Executive Summary / Key Takeaways

• Cardinal Health is demonstrating strong operational and financial momentum, highlighted by robust Q3 FY25 results and a raised full-year EPS guidance, signaling successful execution despite significant customer transitions.
• The company's strategic pivot towards higher-growth, higher-margin areas like Specialty and At-Home Solutions through recent acquisitions (ION, GIA, ADSG) is beginning to contribute positively and is central to its long-term growth strategy.
• The Pharmaceutical segment, the largest business, is proving resilient, effectively offsetting the impact of a major contract expiration through new customer wins, existing growth, and operational efficiencies, supported by favorable utilization trends and a strong generics program.
• The Global Medical Products and Distribution (GMPD) segment continues its turnaround journey, achieving significant year-over-year profit improvement by mitigating inflation and implementing cost optimization, with management committed to further progress despite near-term challenges and tariff risks.
• Strong cash flow generation, bolstered by working capital improvements and strategic initiatives, provides financial flexibility to invest in the business, pursue tuck-in acquisitions in strategic areas, and return capital to shareholders, underpinning confidence in future double-digit EPS growth.

Healthcare's Crucial Link: Setting the Stage

Cardinal Health, Inc., an Ohio corporation formed in 1979, stands as a vital intermediary in the complex healthcare ecosystem. As a global healthcare services and products company, it provides customized solutions spanning the continuum of care, connecting patients, providers, payers, pharmacists, and manufacturers. The company operates primarily through two reportable segments: Pharmaceutical and Specialty Solutions (Pharma) and Global Medical Products and Distribution (GMPD), complemented by a portfolio of growth businesses categorized as "Other," including Nuclear and Precision Health Solutions, at-Home Solutions, and OptiFreight Logistics. This structure reflects an evolution aimed at enhancing focus, efficiency, and transparency across its diverse operations.

The healthcare industry, characterized by its inherent resilience, benefits from favorable secular trends such as demographic shifts towards an aging population, continuous innovation in therapies and medical technology, and the growing movement of care into the home setting. Cardinal Health's position as a critical link in the supply chain allows it to benefit from these trends, although it must also navigate evolving market conditions, regulatory complexities, and competitive pressures.

Strategic Evolution and Investment Focus

Cardinal Health has embarked on a deliberate strategic journey to optimize its portfolio and accelerate growth in targeted areas. Recent history is marked by significant inorganic investments aimed at enhancing capabilities and expanding presence in higher-growth, higher-margin segments. The acquisition of Specialty Networks in March 2024 bolstered its specialty GPO offerings. This was followed by key acquisitions in fiscal year 2025: Integrated Oncology Network (ION) in December 2024 for $1.1 billion, establishing a physician-led oncology MSO integrated into the Navista platform; a 73% interest in GI Alliance (GIA) in January 2025 for approximately $2.8 billion, creating a foundation for a multi-specialty MSO platform supporting gastroenterologists and urologists; and Advanced Diabetes Supply Group (ADSG) in April 2025 for $1.1 billion, expanding its at-Home Solutions business. These investments, funded through a combination of cash and new debt, underscore a strategic commitment to deepen relationships with community-based providers and capitalize on growth in specialty therapies and home healthcare.

These strategic moves are designed to build upon the company's foundational strengths and diversify its profit streams beyond traditional pharmaceutical distribution, which, while stable, operates on very thin margins. The focus on MSO platforms aims to provide comprehensive support services to physician practices, enabling them to remain independent while enhancing clinical and economic value. Similarly, investments in at-Home Solutions position Cardinal Health to capture a larger share of the growing market for home-based medical supplies and services.

Technological Edge and Operational Excellence

Cardinal Health leverages technology and operational expertise across its segments to drive efficiency, enhance service levels, and create competitive advantages. While not a technology developer in the same vein as pharmaceutical manufacturers, its strength lies in applying technology to optimize complex supply chain and service delivery processes.

In its core distribution operations, platforms like InteLogix and Atrix for health systems are utilized to provide value beyond price, focusing on operational efficiency and service. The company has invested in automation within its distribution network, particularly highlighted in the at-Home Solutions segment. New distribution centers, such as the one under construction in Fort Worth, Texas, are being equipped with robotics and automation technologies to improve productivity, quality, and safety. In Q1 FY25, the at-Home Solutions business reported achieving its highest levels on record for service, quality, efficiency, and safety, with fill rates at a three-year high and patient net promoter scores up over 16% year-over-year. These metrics demonstrate the tangible benefits of technology and process improvements in this segment.

