Cardinal Health Inc

NYSE:CAH

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Cardinal Health, Inc. First Quarter Fiscal Year 2021 Earnings Conference Call. Today’s conference is being recorded. Now, I would like to turn the conference over to Mr. Kevin Moran. Please go ahead.

[Kevin Moran, Vice President, Finance]

Good morning. This is Kevin Moran, Vice President of Investor Relations. Today, we will discuss Cardinal Health’s first quarter fiscal 2021 results along with an update for our outlook. You can find today’s press release and presentation on our IR section of our website at ir.cardinalhealth.com.

Joining me today is Mike Kaufmann, Chief Executive Officer and Jason Hollar, Chief Financial Officer. You can find today’s press release and presentation on the IR section of our website or at ir.cardinalhealth.com.

During the call, we will be making forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during the discussion today, our comments will be on a non-GAAP basis, unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliation for all relevant periods can be found in the schedules attached to our press release. During the Q&A portion of today’s call, we please ask that you try and limit yourself to one question, so that we can try and give everyone an opportunity.

With that, I will now turn the call over to Mike.

[Mike Kaufmann, Chief Executive Officer]

Thanks, Kevin and good morning to everyone joining us. I will begin with a few high level thoughts on our first quarter then have Jason review our results and updated fiscal ‘21 outlook. I will close with an update on strategic actions we are taking to carry our positive momentum forward.

Our strong first quarter results were due to great execution on key strategic priorities and additional aggressive cost controls in response to the uncertainties of the pandemic. Regarding COVID-19, we saw continued utilization improvement in the quarter, particularly in elective procedures. These dynamics, along with the disciplined execution I mentioned, contributed to better than expected performance in our medical segment, we saw significant year-over-year growth. And in pharma, we continue to be encouraged by the resilience of our business, which grew in the first quarter despite volume softness related to the pandemic. As a result of the strong start to our fiscal year, we have increased confidence in the full year and we are raising both our EPS guidance range and our medical segment outlook. Overall, we remain focused on serving our customers and their patients as we optimize our core businesses and invest for growth to fulfill our critical role in healthcare now and into the future.

With that, I will now turn it over to Jason.

[Jason Hollar, Chief Financial Officer]

Thanks Mike and good morning everyone. I will review our first quarter performance and updated expectations for fiscal ‘21. Beginning with consolidated company results, our first quarter EPS came in at $1.51, growing 19% versus the prior year and exceeding our expectations. Total first quarter revenue increased 5% to $39.1 billion driven primarily by sales growth from existing customers. Total gross margin grew 2% to $1.7 billion. Despite higher revenue, SG&A was flat at $1.1 billion demonstrating our enterprise-wide commitment to disciplined expense management.

Total operating earnings grew 7% to $618 million driven primarily by strong medical segment performance. Interest and other expense decreased 52% versus the prior year to $38 million driven by lower interest expense as a result of our ongoing commitment to reduce debt as well as multiple other favorable items such as tax and deferred compensation. Our effective tax rate for the quarter was 23%, which includes a few small favorable discrete items. Although discrete adjustments may cause our quarterly tax rate to deviate from our guidance range of 24% to 26%, at this time, we still believe this range is appropriate for the full year. Average diluted shares outstanding were $295 million, about 2 million fewer shares than the prior year, reflecting repurchases completed last year. We generated an operating cash flow of $270 million during the quarter. As a reminder, the day of the week in which the quarter ends affects point-in-time cash flows. We ended the first quarter with a cash balance of $2.7 billion and no outstanding borrowings under our credit facilities.

Now, turning to the segments, beginning with medical on Slide 6, medical revenue increased 1% in the first quarter to $4 billion driven by sales growth in our At-Home Solutions business. Segment profit increased 36% to $230 million driven by cost savings, including global manufacturing efficiencies. The following factors contributed to first quarter medical performance above our expectations. First, while elective procedure volumes were still below prior year levels, they ramped up more quickly and unexpected. Given our portfolio’s general orientation around the OR, this volume improvement resulted in increased demand from many of our higher margin offerings, including our custom surgical kits and patient recovery products. Second, our lab business, which has grown consistently over the past few years to product portfolio expansion and favorable market trends, experienced a tailwind from increased demand for COVID-19 testing products. And finally, as Mike mentioned, our team delivered strong expense management in response to uncertainties related to COVID-19. These measures position us to operate in the best in the business for continued growth.

