Cardinal Health (CAH) Q2 2017 Results - Earnings Call Transcript

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Cardinal Health, Inc. (NYSE:CAH) Q2 2017 Earnings Call February 7, 2017 8:30 AM ET

Executives

Sally J. Curley - Cardinal Health, Inc.

George S. Barrett - Cardinal Health, Inc.

Michael C. Kaufmann - Cardinal Health, Inc.

Analysts

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

Lisa Christine Gill - JPMorgan Securities LLC

Ross Muken - Evercore Group LLC

Eric Percher - Barclays Capital, Inc.

Robert Patrick Jones - Goldman Sachs & Co.

George R. Hill - Deutsche Bank Securities, Inc.

Steven J. Valiquette - Bank of America Merrill Lynch

Charles Rhyee - Cowen & Co. LLC

Jon Kaufman - William Blair & Co. LLC

David M. Larsen - Leerink Partners LLC

Michael Cherny - UBS Securities LLC

Eric W. Coldwell - Robert W. Baird & Co., Inc.

Garen Sarafian - Citigroup Global Markets, Inc.

Greg Bolan - Avondale Partners LLC

Operator

Good day, and welcome to the Cardinal Health Second Quarter Fiscal Year 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Sally Curley. Please go ahead, ma'am.

Sally J. Curley - Cardinal Health, Inc.

Hi. Thank you, Eric, and good morning, everyone. Welcome to Cardinal's second quarter fiscal 2017 earnings call. I'm Sally Curley, Senior Vice President of Investor Relations, and joining me on the call this morning are Chairman and CEO, George Barrett; and CFO, Mike Kaufmann.

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

In addition, we will reference non-GAAP financial measures. Information about these measures and reconciliations to GAAP are included at the end of the slide.

As a reminder, during the Q&A, we ask that you please limit your questions to one with one follow-up so that we can address everyone in queue. We'll do our best this morning to get to everyone's question, but if we don't, feel free to reach out to IR VP, Lisa Capodici, or myself after the call.

In terms of upcoming events, we will be webcasting our presentation of the Barclays Global Healthcare Conference on March 16 at 8:30 a.m. Eastern. Today's press release and details for any webcasted events are or will be posted on the IR section of the website at cardinalhealth.com, so please make sure to visit the site often for updated information. We hope to see many of you at an upcoming event.

Also, please note that neither this call nor or any other Cardinal Health event can be rebroadcast without the express written permission of Cardinal Health.

Now, I'd like to turn the call over to our Chairman and CEO, George Barrett. George?

George S. Barrett - Cardinal Health, Inc.

Thanks, Sally. Good morning, everyone, and thank you for joining us this morning. As I typically do, I'll spend a few minutes of my discussion covering at a high level our performance for the quarter. However, these are not typical times and, on the surface, not a typical year for Cardinal Health. The impact of this year's generic pricing environment accounts for the primary headwind on our financials. It is masking the fact that we are seeing growth in more key initiatives and priorities than we've seen in quite some time.

In that context, I want to make sure that woven throughout my comments we address the following three questions. One, how are we executing and competing in the market; two, how would I characterize some of the more recent market dynamics; and three, how are we positioned for long-term sustainable growth?

Before I get to that, I want to acknowledge that in spite of the extraordinary dynamism in the industry, we at Cardinal Health remain focused on the millions of people that we touch every day. We embrace our vital role at the center of the healthcare continuum, and our responsibility remains unchanged. Our role, providing the highest quality products and services to all of our partners and their patients around the world, lies at the core of who we are and what we do.

Because the healthcare discussion in the U.S. has been so prominent, my commentary today will be more focused on the U.S. So how did we do this quarter? To summarize the performance for Q2, the revenue was up 5% versus the prior year to $33.1 billion. Non-GAAP earnings per share increased 3% to $1.34 versus the prior year. And non-GAAP operating earnings were down 4% versus the second quarter of last year to $701 million.

At the segment level, our Pharmaceutical segment performed a bit better than we had expected this quarter. Revenue was up 5% versus the prior year to $29.7 billion, and segment profit declined 14% versus the prior year to $537 million. This decline was almost entirely the result of generic pharmaceutical pricing and the loss of Safeway, both of which we covered in our last call.

Our Medical segment had another strong quarter, continuing its repositioning to better serve the needs of its evolving market. Revenue for the Medical segment was up 8% versus the prior year to $3.4 billion, and segment profit was up 50% versus the prior year. I would note here about half of this is attributable to the mechanics of last year's inventory step-up. These are really strong numbers.

As you know, our guidance for the year, which we provided in early August, was based on both our plans for the upcoming year, as well as our assessment of market conditions at the time. By the time we reported our first quarter, we'd seen a step-down in generic pricing which prompted us to make a small change to our guidance for the year to reflect that dynamic.

At the time, Mike also provided you with the key factors which could dictate where we might fall in that range. With actual data from Q2 and preliminary data from January, we can now forecast that the top end of that range is unlikely. This is more a function of the math, rather than any further deterioration of market conditions.

With that in mind and wanting to provide enough of a range to account for the normal variables, we're adjusting our guidance range for FY 2017 to $5.35 to $5.50, from our prior range of $5.40 to $5.60. Mike will provide some additional color on how the various factors were included in this decision.

Across the board, Cardinal Health is seeing the results of our team's dedication to addressing the needs of our customers and the people they treat every day. This team's hard work is evident as our lines of business are showing strong fundamentals. Unit sales are strong. Our customer service levels have never been higher. And our ability to operate across the continuum of care with a broad range of products and services creates a uniqueness to our model, which is resonating with our customers across the enterprise.

Our rates of customer retention are extraordinarily high and we are growing with our customers, building on a sustainable value proposition that aligns with long-term trends. We are confident that we can improve efficiency for virtually any part of our customer base, and do so with a valuable and integrated portfolio. At a time of rapid change, we know how essential it is to demonstrate customer intimacy in ways that meet their specific needs and enable them to adapt to a shifting landscape.

I've had the chance in recent weeks to meet with many of our customers, both upstream and downstream; and I came away from those conversations with the clear sense that they are eager to work closely with us. Together, we are better equipped to address the complexities of the system, with Cardinal Health well-positioned as a partner.

Reinforced through these conversations, I'd like to focus on five major initiatives which should be familiar for you. They are: one, growing our generics program; two, driving growth in our Specialty Solutions group; three, increasing our offerings of valuable products and services to our acute and integrated delivery customers; four, driving additional penetration of Cardinal Health consumable Medical products and physician preference items; and five, establishing a leading position in the post-acute space.

