Cardinal Health, Inc. (CAH) 41st Annual J.P. Morgan Healthcare Conference Transcript

Cardinal Health, Inc. (NYSE:CAH) 41st Annual J.P. Morgan Healthcare Conference January 9, 2023 1:30 PM ET

Company Participants

Jason Hollar – Chief Executive Officer

Conference Call Participants

Lisa Gill – JPMorgan

Lisa Gill

Good morning. My name is Lisa Gill and I’m the healthcare services analyst with J.P. Morgan. It is with great pleasure this morning that we have with us Cardinal Health. Presenting for Cardinal Health is CEO, Jason Hollar. Post Jason’s presentation, he and I will sit down for a quick fireside chat. Jason?

Jason Hollar

Thanks, Lisa and good morning everyone. Thanks for joining us today. Let me get a few things out of the way here before I begin. I will be making forward-looking statements today. These forward-looking statements are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected or implied. For description of these risks and uncertainties please refer to our Investor Relations website or to our SEC filings.

So let’s get started by going through a little bit of background for those of you that are a little bit familiar to Cardinal Health. We are essential to healthcare and we have the privilege of serving one of the broadest, widest range of customers and partners in the industry. We are a crucial link between the clinical and operational aspects of the healthcare ecosystem and deliver end-to-end solutions to our customers that advance healthcare and improve lives of the people every day.

And we have scale across the spectrum that you see on this slide being relevant in each of these categories. Whether you are talking about the several thousand manufacturers that we work with every day or the tens of thousands of pharmacies that we provide products to, or the millions of patients that are in the home, we have scale across the spectrum.

But in addition to the scale we’re also aligned with a lot of the key secular trends in our industry. Let’s start with patient demographics. We all know the stats. Americans over the age of 65 the real sweet spot of the healthcare industry is expected to increase by nearly 50% from 2020 to 2040 and that creates an interesting opportunity for us. Obviously there is a lot of volume that comes along with that, but what’s also terrific about that volume is there’s much more resilient, stable, and predictable than what we see in other industries and this is a real boon to our underlying volume across many of our different business segments.

At the same time we’re seeing unprecedented levels of scientific advancement and new drug development. This of course creates opportunities for us, again volume is a key driver of that, but also brings with it other services and support beyond just the delivery volume into higher margin, higher value categories for our customers. Some examples of that will be of course new buy some more launches as the [indiscernible] move into new therapeutic areas and size of care, we’re well positioned in these areas as well as other novel therapies such as cell and gene. And underlying all these growth areas are the services and support that I referenced earlier such as our industry leading 3PL.

Whether it’s that aging population or COVID-19 or other value-based care models, we do continue to see the site of care shifting as well. And this is often to lower cost settings such as the home or ambulatory surgery centers, both areas that we have good scale in. Specifically to our At-Home business we’re now at nearly $2.5 billion and growing that top line very consistently at 10% per year as we continue to benefit from that shift of care into the home.

And then finally, as with other industries and accelerated by the pandemic, we’re seeing technological advancements results in the increased digitization of healthcare with a specific focus on creating a tech enabled supply chain which provides new data and analysts capabilities for both ourselves as well as our customers.

Now stepping back, as a result of these specific capabilities for Cardinal Health as well as the secular trends throughout the industry we’ve benefited from this growth over time and are now exceeding $180 billion in revenue per year while operating in more than 30 countries throughout the world and a team of more than 46,000 people. We’re organized into two key reporting segments. The largest by far is our Pharmaceutical segment representing about 90% of our revenue for the enterprise. The earnings for the Medical segment has been adversely impacted by inflation and supply chain constraints throughout the globe and I’ll get into some details shortly on the initiatives that we’re working through to improve those results.

So let’s start with a deep dive into the Pharma segment and within the Pharmaceutical segment I’d like to start with just reminding some of the recent highlights of some of the changes that we’ve made soon after my appointment in September. I appointed Debbie Weitzman as the new Pharma segment’s CEO and also announced a corresponding restructuring of the organization. We brought the specialty and pharmaceutical distribution team together under one umbrella which reduces complexity, improves both the speed and the quality of decision-making, drives productivity, and importantly provides an environment for direct accountability within the business.

