Cardinal Health, Inc. (CAH)

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Cardinal Health (CAH)

Q1 2012 Earnings Call

October 27, 2011 8:30 am ET

Executives

Matt Blake -

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

Jeffrey W. Henderson - Chief Financial Officer

Analysts

Ross Muken - Deutsche Bank AG, Research Division

Steven P. Halper - Stifel, Nicolaus & Co., Inc., Research Division

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

George Hill - Citigroup Inc, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

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

Steven Valiquette - UBS Investment Bank, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

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

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

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

Charles Rhyee - Cowen and Company, LLC, Research Division

David Larsen - Leerink Swann LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Cardinal Health, Inc. Earnings Conference Call. My name is Stephanie and I will be your operator for today. [Operator Instructions] I'd like to turn the conference over to your host for today, Mr. Matthew Blake, Director of Investor Relations. Please proceed.

Matt Blake

Thank you, Stephanie, and welcome to Cardinal Health First Quarter Fiscal 2012 Conference Call.

Today, we will be making forward-looking statements. 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.

Before I turn the call over to Chairman and CEO George Barrett, I would like to remind you of a few upcoming investment conferences and events in which we will be webcasting. Notably, the Crédit Suisse Healthcare conference on November 9 in Phoenix, and the Oppenheimer Healthcare conference on December 13 in New York. The details of these events are/or will be posted on the 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 the upcoming events.

I also want to point out to you that we will be filing, in early November, 3 documents with the SEC. Our Q1 10-Q and 8-K, which will include the results from our November 2 Annual Shareholder Meeting and will reflect the reclassification of amortization of acquisition related intangible assets from distribution, selling, general and administrative expenses to acquisition-related costs on the income statements, and the exclusion of amortization of acquisition-related intangible assets from segment profit, and the last filing is an S8. Pending shareholder approval on November 2, the S8 will be filed to registered shares that maybe issued as compensation pursuant to the 2011 Long-Term Incentive Plan.

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

George S. Barrett

Thanks, Matt, and good morning, everyone, and thanks to all of you for joining us, on our first quarter call.

We're off to a good start in this new fiscal year and I'm encouraged to see strong execution on our key operational and strategic initiatives. We've created an increasingly balanced healthcare business model that, in a shifting landscape, better leverages our core strength and drives value for all of our customers, business partners and shareholders.

Revenue for the first quarter was up 10% to $26.8 billion and non-GAAP operating earnings increased to $442 million, a 16% increase. This translates to a non-GAAP EPS of $0.73, an increase of 11% over the prior-year period.

As noted in our release, this profit performance was driven by continued excellent results in our Pharmaceutical segment. While both the Pharmaceuticals and Medical segments recorded revenue growth of 10%, our Pharma segment grew profit 19% over the prior year, more than offsetting the anticipated 5% decline in our Medical segment profit. I want to underscore the fact that both of our segments recorded strong sales gains in the period.

Our growth initiatives continue to gain momentum, and last year's acquisitions are yielding results at or above target. Business fundamentals are strong. We are managing our balance sheet with discipline, generating approximately $500 million in cash during the quarter. This past quarter, we increased our quarterly dividend payment by 10%, and share repurchases totaled $200 million. As part of our balanced capital deployment strategy, we have continued to pursue acquisitions which allow us to create value by extending our core capabilities through scale and reach or which leverage our capabilities by creating access to adjacent sectors for markets.

The planned acquisition of Futuremed for approximately $155 million announced this past Tuesday morning actually accomplishes both. Futuremed is Canada's leading healthcare supplier for long-term care facilities. This business complements our existing acute-care medical and surgical platform in Canada and enhances our ability to serve Canadian patients across the healthcare continuum. Our goal is to close this transaction before January 1, 2012, and when completed, this acquisition will be reported as part of our Medical segment.

Now let me provide some color on each segments' performance in the quarter. Our Pharma segment had another excellent quarter. Our 19% segment profit growth was driven primarily by the Pharma distribution business. Strong generic performance and contributions from Kinray and Cardinal Health China acquisitions, as well as from our Specialty Solutions businesses, drove an 11-basis-point margin expansion. All of these businesses continue to perform very well, and the integration of the acquisitions into Cardinal Health is largely complete. As we drove down into the Pharma distribution business, our efforts to rebalance our business mix, both customer and products, continue to bear fruit. In this year's first quarter, our non-bulk sales represented 57% of total Pharmaceutical segment sales versus 53% in the prior year's first quarter.

Our generic revenues grew by 8% versus the prior year. This is more modest growth than in recent quarters, where we anticipated this given the limited number of new launches and a steeper wave of inflation coming from some key products which experienced new competition.

We've continued to work closely with our branded pharmaceutical partners to develop tools which enable their strategies, including our work in specialty, which I'll come back to in a moment. Our recent agreement with GlaxoSmithKline, which leverages our new platform in China, is a great example of our collaboration with biopharmaceutical companies.

Through our enhanced cold-chain distribution capability, we will help GSK expand its vaccine distribution network and geographic coverage, as well as insure the safety and quality of the vaccines.

Turning to our Nuclear business, although raw material supply levels have been back to normal for some time, market demand for low-energy products has not returned to pre-shortage levels. This is associated with the general softness in low-energy cardiac imaging utilization rates. However, we continue to see solid progress in positron emission tomography, or PET sales, while supporting numerous clinical trials with our Pharma partners for new biomarkers and laying the foundation for future growth. We're moving into more kiosk markets with 3 new PET manufacturing facilities targeted to open this fiscal year. Our Center for the Advancement of Molecular Imaging, announced during our August call, is up and running.

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