Let me walk through these one by one. On generics, as I said, industry pricing dynamics were challenging throughout the first half of our fiscal 2017. We are, however, seeing some signs of a return back to more typical patterns. While it may be too early to characterize this as a trend, we see it as encouraging.

Our customer base is solid, and we continue to offer tremendous value for any retail or institutional customer looking to offer an industry-leading generics program. Our team's innovative approach to generics serves our customers well; and our joint venture with CVS Health, Red Oak continues to be a driver of value and, in our view, a unique source of competitive advantage.

Turning to Specialty Solutions, our group continues its high rate of growth, increasing our reach across key therapeutic areas and strengthening our suite of services that we can offer our pharmaceutical partners who seek to get closer to the patients. We've more than doubled the number of clients in our Specialty hub and significantly grown the client base in our 3PL business.

We are beginning to see the first wave of biosimilars entering the market. We've built the right therapeutic footprint to effectively serve any part of this system with these products, and have the team of experts in place to support this business.

With regard to our acute and integrated delivery customers, these providers of healthcare are experiencing significant changes: changes in the size and complexity of their systems; the new technologies which they employ; the shifting sites of care; the adoption of more integrated delivery models, which are directed towards more patient-centered value-based designs; and the accompanying evolution of payment systems, which align with that value-based model.

As their partners, we've built a suite of products and services that are designed to address these forces. Let me give you some examples.

We offer critical supply chain and inventory management solutions that allow clinicians to focus on their patients and remove themselves from supply chain activities and administrative documentation. Our solutions provide visibility to real-time analytics, enabling customers to make data-driven decisions around products supporting patient safety up to the point of care.

This past week, we celebrated the third anniversary of our Academy for Excellence in Healthcare, kicking off our 11th cohort. This program, based on our deep expertise and operational excellence, Lean and Six Sigma techniques, has been designed to help healthcare organizations identify and solve their greatest operating challenges, ultimately driving results that can significantly reduce costs and improve patient outcomes.

To-date, we've worked with 36 hospitals, training and coaching 49 teams comprised of hundreds of Medical providers, and the group has published 16 white papers. Through this work, we've helped our partners reduce readmissions, improve the discharge management process, reduce length of stay and surgical wait times and increase patient satisfaction.

Our Medical/Surgical distribution business is highly efficient and growing again, and we continue to see growth in Cardinal Health Brand products, which as you know includes Cordis. We continue to grow the number of products and product categories in our Cardinal Health Brand, and now offer more than 19,000 SKUs in 110 product families. Our Cordis acquisition is largely on plan, and I'm proud of the way in which our teams have come together around the world during this first year. We feel very confident that we can add value to any system in their interventional cardiology activities.

Demographics and delivery system shifts remain key drivers behind our focus on the post-acute world. We believe that patients can be treated more efficiently, more safely and with better outcomes using the right tools.

In our Cardinal Health at Home business, we continue to focus on bringing Medical products to patients in their homes. And the work we're doing at naviHealth in post-acute care management and care transitions is industry-leading and growing quite dramatically. That business uses the tools and clinical data needed to create the optimal care experience for patients.

In summary, our value proposition is increasingly resonating with our customer, and this includes our manufacturer partners who are also dealing with a dynamic and shifting landscape. We have a unique capacity to navigate through environmental road bumps. Our portfolio is robust, balanced and fully integrated.

Our organization has critical scale, but it's still nimble enough to deal with short-term disturbances, and our team has proven their mettle. They're mission-driven and possess a clear sense of where we're going. Because of this, as an enterprise, we are positioned for sustainable and enduring value creation for our business partners and for you, our shareholders.

Finally, we are an active participant in the unfolding policy discussions around healthcare. We bring to those conversations our key tenets. All people should have access to coverage for healthcare, which most experts agree requires a stable insurance system. We need to support our providers of care, most of whom recognize that healthcare can be centered more around the patient.

It can be more clearly coordinated, and incentives can be designed to encourage innovation, including ways to drive the best outcomes in the most affordable and accessible way. And we know that the overwhelming power of demographics will continue to fuel demand. Those are the inescapable realities which guide our course. This commitment to our true north helps us serve our customers and the people that they treat every day.

So with that, I'll turn the call over to Mike and get back to you during the Q&A.

Michael C. Kaufmann - Cardinal Health, Inc.

Thanks, George, and thanks to everyone joining us on the call today. This morning, I'll start with a review of our second quarter financial performance and then provide some additional color around our expectations for the remainder of the fiscal year. Please note that with all of my comments, I'll begin with GAAP and then provide the comparable non-GAAP figure. The slide presentation on our website should be a helpful guide throughout this discussion as it includes our GAAP to non-GAAP reconciliation tables.

Starting on slide four, our second quarter fiscal results were slightly better than expected with GAAP diluted EPS at $1.02 and non-GAAP diluted EPS at $1.34; a 4% and 3% increase, respectively. Note that both the GAAP and non-GAAP diluted EPS for the quarter benefited from a lower effective tax rate and fewer outstanding shares as compared to the prior year. I'll review both segments in greater detail later, but let me start with consolidated results.

Revenue increased 5% year-over-year to $33.1 billion. Consolidated GAAP gross margin dollars were flat, while non-GAAP gross margin dollars were down 2% versus the same quarter in the prior year. GAAP gross margin rates were down 29 basis points for the quarter, while non-GAAP gross margin rates were down 38 basis points. The decline in rates is best described in the explanations of the Pharma and Medical segment profit rate changes, which I will cover in a few minutes.

Consolidated SG&A was down by 1%. As you would expect, we continue to have a disciplined approach to managing cost while still investing in our future. Both consolidated GAAP and non-GAAP operating earnings declined by 4% versus the prior year. Below the operating line, net interest and other expense was $51 million for the quarter, a moderate increase over the prior year.

For the second quarter, the GAAP effective tax rate was 34% and the non-GAAP effective tax rate was 34.2%, both somewhat lower than historical norms. Both declined 3 percentage points versus the prior year, and these lower rates were primarily due to a few favorable discrete tax items.

Our second quarter diluted weighted average shares outstanding were 319 million, 13 million shares fewer than the second quarter of fiscal 2016. This is the result of our share repurchases, including $350 million worth of shares repurchased during the quarter. We now have $443 million remaining on our board authorized share repurchase program. As I've said in the past, we will continue to evaluate share repurchases opportunistically in the context of our overall capital deployment strategy.

We generated $554 million in operating cash flow during the quarter. At the end of the second quarter, our cash balance, including short-term investments, was $2.1 billion, with $552 million held outside the United States.