Within Nuclear and Precision Health Solutions, Cardinal Health's network of nuclear pharmacies and PET sites, coupled with its Center for Theranostics Advancement, provides a differentiated capability to handle and distribute cutting-edge radiopharmaceuticals. The company is the first to offer actinium-225 at commercial scale and is expanding its support for novel therapies like Novartis (NVS)’ Pluvicto. Investments in increasing cyclotron capacity and the PET manufacturing geographic footprint are critical, as a majority of emerging radiotherapeutics require a companion PET scan. The Theranostics business grew over 20% in FY24, and similar growth is expected in FY25, reflecting the success of these focused investments and partnerships (e.g., with Telix (TLX) for Gozellix®, GE Healthcare (GEHC) for Vizamyl).

OptiFreight Logistics utilizes tech-forward platforms like TotalVue Insights to provide data-driven insights to customers, helping them optimize shipping and manage costs. This focus on technology-enabled services has contributed to an all-time high in the customer loyalty index for this business.

While direct quantitative comparisons of CAH's core distribution technology efficiency (e.g., processing speed per unit) against all competitors are not explicitly detailed, management commentary consistently emphasizes improvements in productivity, service levels, and on-time delivery metrics across the enterprise, suggesting that operational execution and technology adoption are contributing factors. The strategic intent behind R&D and technology investments is clearly focused on enhancing supply chain resiliency, improving operational metrics, and enabling the delivery of complex or specialized products and services, thereby strengthening its competitive moat and supporting margin expansion in targeted areas.

Pharmaceutical Segment: The Resilient Core

The Pharmaceutical and Specialty Solutions segment remains the bedrock of Cardinal Health's business, contributing the vast majority of its revenue and a significant portion of its profit. Despite facing the significant headwind of the OptumRx contract expiration at the end of June 2024 (which represented 17% of FY24 consolidated revenue), the segment has demonstrated remarkable resilience.

For the three months ended March 31, 2025, Pharma revenue was flat year-over-year at $50.4 billion, but excluding the OptumRx impact, revenue increased by a robust 19%. For the nine months ended March 31, 2025, revenue decreased 3% to $149.3 billion, increasing 20% excluding the OptumRx impact. This growth was driven by a combination of onboarding new customers (expected to contribute over $10 billion in incremental revenue in FY25), growth from existing customers (including approximately 7 percentage points from GLP-1 sales in Q3 FY25, although these do not meaningfully contribute to profit), and operational efficiencies.

Segment profit for Pharma increased 14% to $662 million in Q3 FY25 and 12% to $1.7 billion in 9M FY25. This growth was fueled by increased contributions from branded and specialty pharmaceutical products, the performance of the generics program (benefiting from consistent market dynamics and Red Oak Sourcing), BioPharma Solutions, and the early positive impact of the MSO platform acquisitions (ION, GIA). The segment profit outlook for FY25 was raised to 11.5% to 12.5% growth, a testament to the business's strength and the effectiveness of mitigation strategies.

In the highly competitive pharmaceutical distribution landscape, Cardinal Health competes primarily with McKesson (MCK) and Cencora (COR). While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CAH holds a significant position, estimated to be in the 20-25% range in the U.S. market. Comparing TTM financial ratios, CAH's Gross Profit Margin (3.50%) is lower than MCK (4.0%) and Henry Schein (32.0%), but comparable to COR (3.0%). Operating Profit Margin (1.07%) is lower than MCK (1.0%) and COR (0.74%). These differences reflect variations in business mix (e.g., HSIC's higher-margin dental products, MCK/COR's scale advantages in high-volume distribution) and operational efficiency. Analyst commentary suggests that CAH's prior scale disadvantage in specialty is diminishing, and its recent M&A activity could have a more significant growth impact compared to larger competitors. CAH's strategy of focusing on community providers and building out MSO platforms differentiates its approach in specialty compared to peers, aiming to capture value beyond traditional distribution fees.

GMPD Segment: The Turnaround Story

The Global Medical Products and Distribution (GMPD) segment has been a focus of a dedicated Improvement Plan aimed at turning around its performance, which was significantly impacted by inflation and supply chain constraints in prior years. The team has made notable progress, achieving approximately $240 million in year-over-year segment profit improvement in fiscal year 2024 and successfully offsetting the gross impact of inflation by the end of that fiscal year.

