Cardinal Health CFO talks Specialty Networks acquisition, AI

Cardinal Health (CAH) posted its fiscal second-quarter earnings report, beating Wall Street expectations with a revenue of $57.45 billion against an expected $56.82 billion. Despite the positive earnings report, shares of the company are falling. In addition, the company recently announced its acquisition of Specialty Networks for $1.2 billion in cash.

Cardinal Health CFO Aaron Alt joins Yahoo Finance to discuss earnings, the prescription drug maker's acquisition plans, and how the company can leverage AI to aid its business and its customers.

"The impact AI is having on life and business as well, and as Cardinal continues to advance against a strategic plan in our core pharma and specialty business, the fact that we're able to bring the Specialty Networks people into the family that we can help them drive their business with our balance sheet, but more importantly we can leverage the resources they have invested further and drive that AI benefit, that expertise benefit, the practice enhancement benefit across the broader portfolio," Alt says on the benefits of AI.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

SEAN A. SMITH: Cardinal health shares falling despite a stronger than expected quarterly report. The drug distributor and maker of medical products also raising its outlook for its pharmaceutical and specialty solutions divisions. You're looking at losses today of about 4%.

Since the start of the year, though, the stock had been up about 8%, heading into this report. Now up about 3.5%. Over the last year, shares up nearly 40%. We want to bring in Aaron Alt. He's the Cardinal Health chief financial officer. Aaron, it's great to have you here. So talk to us just about the trends that you're seeing within your business.

Yes, you're able to offset some of the headwinds, some of the challenges that has been plaguing the health care and financial sector here heading into the new year. But what is the biggest challenge that you're identifying for 2024?

AARON ALT: Really appreciate you having me today. The Cardinal team was delighted to report strong results this morning really across the board with revenue growth up 12%, profit growth up 20%, and EPS up 38%. And you're asking about the why, and it's because we're seeing strength across the business. As we look at our primary business, the pharma distribution business, the strength that we're seeing comes from a couple of things, starting with our generics program and the strength that we have with our customers supported by our red oak platform.

We're also seeing strong prescription demand in our branded portfolio. And so as we look back and indeed as we look forward, our guidance which we raised today significantly is driven by the expectation that prescription strength will continue, and we'll be able to service that strength through both the generics program and our branded partnerships with our key providers.

BRAD SMITH: What type of contribution on the margin front do you expect that generics program to continue to add into the business, and where then are you able to reinvest some of that capital?

AARON ALT: Yeah, it's a great question. I would answer it this way. Within our business, we're a distributor. So it's a relatively low margin business. The generics part of our platform is the key contributor to our profitability. We are paid largely on a fee for service basis with our branded portfolio. We love innovation. We love the branded growth that drives much of the revenue top line. But of course, we have the cycle of drugs out there.

So as we look forward, we expect continued innovation on the branded side of the portfolio. And we also expect continued movement from branded goods into the generics portfolio. Now that has generated a lot of cash. And one of the upsides for us today was the fact that we were able to call out that we have 4.6 billion on the balance sheet at the end of our quarter, driven by really strong cash trends in the first half of our year.

And to your question around where we're investing, we're really investing in key areas across the portfolio, first within specialty pharmaceuticals. Our primary business, the pharma distribution is a combination of single digit growing, a core pharma business, but also double digit growing specialty pharmacy. And we are really doubling down and investing in specialty pharmacy, including in the recent acquisition of specialty networks, which we signed and announced yesterday. So we're excited about the future that will have on our portfolio.

We're also investing against our overall network, additional distribution nodes within our medical business, within our pharma business, within our consumer health business as well. And so we at Cardinal are taking a long term view of continuing to serve our business every day to give the customers what they need to make sure we're serving them and the patients are getting the drugs they need while also investing for the long term. And that will mean about $500 million of CapEx over the course of our fiscal year 24.

SEAN A. SMITH: Aaron, you mentioned that deal that you guys just announced yesterday acquiring specialty networks, $1.2 billion. What stuck out to me about that deal is the use that company has using AI to analyze data. I'm curious how you see the integration of AI and how big of a driver that could potentially be for revenue for Cardinal Health in the long term.

AARON ALT: We see lots of opportunity on the horizon. And that's why we're so excited about the specialty networks acquisition and indeed the leadership team that we're acquiring by virtue of acquiring specialty networks. You need look no further than the front pages every day to understand the impact that AI is having on life and business as well. And as Cardinal continues to advance against its strategic plan in our core pharma and specialty business, the fact that we're able to bring the specialty networks people into the family, that we can help them drive their business with our balance sheet.

But more importantly, we can leverage the resources they have, invest in it further, and drive that AI benefit, that expertise benefit, the practice and health enhancement benefit across the broader ology portfolio. That's going to be a big win for us.

BRAD SMITH: Aaron, I wonder how you're evaluating the GLP 1 market right now. JP Morgan research they had forecasted that the market is going to exceed $100 billion by 2030. That has considerable kind of effects or ramifications when you think about some of the other flow throughs as a result, in addition to weight loss. Perhaps you're lowering the risk of heart disease. And so, with all the study that's come forward, how does Cardinal Health kind of evaluate that market and kind of get ahead of where that means that you're going to have a different type of patient experience that you need to put forward?

AARON ALT: Well, let me start by saying that we love innovation. And the GLP 1 is a great innovation in the industry that is supporting both our customers and their patients. And we actually move a significant amount of the GLP 1 product through our own distribution chain.

Now as we think about where that goes from a broader picture perspective, the current concerns are often raised. Well, what will it mean for other parts of the medical industry? And right now we're taking a wait and see approach, right? There's been no noticeable impact on the business. And I think as we see how continued innovation in GLP 1 advance, how adoption advances as well, we'll bob and weave accordingly because we are in a central part of the American and global health ecosystem. And we're here to serve the manufacturers and the customers as they provide the most recent innovation to the patients.

SEAN A. SMITH: Aaron, starting today, the Medicare drug price negotiations are starting on Capitol Hill. But when you take a step back, the wholesaler aspect of this in terms of drug pricing, how are you navigating that? Do you think changes need to be made in order to make prescriptions, to make drugs more affordable to people out there who need them?

AARON ALT: Yeah, look, at the end of the day Cardinal is motivated to ensure that the patients are getting the right drug at the right cost at the right time. And we're a central part of the health care ecosystem. Our role is we're the middleman, right? We don't make the products, right? We don't administer the products. But we make sure that the patients have the products on time and in the right places. And so our role is to ensure that things are being done safely, that they're being done securely, and that they're being done as efficiently as possible.

And in this industry, the business model, the business model evolves over time. And we are committed to-- and indeed, we've proven over time that we can evolve our business model to meet the needs of those patients and our ultimate ultimate manufacturer partners as well.

BRAD SMITH: Aaron Alt, Cardinal Health CFO joining us here on Yahoo Finance. Aaron, thanks so much for the time breaking down some of the results from the quarter.