquired over time as well. And we're investing against the growth businesses, which I hope we get a chance to talk about, particularly around the at-Home business, where we recently announced a couple of acquisitions. And so we're integrating those now as well. Coming back to really where I started, which is the beginning, middle and the end, and our business has proven to be incredibly resilient, notwithstanding economic factors, notwithstanding the regulatory change, notwithstanding uncertainty, we are able to leverage our full portfolio, and that's part of why we believe so strongly in the future for Cardinal Health. Over to you.

So did you like the description? Or should I change that for next year?

Well, I now call it the beginning in the middle of the end of that, but the 10-K has to govern there, I suppose.

Okay. Fair enough. All right. So maybe to start and expand a little bit on the point you made about Q4. When we look at the Pharma and Specialty Solutions segment, your segment profit growth there, obviously closed the year quite strong, at least on an underlying organic basis, it seems like to us, it's potentially a bit over double the normalized LRP for the business. Can you expand a little bit on the key drivers of the outperformance and maybe how you think about the components that potentially have the most potential to kind of recur and may become part of the business over the next couple of quarters still, maybe things that could have less opportunity for recurrence.

Sure, happy to. For us, the pharma business had a very successful year because we saw that strong demand in specialty, which is a higher growth part of the business, higher margin part of the business for us. We also saw strong demand, good volumes in the generics part of our portfolio. And when those 2 things are doing well, we are going to have a good month, a good quarter within the pharma business. But we also saw strong demand across all the other parts of the pharmaceutical portfolio as well, the core distribution, the consumer health parts of the business, specialty pharmacy, those were all humming during the quarter, and so we were delighted with that. We also got -- are starting to see the benefit of the acquisitions we've done. Now we have talked about the fact that we've onboarded the distribution across the MSOs. That is certainly helpful to the cause. We've been adding capabilities as well that are on a higher margin rate. And so the pieces of the strategy coming together have been what's really supported the profit delivery in Q4 and indeed for all of fiscal year '26. Now the guide for fiscal '27, you also asked about, and the good news is the strategy isn't changing. And indeed, the trends that we believe will drive to the good news, consistent with our guide for fiscal '27 are also tied into those same things, right? We are guiding strong but not outsized demand. You heard me say earlier that the first half of fiscal '26, we saw increased demand. That's not in our guide. We're assuming that the secular trends will continue. Prescription strength will continue, and we'll see strong demand across the portfolio. Whereas we are assuming excellent growth within the specialty portfolio as we talked about. Generics will continue to have the benefit that we saw in '26, right, the generic benefit, LOE, et cetera, '26 and '27 were both good. It really gets to be good in '28 and '29. We can talk more about that down the road, if you like. But we continue to see that as a positive factor, led just by operational execution and the momentum that we've built in the business.

Yes. That's a good place to take it next. Obviously, you provided guidance for Pharma and Specialty Solutions and helped us to break out the M&A components. We can kind of see the underlying there. And the underlying organic growth is at the high end of the LRP. And you're also noting at the same time that you're not assuming that, that necessarily requires any kind of above-average utilization environment, which I think is a reasonably prudent assumption. So as we do think about what allows you to be at the high end of the range without making that type of assumption, you may expand on that point a little bit more.

Well, we call the high end of the range for the first quarter in pharma, and that's driven in no small part by the fact that we will lap our Solaris acquisition in Q2. And so we want to be reflective of the relative timing of that. But also, we did guide 2% to 3% profit growth from acquisitions over the year, which is down from fiscal year '26 because we don't guide M&A that we have not already announced or completed in that way. And so we are not assuming in our guidance that we are doing significant M&A in the year. You're all aware from the excellent cash flow we had in fiscal year '26 and indeed the strong cash balances that we had at the end of fiscal '26 that we are blessed with financial flexibility such that we could do M&A on the right terms at the right price over the year if we found the right strategic asset. Otherwise, we will roll that cash back through our disciplined capital allocation framework and also be looking at additional return of capital to shareholders.

