Cardinal Health's CEO Hosts Investor and Analyst Day Conference (Transcript)

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Cardinal Health Inc. (NYSE:CAH) Investor and Analyst Day Conference December 10, 2013 8:00 AM ET


Sally Curley - Senior Vice President of Investor Relations

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

Donald M. Casey, Jr.

Michael B. Petras - President of AssuraMed

Jeffrey W. Henderson - Chief Financial Officer

Lisa Ashby - President of Category Management - Medical Segment

Shaden Marzouk

Mike Duffy - Executive Vice President of Global Manufacturing & Supply Chain

Eric Zwisler

Michael C. Kaufmann - Chief Executive Officer of Pharmaceutical Segment

Meghan Fitzgerald

Lisa Ashby

Michael Evans

Sally Curley

Good morning, everyone, and welcome to Cardinal Health investor and analyst event. I'm Sally Curley, the Senior Vice President of Investor Relations for Cardinal Health.

Before we begin, I just want to take a moment to introduce my team. So if you are in the room, if you could please stand up. Director Jennifer Skinner, I see her in the back there; Manager Kevin Moran; Analyst Krysta Butler; and Manager Erika Wadlinger.

For those on the live audience, please note that we are all wearing a Cardinal Health pin. They're small, but hopefully, they're distinctive to easily identify us. So if you have any questions, please feel free to grab one of the members of the IR team, and we'll be able to help you out.

And I'd also like to welcome those joining the webcast and remind everybody that we are webcasting today's event in its entirety. We anticipate ending just afternoon Eastern with a 20-minute break around 10:10. A detailed itinerary is available on our web site at

In addition, we will be making forward-looking statements today, addressing expectations, prospects, estimates and other matters that are dependent on futures events or developments. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied.

The most significant of these uncertainties are described in Cardinal Health's Form 8-K, 10-K and 10-Q reports. These statements reflect the management's views of today, and we undertake no obligation to update these statements, definitions and reconciling information for non-GAAP financial measures. As well as an audio replay of today's meeting can be found in the Investor Relations page of the Cardinal website. How we're done with.

Before I hand over the stage to Chairman and CEO George Barrett, I did want to cover a few logistical items. First, today's agenda, which George is actually going to cover in a moment, is designed to focus on our 5 key strategic priorities. We try to intersperse plenty of Q&A throughout the morning, and we've also tried to address the questions that we've heard from you during the past couple of months. As a result, we do have a very full plate to cover today, so please feel free to take breaks as needed throughout the morning.

And second, for those in the room, we invite you to visit the Cardinal Health Continuum of Care Exhibit, which you will have seen outside where the food is located, to learn more about the strategic priorities that we'll cover today.

In addition, for those here in the room in New York, you'll notice that you've actually got a stack of index cards on your table. We ask that you please write down your questions on those cards for those that are shy. We will also have a couple of handheld mics in the room if you prefer to just directly ask the question. And so just wait for one of the individuals to come over to you with a live mic to ask your questions. In the event that we run out of time, we will actually be posting these on the Cardinal Health website within the next few weeks.

So without further ado, I'd like to introduce our Chairman and CEO, George.

George S. Barrett

Good morning, everyone. Good to see you all. Again, I appreciate your coming. I know the weather is looking a little bit threatening already, and so we'll do our very best to keep things moving quickly and conscious of that.

Again, I'm glad you guys had a chance -- if you haven't already, but please make sure to take a look at the exhibits. And I was talking to someone earlier, and in our group, we -- you'll see in those exhibits a number of the Cardinal brands. And actually one of the things that we've been working on in these last months is a lot of thought around those brands. And my guess is if you look at this a year later, you're actually going to see much more cohesive approach to our own branding. So a lot going on.

Here's what I'd like to do today, and again, part of my goal is to have you leaving with the same sense of confidence and optimism we have. We feel very good about our positioning as a company for the present and for future growth. It's an extraordinary time in health care. We talk about this a lot. Many of you get to talk with us about this, and we really very purposely positioned our business around some important changes that are happening in our marketplace. And we're going to be talking about those during the course of the day.

We will show you a pattern of continued financial growth. We're going to spend some time talking about history a little bit, about how we performed in each of our areas. You'll hear from our team. I think it's important to us to be able to give you a sense of how we've seen our trajectory, but we'll spend a good part of our time today talking about the future.

Again, if all goes well, you will continue to feel convinced that we are responsible, thoughtful stewards of your capital. We will continue to employ capital efficiently and smartly and with a very high focus on returning shareholder value. And most important and one of the parts that makes this day really fun for me, you're going to get to hear from our talent. This is a great opportunity for me to step back a little bit and let you see part of what makes Cardinal tick, which is just incredible leadership team. So you're going to get hear from a lot of folks.

You probably saw, as you're walking in on the slide, a reference to some recognition for our people, and I think that's something that we're going to take great pride and continue to develop and build.

I want to just walk you through this, and this slide is -- captures a number of things. But most importantly, essentially, this is a slice of performance metrics from the spinoff of CareFusion. And what we've captured here is our non-GAAP diluted EPS, our non-GAAP operating earnings and our non-GAAP operating margin.

As you can see, the direction on all this is very positive. We haven't gotten a chance to do these kinds of meetings that often. Anthony was just reminding me it's been a couple of years. It is extremely important for us internally and externally to do what we say we're going to do. We talk about that a lot in our own organization, in our culture, which is about making commitments to one another and honoring them, making things happen. And I hope that as you look at this slide, with an 18.5% non-GAAP EPS growth and a 13.6% non-GAAP operating earnings compound annual growth, that we've done that for you all.

So again, I put some history on here just to remind you, essentially for us, this critical idea of doing what you say you're going to do. And we'll hold ourselves to that, and I know that you will hold us to that expectation.

So I want to do something a little bit different here today. We get a chance to talk to you a lot. This is a little bit of a little twist. And what we'd like to do is hear from you a little bit. And so I'm going to have Sally just come up and describe this to you, and then I'll come back to you.

Sally Curley

Great. So George mentioned we'll actually be using a little bit of pooling technology for a few questions today. We encourage everyone in the room here as well as those listening to the live webcast to participate. And responses are completely anonymous, so please feel free to be candid.

So here's how it's done. Please take out your phones to get ready, first of all, because we do need to give you a couple of seconds. In the To field where you would normally text, you're going to type 2 2s and 3 3s. So it's 22333. And the message you'll type: Cardinal. And you'll know that you're linked in when you send a -- or when you receive a message back saying that you've actually joined the employee com and then parentheses, Cardinal. And so don't worry, this is just our account name. You've not all become employees of Cardinal Health [indiscernible]. Then as George goes through the questions, just text the number corresponding to your response, and some of your responses will appear on the screen.

So again, for those on the live webcast, you, too, can participate. Again, you're going to -- in the To field, type 22333. And then in the Message field, type Cardinal, and you should receive a response back confirming it.

So I'm seeing a lot of heads nodding in the room. Okay, so with that, George.

George S. Barrett

So let me just again set this up. This is a great opportunity for us to hear just a little bit about what's on your mind. And I'm going to ask 2 questions. We'll try to do -- I hope that we'll touch on all this during the course of the day, but we'll try to do some course correction based a little bit on what you're saying. But this is a great opportunity to get a little bit of a read of the room. So let's give this a go.

So the first question: which of the following drivers will be the most important to Cardinal Health sustaining growth over the next 5 years? Which of the following drivers will be most important to Cardinal Health sustaining growth over the next 5 years? A, it's demographic trends; b, generics or some generic pharmaceutical; c, specialty; d, preferred medical products; 4, alternate site and home; and e -- and then f is China. I must have said 5. E, 5, like something. So I repeat them? Okay. A, demographic trends; b, generics; c, specialty; d, preferred medical products; e, alternate site and home; and -- or e, home; and f, China.

And for those of you who are not in the room, what I'm looking at here is essentially bars that tell me the percentage of people that pick their choice. And I'll give it a minute, and then I'll give you what I'm -- I'll tell you and describe to you what I'm seeing.


George S. Barrett

So I'll let you suggest to me when it's time. Stop? Okay. So let's stop right here. So here's what we're hearing. For -- again, for those of you dialing in, generics, by a fair margin. 47% of you listed generics as the top driver of growth over the next 5 years. We were sort of neck and neck with specialty and preferred medical products. Alternate site and home and demographic trends were another distant, sort of tie for the next spot. And then China as the last of them.

So okay, couple of comments for me, and let's sort of -- we're going to keep that in our minds during the course of the day. What we might do is sort of we may not poll you at the end, but I'd like to hear at the end a little bit of how -- whether or not any of this has shifted in any way. We would share you within the generics, it's incredibly important. We know the pressure is occurring in this system that are necessary for us to really sustain our economic growth as a nation, keeping medical costs under control is important.

Obviously, generic drugs are an incredibly important tool in this arsenal. About 84% of all drugs today are filled generically. So we understand that dynamic. We happen to also be very bullish on this. We like our positioning. I know that Mike will spend some time talking to you about this today.

I would answer -- by the way, all of these are going to be important to our growth. They are at different stages of development in our portfolio and probably at different scales. So some, I think, will move the needle more than others. Every one of these subjects we're going to talk about today, and again, I'll be sort of curious to see at the end of the day whether or not any perspective thus will change. But again, this an interesting observation. Again, I hope everybody on the phone was able to hear what we captured in the room, which is, again, the group said generics, probably most important, followed by specialty and medical, followed by demographic trends, alternate site and home and then finally China.

Okay, next question. Those of you who know me know that I don't like elephants in the room, so I think we might as well put hard ones on the table. Which of the following drivers are you most concerned about related to Cardinal Health sustaining growth over the next 5 years? So we're still going to invert this, okay? It's really helpful to us. Which of the following drivers are you most concerned about related to Cardinal Health sustaining growth over the next 5 years? And they are, a, industry dynamics, and let's bracket in that all the sort of movements that have occurred, all right? So that's sort of what I'm trying to get at here, industry dynamics; b, sustaining generics; c, specialty positioning; d, Medical segment overall positioning; and e, execution on preferred products. So we're going to let that play out for a minute. I'll read them again. Industry dynamic is a, b is sustaining generics, c is specialty positioning, d is Medical segment overall position, and e is execution on preferred products.


George S. Barrett

All right, I'll give it about 30 more seconds, and I think we probably -- we're getting most of it. You can see this shifting. All right, what do you think? Is that stable? Good, we'll go. Okay, again, those of you listening, what we're looking at here is essentially, with the 2 leading concerns being what we call industry dynamics and sustaining generics. And it's, I guess, not a surprise that people have seen those in some connected way given all the events of the last year. Specialty positioning was second, after that with Medical segment overall position in the fourth spot in terms of most concern, and execution on preferred products was the smallest.

So interesting observation again. Let's sort of go back to some quick thoughts on this. Obviously, given what's happened in the industry in the last few months and probably 18 months, it's not surprising that these areas are linked in your head. We've obviously had this conversations together. We continue to feel very good about what we're doing in generics and how we're positioned in our industry.

You will hear from a group of people that will all touch on those kinds of issues. We've had a very strong track record in generics and a very strong track record in positioning ourselves in the context of our competition, and I think you're going to see some of that and as it relates to generics, in spite of what has really been a rather lackluster blockbuster launch environment.

So I think what I'd say to you as a starting point is our performance up to date is really important. And I think it's a good barometer for our ability to compete in an environment that's already changing quite a bit. So we'll get a chance, as the day unfolds, to talk to you a little about this and about what we see in the industry dynamics. Again, we'll cover every one of these. My hope is that by the end of the day, areas of concern will be areas of enthusiasm. I understand that they can be both, and that's how we'll cover the day. So look forward to following up on this, and we've got these observations noted.

So I mentioned to you the changes in the marketplace, and I'm not just talking about industry dynamics now inside Pharmaceutical Distribution or medical products. We're talking about big changes occurring in our system. And all of our strategic priorities are informed by our view on these powerful trends.

And I want to start with the one on the left: demographic and public health issues driving demand. It was interesting when we polled you that this was relatively unimportant in your perspective as it relates to growth. Actually, I think it's really important. Now I understand it's very hard to capture the direct impact, but let me just offer this.

We have about 10,000 people a day entering the age of Medicare eligibility. We have 11 million people over the age of 80 today, 11 million people over the age of 80. That number is likely to double by 2025. This is in the United States, 20 million people over the age of 80. We know that on average, this population above 65 consumes a greater percentage of our health care, on average, 4 to 5 drugs per patient. Again, I've said this to a couple of you, with 2 parents in their 90s, that number actually feels very low to me.

So we continue to believe that this is going to be a powerful force for driving demand but also a powerful force in forming some of the other trends to the right of this because economically, as a nation, this is going to be an enormous challenge for us. We believe and have said this to you before that we -- the care has to be delivered in different settings. We built a lot around this, and I'll come back to this in a moment. It's a more cost-effective setting than have historically taken place.

We think the consumer is going to be a much more active participant in our own health care. And this is being driven by a number of things, not the least of which is a generation of people that are beginning to access information about how to get treated, how much it costs to get treated, where to get treated. So I do think the consumer is becoming more involved partly just by the nature of consumerism.

But there's another powerful dynamic at work, which is those employers who are still covering most Americans are putting enormous pressure on their -- on themselves to create a different dynamic among their employees. And that dynamic is to make them participants in their own health care.

And that force, when I talk to CEOs from other companies who are not involved in health care, I'm always amazed at how much they know about health care. And part of the answer is it's a cost for them that is very hard for them to navigate. And so again, what you'll see is employers being much more involved in helping their own employees, encouraging their own employees to take ownership of their own health.

Transition from fee-for-service to a payment for outcomes. This has been talked about a lot, as you know, in public. It's been talked about a lot in academic circles. It was discussed fairly heavily in the early stages of the Affordable Care Act discussions. Here's what I would say about his transition. It is already occurring. It will not occur nationally in a systematic way quickly. This is something that is happening in pockets around the country and in systems around the country, but there is no question that this trend is one that is occurring. It is likely to take a pace at some point, and we're very mindful of this trend.

And then finally, an increased participation of our government, both as payor and as regulator. If you look at where we are today, just combining Medicare and Medicaid, just Medicare and Medicaid, we're probably about 37% of the -- of our medical spend. If you add all the other federal programs, it's about right in and around 50% today. So around 50% of health care is paid for by the government. We are going to see that continue. It's not going to shrink. You all understand the -- some of the dynamics around the Affordable Care Act and the incentives to increase Medicaid. So I think we'll continue to see that as a powerful force, and again, you'll see all this woven throughout our business.

I want us to sort of take a little bit of a step backwards for one moment to talk to you about this slide. When we launched the spinoff, one of our hypotheses right from the outset was we believe that care is not being delivered in the most effective setting by the right caregiver in the right sequence and that, that was likely to change. And at the heart of this, we need to still recognize that care would be delivered in different settings and that our ability to touch and to serve across the entire continuum of care was going to be foundational in our strategic positioning. And we've worked very hard at that in surgery centers to clinics, hospitals, physicians' offices, imaging centers, labs, retail pharmacies and the home. I'm going to come back to this in a minute.

So again, if you go back 5 years, one of the things that we said to you all was we will serve the patient across the continuum of care, and this will evolve over the coming years. And it actually has evolved quite a bit even in the past 5 years. So we'll see continuous shifting here.

And Sally said, this is essentially -- this slide which talks about our strategic priorities, you can think of this as our agenda for the day. This is what you're going to hear about. So let me just again touch on this, sort of at a 30,000-foot level on all these subjects, and then I'll bring Don up.

So generics. Again, you guys highlighted how critically important this is to us. It is critically important to our nation. We will continue to build scale and our capabilities to deliver value in generics. We've had really explosive growth in this part of our business, and it hasn't been an accident. Purposeful, systematic, disciplined approach to repositioning ourselves to build capability, scale, to navigate upstream and the ability to sort of micro-segment downstream, to touch our customers where they can see -- where they need value, to target our programs uniquely for them. And we've built a lot of analytical tools to do this. I know that Mike will cover this.

Meg is going to talk to you about specialty and biopharmaceutical. We are now seeing, as you guys are well aware, sort of a bifurcated pharmaceutical system in which you have a heavy percentage of pharmaceutical utilization coming in generics, a relatively heavy part of the spend occurring in specialty. Further, what we're seeing, if you look at the clinical trial activities, that virtually, virtually, all research-based biopharmaceutical companies, an incredibly heavy emphasis on specialty.

So again, everyone acknowledges that we have patients with unique sets of needs, with unique capabilities now to identify those who are likely to be the responders to our drug. And this evolving change is powerful. It's important to us, important to our positioning, and Meg is going to spend some time talking to you about that.

Internationally, our goal has always been to take advantage of the skills that we have to bring those tools to markets where it can have impact. We've had a significant impact in China. By the way, we often talk about Puerto Rico. Even though it is United States territory, we talk about it as an international market because in many ways, it behaves more like an international market. So I will apologize to all my Puerto Rican colleagues here.

China will remain a really critical focus for us. One quick observation about China. It's projected that if you look at pharmaceutical growth over the next 5 years, IMS predicts that more than 30%, more than -- excuse me, more than 1/3 of that is going to come in China. So for those of you who I know -- actually, we go back to your responses that China you felt was going to be a relatively small growth driver, we're actually hopeful that it's going to be a powerful source for us. And we continue to be really excited about what's happening in China.

We're growing our business well. Eric Slusser is in from China, and both Eric and Erika are going to talk to you about that.

And we'll continue to look at other markets with a very disciplined eye. The eye is not just whether or not it's an interesting market, but is it an interesting market in which we've got tools that we can bring to bear, where we can assert ourselves and be a dealer? So we will continue to look very carefully at opportunities. Again, high priority today on our work in China.

Our health systems and hospital solutions area is a very broad basket of ideas. But here's the basic concept, and Don and his team will talk to you about it, including their panel. They are facing unique challenges, our health system and hospital customers. This has been true for many years, but I think the acceleration of change has been noteworthy, and they are really at a point where they are looking for partners who understand the nature of those problems and can find different kinds of solutions.

They understand that just squeezing unit cost is no longer the solution to actually competing more effectively in a world that's changing. You've got to change some behaviors. And we are, I think, increasingly the go-to company in thinking about how we can help address some of the pain points that a hospital and now a more integrated health system can look at. So you'll hear a little bit about that. We'll talk about our physician preference items. We're going to talk about medical consumables. We're going to talk about our pharmacy solutions, our clinical work that we're doing to support our hospital and IDN customers.

And finally, alternate sites of care. This sort of goes back to this notion of where will care be delivered. I had a conversation with a hospital CEO not that long ago, and one of the things he said to me -- we were sitting in his office which was in the acute care building. And he said to me, "My picture of this building is it's all intensive care beds, that this hospital will be for these sickest patients."

We can serve many of these other patients more efficiently and probably more safely and with higher quality in another setting. And so we've made some important moves in this area, and we'll continue to do that. The most recent move, again, was the acquisition of AssuraMed this past year, giving us access to patients in the home. And again, I'll just bring you back to one more statistic as we think about the home. Think about 20 million Americans over the age of 80 and where -- how are they going to be served and where are they going to be served. And our hypothesis is that more patients will be served in the home. More patients will be served in the home. And so you will hear from Michael Petras and from Don about the work that we're doing in alternate sites and in the home.

