Cardinal Health, Inc. (NYSE:CAH) Evercore ISI 5th Annual Healthcare Conference November 30, 2022 8:50 AM ET
Company Participants
Kevin Moran – Investor Relations
Jason Hollar – Chief Executive Officer
Conference Call Participants
Elizabeth Anderson – Evercore ISI
Kevin Moran
Let’s try this again. Good morning. Thanks for hosting us here, Elizabeth, for the second time this morning. We will be making forward-looking statements today that are subject to certain risks and uncertainties. For a full description of these risks and uncertainties, please consult our IR website or our SEC filings.
Thanks again for hosting us and apologies for the technical difficulties.
Elizabeth Anderson
No worries. Next year, we’re going to be in Miami. So we’ll be a lot happy. You won’t have any glitches. It will be great. Just as one quick administrative note that I perhaps mentioned before, there is a separate chat Q&A function, which I can see all the questions that you guys put them in. So feel free to add them as we’re going along, but on to the main event. So Jason, you’re now a few months into your new role as CEO. Can we start on some of your early impressions from the seat and sort of where you’re focused on now? Obviously, it’s been an eventful few months.
Jason Hollar
Yes. Sure. Thanks. Thanks, Elizabeth. Thanks for having us, and thank you, everyone, for joining us. It’s great to be here today and, as you mentioned, Elizabeth, looking forward to perhaps the next one being in-person. But the short answer to your question is I continue to be very energized about the opportunities in front of us. We obviously just had our first quarter release here several – a couple of several weeks ago. And a lot of the key themes that were in that Q1 were around an underlying demand environment that has been very resilient, stable, predictable. That kind of led to fairly consistent Q1 results versus our expectations.
But we understand that we do still have a lot of work to do. And so, we continue to be very focused on our three key priorities. First of all and probably most important in the short-term is our medical improvement plan. We recognize that this business needs to be improved. It’s been impacted dramatically by the inflation impacts of the global supply chain constraints. And within that this improvement plan, we have a plan in place to enable us to deliver at least $650 million of segment profit by fiscal 2025.
So within that plan, the first and most significant impact will be to mitigate that inflation. That by itself is a $300 million impact. That was a similar impact that we had in fiscal 2022, it’s what’s in fiscal 2023, it’s the net impact and we’re on track for mitigating that inflation. In Q4 of 2022, we were mitigating about 20% of the gross inflation, Q1 that improved to 25%, very consistent with our expectations. And our expectations continue to be unchanged with where we expect to exit fiscal 2023 at 50% and then, ultimately, mitigating all of the impacts by the end of fiscal 2024. So that is the primary component to allow us to get to a more normalized level of earnings for that segment. But in addition to inflation mitigation and pricing, we also have three other key actions to drive the underlying core performance of the business.
The first of those three is optimizing and growing our Cardinal Health brand portfolio. This is through new product innovation as well as investments in our capacity to be able to deliver more of that volume. The second one is growing our – and accelerating the growth of our growth businesses, primarily in the Med segment, that will be our at-Home Solutions business. This is a business that’s consistently grown the top line by 10% per year, and we think that growth can continue. And we’re, of course, working to ensure that as much of that as possible falls to the bottom line. And then the third component is more of the blocking and tackling that we’ve done a lot of over the last several years, and that’s just driving simplification and continued cost optimization. We have taken some actions more recently as it relates to some portfolio decisions, like selling our non-healthcare gloves business, our portfolio of product there, to simplify the underlying business and help derisk our underlying portfolio.
So that medical improvement plan is the big piece of it in the short-term, but we can’t forget about Pharma. The biggest part of our company is the second component in that plan that our primary priorities and focus areas, and that’s to build upon that growth, the resiliency we’ve seen there. I already mentioned, Q1 was fairly consistent with expectations. The prior year, what, was 5% earnings growth. So that business has shown its resiliency after we saw the volatility of the pandemic subside here in the middle of last year. But we are focused on improving that further, further growing it, and that’s in a couple of areas.
