Cardinal Health, Inc. (CAH)

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Cardinal Health (CAH)

Q2 2012 Earnings Call

February 02, 2012 8:30 am ET

Executives

Sally Curley -

George S. Barrett - Chairman, Chief Executive Officer and Chairman of Executive Committee

Jeffrey W. Henderson - Chief Financial Officer

Analysts

Glen J. Santangelo - Crédit Suisse AG, Research Division

Ross Muken - Deutsche Bank AG, Research Division

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

George Hill - Citigroup Inc, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

David Larsen - Leerink Swann LLC, Research Division

John W. Ransom - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2012 Cardinal Health, Inc. Earnings Conference Call. My name is Chris, and I will be your conference moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. At this time, I would now like to turn the conference over to your presenter for today, Ms. Sally Curley, Senior Vice President of Investor Relations. Ma'am, you may proceed.

Sally Curley

Thank you, and welcome to Cardinal Health's Second Quarter Fiscal 2012 Conference Call today.

We will be making forward-looking statements. The matters addressed in the statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to the SEC filings and the forward-looking statements slide at the beginning of the presentation found on the Investor page of our website for a description of risks and uncertainties.

In addition, we will reference non-GAAP financial measures. Information about these measures is included at the end of the slides. I'd also like to remind you of a few upcoming investment conferences and events in which we will be webcasting, notably: the UBS Global Healthcare Services Conference on February 8; the Leerink Swann 2012 Global Healthcare Conference on February 16; the Citigroup 2012 Global Healthcare Conference on February 27; the Cowen & Co. 32nd Annual Healthcare Conference on March 5; the Raymond James 33rd Institutional Investors Conference on March 6; and the Barclays Capital Global Healthcare Conference on March 14. The details of these events will be posted on our IR section of our website at cardinalhealth.com, so please make sure to visit the site often for updated information. We look forward to seeing you at one of these upcoming events.

Now I'd like to turn the call over to George Barrett.

George S. Barrett

Thanks, Sally. Good morning, everyone, and thanks to all of you for joining us on our second quarter call. We are now halfway through our 2012 fiscal year, and I'm pleased to report a solid second quarter performance. We continue to make excellent progress on activities that will benefit the near, mid and long term.

Revenue for the second quarter was $27.1 billion, up 7% from the prior year. Non-GAAP operating earnings increased by 21% to $475 million. Our non-GAAP EPS grew 11% to $0.81 from last year's $0.73, which benefited from a lower than usual tax rate. The earnings improvement reflects continued margin expansion across our business. This continues to be a priority of ours, and our margin improvement is a result of disciplined approach to product and customer mix, as well as overall efficiency improvements.

Our Pharmaceutical segment continued its momentum and delivered a terrific performance, 30% profit growth on a revenue gain of 6%. The Medical segment achieved top line growth of 9%, demonstrating good progress, but as expected, recorded a year-over-year profit decline of 18%, primarily due to residual commodity cost pressures. Overall, our growth initiatives continue to gain momentum, and our recent acquisitions are yielding results at or above target.

Now let me provide some color on each segment performance in the quarter. The 30% Pharmaceutical segment profit growth was driven primarily by our pharmaceutical distribution business. Strong generic performance, solid execution under our manufacture agreements, and contributions from the Kinray and Cardinal Health China acquisitions resulted in a 29-basis-point margin expansion.

To provide a bit more detail, our generic revenues grew by 17% versus the prior year. As you know, this quarter saw the generic launches of a number of major branded pharmaceuticals. In particular, the launches of the generic equivalents to LIPITOR and Zyprexa occurred in the period, with financial contributions largely as planned. Our generics team did an excellent job in preparing for what turned out to be a very complicated launch scenario and executed well for our customers. We've now lapped the year mark for Kinray, last year's acquisition, in the retail independent pharmacy space, and our integration is complete. We were very pleased with the performance this quarter, and we continue to see the positive impact of Kinray on both our customer and product mix.

Innovation continues to be a high priority for our organization. BarCode360 launch during this quarter is a great example. This barcode administration solution supports hospitals' medication safety initiatives by making it easier, timelier and more cost effective to order medications. It also ensures that more unit dose medications can be scanned at the patient bedside.

Moving to nuclear. Our team continues to do a terrific job serving our customers in this high-touch business. That said, sluggish utilization in low-energy cardiac imaging have negatively affected our top and bottom line in the space. However, we continue to see solid progress in positron emission tomography, or PET, sales. As I noted last quarter, we're moving into more key U.S. markets with 3 new PET manufacturing facilities targeted to open this fiscal year. And we look forward with promise to the potential for several launches of new biomarkers for cancer and Alzheimer's from our biopharmaceutical partners.

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