So that is sort of the general tee-up to the day. Again, a few final comments before I turn it over to John -- to Don. This is a really exciting time for us. It's been a couple of years since we have had a chance to do this. We want to use this day productively. We'll have a number of settings where we can do Q&A. We'll try to, as always, be as responsive as we can. But my hope is that when you leave today, you'll take away a couple of things. Cardinal is really well positioned. They are very committed and disciplined about what they do, and they honor their promises and their commitments, and they've got incredibly talented people.

And so I will leave you with this important notion. Our people are in a business that's heavily service-oriented. A distinctive characteristic is your ability to have the talent to drive your strategies. And I feel really good about our guys and proud of the work that they've done and the work that they are doing for you every day.

And so with that, I will pause, and I'll bring Don Casey, CEO of our Medical segment, up to join us.

Donald M. Casey, Jr.

Thank you, George. I want to judge by the very scientific polling that you have complete confidence in the M segment. And I will keep my remarks extraordinarily brief, but could be a long presentation if we don't even get a smile on lines like that.

So first, I'd like to also talk about talent, and I'm pleased to say we have most of our leadership team here. And I just want to call out a few people. Mark -- and if you guys will just put your hands up, Mark Rosenbaum, part of -- a key member of our M team, our Chief Customer Officer. Lisa Ashby is President of our MD&D group. Mike Duffy is President of Medical Consumables. Steve Inacker is President of our Hospital Services group. I believe we have Tony Vahedian, who is in Senior Vice President in charge of our service business; Dr. Shaden Marzouk is -- there's Shaden; and John Rademacher who is President of our AmCare group. It's always dangerous to do that without a prompt. I hope I got everybody.

But we're extremely excited to talk about how we are repositioning our M segment business to support an evolving health care system, and I think George really set this up quite well.

I'd also leave you with the thought that if you're going to take a couple things away from our M presentations, we're really excited about the opportunities. The pace of health care change is accelerating. For those of us who've been doing this or following this for a long period of time, I think it's fair to say that we have never seen the level of change that we've seen in the last 3 years. And as a matter of fact -- unfortunately, I can say I've been doing this for close to 30 years, the pace of change is accelerating almost on a weekly basis.

Now in a lot of cases, this level of disruption in the base system would cause concern. We tend to look at this, though, as a real opportunity. This level of disruption is really a opportunity to really reset how health care is delivered, how health care is provided to patients. And we think we've assembled a number of assets and solutions that really position us extraordinarily well for this future.

These solutions and services that we tend to talk about are one products. And if you saw the products when you're walking in today, one of the solutions that hospitals are really looking for is how do I control costs across the broad array of areas? One of the critical things is they really look at us and say, "We buy a lot of stuff." But we're proud to say at this point we're expanding the amount of stuff we are offering both in the medical consumables as well as the preferred product area in such a way that we become increasingly relevant in a number of different categories because we're saving them money by providing great quality products at a dramatically lower price.

The other key area is solutions and service solutions. So up here, we're going to talk about what a hospital P&L looks like. We're getting increasingly relevant across a broader array of what's important to the hospital.

So again, not to reiterate everything that George has said, but reimbursement changes. I think everybody in the room is familiar with the transition that we're seeing from fee-for-service or fee-for-value. But the other thing that is a significant change there is the amount of reimbursement on an absolute basis going into the system. While that's not expected to change, if you do anticipate at some point there's going to be a significant influx of patients with insurance, you can sit there and say, "Okay, on an aggregate level, there's going to probably be a fixed amount of money into the healthcare system, and if there's more patients on a per patient basis, that's going to go down." And hospitals are beginning to say, "How are we going to cope with a dramatically changed environment?"

The second issue is I think everybody shares this in common today. We were actually a day older today when we woke up than we were yesterday. And George talked about the fact that there's 10,000 people a day that are hitting the age of 65. And when we used to have like a Newsweek and a Time Magazine, you'd see the picture of Mick Jagger is now 65. Well, the issuing issue is if you would look at per capita spending on a 65-year-old, a 75-year-old and an 85-year-old, that's dramatically different than what you see as a 20-year-old. So if you're going to look at a positive headwind -- or excuse me, tailwind over the course of next couple of years, you sit there and say, "Basic demographics, as this society ages, are going to be very favorable to our overall business." But the important thing, if you're a hospital, also you're anticipating a ton of elderly patients that are going to come in, going to demand a significant amount of health care.

How are hospitals responding? They're consolidating. A day doesn't go by when you don't see an announcement that this hospital or this hospital system expanded and bought another hospital. And if you look at it, it's expanding at an increasing rate. So in 2012, there were 105 significant transactions involving 1 hospital system buying another hospital system or significant large physician practice, right?

The other thing that's beginning to change is the idea that physicians who choose to be an independent group are now owned by the hospitals. At this point, at the end of 2012, more than 50% of practices and upwards of 60% of physicians are now employed by the hospital. They're doing this so they can go buy up the referral sources. And they're also anticipating the day when the hospital has to move from a freestanding acute care entity into something that's going to have to care for the patient over a broader continuum, so you're going to need to be able to serve them right starting from when they come into a physician.

As they are also looking is how are they going to expand, not only in the acute-care setting to the physician, but how are they going to manage a patient post discharge. So the idea of this continuum of care that George set up is really, really important to us where, look, if the patient comes in, in an ambulatory setting, they're going to refer if they need to. In acute care setting, there -- whether that's an academic medical center or specialty hospital, then we're going to have to take care of them after they leave. And that's creating, we think, a significant opportunity, but it represents an extraordinary challenge if you're a hospital. Can you imagine if you were a hospital CEO 5 years ago that didn't know any physicians, now all of a sudden, you're owning acute care centers, you're also trying to manage a sniff and looking at a long-term care center because that's where your patients are going to go. So we think this is a significant change in how they're operating. And now they're beginning to realize if you need to write site care, which you're going to provide great patient care at lower prices, where are you going to go? The home, which, in a large way, explains why we are so excited about a new platform for us where we can serve the patient across the entire care continuum.

This is, in our mind, our estimation of what we think a typical hospital or IDN spend looks like. So about 60% to 70% is spent on labor. We also look at services, representing close to 20%; medical device and supply is around 15%; and drugs administered within a hospital setting, around 6%. It's important to note that Cardinal participates now in all 4 of these segments and is extremely relevant today in the services medical supply and devices, and we believe that labor pool eventually gives us another significant opportunity to align with what our customers need to provide them with solutions.

George mentioned the fact that we believe we're well positioned, and we have spent a lot of time making sure our business is aligned with our customers, which we're defining as the hospital and these new healthcare systems.

So 5 core things that we are focused on. First, increasing the breadth of our consumable product portfolio. And we said -- we think we've talked about this, we had more launches in the first quarter than we had all of last year, and I'll talk a lot about this in a couple of minutes.

Launching solutions that offer position-preferred items in a whole new delivery system that will allow the hospital and these IDNs to access generic medical devices, the term we use, as well as a new delivery system that will result in great patient care at dramatically lower prices. We think services is a way of our future. And we don't necessarily break this out a whole lot, but we're going to show you today why we think the service businesses beyond logistics represent a really important growth opportunity for our business going forward.

AssuraMed, I'm going to ask Michael Petras to join me in a couple of minutes when we talk about AssuraMed and, again, why we believe that we bought a leadership platform in a fragmented segment that gives us such tremendous opportunity to serve these healthcare systems that are looking to manage a patient basically from the physician right to wellness.

And the last issue that we're not going to spend a heck a lot of time, about a year ago, you saw that we did a significant restructure within the Medical segment, where we spent a considerable amount of time making sure that our cost structure is aligned to what our customers need, and we're beginning to see positive results from that.

When we talk about preferred products, what are we -- we want to make sure everyone has the same definition. So basically, that's products that we manufacture or source and then we believe that will be preferred by our partners because they offer great quality at lower prices, all right? Two kinds. First is consumables, which I'll talk about in a minute. And the second is -- and this is a wonderful picture of a cannulated screw. I'm often asked by you guys, what is a cannulated screw? Well, that's a cannulated screw. Basically, you don't want to use any of the products that we manufacture, just as a safety tip. When we talk about it, the increasing breadth of our consumable portfolio, all right? George referenced the products out there, so you can actually pick up and look at a lot of these different things. But this is, if you think about, there's 2,000 categories that represent the medical consumable and medical device categories that are purchased by IDNs. We believe that by expanding our presence and offering more cost-effective alternatives in a broader array of these categories, we become far more relevant to the hospital system because we're saving the money, we're delivering them great products. And we believe this is absolutely essential for us to continue as a way we're going to build our distribution partnerships with people.

All right. The second issue that you saw, there's probably about 400 or 500 different SKUs out in our continuum of care exhibit. We believe that we have a tremendous opportunity to expand the Cardinal Health brand name beyond where we are today. Currently, we tend to focus on what do we ship into the hospital, but we believe that brand name, which is extremely relevant to the patient and the hospital, will now be something they would be willing to look for in the retail independent pharmacy, in chain pharmacy, in the hospital, as well as in the home. And as George referenced, we fully expect, within a short period of time, probably about a year, that we will be able to rebrand this and make that relevant so that a patient in the hospital could now find the same great products in all of these channels. And the more channels you get, the more scale you get, and scale in this category is extremely important.

We've talked a lot about this, and these are more products that, hopefully, you don't need. But these are -- this is our trauma line, which is the first of our solutions that we are focusing on, reducing the cost of physician-preference item. Four basic things we're looking for. How do you find something that is a high-position preference with little clinical differentiation in a relatively high profit pool that is extremely relevant to a hospital or surgery center. We believe there's been a large number of categories that have not seen innovation in a long period of time. And like what we saw in the pharmaceutical industry, the industry is probably going to need to focus more and more of its R&D talent on innovative products, and the system is going to have to free up money by looking at changing the cost dynamics in some of these lower technology areas. We believe that not only can we offer great products like trauma, something like orthopedics, in certain cardiovascular categories and certain wound treatment categories, we think these represent a pretty significant opportunity for us to grow in the future. While we're not going to be very specific about all the plans, I would tell you that over the course of the next 2 years, we expect this to become a very significant portion of our business.

Expanding our service offerings. Again, it is so important that everything we do starts with the important partnerships we have with these IDNs. And a lot of our time is spent on how do we make sure our core bulk distribution business is in good shape. And as we have spent time in the last 1.5 years, focusing on getting our cost structure aligned and getting operational efficiencies, we've seen good improvements in a number of key metrics there. But we've also launched an updated things like value link. For those familiar or not familiar with this, this is our non-inventory stocking position where we will actually deliver directly to the floor individual items. This allows our customers to save a significant amount of money because they are not stocking the inventory, and they don't have to take up all the space and allows for considerable efficiencies there.

But as we look into the future, what does the supply chain of the future look like? We think the 3PL business represents a significant growth opportunity, so is significant part of our business. And we recently announced a partnership with Federal Express that we think will get us into a new level of service where we are talking to partners that we haven't talked to before. And in -- about 3 months ago, we purchased an RFID solution referred to as WaveMark. And again, as we begin to look at the supply chain of the future, we think it's going to be critical that you're going to be able to offer our supplier partners something like an RFID solution that will not only identify the product by lot number, but it will be able to help them understand to manage inventory better, as well as understand where all their products are. All right?

And I'd ask Mike Petras. Why don't you join me, Michael, up right now? We talk about serving the patient in the home and that continuum across the IDN space. But why do we really like the home? Well, the first -- George has mentioned a couple of times his parents are actually 90, and we're talking about 11 million people are 80. Where is the best place to treat these people? We believe the home represents where that is going to be in the future. It's a very cost-effective care setting. And that combination of right care at a lower cost environment, we think, will create a very rapidly growing area for us.

We believe we, with AssuraMed, have purchased a leading platform and a very fragmented category, a category that's so fragmented that over time, we think partners are going to demand some level of consolidation. We also think it's increasingly critical to our hospital customers. People who are now discharging people after something like congestive heart failure or a knee or hip, are acutely aware that there cannot be readmissions, so they're going to be very interested in how do we manage these patients post discharge.

And the last issue is, this is the first plush where we're actually looking forward to tying directly to the patient. And this direct-to-patient capability or direct-to-consumer capability, we think, will be an increasingly important part of our business in the future.

Michael B. Petras

Good morning. Thank you, Don. I will give you a brief update where Cardinal's presence is in within the alternate site of care. Within that, the home, as Don mentioned, is a very important platform for us as we look to grow the business long term.

Cardinal is very uniquely positioned in their ability to take care of patients, not only in the hospital and acute setting, but also in alternate sites of care. And you could see in this chart here that alternate sites of care and the presence that Cardinal has, if it's a physician office, clinic, surgery center, long-term care or in home health. Cardinal's got a leadership position in the surgery centers and, really, we look for continued growth in those markets as we move forward in the future years.

Also, within the home, I'll talk to you briefly in a moment about AssuraMed and our platform in the home, but again, we see growth coming in these alternate sites of care that will exceed the growth that we see in acute settings.

Underlying all these alternate sites of care are some core capabilities that we have within the business, fundamentally low unit of measure capability in the national distribution footprint, which we have and we're able to fulfill all these different alternate sites of care. And then in addition to that, as Don mentioned, the comprehensive product offering that we have in some of the consumable areas as we look to build up the Cardinal brand over time.

Now transition for a moment, talking about AssuraMed, which is our platform in the home. Some of you may have heard about the business that Cardinal purchased last year. As we look at it and you start to build from the bottom up on this, you have a national platform that services the home. We can hit anywhere in the United States patients in the home. 72% of the homes are covered within 1 day, or 99% of the homes covered within 2 days of transit time. You've got a common platform of products of over 40,000 SKUs across many chronic conditions. Then you take the business and you really break them into 2 elements: one is the Edgepark business, and one is the Independence Medical business.

The Edgepark business is a direct-to-patient business. We provide a service where we're interacting with the patient, the healthcare provider and professional as well as the payer. We are very uniquely positioned because we have over 1,200 payer contracts that we are able to access on behalf of the patients that really provide the service for them to make it very easy for them to get their medical supplies, and we handle all the interfaces with the payers. We talk to over 8,000 patients a day in this business.

On the Independence side of the business, we are wholesale business. What's unique about this business is focus on the 40,000 products I mentioned earlier, but in addition to that, almost 90% of this business is directly -- the product is directly distributed to the patient's home, where in the Edgepark type of business, 100% that goes directly to the patient's home. So we have a very unique platform and the -- our Edgepark side, we're talking directly to patients on a day in and day out basis. On the Independence side of the business, we have over 12,000 B2B customers that we interface with and we do fulfillment of these supplies, these critical supplies, to the patient's home. What's really exciting about this business is the market is growing at 7% a year, so it provides growth for us in the long term.

As Don mentioned to you and George mentioned, the IDN, the integrated delivery networks, are very critical to the long-term success of our business and very important for us in our day-to-day interactions with them.

AssuraMed is uniquely positioned. Nobody else in the industry has the capability to cover this whole continuum within an IDN. So if an IDN owns their own DME, we are able to do all fulfillment to our Independence Medical business directly to the patient's home on behalf of that IDN-owned DME.

On the pharmacy side, we are able to capture patients at the pharmacy with [indiscernible] Independence Medical business and help expand their offering of durable medical equipment and medical supplies. Again, think about these pharmacies within the hospital, they have very limited footprints as far as space day to day. We can offer them the 40,000 products I referenced on the previous page. We can do all fulfillment to the patient's home as they're discharged.

Then you take a look at the hospital systems, the health systems, the home health agencies, the surgery centers, physician offices and payers. All of those are referral sources for Edgepark. So think about patients are coming to us as they're getting discharged from any of those locations or any of those stakeholders, and Edgepark is able to take care of those patients in the home and handle all the medical billing. So think of an example where a patient is leaving the hospital. Historically, the hospitals have given away a lot of supplies as they walk out of the hospital to these patients. We are able to coordinate the discharge as that patient leaves the hospital and transitions in the home. Edgepark is able to handle the medical benefit billing and get those supplies to those patients when they get home and help save the cost for the hospital systems. So hopefully, you can understand that AssuraMed and Cardinal Health are very well positioned and uniquely positioned to service the IDNs across multiple needs within their portfolio.

What's unique about Cardinal's capability in alternate site of care is their low unit of measure, their referral demand generation, the payer access and the billing capability. This is not like pharmacy benefit billing with instant adjudication. Medical benefit billing in the DME space is very complicated Part B billing. It's a core competency we have within the business. We have a very high-touch patient service model where we're talking to 8,000 patients a day. These patients are chronically ill. The referral sources that provide the patients to us want to make sure these patients are cared for and taken care of in the products that they know and trust and that the patients are not surprised on what their payments or fees are going to be associated with this service. That's where we come in and really bring this value-added capability.

If you look at this, these are significant enablers for longer-term growth in the channel expansion, product class expansion, as well as service extensions where we can get into different business models to help accelerate the growth within the home.

So how does the integration go between Cardinal and AssuraMed? We've come together very nicely as an organization. We've been really focused on a couple of key areas around sales, product, cost and leveraging the platform. From a sales perspective, Cardinal's got a very significant presence within the retail independent pharmacies. So we are able to help extend the endless aisle, if you will, within the retail independent pharmacies and bring these pools of medical supplies into that pharmacy and be able to fulfill into the home as these pharmacies want to move and transition with their patients into the home.

With pharmacy benefit managers, we've been able to realize significant opportunities around, not only the capabilities we have in medical supplies, but also OTC and other wellness products that Cardinal has a strong presence in today within the retail pharmacy.

From a cost perspective, we've been able to realize synergies around freight and transportation and leveraging the overall spend within the corporation, as well as across product sourcing, and be able to leverage and understand all the spend going on across the enterprise in products like incontinence and asthma and diabetes.

And lastly, from a platform perspective, as Don mentioned, this is a very fragmented industry. We continue to look for opportunities and strategic tuck-ins that will continue to enable the growth of the business long term to capitalize on the market that has grown 7% a year.

With that, I'd like to turn it over to Don.

Donald M. Casey, Jr.

2017 is that we believe that we'll deliver 45% of our segment gross profit from preferred products, and I offered that definition in the beginning. We believe that we have an opportunity to increase our income from the home platform by greater than 50% over this time horizon, and we believe that we can deliver greater than 70% of our segment gross profit from our preferred products, services, solutions, as well as alternate site solutions.

So as you look at it, just to make sure that we're all in the same page, so the segment gross profit from the preferred product sales represents a consistent steady increase and as a result of our emphasis on the space. You can see that why we're so excited about the home, a rapidly growing area with -- it's accretive from a growth perspective, as well as we believe it continues to represent an opportunity for us to, not only take advantage of our sourcing, but also our relationship, so we think we should be able to expand that. And when you really look at the whole thing, when you put it all together, our preferred products, our solutions and our alternate site of care platform, we think is a real opportunity to show that we are a very significant player in the acute care setting. All right?