Of course, specialty is the primary growth area. We’re investing both organically and inorganically there. And we’ve restructured the team to be more focused on this business by consolidating a lot of the key leadership activities, bringing the right people into the right roles and simplifying how we approach both our customers as well as our manufacturing partners, and we’ve appointed Debbie Weitzman as the CEO of that segment. But we also have other organic investments that we’re making in our Navista TS platform. Again, I mentioned inorganic growth through the Bendcare GPO acquisition, as well as other investments in the business. And of course, Generics continues to be operating very consistent with what we’ve seen in the past.
And then the third stool, leg of the stool is the maximizing our shareholder value, continuing to look through our capital deployment through the lens of our shareholders, driving consistent profit and cash flow generation and then returning that in a very balanced manner to our shareholders. That was shown through our share repurchases. Last year it was $1 billion. We’ve guided to $1.5 billion to $2 billion for this year. Q1, I announced the completion of $1 billion already in the first quarter through an ASR, and we – that’s all in addition to our ongoing $500 million plus dividend.
So we’re demonstrating that through our capital allocation priorities. But we’ve also made some other enhancements to our governance structure. Of course, we’ve recently added four new Board members, and we’ve established the Business Review Committee that I chair. That’s supporting a comprehensive review of our strategy, our portfolio and, of course, the capital allocation framework. And we’ll provide a lot more details with that in an Investor Day within the first half of the calendar year. So, a lot going on, a lot to be excited about, but a lot of work to do, but we’re very focused on these priorities to ensure that we have the best chance of success.
Elizabeth Anderson
That makes sense. That’s a great start. Lots to unpack there, so we’ll take a stab at that. So maybe just starting on sort of the order that you had it focusing maybe on the Medical first. PPE has clearly been a source of volatility over the past couple of years. What are the latest trends you’re seeing? I mean how stable are – is pricing in your like remaining glove business and then maybe PPR – I am sorry, PPE more generally? And then like how are we thinking about inventory levels versus earlier in the year?
Jason Hollar
Yes. And so when – let’s just kind of step back and make sure we’re all level-set on the problem statement there. With PPE during the pandemic, we had a shock on really all aspects of the business. Demand was volatile, very strong. Supply chain was strained, and that drove just crazy swings in cost that then flowed into price. So all aspects of the economic model, demand, supply, price and costs, were all very, very volatile. That created a lot of uncertainty. And of course, what we did is we try to protect our customers by buying a lot of inventory that ended up taking way too long to be pushed through the supply chain.
So what we’ve been talking about over the last year is having a higher cost of inventory on our balance sheet that has had to work through. And embedded in your question, Elizabeth, is the fact that volumes then reduced over that period of time because our customers ended up having sufficient levels of inventory. We started communicating that six to nine months ago, and we saw that the volumes seem to have bottomed in terms of the pull-through demand to us in the fourth quarter of last year.
We indicated in our Q1 call that volumes were fairly flat sequentially, although we do think that the bottom was there in the fourth quarter. So a little bit improved, but not very dramatic. And so underlying that is it felt like our customers had started to now begin to replenish some of their inventory, but at very weak levels compared to the historical levels and certainly we compared to what was during the pandemic.
So not a lot of new news here on this topic, very consistent with the dialogue that we had during the Q1 call, that cost remains high in our inventory, and we would expect, at least the next couple of quarters, for us to further work that through, all entirely consistent with our guidance. But by the time we exit fiscal 2023, we would anticipate – because we know that we’re buying this PPE right now at a much more competitive cost, so we would expect prices to continue to come down, volumes to continue to improve over this period of time, such that by the time we exit fiscal 2023, we think it will be a much more normalized environment. And just as a reminder, normalized for us is fairly consistent demand at relatively low margins. This is not a business that we’ve historically made a lot of money on, but it’s been a very predictable level of margin in the past that we just haven’t seen more recently.
So we continue to see us working through that path and, importantly, our customers working through their inventory over the next couple of quarters.
Elizabeth Anderson
Yes. No, that makes a ton of sense, and I appreciate what you are saying in terms of sort of a more normalized sort of sell-in, sell-out through the period. If we think about where PPE pricing is now, and I don’t – if you want to use sort of gloves or generically sort of the category as an example, how elevated are we still versus fiscal 2019 kind of levels?
Jason Hollar
Yes, so it’s come way down from the peak, but still elevated from where we were pre-pandemic. And when you think about costs in general, that’s consistent with that. I would say inflation is still obviously very elevated in a lot of different areas. In some cases, it’s pulled back from the peak levels. But given that the cost inputs are still elevated, that means that the economic model is such that I would expect prices to be elevated versus pre-pandemic.