Got it. And then across really both your business and your competitors' businesses, there's a big focus at the moment on the timing of kind of large customer renewals. Obviously, that's a normal part of your business. You have business renewing all the time. I guess how should we think about the dynamics around kind of large customer renewals is different from maybe more ordinary course of business? And what's a realistic window for when the investment community might start to kind of learn more about how all this is trending?

Sure. I'm going to start with a general observation, which is we discuss, negotiate, collaborate with our suppliers and our customers every day, right? And contract negotiations are not a one and done. They're not a just in this 1-week period during the year. We have a constant rolling cycle of negotiations with both the suppliers and the customers as we seek to ensure that we're creating value across the full ecosystem. And so whether we're talking about the IRA, which wasn't your question, but I'm sure we'll come to it, or we're talking about large customer renewals. What I want you to walk away with is the understanding that we're on it, right? We believe we have a strong relationship with our customers. We are always focused on how can we do more for them from a service level perspective, how can we drive our own revenue and profitability by virtue of having a value creating, not just a transactional relationship with our customers and suppliers. And I would point out that during our fourth quarter, we did announce that we did renew the Kroger contract, which is our second largest customer within the pharma business, and we renewed the largest customer within our GMPD business. So there are a couple of data points that, to my point, indeed, we're on it and working on it. Now with respect to other customer renewals that are out there, I imagine you're probably asking me about CVS. And so I can only tell you this, which is we believe we have a strong relationship with CVS. We work with them every day to how can we better support them over the course of their -- the variety of their businesses. And they will ultimately decide when they renew their contracts. But we feel good about our relationship with them and indeed with our other large customers as well.

Okay. Fantastic. Thanks for that. Then you mentioned the generics business has been like a quite strong contributor to results. I guess how should we think about market dynamics in Red Oak and what you're expecting over the balance of your current fiscal year. And then as we start to think about some of the upcoming small molecule LOE kind of pipeline, like how is the company thinking about the cadence of opportunities in that business?

We view Red Oak as a competitive strength. Many of you have heard me talk about the fact that the dual mission of access and affordability is demonstrated by Red Oak to us every day. It's our joint venture with CVS that goes through calendar '29. So we got a couple more years on that as well. And we believe it's been a real benefit, not just to CVS and to Cardinal, but indeed to ultimately the provider and the patient as well because we are the largest purchaser. We lean in differently. We're willing to provide long-term commitments leading to that better access, better cost. And what that means is that when other people are short, they come to us, which is also a business opportunity for Cardinal and the Red Oak team as well. '26 was a positive year from a generics. While we had consistent market dynamics, which means that we're able to manage to the average margin per unit. That's how we manage the business. We saw strong volumes. And so that contributed to our profitability in a very positive way. And we are anticipating that unit growth within -- or the utilization within generics will be a touch above our long-term guide from a generic unit perspective in fiscal '27 as well. I commented on that in our earnings call. Where the real interesting thing happens, though, is in fiscal '28 and fiscal '29 because we see a surge of LOE opportunity coming. And so while '26 and '27 will be roughly equivalent positive versus prior years, '28 and '29 is where we will see some real benefit.

Got it. Well, maybe that's the right question to ask now is just when you think about some of these longer-dated biosimilar opportunities, I think you're alluding more to Part B than Part D, but correct me if that's not the right way to be framing it. I guess just how are you thinking about the ways that this potentially could impact the business, both maybe more of the what I describe, I guess, more of the core distribution business, how it could impact MSOs? And I guess how do you think about the interaction of like IRA on some of these opportunities and whether there's a potential chance that, that could dampen it or maybe enhance it in certain cases?

Yes. I mean, look, overall, biosimilars, we view as being a very early innings story for us. And David, why don't you take this one?