In Q3 FY25, GMPD revenue increased 2% to $3.2 billion, and for 9M FY25, revenue also increased 2% to $9.4 billion, driven by volume growth from existing customers. Cardinal Health brand sales grew 3% in Q3 FY25 (closer to 5% normalized for billing days and currency) and 3% overall in FY24.

Segment profit for GMPD increased significantly by 77% to $39 million in Q3 FY25 and 44% to $65 million in 9M FY25. This improvement was primarily driven by the beneficial impact of cost optimization initiatives and growth from existing customers, although partially offset by higher manufacturing costs. The GMPD segment profit guidance for FY25 was narrowed to $130 million to $140 million, reflecting some unanticipated costs (like health and welfare) and volume softness earlier in the year, but management remains committed to the target of approximately $300 million in segment profit by fiscal year 26.

The GMPD segment competes with companies like Henry Schein (HSIC) and Owens & Minor (OMI) in the medical supplies distribution and manufacturing space. CAH's TTM Gross Profit Margin (3.50%) is lower than HSIC (32.0%) and OMI (21.0%), reflecting different product mixes and cost structures. However, CAH's TTM Operating Profit Margin (1.07%) is higher than OMI (-0.02%) but lower than HSIC (5.0%). CAH's turnaround efforts are focused on improving these metrics through cost optimization, supply chain resiliency (including expanding domestic manufacturing for products like syringes), and driving Cardinal Brand growth. The company is also implementing targeted working capital improvements within GMPD, aiming to generate at least $500 million in cash over the next two years.

A key risk for GMPD is the potential impact of tariffs on products sourced from countries like China, Mexico, and Canada. Management is proactively implementing mitigation actions, including diversifying suppliers, increasing U.S. manufacturing capacity (90% of the syringe category is now manufactured in the U.S.), and deploying AI for tariff planning. While they anticipate mitigating the majority of potential gross tariff costs through these actions and price adjustments, the inability to fully offset these could negatively impact financial results and competitive positioning, particularly in segments where reimbursement may not increase commensurately.

Other Businesses: Accelerating Growth Drivers

The collection of operating segments reported in "Other" (Nuclear and Precision Health Solutions, at-Home Solutions, and OptiFreight Logistics) are increasingly important growth engines for Cardinal Health. These businesses collectively benefit from strong secular tailwinds and strategic investments, contributing to both revenue and profit growth.

Collectively, revenue for these segments increased 13% to $1.3 billion in Q3 FY25 and 13% to $3.8 billion in 9M FY25. Segment profit increased significantly by 22% to $134 million in Q3 FY25 and 14% to $356 million in 9M FY25. The collective outlook for FY25 is for revenue growth of 17% to 19% and segment profit growth of 16% to 18%, reflecting stronger organic growth and the anticipated contributions from the ADSG acquisition.

Nuclear and Precision Health Solutions continues to see double-digit revenue growth in its core business and Theranostics, with Theranostics growing over 30% in Q3 FY25 and over 20% in FY24. Investments in Actinium-225 commercial scale and expanding the PET network are key drivers. At-Home Solutions is experiencing double-digit revenue growth, faster than the market, driven by categories like CGM and urology and benefiting from investments in automation and new distribution centers. The ADSG acquisition is expected to be accretive and create value through synergies. OptiFreight Logistics is delivering consistently strong performance, benefiting from increasing demand for logistics management services and investments in technology platforms.

While these businesses operate in diverse niches with specific competitors, Cardinal Health's strategy is to leverage its existing infrastructure and relationships to expand its presence and offer differentiated solutions. The strong growth rates and profitability in these segments highlight their potential to contribute meaningfully to overall enterprise performance and diversify the business mix towards higher-margin activities.

Financial Strength and Capital Deployment

Cardinal Health's financial performance in Q3 FY25 and the first nine months of the fiscal year demonstrates solid execution. Consolidated revenue was flat at $54.9 billion in Q3 FY25 and decreased 3% to $162.4 billion in 9M FY25, primarily reflecting the OptumRx impact offset by growth elsewhere. GAAP operating earnings increased significantly to $730 million in Q3 FY25 and $1.8 billion in 9M FY25, benefiting from operational improvements, acquisitions, and favorable litigation recoveries, while also reflecting the absence of prior-year goodwill impairment charges in GMPD. Non-GAAP operating earnings increased 21% to $807 million in Q3 FY25 and 14% to $2.1 billion in 9M FY25. Gross margin increased 10% in Q3 FY25 and 8% in 9M FY25, driven by favorable product mix and acquisition contributions. SGA expenses increased 4% in Q3 FY25 and 5% in 9M FY25, reflecting acquisition impacts and growth investments, partially offset by cost savings.