Now, I'll move to the segment reviews. You can follow along on slides five and six. Our Pharmaceutical segment revenue increased 5% to $29.7 billion. This increase was a result of growth from existing Pharmaceutical distribution customers, as well as strong performance from the Specialty business.

Segment profit for the quarter decreased 14% to $537 million. Generic pharmaceutical pricing and, to a lesser extent, the previously announced loss of Safeway partially offset by solid performance from Red Oak Sourcing drove this decrease.

Note that while profits tied to branded inflation were a headwind in Q2, this headwind had a smaller impact than the loss of Safeway. Remember that less than 15% of our branded margin is tied to inflation and we continue to work with our branded partners to ensure that we receive fair value for our services. My expectation is that this contingent component will be less than 10% in the near future.

Segment profit margin rate for the quarter was down 41 basis points to 1.8%, largely due to generic pharmaceutical pricing. Last quarter, we told you we expected that generic pricing and brand inflation would cause Q2 Pharma segment profit to decline a percentage similar to Q1. While these items came in about as expected, our better-than-anticipated performance in Specialty distribution as well as SG&A contributed to the Pharma segment's better-than-expected results.

The excellent performance in Specialty was driven by growth in the acute space in Metro Medical on the provider facing side, and growth in our 3PL and regulatory science service offerings on the biopharma side.

Now, let's go to the Medical segment which had another strong quarter. Revenue for the quarter grew 8% to $3.4 billion, driven by contributions from net new and existing customers. Segment profit increased 50% to $159 million due to the contribution from Cardinal Health Brand products which includes Cordis. This increase reflects the $21 million unfavorable impact of the Cordis-related inventory fair value step-up in the second quarter of fiscal year 2016. Excluding this step-up, year-over-year Medical segment profit growth was a robust 25%. Please remember that in the Q3 comparison, we will have the same $21 inventory step-up from fiscal year 2016.

Segment profit margin rate increased 132 basis points to 4.68% due to the Cardinal Health Brand products which, as noted above, includes Cordis. Overall, the Medical segment team is working well together to drive results.

My comments until now have been largely U.S.-focused, so I want to highlight two global items. First, Cordis is performing well, particularly in Europe and Latin America. And second, the China team continues to execute well, and they're on track to achieve double-digit top and bottom line growth for the full fiscal year. On a related note, during the quarter, we didn't see much of an impact resulting from foreign exchange or commodities.

Before I discuss our outlook for the full year, you can turn to slide number seven to see our consolidated GAAP to non-GAAP results for the quarter. The $0.32 variance to non-GAAP diluted EPS result was primarily driven by amortization and other acquisition-related costs.

Let me move to our fiscal year 2017 non-GAAP earnings guidance range and assumptions on slides nine through 12. As George mentioned earlier, with six months of data behind us and a good view into January, we believe achieving the upper half of our $5.40 to $5.60 guidance range will be challenging. So to adjust for this and provide some room for variability, we are modifying our guidance range to $5.35 to $5.50.

To be specific, the most significant parts for the second half are mainly environmental. They're generic market pricing, taxes and brand inflation. So all this translates to a non-GAAP EPS growth rate of between 2% and 5% for the fiscal year, a minor adjustment from our prior guidance.

With that context as a backdrop, I'll walk through our updated corporate assumptions on slide 10. We expect diluted weighted average shares outstanding to be between 320 million and 321 million shares. Additionally, our updated assumption for acquisition-related intangible amortization will be about $384 million or $0.77 per share, which does not affect our non-GAAP earnings. As you can see, all of our other corporate assumptions remain unchanged.

On slide 11, there are two updates to our full-year Pharmaceutical segment assumptions. First, based on our six months of data plus a good view into January, we are updating our generic drug price assumption from mid to high-single digit deflation to high-single digit deflation for the full fiscal year.

Second, our Q1 assumptions expected Pharma segment profit for FY 2017 to be down mid to high-single digits versus the prior year. Based on the factors I discussed earlier, we now expect full-year Pharma segment profit to be down high-single to low-double digits. All other Pharma segment assumptions are unchanged.

Now turning to the Medical segment assumptions on slide 12. We are on track to achieve mid to high-single digit percentage growth in revenue, up from our previous assumption of mid-single digit percentage revenue growth. All of our other Medical segment assumptions are unchanged, and we expect to see double-digit profit growth versus the prior year for the segment.

One final comment. As you can see, based upon our first half performance and updated total year guidance, we expect our second half to be somewhat better than our first half with Q3 slightly larger than Q4.

Overall, we believe that we're well-positioned to manage the changing healthcare landscape with a clear, well-defined strategy across the enterprise. The vast majority of our businesses and initiatives are going very well, and we know our key priorities and how to get after them.

With that, operator, let's go to the questions.

Question-and-Answer Session

Operator

Thank you. And we'll go first to Ricky Goldwasser with Morgan Stanley.

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

Yeah, hi. Good morning, and thank you for all the details.

George S. Barrett - Cardinal Health, Inc.

Good morning.

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

Just to follow up on how we should think about the update to guidance and kind of when we think about the different factors that are getting worse in the second half, are these things that you think are going to be isolated to, one, the third or fourth quarter? Or should we expect some of these headwinds to persist throughout the year? And basically, what I'm trying to get is kind of will some of these things carryover or flow through to fiscal year 2018? How should we think about that?

George S. Barrett - Cardinal Health, Inc.

Ricky, good morning. It's George. I'll start and then I'll let Mike pick up. Again, it's important, in my commentary I made the observation that actually we're not seeing a further deterioration. That, in fact, as we started to come to the very end of our Q2, we started to see more normal patterns on generics. So largely – and I'll let Mike touch on this – the base is sort of reset lower. But, Mike, do you want to add to that?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. I would just emphasize, Ricky, as I look across all of our businesses and all of the various factors that contribute to our overall results, I would emphasize that as we've been saying for the last couple of quarters, it's really this generic pharmaceutical pricing that is the number one factor.

And all we're saying here is that it basically ended up finishing a little lower than we expect it to, in the sense that our base is reset a little bit lower than we expected it to, but the actual activity that we saw in December and January looks to be stabilizing, and that we've just set at a little bit lower base. And so, when we took that lower base and spread it across our second half, that's really essentially what lowered our overall guidance.

So as you think about the various components, I've mentioned three things, generic pricing being the biggest factor that can have a little bit of variability to it. But again, as George mentioned and I mentioned, it's looking much better over the last couple months.

Branded inflation, we did see some branded inflation in January and it seems to be about where we're expecting it to be. But again, depending on what happens over the last five months, we just want to call that out. And lastly, taxes, which I called out is the third factor. It's more about timing within quarters than overall being concerned that we're going to fall outside our 35% to 37% guidance range. It's really that you might see it be a little better in one quarter and a little worse in the other. But overall for the year, we expect it to be...