As we have previously discussed, we continue to incur significantly higher procurement costs for certain PPE product categories due to global supply challenges during the pandemic. To help mitigate these cost increases, we implemented price increases on select PPE products with the goal of maintaining neutral margin dollars. PPE cost increases and corresponding mitigation efforts did not have a material net impact on our results for the quarter. I will discuss the potential effects of these dynamics on the segment for the full year when I share our updated assumptions.

Now, transitioning to the pharma segment on Slide 5, revenue increased 5% to $35.1 billion, driven by sales growth from pharmaceutical distribution and specialty solutions customers. Despite expected COVID-19 related volume declines, segment profit increased 1% to $402 million driven by a higher contribution from brand sales ix. Additionally, the pharma team remained focused on diligent expense management. During the quarter, we saw improving pharmaceutical demand, enabling us to finish generally in line with our COVID-19 expectations for this point in the fiscal year. Our specialty solutions business also demonstrated improvement in the quarter resulting in strong overall growth.

Our nuclear business as expected was down year-over-year, but experienced significant volume recovery in the quarter. We have mentioned nuclear then particularly affected by the pandemic due to the mix of higher margin products and the businesses’ higher fixed cost structures. We continue to believe we are well positioned to capture long-term value in the radiopharmaceutical industry. Finally, we are encouraged to see another quarter of consistent market dynamics within our generics program, which excluding the impact of COVID-19, was net tailwind in the quarter.

Next on Slide 8, I will move to our updated fiscal ‘21 outlook. As a result of our strong first quarter performance, we are raising our earnings guidance range to $5.65 to $5.95 per share, which at the midpoint represents 6% EPS growth from the prior year. We are reaffirming the guidance ranges for each of our other corporate assumptions. This increased EPS guidance is driven by an improved outlook for our medical segment depicted on Slide 9. Because of our strong execution on cost savings, including increased global manufacturing efficiencies and the lower impact of COVID-19 related volume declines, we now expect low double-digit profit growth in the segment. With one quarter of additional insight, we are updating our segment revenue growth to mid to high single-digits for the full year. To be clear, the increase in our revenue guidance relates to better clarity on the impact of PPE pricing and we expect this increased revenue to be more than offset by the higher cost of procuring PPE products, which will adversely impact our margin rate. Mike will provide more color on our PPE supply assurance efforts for our customers later in his remarks.

As it relates to the pharma segments, we are reiterating our assumptions of mid single-digit revenue growth and low single-digit profit growth. With respect to our enterprise COVID-19 assumptions, we are not assuming that the virus triggers another wave of widespread reductions in elective procedures or physician office visits. However, we are closely monitoring virus trends, patient utilization and the health of the global economy, including unemployment trends, all of which currently have varying degrees of uncertainty. At this time, we anticipate the total net impacts from COVID-19 in the second quarter to be relatively consistent to what we experienced in the first quarter. This is primarily due to the improved utilization environment offset by cost absorption on our self-manufactured products and the previously mentioned higher costs of procuring PPE. We continue to expect a lower total COVID-19 impact in the second half of the year and we assume utilization will exit the year at or near pre-pandemic levels. Furthermore, we continue to explore opportunities to mitigate these impacts in our business through cost controls and more permanent improvements to our operational cost structure.

Now, I want to mention a notable item included in our GAAP results. Recall that in the first quarter of fiscal ‘20, we increased $5.6 billion pre-tax related to an agreement in principle amongst our leadership group of State Attorneys General to resolve pending and future opioid litigation claims by states, cities and counties. While the definitive terms for settlement continue to be negotiated with better visibility into a potential outcome, we accrued an additional $1 billion pre-tax in the quarter. The estimated total cash component for Cardinal Health would be $6.6 billion, with the majority currently expected to be paid over a period of 18 years.