The company maintains a solid liquidity position, with $3.3 billion in cash and equivalents at March 31, 2025. Net cash provided by operating activities was $870 million for the nine months ended March 31, 2025, impacted by the OptumRx working capital unwind and opioid litigation payments, but also benefiting from new customer onboarding. Capital deployment during this period included significant investments in acquisitions ($1.1 billion for ION, $2.8 billion for GIA), capital expenditures ($315 million), share repurchases ($765 million), and dividends ($374 million).

Total long-term obligations increased to $7.7 billion at March 31, 2025, primarily due to new debt issued to fund acquisitions, but the company remains committed to maintaining an investment-grade credit rating and managing its leverage ratio. As of March 31, 2025, $2.7 billion remained under the existing share repurchase authorization.

Outlook and Guidance

Cardinal Health's outlook reflects confidence in its strategic direction and operational execution. Following strong Q3 FY25 results, the company raised and narrowed its fiscal year 2025 non-GAAP diluted EPS guidance to a range of $8.05 to $8.15. This updated guidance is supported by raised segment profit expectations for Pharma (11.5% to 12.5% growth) and Other (16% to 18% revenue and profit growth), partially offset by a narrowed GMPD segment profit guidance ($130 million to $140 million).

Key assumptions underpinning the FY25 guidance include continued broad-based pharmaceutical demand, successful integration and contributions from recent acquisitions (ION, GIA, ADSG), ongoing benefits from cost savings and operational efficiencies, and the ability to effectively manage potential tariff impacts in GMPD. The company expects adjusted free cash flow for FY25 to be approximately $1.5 billion, at the high end of its prior range, reflecting better-than-expected year-to-date performance.

Looking ahead to fiscal year 2026, management anticipates achieving double-digit non-GAAP EPS growth, driven by continued momentum in the Pharma and Other segments and the expectation that GMPD segment profit will be at least consistent with fiscal '25 levels. Robust cash flow generation is expected in FY26, having lapped the negative working capital unwind from the OptumRx contract. Updated long-term targets announced at the June 12, 2025 Investor Day signal further confidence, including a non-GAAP diluted EPS CAGR of 12% to 14% for FY26-FY28, raised profit growth targets for Pharma (5% to 7%) and Other (~10%), and a target of over $50 million in profit growth per year for GMPD after FY26. The company also expects at least $10 billion in adjusted free cash flow over the next three years and raised its baseline share repurchase plans to at least $750 million per year.

Risks and Considerations

While the outlook is positive, investors should consider several key risks. The successful integration of recent significant acquisitions (ION, GIA, ADSG) is crucial for realizing anticipated synergies and growth. Failure to effectively integrate operations, retain key personnel, or achieve expected financial benefits could impact future performance. The highly fluid tariff environment presents a risk, particularly for the GMPD segment, potentially leading to increased costs and requiring price adjustments that may not be fully accepted by customers or offset by reimbursement. Opioid litigation remains an ongoing matter, with substantial accrued liabilities and potential for future developments to differ from current estimates. Competition across all segments is intense, requiring continuous investment in technology, efficiency, and service to maintain market position. While management has outlined mitigation strategies for these risks, their ultimate impact remains subject to external factors and execution.

Conclusion

Cardinal Health is demonstrating strong operational and financial momentum, successfully navigating significant customer transitions while executing a strategy focused on accelerating growth in key areas. The Pharmaceutical segment's resilience, fueled by broad-based demand and strategic offsets, provides a solid foundation. Investments in Specialty and Other businesses through targeted acquisitions are expanding capabilities and diversifying the profit mix towards higher-growth, higher-margin opportunities. The GMPD segment's turnaround is progressing, albeit with near-term challenges, as the company works to mitigate inflation and manage external pressures like tariffs. Robust cash flow generation supports strategic investments and shareholder returns. While risks such as integration challenges, tariff impacts, and ongoing litigation warrant attention, management's raised guidance and positive long-term outlook, underpinned by a clear strategy and demonstrated execution, present a compelling case for Cardinal Health as a resilient business with significant potential for future growth and value creation.