Business Description
Cardinal Health, Inc. is a global healthcare services and products company that operates primarily through two main segments: Pharmaceutical and Specialty Solutions, and Global Medical Products and Distribution (GMPD). The company distributes branded and generic pharmaceuticals, specialty pharmaceuticals, and over-the-counter healthcare products in the United States, and provides services to pharmaceutical manufacturers and healthcare providers . Cardinal Health also manufactures, sources, and distributes medical, surgical, and laboratory products, and offers inventory management technology . The company has undergone a reorganization to focus on core operations and growth areas, prioritizing long-term growth and investment in its key segments .
- Pharmaceutical and Specialty Solutions - Distributes branded and generic pharmaceuticals, specialty pharmaceuticals, and over-the-counter healthcare products in the United States, and provides services to pharmaceutical manufacturers and healthcare providers.
- Global Medical Products and Distribution (GMPD) - Manufactures, sources, and distributes Cardinal Health branded medical, surgical, and laboratory products, as well as national brand products, to healthcare providers in the United States and Canada. Includes the Wavemark division, which provides inventory management technology.
- Nuclear and Precision Health Solutions - Offers specialized healthcare solutions, although not significant enough individually to require separate reportable segment disclosures.
- at-Home Solutions - Provides healthcare products and services designed for home use, contributing to the company's growth strategy.
- OptiFreight® Logistics - Delivers logistics and transportation services, supporting the company's focus on efficient supply chain management.
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Q4 2024 Summary
What went well
- Cardinal Health's Other segment, including OptiFreight, Nuclear, and at-Home Solutions businesses, presents significant growth opportunities, with investments in new distribution centers, automation, and expansion of the PET network and Theranostics opportunities.
- The Pharmaceutical segment is expected to achieve adjusted revenue growth of 15% to 18% in fiscal '25, driven by strong overall pharmaceutical demand and $10 billion of new revenue from new customer wins and expansions, including the Publix contract win, despite a $40 billion revenue headwind from the non-renewal of a low-margin contract.
- Effective management of supply chain and input cost increases, with freight cost increases being manageable and the supply chain functioning more efficiently, allowing the company to navigate cost pressures without widespread price adjustments.
What went wrong
- Cardinal Health identified a long-standing accounting error in revenue recognition within its at-Home Solutions business related to third-party payers, which raises concerns about financial reporting reliability.
- The company faces a $40 billion revenue headwind in fiscal year '25 due to the expiration of a large customer contract, potentially impacting overall revenue and profitability.
- Supply chain inflation and increased freight costs continue to challenge the company's margins, particularly in the GMPD business, requiring ongoing mitigation efforts. ,
Q&A Summary
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Margin Improvement in Pharma
Q: What's driving the margin improvement in fiscal '25?
A: We're pleased to raise our guidance for the pharma business in fiscal '25, reflecting confidence in our team and the resiliency of the business despite some challenges. We've increased profitability guidance to 1%-3% growth, supported by consistent market dynamics, low single-digit growth in core generic volumes, high single-digit growth in specialty, and strong overall prescription demand. We've added $10 billion in new revenue from new customers and expanded services with existing customers, offsetting the $40 million headwind from a low-margin contract nonrenewal. We also announced the Publix win, which won't hurt us as we carry forward. -
Specialty Pharma Growth
Q: How will specialty impact pharma growth amid contract loss?
A: Specialty is key to our continued growth next year. In fiscal '24, we saw another year of 14% growth in specialty, consistent with our prior 14% CAGR. Growth drivers include our Advanced Therapy Solutions, the new venture with CVS for Averon focused on biosimilars, and the acquisition of Specialty Networks. Despite the revenue reduction from the contract nonrenewal, we expect our specialty business to grow in fiscal '25, aligning with our long-term expectation of low single-digit profit growth in core pharma distribution and double-digit growth in specialty. -
Earnings Cadence and Customer Unwind
Q: How will the Optum unwind affect earnings cadence?
A: The nonrenewal of the Optum contract will impact our Q1, as they were a large low-margin customer. New customers are mostly back-half loaded, so we'll see a timing difference in revenue and profitability over the year. We're implementing cost optimizations and benefiting from contributions of Specialty Networks and new customer wins. -
Cost Cutting and Structural Changes
Q: What's the long-term benefit of cost cuts?