There is some cost categories that are never going to go back to pre-pandemic levels.
Kevin Moran
Yes.
Jason Hollar
And so it’s going to be possible they will never get back in terms of a pricing perspective. But when you think about the magnitude, it’s nowhere near where it was at peak. And I would expect it to settle closer to pre-pandemic levels than certainly at the peak.
Elizabeth Anderson
Okay. So maybe we’re still at like, I don’t know, 20% versus pre-pandemic, but it’s sort of slowly coming down maybe at a slower pace versus…
Jason Hollar
Whether you’re talking gloves, masks or ICA, it’s a very different answer and then there is different SKUs within that. So there is not a short answer to that question. It’s a much more complicated discussion. But in general, yes, it will be elevated from pre-pandemic levels, but nowhere near the peak that it was before. So closer to pre-pandemic than to the peak level.
Elizabeth Anderson
Got it. Okay. That makes sense. And then if we think about like across Medical, maybe outside of PPE, how is the product cost trend – cost inflation trending versus earlier in the calendar year? And sort of can you talk about sort of the continued work on mitigation that you are doing?
Jason Hollar
Yes, there is a few points within that. So first of all, the most important takeaway as it relates to this topic for us is that there is a couple of really key data points that have been unchanged the last couple of quarters, and there is no new news here as it relates to that, which is we continue to expect that overall net impact in fiscal 2023 to be about $300 million. So, the impact of inflation, net of the pricing and other mitigation actions that we are achieving. And we expect the exit rate in fiscal 2023 to continue to be at a rate of offsetting that gross impact by about 50%.
So what is important to us is the fiscal year impact, but it’s also important to us that we continue to show progress towards a normalized level of results, which means we have to – the underlying inflation is going to be volatile, it’s going to move day-to-day.
Elizabeth Anderson
Yes.
Jason Hollar
Our objective is to make sure that whatever that number turns out to be, we offset it. We’re not expecting to improve our margins, but we don’t accept that we should have lower margins as a result of the inflation. So the key takeaways is that we’re on track to that. That’s very consistent with our plan, entirely consistent with our guidance.
Now to answer other elements of your question Elizabeth, it’s very choppy, right. There are certain aspects of inflation that have come down dramatically. And the biggest one is the international freight. The cost to ship product from Asia to the United States, even though we’ve diversified our supply chain and we have a relatively small percentage coming from places like China, we do still have a relevant supply base there. We think the global diversified supply chain is in the best interest of ourselves as well as our customers, and we continue to lean into that. That cost of shipping product from Asia, especially to United States, same thing as to the prior discussion on pricing for PPE, is we’ve come now back in line with close to pre-pandemic. Still a little bit elevated levels of international freight.
But when I think about all the impacts of that net $300 million, international freight is the only one that’s shown a material improvement in its trend. All the other ones have been choppy and bouncing around. Like I said, labor, of course, will never come down. Maybe the rate of increases certainly will come down, but not the actual level of that cost.
The other commodities, which, when I think about the impact of that $300 million, it was international freight, it was other commodities and it was domestic transportation. When I think about those other two categories, commodities and domestic transportation, they remain very high. Even though oil has come down, and that’s an input to a lot of that, a lot of the byproducts and the products made from petroleum still remain very high. Some of our inputs like nonwovens are actually still increasing. And that’s got some other supply and demand dynamics beyond just the cost of inputs like oil that are going into that.
So, we do see that these costs remain very elevated. It’s why our pricing is more than just temporary price increases. We are having success at rolling these temporary price increases into permanent price increases. It’s a necessary element of this strategy because we do not see that these costs go back down to pre-pandemic levels. Some categories will, but they will be elevated permanently. And therefore, our prices have to be elevated permanently, and we continue to be on track with that. But it continues to be a very volatile environment, but pluses and minuses. And so overall, that’s why we still think the $300 million is the right number, and we’re on track for it, as well as the exit rate in fiscal 2023.