Considering this accrual update in the dynamic global environment, let me remind you of our capital allocation approach, which we are prioritizing in the following manner. First, we are investing in key areas of our business to enable our strong pipeline of organic growth opportunities. Second, we are focused on taking appropriate action to maintain our investment grade balance sheet. And third, we are committed to returning cash to shareholders primarily through our dividends. We believe this prioritization of capital does position us to both maintain flexibility and generate significant value over the long-term.

I will now turn it back over to Mike.

[Mike Kaufmann, Chief Executive Officer]

Thanks, Jason. We aspire to be healthcare’s most trusted partner by delivering products and solutions that improve the lives of people everyday. To achieve this mission, we leverage our scale and expertise to excel in our traditional spaces and expand into adjacencies. I will share how we are doing both, while simultaneously addressing the challenges of the ongoing pandemic through targeted investments in pursuit of this mission.

First, we are enhancing our IT infrastructure in key areas to increase capabilities, simplify processes, and improve the customer experience. These multiyear initiatives will generate significant benefits in the future, some of which we are beginning to realize. For example, in our pharmaceutical distribution business, our teams are preparing to deploy the next iteration of our technology platform enhancements, creating greater operational efficiencies and better data visibility. Also, initiatives in our corporate functions will harness the potential of AI and machine learning to enable stronger insights both for our business and for our customers.

In medical, our work to streamline our global supply chain network and processes continues and we are seeing significant efficiencies. We are also strategically investing to expand in high growth areas to support new technologies and therapies and to drive innovative care delivery. For example, in specialty, we are developing partnerships and making thoughtful investments that combine the technology, scale and expertise of our business with new innovations in cell and gene therapy, biosimilars, and value-based care models. Our 3PL continues its strong growth, with recent launches in traditional markets as well as emerging markets. Also, we recently made an investment in Vineti, the first commercial cloud-based platform to integrate logistics, manufacturing and clinical data for cell and gene therapies. In our at-Home Solutions business as trends and technologies accelerate in the increasingly virtual world of the pandemic, we are focused on optimizing our product portfolio and enhancing the customer experience.

We are deepening partnerships with patients, payers and manufacturers to meet their evolving needs and expand our capabilities. We are also investing in our operating systems and digital commercialization capabilities with a pipeline of AI initiatives to lower our cost to serve and provide fully integrated medical and pharmacy billing solutions for our customers. These work streams will make us uniquely positioned to lead in the developing interconnected health and home space. Across the company, we are working diligently to meet our customers’ current needs, while also looking ahead to what they might need in the future. While doing all of this, we remain highly focused on our internal and external responses to the pandemic.

In medical, we implemented multiple measures to address ongoing supply challenges for PPE product categories. For example, we established our supply assurance program to provide consistent long range supply for our products, including exam gloves, gowns and mask. The program has been positively received. And this collaboration with our customers will enable us to collectively navigate supply volatility and deliver critical products for patient care. In pharma, we are constantly monitoring evolving treatment patterns, collaborating with the team at Red Oak to ensure supply, and focusing on delivering the industry’s highest service levels. And across the company, we continue to aggressively control our expenses to ensure we deliver on all of our commitments and create long-term value. As I said earlier, we aspire to be healthcare’s most trusted partner and create the greatest value for our customers, shareholders, communities and employees. I want to thank our employees around the globe for their integrity, adaptability and persistent dedication to this mission. We are confronting today’s challenges and developing tomorrow’s solutions with the tenacity, agility and innovation that makes Cardinal Health essential to care.

With that, I will pause to open it up for questions.

[Operator]

[Operator Instructions] We will begin Q&A with Mike Cherny of Bank of America.