At its core the pharmaceutical and specialty distribution business distributes branded generic and specialty pharmaceuticals as well as over-the-counter consumer healthcare products. As I mentioned before, we have a strong broad customer base from the largest retail chain customers to the smallest retail independent customers.

Specialty is a critical growth area for us, both in oncology as well as the other therapeutic areas such as rheumatology and in addition to this recent services we brought other service capabilities as per our customers offerings such as our GPO services as well as technology capabilities like our new CTS technology platform.

As part of the restructuring that I referenced in the Pharma segment we did create a more focused team for creating the sourcing and manufacturing services organization. This takes a holistic approach with manufacturers from the development, commercialization and distribution, more of the full-line supplier there and from a sourcing perspective of course we have our Red Oak Sourcing joint venture of CVS Health that has the dual mandate not only of controlling costs, but also to maximize the service delivery for our customers.

Beyond that we also support biopharma manufacturers, a full range of other services such as the 3PL I mentioned, as well as other services like data and evidence solutions, commercialization support and others.

Within the Nuclear business we do operate the largest network of radio pharmacies in the United States. Our core business here is getting those radiopharmaceuticals to the end user, but we’ve also recently extended the business to be more of an end-to-end innovation partner with our manufacturing customers. This is primarily through some significant investments that we’ve made in our Center for Theranostics Advancement in Indianapolis and we support these manufacturers through contract manufacturing and drug development.

This is a key part of our growth strategy for the Nuclear business, but we also invest in other areas like our [indiscernible] capabilities and other innovation and a combination of all those items is why we have confidence that we can double the profits of the Nuclear business from fiscal 2021 to fiscal 2026.

Final business there, our Outcomes business is that digital ecosystem that’s designed to build that connectivity across the industry landscape that I referenced on the first slide, connecting the manufacturers, payers, pharmacies and patients.

Now moving on to the Medical segment, I will start with the medical products and distribution. Here we manufacture, source and distribute our Cardinal brand portfolio of products, $4.6 billion portfolio, focus on medical, surgical and lab products. They range from consumable products like PPE, all the way to more clinically differentiated products like operating room and recovery room products, surgical gowns, nutritional and enteral feeding products, as well as compression devices just to name a few. We support and again another broad range of customers, large hospital systems, ambulatory surgery centers, clinical labs.

Next we have our At-Home solutions business. I already referenced that a few times on those secular trends. This business delivers products and service customers and patients directly in the home and is on that key trend. A lot of products here include ostomy, nutritional and diabetic supplies, and it is a key strategic area of focus for us, not just because of our right to win there with our capabilities but also again with the secular trends.

The final businesses there, the medical services, these are businesses that trend that capitalizing the trend of digitization of healthcare and include our OPTi free [ph] business is by far the largest with that. And this is providing data-driven supply chain solutions, just another way of saying that we help our customers reduce their fright costs which of course is even more important in this environment.

Over the last 18 months or so the medical business has been dealing with the effects of the global supply chain constraints and inflation and that was largely on the Cardinal Health branded products, a lot of the national brand products could pass through the cost plus, but our own brands we tend to have longer term contracts in place which means it takes some time for those price adjustments can occur. So with that challenge and in conjunction with my permanent CEO I announced a detailed medical improvement plan a couple of quarters ago targeting at least $650 million of segment profit by fiscal 2025.

And given the importance of that, sort of initiatives let’s go into that a little bit further. So the key driver of the challenge is the global supply chain constraints and the inflation. So that’s the number one area of focus for us is to mitigate that to eliminate that $300 million headwind that first originated in fiscal 2022. It’s a similar sized headwind for us in fiscal 2023 and our objective is to eliminate that by the time we get to fiscal 2025. And this is through pricing actions as well as other commercial strategies to offset. We are making good progress. My reference last quarter Q1 that we had mitigated 25% of the gross impact of inflation and that we expect to exit fiscal 2023 mitigating 50% and then further mitigation to eliminate the entire $300 by the time we exit fiscal 2024.

Also our mitigation actions for inflation we expect the next largest contributor of growth by 2025 to be optimizing and growing our Cardinal Health brand portfolio that I already referenced earlier. This is to be achieved through new product innovation as well as increased product availability through targeted capital investments.

