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

Okay. I want to talk a little bit about biosimilars. I guess our Pharma team estimates about $175 billion in revenue that will go off patent by the end of the decade. Biosimilar is obviously a big part of what you do and some of the focus in terms of the profit contribution. But -- can you speak to where the greatest opportunity is from a biosimilar standpoint? How important are some of these biosimilar transitions as you think about the MSO business as well and the economics there? How do we think about some of the puts and takes? And then I guess since we're on that topic, let's talk about generics, too, like in terms of just the generic opportunity, how do you see the cycle different? Obviously, it's very different from the last cycle, many years ago in terms of the last generic wave just with generic purchasing consortiums and otherwise, but we talk about that.

A lot there. But there's a common theme to your question, though, I guess, at the same time as you step back and think about everything you just asked there, the reason why I suppose you asked the question that way is that you're talking about the innovation evolving to the loss of exclusivity, whether it's in biosimilars or generics. And that's kind of how we see it, too, where there's going to be some elements of variability. Some years are going to be stronger than others. Some products are going to have a greater impact than others. But this is not an environment where we see a singular product therapeutic area that's going to be outsized for our business and our business model, whether it's generics or biosimilars, it's not a triple in a home run. It's a lot of singles and doubles that add up to a nice base of business. So whether you're talking about our MSOs, our distribution, our Specialty business, our PVC business, they are all areas that we see more -- certainly opportunity with this. This is why we love innovation. Even if we don't have a rate of margins on day 1 with these -- some of these innovative products that go straight to brand. Longer term, we have opportunities for services. Shorter term, sometimes we have some opportunities for some of the services like our patient hub. But longer term, as they lose their exclusivity, these are almost always opportunities for us to then generate even higher margins, even higher profitability. And all the examples that you referenced, we see as being opportunities for our business. LOE, overall, you mentioned the biosimilar piece but also for generics, '26 and '27 are pretty constructive, pretty good years for LOE. 2029 will be a little bit better just by the nature of the cycle of the patents rolling off. So it will be for the next several years. And then, of course, you get after that and you start to get GLPs into some of the time horizons to think about. So as you look out for quite a long time, you see it being a pretty constructive environment, and it's why we have confidence in our long-term numbers. And we'll see if any of those themes and drivers can keep us to the upper end of that range. But the exact timing of the rollout of these and how many manufacturers participate how brand manufacturers react and how our customers and PBMs manage the process. These are all relevant factors, but we see more opportunity than not as it relates to both biosimilars and generics. And that environment continues to also remain quite constructive.

Okay. I want to shift to kind of policy IRA, drug pricing dynamics. I guess you've indicated the ability to maintain economics, for instance, this year, successfully with the price negotiations and IRA-driven changes. So I guess -- and that's kind of the nature of the fee-for-service model these days, but can you talk a little bit about how that evolves with potentially [ per B ] drugs kind of rolling into that as well as your exposure from an MSO perspective?

Yes. So overall, we continue to be very confident in our business and our model as it relates to any and all of those regulatory changes. And not only do we have good contractual protection for this, I'll say it's equally as important, it just makes sense. The compensation we receive is a 1% margin business when pricing changes. And by the way, we can't control pricing. So when something happens to the industry, it happens to us. We are providing a service, and we expect to be compensated fairly for that. And that service does not change as pricing changes, and therefore, we fully expect and have seen very clear, consistent examples of our economics been maintaining over that period of time. And there's nothing I see in '27 and beyond that indicates that there will be anything different. You're right, the MSO piece has a potential variable to that. And there's a whole discussion around that's not the intent of administration and everything that we're seeing is that they have sufficient off-ramps and opportunities to manage the community physician differently in this process and we suspect that will likely be the case. But even if it's not, it's not a material impact to our organization because of the diverse revenue streams that our MSOs have. Because of the breadth beyond yes, oncology but also the urology and GI, especially urology and GI, which are the bigger pieces of our MSOs, our drug spend is only about 1/3 of the overall revenue. The other 2/3 being split between patient visits, office visits and the procedures. So this diverse revenue stream gives us diverse margin within the practices and MSO that mutes any type of impact if there were some impact to their economic model, which, again, we don't anticipate at this point. So it's something that we certainly analyze many different scenarios and variables. We feel very good about the setup. We, of course, advocate, ultimately for the patients, the physicians to ensure that the administration hears this voice because it is the lowest cost form of care in the industry through these specialty community physicians. And that's where patients want to receive their care, is closer to home with that physician and not necessarily in some place that's far away from home. So well, we think it makes sense as well and that the administration will support that, but we feel good about any and all alternatives that go around that.

And on 340B, you noted that, I guess, the more meaningful exposure would essentially be for some of your, I guess, hospital customers in terms of their ability to fund procedures and patient access rather than your own economics? I guess, can you describe a little bit your exposure to 340B and where kind of some of those changes in 340B kind of could create, either volume dynamics that are a little bit different or different economics for you?