[Mike Cherny, Bank of America]

Good morning. Congratulations on the good quarter. Yes, I guess on question for Mike or Jason, but I just want to dive in a little bit to the medical performance in the quarter and the strength you saw especially against the backdrop of some of the PPE dynamics. If you can even parse out a little further, was there anything that was more short-term in nature in terms of what you saw on the quarter? And as you think about the risk weighting of the various different tailwinds, headwinds you have tied to the guidance increase, where do you think are the most sources for potential upside downside or what I guess maybe on the downside of the most concerning or most risky in terms of how to achieve the various levels of that cost expectation?

[Mike Kaufmann, Chief Executive Officer]

Yes, thanks for the question. I will start and then I will turn it over to Jason. First of all, I would just emphasize we are really excited about the efforts we are seeing in our medical segment. The team did a really good job this quarter of staying not only focused on driving expenses for the quarter in relation to the uncertainty of the pandemic, but also continuing to get after the longer term expense initiatives we had and working on a lot of the other strategic initiatives we talked about, like our commercial work. So, a lot of really good progress with Steve and his team, but I am going to turn it over to Jason, so he can give you a little bit more of some of the color you would like to hear.

[Jason Hollar, Chief Financial Officer]

Sure. Thanks Mike. Yes. And first of all, we should start with the COVID impacts. And the key point is that within the quarter, there was a relatively minimal impact on the business on a net basis. Of course, there is a lot going on within that. So, there is still a headwind year-over-year as it relates to the lower elective volume. However, that was offset in part by some of those COVID-specific costs that Mike had referenced, but also increased volume in our lab testing business. So, all those items came together in a way that effectively offset one another. Another key point that you referenced and I didn’t reference here is PPE. For the quarter, we saw that the increased cost that we did recognize were mitigated through price increases that also happened in the quarter. So, for the first quarter that all kind of offset. I will come back to that point in a second, but for the rest of the performance within medical for the segment for the quarter, there were also additional cost savings. As Mike indicated, this was led by the ongoing multi-year effort and building healthier future initiative that’s really getting after global manufacturing and supply chain transformation. So, that was very much consistent with our expectations. But as Mike highlighted there are also some additional aggressive cost controls that we put in place due to the uncertainties in the quarter. And we saw some really great flow through of those actions, in terms of delaying some open positions and managing third party spend, that may be a bit more temporary in nature, and is something that will continue to work to see if we can make more permanent. So we have a good balance included within our guidance for all those items. Going back to PPE as it relates to the rest of the year. That is the one area that we do anticipate having higher costs in the second quarter higher net costs in the second quarter versus the first quarter. And that is just due to the timing, we have procured these higher costs, PPE inventory items, but it is in transit, a lot of that that volume is in transit. So we know that we will be incurring those costs. A lot of it’s already on our balance sheet and our inventory. And we will recognize that higher costs in the second and across third and fourth quarter as we sell those items. And of course, we are also raising prices consistent with that. However, there are some timing elements that don’t line up perfectly between the two. So that’s the one element from Q1 to Q2 for the medical business that we would see a bit of additional headwind. Now on the flip side, we would expect that in the pharma business, there is a little bit of a, lesser of a headwind from Q1 to Q2, as that environment is a little bit more normalized, but I would not call that significant.

[Mike Cherny, Bank of America]

Great, thanks.

[Operator]

We will now take a question from Steven Valiquette with Credit Suisse.

[Steven Valiquette, Barclays]

Yes, it’s Steve Valiquette from Barclays. Nothing has changed there. Hey, just want to mention, on the opioid litigation and extra charge that you took, one of your peers also took a charge this morning and they made a note of – a point of press release that it includes not only the states, but also the counties and municipalities and other government entities as well. So I am just curious with your total charge that you have now, do you – what percent of your total liability do you think that would cover? Is that pretty comprehensive or would there still be other cases to limit, just share some more color around that? Thanks.

[Mike Kaufmann, Chief Executive Officer]

Sure. Thanks, Steve. I will give you a little bit of color here. Our view has always been that it is a global settlement that takes into account, all of the states as well as the political subdivisions in the state. So that accrual represents our assumption around that what is not in there is any private party plaintiff cases, individual or some other non political subdivision or state. Those are still out there. We intend to defend our self vigorously against those but that accrual takes into account all both the states and the political subdivisions.