Yes. I think we've been relatively consistent with our communication on biosimilars. I think it's a profit opportunity for us. It's not one that has risen to the same level as some of our other profit drivers, which is why you probably don't hear us talk about it as frequently. But the performance would be a part of our total specialty performance, which Aaron just commented, FY '26 grew 25%, surpassed $50 billion for the first time. So a nice tailwind for the business overall. We view that as relatively early in its maturation. So I think it can continue to evolve, but it's a rising tide. So it has potential benefit for patients as well as our model and the ecosystem. As it relates to IRA, which you brought up and the Part B side of the house, I think still a little bit ways out before that will actually go live. So we'll need to see how it plays. But fundamentally, I think we believe that we're aligned with the administration's intent, increase access, increase affordability. And we don't believe that their intention is to impact community practitioners. The outcomes that occur at that site of care as well as the cost overall leads to a viable interest in maintaining its viability. So I think overall, we expect that to be something that is top of mind as we continue, and we'll have to see how that plays out. And then I think the third part of your question was our MSOs.

Yes. How do you think about the MSO potential impact financially?

Yes, yes. So I would highlight maybe just a couple of things. So the specialties that we have focused on within MSOs, notably within the specialty alliance, gastroenterology, urology, those MSOs have a more diversified revenue profile. So the drug spend component is a little bit smaller, roughly 1/3 in comparison to something like oncology, which might be closer to 80%, 90%. . So the overall exposure there, especially when you're looking at IRA's translation to that becomes a percent of a percent and isn't as material. But that said, we still are aligned to the overall intent that I was speaking to before. So I think the biosimilar piece is an opportunity for the MSO space. I think the IRA exposure is something that we're closely monitoring, but believe that the overall expectation is that we're aligned with the administration's goals.

Okay. Fantastic. And then as we think about another facet of the IRA, I mean, obviously, the company is pretty clear that 2026 cohort of IRA price negotiations were something that you were able to deal with as you recontracted with manufacturers and made clear the value provided is not changing as a result of these changes. I guess as we think about the future cohorts here of IRA, and I'm assuming these discussions are well underway for 2027 at this point, is there any reason to think that any of these discussions could ultimately result in a different outcome or equal level of confidence on 2027 at this point?

We are expressing the same level of confidence on the impact for January '27 as we did for January '26. And you're right, those conversations aren't yet to come. Many of them are already underway as manufacturers make choices and we talk about the knock-on consequences of if they're going to adjust their WAC, what does that mean for our overall contract because we will be compensated for the services we're providing, right? And we have a decades-long history of -- along with others in our industry of proving that those conversations can be productive to ensure that we are not negatively impacted by a manufacturer's decision to reduce the WAC price.

Okay. And then to come to the MSO business, I mean we touched on this a little bit. Obviously, you have a bit of a different MSO strategy than perhaps some of your peers more focused on therapeutic areas that have kind of overall less drug spend running through the practice. I guess as you think about strategically why these are the right fit for Cardinal, I guess, like how is that tracking relative to the initial business cases that you've built out and just generally like success attracting providers into these platforms and growing the business?

Yes. The MSOs are the downstream part of our specialty business. As you think about specialty as a whole, which is growing double digit at a higher margin rate for us, it's important that we be exposed upstream, also continue to grow our share within the specialty distribution core of who Cardinal has been historically and then downstream with the MSOs and the provider network as well, along with data, RWE, the other elements that go around it. That's a frothy ecosystem for Cardinal to operate in given the scale, the financial backing, the technology that we bring to that, both organically and through the acquisitions we've done. We are not quite to lapping the Solaris deal, which is our last large MSO acquisition that happens in November, I believe. We're a little bit over a year now within GIA, a little bit over a year within UA as well. And so we're heads down doing the integration across the businesses as well, thinking through how do we further advance our autoimmune strategy within MSOs and specialty more broadly as well. And so feeling good about where we're going and the potential that those businesses bring to the portfolio as we carry forward. Naturally, all of the dynamics we've already been talking about far as drug spend and pricing and doctors and the ecosystem and recruiting, to your point, those are all things that we're very focused on in building the plans going forward. But we continue to have the conviction that the MSOs by specialty area that we can help create a lot of value for the ecosystem and for the doctors by bringing our scale, by bringing the efficiencies, by bringing all those pieces together, but heads down focused forward.