I opened up the slide, we are so excited -- by the way, that slide is going to be posted, so if you didn't get it, I'm sure we can address it in questions but it'll also be on the site. We're really excited. Look, we think the changes in the healthcare system are going to continue at a rapidly accelerating pace. We think we're uniquely positioned to help our healthcare systems due to both our breadth of what we see, as well as our product and services offerings. I'd also add that we just have an absolutely terrific talent pool that's got a tremendous amount of experience. And I take my team into the trenches almost any day. And you can see one of the reasons we're so excited about AssuraMed, we've got a great management team, and Michael represents approximately 1,000 just absolutely terrific new additions to the Cardinal Health solution. And look, we think the solutions are going to provide us both growth and margin expansion for Cardinal Health as we move forward, both because of our cost effective product solutions, or what the system is demanding today, as well as a growing set of increasingly relevant services that are going to allow these evolving healthcare systems to address an increasingly challenging environment going forward.

So with that, I'd like to bring Jeff up, and why don't we have our panel come up and we can address some questions as we go forward.

Jeffrey W. Henderson

Good morning, everyone. So happy to take questions from the crowd and we also are collecting index cards, which I'll read from this first with the questions from the crowd. Just one clarification before I take your first question. Don did present some aspirations for fiscal '17. Allow me to give you sort of a base point to refer those 2. So for preferred products, the aspiration is for more than 45% of our segment gross profit to come from preferred products. That's versus a number of mid-30-ish today. And more than 70% of our gross profit coming from the combination of preferred products, services and alternate site solutions, that are at low 60s today. So again, just so you have a point of comparison.

So with that, let me go ahead and open it up for questions. [indiscernible], you'd be...

Unknown Attendee

[indiscernible] home income?

Jeffrey W. Henderson

Pardon me?

Unknown Attendee

What's the base for home income?

Jeffrey W. Henderson

We have not given that. The question was what's the base for home income, and my answer was we are not providing that.

Unknown Attendee

You just answered my question, so I'm going to be clever and think of another one on the slide. I was going to ask about Ohio State, but I won't do that. At the same time you guys are focused on the home, the government is on a 4-year mission to cut back home health reimbursement pretty dramatically. How much of your delivery, if any, is dependent upon a functional Medicare Home Health segment? And have you had any conversations with policy makers on that disconnect?

George S. Barrett

Great question. Michael, Don, why don't you take that?

Michael B. Petras

Yes, I'll take it, so direct reimbursement for Medicare is very small portion of our business. We did not win, for example, on diabetes competitive bid strategically. It was less than $5 million of business in our Edgepark business as it exists today. So we are heavily focused on the commercial payor marketplace. On the Independence side of the business, we do have some providers that are customers of ours that play in the Medicare space. But we really are focused in categories that really have not significantly been impacted by competitive bid.

Donald M. Casey, Jr.

And just to build on that a little bit, I think it's also important to differentiate, the government tends to focus a lot more on what home health agency fees are playing, more -- a little bit more on the service side of the business than on the product side of the business. And I'd also point out that by virtue of the fact that we're now in the space, we do think there's an opportunity just to -- and we spent a lot of time working on policy across a broad number of areas that kind of offer a leadership position within this industry that they have kind of a go to reputable, well-established company like Cardinal to begin to talk to and work to, what is in the best interest of the system as well as the patients.

George S. Barrett

One piece of data that we've given you before, but I'll repeat it, on the Edgepark side of business, which where we actually deal with the payors directly, less than 15% of the overall book of business is directly exposed to Medicaid.

Question at the back of the room.

Unknown Attendee

Just a couple of quick questions. One, can you just remind us the difference in margin between your preferred products versus distributing somebody else's product, just so we can get an idea of what the impact of this can be?

George S. Barrett

Let me start and if, Don, you're willing to add. What we disclosed before, we haven't given the specific margins on preferred products. But what we have said before is that currently, preferred products make up about 20% of the revenue of the Medical segment and then make up mid 30s, 35%, 36% of the gross profits of the Medical segment. So it just gives you an idea of the relatively higher contribution that preferred products make to the overall profits.

Unknown Attendee

And second question would be around preferred products and your relationship with the GPOs. Can you talk about how you're driving that preferred product, especially into the hospital segment? Is it primarily through your GPO relationships, or is it going directly to the relationships with the hospitals?

George S. Barrett

That's a good question. Don?

Donald M. Casey, Jr.

Yes, actually, it's a combination of both. In categories where there's well-established GPO relationships, we tend to work with the GPOs. And one of the biggest evolutions we've seen in the last 2 or 3 years is this kind of evolving regional purchasing coalition, where like a subset of the GPO will get together and where that's appropriate will work through them. It's really at the customers' request on which way we go through. But we've had very positive interactions as we get into some of these new categories that heretofore haven't had some value-oriented solutions the GPOs are pretty excited about, and the response has been pretty good so far.

Unknown Attendee

Could you just elaborate a little bit more on the earlier question about the pressure we're seeing in the home health space because, obviously, on the services side, those companies have been on a great through from CMS, from MedPAC and all these other government agencies that have been calling for more cuts over the next few years. And I'm wondering, when you're looking at the picture, how are your economics insulated from that? And clearly, as you move forward in this home health space, theoretically, you're going to be dealing with some of these home health services companies that are getting pressured by cuts. Theoretically, they're going to be trying to push back with the people they're dealing with like yourselves. Talk a little bit more about how your economics, you think, is going to be insulated over the next few years with that backdrop?

George S. Barrett

Yes, great question. And given the news in the States, it's one that we get a lot. So let me start off, and I'll turn it to Michael and Don. I mean, I think the simple answer is we're not insulated. We fully anticipate that in some of the categories that we play, there's going to be price pressure over time. And in fact, when we did the AssuraMed acquisition and modeled the future, we actually modeled in price compression in the categories that we knew we're going to go through competitive bidding. That's scheduled competitive bidding is quite public. We had some data from historical competitive bids that we could use. And we made some fairly conservative assumptions regarding price compression that we'll see in the future. I would say, in spite of that, just given the overall strength of the portfolio, given the overall market that we feel very good about the financials associated with AssuraMed, yes. Second point I'll make, a number of the areas that have gone through the most intense competitive bidding so far, diabetes, oxygen, durable medical equipment, some of those places, we don't play at all, oxygen for example. Other, such as diabetes, we had a very small exposure to. And durable medical equipment, again, a relatively small exposure to. So thus far, I'd say we've been relatively likely impacted from the impact of competitive bidding. Again, we know that it's going to continue going forward. We're prepared for that and built into our models. I will also say, though, as the market leader in this space, as there is the inevitable price compression that happens over time, I think one of the advantages we have being the market leader is we do have the opportunity with the scale that we have to share some of that burden with our manufacturing partners. And I think as the pressure on prices becomes more acute over time, really, it's going to very much advantage the scale players, which is why it is important to be the leader in this space.

Donald M. Casey, Jr.

And Jeff, I was going to build 4 key points. As we were getting comfortable looking at this property -- it is a fragmented category. And I completely agree with what Jeff is saying. Scale is going to play a significant advantage when you're dealing with manufacturing partners and others. The second issue is, I think, Michael articulate it pretty well, our ratio of exposure to commercial pay versus strict reimbursement is probably something that people didn't realize when we acquired it. And Jeff offered the statistic, 85% of the business is not exposed to direct government reimbursement. And then why is that important? Well, we're offering beyond just products. One of the crucial elements that we're excited about when we bought AssuraMed is it's not about products, it's about a large call center that builds a personal relationship with a lot of these patients or in the independent side, these durable medical equipment suppliers. We provide billing services. So it's not a commodity. This is not who can move a box with the cheapest product all the way to the home. And the last issue was when we talk about preferred product, when we talk about our ability to move preferred products across multiple channels, this is a channel that historically hasn't benefited from a scale player in the preferred product area. So we think that represents a significant opportunity right now to begin to shift the mix towards something that will look a little bit more like our traditional channels do. And that's -- today, it's an extremely, extremely underdeveloped channel for us.

Michael B. Petras

Yes. Just to build on that point, less than 10% of our business today in the AssuraMed platform is preferred products.

Jeffrey W. Henderson

I have a question from some of the [indiscernible] that I'll just throw to the group and then I'll turn it back to the audience. So some of this question, can you tell us a little bit about how the cross-unit collaboration is happening, particularly as you get into spaces like home that may transcend certain other areas. Just can you give us some examples of that collaboration? Don, maybe you can start. And then...

Donald M. Casey, Jr.

Yes. Thanks, Jeff. I'll take that one, Jeff. So let's take an IDN. We go into an IDN and have a discussion with them around, one of the charts I showed earlier, do they have a DME. And if they have their own DME in-house, they may or may not have access to all the insurances that they may need. So in that instance, they would turn the patient over to Edgepark, so we can get the building coverage for that. In addition to with that DME within the IDN, we would do them -- we will provide them a whole host of products in the neighborhood of 40,000 products that we currently offer. That's one example. They may have their own home health agency. And we're able to help them transition and cover not only when they're under Medicare episode but also if the patient is being reimbursed by commercial payer. We can cover the medical supplies for them and discharge into the home through the home health agency. On the retail pharmacy side, we can help transition some of the medical supplies into the homes, another one. Another example is if an IDN has their own payer, their own health plan. So think of the breadth and scale of Cardinal, not only if you have the pharmacy, the DME and the home health piece but also now if they have their own, their -- they are payer. And we can bring Edgepark as a provider within their payer network and have that entire scale across the whole continuum with Cardinal Health. That's one example. We go in and have these discussions with the IDNs and understand what their needs are. We don't have one-size-fits-all, depending if they own their DME, if they don't own the DME, they have a partnership with a DME, they have their own home health agency, if they have their own payer, we have a solution across the board for them. And that's an example of how we're making IDNs at home work. But the cross group collaboration is probably changing more dramatically than it has in the last 10 years because the environment is changing. So while traditionally, you might have looked at Cardinal as an MMP, we don't look at it that way anymore. Our strategic priorities show that there's a tremendous intermingling of how we do things across the line. So if you take looking how do we manage the care continuum, that's something where somebody like John come in and Michael Petras who -- John handles a tremendous amount of retail independent pharmacies, how do we make coordination work there. George mentioned right up front, perhaps the biggest opportunity we have as Cardinal is how do we begin to act cohesively in a marketplace from both a branding perspective, as well as a sourcing perspective. So the same gloves that are needed in the retail independent or a chain pharmacy is also needed at the home and needed in the hospital. So the opportunity in something we've been doing a lot better is acting with scale across all at Cardinal. And we think that's something that differentiate us. We have multiple products and multiple channels now. And under George's leadership, we've spent a lot of time making sure that we are acting as one Cardinal. And we learn the more scale get, it's -- that's off a very virtuous cycle, so...

Jeffrey W. Henderson

Maybe a follow-up question on the same topic. What's your current thinking about leveraging the AssuraMed distribution network across other products? I'm thinking about specifically the physician office.

Michael B. Petras

Yes, it's a great question. The interesting point is that as you look at the physician offices, we see that market bifurcating in 2 ways. And if you get a chance, John Rademacher, who heads up our amb care business, a great person to follow up with. But look, the IDN-oriented physicians, we see increasingly somebody like a large health care system is going to start asking their physicians to act off 1 formulary. And now we have that capability of doing there. But we have lacked, historically the low unit of measure, basically the small items 1 or 2 lines, how do we get there. With AssuraMed, one of the things that we're extremely attracted to with this low unit of measure capability, that when you combine it with whether the IDN wants everything coming out of their central formulary and they're going to manage it to a kind of a smaller physician office, we now have the capability of serving them on a cost-effective basis and how they want to do that. So that was absolutely one of the synergies we looked at when we were acquiring this asset.

Donald M. Casey, Jr.

And when -- if you look at scaling that area, so just yesterday, for example, we shipped out 26,000 packages, average 2 lines per order directly into the home. I mean, that's significant scale. It's not just a couple of orders a day. We do this across a broad range of 40,000 SKUs. We're servicing over 1.4 million patients throughout the AssuraMed platform as well. And we're in the process of doing that. Some of the home health business, we had generated at Cardinal has now been moved, is in the process of moving on to the AssuraMed platform. And it's really interesting. If you were to look at the distribution centers at AssuraMed, Michael's DCs look considerably different than Steve Inacker's DCs. You can probably fit 4 or 5 of Michael's DCs inside 1 of Steve's.

Jeffrey W. Henderson

Question here about the -- our generic medical device strategy. And, Lisa, maybe I'll direct it to you. What have we learned from the orthopedic trauma line that we've launched already? And what is it going to take for us to move up the technology curve?

Lisa Ashby

I think everyone's aware, last year, we entered the orthopedic space with this trauma portfolio out there today. I think the big learning that we've had over the last year is that the demand from customers is accelerating. So the interest in what we would historically call PPI, or physician preference items, continues to accelerate. And our customer base continues to ask how do you go bigger? What are those other areas that you can participate in? And Don outlined kind of those 4 key criteria that we look at across any of these categories as we look at what are some of those new categories that we should get into. So we're actively now looking at expanding our trauma portfolio, as well as, as Don referenced, we continue to actively pursue expanding those platforms both across orthopedic, as well as cardiovascular and willing [ph] the management as we look at those things. So I think the big learning, as we look at that, is one, customers are asking us for more. So the market is moving towards us, I think, at the end of the day. The other thing from a pure learning standpoint is it's not just about a product. You guys have heard us talk a lot about this is about a solution and this is where we think we're unique. It's not just about a product, but how are we enabling change at the customer site, because it's a very complex system and business model that's in place today. And we're going to have to bring to market, Tony Vahedian's WaveMark that we are moving into the market. And we just did an acquisition recently as a key part of that service element, and how do we change the business system associated with that device market.

Donald M. Casey, Jr.

Yes. I think it's a great answer. I mean, we're going to have to offer solutions. It's really interesting. We've always said that if we make this a race to the bottom on price, at the end of the day, that's not necessarily creating, sustaining value for our shareholders. So it's how do we create an integrated delivery system. And the response -- obviously, these are categories with well-entrenched competitors and you have to offer a complete solution. But when we've offered this solution, the response, so far, has been very, very positive.

Jeffrey W. Henderson

I was actually going to ask Shaden, if you're out there. Shaden Marzouk, who's our VP of Clinical Affairs, since you're very much involved in a lot of the work related to our medical device strategy. What are you hearing from doctors? What are they looking for? What are they expecting about? What are they concerned about?

Shaden Marzouk

Thank you very much, Jeff. We're hearing a couple of things from doctors. Number one, their concern is obviously patient safety and the quality of the implant. And that's something that we take very seriously. Patient safety and high-quality products come first for us. Secondly, what we're also seeing is that doctors are beginning to think economically. They're thinking about the choices that they're making. And while keeping patient safety at the forefront, what is the cost of the decisions that they make for treatment.

Donald M. Casey, Jr.

And we referenced in the beginning that the fact that we've seen a dramatic shift in -- probably 10 years ago, you're talking between 35% and 40% of physicians were employed by IDNs. At this point, we think well over 50% of practices and approximately 60% of the physicians are now employed by the hospital. As these hospitals are looking at bundled payments and other things, they're beginning to look at economic assessments that give high, as Shaden said, very high patient care, high-quality patient care. But they have to be much more economically conscious in the future.

Jeffrey W. Henderson

Question over here.

Unknown Attendee

So as you assembled this integrated care system, who do you think your biggest competitors are? And what are the gaps that you see that you need to fill in that you don't have currently looking for to the next 3, 4 years?

Jeffrey W. Henderson

Yes. It's definitely one of the great questions. But Don, do you want to take that?

Donald M. Casey, Jr.

Yes, it's interesting what -- I think, 5 years ago, you -- everyone would have drawn a conventional set of competitors that would look like -- a lot like traditional distribution plays. And today, we don't look at that at all. If you look at a blended set of competitors right now, where some of them are products, some of them tend to be more traditional product players, some tend to be solution, service offerings. We -- in some of our 3PL businesses, we're bumping into people that would be a traditional third-party logistic player. And then as we get in more consult type of services, there -- they'd be names that would be very, very familiar with you. But on a day-to-day basis, the -- George challenges us almost every day on if an IDN had 3 phone calls to make to solve a big problem, with Cardinal Health one of them. And we think we're quickly evolving into that space. And we would probably look at probably a big product player as one and a big consultant would be another. If you look at that, who would you -- who would the 3 people that the IDN would call. It's changing very fast and we get the question a lot is like how our national branded manufacturers reacting to the fact that you're moving into some categories. And I just want to remind people that we've been doing this for a long time. I mean, if you go all the way back to the Allegiance that is -- which is the forerunner name of the end segment today, they -- we deal with some of these manufacturers as partners. We deal with them as distributors. And sometimes, we deal with them as manufacturers and sometimes we now deal with them as suppliers. So it's a -- it certainly keeps us on our toes.

Jeffrey W. Henderson

Now the second part of that question was what are some of the gaps that we need to fill in, I think particularly as it relates to sort of moving up the technology curve. We know there's things we're going to have to do.

Donald M. Casey, Jr.

Yes, that a great question, Jeff. There's 2 things that we were going to need to get better at that we're not at today, is as we get into more sophisticated clinical selling. It's great that if you can offer these solutions. But at the end of the day, even in something well established like trauma, you are going to have to prove that there's clinical equivalent. And it's different than the pharmaceutical space, where there's [indiscernible]. So we're going to have to get better at clinical selling than we are today. It's a gap that we don't have. The second issue, we don't have an international network for a lot of -- the stuff that Mike builds on the medical consumables and some of the stuff Lisa's doing. So we're -- over the long term, we think we're going to need a fair amount of scale to be competitive, and we're actively out looking for partners. When we do something like trauma, how does that not just succeed not only in the U.S. but how does that succeed around the world.

Jeffrey W. Henderson

Mike, just on -- reference you there for a second. Maybe you could talk a little bit about the launches that we had in the first quarter. Don referenced that we'd launched more in Q1 than all last year. Why the big increase? And what's your biggest obstacle even moving more quickly?

Mike Duffy

Thanks, Jeff. Just for further reference, we launched over 500 SKUs last quarter in product lines that are used by nurses to deliver patient care, as well as produced a non-acute channel. So Michael and Don both talked -- and you talked about the cross unit. So as we go to the home, into retail, a lot of these products travel across into multichannels. Why the increases? Our customers are asking for it. They're asking for alternatives to a national brand where we can provide savings but quality products. The biggest obstacle right now, quite frankly, is us, as we mobilize our resources. Don referenced this is a 3x increase in all of last year in terms of number of SKUs we've launched. So as we train and execute across our organization, we want to make sure we execute with excellence, so we're the limiting factor. But the teams are doing a tremendous job getting after it. And as you can see, with 500 SKUs, doing a nice job.