Next is accelerating our growth businesses back to At-Home solutions business there, continuing that 10% topline growth to drive value over the next few years. And then finally driving simplification and cost optimization. This is beyond just the Medical segment, but it is a component of our turnaround plan here. One example is the medical, nonmedical grade gloves portfolio that we recently exited as a good example of our actions to not only reduce the impacts of those issues, but also to de-risk our operating model going forward.

Okay so now enterprise level our key strategic priorities as you can imagine, first and foremost is executing upon that Medical segment improvement plan. So I think we’ve been through that enough, but that is not only important for the Medical segment, but clearly the top objective for the enterprise given the magnitude of inflationary impacts. But we can’t look past the fact that our Pharma segment is by far our largest business, 90% of our revenue and a substantial part of our profitability. And here we’re very pleased with the ongoing stability that we’re seeing in this business, not just with the underlying volume, but also with consistent dynamics of our generics programs.

We did see some volatility in this business over COVID specifically in our fiscal 2021 and we have seen that over the last 12 months really get back to much more normalized levels and to build upon that momentum we continue to focus on the core operations of this business driving improvements through investing in and prioritizing our customer experience as well as reducing the organizational complexity through the restructuring I referenced and driving other productivity and efficiency gains.

Within our growth areas we’re focused on our specialty business. It’s by far the largest and still growing very strongly. I mentioned earlier the organizational changes are very much focused on getting more effectiveness out of that organization and more access to the investments necessary to grow. But we also do, also continue to look at other growth areas such as inorganic investments in downstream. One good example will be our recent acquisition of the Bendcare GPO.

Lastly, through the new sourcing and manufacturing services organization, we are building that end-to-end manufacturer strategy to ensure that we deliver value to those customers. Finally, and certainly not the least is the relentless focus that we have on shareholder value creation. It all starts with the first two strategic priorities in driving the appropriate growing profitability and cash flow, but then it’s reinforced by the responsible return of that capital to our shareholders. So for example, we continue to guide for $1.5 billion to $2 billion of share repurchases this fiscal year and that’s on top of last year’s $1 billion of share repurchases and in addition to the $500 million per year in dividends that we pay.

So far for this fiscal year we announced that we had initiated a $1 billion ASR in the first quarter. We did increase that with another $250 million in the second quarter. And in addition to all of that we’ve also further enhanced our governance structure with four new independent directors as well as the creation of the business review committee focused on both the operational strategic aspects of our business and of course the portfolio review. We do plan on having an Investor Day by then in the fiscal year to take you through some of those aspects further.

Sorry I missed a slide there. So before I wrap up one important note as it relates to ESG. We are committed to a more sustainable and equitable world and we’ve established our ESG initiatives accordingly and that’s depicted here in front of you on this slide. So we’re making progress against these targets which we’ll detail in further ways with our new ESG report that will come out in just a few weeks. But what you’ll see in this report in how we’re approaching ESG is that we do believe that we can simultaneously drive improvements in these ESG initiatives in support of and not in conflict with our overall business transformation. So we believe that can be win-win.

Okay, so let me just close by explaining further why I’m energized by my role here at Cardinal Health and why I believe that we’re compelling investment opportunity. First, and we continue to see stability in our largest business. Our pharmaceutical distribution and specialty distribution business continues to have tremendous stability much more predictability than we’ve seen more recently and again back to the generics program continuing to see consistent market dynamics.

This was off of a pretty good year last year even in spite of the inflationary pressures we saw in fiscal 2022 for the Pharma segment. We’re able to grow that business bottom line by 5%. We had similar growth in the first quarter of 2023 and we have guidance for fiscal 2023 that is consistent with our long-term financial objectives of low to mid-single digit growth there.

Next and importantly, we have a very clear robust plan to mitigate the impacts of inflation of the Medical business through the medical improvement plan and to delivery at least $650 million of profit, segment profit by fiscal 2025.

Next we have the secular trends that I referenced before in healthcare that provide long-term tailwinds to our businesses notably our growth businesses are on those secular trends for the Pharma business. That’s primarily the specialty business and for the Medical businesses that’s the At-Home solutions business. And we expect that as these businesses continue to grow that they would be a larger and larger contributor to our underlying earnings.