Elizabeth Anderson
Got it, okay. So, there is a bunch of stuff there. So, it sounds like sort of that and sort of based on what you are seeing in your first comment that you are mitigating sort of 25%, I think, of the inflation impact, as you were saying, in the first quarter and on track for 50%, we should think of that as being sort of more gradual in the first half of the year and then accelerating as we get into the back half, right. That’s sort of the way to continue to think about it based on what you’re saying about freight costs and whatnot, it’s not like ratably across the quarters.
Jason Hollar
Yes, it’s going to be choppy as well.
Elizabeth Anderson
Yes.
Jason Hollar
That 50% is the exit rate, and so the 25% is what the all-in Q1 rate is. We had some increases at the beginning of Q1. We also had some increases at the beginning Q2. We do have some additional increases planned for the beginning – or within Q3. And so those increases are not each stair-stepped. And behind the scenes, every day, we have contracts renewing that are also increases.
So, it will be a bit more of a stair-step than not. But it will – from 25% to an exit rate of 50%, we’re going to have to make progress each and every month in order to be able to get to that 50% level.
Elizabeth Anderson
Got it. And then I think in the answer to the sort of prior question, we think about sort of not just like the temporary price increases that you have been asking for, that sort of played out at this point like in terms of having gone out to everyone and sort of getting the different [indiscernible] out. Maybe we’ll start there, is that sort of the correct characterization there?
Jason Hollar
Yes. Yes, so in terms of the temporary waves of price increases, we had the first one in March 1, then July 1 was second one and October 1 was the third one. We do anticipate a fourth wave of price increases in our fiscal third quarter, first calendar year. So, every quarter we are making adjustments because we are trying to measure this we don’t want to get out too far in front of it. And of course, we’re working with the GPOs and our customers very closely to make sure that we are bringing that together at the appropriate pace.
And then behind the scenes, when those contracts renew, we are anticipating that those temporary price increases then flow into the permanent price increases, with the appropriate adjustments baked into those agreements so that we don’t have the same issue in the future if we see through.
Elizabeth Anderson
Okay, that was my next question. So those sort of contracts are now structurally different than they were previously in terms of – like how to – is this sort of an agreed upon price increase? Is it kind of just like here’s my invoice and this is my – like how does – how do you sort of think about that?
Jason Hollar
Yes. The primary objective is to have some type of index we can attach it to in order to make the appropriate adjustments. Why this process will never be perfect is that there’s not indices in place for every single cost input. But it’s important to have a mechanism that allows for those adjustments and that are reflective of that type of environment.
And again, it will never be a perfect type of surcharge that is put in place every single week to every single cost element. It won’t be that. But it should be something that within a quarter or two of some significant shocks, you see us getting back to a much more normal type of level of margin.
So we should not have these years of gaps like we do today. And of course, we wouldn’t expect a shock like this to reoccur anytime soon. But if it does, we would expect that impact to be much more timely. But there will always be elements that are hard to foresee. And so no contract structure will ever be foolproof, but it will be much, much more consistent with what we would have seen in the past.
Elizabeth Anderson
Okay. Got it. And is that true, again, we think of obviously sort of more of the GPO contracts on the hospital side of the business? Is it sort of the same structure for the like how Cardinal at-Home products? Is that kind of a different mechanism? Just to make sure that we’re understanding across your scope of businesses?
Jason Hollar
Well, we have a variety of different customers within at-Home, and so some of them are more real-time types of price adjustments, others are more like a GPO type of structure. So we have a very diverse set of customers and it depends on what type of customer that flows through. It’s much less of an issue for at-Home than it is for the core Medical products and distribution business.
And so that’s where the primary issues are for the whole enterprise. And as a reminder, I think most people understand this, but we don’t have those same issues for the Pharma business, because, again, the product cost is one that we largely pass through. It’s – we do have the inflation on our distribution fees or distribution costs, and so that’s something that does need to be addressed through other means.
But the magnitude relative to the size of the business for Pharma is very, very small. This is really just our Medical, Cardinal brand medical products that is the primary issue. And that’s more of a core Med issue and outside of that at-Home business.
Elizabeth Anderson
Got it. That’s helpful to remind people [ph]. So I mean the other thing I’m just sort of thinking about your expectations for the fiscal 2023, how do we think about medical utilization? Because obviously, from all the managed care players and from you guys and everybody else, it’s sort of like utilization has been broadly sort of suppressed still this year.