George S. Barrett - Cardinal Health, Inc.

Right. Ricky, my comments were specifically about the generic environment, which is what I thought you were asking about. But I think Mike captured the more broad perspective on this.

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. And I would emphasize, I think, it's really just a slight EPS reduction because of, again, this variability in the generic market pricing.

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

And just to clarify on the generic pricing and deflation. I know last quarter you mentioned that generic deflation is also a mix, right, so it's the sell-side versus buy-side. So should we read into your comments that you've seen both the sell-side and buy-side environment stabilizing by December?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. I would say the answer is yes. As far as price activity from manufacturers to us, that's been tracking all year about as what we expected. It was really the sell-side that started out for the first couple quarters lower than we had originally anticipated. But, again, we see it stabilizing now.

George S. Barrett - Cardinal Health, Inc.

Thanks, Ricky.

Operator

And we'll go next to Lisa Gill with JPMorgan.

Lisa Christine Gill - JPMorgan Securities LLC

Thanks very much. Can I just start and just follow-up there just so that I understand this, George? When you talk about it stabilizing, but yet we think about the fact that you're lowering the back half of the year. I guess, I'm just trying to understand that math. How that works. So if it stabilized in the most recent quarter and SG&A and Specialty drove a little bit of better upside, was it just that your anticipation was that things were going to get better in your fiscal back half of the year and now they're somewhat carrying through, although they've stabilized?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. That's a fair question, Lisa. I would say that's pretty much accurate. I'd say that where it's stabilized at, we're just a little bit lower than we had originally anticipated when we projected our second half. And so, that even though Specialty is over-performing and we're seeing some really good controls in SG&A, that when you mix the two together that it net was a little bit potentially lower for us.

And then, we just wanted to give ourselves a little bit of variability. When we first thought about taking off the top half of the range and having just a $0.10 range, that seemed a little tight for us only halfway through the year. And so, we thought that adding another $0.05 to give us a little bit of room would be the smart thing to do.

Lisa Christine Gill - JPMorgan Securities LLC

Okay. And then, Mike, you also made a comment about Q3 being better than Q4. Can you just talk about is there something specific that you're anticipating in either side of your business in Q3, or was that comment specific to drug distribution?

Michael C. Kaufmann - Cardinal Health, Inc.

No. That was just specific overall, just to try to be helpful. Obviously, you'll be able to estimate we think the second half will be, and then I just wanted to give you a little thought that Q3 would be bigger than Q4 mainly because that's the quarter where you see the majority of the branded inflation. Anyways, as you know, that's typically the quarter where you see it. And so, I thought you guys are all going to be thinking Q3 is bigger than Q4 generally because it historically always is. But I just wanted to give you little thoughts around that it should be about slightly bigger than Q4, to give you a little help.

George S. Barrett - Cardinal Health, Inc.

Thanks, Lisa.

Operator

The next question is from Ross Muken with Evercore.

Ross Muken - Evercore Group LLC

Good morning, guys. George, appreciate the commentary. Obviously, it's a tough environment for all of us to kind of navigate. And amongst your peers, the commentary regarding the outlook has been slightly different in terms of various drivers. I guess, from your standpoint, what do you think are the one or two things we need to be spending the most time thinking about as we analyze and grade how this business is doing given all these macro factors?

And, obviously, you feel as if the underlying was better than sort of what the guidance or the quarter showed. And so, help us think through what sort of KPIs you're looking at or how you're thinking about the evolution relative to kind of how the last 12 months played out? Because it's obviously been a pretty volatile environment relative to what this business has been used to.

George S. Barrett - Cardinal Health, Inc.

Sure. Thanks, Ross. Yes, let me try to do this, and then I'll comment a little bit on the unique dynamic of having some of our peers report with actually different year ends. And Mike will touch on that because I actually think it's an interesting dynamic at work.

For us, the drivers – we know that economically, as we've said, that the generic pharmaceutical pricing environment is a big factor. We'll watch to see, for us, that those rates look more normalized. We started to see that towards the end of the quarter and the beginning of January. Obviously, as I said, it's a little early to declare trend, but I thought that was an encouraging sign. It's something that I said to you guys I thought would start to happen.

The other thing is all of our priorities have to be going in the right direction. Specialty; our Specialty business is in a really good position right now. We've seen really good signs of growth broadly, both downstream and upstream. Across our Medical segment, we're seeing really encouraging signs, even in what you think of as our legacy Medical/Surgical business is really beginning to get a little bit of wind in their sales.

So watching for all the components, our service lines in Medical, our Cardinal Health branded products, our work in naviHealth, our activity with our Med/Surg products. These are all, for us, key indicators of our long-term positioning playing out the way we want and, actually, the general growth in customer base. We want customers to see us as that go-to company at a time of complexity.

So we're beginning to see that. And so, actually, we're feeling quite optimistic about where we are, we're having to navigate, and have had to navigate through a little bit of a tough environment in generics. But as we've said to you that happens from time to time and we're keeping disciplined about how we see the future of the business. Anything to add there, Mike?

Michael C. Kaufmann - Cardinal Health, Inc.

I think the only thing I would add is, as you mentioned, generic pharmaceutical pricing is a key driver, and I think the timing of the three distributors' year ends is an important factor to consider. When you think that what we really saw, the impact of that was really in our Q1 and if our – I'll just put it simply, if our year-end had been three months later, we probably wouldn't be revising guidance because we would've had some insight and built that into the year. If our year-end had been three months earlier, we probably would've had a bigger miss because we would've had even less insight into it. So it's difficult to compare when you have three different year ends.

Ross Muken - Evercore Group LLC

Thanks. And obviously, George, you talked about just in terms of key priorities. On the Medical business, the growth there has been obviously quite good. You've gained some share, you've executed on the deals. The balance sheet still has some capability. And in terms of adding incremental assets to the mix and continuing to evolve that strategy, where are you in terms of appetite for having digested Cordis, contemplating whether or not it makes sense to add more into the bag there in Medical?

George S. Barrett - Cardinal Health, Inc.

Yeah. Yeah. Thanks, Ross. I'll just do this very generally and probably consistent with the comments we've made in the past. We continue to look for opportunities to grow our business organically and certainly through the strength of our balance sheet. And so, to the extent that we see opportunities to grow capabilities that we think have sustainable competitive advantage, position us for this continually evolving market, we will not be shy to look at those opportunities. But, again, hopefully you'll expect from us discipline in doing that. But certainly a part of the equation for us is how we use our balance sheet, and that may be through activities that are available external to us and the other ways that we deploy capital.