[Steven Valiquette, Barclays]

Okay. And also a few questions is found from investors on the run rate of medical profits on a quarterly basis. Obviously, this fiscal first quarter was very strong. Any additional thoughts on kind of quarterly run rates from here might be helpful as well? Thanks.

[Jason Hollar, Chief Financial Officer]

Yes, I don’t think there is too much more to add than what I just went through where, again, from a Q1 to Q2 perspective, we definitely anticipate there being a greater headwind related to the PPE recognition of that cost. But for the other elements, we continue to see relatively consistent types of dynamics there. And then, as I also mentioned and Mike touched on as well, as it relates to the underlying cost controls, we feel really good about our performance in the first quarter. Some of those were absolutely permanent and part of those structural cost reductions that we have been putting in the place for the last several years. But other elements were very specific to the pandemic and really tightly managing our costs and then perhaps and a little bit of a shorter term, we will continue to evaluate those initiatives and see if we can make them more permanent by changing the way in which we do on certain things, which is very consistent with our building healthier future initiatives elsewhere. But we need a little more time to work that through.

[Mike Kaufmann, Chief Executive Officer]

The only other thing I would add is that we did exit the quarter, roughly mid single digits down on electives. And so that was better than our expectation. And as Jason said, we expect to finish the year, near pre COVID level. So a lot of the upward trajectory already has occurred in the first quarter. So you wouldn’t see that sequential is not as big as maybe it was historically, when we were first thinking about this. I think that is one component, also to keep in mind. Next question, please.

[Operator]

And our next question will come from Jailendra Singh from Credit Suisse.

[AdamHeussner]

Hi, this is Adam on for Jailendra today. In terms of the cost savings, which were partially contributing to the EPS raise, just curious of how much of the improvement there had already been planned versus if you expedited those cost initiatives? Thanks.

[Jason Hollar, Chief Financial Officer]

Yes. So, as I think about the – let’s just step back and think about the raise for the full year guidance that is entirely due to the medical performance and you saw that we raised the outlook there as well. And so within that, we had two key components, first of all, COVID is being – is better, less of a headwind than what we had anticipated, although it’s still a headwind for the year and that is the most meaningful impact, but also significant within that not insignificant is the underlying cost reductions that we have been referencing. So, both go into it, but I would say COVID is a little bit more of a benefit there versus the cost savings, but still very meaningful.

[Mike Kaufmann, Chief Executive Officer]

And then I would just add, we have also seen really good performance on our lab business, in the first quarter that we would expect to continue through the rest of the year and so some of our other components of our business performed very strong too.

[Jason Hollar, Chief Financial Officer]

And one other item, maybe just to make sure we referenced is tax rate for the first quarter was a couple of 100 basis points lower than the midpoint and lower than the range that we have. That is just the timing of some discrete items that were all anticipated when we established our guidance range. So we will continue to have some fluctuations there, but that does look like an impact in the first quarter that we would expect to revert more to the mean by the time we get to the end of the year.

[AdamHeussner]

Thanks.

[Operator]

Now we will move to Kevin Caliendo with UBS.

[Adam Noble, UBS]

Great. Thanks for the question. This is actually Adam Noble on for Kevin. Just wanted to go back to the lab business, curious if you guys can kind of size how big a business that is within the overall medical segment than you are just curious is that mainly the hospital channel or do you have a significant presence with outpatient labs in other areas of the lab testing to universe?

[Mike Kaufmann, Chief Executive Officer]

Yes, our lab business has been a business that we have had for a really long time. It always has been a consistent grower for us both on the top and bottom line for a lot of years. It’s main customers are basically the outpatient labs and other hospital lab type of businesses. So, those are who we are supplying, we have a very robust product line, some of which is our self-manufactured or sourced items as well as we work with all of the national brand players. And so while it’s always been a business that has performed well and grown nicely for us with the increase in COVID testing, that business has had some additional growth this year. They have also been a real leader in getting reagents out, testing equipment, working with folks on helping on the swap supply early on. So at the business, we are really proud of the team there and continue to feel good about their growth this year. And we actually are evaluating how much of that might continue on going forward as we continue to look at that business going forward, but really strong performance by the lab business.