We also continue to operate with urgency as it relates to the simplification of how we operate as an organization. You’ll hear me talk a lot about efficiency versus effectiveness and most of all these reorganizations and restructurings do bring with it some level of cost savings and efficiency, but I believe firmly that we get at least as much value as it relates to the effectiveness of these changes back to this quicker decision-making, better decision-making and holding ourselves accountable to those results.

We are clearly focused on cash conversion and continue to generate that robust cash flow to provide the financial flexibility for that capital deployment. And here we continue to look at those various alternatives and see that, sorry, purchase I referenced earlier have been a key component of that, and we’ll continue to look at those priorities.

So, overall proud of the progress to date. I recognize that we still have some work to do, but I’m really excited about what comes next for the organization.

Lisa Gill

Thanks Jason for all the detail and it’s nice to finally spend some time with you.

Jason Hollar

Yes, in-person right?

Lisa Gill

In-person and we’ve done a number of calls together over the last couple of years, but it’s been a few months since you took the lead role as CEO of Cardinal. Maybe just reflect on a few things. One, what have been some of your biggest take away sitting in this seat versus the CFO seat? And then secondly from a strategic standpoint, where are you most focused?

Jason Hollar

Yes, so there’s not as much different as what perhaps there would have been the perception, because some of these initiatives I’d already had the momentum going in the old role. The medical improvement plan is something that right out of the gate was really important for us to not only put a clear line in the sand as to where we’re going, but make certain that we have the resources and the attention to it. So that was a key component and of course we’ve streamlined the organization in a number of ways. The internal organization hears me talk a lot about simplification, prioritization, everything that we do to, again not just take cost out, but to ensure that we are moving with speed. And so I think where we go from here, I’m really proud of the fact that we made a lot of those changes very quickly.

So within the first month or two there was a lot of change. We had some organizational changes. We chose to exit some product lines in the Medical business, but the Pharma business continues to operate quite effectively with a strong volume, but those organizational changes happened quickly and then we all got focused to getting back to business as usual and we want to make tweaks along the way, but I think what you’re going to see is that we’ve clearly defined where we’re going, what the objectives are, what the plan is and it’s really at this point all about execution.

Lisa Gill

You talked about capital allocation and talked about the $1.5 billion to $2 billion of share repurchase. As we think about the assets that you have today, do you feel like you have everything that you need? Is there areas that you would think about from an acquisition standpoint? And beyond share repurchase how we think about the capital allocation priorities that you have in place?

Jason Hollar

Yes, I think we have in the first slide I showed, demonstrated we have really great breadth in the industry. There were some things that we had to divest in the past and we had three divestures over several years that generated $3 billion of proceeds. So there were some things that did not fit. We will continue to look at that, but at the same time there’s nothing that we are missing that we need to be successful. There are going to be areas that we’ll want to augment. More recently you saw that we did a relatively small acquisition in the specialty space with the Bendcare GPO and that’s a good example of the type of opportunity we have that can accelerate further, but when I look across the spectrum it would be plugging into those growth areas and not taking us down a different path. We are going to be very focused on what we do and what we do well that core and when we grow or when we really, really focused on very few areas, but prioritize those areas and invest more heavily, both organically as well as inorganically.

Lisa Gill

That makes sense. I’ve followed Cardinal for a long time and watched them bear down that path whether it was to China or the Cordis that we didn’t know you’re thinking about the best thing…

Jason Hollar

The phrase, focus on the core comes up every single day in this organization, and that is — it can evolve and morph a little bit, but we will — we have $180 billion plus of revenue. We have enough customers, enough products, what we need to do is be more effective and efficient at delivering those products and services.

Lisa Gill

So as we think about the Medical Improvement Plan, what are the factors that could impact you reaching that $650 million of segment profit by 2025? I think if there’s one area of push back, I’m sure Kevin tells you this, you probably hear from investors as well is just really getting our arms around that and feeling comfortable and confident around that number, even though it’s a few years out.