Sally J. Curley - Cardinal Health, Inc.

Operator, next question.

Operator

We'll go next to Eric Percher with Barclays.

Eric Percher - Barclays Capital, Inc.

Thank you. I think I like to maybe split hairs a little bit on the drug pricing conversation. So I heard you loud and clear on the impact to this quarter from generic drug pricing assumptions moving to high-single digit deflation. I want to make sure I understand perfectly that commentary relative to competition in the marketplace and your view. Did that competition element impact the change in guidance, or are we really focused on the element and the assumption that you focused on?

Michael C. Kaufmann - Cardinal Health, Inc.

Well, I think one feeds the other. The competitiveness in the generic market is what drove the revision to the generics being down net high-single digit deflation for the year, because it's made up of two key components: pricing from the manufacturers, which we said we haven't seen really much variability from what we expected for the year; and then our pricing downstream to the customers. The combination of those two drive that factor. And so, since we've seen, like we said, more aggressive pricing in the market early on in the year – although again we've seen some positive signs lately – that is what drove that number to be down high-single digits.

Eric Percher - Barclays Capital, Inc.

Okay. Now, I get it relative to the manufacturer expectations. That's helpful. And then, your comment on Q3 versus Q4, Mike.

Michael C. Kaufmann - Cardinal Health, Inc.

Yes.

Eric Percher - Barclays Capital, Inc.

We've been trying to understand the ramp through the year. Should I expect that we're still down high-single digits in Q3, but then potentially up as we get to Q4 and you lap some of the headwinds?

Michael C. Kaufmann - Cardinal Health, Inc.

As far as actually giving growth percentages, I don't want to necessarily step right into that, but I do think that – again, just trying to be helpful. If you take what you obviously think the guidance for the year is and take a look at the second half, we just want to give you a little bit of color that Q3 would be slightly larger than Q4.

Operator

The next question is from Robert Jones with Goldman Sachs.

Robert Patrick Jones - Goldman Sachs & Co.

Great. Thanks for the questions. Just following up, Mike, on the back half commentary. Seeing some of the key metrics stabilizing as you move into the back half, other than maybe some residual impact from something like Safeway, do you feel that the back half as you look at it today is more representative of the new world order? Is this how we should think about how the business can perform in this environment as you think about, obviously, a little bit of a difference between 3Q and 4Q. But taken together is that how you envision the business performing going forward?

Michael C. Kaufmann - Cardinal Health, Inc.

Generally, probably, overall that's not a bad assumption. Again, we have to think through all the pieces and how it relates over a full year because you've got comps and stuff through the prior year. But if you think about certain things like if the generic market has stabilized – which again we say early results we've seen – will lap Safeway in the fourth quarter, then you have the $21 million step-up in Q3 that completely goes away.

So you do have some large moving parts that kind of settle out during the year, but you're going to continue to have positives like Red Oak and some of the other initiatives that we're driving that continue to be tailwinds for us. But, yeah, a lot of those things that have created some noise in the P&L should either be stabilizing or we should be lapping.

Robert Patrick Jones - Goldman Sachs & Co.

Okay. Got it. And I know we spend a lot of time on the generic pricing side, but just can you remind us on the branded side what's factored in for the year? I guess, specifically, is there another assumption in your fiscal 4Q that you would see another round of more significant branded price increases?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. It's a great question. It's hard to know whether or not we'll see another set of increases or what they'll be for the rest of the year, but we still believe that our estimate of 7% to 9% for the full fiscal year is approximately the right number to be at. Again, that's a range that – obviously, there's some variability into that. So we're trying to take into account all of those factors as to whether or not there should be. I would also mention that, again, most of the price increases in the second half do happen in January. So we have seen a lot of it. So the amount of it in the second half that's left to go is not necessarily huge.

George S. Barrett - Cardinal Health, Inc.

Yeah. And I think the other thing, again, just as a moving part, movement here is not as relevant economically as what we were describing in generic.

Michael C. Kaufmann - Cardinal Health, Inc.

Yes.

Operator

And we'll take a question from George Hill with Deutsche Bank.

George R. Hill - Deutsche Bank Securities, Inc.

Yes. Good morning, guys, and thanks for taking the question. I guess, Mike and George, I'd ask what type of insights is Red Oak giving you in the ability to kind of forecast generic drug pricing? And does Red Oak provide you any protection from downward price activity that might differentiate you from your peers?

George S. Barrett - Cardinal Health, Inc.

George, okay, I'll start with that and then Mike. So on the buying side, remember there's two components to this. There's the buy and the sell. Red Oak, I think we've got really sophisticated analytics and capabilities and just great dialogue with our manufacture partners. So as much as you can, obviously, these are products that, as you know, change frequently in the generic world. But I would say we've got pretty good line of sight and really good analytics and great teams. The sell-side is a different story. And so, Mike, thoughts on that?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. I'd say, I guess, the first comment again kind of emphasizing what George said on Red Oak, right, the ultimate – for lack of a better word – game in generics is while you can have a deflating sell price, but if you're managing your costs better you can always be expanding your margins. And so, if you're asking me do I think we're in a great position with Red Oak. Absolutely, based on what George said. I have a ton of faith in the team, the analytics. The fact that we are the largest in that standpoint I feel really good about that.

As far as Red Oak, working together with the sell-side, there's actually no cutover. Red Oak doesn't do anything or have anything to do with what our sell price should be. Their goal is to ultimately go out and get us the best absolute cost. And then, we actually have a firewall between the two, because I think it's incredibly important that our selling side folks aren't actually seeing the cost of our generics because I don't what that to influence how they decide to price. We want the price to market and we want to make sure we're overall evaluating our overall selling proposition. So we actually have a very strong firewall between our sell-side decisions and our costing decisions with Red Oak.

George S. Barrett - Cardinal Health, Inc.

What I would add to this, George, is that I do think our telemarketing operations give us, on the sell-side, probably a very nice line of sight because we're having so much daily dialogue with the pharmacy world. So, I think, as good a line of sight as we can. But, as you know, this year has been a little bit more difficult to model than past years, but we're a little bit encouraged by the more recent signs.

George R. Hill - Deutsche Bank Securities, Inc.

Okay. And then, maybe a quick follow-up might just be your largest customer seems poised for some market share losses. I know for you guys that's largely brand business. Is there any impact to kind of market share shifts on the retail end factored into the guidance or is it immaterial?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. We knew about all of that in the past, as we mentioned before. All of that was factored into our guidance.

Sally J. Curley - Cardinal Health, Inc.