Unknown Attendee

Yes. Jeff, this morning, you guys talked a fair amount about the favorable demographic shift and the potential impact that would ultimately have on utilization. And while it seems like the medical segment has evolved a fair amount in terms of the product offering, utilization trends still remain somewhat anemic through the division. And I'm kind of curious what's your assessment of that. I mean, I think most would conclude it's a function of benefit plan design changes that are impacting utilization throughout the industry. So maybe if you and some of the panel could give us your thoughts on how benefit plan design changes may be impacting utilization. And as we look forward to 2014, what's your outlook with respect to utilization, particularly maybe influenced by the Affordable Care Act as well.

Jeffrey W. Henderson

Yes, I'll start and I'll turn it to Don. Whether it's benefit plan design or still sluggish economy or other factors, yes, I would say med-surg utilization, particularly acute care procedures, both inpatient and outpatient, have remained somewhat sluggish. But we fit, design a business and Don has very much designed a business that we expect to grow from a bottom line standpoint even in that environment. And one of the reasons some of these higher-margin areas like preferred products and services and the home are so important is as we change our mix, both from a product standpoint and customer standpoint, over to those higher-margin area, that allows us to grow the bottom line at a good clip even in a sluggish top line environment. Now I think we ought to be carefully when we talk about sluggish. That may be true for hospital inpatient, outpatient, they'd also be true off and on for physician's office. But then I would look at the home, which is growing at a 7% to 8% clip, and there are pockets within our business that are growing at a much higher rate. And again, one of the reasons the home was attractive to us is we saw that was a high growth area not only today but for the foreseeable future. So we have built a business and a strategy that will allow us to grow really independent of that sort of top line utilization. That all said, when the inevitable turn comes, and we do believe at some point some of the changes we're seeing with the Affordable Care Act, et cetera, will drive increased overall utilization, we'll benefit from it but we're not trying to bake that into our plans right now. Don?

Donald M. Casey, Jr.

Yes. And for perspective, we didn't bake any increase associated with the Affordable Care Act into our base utilization numbers. And just to amplify 2 points, Jeff, starting with the last one first. There's ample capacity in our system, if the inevitable age demographics begin to hit us, we -- it's something we can manage relatively straightforward. And I think when Jeff talks about the fact that we think we were able to grow independent of whether procedure volume is going up or down, when you get into new categories, things that Mike is talking about, medical consumables or some of these physician-preferred areas, they're new to us. So last year, we had 0 sales in trauma. And now we're in the trauma business. So we think it gives us an opportunity to show total growth across the portfolio because your -- of category expansion. So even if the category is not growing, the fact that it's new to us and growing give us an opportunity. And again, one of the internal things that we have been seeing, over time, when we look at alternative site care, if you look at surgery centers, that business has been growing, whereas the hospital is not growing as fast. So we do think we're seeing a shift in where care is delivered. And sometimes it's hard to track that. But when you look at places like the home, to Jeff's point, we think that is probably going to track most consistently with the demographics. Because obviously, as you're looking at caring for 80 year olds, 90 year olds, they're going to be looking increasingly to how do you manage them in a site that's a little bit more cost effective and comfortable.

Michael B. Petras

Jeff, if I could add something. I don't think [indiscernible] utilization because it's an interesting one. I think what we're seeing actually is the first -- over the last couple of years, pressure on per capita utilization. So I think we've gotten sort of 2 forces at work. One is pressure to reduce per capita utilization, which is done primarily through benefit design shipping. But you can't escape the capita, I think that -- I think from a long-term perspective. So our modeling has been very conservative. And we sort of said, "Look, this is a relatively soft utilization dynamic today." But over the long haul, it's hard to escape the reality of this aging population. So even though we're doing some work and we've done some -- modeling this with some with experts, as you put pressure on per capita utilization, you still have this growing population. And so I think that's going to be -- by the way, as age one of our challenges, because this bolus of patients is going to age and they're going to need care and they're going to need hips [ph] and they're going to need pharmaceutical products. And I think that's a reality that we'll face. But I think part of it is, again, think per capita versus the total systemwide. And the system is influenced by this dynamic around demographics. Is [indiscernible] out there?

Donald M. Casey, Jr.


Jeffrey W. Henderson

We've talked a lot about product mix shift and the importance of launching more consumable products, preferred products and moving up the technology curve in Lisa's area. But ultimately, none of that matters unless your sales organization can actually sell to our customers. Maybe you could tell us a little bit about how we're doing that and maybe a little bit of the Signature Savings program that we've been embarking on?

Unknown Executive

Sure. Thanks, Jeff. The Signature Savings program is a tool that we developed about 2 years ago. And it's really built around driving the mix of our preferred products into our customers. You heard Lisa mentioned earlier that many of our customers are coming to us and asking us for low-cost alternative products for the national brand products that they utilize today. What this tool does is basically analyzes everything that, that customer utilizes today and provides the output that shows what the alternative would be for that particular product with low-cost alternative of our preferred products. And it also does the map to show for them, based on their annualized utilization, what the savings would be if they migrated from their current utilization of national brand product over to the preferred product. It provides a report for them. Then we also map for them what a transition plan looks like, so that we can phase in products over time and make it manageable for them. Adoption of the tool has been great. We've gotten great customer response from it, and it's really helping to bring the preferred products to the forefront with our customers in a very simple and easy way for them to manage.

Jeffrey W. Henderson

We'll probably bring this particular part of the segment to an end.

Donald M. Casey, Jr.

Just one question.

Jeffrey W. Henderson

Oh, we have one more question?

Unknown Attendee

One quick one, Jeff, can you talk about growth in China and discussions you've been having with your manufacturer customers? And why China, why not Europe? And then also with the changes in your relationships with Walgreens, has that opened up any potential opportunities for you with other retailers?

Jeffrey W. Henderson

Are you referring to the sourcing side of things with your first question.

Unknown Attendee


Jeffrey W. Henderson

Okay. Mike, do you want to talk about China?

Michael B. Petras

Yes, we have an office in Shanghai. We have an extensive network of suppliers throughout all of Southeast Asia, obviously, China being the biggest. And that's -- as we look for the lowest delivered cost in terms of bringing our products to market, China continues to be a very attractive market for us, despite the wage inflation and some of the FX challenges, but that market as a sourcing -- a source of supply is as robust as ever.

Jeffrey W. Henderson

With regard to your -- the second part of your question, as Don mentioned, the key to success in this part of the business is really scale, right, continuing to source that scale and then sell into its broader market as possible. Don referenced the needs to continue to sell overseas some of the products that we source. And we'll also look for opportunities to close [ph] as many channels as we can in the U.S. market as well. But ultimately, driving volume is going to be critical to expand the portfolio and maximize the offering that we can provide to them.

Jeffrey W. Henderson

So I'll bring this segment to a close. I'd put the slides that -- the money slide, as referred to it that Don showed you earlier, really outlining. Oh, I did have it up here. The aspiration, the financial aspirations that the medical segment has, which really relates to the priorities that we discussed today, getting 45% of segment gross profit from a preferred product sales, increasing our income from the home platform by greater than 50% and delivering greater than 70% of our segment gross profit from preferred products services and alternate site, solutions. And really as we talk for the next 3 years, we'll continue to give you updates on these and drive aggressively to achieve and exceed them.

So with that, I'll excuse our panel. Thank you very much, ladies and gentlemen, and we have the international and China section to go through, and then we'll take a break.

[indiscernible] out of my Blackberry. And by the way, this is what a Blackberry looks like for most of you. But my youngest daughter sent me a text just before I got up on the stage and said, "Good luck. You got this. You know why? Because you're Canadian." I hope I could have said it better myself.

So I'm going to ask Eric to join me on stage in a few moments. And I just really want to kick off this section by giving you a bit of an overview of our international strategy. And then as I said, Eric will do a bit of a deep dive into our China business. We have some very, very exciting things going on.

Let me start with our strategy. And I'll start off by saying that our strategy really hasn't changed a whole lot in the last couple of years with respect to international.

First and foremost, perhaps, at least in the near term, our priority really is to continue to invest in our Chinese platform. As you know, we purchased Yong Yu, really almost 3 years ago to the day. And in the 3 years since, we've had a tremendous platform that's built up both in terms of geographic expansion, in terms of the product lines that we offer, the competitive position we've been able to establish. And last but not least, really the establishment of the Cardinal Health brand, which is the brand of compliance and integrity. And it is our intent to continue to invest over time to build up that platform, to continue to leverage what we have there. And we're very excited about opportunities there. And again, Eric will talk to that in a few moment.

Second, we have market-leading positions in both Canada and Puerto Rico. In Canada, it's primarily a med-surg business that delivers to hospitals, long-term care facilities and other sites of care. In Puerto Rico, our business there is really a microcosm of all of Cardinal Health, pharma distribution, med-surg, nuclear pharmacy. And again, we'll take advantage of the platforms that we have in both of these geographic locations to continue to build on it and, as appropriate, add product lines.

And then we'll continue to evaluate opportunities in select new markets. One example, that would be continuing to look at specific countries where we can establish our platform and add value. And China is the best example of that. We saw an opportunity 3 years ago. We saw an asset that allowed entry. We had the support of the government, and we made the decision to enter that market. We'll continue to look at other geographies using that same lens. And just to remind you, the filter that we sort of put our international locations through is looking at things like what's the size of the market, what's the growth potential, what's the government and regulatory situation like, how easy it is for us to enter and last but definitely not least, what specific value add Cardinal brings. So again, we'll look at specific countries. We'll also look at regional place or perhaps certain business lines make sense to put in certain region of the world.

Last point on this, I'm sure some of you ask the question -- it's about Europe. And I think it's particularly relevant, given some of the market dynamics we've seen recently. We'll continue to assess options in Europe and we'll put it through the same financial lens that we put all of our international reviews through. Does the financial returns justify the risk, is there specific value add that we can bring, what is the business and regulatory environment look like and is there an entry point that makes sense. It's something we'll continue to assess over time and obviously keep you updated.

I'll review with you what our current global presence is. We have major commercial operations in 3 countries outside of the U.S., Puerto Rico, Canada and China, as we referenced. We also have manufacturing and sourcing locations in cost and tax-advantage locations around the world. Particularly, I want to highlight China and Singapore because as we continue to increase our medical consumables portfolio that Mike Duffy referenced earlier, we will continue to invest to build up resources in those critical areas to ensure that we have the sourcing and quality and regulatory folks that we need to source world-class products that we bring back to U.S. and our other markets.

I'd also mention, although not specifically listed on here, we do sell our preferred product lineup into Asia and Europe through third-party distributors. And again, as part of our goal to increase scale over time, we'll continue to look for opportunities to increase the ability to sell our entire preferred product lineup, not only in the countries where we have a specific commercial presence, but through third parties in other locations as well.

Snapshot of the trend in segment profit from our international businesses over time. You can see, it's been on a very nice upward trajectory. Although I will say, most of this growth actually has come from our Chinese operations over this time.

Okay. Before I turn it over to Eric, I just want to remind you of something we said, again, almost 3 years ago to the day when we did our Investor Day with many of you. We had just completed the Yong Yu acquisition. And I actually had put this slide up, which basically laid out our objectives for the Chinese business as we look forward. We knew we had this wonderful new platform and we were deciding what are we going to focus on, what will it look like as we go forward in to the near and medium term. You fast-forward to 3 years, we've sort of done a bit of a report card here on what we accomplished. And I am proud to say that we've largely accomplished everything we set out to do and more. Now granted, we did not end up pursuing the nuclear pharmacy business in China, and that was based on a really economic analysis of the return on investment we could expect and also had made the decision that particular product line didn't make sense for us right now. But we did end up launching all the other product lines that we had anticipated and much more.

I think -- I'm going to give you one example here of our ability to really think creatively and act with flexibility. Based on input that we got from our manufacturing partners and patients, a couple of years ago, we realized that setting up direct-to-patient pharmacies was a very, very important part of our brand in China, of being a supply chain company that promise compliance and integrity. So we embarked on that initiative a couple of years ago. And we now have over 25 direct-to-patient specialty pharmacy stores in the country. And again, I think it's a testament to the team that we were able to listen to our customers and our partners, act with speed, flexibility and quickly set up these very effective stores that really extended our reach in the Chinese supply chain all the way to the patient. And Eric will tell you a little bit more about that.

With that, I'm going to invite Eric Zwisler up. He is our President of Cardinal China. He's been living in China for 23-plus years now, Eric?

Eric Zwisler

Close enough. It's close enough and long enough.

Jeffrey W. Henderson

Eric's done a fantastic job of really leading us through the accomplishments that you're going to see in a few moments.

Eric Zwisler

So let's take a quick 10-minute tour through China. It's a little far away, but as Jeff keeps telling me, China is just like Canada. So it's really, really quite interesting or quite easy.

It's almost 3 years to the day when -- it was a week after the acquisition of Yong Yu by Cardinal that landed the night before jet lagged and stood before you and talked about the opportunity in China. So it's a relatively large deer in the headlights' moment. So I'm really happy today. It's 3 years later that I can talk to you not only about the opportunity in China but really do share with you how we're delivering on that opportunity, and I must tell you, 3 years on and facing the future, the same level of opportunity and success that we saw in the past.

Let me just remind you a little bit about the opportunity. Look, these numbers when you talk about China get to be substantially larger than the numbers in your ordinary life, 1.5 billion people and it's aging. But take a look at some of these numbers, over 100 million diabetics in China, over 100 million diabetics. Many of those have no access to care right now. So access to treatment is very important.

350 million smokers, 350 million smokers. Probably the more troubling statistic is that 60% of the male doctors are also heavy smokers. So it doesn't look like it's going to improve quickly.

Obesity. Obesity approaching 20% in the major urban areas. So you can see that this is a, I hate to say it, a bottomless pit of need in China. Now we've seen some moderation of growth lately, probably a good thing. It's hyper growth, but a little bit of a moderation of growth. We're still at 7% ranges. But in terms of health care, a continuing ramp-up and a balance where health care has grown continuously at rates much higher than GDP growth because of the need, the social need for it.

Policy reform, constantly turning, constantly turning, heavily regulated. But what's important is that we have been in China -- this is our 20th year, 20th anniversary in China. And we've always worked with the government to help design and to bring services, policies into China and be that bridge. And so that what we do is closely aligned with issues of access and affordability in China. And certainly, government policies. I wanted to take a couple of minutes just to comment on some of the compliance issues that you've heard and have been highly publicized in the Western media.

Look, one of the core value propositions in our business is our compliant approach to the business, and we're very proud of it. We certainly believe, as a western company operating in a foreign environment, that compliance, as part of our core values, operating in a more transparent and regular market is certainly very close in line with the growth of our business. And so while we've seen some moderation of growth in China, because of these moves, we still expect there to be healthy growth not only in pharma but other health care products in the future.

Being in China for 26 years, I've seen it several times. We go through these dips, it comes back, go through these dips, and I expect we'll continue to see that.

We started 3 years ago, we started 17 years ago or 20 years ago, but 3 years ago, with 3 pillars: support the existing business, continue to expand the local distribution network and then what was tremendous about joining the Cardinal operations, being able to layer on Cardinal-specific services, product lines. And really that continuum of care that we talk about, to implement that idea in a fresh market and certainly to build the Cardinal brand, the Cardinal brand for all of our stakeholders. That means quality, that means compliance. It means security and efficiency.

How did we do? Look, we've more than -- in 3 years now, we've more than doubled our Distribution business. This is the distribution or the invoice sales of the business. We have a very, very large 3PL logistics business in medical device, which is a multibillion-dollar business as well, on invoice with service fees. More than doubled our workforce and expanded our coverage in the country from 5 to 10 local direct distribution operations. This team, a team I'm very proud of, has acquired -- successfully acquired 12 companies in China without a stumble. And that, given the issues of acquisition in China, is quite an exceptional track record. And as Jeff just talked about, I'll speak more in a few moments about our specialty retail initiative and business that we've set up. So really quite an expansion of the business from a numbers point of view. But almost as important is the way in which we've layered capabilities and we've layered products in that continuum in China. So if you take a look at capabilities from our, essentially, very simple Pharma Distribution platform, we've moved on to retail capabilities in specialty retail. In the e-commerce platforms into actual product promotion and forward-facing in the hospitals retail pharmacies and platforms to deal directly with customers. And we can start to see some of these platforms developing, some of the capabilities we can draw off in the U.S., for example, AssuraMed, and our interactions with direct-to-patient. But even as important, though, the products that we can build onto that platform. And you can see quite a shift and an expansion to other areas, including the medical products, laboratory products, the surgical theaters, vaccines, biologicals. Nothing says it better than taking a look at the map. Five original companies. Now we always had a business across China selling to every corner of China, but 5 owned companies. We've added 5 companies now, including coverage of the south, expanded up in the north most recently with Xinjiang, the fourth largest economic area. And then, Dalian, up in the north. These are very large economic areas in China. But as well, have layered on the specialty retail pharmacy network, handling non-reimbursable high-value products sold directly to patients. And of course, our existing and expanded commercial network across the country. So you can see there's a vast area -- there's a vast area that's covered, but there's also a vast area that can be covered. And as we work from Tier 1, Tier 2 into Tier 3, 4 cities -- and many of these Tier 4 cities are over 1 million people, we have quite a depth of business to develop as we go forward.

Specialty pharmacy services. This is one of the areas in which we brought together quite a number of capabilities. The base of this is not traditional retailing but it's selling high-value, non-reimbursed pharmaceutical medical products directly to patients for use in the hospital setting. Obviously, completely compliantly with some prescription. We have established this network and just accelerated the growth in this area by acquiring a specialty pharmacy company on October 1, which brought to us full Internet capability information portal and B2C capabilities, when appropriate, for whatever product lines there are. So we're quite excited about this investment, about this business. We see it as a platform, a new platform, a platform that doesn't exist at the level in which we can implement it at direct-to-patient or direct-to-consumer level. So it's a very exciting development. It's one in which we're going to continue to invest in quite substantially. And certainly, what we like here is being able to take the Cardinal brand before the patient or in front of the patient and establish that belief.

Look -- when we take a look at the strategy going forward in the future, this is just a much more granular statement of the original 3 pillars that I showed you that we put in place 3 years ago. That's great, I mean, we've been on a good course. We have a business that's on the front of its feet and moving very quickly. We will continue to expand our geographic reach by developing and acquiring other local direct distribution companies to sell directly to hospitals and retail pharmacies. We will continue to expand our reach of direct-to-patient pharmacies from our current 28 up to over 50 as we expand. Now this business is not one about thousands of retail pharmacies, it's about being able to supply into major urban areas. And for example, in Shanghai, having 1 or 2 pharmacies is certainly enough with these kinds of product lines. And to build on top of that, some of the innovative health care services that enable not only our relationships with patients, disease-centric support, diabetes-related care, but also working with our downstream stakeholders, hospitals, retail pharmacies to help them improve their operation. In a country like China, there is, again, a bottomless pit of need for just about everything we can bring. And a lot of our job is to make sure that what we're doing is properly timed and economical as we go forward.