Jason Hollar

Sure. Yes, and it’s materially different than where we’re operating today. So we understand that, and that’s why we laid out the detail we did, the four point plan to get there. And of course, within that, two-thirds or so of the actions are in one category, which is to ensure we get the pricing and other commercial actions to mitigate that inflation.

And that’s the biggest point is we are in the middle of the supply chain and there’s no reason that the inflation should stick with us. It needs to get pushed down. There are reasons why it’s not simultaneous, and we are working on more permanent changes to the contracts to ensure that that’s the case. But in the meantime, we are working with the GPOs and our customers to find the the right path, but we’re confident that’s the right answer long-term, and that’s why it’s a key tenet of that plan.

But there — so within that, to get to your question, there’s things that can change with inflation, right? None of us know exactly where inflation is going, but what’s important is we have a process in place that allows us to pass through those impacts more quickly. And of course, first and foremost, to make sure we get this first $300 million remediated. So having the right structure there is important.

Within the other key piece is the next largest is, of course, Cardinal Health brand volume. That’s a component that the innovation and the investments in the product is completely dependent upon this management team to get that done. There’s an underlying volume utilization that is going to be a component of that. That’s about half and half. Half of it is the mix that we’re driving and about half of it is this underlying volume and over longer periods of time, given the demographics, we think that there will be a tailwind there.

Lisa Gill

So there’s always been a focus on the Cardinal brand product, right, since buying Allegiance all those years ago. And the penetration of Cardinal brand products have never really dramatically increased. Is that because Cardinal just didn’t make the investments needed for the next generation of private label product or was there something else that is changing now that you feel like that penetration can increase?

Jason Hollar

Yes, there’s very specific things that we are doing to drive that, the innovation is part of it. So there’s innovation, there’s also capacity. So especially with the pandemic, there was a delay in terms of what we were able to execute. Our customers didn’t want to talk about transitioning to our own products. They wanted to talk about just how do I get product. So now that we are through the worst of that element of the supply chain constraints now is the appropriate time to again sell that concept to our customers. There’s value for them to have those products, but we also need to invest in the capacity because especially with the supply chain constraints, part of our challenge has been we’ve not been able to deliver as much product as what there’s demand for and then combine that with further innovation to further spur that demand.

But remember, we’re talking about a 3% annual CAGR. A couple of points is the market, one to two points is that mix. So we’re not talking about dramatic movements that are needed, but an evolution. And given the fact that we are underpenetrated, we believe right now, that’s a real opportunity for us.

Lisa Gill

There’s been some question in the marketplace around now destocking for these hospital systems that they were taking hotel rooms and other places and putting as much PPE as they possibly could get their hands on. And I know talking to yourself and your predecessor et cetera, that in many cases, that wasn’t Cardinal’s product because you were in a position that you were having difficulty getting product as well. What are your general views on destocking in the marketplace right now? And does that view change versus my perception of what has been said before around how much of your product could potentially be in the channel today?

Jason Hollar

Yes, so there’s a lot there. So PPE — so there’s not any new news here as it relates to PPE. So what we said last quarter is that we believe that the low point of the demand pull from our customers to us was at the bottom in the fourth quarter. So you heard us talk fourth quarter 2022. You heard us talk about some volume challenges with PPE in Q3 of 2022. It got worse in Q4 2022. It got a little bit better last quarter. And what we’re seeing is that our customers probably in the fourth quarter of last year finally started to hit those restocking points, where they were using PPE at a pretty consistent pace is just that they didn’t need as much. So that destocking is happening very consistent to our expectations. We expect it to be a slow improvement.

Different customers, different products, right? They may have enough of one, but not enough of another. Generally speaking, they’re still holding more than pre-pandemic, but it’s also getting — the pendulum is swinging a bit back the other direction. And the other key thing as it relates to the Cardinal Health story here is remember that PPE has never been a category that we’ve ever made a significant amount of money on. It’s not a category. It’s a commodity product. It’s one that’s important to our customers. So we want to support them, we need to have the full line. But as that volume fluctuates, it was really more of a challenge because we had volume fluctuating, price fluctuating and costs fluctuating. So it created wild swings in profitability quarter-to-quarter on a product line that typically had very little difference as it relates to those types of margin swings.