A: Operating in a 1% operating margin business, we're always mindful of our cost structure while ensuring customer service. Actions identified in Q4 help offset the near-term impact of customer loss and create a more efficient operational structure. Changes are broad-ranging and many have already been implemented, leading to long-term benefits as we support existing and new customers. -
Competitive Landscape in Drug Distribution
Q: Has the competitive environment changed?
A: The drug distribution industry remains competitive but stable—it's a 1% industry. The vast majority of contracts don't change hands period-to-period. We feel good about our competitive positioning, focusing on customer experience, service levels, value propositions, and tools like Interlogix and Atrix platforms. We're not just competing on price but offering value, which has helped us offset challenges. -
Freight Costs and Input Inflation
Q: Are rising freight costs affecting you materially?
A: While freight costs have increased, they're still much lower than during the peak a couple of years ago. The supply chain is functioning more efficiently now. We monitor and manage these increases tightly and haven't needed widespread price adjustments yet. Overall, we're managing better than before, with puts and takes being manageable. -
Supply Chain and Domestic Investments
Q: Are you investing in domestic manufacturing due to tariffs?
A: We're investing in a diversified, competitive geographic footprint, not limited to domestic. We have low exposure to China, sourcing less than 10% of our branded products from there. By enhancing supply chain resiliency across various regions, including nearshore and domestic, we're ensuring customers get the products they need. Investments are driven by volume opportunities and customer needs rather than just cost considerations. -
Growth in Other Segments
Q: What are growth expectations for OptiFreight, Nuclear, at-Home?
A: All three businesses are expected to contribute to double-digit 10% growth in fiscal '25. We're investing in each: At-Home has opened two new distribution points and is automating; OptiFreight is investing in digital platforms; Nuclear is expanding the PET network and exploring Theranostics, with about $100 million invested from fiscal '24 to '26. We believe in their ability to grow and benefit from secular trends. -
Averon and CVS Partnership
Q: Will Averon only serve CVS?
A: No, Averon won't just serve CVS. Similar to our Red Oak Sourcing model, we both have different needs and customers but can jointly benefit patients by combining capabilities. The structure is different, without the same payment schedules as Red Oak. Our distribution contract with CVS goes through 2027, and Red Oak agreement through 2029; Averon is outside of these agreements and exemplifies partnerships we seek with customers. -
Impact of Insulin and Biosimilars
Q: How do insulin pricing and HUMIRA shifts affect gross profit?
A: We've seen offsets due to insulin pricing changes from WACC adjustments at the beginning of the calendar year, impacting us until Q2 of fiscal '25. HUMIRA biosimilar penetration is starting but remains low industry-wide. Actions by companies like CVS are moving things along. We're focused on biosimilars and our joint venture with Averon to increase patient access to affordable therapies. -
AI and Efficiency Improvements
Q: What's your AI strategy for efficiency and savings?
A: AI is integrated into our operations broadly. Examples include Specialty Networks' PPS analytics, which synthesizes electronic medical records for actionable insights, and automation in our at-Home Solutions network, now at over 25% of sites. Platforms like Interlogix and Atrix, in partnership with companies like Palantir, enhance value. We focus on meaningful applications beyond buzzwords to drive our business forward. -
Restatement Impact on GMPD
Q: Does the restatement affect GMPD targets?
A: There's no comparability issue; the $175 million target is unimpacted by the revisions. Adjustments over the three-year period involved shifting income or expenses into prior periods. We've addressed a revenue recognition issue in our at-Home business, which is less than 0.5% of our revenue. Now, we have clean financials entering fiscal '25 to discuss our progress moving forward. -
Medicaid Disenrollment Effects
Q: Has Medicaid disenrollment impacted your business?
A: We haven't seen meaningful impacts from Medicaid disenrollment. Our broad customer base and payers make it hard to pinpoint reimbursement sources. Same-store sales show consistent utilization without significant fluctuations. Currently, these trends aren't driving our business materially.