Yes. I think the important thing to think about as any type product class, whether it's 340B, GLPs, generics brand, specialty, all these product classes because the question that you're asking here is about the health systems. And typically, with the health system, we have a wide array of products with them. And we can't necessarily control where they choose to prioritize their business, their model. And so we have a lot of utilization protection within those different contracts and agreements. So the mix of products are relevant, but we try not to guess so much with that. We try to have contracts in place that allow the customer to have flexibility. And if they choose to really have lean in on one part of the business or another, then we shouldn't be harmed by that type of activity. There's always going to be normal volatility and there's some timing between when those corridors hit the utilization hits and then you have to have those price adjustments. But overall, I think the original comment you're referencing is what we think is most impactful to the industry would be how does this flow down to those that dispense these products? And does that change the behavior? And is there some type of volume impact for those particular patients that then, I think, people typically find care somewhere, and it may shift from a health system to a pharmacy or something else at a higher cost. We won't track that individual script. We'll just be present with all of our customers, and given our size and breadth and history, if we lose it on one spot, we typically pick up another. Our health system market share is pretty consistent with our peers. And so we're not unusually large or small in this space. So as that volume moves somewhere else, then we're in pretty good shape to pick it up. So overall, this is one about just being present for our customers and make sure we're helping them manage through any of these scenarios. And it's just not something at this point a lot to play out with 340B. So we don't know exactly where this is going, just highlighting that care finds a way of getting delivered at some point. And with IRA with [ MFN ], there's a lot of opportunities to make care more affordable as well. And so the net-net of that, we think, will continue to drive at least that 2% to 3% underlying volume growth for Generics and double digits for Specialty. And that thesis remains intact, irrespective of what's happening with 340B or any other particular product class.

Okay. I'm going to do a couple of GNPD questions and make sure we leave enough time for other, which I view is somewhat underappreciated. But on GNPD. So your guidance assumes modest tariff tailwind that will broadly offset, I guess, pricing fuel and commodity costs. What sort of price realization is embedded in your expectations from medical standpoint? And how does that flow through? And then also, if you could comment on just general underlying medical utilization trends, that would be great.

Yes. We're well into the tariff framework now where anything related to tariffs and pricing has largely been put into place. And so we took very limited types of increases. You may recall that we had a $450 million tariff impact last fiscal year, and we were able to mitigate 2/3 of that operationally through sourcing and other actions. So that remaining $150 million or so is what we actively split with our customers and then we refund -- will expect to refund that as we receive our tariff refunds ourselves. So a lot of activity there, but ultimately, a relatively small impact to our underlying business, given the $450 million starting point. So that's an important position. But but that half that we did price for that pricing remains in place, and that effectively covers the most of what would carry over into fiscal '27 as it relates to tariffs. Now the part that we highlighted at our guidance for '27 is that, well, you got a lot going on here with the Iran conflict that is putting pressure on oil-based products, whether that's fuel or some of the commodities and raw materials that go into the products. And that is something that is still in the early innings of the underlying cost, and we don't even know exactly where it's going. At this point, we certainly know some of the input costs. But first and foremost, we're doing what we can to mitigate it so that customers won't have to deal with this. We have not put in any significant pricing at this point related to commodities. It's something we're going to watch very, very closely. But the other key is that we have about a 6-month buffer because most of these products are -- have enough inventory that we don't have to react right away. We'll see what happens with the market, certainly. And we'll see about our ability to mitigate it. But that's a different question for a different day. Right now, we're operating with the mechanisms that were put in place earlier in this last year.

Okay. Okay. Great. So I want to switch gears to the other segment, which never gets enough airtime. The -- it was significant profit growth in '26, I think, 37%. You're targeting 15% to 18% AOI growth in '27. That includes about that 2% contribution from Strive, AdaptHealth, Diabetes transactions. I guess, what's driving then the underlying kind of growth that's now still well ahead of the long-term target of 10%?

Yes. We're really pleased with the performance of the business. Obviously, it came off of a really strong fiscal '26 as well. So it's another example of the continued momentum that the same level from a core perspective but above our 10% long-term guidance that we had originally put out there for those businesses. So whether it's nuclear with the theranostics growth continues to grow well above the underlying market or OptiFreight continuing their expansion, both on the medical side, but also now into new product categories like pharmacy, those are nice additions as well. The more significant incremental growth has been and will continue to be with our at-Home business because of the M&A piece, as you highlighted. Now the 2%, that's a part of that 15% to 18% growth, is driven by the strive and the expected very small benefit for what we would expect at the tail end of '27 for the Diabetes segment of AdaptHealth. But there's also the carryover benefit of the synergies that we have with ADS. So we fully lapped ADS, but it's good volume that when we implemented that. When we announced that transaction, we talked quite a bit about the synergies we expect that business to bring. So that gives us some additional opportunities in addition to a strong underlying core business there. But each 1 of the 3 operating segments within the other reporting segment is well positioned to grow and is a component of that growth.