Lisa Gill

Do you feel that coming out of the pandemic, the competitive market has changed at all when we think about being a medical supplier? And I agree with you that when you look at Cardinal historically, a lot of your medical supply business was not just that traditional PP&E, but rather the surgical kitting and other higher-margin types of products. So do you feel though that relationships have changed at all or the competitive market has changed at all?

Jason Hollar

Well, you’re asking the question to someone that wasn’t here pre-pandemic, but what I can tell you is that even in the time period I’ve been here, the relationships, they evolve, but where the medical healthcare industry is right now is where I think most industries are. Customers want product at a great cost at great value and delivered on time and de-risked. And so with the pandemic through a lot of things upside down, where you could get the one of those, but not all of those out at the same time. And so it’s up to us and the industry to continue to demonstrate to our customers that we’re focused on our core. We’re focused on investing in our distribution channels, our products to ensure that they have access to the products that have great value for them.

Lisa Gill

So kind of switching gears a little bit to talk about the pharmaceutical side of your business, which has been nicely stable, which has been a great business. Just really a few questions here. So generally, this week, we start to hear price increases for the pharmaceutical manufacturers. I know not as big of a swing factor for drug distribution these days, but has that come in largely in line with your expectations?

Jason Hollar

Yes, I think the word is largely in line is right. And the main point is exactly how you framed the question, Lisa, is that this is certainly less than 5% of our brand margin, and it continues to be a smaller and smaller part. We continue to go to more and more direct fees. So it’s relatively small and it’s in the ballpark of what we expected.

Lisa Gill

Has it surprised you on the generic side that we’ve seen inflation everywhere but in generics. And so when we think about generics, and I just really question how these generic manufacturers make money, like just given the amount of pressure we continue to see on pricing and the overall cost environment that we’re in today, what are your more broad thoughts on generic pricing? And could we potentially see some level of inflation in 2023, calendar 2023?

Jason Hollar

Well, it’s not something that we spend a lot of time thinking about because we’re Red Oak Sourcing is absolutely focused on driving down the costs, also remember, it’s the domain. It’s driving down costs. It’s also maximizing that service delivery and having the best service possible to our customers.

But what we see is they continue to find opportunities in the marketplace. It is a large industry, a large market with a lot of very capable suppliers. And so we want to continue — we want to see them healthy. We want to work with them. But ultimately, what we see is still some opportunity to always continuously improve.

But when we look at the underlying performance of our generics program, we don’t like to break it apart into the pieces because what Red Oak’s performance is very much based upon how well they’re doing relative to others in the industry, which is more of the spread. And so we continue to see, and that’s why we used the reference consistent market dynamics is to indicate that, that spread continues to be as expected.

Lisa Gill

Any surprises or any updates on the Red Oak side? I mean, if I remember, I think that agreement was signed long before your time, 2013?

Jason Hollar

Well, we renewed it about a year ago, a year and a half ago, and then it took it through June of 2029. So it was a long — it is a long-standing relationship. So no, there’s no surprise or changes. And I think the fact that we renewed it more recently well in advance of when it expires is highlights that it’s working for certainly our organization.

Lisa Gill

One of the things that we’ve written about recently have been flu. We’ve been tracking the flu pretty closely. My understanding for drug distribution is that any incremental volume is good, but flu is not a huge driver of volume. So maybe can you just talk about what we’ve seen more recently for volume overall and is my assumption correct?

Jason Hollar

Your assumption is correct. It’s really not a needle mover for us. It’s one of many different products and product categories. So overall, for volume, as my prior comments, we’re pleased with the stability that we’re seeing, and that’s the most important thing for us is that we see predictability, consistency within that demand. And overall, there’s pluses and minuses any particular quarter. And this — what we’re seeing for the last 12 months really is some pretty consistent levels of demand, not just quarter-to-quarter but even month-to-month. We’re just not seeing the variations and fluctuations that we had certainly during fiscal 2021.

And back to flu, even with a little bit higher volume there, we don’t know if it’s just early volume or more volume at this point. So it may not be much different for the full year. But the main point is, it’s a very mature set of generic products that go along with that, which usually means it’s a lower price point, lower margin points and so it’s not something I would expect to be material.

