Cardinal Health, Inc. · NYSE:CAH
Cardinal Health — 2005 Lehman Brothers 8th Annual Global Healthcare Conference
27 slides from Cardinal Health's conference presentation, Apr 1, 2005
Slide 1: Cardinal Health Update
Robert D. Walter Chairman and CEO April 1, 2005 2005 Lehman Brothers 8th Annual Global Healthcare Conference Cardinal Health Update
Slide 2: Forward-Looking Information
Forward-Looking Information Except for historical information, all other information in this presentation consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that co
Slide 3: Agenda
Agenda Cardinal Health overview Segment review Performance drivers FY '05 Issues Actions Implications for FY '06 Conclusion Q & A
Slide 4: Cardinal Health A Health Care Leader
Cardinal Health A Health Care Leader Distribution, manufacturing, and services 55,000 associates on six continents Annual revenues: > $65 billion Operating earnings: ? $2.3 billion Strong balance sheet Strong cash flow Overall corporate strategy: Build an offering of market leading capabilities to p
Slide 5: Four business segments
Four business segments Medical Products and Services Clinical Technologies and Services Pharmaceutical Distribution and Provider Services Pharmaceutical Technologies and Services
Slide 6: Percent of Operating Earnings by Segment
Percent of Operating Earnings by Segment Pharmaceutical Distribution and Provider Services ? 40% FY '05 * Medical Products and Services ~ 30% Pharmaceutical Technologies and Services ~ 15% Clinical Technologies and Services ~ 15% * Estimate
Slide 7: Percent of Operating Earnings by Segment
Percent of Operating Earnings by Segment FY '05 * PDPS ? 40% FY '05 * MPS ~ 30% PTS ~ 15% CTS ~ 15% * Estimate
Slide 8: FY '05 Performance Analysis
FY '05 Performance Analysis Key Drivers of Performance FY '05 Issue Branded Rx vendor margin decline and volatility Capital deployment Pharmaceutical Distribution and Provider Services Driver Comment Revenue Strong market growth Gross Margin Generic and branded Rx Customer Pricing Stabilizing Expens
Slide 9: Analysis of Key FY '05 issue
Analysis of Key FY '05 issue Branded Rx vendor impact Fewer and smaller Rx price increases Less inventory available to purchase Timing of "handoff" from buy-and-hold to non-contingent fee-for-service Pharmaceutical Distribution and Provider Services Result Volatility in capital and earnings
Slide 10: Capital Volatility
Capital Volatility DIOH * IMPLICATIONS Inventory Investment 12 less days = $2 billion lower investment Gross margin required to support At 13.5% pretax WACC $2B less inventory = $270 million less margin Operating margin impact $270 M less margin = ~45 bps 50 45 40 35 30 FY '03 FY '04 FY '05 (E) * DI
Slide 11: Branded vendor margin conversion
Branded vendor margin conversion Key Elements Form of Payment Amount of Payment Timing of Switch Volatility in hand-off Reduction in inventory available before FFS implemented Timing of completing individual manufacturer agreements Seasonality of B&H vs. stability of FFS Pharmaceutical Distribution
Slide 12: Earnings Volatility from Seasonality
Earnings Volatility from Seasonality PDPS - Return on Sales 1.00% 1.30% 1.60% 1.90% 2.20% 2.50% Sept Dec Mar June Period Ending * Segment information does not include special items or non-recurring charges. See the notes to the consolidated financial statements included in our SEC filings for additi
Slide 13: Key FY '05 issue - Branded Rx Vendor Margins
Key FY '05 issue - Branded Rx Vendor Margins Actions Educate manufacturers on our value and their Next Best Alternative Set date with each manufacturer to move to compensation which is not contingent on price increases Goal Established: By April 1, reach agreements to convert the majority of targete
Slide 14: Key FY '05 issue - Branded Rx Vendor Margins
Key FY '05 issue - Branded Rx Vendor Margins Where do we stand? April 1 goal was effective in focusing discussions Pleased with progress and status of negotiations Majority of ongoing discussions focused on price, not form of payment Do not anticipate disruptions in supply to our customers More deta