Key Metrics
Revenue by Segment - in Millions of USD | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | FY 2024 | Q1 2025 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pharmaceutical and Specialty Solutions | 49,377 | 188,812 | 50,682 | 53,520 | 50,651 | 55,166 | 210,019 | 47,990 | |||||||||||||||||||||||||||||||||||||||||||||||
- Nuclear and Precision Health Solutions | 322 | 1,197 | 324 | 330 | - | - | 1,369 | 373 | |||||||||||||||||||||||||||||||||||||||||||||||
Global Medical Products and Distribution | 3,101 | 12,374 | 3,076 | 3,167 | 3,113 | 3,025 | 12,381 | 3,123 | |||||||||||||||||||||||||||||||||||||||||||||||
- at-Home Solutions | 654 | 2,640 | 684 | 761 | - | - | 2,869 | 739 | |||||||||||||||||||||||||||||||||||||||||||||||
Other | - | - | - | - | 1,167 | - | 4,512 | 1,186 | |||||||||||||||||||||||||||||||||||||||||||||||
- OptiFreight® Logistics | - | - | - | - | - | - | 274 | 74 | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate | - | - | -3 | -3 | -20 | -59 | -85 | -22 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | 53,453 | 205,012 | 54,763 | 57,445 | 54,911 | 59,708 | 226,827 | 52,277 | |||||||||||||||||||||||||||||||||||||||||||||||
Revenue by Geography - in Millions of USD | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | FY 2024 | Q1 2025 |
United States | 52,248 | 200,384 | 53,557 | 56,241 | 53,715 | 61,718 | 225,231 | 51,891 | |||||||||||||||||||||||||||||||||||||||||||||||
International | 1,206 | 4,639 | 1,209 | 1,207 | 1,216 | -1,951 | 1,681 | 408 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | 53,463 | 205,023 | 54,763 | 57,445 | 54,911 | 59,708 | 226,827 | 52,299 |
Executive Team
Questions to Ask Management
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Regarding the GMPD segment, despite the expected annualization of inflation mitigation benefits, can you provide more detail on how you plan to achieve the significant jump to $300 million in segment profit by fiscal year '26, especially considering recent input cost increases and challenges in passing these costs on to customers?
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In the Pharma segment, you anticipate a 4% to 6% revenue decline due to the nearly $40 billion headwind from the large customer contract expiration. Can you elaborate on the specific strategies and customer wins that will offset this loss, and how confident are you in the timing and ramp-up of these new volumes?
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You've highlighted the Averon joint venture with CVS to source biosimilars. Given that the joint venture extends beyond the distribution contract ending in 2027 and the Red Oak agreement ending in 2029, what are the financial implications and risks associated with this venture, especially if the underlying agreements with CVS are not renewed?
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In light of the restatement of GMPD financials due to revenue recognition issues in your at-Home business, can you explain the controls you have put in place to prevent such issues in the future, and reassure investors about the reliability of your current financial reporting?
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Could you provide more clarity on the expected growth and investment returns from your 'Other' segment businesses, particularly Nuclear and Precision Health Solutions, OptiFreight, and at-Home Solutions, and how these investments will contribute to overall profitability, considering the heavy investment periods and the timing of returns?
Past Guidance
Q1 2025 Earnings Call
- Issued Period: Q1 2025
- Guided Period: FY 2025
- Guidance:
- EPS Guidance: $7.55 to $7.70
- Pharma Segment Revenue: Decline 4% to 6%
- Pharma Segment Profit Growth: 1% to 3%
- GMPD Segment Revenue Growth: 3% to 5%
- GMPD Segment Profit: $175 million
- Cardinal Brand Sales Growth: 3% to 5%
- Other Segment Revenue Growth: 10% to 12%
- Other Segment Profit Growth: 10%
- Interest and Other Expenses: $140 million to $170 million
- Effective Tax Rate: 23% to 24%
- Share Repurchase Expectations: $750 million
- Share Count Guidance: 245 million shares
- Adjusted Free Cash Flow: $1 billion .
Q4 2024 Earnings Call
- Issued Period: Q4 2024
- Guided Period: FY 2025
- Guidance:
- EPS Guidance: $7.55 to $7.70
- Pharma Segment Revenue: Decline 4% to 6%
- Pharma Segment Profit Growth: 1% to 3%
- GMPD Segment Revenue Growth: 3% to 5%
- GMPD Segment Profit: $175 million
- Other Segment Revenue Growth: 10% to 12%
- Other Segment Profit Growth: 10%
- Interest and Other Expenses: $140 million to $170 million
- Effective Tax Rate: 23% to 24%
- Share Repurchases: $750 million
- Adjusted Free Cash Flow: $1 billion .