In terms of your expectations now from what you’re hearing from your end market customers and sort of your expectations, what do you – how are you sort of thinking about the back half of this fiscal year?
Jason Hollar
Yes. It’s another example. There’s not a lot of new news here for us today, but let me kind of remind us what we talked about a few weeks ago. Let’s go back again. With the onset of COVID, we had significant reductions in the utilization and we had significant volume impacts in our business. And we communicated about a year ago that we were starting to see that get back to close to pre-pandemic levels.
And since then, it’s been what I would call choppy. It has been fairly close to that level, but a little bit short. And we indicated that Q4 of fiscal 2022 appears to be our low point for volume in general, which a part of that was PPE. But we also saw just a little bit of that weakness across the Board.
But we did see sequential slight improvement also across the Board going from Q4 of last year to Q1 of fiscal 2023. And so that continues to be the environment that we’re in, where it just hasn’t gotten back to the pre-pandemic levels, but it’s a whole lot closer to that than where we were during the depths of the pandemic.
So it’s at a manageable level. It’s the one that we haven’t called out any fluctuations other than PPE more recently. So it’s something that is manageable within our model. But like everyone, we’d like to see a little bit more volume, but it’s – what we expect is a gradual improvement over the course of the year. So we’re not expecting a significant improvement, but we do believe over time that we will see utilization continue to improve, but at a gradual level.
Elizabeth Anderson
Got it. Okay. That makes sense. And then if we think about sort of the financial crunch that hospitals and others have been under just from labor costs, et cetera, how does that sort of change like what they’re looking for from you in terms of their – some of their supplies?
Jason Hollar
Yes. I think everyone in the supply chain is doing what we can and looking for opportunities to be more efficient, to take cost out, so that we have to pass through as little as possible to the customers in the form of pricing. This is everyone’s issue and everyone’s obligation to do as much as possible to mitigate that.
With that said, pre-pandemic, we had a relatively low margin rate. And we certainly don’t have the margin embedded in our business to be able to absorb these types of shocks. And so our – and that’s why we’ve been working with our customers though, too, for a fairly prolonged period of timing. When you think about from when we started incurring the cost over a year ago to when we’re committing to getting all of this mitigated, it’s like a three-year process.
So we’re doing our part to absorb this in a way that allows our customers to get this push-through to the payers and ultimately to the patients. But in any economic model, inflation has to be either mitigated in some fashion or pushed to that final customer. Most businesses, most industries don’t have the margin in the middle just to absorb it.
And certainly, we started out at 3% to 4% types of margins for the Med business, 1% margins for the Pharma business. There’s just not enough there to deal with shocks that, in some cases, were impacting our cost inputs by 10x.
Elizabeth Anderson
Yes.
Jason Hollar
So we’re working with them. We’re doing our part. But ultimately, we need to assist them in figuring out a way to get this pushed through. So that ultimately, it gets to the end of the supply chain.
Elizabeth Anderson
That makes sense. Okay. Maybe shifting over to the Pharma business and maybe focusing on sort of maybe the shorter-term things and then we can go broader. So in terms of the second quarter, what are some of the drivers of having Pharma profit dollars sort of flat Q-on-Q in the second quarter?
Jason Hollar
Yes. So first of all, to think about the – think about our implied guidance for Q2 implies flat sequential dollars from Q1 to Q2. It also implies kind of flat year-over-year. And the primary reason for that has less to do with Q2 of this year and more to do with Q2 of last year.
You may recall that Q2 of last year, we highlighted about a $20 million favorable one-time item that is not expected to reoccur by its nature, it’s a one-time item. And so when you adjust for that $20 million in the prior year, those growth rates are actually quite consistent with the historical levels that we’ve seen for that business.
So there’s really nothing unusual that we anticipate in this year. But as a reminder, what is included in the first half of this year as a headwind is the inflation, because inflation for the Pharma business really picked up. There it’s more the domestic transportation, some of the labor costs. That was a Q3 of 2022 increase.
And so for the first half of our fiscal 2023, we still have the year-over-year comp that is challenging or that’s a headwind from a year-over-year perspective. Now we have a few tailwinds like opioid legal expense and our IT investments from rolling out our broad ERP system, those items generally offset. And so when you highlight all those, those all offset. And then you account for that prior year onetime item, it’s still in that low to mid-single-digit growth rate like what we’ve guided for the full year.