[Adam Noble, UBS]

Got it. That’s super helpful. With regards to the medical business overall, I am just curious if you can talk about the recovery in utilization there between the U.S. as well as some of your international footprint then your comments around not expecting to see a real drop in elective procedures, probably most likely in the U.S. in COVID, I am just curious given some of the lockdowns that have recently been implemented in Europe, whether there is any pipe insert there that you can do?

[Mike Kaufmann, Chief Executive Officer]

Yes, it’s a great question. I think the first thing I think we all need to keep in mind is it will probably be very choppy over the next 6 to 12 months, it’s hard to know how long, but I do think it will be choppy. We are even seeing small shutdowns here and there in the U.S. and then obviously potentially in Europe in different spots. As far as our – the majority of our product is going through our U.S. channels. And as I said, it relates to electives, we exited Q1 down mid single-digits and expect to get at or near pre-COVID levels by the end of the year. And while that’s not a huge sequential growth, we do expect it to be somewhat choppy and it’s hard to exactly predict on a quarterly basis. But we feel good about our current guidance, as it relates again assuming there is no major shutdown, if we had everybody shutting down again like in our Q4 that would create some different types of concerns. But as long as we received spotty types of – lumpy type of shutdowns, we would expect the – we can manage through that. As far as in Europe, again, that is just product sales, you don’t do distribution over there and our current guidance does assume and get some choppiness over there and we are not looking for major shutdowns over there either.

[Adam Noble, UBS]

Great. Thanks for the question.

[Mike Kaufmann, Chief Executive Officer]

Next question.

[Operator]

We will now take a question from Lisa Gill with JPMorgan.

[Lisa Gill, JPMorgan]

Thanks very much. Good morning, Mike and Jason. Just as we think about the pharmaceutical distribution business, on a go forward basis, Mike, can you talk about maybe what you saw in the quarter around new prescription volume trends and expectations, we understand that people are starting to go back to the physician office, but just looking at IQVIA data, it doesn’t look like trends for new prescriptions are back to what they were historically. So you can talk about what trend you are seeing there. And then secondly, we think about your guidance and think about your pharmaceutical distribution component, can you talk about your expectation for biosimilars in your numbers? Do you have an expectation that that’s going to be a positive for you for this fiscal year and how do we think about potential margin differentials?

[Mike Kaufmann, Chief Executive Officer]

Yes, I will just start with the biosimilars first and then move on to the RX trend. We do continue to see biosimilars gain momentum with increased adoptions across multiple sites of care. And we have been successful working with the suppliers and our customers. In this area, we think we are really well positioned to distribute and provide services both upstream and downstream to the biosimilar players. Generally, biosimilar margins are similar to branded margins. It depends on the individual supplier and the product. There are some opportunities when you are able to move share through your GPOs and stuff to make some potential extra margins on that. But generally, as I said in the past, the real margin opportunity for us in biosimilars over the mid to long-term would be as if they get an interchangeable designation. And then now I think that will increase the opportunities for us to really make what I would say more meaningful contributions to our bottom line. So, while we continue to be very excited about the future potential for biosimilars they have really not at this time reached a level of materiality for us. And then flipping to your other question around RX trends, I think the first comment I would make is the real resilience of the pharma segment in general. This is a business that it seems like whenever we go through large challenges in the U.S., it’s a business that continues to, while it may have some headwinds, continues to be very resilient to the overall marketplace. Now, we also know in our pharma segment that includes our nuclear business, which as Jason mentioned, was coming back nicely in the quarter and tracking well. So, we are glad that we maintain both the people and the resources and commitments there, because we did see that bounce back still below prior levels, but bouncing back nicely. As far as your comment around the IQVIA data, actually I would say that what we are seeing is that our general business tracks pretty closely to it around both new RX generics etcetera. So we are not really seeing any trends within our business that I would call out that are much different than what we are seeing in the overall IQVIA data.