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024 and preliminary FY 2025
- Guidance:
- FY 2024:
- Non-GAAP EPS: $7.30 to $7.40
- Effective Tax Rate: 22% to 23%
- Adjusted Free Cash Flow: $2.5 billion
- Capital Expenditures: $500 million
- Diluted Shares: 247 million
- Share Repurchases: $750 million
- Pharmaceutical and Specialty Solutions Profit Growth: 9%
- GMPD Segment Profit: $65 million
- Other Businesses Profit Growth: 6% to 8%
- Preliminary FY 2025:
- Pharmaceutical and Specialty Solutions Profit Growth: At least 1%
- GMPD Segment Profit: $175 million
- Other Businesses Profit Growth: Approximately 10%
- Non-GAAP EPS: At least $7.50 .
- FY 2024:
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- EPS Guidance: $7.20 to $7.35
- Pharmaceutical and Specialty Solutions Revenue Growth: 10% to 12%
- Pharmaceutical and Specialty Solutions Profit Growth: 7% to 9%
- GMPD Segment Profit: $65 million
- Other Segments Profit Growth: 6% to 8%
- Interest and Other Expenses: $50 million to $65 million
- Effective Tax Rate: 23% to 24%
- Shares Outlook: 247 million
- Medical Segment Profit: $380 million .
Latest news
Recent developments and announcements about CAH.
Financial Actions
- Balance Sheet Impact: The creation of this direct financial obligation will likely increase the liabilities on Cardinal Health's balance sheet, affecting its leverage ratios and potentially its credit ratings.
- Financial Health: Depending on the terms of the loan, such as interest rates and repayment schedules, this could impact the company's cash flow and financial flexibility. However, if the funds are used for strategic investments or to refinance existing debt at a lower cost, it could also have a positive effect on the company's financial health.
- Balance Sheet Impact: The issuance of these notes increases the company's long-term liabilities, which could affect its debt-to-equity ratio and overall leverage. This could impact the company's credit ratings and borrowing costs in the future.
- Interest Obligations: The company will have to meet interest payment obligations on these notes, which could affect its cash flow and profitability, especially if the company's revenue does not grow as expected.
- Strategic Flexibility: The funds raised could provide the company with additional liquidity to pursue strategic initiatives, such as acquisitions or capital investments, which could enhance its competitive position and growth prospects.
Debt Issuance
Alert: Cardinal Health, Inc. (CAH) has created a direct financial obligation by entering into a Term Loan Credit Agreement dated December 5, 2024. This agreement involves multiple lenders, including Bank of America, N.A., JPMorgan Chase Bank, N.A., and Wells Fargo Bank, N.A., among others, with Bank of America serving as the Administrative Agent .
Potential Effects on Financial Health:
Please monitor for further updates on how this obligation will be utilized and its detailed terms to assess the full impact on Cardinal Health's financial position.
Debt Issuance
Cardinal Health, Inc. has recently created a direct financial obligation through the issuance of several series of notes. These include $500 million of 4.700% Senior Notes due 2026, $750 million of 5.000% Senior Notes due 2029, $1 billion of 5.350% Senior Notes due 2034, and $650 million of 5.750% Senior Notes due 2054. This issuance is part of a Second Supplemental Indenture dated November 22, 2024, with The Bank of New York Mellon Trust Company, N.A. as the trustee .
Potential Effects on Financial Health
Overall, while the issuance of these notes increases Cardinal Health's financial obligations, it also provides the company with capital that could be used for growth opportunities, potentially offsetting the increased financial risk .
New Share Buyback Program
Cardinal Health has announced a new buyback program as part of its capital allocation strategy. The company plans to finance its recent acquisitions, including the GI Alliance and Advanced Diabetes Supply Group, with a combination of cash on hand and new debt financing. Despite these financial commitments, Cardinal Health intends to maintain its share repurchase plans for fiscal year 2025. The company aims to pay down debt over the next 18 to 24 months while continuing to invest in growth opportunities and returning capital to shareholders .