Elizabeth Anderson
Got it. That makes sense. And I think you talked about this in terms of some of the freight costs and things on the Medical side. If we think about sort of the labor costs and things like that on the Pharma side that you just mentioned, how are those like trending versus earlier in the calendar year? Is that something you view – obviously, you just talked about the comp issue, but would you give us sort of those costs as continuing to increase at that kind of higher rate now versus, say, six months ago? Or is it kind of like the economy is a little softer, so it’s a little bit better? Like help us think through the different puts and takes there?
Jason Hollar
It’s really the same answer as the broader inflationary comments I made. In general, what we’re seeing is that costs are still elevated. Labor rates and wage increases are still higher than historical, but not at the same level as what we saw six to nine months ago. So it does seem to be weakening, but still at high levels. It’s again, very consistent with our expectations. This is how we forecasted and estimated this would roll through the fiscal year. It’s still early, and these are the things that are incredibly important to us. And so we, at this point, don’t see anything that’s very surprising for us as it relates to that.
The Fed’s work seems to be doing its job, where it’s taking off some of the pressure. We’re seeing attrition still at elevated levels, but not at where they were at the peak of when the wages were increasing the most. So those all are pointing to the same type of real outcome, which is still something we have to work on, it’s still something we’re very aware of and have initiatives against. But we’re seeing it start to ease.
Elizabeth Anderson
Got it. That makes sense. And then I think your very first answer, you talked about it a little bit, but maybe we can expand upon that. Can you tell us a little bit more about what’s going on with the sort of Pharma restructuring? What are some of the short-term benefits? You say, okay, obviously new management in place, et cetera. But then how does that give us – what does that do short-term and then sort of maybe as we think about 2024 and beyond, like what changes over the longer term?
Jason Hollar
Yes. And as a part of that restructuring, we effectively took out a layer in the organization to shorten decision-making timelines and you get the business more connected in that regard, as well as brought together the core PD and Specialty businesses so that we had more of one face to both the customers and then one face to our manufacturing partners. So by doing that, there’s a couple of things that come out of it. It is a lower cost structure, that wasn’t the primary reason for doing it and it’s not something that’s material for the business. But it is a lower cost structure. But most importantly, it was the effectiveness of the structure.
Again, quicker decision-making, having a more simple structure for our customers and our manufacturing partners to do business with. And it allows us to have an intense focus on this key growth area. Specialty is an area that we have broad capabilities. We have leadership positions in some of the ologies, but not all of them. And we have room to further improve that growth. So it’s an area that not only has grown nicely, but it’s an area that we have high comments will continue to grow. And so we wanted to make certain that we had a structure in place that would set us up for success going into the future.
Elizabeth Anderson
Got it. And I think if we think about sort of specialty going forward, how do you go about sort of tackling some of those opportunities? And we can talk about biosimilars in a minute, but like you said you’ve strength in certain areas, obviously, less so in others. Like how do you sort of – is that something you kind of like want to fill in across different therapeutic areas? Is that something you just kind of go deeper with certain clients? Like, where – what are the sort of specific opportunities there?
Jason Hollar
Well, yes, first of all, the way – even the way you ask the question is the right way. I mean, there’s so many different opportunities there. That’s part of the restructuring is to make sure we were structured as a team to be able to be a bit more decentralized and be able to go after each one of those opportunities in a way that makes sense. But how I would start to think about it is separating these opportunities into more of the provider-facing opportunities, kind of the downstream work as well as then the upstream manufacturing services. That’s how we structured the business, and that’s how we are launching our investments, and our focus are very much in that way.
So as I think about the downstream provider-facing, certainly, oncology is a huge opportunity for us. That’s one of the areas of least penetration for us, but still large and very relevant. We have a lot of great programs and platforms to be able to further grow that business. Navista TS is one that we’ve invested heavily in. And that’s very much in the leading edge of being able to offer that value-based care, especially as we go to the new CMS enhancing oncology model, we’re well positioned for that. But in the other ologies, we continue to invest in as well. In rheumatology, already well positioned there, but we’ve also added to that with our recent tuck-in acquisition of the Bendcare GPO, as well as our investment in their MSO that has further expanded our capabilities in that space and contributed already to some new customer growth.