Absolutely key to what we do is establishing the Cardinal brand. The Cardinal brand in a market, in an organized market like China, is incredibly important. And to build that brand, so it has those core value statements that we believe in. That means the quality, compliance, transparency, cost, assurance to a customer, to a hospital pharmacist, to a lab technician, to a nurse, is incredibly important for us. And I'm happy to say one of the very nice surprises for me starting and establishing a business called Yong Yu, and a brand that I believed in, is how quickly and how resonant the Cardinal Health brand was in China and how important it is to not only the companies we acquire and the belief that they have in it but, I believe, for the future growth of our business there. So these are the pillars of our growth going forward. I mean, as I said, we're very excited about the future. 3 years ago, we were are excited about the opportunity. We've done a lot of delivering on that opportunity, and we've set ourselves up again, I hope not in 3 years, maybe in a couple of years when we can come back to you and also share how we've delivered on the platform today. Thank you.

Jeffrey W. Henderson

And Eric will be joining us on the panel later on that we'll be doing after the break. Just 1 point of clarification and then, 1 comment before I send you all on your break. Eric referenced making 12 acquisitions, and you might ask, how does that compare to the 7 that you often talk about, Jeff? 5 of those were done before we acquired Yong Yu. 7 of them have been done after we acquired Yong Yu.

And a final comment I want to make, if I go back here, I showed you the financial slides. We're going to spend a lot of time today talking about the commitment that we've made in the past and how we're performing against them, and as you'll see, we're understandably proud of our ability to deliver our commitments. But part of that will also tell you where we fell short. And I will say, about 3 years ago, we had given The Street a goal in terms of percent of overall operating earnings that would come from international by a certain date.

I will say that the actual dollars that we've delivered over that time frame had actually been pretty much consistent with what we expected at that time. However, our domestic businesses has actually grown much, much more quickly than we anticipated at that point. So our international mix has actually fallen short. But I guess, when we get them as a target, that's a good reasonable method.

With that, I'm going to ask everyone to please take a break, grab a coffee or whatever. We're going to come back here at 10:10, and start up with the Pharmaceutical segment and Specialty. Thanks.


Sally Curley

Okay. Thanks, everybody. Welcome back from the webcast and from the break. And for those live on the webcast, as well as in the room, I just want to remind you that the Safe Harbor is in place.

So without further ado, I do want to introduce our CEO of the Medical segment, Mike Kaufmann. Mike? Sorry, CEO of -- you changed segments, did you not? CEO of the Pharmaceutical segment, Mike Kaufmann. Sorry about that.

Michael C. Kaufmann

Thank you, Sally. Oh, boy. Good morning, everybody, I'm really glad to get a chance to talk with you today. Before I start, let me introduce a couple of people on my team that aren't going to actually get a chance to make it up on stage, but are here. First of all, over here, is Jon Giacomin. Jon is the President of our U.S. Pharmaceutical Distribution business, which is a business that's just been doing incredibly well. And he's really been the guy behind driving some of the things I'm going to talk about. And then also, very new to the business, been with us just about 6 months, is Tiffany Olson back here. And Tiffany is the President of our Nuclear Pharmacy business. And as you know, this is a business going through a lot of changes. And I'm really glad to have brought Tiffany at the beginning of our fiscal year, and she's really taking a look at that business and doing some great things with that.

So let me jump into it. I have been with Cardinal 23 years now, a little over 23 years now. And I could not be more excited. I really enjoy what I'm doing, I really enjoy who I work with. Don has just been an incredible teammate on the Medical side. I love working with the team. The fact that we share talent across resources, ideas. Seeing our teams working together is great. I love my -- the team I have put together right now and we're working really well. So it's really, really exciting. And back in FY '10 when we first kind of launched the segment as it is today, we have set some really interesting goals at that time that we thought were going to be tough to hit. We said we were going to hit about $1.4 billion in earnings. We said we are going to have a margin rate of 1.43%. And you're going to see that we've exceeded both of these tremendously. And the bottom line is we really performed well over the last 4 years. I am excited about where we're going to be able to head going forward.

But here's, first thing I would mention is, like I just said, if you take a look, we have set that FY '13 bar, we thought that $1.4 billion was a target for us. And you should see now, we exceeded $1.7 billion. So we blew our number away by over $300 million. And it was just a lot of hard work, a lot of focus on a lot of things.

Also, if you take a look at our segment profit percentage, we have again set that goal to be 1.43%, and we hit 1.90% as of FY '13. Now a little bit of that, it happens to be with the loss of the Express Scripts business, changed our mix a little bit and that helped juiced it a little bit. But you can see the steady growth up through there and really, the real driver behind those numbers has really been our really relentless focus on 4 things. And I'm going to talk about these. The first one is our -- that we are really focusing on executing with relentless discipline and excellence. We really are doing some great things in our distribution centers and throughout our businesses, that I'm going to talk about a little bit later. We've really focused on diversifying our customer base, which I'll talk about; growing generics volumes and margins, which is going to be a big portion of my presentation and which, I guess, is a good thing since you said that was something you were both interested in and had some concerns on. So we'll definitely talk about that. And then lastly, investing and then growing in Specialty. And we're going to give this one a little bit more emphasis right now because I'm going to bring up Meg FitzGerald. And now Meg has been with us about 3 years. She's the President of our Specialty business. She has, prior to coming to Cardinal, she spent time with some great companies like Medco, Pfizer, Sanofi. She recently finished her doctorate in health policy. She's an adjunct professor at Columbia University. And she has just brought so much enthusiasm, knowledge about health care and health policy to the business. And it's my pleasure to have her come up on stage and talk about what's going on in Specialty before I come back.

Meghan Fitzgerald

Hi, everyone, nice to see you. They're happy to see me. I got this, I'm Irish, right? So I'm excited today to share with you -- I've seen some of you, I think, 3 years ago and then intermittently over the last 3 years. But today, we're going to share some quick highlights on our business, the performance, how we've continued to grow, as well as to share what we see in the new world of Specialty medicine, and that is a bit of a nuance, because it's not just about Specialty drugs. The field of Specialty medicine has evolved quite a bit. And I want to share some stats and some trends to kind of let you know how we're looking at this marketplace. I think, for many, Specialty just means the premium and everyone has to be in it. So it's a bit of a word that needs a description and how we see it, and also, our differentiation and strategy to win. So the most important thing, the money slide. We'll start with a quick overview of our performance.

Overall, we've experienced year-over-year growth of 44%. In fact, since our inception 3 years ago, we've experienced triple-digit growth in our Distribution business, as well as our Specialty pharmacy business. Our track record really has been driven by revenue in both the acute setting and the physician office setting in Distribution, as well as our Specialty pharmacy. Our Specialty pharmacy, which is called OncoSource, that's the brand name. We've been able to capitalize on our nimble nature. And many products in Specialty go through a Specialty pharmacy, and we expect more will do so because of the high-touch need that's required for patients that take Specialty medicines.

We can deliver on-demand programs. We deliver compliance rates north of 95%. It's very meaningful to patients, very meaningful to pharma. And it's really been a bright light in our portfolio. And we also target to serve patients throughout their life cycle or disease course.

And I think a lot of what you heard today and what you know, because you follow us and a lot of other companies, is it's really becoming a binary world of Specialty medicine and generics. And it's hard to believe that 10 years ago, Specialty represented less than 10% of the pharmaceutical spend. And here we are, a decade later, and the pipeline will have about 60% representation of specialty on a go-forward basis. And most of that pipeline will be in oncology. And this really is the megatrend that will drive our business, that taking care of these patients has become extremely complex and very important for pharma. Most of the major pharma companies have now scaled down divisions, with specialty being one of them, consumer being another and then, some add a third, depending on what they are going after. But it really puts a bright light on the focus that pharma has to get there. And what we find is most of the innovation is happening at significantly smaller biotechs, and they also need a lot of help and support because they want to offset as much commercial expense as they can until they can be acquired or until they know they definitely have a fileable compound with the FDA that they can sell either to a larger pharma company or get enough revenue and profit to buy another drug. So we're finding a new set of customers coming to us with trends around -- requests around capabilities and what we can do.

We put this slide together because I think it brings together how much the landscape has evolved. And this really is a big trend for us. Since these medicines are so important to biopharma and patients, we're really entering an era of what we call patient-centered care, that's really where we focus our positioning and our effort. The services around the medicine had become just as important as the medicine itself, equal to that. So in addition to clinical complexity, payors, biopharma, patients and physicians are now dealing with financial complexity head-on. Not just clinical complexity, but who pays for these medicines and how do they get reimbursed. Populations and drug discovery are significantly smaller. So populations that used to look like they were orphan drugs under 200,000 have now become the normal market for which these drugs get launched into. Some populations are as small as 10,000. So finding these patients and getting them on therapy as soon as possible is really the unmet need.

And I think higher skilled partners like Cardinal and the team we put together and the focus we've had compliments the medical innovation with business innovation around the patient. And again, we see that just as important and it's a big trend that we're capitalizing on. As many of you know, under the Affordable Care Act, no one with a pre-existing condition can be turned down for care. And that's really important when you think of cancer. And with 11 of the last 12 oncology drugs approved by the FDA costing more than $100,000, 11 out of 12 have annual costs of over $100,000, this innovation is important to patients but also brings a lot of financial complexity to those that have to manage these patients.

And so thinking about it, in addition to the biggest risk for getting cancer is being your age, you now have a skewed overpopulation with very expensive care. And all the other comorbidities that go along with being an elderly patient. So aside from a lot of the discussions today about site of care, it's also important to think about the financial piece of this equation as you're dealing with very expensive drugs.

And what we have said to our customers, and what really resonates with them, is that regardless of who's paying, and that could be probably a full-day presentation and I'm actually one of the few people hoping we get marooned here in the snow. So if that's the case, I guess we can spend some time talking about it, but regardless of who's paying, these medicines are analogous to somebody buying a home in terms of complexity, where ancillary support services like insurance, maintenance, financing are all part of the package. And all the stakeholders we deal with, no one can afford to have a specialty drug delivered to a patient that doesn't need it and can't pay for it.

So when you think of our positioning and where we see the market, managing a specialty patient is now a 24/7 job. The services consist of patient assistance programs, 24-hour hotlines, pharmacy hotlines. Most of these patients forget what was told to them at the time they're diagnosed as extremely severe. So oftentimes, they go home and get to process what happened, and that's really where a lot of the care kicks in. And this demand has really opened up a new sector of Specialty services, with a focus on technology, pharmacy, clinical care and now financial care. And that's pretty new in the last 2 years, is to bring some of the financial management to the physician to the bedside. Many of them have told us we don't have time to do this, we're not paid to do this, we want to work to the full extent of our license. There's a shortage of us, so in order to spend an extra day a week on financial management is not where we want to be.

So as we think about our vision, success requires managing a portfolio of patients where, oftentimes, the individual patient is different as the population. All stakeholders want to manage patients, want to get them on therapy as soon as possible within the doctor's orders. And Dose 1 is as important as Dose #5. Keeping the patient on therapy is really the challenge that we get asked about.

So it's important because you guys raised it in the Q&A, or sorry, in the polling, about our positioning and what is unique about our positioning. And we feel we can capitalize on the growth of where the market is going because it feels as though some of the market is coming to us. And we have 2 key tenets about our positioning. The first is it's patient-centered. Doing well by doing good is really at the heart of what we do with all stakeholders: payors, providers and biopharma. Many in Specialty have picked 1 stakeholder. We did not. We believe that you can work with all 3. That's where health care 2015 has placed an emphasis, and that picking sides is not really going to benefit the patient or benefit the innovation or really help physicians manage the financial complexities in Specialty medicine. So we bring these 3 groups together to collaborate and find common ground. It's also a unique single point of contact that Cardinal has with all 3 stakeholders, which brings a host of benefits to our positioning and the efforts and the support that we can bring. Our ability to focus on the needs of the patient and assisting biopharma with getting closer to the patient, having more intimacy. Most in biopharma have 1 chance to launch really well. Because many of you track them and getting every single patient, all 10,000 patients not only on a trial but then getting them on therapy is really the question that biopharma is answering. And ensuring that there is the required support to stay on therapy, that they don't take 1 dose, as I mentioned.

The second part of our positioning is having an agile enterprise and a focus on what we call stakeholder connecting technology. A lot of people talk about technology in this space. It's probably a mile long and an inch thick. So the one message we wanted to give to you today is that any technology that is launched, if it doesn't connect all 3 stakeholders together, then there'll be a gap. There'll be less likely that it will be used and if it doesn't work easy for physicians and it can't be loaded very fast and they can't get to it from being on an iPad to some people being on a Commodore, it's not going to be used by physicians. So -- and it's not a joke. Some are on Commodores and are happy to stay that way. So when they approached us, they don't want anything terribly confusing and they wanted easy, and they wanted to be able to connect to clinical information they need, as well as financial and reimbursement information. There's nothing worse than saying, "This is the best clinical decision for you, but I'm really sorry, it's not going to be reimbursed," or, "Your co-pay is $10,000." We have to somewhat be at the central command of helping them navigate all these decisions. So technology that helps promote value, transparency and collaboration is really the new, new. And in everything that we launched this year, we launched 7 products, they all were focused on being able to do this.

So our products today, just to take you through what we do today and then, where you should expect to see that we're going or hear more for me, our offerings today already serve a robust set of patients, stakeholder needs in our model. And we have scale to allow flexibility in our model, as well as grow it at any given time. So when you think about today, think about when a drug is launched, the first few things that go on in Phase II and Phase III, we get in early and strong with manufacturers and have a lot of intimacy around their trial data. And you're dealing with very, very complex medicine. So to be able to advise them in Phase III, you should add a health outcomes endpoint, you should add this to your trial. Given what we're hearing upstream, from payors, is very important to pharma. We have a scientific regulatory consulting business that has many master accounts with some of the top pharmacos in the industry. We have a large team of Ph.D.s, true subject matter experts that understand safety, regulatory compliance and are very intimate with what goes on at the FDA. And we have a wonderful reputation with clients. We're very well-known for what we do in the early stages of development. And then as you think, as that drug moves, the Healthcare Marketing and Analytics team that we have further positions us as a real thought and execution partner as they go-to-market. Again, we are highly regarded and we know so much about your product having worked early on, that it's a very easy transition to start to use our division for launch. And then, we kick in with our Distribution business, group purchasing, all things Cardinal does really well. It's the legacy of our company. We should expect to be really good there, and we have been. And then we have associated tools to help with providers, as I mentioned, in the office, around technology and all the things that you would expect serving this group. And we serve beyond oncologists. We also do rheumatologists, gastroenterologists, Hep C, all the top areas. We really made a focus in our positioning to also be about Specialty, not just 1 therapeutic area, although, most of the business is in oncology.

And then the final vertical of the day and what gets me most excited when I talk about the market playing to us is the proprietary software we have with PathWare. And we do a lot of press on that because we are always at ASCO, we're always publishing, which is expected of payor group and also expected of our biopharma group. So this provides health care professionals with real time, point-of-care decision support at the bedside. And it benefits all stakeholders by decreasing treatment variability, enhanced operational effectiveness, reduced ER visits, reduced hospital stays. And our program to-date has a few accolades. We're the first -- in oncology, rheumatology and GI, we were the first to deploy real time decision support software, we were the first and only to be validated by third parties, which is very important to payors. We're first to be deployed across an entire provider network, so it's important that you have PathWare coming from physicians, as well as coming from payors, because there's a need to work together. And we've also had an average of 15% savings, while decreasing hospitalizations by 7%. And this was despite higher reimbursement for physicians, which is somewhat counterintuitive. But paying physicians to do work that they fairly want to do and that is in alignment with patient care and what's most appropriate in terms of use of Specialty medicines, it's something that the payors want to reimburse. So having patients with better outcomes, having payors saving 15% and having physicians see their revenue go up is a win, win, win. And I think most of health care is after that, whether it's in an ACO or medical home. And we're most excited about where to take this model because it really is to help people manage and underwrite financial risk. And it really works in Specialty because some of the costs are so high. But we see this as being applicable across other product lines.

As we look to the near future to gain scale with PathWare, the Affordable Care Act, even though maybe it didn't bring as many patients as we all had anticipated, it did bring a momentous change in how people think about cost and how they think about managing expensive diseases. And I think that, that trend will play to our favor as there's new folks coming into the system that take risk. It's no longer just the traditional payors that are taking risks. IDNs are taking risks, physicians are wanting to take risks. Everyone is wanting to say, "If I can control the patient and everything about them, I should take on some of the financial risk." The challenge is they're not always the most sophisticated to do that, so our positioning and our partnership allows them to do that in -- at a much -- it de-risked it for them, really. So the future of our division will count on us expanding in 3 areas that you should look to hear from.

Commercialization consulting. While we have a strong position in our cradle to grave product line, customers have asked for more around health outcomes and reimbursement. So given our connectivity to payors, we invest -- we anticipate that we'll invest more heavily in this space and look at commercialization consulting, as it will be increasingly important for pharma and patients to understand and plan for how payors will respond to new drug launches, and how they'll be reimbursed and what will be required in clinical trials. This is especially true as we think about biosimilars, where this model will work as well. We believe biosimilars will behave more like a brand, and so there'll be some differentiation and some data that would be accounted for. Even though the pathway from the FDA is not totally clear, I think enough is clear that we know this.

Second, patient-centered support services. We will remain with a patient-centered positioning. As more cost shifts around even at 10% co-pay on something that is $50,000 or $100,000 could limit patient uptake with therapy. So we'll be able to complement our Specialty pharmacy OncoSource, with the next generation of electronic hub, which is a bit of a buzzword, which is really a command service center to take care of the patient holistically, 360, 24/7. And that will ensure patient access. They get the drugs they need. Pharma gets the benefit from bringing their new innovation, and payors feel like they have some sense of control about ensuring that it's the right drug, right patient, right time. We can also facilitate co-pay systems, which is very, very common nowadays, as well as providing clinical programs to ensure the patient stays on drug.

And then finally, enhanced data analytics. As you can think about, when we go deeper with payors, providers and biopharma, we're left with an ecosystem of data, very, very valuable data. Many on our tech team will call this exhaust, and so the exhaust will help us track, predict, confirm how, when and where and what outcome some of these treatments are being utilized. And it's extremely powerful to a product manager who wants to know within 30 days, not retrospectively, but how am I doing right now with the drug? Are we running into any reimbursement hurdles? Same for the physician. It's to remove all the burden of obstacles for physicians and patients and pharma. And we're keen to broaden our data reach, which is already at 3,600. We carry and manage 3,600 oncologists to touch our system. 2.3 million cancer patients, 100 million payor lives, 6.5 billion medical records, which includes Medicare and commercial patients. So expanding this offering is really important.

So in closing, we believe our model and positioning continues to serve us well, a patient-centered positioning focusing on all 3 stakeholders. We have gained scale and enhanced our capabilities across each of our services. We remain with a diversified set of assets and businesses that serve all of health care. And we have attracted and developed strong talent, not just for today, but for what health care looks like in 2015, which is rapidly changing. And we're poised to invest. We're careful about that and we're opportunistic. And I don't think there's been a deal or an asset in Specialty or even a few degrees of freedom to the right or left that we haven't looked at. So I look forward to updating you well before the next Analyst Day on some progress in this space. And I thank you for the time.