Slide 15: Percent of Operating Earnings by Segment
Percent of Operating Earnings by Segment FY '05 * PDPS ? 40% FY '05 * MPS ~ 30% PTS ~ 15% CTS ~ 15% Med/Surg Manufacturing Med/Surg/Lab Distribution Specialty Rx Distribution * Estimate
Slide 16: FY '05 Performance Analysis
FY '05 Performance Analysis FY '05 Issues Self-manufactured products pricing pressure Raw material and fuel prices Medical Products and Services Key Drivers of Performance Driver Comment Revenue Above market growth Gross Margin Distribution and self-manufactured Customer Pricing FY '04 GPO re-pricin
Slide 17: Key FY '05 issue - Margin compression
Key FY '05 issue - Margin compression Actions Low-cost sourcing initiative Manufacturing network optimization Potential price increases on oil based products Implications for FY '06 New products drive continued revenue growth Productivity/expense improvements Improving operating margins Medical Prod
Slide 18: Percent of Operating Earnings by Segment
Percent of Operating Earnings by Segment FY '05 * PDPS ? 40% FY '05 * MPS ~ 30% PTS ~ 15% CTS ~ 15% Oral Tech. Sterile Tech. Packaging Nuclear Pharmacy Other Services * Estimate
Slide 19: FY '05 Performance Analysis
FY '05 Performance Analysis FY '05 Issue Execution in sterile manufacturing Puerto Rico regulatory progress Albuquerque productivity Pharmaceutical Technologies and Services Key Drivers of Performance Driver Comment Revenue New project/product pipeline Gross Margin Hurt by sterile costs/execution Cu
Slide 20: Key FY '05 issue - Sterile mfg. execution
Key FY '05 issue - Sterile mfg. execution Actions Resolving Puerto Rico regulatory issues Process improvement initiatives at Albuquerque Plant and facilities optimization Implications for FY '06 New projects drive growth Puerto Rico drag of ~$15 to $18 million eliminated Operating improvements Margi
Slide 21: Percent of Operating Earnings by Segment
Percent of Operating Earnings by Segment PDPS FY '05 * MPS PTS CTS Pyxis Alaris Clinical Services & Consulting ? 40% FY '05 * ~ 30% ~ 15% ~ 15% * Estimate
Slide 22: FY '05 Performance Analysis
FY '05 Performance Analysis FY '05 Issue Pyxis products business execution issues: Delayed MedStation(r) 3000 launch Installation problems Product quality issues Clinical Technologies and Services Key Drivers of Performance Driver Comment Revenue Alaris and CSC solid, Pyxis weak Gross Margin Hurt by
Slide 23: Key FY '05 issue - Pyxis execution
Key FY '05 issue - Pyxis(r) execution Clinical Technologies and Services Actions New management team New MedStation? product launched in December '04 Restructuring of installation team and processes Productivity initiatives underway Sales and R&D focus on new value- added solutions Alaris/Pyxis oper
Slide 24: Corporate Initiatives - Our "5th Segment"
Corporate Initiatives - Our "5th Segment" One Cardinal Health Integrated go-to-market strategies Shared services Strategic sourcing Operational excellence Capital Deployment ~ $1.5 billion annual free cash flow
Slide 25: Conclusion: A Difficult and Volatile Transition Year in FY '05
CONCLUSION A DIFFICULT AND VOLATILE TRANSITION YEAR IN FY '05 - - Previous guidance: EPS for FY '05 of $3.20 - $3.40 (excluding special items and non-recurring charges) - - Short-term earnings volatility, driven predominately by: - Pharmaceutical Distribution vendor margin - Lag in installation of c
Slide 26: Conclusion (cont'd)
Conclusion (cont'd) Driving better performance into FY '06 Continued strong revenue growth in all segments Better predictability of profits in PDPS from non-contingent vendor margin Margin improvement at MPS from sourcing and productivity initiatives Improvement at PTS from better sterile performanc
Slide 27: Cardinal Health
CardinalHealth Working together. For life.”
Cardinal Health — 2005 Lehman Brothers 8th Annual Global Healthcare Conference on 6ix