Operator, next question.

Operator

And the next question is from Steven Valiquette with Bank of America Merrill Lynch.

Steven J. Valiquette - Bank of America Merrill Lynch

Thanks. Good morning, George and Mike.

George S. Barrett - Cardinal Health, Inc.

(43:47).

Steven J. Valiquette - Bank of America Merrill Lynch

Good morning. So just on the generics, on the signs of returning back to more normal typical pricing patterns, just curious to get more color on what you think are the drivers of the slightly improving generic deflation rate? You don't have to throw things out there. I'm just curious, are you seeing maybe just some price increase activity to offset price erosion on others? Is it just anniversarying tougher comps? Just wanted to get more color on what you're seeing that's leading to the better trend?

George S. Barrett - Cardinal Health, Inc.

Steve, I'll do the best I can on this because these are complex markets. I would say, in general, we saw what we thought to be a pretty unusual flurry of activity in the early part of our fiscal year. And our expectation, just based on sort of history, was we see those things from time to time and they tend to stabilize and revert back to more normal patterns if you don't see significant movement of share. And I would say that's probably what we saw.

So what happened during a period of time was that the steepness of the curve was sharper. It was a more steep downward curve. There's always erosion on the sell price. That's sort of the normal pattern. But the rate, the steepness of that curve was a little heightened. And our feeling was that what we might see and we expected to see was a bit of a calming down of that at some point. And I think that's largely as best as we can describe that dynamic.

Steven J. Valiquette - Bank of America Merrill Lynch

Okay. And then just quickly on the brand side. You mentioned that 15% of the profits may be tied to brand inflation. For whatever reason, it seems like investors have a higher-than-normal amount of focus on the upcoming midyear round of brand price increases for the industry. And my sense, kind of as you touched down a little bit earlier, it's just not that critical to the overall earnings picture really in any year. So I'm just wondering is there any breakdown of how much of that 15% of those economics occurs around the January round of branded inflation versus the midyear round. I'm guessing the overwhelming majority is tied to the January round? Thanks.

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah, absolutely. When you take a look at the historical patterns and even so far what we seen this year, is the branded price increases are heavily more weighted to the January timeframe than any other time. Probably that mid-summer timeframe is the second largest, but it's by far larger in the January timeframe. And again, to emphasize, if I had to talk about the three variables, I would rank them in order of generics by far being the largest, and then the taxes only because of its variability between quarters, and then brand being the smallest of the three at least for our mix of products and what we're expecting.

Operator

The next question is from Charles Rhyee with Cowen & Company.

Charles Rhyee - Cowen & Co. LLC

Yeah, hey. Thanks for taking the question. George and Mike, if we go back to the Dublin day in December, you had talked about the competitive environment on the sell-side highlighting your independent book. And, George, if I recall you made a comment saying that you had factored in sort of the competitive sort of step-down in the pricing into your guidance here. So then when I think about your comments today, are you saying that we continue to see more competitive price erosion? Or was it your assumptions on what you needed to give in terms of maintaining your book had changed? Thanks.

George S. Barrett - Cardinal Health, Inc.

Yeah. Hey, Charles. Good morning. So, I think largely what we're saying is that as we came to the tail end of Q2, we started to see more typical rates of erosion in comparison to what we had seen in the early fall, which was more sharp. So actually, again, we're being a little bit cautious here because – I wish I had more data to say this is a discernible trend. But I would say it's a good sign that we did see some stabilization to the more normalized rates. Mike, could you add to it (47:36)?

Michael C. Kaufmann - Cardinal Health, Inc.

I'd just again emphasize that at the time in December we didn't have quite as much information as we did by the end, and bottom line is it just settled out a little lower than we expected it to across all of the channels where we sell generics. But the good news is, it seems to have stabilized at that lower level and we just needed to update where we were for the rest of the year.

Charles Rhyee - Cowen & Co. LLC

Great. And then, as a follow-up, you mentioned earlier you expect the component of your fee-for-service, that's contingent to be less than 10%. I missed the timeframe that you expect that to happen. Is that sort of as we get into fiscal 2018, or is that a contracting cycle over the next few years? Thanks.

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. I would say that it would be more of a next 12 months type of a thing. Right now, it's less than $0.15. I would expect it to get to that $0.10 range within the next 12 months.

Operator

The next question is from John Kreger with William Blair.

Jon Kaufman - William Blair & Co. LLC

Hi. Good morning. This is Jon Kaufman on for John Kreger. Thanks for taking the question. So you noted strong growth in your Specialty business this quarter. So could you touch on how your discussions with specialty drug manufacturers are going? And then, how quickly is your Specialty distribution business growing compared to the hub services piece? And how confident are you that growth in Specialty over the long-run won't cause some downward pressure on margins?

George S. Barrett - Cardinal Health, Inc.

Yeah. So there were a couple of parts to that question, Jon. I just want to make sure I got them right. One is, I think you're saying what's driving it, if I got it right. Again, there's multiple components. What's driving it? Do we see it as sustainable? And the impact to margin rates?

So let me start with the basics. I think we're driving it and have been very consistently been driving growth in two primary areas. One is our reach across therapeutic areas has just become dramatically larger over these last three to four years. So we were present in certain areas in the institution and then we started to grow our oncology businesses. We've expanded into urology and rheumatology. And so, I would say our overall footprint downstream in therapeutic areas right now is very strong, and that just makes us a stronger partner for anyone.

On the upstream, I think we've started to build more tools and capabilities for the manufacturer partners and, in particular, I'd highlight our patient hub. And this is a time where manufacturers really want to connect with their patients and I think our hub allows us to do that. So we do see continued progress in our Specialty business.

As it relates to margin rates, we don't break out the specific margin rates in Specialty versus sort of traditional Pharma. Having said that, we don't see the Specialty as being dilutive to it. And, again, Mike, I'll ask you to just qualify anything I (50:35).

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. Just a couple of quick comments. I would say, if you think about Specialty, just separate it in two different businesses – services upside, the biopharma downstream to the providers – both are growing significantly. On the downstream side, although we've lapped the Metro Medical acquisition, it continues to perform very well in some of the areas where we weren't as strong before the acquisition.

For instance, we were strong in oncology. They were very strong in rheumatology and nephrology, and those areas continue to go very well for us. And the team down there executes very well. So we're seeing very strong growth downstream on the provider side. That's going to be our more lower-margin typical distribution type of margin business.

And then, upside on the biopharma side, the strong areas have really been our hub, our 3PL business and our scientific and regulatory businesses are all doing very nicely. And these are going to be much higher-margin services businesses. So when you blend it together, it makes for a nice mix for us.