Jeffrey W. Henderson

Okay. Thanks, Meg. We're going to move into our second Q&A panel of the day. I'm going to ask Eric to come back up and Dr. Scott Howell, who is our SVP of Clinical Solutions, works with Meg in the Specialty and Biopharma group. So we're going to focus the Q&A on the last 2 strategic priorities we just covered, International/China, and specialty and biopharma. So with that, we're open for questions.

Question-and-Answer Session

Unknown Attendee

Thanks for the overview. Just curious how you would describe the competitive landscape and how Cardinal competes in that landscape. In some of the other presentations, we've heard a lot about scale being a factor, obviously, not as big as some of the other players in this particular niche. So any color you could offer there would be great.

Meghan Fitzgerald

Yes. So thank you for the question. I think, first and foremost, scale is one benefit for sure. But what we found is relevant and getting paid for service and value that you bring is equally important. So you could look at us from a standpoint of distribution scale, GPO scale, specialty pharmacy scale, payer lives, how many oncologists under management. And what we're finding is to be relevant in this system and to be able to get paid fairly for doing work and doing high-value service, it's really about having relevance with patients, providers and payers, not just one audience. We had grown, I think, to a level that we feel comfortable with and have been happy with our growth in distribution. We're, of course, significantly smaller than our competition, but I think our relevance has increased significantly in terms of what we can bring to biopharma and what we could bring to payers and the help that we have with providers. So covering 3,600 oncologists, that would be 8,000 or 9,000 that are in the field, we feel very good about it. And whether they're in the community or they're in the hospital, we're able to provide them coverage. So I hope that answers what you're looking for.

Unknown Attendee

Just going back to China. You mentioned 12 acquisitions there. I know it's a very fragmented market and the lines are blurred across channels, but maybe if you could just give us some sense of where you think you are as far as market share. And I guess, more importantly, as we look out longer term, could you maybe give us a sense of what the goals are and what those timelines might be about where you want to be in China over some 3-, 5-year time horizon?

Jeffrey W. Henderson

Sure. I'll start and then Eric, by all means, chime in. So we -- currently, we believe it's always hard to get control the accurate data, but we believe we're in the top 10 in terms of pharmaceutical distributors in China. We expect over time to move up that ranking. Our goal isn't necessarily to be the top 1 or 2 pharma distributors in China. That may be difficult given the size of the local players, et cetera. And the fact that there's certain products and regions that we don't anticipate ever playing against. That all said, if we continue to increase our share within the pharma distribution area, continue to ramp up our med supply distribution and med device distribution, continue to expand our specialty pharmacies, we believe that overall footprint can give us a pretty significant portion of the health care flow in China and importantly drive profitability, right? There's lots of ways to driving revenue in the Chinese market. They don't necessarily correlate to profits or good return on capital. And our focus has been on the highest value-added, particularly focusing on multinational products from multinational manufacturers, where we think we can provide the greatest value add and generate the best return on investment. Here's our longer-term goals, Eric made note a few of those today, continuing to expand our geographic reach. We currently have 10 local distribution operations. We like to get that closer to 25 over time. We're off to a great start. We like to continue to build out our med-surg lab and retail pharmacy product lines. And we'd like to get our direct-to-patient specialty pharmacies to at least 50 in the next couple of years. And then we'll assess what the ultimate right number is, and whether that's 100 or 200, it really depends on the need and the profitability of those pharmacies. So that's really it in a nutshell. Eric, anything to add?

Eric Zwisler

Yes, when you think about market share in a foreign country, in a China context compared to a U.S. context, there's some significant differences. And so it's very clear that we're one of the top 10, but we punch way above our weight, and we punch above our weight because of what we can bring to lead the industry in development. And so it's very clear that there are less than 5 national players of which we're considered one of those players and, as I would say, the leading foreign player in China distribution. And so that's key. So what we want to have -- what we want to do is have a scale so that we have economies of scale and cost and relevance in the market to compete with bigger players. We don't need to be an instrument of government policy, which means a lot of distribution at the state level, where you see bigger numbers and bigger market shares are because these are policy decisions in support of public health care and not necessarily profitable. But I believe that we are clearly a national player. We're considered a national player, and we have the scale and the scope and the value-added to maintain that. And as we continue to build out, that position will only strengthen.

Unknown Attendee

On the specialty drugs, there's been news in the exchanges where people are signing up for plans, and they don't realize that their plan doesn't cover the drug and they end up with gigantic co-pays. With exchanges possibly being pushed down to 50 million more people in the small group market, is that -- on a 1 to 10, is that a concern for you, number one? And if it is, are you taking any incremental steps in terms of educating patients on the front end with plans and drug coverage and that sort of thing?

Eric Zwisler

Sure. So, of course, we're concerned about access to these medicines. It's a difficult business model, the biotech specialty model. As Meg described, they're targeting very small populations, these companies, but they have all the same costs and all the same risks and so we see much higher prices spread over those smaller populations. And when you combine that with skinning down of the benefits and insurance, it's happening some with exchanges, but really it's happening kind of more broadly as we all understand. It creates a tension there obviously. At the time, I think most of that gap is frankly being filled in by manufacturers and by their agents, and that would include companies like us, who are working to help stand up reimbursement support services, co-pay assistance programs, free drug programs and the like. And I think for the foreseeable future, that's going to likely continue to be the solution that we have.

Unknown Attendee

Specialty business. You typically need scale or relevance in one of the major sleeves, either that payer sleeve, that provider sleeve or that manufacturer sleeve to drive relevance and to drive some type of excess margin. I guess, if you think about pharmacy on one side, medical on the other side, the providers -- the provider market share, there's 2 pretty dominant players. There seem to be opportunities on the payer side and the manufacturer side. I guess, could you talk about a strategy there? Or which one seems more attractive to you as you think about the rest of Cardinal's business?

Meghan Fitzgerald

Yes. Well, we always say -- it's a great question. We get this from George and our board, obviously, all the time. You need a certain level of share-touching physicians. So 3,600 is a great level of share. 2.2 million cancer patients, given that 1.5 million get diagnosed every year, we probably touched 25% of all the cancer diagnoses or people that are either incidents or prevalent. So right then and there, that's enough scale for payers and pharma to stay irrelevant. Now if you only had 500 physicians or not many patients, there is a number to which you're not relevant. So I totally get the point. We're at a point now where we're extremely relevant and have not been an issue. I think on a go-forward basis, and this gets to something we say in terms of one -- I made the differentiation earlier when the question was asked over here about relevance to us also means profit and where are you going to get paid. Access to these medicines and getting them to patients is so important to pharma. They'll pay for the support. We're entering an era where the services around the medicine are just as important as the medicine. They're equal, or the patient doesn't take it. So there are stakeholders willing to pay to ensure that these patients get this medicine. And also, it's relevant to the physician because they don't want to worry about that at midnight. They want to know that there's a partner that can take care of this. And on the other side, you have a new group of payers, if you will, or risk bearers that also want to pay for performance and ensure that an outcome was given to them that they signed up for, for the cost of medicine. They are also willing to pay for a shared outcome. So I think all 3 pools are very relevant. Some are more profitable. Some are significantly more important, but maybe not as profitable. I think we all know distribution hasn't been as profitable, and you guys know the numbers and report on them. We've limited exposure there, so we're not coming down necessarily, and we're able to grow in the areas where we can bring relevance. But I think having market share in all 3 is important. And I think for the last 10 years, the market share was always talked about in terms of what's the share in distribution. I think now entering a new era of health care, many want to know how many patients under management, how many lives, what specialties do you touch aside from oncology and what is your relationship with IDNs and a lot of what goes on in the Cardinal ecosystem that benefits. So it's a great question. I couldn't pick one, but they're all equally important. It would be hard not to have one nowadays.

Jeffrey W. Henderson

I think buried in there was the comment that we need to continue to increase our relevance to the manufacturers or the pharma companies as they look to get these increasingly smaller volume products to the right patients, I mean, a little bit of what we're doing either organically or inorganically that accelerate that relevance.

Meghan Fitzgerald

Yes. So organically, we feel as though we have the right team in place. We've had the right experiences over the last 3 years, and we've grown profitably. And the revenues that we've grown in the triple-digit growth has enabled us to invest in the business. So organically, we feel like we're in a good spot. There's some things we can build and there's some things we can't, and we have done numerous small tuck-in acquisitions over the last 3 years to kind of build the scale. I will tell you, on the M&A side, we're extremely active and very opportunistic, and we're looking every single day. So you should expect to hear that there will be more M&A modestly in this space. And we feel as though some modest investment will actually only increase our relevance and what we're able to deliver.

Jeffrey W. Henderson

Yes, I just want to echo that. As Meg has built her team and did it after strategy, I think our level of comfort with where that strategy is going and the focus of it has increased immeasurably. And along with that comes a propensity to want to make some of these modest investments in select areas, and we'll continue to look for those. We've made some -- we'll look for others, and we're ready to make them if the strategy in the financial returns makes sense.

Meghan Fitzgerald

And just to give an example of some of the investment, we brought Scott Howell over from Genentech, where he ran reimbursement and access services for Genentech. And we know that, that is really at the heart of the new model. So it's also an investment in talent to bring people in the market that are best in class in some of these areas and put them on the team. Same with payers. Most of our team has read the Affordable Care Act, understands all the duels, has worked in that space and is very intimate in managing lives at risk. So we're adding to our bench to make sure that as we take on assets, we have the right team to deploy them and make profit.

Unknown Attendee

Meg, just another question. Can you follow up a little bit more on your relevance? I know there's a lot of concerns about the very high rates of inflation for some of these new specialty meds, as you mentioned. What can you guys bring to the table to really get that under control for payers?

Jeffrey W. Henderson

Okay. Yes, so as Meg mentioned in her presentation, we really do have what we view as a leading position in the marketplace with our clinical pathways program and with the tool that goes along with that, the software tool, clinical PathWare. And, as she also mentioned, we've got some demonstrated success there. It's been studied by some outside parties. It's been published. The results have been published in peer reviewed journals, where in the context of programs that actually are reimbursing physicians on a per activity or per drug use basis somewhat higher, net cost coming down and care improving in terms of reduced variability, reduced emergency room visits, reduced hospitalizations and so on. And so there is better reimbursement for the physicians at the core of it, so they're happy with that, and at the same time, a very substantial improvement for the payers. In publications, if you look those up, you'll see on the order of 15% reductions in their year-over-year costs in those populations.

Meghan Fitzgerald

I will tell you what they tell us is it's a real conundrum for payers for sure. You're dealing with people with various serious illness. And in some cases, some of the drugs that were launched, including -- look at what happened this week with Hep C, if you're looking at words like cure or cure rates or extending survival, and so it's very difficult to turn that down, and most of the patients in cancer would fall under Medicare and it gets picked up. So what they want to know is that, that outcome is appropriate for the patient. In fact, Scott always reminds me, 50% of the cancer compounds in the development right now are coming to market with a diagnostic test. So again, that validates that the product will actually work in a certain micro population. So what payers ask of us is, "Is this clinically the best way to go? And if it is, is this patient going to respond because $25,000, $50,000, $100,000 absolutely can't be wasted. And if they're on it, are they going to stay on it?" So we're finding that there's 2 models out there. You can either take a more strong-handed approach with physicians or you can work with the physicians to say "Listen, if the right care is done, we will share in some of the benefit with you, which has been our model," because they also know that if a physician defects to the hospital and gives an infusion in the hospital, that's $4,000 when they could have given it in a community setting for $400. That's also a conundrum. So that's why we feel as though these parties now more than ever are working together because they want to influence the appropriate set of care along with the appropriate drug being used.

Unknown Attendee

I have a question back here. Can you just help me to better understand the actual financial models, either Jeff or Meg. I mean, obviously, we all understand distribution and how you would make money on distribution. But when you have the relationship with the payers, it sounds like you're talking a lot about taking risk. Are there certain risk corridors? Are you only sharing on the risks to the upside? What happens to the downside? And then are you being paid service fees, consulting fees from the bio manufacturer -- or I'm sorry, from the -- yes, from the bio manufacturers? I mean, how do we think about how this all fits together both from a revenue and a profit perspective? Are there certain areas that are more profitable for you than others?

Meghan Fitzgerald

Yes, sure. Thank you. So we get paid 3 to 4, 5 different ways. So thanks for the question. On the manufacturer side, we absolutely get paid a service and a consulting fee, which is pretty common. And the more that a biopharma offloads their commercial expense to you, you can start outsourcing the entire commercial entity. So if you were a biotech [indiscernible] and you're predominantly focused on R&D, and suddenly, you get a positive signal and you want to start to apply hiring a regulatory team, market researchers, pricing consultants, health economists, is not something you can afford when you're down to 8 months worth of cash. So they'll outsource a lot of those fees to us. Most of the time, we take a straight consulting fee. There are some that have approached us and said, "Can we do a shared risk? You have some of the upside if we launch and if we do well." A lot of flexibility in terms of working with biopharma and actually pretty straightforward. When you get to the payers, most of the time, it's under a shared risk model. You can get a per member per month or you could also get paid based on how much you save. If you save $10 million, some will go to the physician, some will go to us at the intermediary and some will obviously go to the payer. But again, when you're saving $10 million, a lot of it is upside that wasn't planned for, so it comes to us. And then [indiscernible], you know more better than anyone the distribution revenue and the GPO and how that works. So I'd say it's a sliding scale of profit, and that's why we feel pretty good. We have a very diversified, well-rounded set of assets that give us different levels of profitability, but hanging together. And then the data is also a -- valuable to all of these stakeholders as well to kind of know where the product is, where all the health economics is being recorded around the product and how it's being used. And that's also an opportunity for us to grow and make more money there.

Jeffrey W. Henderson

Thanks, Meg. With that, I'll push this section to a close, thank our panelists. And I'm going to bring Mike Kaufmann back on stage. He's going to talk about a lot of strategic priority in generics. Mike?

Michael C. Kaufmann

All right. Well, first, I want to thank Jeff for leading that panel with Meg and Eric and Scott. And there is a lot of exciting things going on in Specialty. What really excites me the most, and Meg said it a couple of times, but I really want to make sure it registers with you guys, is we have really invested in talent.

And it's just not from Meg, but across her team, with Scott and so many others on her team. And this market is really changing and what we've realized is the clinical capabilities are important part of the specialty market, and if you're going to be successful in specialty, you've got to invest in those types of talent, which we've done and we've gotten people, again, like Scott, who has experience working with one of the leading specialty companies like Genentech. And you'll see folks throughout our team that have that type of experience. So I think that's incredibly important.

So while this business is still relatively small compared to all the other things in my segment, it's growing incredibly fast. And I get a lot of really positive feedback from manufacturers and from customers that we're trying to look at things different. We're just not doing it the same old way like others are doing it.

We're willing to be different. We're willing to try new things. So I think that's what's going to be our differentiator as we continue to grow this business.

So we talked about investing and growing in Specialty, and I told you I would come back and talk about the other 3 key priorities for us. Again, we're going to talk about our execution, our diversification and then most importantly, base. To get early on your comments, we're going to talk about what we're doing in generic areas.

So let me jump into these. So we have a lot of really good things going on. And I would tell you, particularly, as it comes to the Pharmaceutical Distribution businesses, we have really done a lot of things focusing on -- if you kind of look at these in group. And we've really focused on our customers, like I said in diversification. We've really focused on our execution and our expenses, and we've also really focused -- also on our balance sheet. And I'll talk a little bit about each one of these with these points.

So we've said when we got started back in FY '10, we were really going to focus on diversification. And as you can imagine, we've done that in a lot of different areas. We've grown our acute business, our chain business, but we've also really focused on independent. And we've more than doubled -- almost doubled the number of retail independents that we serve.

If you will remember, we acquired both Kinray and Dik during this time period. We retained essentially 100% of both of those businesses' customers. And not only did we retain 100%, we've actually grown both of those businesses. So if you look at the number of customers we're serving by those, it's actually more than what we've -- when we bought the business. And not only did we retain the business, but we were also able to increase the profitability of both of those businesses nicely. So I'm really excited about how the hard work that John and his team did to reach customer retention.

Adjusted service levels have been over 99%. So we have really gotten after making sure the quality of what we deliver every day to a customer has been at outstanding levels. I think if you guys will survey customers throughout the country and say, "Who's really doing well at taking care of business with their customers, delivering an order on time, accurate with great, great service?" I feel really confident you're going to hear a lot of great things about what we're doing.

We've also really gotten after our expenses. So we, obviously, we focus a lot on our warehouses, and it's not just about expenses. It's also about accuracy and what we're able to do. And so we've really seen some tremendous gains in efficiencies in our warehouses. We have many of our warehouses that have reduced their costs to pick a line by over 10%. And we've been able to reduce our airs by over 13% over just the last couple of years.

So our warehouses have really taken to heart and really emphasized our Lean Six Sigma operational excellence culture that we've built throughout the company. And we've been able to take this through our distribution centers. And if you look at the way John and team have been able to take those folks that are running those buildings and put them through our OPs Ex programs, put them out there as black belts, get some experience, bring them back, start running these distributions enters. The level at which we get after things and deliver quality has been very, very good.

All that together, not only focused on the buildings, but our back office, getting after efficiencies across the entire segment, we have been able to reduce our SG&A as a percentage of our gross margin by 8 percentage points over this time, which is significant on a business like the size of ours.

We're always thinking 2 places to the right of the decimal point. I think that's what makes us good as a business. We don't think of percentage points. We think in basis points not only when it comes to maximizing our margins, but also to taking a focus on our expenses.

And lastly, we've also focused on our balance sheet. We focused on our days in inventory, our accounts payable, all the components of that. In our return on tangible capital, if you exclude the China business, has more than doubled since we've taken over the last 4 years.

So I've talked about that I really believe that we've done a great job of diversifying our base, and how have we done that? Well, we're going to talk about retail here and specifically, a lot of things -- I'll just give you a few highlights because we have a lot of going on.

But first of all, I'm really confident that we do have the leading generic program, not only in terms of breadth, but in terms of service levels, in the terms of the way we communicate with our customers. We have experts in the field that are working with customers, explaining things like why prices are going up, how reimbursement's being impacted, et cetera, et cetera. Customers really, really value what we're doing out in the marketplace.

We have best-in-class inventory management software also. This is an area, we call it Cardinal Inventory Manager, or CIM, where we have invested a lot of time in this area. And we have customers that have increased their cash flow by $100,000 and reduced the error rates in their pharmacies are out of stocks by over 40%.

We've got comprehensive and innovative offerings in our DME in consumer health areas. We've been able to work with AssuraMed. We've added talent from companies like Walmart and BigLots to our consumer health team, and this is an exciting area.

And lastly, people are talking a lot about pharmacy transition services team. And we've invested in this for years, and we have a group of people who have over 65 years experience that have closed over 600 deals, and we've retained or won over $700 million in new business.

So here's just a lot of the other programs we have. As I said, I just want to give you a few highlights. I could have done the same thing on the acute space. We have leading share in this space. And so I want to make sure that you understand that there's so much going on in our offerings I feel incredibly good about, but I want to take now and spend a minute to talk about generics.