But on the upstream of the manufacturing services, again, it’s an area of space that we have a lot of strong foundations in already. Our 3PL and Sonexus business, well positioned but continue to invest in that. But again, back to the org structure, we’re just hyper focused on this now. A team that is not only structured the right way, clear accountability, that we have people that will be driving each side of that to ensure that we optimize it based upon where the market is going.
Elizabeth Anderson
Okay. That makes sense. And then maybe turning specifically to biosimilars. Obviously – Humira is coming about Generic in 2023, as we all know. But we just heard from like UNH yesterday a little bit about publicly, their formulary where they’re going to keep Humira for the different categories, but then to also bring in like biosimilars. Then some of them obviously have interchangeability, some of them don’t have interchangeability or they only have it in the formulation of fewer people – like there’s all sorts of like, I guess, nuances to how this comes out. Like so how do we think about sort of the opportunity in 2023? And is this really like more of a 2024-plus type of opportunity for Cardinal?
Jason Hollar
Yes, I think it’s…
Elizabeth Anderson
Calendar year, sorry.
Jason Hollar
It’s already been an opportunity for us. I mean it’s a tailwind for the business. It’s still, compared to other parts of our business, small but growing quickly. So it has been a nice contributor over the last couple of years, and we’d expect it to be a nice contributor this year. It’s going to take more time and for the business to grow bigger for it to be meaningful enough that you start to see us call it out. So we’re not anticipating that soon. But it’s a part – it’s a relevant part of the growth that we’ve already seen, a relative contributor to that growth.
Part of what gets us excited about biosimilars is that, especially as we expand into the – biosimilars expands into new therapeutic areas and sites of care, where biosimilars seems to be going from a broad overall market perspective is where we have better penetration. And so we think that will work to our advantage as we go forward.
But to your point, there’s a lot of inputs to this whole model that are very hard to predict at this point. So I would – right now, we look at it like there’s a rising tide. We have strong confidence. We’ll continue to benefit from that rising tide. Exactly how much that impacts us, will be dependent upon exactly what you indicated. Not only the pipeline, but the payer and PBM decisions are going to be incredibly relevant to determine where we can add more value in that whole chain.
And so that is just too early to tell, broadly, but we have a role across the board as it relates to these opportunities and believe we’ll participate, we’ll create value for our customers and we’ll benefit from it. But the significance in the word of magnitude is something that will still need to be determined period-to-period. We have a pretty good viewpoint of what the Fiscal 2023 pipeline looks like. That’s all been included in our guidance from Day 1. So again, it continues to – we continue to expect that to be a nice tailwind for the year. But nothing that we would anticipate being a real shock up or down relative to our fiscal year. And of course, as we get closer to Fiscal 2024, then we’ll have more visibility as to what some of those decisions are by the payers and PBMs that will then determine better where we can add value.
Elizabeth Anderson
Got it. No, that makes sense. And maybe just conceptually, I mean, I think a lot of us think about your Medical business, when they think about your Pharma business is like two distinct entities and two distinct businesses that you run. Can you talk about where those businesses are most tightly integrated and where having both of those gives you a benefit?
Jason Hollar
Sure. Yes, I think there’s three key areas when we talk about the synergies between these businesses. Two are kind of broader and a little bit more conceptual and there’s one that’s a little bit more specific to how you asked the question. The first two that are a little bit broader, common customers. This is an industry where we serve the same customers in both segments of the business. We have strong relationships that do benefit from each other. And especially as health care continues to evolve, some of those lines – traditional lines of health care will probably continue to blur a little bit. And having the ability to work with customers and solve their problems across the spectrum is an area that we think that there’s value associated with that.
The other area that’s kind of a broad philosophical point of synergies is just the cost synergies. That when you think about we do distribute products in both segments; they’re different products but similar core operational capabilities so we can leverage that scale and that expertise across the enterprise in ways that are hard to define explicitly, but certainly implicitly there’s something – there’s something there that we’re – like freight and transportation is a great example. That’s one that’s much more explicit. But there’s other elements that that expertise is harder to find.