Lisa Gill

The big opportunity was a few years ago when Tamiflu went generic the first time, right, like that was the upper [indiscernible].

Jason Hollar

Early stories I’ve been told, yes.

Lisa Gill

Historical so even they’re true. Let’s spend a couple of minutes on your Specialty business because it’s smaller than your two peers. You talked about it today as a growth opportunity. So maybe start with how these services have changed over time? And hopefully, you have some historical perspective on how they’ve changed? And where do you think the future is going and how Cardinal will play a role in the future of that?

Jason Hollar

Well, as I commented earlier, we have a very broad level of services that go along with our specialty business. And by the way, we are very large and very relevant. This is by far our largest growth area, and it has grown consistently at double digits over the last several years. So it’s a space that we are very relevant, and we continue to see the same type of opportunities in front of us and to ensure that we continue to evolve and provide the most relevant services to our customers, that’s where we’re making both the organic as well as the inorganic investments, whether it’s the technology.

Even the restructuring that I talked about that, that was very much focused on ensuring that the Specialty business, the distribution and the upstream have the right leadership, resources in place to drive that, given the importance of that on our organization. And again, back to our inorganic types of opportunities, this is an area that is — M&A is, in general, for Cardinal Health is not the highest priority of capital deployment, but within M&A, one of the highest priorities for us would be the Specialty business. So it’s an area we would definitely continue to look but there’s a lot of factors that would go into that.

Lisa Gill

And I think you mentioned this in the presentation that Bendcare GPO acquisition, are there other opportunities like that in the market or was that more of a unique type of asset that was available?

Jason Hollar

There — the downstream side is completely crowded and has been consolidated some time ago. But on the upstream side, assets that are generally like Bendcare and there’s lots of other different services, too. So I don’t want to talk about just GPOs, but in general, the upstream assets are much more fragmented, growing very quickly, tend to be good margin types of opportunities and so that’s where we would be most focused for inorganic.

Lisa Gill

And so when we think about beyond specialty, where you talked about growth, you’ve talked on other calls about other growth areas within Cardinal upstream opportunities. I think you’ve talked about nuclear coming back. So maybe can you give just a couple of minutes talking about maybe some of those other growth areas and the opportunities that you see?

Jason Hollar

Sure. Within the Pharma business, the largest by far would be nuclear. Now Outcomes is a great business and growing, but it’s relatively small. So when you talk about what could move the needle over time, the Pharma business is still only — it’s all relative to everything else, so only $1 billion top line business, but it’s a higher margin business. And as I mentioned in my comments, we are investing heavily into that with the Center for Theranostics advancement as well as other capacity in our ecosystem and other innovation. [Audio Gap]

Which means that it takes a while for those investments to pay off, but when they do, it’s very predictable, and we have good confidence, which is why we can have a five-year plan and have confidence in committing to a doubling of that business over that five-year period through fiscal year 2026.

On the medical side, the primary other growth business that I referenced is, of course, At-Home Solutions business that’s, again, also been growing very, very consistently, and we are also making investments here, not just in brick-and-mortar distribution capacity, which is needed because it’s a $2.5 billion business growing at 10% per year, it’s $250 million of product that’s got to get pushed through that pipe every year. So we’re going to have some additional capacity there, but also in terms of some of the systems and processes that go along with that to ensure a good customer experience as well as an operational experience.

Lisa Gill

We touched earlier on kind of destocking of PPE, et cetera. But I said some of your bigger products are going to be like surgical kits, et cetera. And so we always get the question around how do we think about the current environment for elective surgeries? Again, I know you’re not reporting the December quarter, but how is it compared versus pre-COVID levels and do you feel like we’re finally back to kind of more normalization?

Jason Hollar

Yes. It’s a little more clear to me on Pharma that we’re back to the pre-COVID. With medical, it’s even hard to define what pre-COVID is any longer. I mean we’re talking three years ago. But with Medical, it was I guess, early 2022, we had talked about — well, fiscal 2021, the early part of that was when it was — it went down faster than Pharma did, but then it came back pretty quickly. And it came back in the ballpark of where we were before. Always a little bit depressed. So we haven’t always gotten like all the way back, but we got nearly all the way back in and since then, the volumes have kind of bounced around a little bit. I’d say it’s a little bit more of a little bit of a lack of growth as opposed to having an actual reduction versus that pre-COVID.