So the first thing I want to talk about is our history in generics. As you can see, we have done a great job of expanding our generic sales. So our source business is a business where we control the actual products going to the actual stores. And this is a business that we've been able to grow our sales by over 20%. And not only have we grown our sales by 20%, we've actually been able to expand our margins even more. So we've done some great work in this area.

So what do I think about going forward? While we believe that even though the launch schedules going forward, as George mentioned early on, are not going to be quite the same they were -- as they were in the past, it won't be quite as many blockbusters. We still believe that between all of the launches that are going to happen and all the other activities we have around pricing, analytics and our activity to gain more share of wallets with acute customers, as well as with our retail customers, we expect that we will continue to grow at least at 10% on our margin rates.

So last slide, I will talk about generics. I really think -- you could talk a lot of things on generics, but there's really 3 important things that have to happen. The first thing you've got to do is, you've got to always be focused on your scale. Then you've got to be able to take that scale. You've got to turn around and utilize it to lower your costs, and then optimize both of those with analytics. And that's something that we have been able to do, and this wheel is -- continuously works to drive us to get better margins and better performance in our generics.

And while I could talk about a lot of things going on, we have some real types of things, something really important we're going to talk to you about in our area of increasing skills. So I want to bring George Barrett back on stage to talk about some exciting news.

George S. Barrett

Those of you who have been not paying attention because I know you're supposed to be glued to our every word, you may have seen that we temporarily halted trading on our shares. And we've done that so that we could make a couple of announcements here.

And so I'm going to start and then I'm going to turn this to Mike. And so let me just sort of shape this for you. So we have announced that we have signed an agreement to form a 50-50 joint venture with CVS Caremark, focused on the sourcing of generic drugs.

This is something we've been working on for some time. And interestingly, this morning -- by the way, those of you who are on the phone, I think there maybe something posted now on the website to give you a quick overview of this.

You told us this morning that this was an area of great opportunity, which we agree with. And on some level, an area of concern, which is how do you keep the ball rolling. I've got to pause for a second here. So we have said to you and I've spoken probably to every single one of you at some point about the fact that we think scale matters, but we also think it matters in the right places.

And so we're really excited about this partnership. This is an agreement with a partner we know and trust, with teams that know how to work together, have done so for many years in what we think is the most important generic market in the world right here in the U.S.

We bring together tremendous talent and know-how, deep manufacture relationships. I have seen this from, frankly, many angles over my years. It is a design that makes us a 50-50 partner with equitable value sharing in a very capital efficient approach.

For us, a very important issue, one that we felt that we could operationalize in a straightforward way and relatively rapidly. And I guess, I'll conclude by saying this is really important.

These are 2 businesses that respect one another, and we designed a system that essentially respects our independent business model. This is a program focused on one issue, which is the sourcing of generic pharmaceutical products, and essentially liberating us again to continue to pursue our independent business strategies, and we will continue to do so and to serve all of our customers. This will only enable us to serve our customers in the most cost-efficient fashion.

And we're really excited about this. And so I hope, in some ways, these conversations will help address some of your questions from the morning. And Mike, I'll turn it to you for a couple of minutes. And by the way, Jeff is going to follow up with some structural.

Michael C. Kaufmann

So as many of you are waiting for the announcements, one of the other exciting components of this is, we have extended our distribution agreement with CVS for an additional 3 years onto our old deal, so we will be servicing their -- our distribution businesses with them through June 30, 2019.

And, as George mentioned, we have been working with CVS over a lot of years. I personally began working with CVS in the mid-90s when I was a VP GM of our repackaging business and had the great honor of being able to take over the repackaging business back then. And I served as the head of sales when we were able to bring that business on board and put some a lot of unique deals over the late 90s and 2000s and all the way through. So I've had a lot of experience and opportunity to work with them.

They're a great group of people, and I think the success of any joint venture is really about the people and their ability to work together and the design to make sure that it's designed in the right way for success. And what I like about this is that it is a 50-50 joint venture. We are going to be sharing the best of the best talent into the organization, and we are committed to work together and have been having a lot of discussions on how we can do this.

I also really like the way that we've built this in a simple manner. This is going to be based here in United States. We don't have time zone differences when some generic launches failing at 10:00 at night, and we're not going to be on 6-, 7-hour time differences. We're going to be right here. We're going to be where the manufacturers can work with us, spend time with us, understand our strategies and plans, work with them collaboratively, work together collaboratively, and so I'm very excited about what this is going to do for us as a business.

And so I will -- I appreciate your time. I hope you see there's a lot of great things going on in the Pharmaceutical segment, and not only this but a lot of other things that we're executing well. And now I'm just going to turn it over to Jeff to talk more about this.

Jeffrey W. Henderson

Thanks, George. Thanks, Mike. That was exciting. George and Mike will be back up here for a last Q&A panel, and I'm sure there'll be a few questions about this, so you might want to ask them.

Before I get to my main financial presentation, I did want to spend a few minutes on a couple of slides, just giving you a little bit more detail on this exciting new partnership with CVS.

The venture itself is a 50-50 JV, which will be staffed with expertise and personnel drawn from both companies, CVS and Cardinal. It will be responsible for sourcing the vast majority of generics for both CVS and Cardinal, with really a very limited set of exceptions. Although the exceptions are really hospital-based injectables and nuclear products because those products are really exclusive to Cardinal.

I should mention that the JV will consist mostly of people, actually, who will perform the sourcing services and the supply contract negotiations on behalf of both companies. There'll primarily be a call center, so its expenses will get billed back to CVS and Cardinal over time. As such, there'll be relatively minimal funding upfront to capitalize the JV itself.

Since the venture will function solely as a sourcing services operation on behalf of the 2 companies, both CVS and Cardinal will continue to manage their product orders and logistics processes as they do today. So in our case, that means the contracts, product flows, financial flows will still be executed directly by Cardinal Health with the manufacturers based on the pricing negotiated by the venture.

Given the larger volumes that CVS is bringing initially into the venture on day 1, we have agreed on a fixed quarterly payment of $25 million that would be paid from Cardinal to CVS over the life of the agreement. The payment was designed, really, to ensure equitable value sharing and alignment of our strategic mission around the 50-50 partnership.

The joint venture is expected to commence operations as early as July 1 of 2014, which would be the start of our next fiscal year.

From a financial perspective, and I'll just comment from a Cardinal perspective, for the remainder of this fiscal year, so our fiscal '14 which ends June 30, we do expect that there'll be some modest related costs, which will appear in our income statement during the second half of our fiscal year. Any amount, though, is encompassed within our October non-GAAP EPS guidance of $3.62 to $3.72 per share, which we're affirming again today.

Afterward, we expect this deal to be accretive in year 1, which would be our fiscal '15, and accretion to increase in year 2 and beyond as the benefits ramp up.

This final slide, really, is intended to outline some of the key accounting and reporting considerations with the deal. And I'm not going to go through this in detail. We are going to post it on our website. Be happy to answer questions.

But really, from an accounting standpoint, the most important thing is really what I'm going to say now, and that the key financial flows related to the venture will appear in our financial statement in a pretty straightforward way. Both the amortization of the quarterly payment from us to CVS and the benefits we get in our sourcing cost over time will flow directly through our income statement through our cost of goods sold line. So they'll appear in the pharma gross margin numbers and, ultimately, the segment profit for pharma.

And then some other reporting and disclosure items that are listed on the slide, and again, happy to answer questions, but again, I think the key point is the major flows will appear in a pretty straightforward way in our COGS line in the pharma segment.

Okay. Again, we'll come back to this when we do the Q&A, but obviously, we're very excited about today's announcement.

So with that, I wanted to give the final presentation of today. And really, it's a financial overview which attempts to really wrap up everything you saw today. Talk a little bit about our performance track record because I think history is always a good indicator of the future, hopefully, and talk about what our aspirations look like in the context of these strategic priorities.

So let me start with a review of what we told you 3 years ago when we stood here and provided some performance goals. We told you that our long-term non-GAAP EPS goal was to grow at least 10% annually. To date, over that time frame, we've delivered 18.5% CAGR.

We set a goal of modified TSR or total shareholder return to be at least 11% annually, and that metric is really a combination of annual EPS growth and dividend yield. Today, we've delivered 21.1% annually.

We said we're going to focus on substantial margin expansion. Gross margin has gone up 113 basis points over that time. And then our -- and our non-GAAP operating margin rate as well, and that's up an equally impressive 64 basis points.

And last but not least, we then have laid out an expectation to grow dividends at least in line with long-term earnings. And we did, in fact, do more than that, resulting in a 5.1 percentage point payout increase through a payout now that's well in excess of 30% of our non-GAAP earnings. Hopefully, that track record speaks for itself.

Supposedly, this next slide is relatively quickly because really they're meant to underscore the performance comments I've already made. But I think they really demonstrate the continuous improvements we've made across the business and all the key metric areas that we believe drive bottom line performance and, ultimately, shareholder value.

Clearly, our focus on customer and products mix has paid dividends as we've shown strong gross margin expansion. We've combined that with a relentless focus on efficiency, driving our SG&A as a percent of gross margin, down 433 basis points over the time frame.

And I will say as we've pursued these productivity initiatives, we've done so in a very thoughtful manner. Rather than just take a blunt force approach to cost containment, we've utilized our expertise in operational excellence really to drive a lean approach to everything we do from our distribution operations to manufacturing, to our accounting operations.

And the slide you see here you is really just an example of the manner which we track the benefits that we're driving from our operational excellence initiatives over time. And this is something that's very closely monitored by the entire team.

When you combine all that together, it results in a consistent operating margin expansion up 64 basis points over the 3 years and outstanding non-GAAP operating earnings CAGR of 14% since 2010, which we've levered into 19% annual non-GAAP EPS growth throughout a fairly steady reduction in our diluted shares outstanding over that period.

I should point out that this 19% CAGR does include $0.18 of tax settlements that we called out last year in our non-GAAP results. But even if you exclude that one-time tax benefit, our annualized EPS growth is still a robust upper teens.

So through a combination of that strong earnings performance and some really outstanding capital management by our operating teams, we span off some very strong operating cash flow over that period as well. When you combine it with our strong balance sheet, it's really given us ample flexibility to deploy capital and in a balanced, flexible and, we hope, profitable approach.

Clearly, the largest portion of that deployment is going to acquisitions, and those acquisitions are really distributed across all 5 of the strategic priorities that we've discussed today. Besides, the boxes on this page, by the way, are meant to roughly correlate to the size of the deal, though it's really [indiscernible] purposes only.

If you'll have the range from what I would describe as larger transactions such as AssuraMed and Kinray, the more midsized deals such as People Health Care and Yong Yu, and then a host of smaller tokens that have complemented our existing platforms.

As you would expect and hope I imagine, we monitor retrospectively the performance of each and every one of these deals, large and small, against both our financial and operating metrics that we established at the time of the approval. I'm pleased to say with only a relatively few exceptions, we've met or exceeded our expectations on all of these transactions that you see here.

And in several notable cases, and Kinray is probably the best example, and Mike referred to that a little bit earlier, we've far surpassed our original assumptions for that deal.

From this time frame, we've also committed to returning a sizable portion of our cash to shareholders in the form of both share repurchases and dividends, with a total amount returned up 66% from fiscal 2010.

On the dividend side of things, as we did commit over 3 years ago to a differentiated dividend, and I've taken that promise very seriously, we have a consistently growing dividend over this period, as I said earlier, increasing more than our earnings growth rate. And this has resulted in a payout well above 30% of our non-GAAP earnings.

So let's try to wrap everything together today and talk a little bit about what this focus on our strategic priority is and the overall direction of the company means for our financial future. We do spend a lot of time on strategy and our outlook for the future, taking in consideration both the evolving health care environment, but also the key role that we play in it and our ability to maximize our role in that environment as it continues to evolve and take shape going forward.

So when we do that and as we look into fiscal 2017, and what we think will look like in fiscal 2017, and taking into the consideration the strategic growth drivers that you've heard about today, as well as the resources, both human and capital, available to us, we've arrived at the following set of financial aspirations:

First, we continue to expect to drive a relentless focus on margins in all parts of the business. And in fiscal '17, we expect our consolidated non-GAAP operating margin to be above 3%. Within the pharma segment, we started the at 2.5%, and the Medical segment above 5.75%, again reflecting the various growth and margin initiatives that you've heard about today.

Off our FY '14 days, we aspire to a 3-year non-GAAP EPS CAGR of 10% to 15%. Our 10% aspirations, so the one end of the range, will require strong performance against strategic priorities that you saw today. Modest incremental capital deployment for tuck-in acquisitions related to those priorities and share repo that gradual brings down our diluted share count over time. And finally, I would expect our dividend payout to stay in the range of 30% to 35% of non-GAAP earnings.

Well, I leave this slide While it is just answered question he may have in your minds financial aspirations outlined here do reflect consideration of the CVS sourcing partnership that we announced earlier today.

As I said multiple times and, hopefully, you've picked up from today's presentations, critical to achieving these aspirations is this portfolio of growth drivers that -- they really complement, we, believe, complement the changing landscape of health care.

Portfolio that they are still very nicely over different periods of time as well, and we have every intent of continuing to invest resources to drive optimization of this portfolio both now and in the future.

All this, as I said earlier, is having the rock solid balance sheet and capital access to pursue our strategic growth and drive returns for U.S. shareholders. We remain confident that we have the flexibility to do so while maintaining our commitments to investment grade ratings.

Let me leave you with this last slide. Hopefully,, you, agree that our track record of outstanding financial growth and delivering on our commitments is based on a combination of strong execution and focused on the right strategic priorities is a track record that we're very proud of.

Along the way, we deployed capital return in cash or shareholders and delivering outstanding market returns. And we will remain very well-positioned for strong future growth, and really are excited about what the future holds for Cardinal Health and our shareholders.

So with that, I thank you for your attention. We're going to go to our final Q&A panel. George, Mike, Don and myself will be in the panel, and Sally is going to come up and moderate. And we'll be happy to answer any questions about the CVS partnership we just announced, the financial aspirations or anything else that was presented over the course of today.

So with that, Sally, I'll turn it over to you.

Sally Curley

So we'll just take a moment. We're going to bring everybody up here on stools. We'll do a little bit of an unplugged -- MTV Unplugged acoustic set here.

So for those on the webcast again, we've got George, Jeff and Don Casey and Mike Kaufmann. I'll get their titles right this time.

So Jeff, we're going to start with you. So he asks the question and then we'll go to the audience for questions. It's a question that we get often when we give long-term guidance. Will EPS growth be relatively even over the FY '15 and the FY '17 period?

Jeffrey W. Henderson

Yes. Well, I wish life was that simple. Actually, we had a very smooth growth rate over that period. But I think the reality is that there will be volatility in the growth rates year by year. We do believe over that 3-year period, we'll deliver EPS growth in the 10% to 15% range. But I'm sure there'll be years that are at the lower end of that range, that are at the top end of the range and maybe a year that's outside the range. But overall, we do feel comfortable that we'll deliver 10% to 15% over that period. I don't want to get into giving specific guidance for the individual years. But I'll make a couple of comments about at least what we know about FY '15, just as you're thinking about it. We do know for some of -- one headwind that we had heading into FY '15, and that is the fact that we've got one more quarter of compare to the Walgreens contract. We had basically a full quarter of earnings related to Walgreens in Q1 of our fiscal '14, so we'll have that tough compare in Q1 of FY '15. Also really, what I said about the CVS partnership. We do expect it to start as early as July 1, but the benefit will ramp up over time. Although we do expect it to be accretive in year 1, clearly, we expect those benefits to accelerate in year 2 and beyond. Hopefully, that answered the question. Even all that, I'll update into our 10% to 15% CAGR assumption.

Sally Curley

Questions? George?

Unknown Executive

George and Jeff, and I was going to ask a lot about private label and med-surg. But I think you guys kind of took that away from me. Don, I'm sorry, I'm sorry. Just a couple of things noticeably absent from the CVS announcement, I guess, number one, can you tell us if anything functionally changes with the announcement? Will you guys be distributing generics to CVS? Or is there anything changed there? Specific accretion figures, noticeably absent, I guess, is there any more color that you can provide around that? And I'll let you guys take it from there.

Sally Curley

Maybe Mike...

Unknown Executive

Why don't we let Mike start with the first part of that and then we'll turn to Jeff?

Michael C. Kaufmann

Essentially, the way it's going to work is we're going to contribute talents to the JV. They're going to contribute talents to the JV. We're not going to be purchasing generics as separate entities anymore. [indiscernible] Call it whatever you want. Sourceco [ph], we'll be the entity. The talent will be in there, and they will negotiate the pricing and the terms of conditions for both entities. But we will -- on flip side, we will receive our products directly, and there are national logistics centers distribute to our distribution centers. They're going to receive products directly into their distribution centers just as they do today. They're going to manage their inventory levels, their service level to the stores. We're going to do all of that on our end. And so really our relationship with CVS in terms of our day-to-day relationship today does not change operationally for either company. This is really about bringing talent and scale together to be able to work in collaborative ways with manufacturers to provide benefits for both companies.

Sally Curley


Jeffrey W. Henderson

Yes. On the accretion question, you're right. We did not give specific numbers. I know that wasn't the answer you were looking for. But here's the reality. First of all, we expect both companies to benefit from this, right? We structured it in a way that there's equitable value sharing, and at least, speaking for Cardinal, we expect that to result in accretion in FY '15 and then increasing accretion thereafter. The reality is we still got a lot of work to do: to put together the JV; to look at our respective costs, et cetera; and figure out exactly what those means going forward. We know enough to be able to say what I just said today, but still a lot of work to do to finalize exactly how this is going to play out. By the way, I suspect going forward -- not suspect, I know going forward we're not going to update you as a collective entity. Any update that we give will be done respectively by CVS or Cardinal Health. And as I said today, the assumptions we have, currently, are reflected in the guidance that we've given for both the affirmed guidance for FY '14, which reflects the small dilution we expect, as well as the upside in our future aspirations numbers.

Unknown Executive

George, one thing I might add -- one of them was the decline on the debit. Straightforward, a market we know, each year trying to, for us, to model what we think the benefit is going to be should be quite transparent for us as we go. And that's a huge benefit. And line of sight, it's really helpful. And so we lack to sort of clean nature of this. And the fact that we're going to be running our independent businesses and serving our own customers and operationally serving CVS that we have.

Jeffrey W. Henderson

So I think -- and just to point to out, we've mentioned this previously. I think that we view this as a very capital efficient venture as well, that it's -- yes, the fixed payments that we have just give you an idea and it's in the press release. But the after-tax present value of those payments is $435 million. We view that as a pretty efficient way to use our capital really to create the largest U.S. sourcing entity. And that's what's pretty exciting.

Sally Curley


Unknown Analyst

First of all, congratulations on the announcement. Secondly, there's still some pretty large purchasers in the U.S. market today. They bypass the distributors for purchasing of generics. Do you think that the joint venture that you have with CVS could change these dynamics and effectively increase your addressable market opportunity?