Jon Kaufman - William Blair & Co. LLC

Okay. Great. Thank you.

George S. Barrett - Cardinal Health, Inc.

Thanks, Jon.

Operator

Next is David Larsen with Leerink.

David M. Larsen - Leerink Partners LLC

Hey. Congratulations on a good quarter. Mike, can you talk about the – yeah, very good quarter on both divisions – can you talk about your SG&A costs? I mean, those looked like the lowest percentage of revenue that I've seen in four years. Are there any focused efforts going on at Cardinal to maybe reduce costs? Can you talk about that, please?

Michael C. Kaufmann - Cardinal Health, Inc.

Sure. As you can imagine, any time when you're not performing at the level that you would expect yourself and hold yourself accountable to delivering, you're going to get after managing your expenses maybe even tighter than you normally would. And so, I think that both the Pharma and the Med team, even though the Med team's performing very strongly, they're also paying attention to their expenses too, because we're all one company. We're all Cardinal.

But the Pharma side is just being very thoughtful about where they're making investments, trying to prioritize; and I do want to emphasize, we're still making investments. It's important to know that while we're paying attention to our SG&A, we're also at the same time prioritizing things that are still important to our future and investing in those. So I would say it's really about tight focus, prioritization and just managing through those types of things.

David M. Larsen - Leerink Partners LLC

Okay. And then on the Medical side, if Don is here, maybe he can comment on the margins? And is this a good sort of go-forward run rate?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. I think we're going to continue to see some fluctuation in our margin rates in Medical, but I do think that you're now starting to see a margin rate where we would expect it to be. As you said, we've never given up on our goal to be at 5.75%, both through our organic growth and inorganic moves that we'll continue to make.

I think that you're going to see big wins like Kaiser, that we talked about, while that's a distribution customer, it's going to be margin dilutive because it's more margin. It's more of a distribution business. And then, you're going to see adding businesses like Cordis, which are going to be higher margin. Then you're going to see us convert our customers to more Cardinal Health Brand products, which is going to increase our margin rates, grow our at Home business, which is growing our margin rates as well as naviHealth. So I think we have a lot of moving parts in Medical that should continue to help us with the momentum on growing our margin rates on that side of the business.

Operator

The next question is from Michael Cherny with UBS.

Michael Cherny - UBS Securities LLC

Good morning, guys. Most of my questions have been answered. Just quickly, Mike, one for you. Just a more technical question than anything else. It looks like just from your updated share count assumptions that we're pretty much assuming no real incremental buyback based on current levels of the back half of the year? Is that how you guys think about it and then to be opportunistic if you see fit?

Michael C. Kaufmann - Cardinal Health, Inc.

Mike, you said it about perfectly. Yeah, we're not anticipating any more stock repurchases in the second half. However, if there is an opportunity and depending on where our cash sits, we may opportunistically do that. But right now, we're not planning to do that at this point.

Michael Cherny - UBS Securities LLC

Got it. Must be the patriots' blood in me. And then, George, one...

George S. Barrett - Cardinal Health, Inc.

Don't encourage, Sally.

Sally J. Curley - Cardinal Health, Inc.

Okay.

Michael Cherny - UBS Securities LLC

George, one just big picture question for you, particularly as you move into your role as Head of Healthcare Leadership Council. So as you think about all the moving pieces in D.C. and whether it's uncertainty around stuff around tax reform, be it corporate tax reform in the U.S., border adjustability, all of the moving pieces related to the changing landscape of healthcare reform and will they, won't they on the Obamacare repeal, how do you think about positioning the business and positioning the company so that you're as nimble as possible as some of these changes come down to landscape? And is there any way you can even pre-prepare the business for something that's a moving target?

George S. Barrett - Cardinal Health, Inc.

Yeah. It's a great question, Mike. I appreciate it. So let me do the best I can. One of the interesting things about our business is that our fundamental strategic direction has been set really for a number of years, and we actually have a strategic plan in process that we do with 100 or so people in the organization a couple of times a year. And as it turns out, we had one just a few days after the election. And the first thing we did with the group was put out a chart in front of them and said, these are our priorities, these are the trends in healthcare. What changes?

And with the exception of the fact that we're going to have to deal with some policy issues along the way, fundamentally the directions are clear. Demographics will not turn backwards. We know it's an inexorable march. We know that care is going to move to more ambulatory settings, move to different settings. We know that there's going to be a focus on efficiency and coordination of care, that the post-acute world is going to be important. So we built our strategy around those things.

So it's been really interesting to try to sort of navigate the short-term stuff, but keep our eye very much on the long-term. Here's what I'd say just very, very generally about the two things you mentioned, the Affordable Care Act and the tax-related issues. The President, the majority party have made it very clear that their intentions are to repeal the Act through the budget reconciliation process. And through that, as you probably know, they can eliminate components of the law. But they've also reaffirmed their commitment to retain certain aspects of the law like the pre-existing conditions requirements.

So again, these are complex moving parts. And so, the things that we're doing is making sure that there is an educator reminding people about whether we're going to replace, or rebuild, or repair, or whatever the right term is. We want to make sure that there is a stable insurance foundation to support it, and that sort of is a key opening part to it. And we think that is at this point well understood, and that the timelines are probably going to adjust a little bit as people try to figure out how to navigate that. We'll make sure our voice is heard.

On the tax proposals, we generally have been a supporter, as you know, of tax reform. But again we want to make sure that we are educators and informers on certain dynamic. So, for example, you know that many Medical products including some of ours are made outside of the U.S. and related facilities. And so, we just want to make sure that that information is well understood as policies are starting to come through. So, yeah, there was interesting time both as Cardinal Health and certainly in my new role as Chair of HLC. But I think we're well-positioned broadly, and I think we're nimble enough to continue to adapt to short-term dynamics at work.

Operator

The next question is from Eric Coldwell with Baird.

Eric W. Coldwell - Robert W. Baird & Co., Inc.

Thanks very much. Medical, obviously, I think everybody is feeling a little bit better about it today. That being said, you do have a very large win with Kaiser. I'm just trying to pull back the layers of the onion here a little bit. If we could strip out Kaiser, my guess is growth looks like 3% to 4%. What is the growth in acute care stand-alone, ex-Kaiser? You've got a lot of small businesses that are growing faster, doing better. I'm just trying to make sure that the acute care distribution piece stand-alone ex-market share isn't actually flat to shrinking at this point? Or maybe it is.