Then the third component is we do have very specific offerings that do span the whole enterprise. They are some of our smaller businesses, our growth businesses, but they are definitely relevant for those businesses. The two primary ones are at-Home and OptiFreight, where we have very explicit opportunities as well as business between the different segments that they facilitate and leverage. So those are the areas that are most significant when thinking about the interrelation between our Med and Pharma segments.
Elizabeth Anderson
Got it. No, that makes sense. And I think over time, you’ve also talked about some investments. I think you’ve sort of alluded to them at various points in terms of some IT functionality, et cetera. Like where do you see as the biggest opportunities for you guys on that – on the investment front?
Jason Hollar
Unlike organic investments?
Elizabeth Anderson
Yes, internal investments.
Jason Hollar
Yes. Well, right now it’s definitely on the medical improvement plan. So investing in – the product innovation tends to be more R&D and that type of investment. And while that’s larger than what we have done historically, it’s not a massive number and certainly not something that we’ve called out. On the CapEx side, what we guided towards this year at around $500 million of CapEx is about $100 million higher than what we’ve historically spent, and that’s very much driven by the need to invest in more capacity and capabilities within the Medical segment. And these are all, well, largely investments that are focused on our Cardinal Health brand products. Products that again are higher margin, better growth areas, certainly parts of the market that we think are growing as well.
So it really hits that sweet spot where we have a good market position. We have a good margin product, and we have an expectation that volumes will continue to grow. That’s where we want to lean in and invest in more of that capacity. The one example we’ve talked about is our surgical glove portfolio, where we’re building an incremental plant. We’ve been investing in getting more capacity out of our existing plant for the last several years, but there’s only so far you can take that. So now we have a step-change opportunity to further invest in that to get to the next level. So those are some of the areas.
I also would expect us to continue to invest in areas like automation and technology, even in the DC, the distribution center type of environment. These are – why I like these investments is that they are a good balance of risk and return. These are investments that we can roll out in a handful of our distribution centers, see how they do and then multiply that by 10 or 20 by rolling them out to the other distribution centers. And this is an example of if the technology works in the Medical DC, it could very well work on Pharma DC.
And so these are the areas where I’m most excited about further opportunities. And when you’re talking about the level of investment, while it’s higher than what we spent in the past, it’s still small relative to the capital that is the cash flow that is being generated in the business. And so it’s affordable, but of course, we want to balance that with returns across other decisions for our deployment.
Elizabeth Anderson
Got it. And maybe since we’re running around time, when we’re sitting here next year in Miami, what do you think is going to be the big focus for you at that point?
Jason Hollar
I think it will be the same topics. And with the medical business it’s clearly going to be – because we’re not going to get the end game a year from now. We will have a lot more data points. We’ll be exiting fiscal 2023 at 50% mitigation and I’ll be 1.5 quarters into Fiscal 2024. So we should start to see how close are we to getting that 100% mitigated just two to three quarters in front of us. So we’re going to have a lot of additional data points on how that rollout is going. And you’re going to have, I would expect, more data points on the other three growth areas of the Medical Improvement Plan as well.
Within Pharma we’re very happy about the underlying environment being as predictable and consistent as it has been more recently. I hope we’re saying the same thing a year from now. That’s something that is welcomed after the volatility of the pandemic. And right now, we don’t foresee there being substantial changes as it relates to that, but that’s the whole definition of a surprise is that you don’t see it coming.
Within the Pharma business, of course, it will be those other – the progress and the investments that we’re making in the Specialty business, talking about the success of what we’ve rolled out and where we’re taking that business going forward from there.
And then finally, capital deployment, I don’t think it will be different than the messages that we’re seeing now. But there’s an interpretation that that the lens that we’re going to be looking through, anticipated being the same. But whether that – that the level – the order of priorities will be the same, but that remaining piece of deployment, how much goes into repo versus other growth, is one that we need to continue to evaluate how we’re receiving that operating leverage from that.
Elizabeth Anderson
No, that makes sense. Well, unfortunately, we are out of time. But thank you so much, Jason. This was a pleasure. It was great to catch up and here your sort of, most updated thoughts on everything that’s going on. So…
Jason Hollar
Thanks, Elizabeth, and thank you, everyone, for joining us.
Elizabeth Anderson
Thanks so much.
Jason Hollar
Okay.
Question-and-Answer Session
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