The key with utilization, though, is PPE. That’s the part that’s been most volatile. And again, there’s no new news here because these comments are very similar to what I said this last quarter, where it’s been much more predictable also for the medical business in the last couple of quarters. So that’s why we feel certainly pleased with the underlying volatility in the business because both of our biggest businesses are showing that as we get farther and farther away from the depths of COVID, that those volumes are a lot more predictable.

Lisa Gill

The managed care companies have talked a little bit about the acuity level, maybe being a little bit higher for surgeries. And again, they’re projecting for the next calendar year and they’re looking at this and saying, let’s say, you were supposed to have a new surgery and you didn’t do it. Did you pull an incremental ligament or something so that now it’s going to be a little longer surgery and a little more complex, so a higher cost. If that is the case that we see things that are a little more complex, not saying that there was pent-up demand, but more complex type surgeries, is that something that’s good for Cardinal?

Jason Hollar

I really don’t know. I think I need to spend a little bit of time on that. That’s — I think the key with our product line within Medical is it’s very diverse. And so as the tide rises and falls, that business will rise and fall with because we do have a very diverse across the surgical room, the recovery room. So I think that as there’s more activity, there’s more patients needing more procedures that will be a good thing for us, generally speaking.

Lisa Gill

You’ve mentioned in the past the newly formed review committee, which you also talked about today, will present its findings and recommendations at the Investor Day in the first half of the calendar year of 2023. Any idea or you want to kind of maybe talk to us about in terms of focus and scope of those recommendations and what we might hear would be my first question? And then secondly, it’s been a while since Cardinal sent an Analyst Day. Anything else that we should really be thinking about going into that Analyst Day?

Jason Hollar

So what I’ll tell you here is that we are already in the first half of the calendar year. So I would expect it by the end of the first half of the calendar year. So you can think about more on the June type of time frame is what we’re kind of penciled out at this point. And within that, I would expect it to be a fairly traditional type of Investor Day. We’re going to talk about the business, the operations, the strategy and of course, there’s going to be a portfolio component with that, but that’s several months in front of us. And so we need some time to be able to scope that out a little bit further before I can go much deeper now.

Lisa Gill

I look forward to it. So as we have about a minute left together here, we started this discussion with your fairly new to the role, but a year from now when we’re sitting here together, what do you hope that investors will appreciate about Cardinal that perhaps they don’t appreciate today?

Jason Hollar

Well, a year from now, I think it’s something you have to talk about each of the different components of our business. I think the short answer is what I hope investors see is that they think back about what we said today, what we’ve been saying pretty consistently in the last couple of quarters, they see a continuation along that journey. And a year from now, when you think about the Medical Improvement Plan, we’re going to be pretty deep into that, and we’re going to have some very key data points. We share every quarter, our progress on the pricing initiatives.

And when you think about being halfway through our fiscal 2024 at that point in time, we’re going to have most of those — or a lot of those prices in place and may not be in the run rate yet, but there’s going to be a lot of data points there. You’re also going to see the growth of the growth businesses, whether it’s At-Home, within the Medical business or Specialty within the Pharma segment.

But as it relates to Pharma, I think what I hope and expect we’ll all see is that will be another year into what is, I expect to be a pretty resilient predictable demand pattern. And while I think our industry and our Pharma business has that reputation to some extent, we’ve also been shocked a little bit here the last couple of several years and adding one more year to that, I think, just gives further weight that, that’s a fairly resilient business.

And then finally, I’d expect you to have another year of credibility about our capital allocation. When we talk about responsible focus on that deployment, I think you’re going to continue to see that and that investors will say, yes, that’s what they said they do, and that’s what they did. It’s consistent with the philosophy. We’ll have to make adaptations along the way, but we think it will be very consistent with how we’ve laid out the plan.

Lisa Gill

Great. We’re well out of time. Thank you so much. It’s so good to see you, Jason. Thanks, everybody.

Question-and-Answer Session

Q –