Jeffrey W. Henderson

Ricky, it's a very good, very fair question. Here's what I'm going to say for the moment. We are very much focused right now on operationalizing this relationship with CVS Caremark, and that will be our focus. We think the value from doing that is very meaningful. We've tried to create a model that has flexibility. But I don't want to go too far into thinking about are there sort of market dynamics associated with it, but really focus on the fact right now that we think there's substantial opportunity in this venture, focused on sourcing generics in this market with CVS Caremark. That will be our primary focus with them.

Unknown Analyst

Just first, a point of clarification, Jeff. If you look at the accretion, does that include the roughly $100 million a year that you're going to be paying to CVS as part of this deal?

Jeffrey W. Henderson

Yes. All the accretion numbers I gave were net of the $100 million we're paying to them.

Lisa Ashby

And then secondly, as we think about the JV, will there be others that you'll sell product to? Or will there be parties to this JV or will it only be CVS and Cardinal?

George S. Barrett

So let me take that as -- it sort of to relates to Ricky's question, Lisa. And again, what we had assumed for now, and I think this is the right way to go, is our focus all of our work operationalizing this, very important to get this moving, which we will right away focus on leveraging the scale of the 2 companies we put together. We continue to have all kinds of customers, and our hope is that we, through improving our own competitiveness in generics, that we'll be able to serve any set of customers, and we'll continue that through our business.

Unknown Analyst

George, I think in the past, when some of your competitors have united these larger, bigger platforms, you had some comments about your thoughts on global sourcing, global platforms. Can you talk about how this you think is different from that? And how this will operate differently maybe from some of the other competitors?

George S. Barrett

So I'm trying to do this without trying to [indiscernible]. I think it's very different in a number of ways. So let me focus on one. One, obviously, is just that I think is an incredibly efficient side to deployment of capital. The complexity of doing global work -- we will, by the way, this joint venture is sourcing globally. And I've said this before, Cardinal sources globally, and no doubt that Caremark today sources globally. So I think the U.S. market is unique. It's the most attractive market for any general company in the world, an incredibly dynamic market with huge opportunity for virtually any manufacturer. So we felt that this is really the place to start, right here at home, where we know our market, where we know the company's strategies about trying to enter this market and how we might create value from doing that. And knowing the folks at CVS Caremark, how we can do that together. We will continue to evaluate whether or not we think opportunities at U.S. are effective. And we've said that all along, and we have not changed our perspective. But I think the level of complexity here is quite natural. And so we know how to execute and our ability to operationalize quickly with clear sense of how the money flows is just enormously important. So again, it's not to knock anybody else's strategy. They've got their own game plan on it. I think that we know the global generic market, not just from a procurement standpoint, but something about how it flows in different markets. And the reality is it's many, many, many markets. So our perspective with the most attractive -- they move right now to change the game for us was right in the U.S. market. And I think that's sort of [indiscernible], clean system, capital efficient in the market we know with a partner we work with and trust, which is just very, very attractive for us.

Unknown Analyst

George, just -- we've seen a number of these deals announced. Obviously, a lot of savings being had across the supply chain. I'd imagine that the expense, to some degree, of the generic manufacturers -- maybe you, given your background, appropriate person to answer this question, what's the value proposition to the generic manufacturing? And clearly, there's a lot of savings being extracted somewhere. So that will be one. And then I guess, Jeff, just on the structure of it, some of the other arrangements that we've seen, involved more of a variable fee based on savings, maybe just some thought around why structure this as asset fee every quarter every year?

George S. Barrett

So let me start -- look, here's one of the things that I would characterize. Again, I have some advantage of some historical perspective and experience about the Cardinal folks and CVS Caremark folks. Both have really intimate relationships with manufacturers. Very, very deep with an understanding that everybody sort of needs to -- when you're in these business, as you're really looking as often as possible for a win-win situation. Now there are moments where it doesn't work that way and I've looked on both sides of that. But our ability to understand what any given manufacturers are thinking strategically, literally from the standpoint of market strategy, vertical integration strategy for them, this allows us to work with them, one point of contact with a really meaningful share of position here. And so I think while there is some stress that this creates. And there's no doubt for manufacturers when they see consolidating customers, we have the same experience, of course, there is opportunity for them. And we will work really carefully with them. And again, a lot of us bring a lot of perspective to this. And one thing that we agreed as a group when we're negotiating this about that, and I think Mike would echo it, is we want this also manufacturer seeking opportunity. Again, understanding that there's some challenges when your customers get bigger. So we'll proceed with Andy.

Michael C. Kaufmann

So I think we'll be very relieved by the fact that we're still purchasing. We're not trying to buy all this product that are priced and running through our distribution centers and sell it in making the fee structures complicated. I think manufacturers will appreciate the cleanliness of this, will be important for them. Besides the share opportunities and those types of things.

Sally Curley

Jeff, do you want to take the finance?

Jeffrey W. Henderson

So the question was like a fixed fee versus a variable. It sort of goes back to a basic tenet we had going into this is let's try to keep this as simple as possible. And although the operating folks will have to operationalize and that question whether we achieved that end, I think if you look at the structure and the way we settle up and the fact that it's U.S.-based and the simplicity of the JV. Again, our goal was just to keep it simple. Let's have equitable value sharing. Let's focus on speed and getting up and running as quickly as possible. And it even comes down to the CP [ph] quite frankly. We probably could have come up with some very complex variable payment. It would've been very difficult to calculate that after year 1, probably would've caused a lot of internal strife as we arguing over savings exactly this, versus theirs and, ultimately, decided us keep it simple that sticks for the whole life of the payment so we don't have that angst going forward. And from day 1, let's treat both partners in an equitable way in a 50-50 JV. And I think we've achieved that. So I think [indiscernible].

Unknown Executive

I was going to say, too, I also think as you think about when -- if you have to do it on a percentage of savings, the tone of when you would go into the comparison of, say, this is some [indiscernible] sharing percentage, it just changes the tone. And from the very beginning, we've said we want the tone in this partnership to be incredibly collaborative how do we say that per? How do we work together? And from our side, the other thing was, too. We don't want any of our current customers or future customers to believe when they buy generics from us that some percentage of that is going to go to CVS. In this case, with a fixed payment, it doesn't change. And so, we can say in front of the customers and explain what we did here was basically buy up in order to get used to the size difference. And now what's ours is ours and you working with us as your peer partner, they don't have to worry about that. I think that's a really important component of this that I think is going to be important for our customers as we go forward.

Jeffrey W. Henderson

I want to add to that, this -- these guys know, these things are always hard. And so the most important thing upfront is to establish sort of a line and system of incentives to make everybody sort of want to follow it. And it's been terrific in that regard, and I think we all felt it. So I think it was really an important piece to it. The other thing I want to say, because I don't know if Michael and John may choke me, we keep talking about simple structure. None of this is easy stuff, right? There are a lot of moving parts to get this operational, and it's actually goes back to an earlier question. To me, that's one market [indiscernible] that have known each other for decades. You think about how complicated it is to do it another way. So I don't want to trivialize operationalizing these things. It's got a lot of work, and a lot of people are working their tails off to get it up and running and running smoothly. But I think the design was straightforward and the principle. We started this, by the way, with a bunch of working principles that were just -- it was fantastic. Basically, which was also respect for each other's businesses. A great place to start. So it was -- it's been we're very excited about.

Sally Curley


Unknown Analyst

I'm not optimistic about getting an answer from Jeff, but it's his birthday. Could you give us at least some idea -- 2 questions, 1 dumb question and hopefully, 1 not so dumb. Just an idea of what that quantity of dollar generics that you represent in this JV versus CVS? I know Walgreen and ABC have provided a disclosure this helpful. And then secondly, the dumb question is why are you paying them? I mean, versus vice versa?

Jeffrey W. Henderson

So let me answer those in reverse order, and while I'm answering the second one, you can maybe think what you want to disclose, the first one. Why are we paying them because it's based on the principle that they're bringing considerably more scale to the joint venture initially. We assume that means that they can buy materially better than we can. When you think about it initially when we both went to the venture, if we're buying at the same price from the venture, we stand to benefit more initially because they are considerably bigger and, like, we're buying better. So in order to equalize that and ensure that there's some value that goes back to CVS initially and over time, we agreed on what we thought was a fair payment from Cardinal to CVS.

George S. Barrett

So hopefully that answers. Is it important by the way? But then he is throwing up, which I think is very important. So I'm not going to give you an exact answer on the second one. I'm going to suggest that we've seen a lot of numbers around -- I struggled with some of them, by the way. I know everybody's working hard. It's hard to get these of numbers as you guys know. I suspect it would be. Let me tell you following. We, in terms of practical influence on the product lines, we are going to be right up there with anybody. So we would be identified purchaser by ourselves.

Michael C. Kaufmann

By ourselves, we'd be a top 5 purchaser.

Sally Curley

In the U.S. market...

George S. Barrett

So some folks who had the order, and at least, we are larger than people really, #1. CVS Caremark is a good-sized purchaser of generic drugs. You guys know that. You've seen it and studied it. So you should assume that this is a venture with considerable purchasing weight, and we think that compare favorably to anyone. And in a market that is again full stop [indiscernible] market world.

Unknown Analyst

So -- it's interesting. We sort of came in through today and you said that the question was sort of this strategic overhangs and you wanted to sort of refocus everyone on growth. I guess, as we think about the fact that you're able to obviously address this bigger question, right, which not just came from the investment community, but probably from customers, suppliers, good or bad, how Cardinal would be positioned in genetics sourcing longer term? So you're able to do this relatively quickly, fairly elegantly, how important was that in sort of setting the rest of the strategic plan, right? Because you laid out a lot of ambitious goals in specialty, in medical. I mean there's a lot going on at Cardinal. Did you feel like you need to get sort of the base settled so that you have the cash flow to fund a lot of these other endeavors and make sure that the sort of shift was and it's based on sort of the right path?

George S. Barrett

Yes. Look, it's a really great question. I've always said, and I think said this 4 or 5 years ago that having a commitment to your core activity is being great at those things and making sure we invested -- has been important. And I think actually part of our progress over these last couple of years has been all of these folks, just putting our nose to it and being great at things we need to be greater at that our core business. Having said that, we -- first of all, we've been working on this for quite sometime. And we've known that we have had multiple strategies for improving our generic business. This was the most attractive, and I don't think I'd say it was sort of we were dependent on this for our growth. We have felt -- if you had asked me a year ago, I would have said we're going to continue to grow at a very high cliff. As I've seen our team at work, I know that we're devoting our energies, too. I know and measure our proponents against specific priorities. But what this does, which I think is incredibly important and you're highlighting for us, is it does secure a part of our business that is really an important underpinning, and it's really important to our customers. So I don't know how to answer it. This was joined together obviously. This is something we've been working on for quite some time. But you never know when you're going to finish, right? These things are always complicated. So -- but we feel good about the balance of our businesses. And when I wrap up today, I'll try to give you a little bit of my -- I try to -- when I do this, I think of what I want to say, but also I think a little bit about what you guys have been asking during the course of the day, and I'll try to see if I can -- make sure I'm addressing that. But I like the balance of our business and it's a very reassuring thing to know that this part feels like it has long legs and strong, strong legs, long and strong legs.

Michael Evans

It's just important for me to mention, too, that we didn't answer this from a point of view of any weakness. I couldn't have been more comfortable, more excited about what we're doing in generics with the team, the strategies we have employed with our success with our customer relationships. So we didn't enter this as a from a point of weakness. This is just an opportunity, as you're looking at everything, we're very good -- this is going from very good to great, in our opinion. This is just a great partner to be able to partner with and take an opportunity to have both entities leverage the talent that we have and a lot of ideas we both have to drive profitability on generics. So I think this just going from good to great. Just feel [indiscernible].

Sally Curley

So, Jeff or Don, any comments, given that Ross asked about the 5 strategic priorities?

Donald M. Casey, Jr.

I think as you -- as we, the leadership team, have come through the strategic planning, it's like, where is the market going? If there's 2 or 3 big trends, how are you going to manage [indiscernible] costs, and then how are you going to deal with the acute space? I think we've tried to develop a pretty balanced portfolio. And I think we used the words 2 or 3 different times, we're trying to create business systems that are not necessarily dependent on procedure volume or specific tactical trends you might see in generics. So we tend to paint it a little bit more broadly about we got to shore up the base and then go build the second and third quarters.

George S. Barrett

Yes, just want to add to it in a way that all of us in our businesses, it's -- I think, is constant spike for relevance, like making sure that you are relevant in light of the systems changing around you. And we've all seen businesses who, in a way, they stay great at something that doesn't matter, right? And that's never where we want to be. So our focus on studying our ecosystem and what's happening around us really is critical to our strategy. Because we want to make sure that as the market is changing, we are continuing to be that go-to company, that relevant company that when an IDN is saying, "Hey, we're really looking at the big changes, what do you guys offer?" The answer -- you've got to be able to offer more than another basis point of price reduction, right? You've got to be able to offer something that changes the game, something that changes behavior. And we're working really hard at that and we challenge our team a lot on it.

Jeffrey W. Henderson

Just one final comment on answering your question Ross, at the risk of repeating myself. What I particularly love about this partnership is it allows us to accelerate growth in a key strategic area like generics, without using up very much of our balance sheet. So it leaves us with the dry powder to continue to invest in other strategic priorities going forward. To me, it's sort of the best of both worlds.

Sally Curley

Any other questions from the audience? We've got one more, right there. If you could put your hands up again, that would be great. If you can...

Unknown Attendee

Yes, just curious in terms of this arrangement, who initiated the conversations or this idea? Did this come from you or was this initially brought forth by CVS? And then also, any thoughts around potential competitive implications with other partners, other customers, I've been thinking specifically around the PBMs, other PBMs, any concerns? Have there been any reluctance with them to build more business with you given that you're now closely linked with CVS Caremark, which is potentially a competitor of theirs?

George S. Barrett

So I'll not answer the first and then I'll turn to Mike to answer the second. I'm not even sure that I could tell you, actually, who started the conversation. So you could imagine our relationship is deep, long and we talk often and have for quite some time. So I don't know if I would even be able to say who initiated the conversation. As you can imagine, at the strategic level, this is kind of a discussion that we've had. And so, it's partly ducking the question, partly I don't know how to answer to the question, because I don't know how exactly it started, but it started quite some time ago. And Mike Evans, do you want to keep that chat on the market dynamics issue.

Sally Curley

Mike Evans.

Michael Evans

Sure. I think -- look, generics are the most important thing to any of our customers on the retail side down by it. So the acute space isn't going to have an issue with it, so I think the -- it's a nonevent from their point of view. But on the retail space, so you have customers that are going to ask our sales reps some questions about what does this mean. And again, if you go back to the design of this, by having a fixed fee, we can clearly look at the customer and say, "Nothing when you -- that you do with us is going to benefit CVS, it's not like we're transferring." So I think we can get them over that. They're looking to us to say, "How are you going to stay competitive in generics as the market declines? Can we stay market competitive to help keep them in business? We have a breadth of line." This partnership's only going to be able to help us through that. So I think we can clearly stand in front of customers and say, "We've now positioned ourselves to be able to buy generics better." So that we can stay competitive in the marketplace, which is what they need us to be. We can access supply, differently, probably, than anybody else potentially in the world to be able to work with partners going forward. We're going to have the breadth of line that you need to be able to take care of it, both in terms of number of items and backup positions on various items in case there's market disruption. And I think that whether you're a retail independent or a chain, again, there's no ownership or anything like that in here. As far as with each other, this is just purely invested in a joint venture. So my team that has been involved in this, a few individuals, not many, but the ones we've talked to, we benefit a lot. And we feel really comfortable that our customers are actually going to be very excited about this.

Sally Curley

Any other questions from the audience? I'm going to turn it over to George for closing remarks. Thank you, all. Thank you, Kevin.

George S. Barrett

Good. Great. Guys, thanks. So I'm going to try to be conscious of, as I said, getting you guys out of here. And so let me just finish with a couple of concluding observations, and I try to sort of take some notes as we left. We started the day asking you some questions and it was really -- it was meant quite genuinely. You often say to us, what other people asking about. And, I think, in a way, it gives a chance to say what are people thinking about. What are we feeling pretty good about in terms of the future, what worries us. And we've hopefully been so much transparent about saying, "We're okay talking about these things."

I'm really excited about where we are. I think -- I was just starting with this discussion on generics, securing this, stabilizing that business, putting us in a position to compete effectively, sustaining the length of our position in generics we love. We're really excited about it. I think Meg's work and our team's work in Specialty, it really is where the puck is going. I've no doubt about that. And I think we've started to build some extraordinary capabilities there. I think China is an extraordinary opportunity for us.

And again, I hope you got a chance to see that. I know for some of you it still feels pretty mysterious. My guess is 5 years back, looking back on this you're going to say, "Hey, it turned out to be bigger than I thought." I'm really excited about we're on Med. I think Don made a really interesting point. But even in an environment where utilization is somewhat subdued, and I think that's a short-term environment, the work that we're doing actually is a solution provider to customers under pressure and it's a margin expander for us, preferred product, service solutions, all important. The home, the home. There is no doubt, no doubt that more care will be delivered in the home. And I think we're were going to see, as a lot of creative thing are happening around the system between patients who are now going to be cared for in the home.

So I want to just cover 1 or 2 quick observations and I'll say thank you and goodbye.

Our team works like a team. That sounds trivial and sort of warm and fuzzy. Trust me, it is not. I've run many organizations. Organizations are healthy or they are not healthy. And ours is healthy. We have high expectations of one another. We hold each other accountable. We have each other's back. We like working together, and our whole organization will be headed this way. And the more that we model it, the more that organization would be headed this way. I just want to highlight 2 examples. We see this, we see this at moments where we're not giving directions. A tornado in Joplin, Missouri, a flood in Houston, an awful crisis around a marathon in Boston. We don't direct our people on what to do. They know what to do in those moments. And I think that comes from a perspective on what we're all about and what we're trying to do, and how we work together. So I think that matters.

Our growth that you've seen in recent years reflects not just discipline and talent, but it reflects something else, which I think is probably worth highlighting. And I wanted to actually put a chart on this and everybody choked me and said, "No, you can't do that because it's not very precise." And they're right. But one of the interesting -- the chart would've been saying, "We make money differently than we used to, right." And I think that's part of what's been happening, as you look at the shift of our margin rate, it's just that I think we are becoming increasingly relevant on critical things to the market. And we make money in some different ways that we used to. And even if you look at our talent base, we will always build up our capabilities and supply chain excellence. And logistics, it's part of our DNA. What is building though is our clinical job, our clinical capability. And so if I take, for example, the number of people that work on -- directly on clinical activity, it's tripled over 5 years.

So the distribution part of our business is still critical to us, we'll invest in it, it's very important connecting tissue for us. We're adding muscle to the connecting tissue. We're adding muscle to it.

So we're really excited about where we are. We think we're poised for growth. These people could do it. We very much appreciate your support and your attention here today, and we look forward to seeing you in the coming days and coming weeks. Thank you.

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