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. So, Eric, thanks for the question. I don't want to pull Kaiser out for two reasons. One is, I wouldn't want to talk specifically about the size of any one customer, but second of all it is part of our business, it is the result of all of the work that the team has done to reposition the business as a thought leader, as a business that has lots of other services, a broad product line. And so, to me it is more of the result of all of the work we've done, so to pull it out doesn't make sense. Now, business is still definitely growing without the Kaiser piece in it, but it's hard to break it down. I don't know that would be appropriate. George?

George S. Barrett - Cardinal Health, Inc.

Yeah, Eric, if it's okay, I will do this because we don't break out individual pieces, and we certainly don't want to break out individual customers. But remember I talked to you about and someone asked earlier lead indicators. So they are all looking green. Our Pharmaceutical – excuse me, our Medical/Surgical distribution business is probably the healthiest position we've seen it in quite some time. So we're seeing really a very good organic activity and growth there. So I think I can answer qualitatively without breaking out the individual pieces for you.

Michael C. Kaufmann - Cardinal Health, Inc.

And if you set aside Kaiser and make it Cordis, the business (01:00:28).

Eric W. Coldwell - Robert W. Baird & Co., Inc.

I don't want to take Kaiser away from you. I actually think you're structurally advantaged perhaps versus some in the market. I am just trying to get a sense of where the market is?

Michael C. Kaufmann - Cardinal Health, Inc.

Understood.

George S. Barrett - Cardinal Health, Inc.

Yeah. Absolutely. And I didn't mean any other way than that. But I appreciate that.

Eric W. Coldwell - Robert W. Baird & Co., Inc.

Okay. Thank you. We can take it offline. Thanks.

George S. Barrett - Cardinal Health, Inc.

Thanks, Eric.

Operator

The next question is from Garen Sarafian with Citi.

Garen Sarafian - Citigroup Global Markets, Inc.

Good morning, George and Mike. High-level question on procurement in generics. One of your peers is in the market getting updated pricing that includes the volume of a large new retail client. So how has that impacted the market? And how long do you think whatever changes are going on take to flow through?

Michael C. Kaufmann - Cardinal Health, Inc.

That's a tough question, because I don't really want to speak for our competitors. And I'm not sure of the timing of exactly when they are launching and all the different pieces of when they go-to-market. But I will say that as you can imagine, our Red Oak team is paying attention to that, has great relationships with the manufacturers and will be paying attention to that to make sure that we are costed appropriately for our size and simplicity and transparency of our model. And other than that, that's probably all I can say.

Garen Sarafian - Citigroup Global Markets, Inc.

Okay. Fair enough. And then, I guess, if there's anything on – how long, in generic terms when there's a large new client, it takes to flow through the system? But the follow-up was actually going to be, to close out a prior question, on the impact of branding price increases and impact to Cardinal. So could you put some sort of any broad weightings around the impact of January price increases versus the midyear? Is it more of two-thirds, one-third? Or is it more 80/20? Or something else that you could share? Thank you.

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. I probably can't share that level of detail because it's obviously hard to know, and manufacturers moved slightly between month-to-month and quarter-to-quarter. So again I'll just emphasize January is bigger, the biggest month, but other than that, George?

George S. Barrett - Cardinal Health, Inc.

Yeah. Garen, I'd just add to this? I mean, typically January is bigger, as Mike said. The other thing that we need to note is, it's been an unusual stretch for some time. And so, again, predicting exact ramp behavior is always a little bit tricky. As you know, years ago it was very, very systematic, and today it's a little bit more one-offs. But I think that January typically is a bigger month, but I think we have to recognize that things are little bit different and maybe not as predictable in terms of exactly when things occur as they might've been five years ago?

Michael C. Kaufmann - Cardinal Health, Inc.

Yeah. And to answer your other question around generics and being able to execute on that, I think that just depends very differently on how you go to market, the size of that customer, whether it even deserves a repricing, and then how you go about that, how your relationships are with the manufacturer. So I think that can vary drastically and dramatically between different players in the marketplace. I know we feel really good about when we combined how quickly we executed, but I'm not sure I can say that anybody else would go faster or slower than us.

Operator

The final question will come from Greg Bolan with Avondale Partners.

Greg Bolan - Avondale Partners LLC

Hey. Thanks, guys. And I hate to ask this at the very end of the call, George, but – and by the way I very much enjoyed the white paper on DIRs and that just was issued, what, last month? But from the standpoint of your ability to defend or protect end of tenant pharmacies and obviously maintain, maybe even gain, market share in the independent pharmacy space as it relates to DIRs. Where do you guys sit in the spectrum? Because it does feel like this is obviously – these revelations that we're starting to see on DIRs. I mean it's a very painful experience for your Pharmacy customers. And I just wanted to kind of see how you guys could possibly or how you are potentially defending them, protecting them, when they are obviously experiencing these pretty massive decremental margins 90, 120 days after the fact.

George S. Barrett - Cardinal Health, Inc.

So there are two parts to this, so let me answer the second part first. I'm not sure there's a company more focused on the community pharmacy and pharmacy industry, in general. We believe that they're going to be a key player. As healthcare continues to evolve, we have shortages of primary care physicians. We think pharmacists will and should play a more active role.

We're doing an incredible amount of work through Jon Giacomin's organization to make sure that we're close to them and providing all of the solutions and tools that can help them compete in the market, and actually help them provide cognitive care which we think is very important.

Going back to your first point, I might want to make an important note about this because we've gotten a few questions. We are a player in oncology and, as such, we've been a member of Community Oncology Alliance. And as a member of that, we have funded research. But you specifically referred to a particular project. We do not direct the researchers' – the subjects. So it's just important for me to comment on that. So we've had questions about that paper. We didn't specifically fund a paper on this. We are basically part of an alliance, and that group does research.

But the summary of what I'm describing is our work around community pharmacy and around pharmacy in general, is very much a part of what we do. Whether it's through generic programs, the abilities to help them tie to a hospital system or to a post-acute facility or to set up a diabetes center, we've done a huge amount of work in providing tools to help community pharmacy compete in what is for all of us an interesting and challenging environment.

Greg Bolan - Avondale Partners LLC

Thank you.

George S. Barrett - Cardinal Health, Inc.

You're welcome.

Operator

And this concludes our question-and-answer session. Mr. Barrett, I'll turn the call back to you for any additional remarks.

George S. Barrett - Cardinal Health, Inc.

Sure. Thank you, Eric, and thanks all of you for your questions today. Our organization, just in summary, remains focused on execution, on driving our strategic priorities, on making sure that we are creating what I would say is, again, sustainable value creation for our partners and for patients and for you all. And we look forward to seeing you all in the near future, and thanks for joining us on the call today.

Michael C. Kaufmann - Cardinal Health, Inc.

Thanks, everyone.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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