And how are you positioning the business when I dig into -- at-Home Solutions, particularly on the Diabetes Care segment with ADS and others, I guess, how do you manage the potential change from a reimbursement environment standpoint, especially with competitive fitting? Potentially returning for CGMs and pumps, how do you navigate that end?

Yes. Well, first of all, let's step back and think about the administration's intent with competitive bidding. First and foremost, it's getting after fraud. We know there's a lot of fraud in that space. We know that we are operating at the highest level of compliance and regulatory attainment, and we feel really, really good about our leadership in that space. And the partners that we are aligning ourselves with through these acquisitions, we feel really good about how they have operated as well. So we are the leader in the CGM space, the Diabetes space already. This will allow us to continue to build even greater capabilities for administration. These acquisitions not only diversify our products, but also our customers and our payer set. So competitive bidding is just for the government payer and we have a much bigger business above and beyond that. So our leadership becomes even more clear. Our capabilities become even more clear, and we become an even more obvious partner for the government through competitive bidding to be a part of the solution. We anticipate that with or without these transactions, as a key leader in the space, that we would be successful in the competitive bid process, likely picking up share and likely having a lower margin for that share. But net-net, we feel really good at that trade-off. And you see very few people in this space willing to invest in it. It's a bit of a [indiscernible]. I can tell you that when we looked at Strive and when we look -- which drives urology, so it's not impacted at all by the competition. But when we looked at Adapt Diabetes business, there were a lot of choices with who to acquire in that space. We ran a process more than the sellers running a process because we wanted to make certain that we picked the right partner, and that absolutely is Adapt Diabetes team. We feel really good about the fit with their product set and our capabilities, and we feel really good about the culture and the people that will be coming along with that as well. Some work we've done. We have a few years until whatever impacts will be, will occur there. And along the way, we'll build up a bigger, better, stronger, more competitive, more efficient business that will allow us to migrate to whatever that outcome looks like.

Okay. And so as you think about the mix of your business longer term, is there anything else that you would reprioritize? You emphasize lean into a little bit more from a capital deployment standpoint. Any areas that you really want to build out more? We did see a competitor of yours by a CRO asset, for instance, maybe that fits their oncology strategy. But how do you think about building out -- like what is the focus? Is it building out in Specialties? Is it building on at-Home or obturator otherwise, that across the other segment and then the continued commitment to GMP?

It's a fantastic question, especially as we're getting closer to wrapping up here. And I think the key about strategy is it should not be done just annually. It shouldn't be -- also shouldn't change every single year. It should be something that you're always evaluating, always thinking about making changes, when it makes sense to make changes usually because something else changes in the market environment, maybe your own operations. Our strategy has remained quite consistent ever since our last reprioritization a couple of years ago. And that remains now the same exact prioritization. And I cannot imagine this is going to change for the rest of even our careers, and David, he's a lot a lot younger than I am. But Pharma and Specialty Solutions, it's by far the biggest, most impactful and important part of our business. It's where we prioritize organic and inorganic growth. Within that, we will continue to prioritize the core of the business. That strong foundation is incredibly important for all customers. You asked about CBS earlier, but for the big customers, especially, they want to see that we have a strong foundation, but also investing into areas like Specialty. We will continue to prioritize as the single greatest recipient of our investment outside of the core is going to be in the specialty business. It's still the fastest growing, highest margin part of the industry. And the reason why they have those attributes is solving a lot of customer and patient problems. And so we don't see that innovation slowing down anytime soon. And so I anticipate Pharma, with investments in Specialty, be our priority for a long, long time. The more recent reprioritization that we had on bringing other growth businesses to the rightful place as a close second to Pharma was intentional. And that's when we embarked on inorganic strategy as well. We saw that we had the foundation of each of those 3 businesses in a really great spot: OptiFreight, Nuclear and at-Home. And we saw that in this incredibly fragmented part of the market with at-Home Solutions, the direct-to-patient business, no one doing it really, really well, that this was a fantastic opportunity for us, not just to grow and expand the business. Those capabilities are bringing those supplies, those products directly to customers' homes fits very well with the other capabilities and strengths that we have in the enterprise. And so that -- those businesses, especially with at-Home and that inorganic investment was a natural fit. Now with our GMPD business, still an important priority for the company, but it's still in that turnaround mode, but we do see great growth opportunities like our Cardinal Health brand volume, growing at least at the mid-single digits now for 6 consecutive quarters, highlights that this can be a very good growth type of business for especially those higher-margin Cardinal-branded products that is a nice addition to our business as well, but not the same level of priorities as the others 2. And of course, those other 2 are the ones that are getting the M&A dollars, and that will continue to be that priority.

Okay. Great. Thank you so much for your time. I really appreciate it. Thank you.

Thank you.