[Lisa Gill, JPMorgan]

Okay, great. Thank you.

[Operator]

Now, moving to Elizabeth Anderson with Evercore.

[Unidentified Analyst]

Hi, this is [indiscernible] for Elizabeth. Just a quick question on Cardinal Health at-Home, could you give us a sense for kind of how you see demand trending as you progress through 2021? Thanks.

[Mike Kaufmann, Chief Executive Officer]

Yes, this is a business we continue to be super excited about. As we have said a couple of different times, it’s one of those areas that we have called out as one of our strategic growth areas with both specialty, our services businesses and Cardinal Health at-Home, we are a leader in the space and we intend to stay that going forward. And so we did see very nice revenue trends in that business, we continue to make investments in that business specifically to continue to grow and have a very nice both mid and long-term view of that business. So, we remain excited about the team, our resources, the pipeline of opportunities we are working on feels really good in that business. Next question please.

[Operator]

We will now move to our next question and we’ll hear from Eric Percher with Nephron Research.

[Eric Percher, Nephron Research]

Thank you. I want to ask for a little bit more detail on the nuclear business. And I am curious to hear if some of that strength has been in specific areas across cardio or neuro or onco? And has that been a pretty good forward indicator for upticks in volume and maybe getting back to the new scripts you are talking about?

[Mike Kaufmann, Chief Executive Officer]

Yes, it’s a great question. We have seen a little bit of difference between onco coming back faster than cardio. So, we do a lot of work in both those phases in our nuclear business. And really, as we expect it, it has bounced back nicely. But to your point, what we have seen both in nuclear and in our specialty business is that onco has bounced back much faster than other ologies whether it be cardiology, rheumatology, nephrology, but particularly to nuclear, our cardio business has bounced back a little bit slower than oncology.

[Eric Percher, Nephron Research]

And was there cost reduction there that may come back as you get back to full speed?

[Mike Kaufmann, Chief Executive Officer]

Actually, it’s a business that is pretty fixed cost business. And so we did not take any – we took appropriate cost reductions. But I wouldn’t say we took aggressive cost reductions, because we really believe in that business over the long-term. We think it has a very nice pipeline of projects we are working on with manufacturers for clinical trials the theranostics area we think is a real growth area for us. So we decided essentially as we kind of talked about last quarter, just to hold on to both – our people, because the rest of our assets, being whether it’s our manufacturing facilities with our cyclotrons or individual pharmacies, which still needed to be staffed. We didn’t make extra aggressive cost reductions there. And so it’s nice to see it bounced back and delivered the type of results that we saw in our Q1.

[Eric Percher, Nephron Research]

Thank you.

[Mike Kaufmann, Chief Executive Officer]

Next question.

[Operator]

And our next question will come from Ricky Goldwasser with Morgan Stanley.

[Ricky Goldwasser, Morgan Stanley]

Yes. Hi, good morning. One question related to specialty, obviously, there was some big news on Biogen yesterday and we are getting questions from investors and how should we think about drugs like that is potential contributors to your business? Should we think about it as flowing through core distribution through specialty? And then also any thoughts about a potential role for Cardinal in distribution of COVID vaccine once it’s available for the general population?

[Mike Kaufmann, Chief Executive Officer]

Yes. As far as the specialty products, I would say this is – what I really like about our position is we can manage both. We have the capabilities for a manufacturer to choose going through our pharma distribution business. Obviously, we serve one of the largest chains, the largest grocery chain, largest mail order insurer. So we have got a lot of strong customer base as well as a strong presence in the acute space that our pharma distribution business has the reach to be able to match specialty drugs that way and then also with our specialty business, they can go that way. So, that’s something that we feel really good about that. We talk to manufacturers all the time and can work with them in either way. A lot of manufacturers, it depends on who the ultimate customer is and who they are trying to reach on which one they may choose. And sometimes that they will choose both, depending on certain customers will go one way and other ones will go the other. So, it’s hard to specifically talk about any individual drugs. We don’t really like to do that. But in terms of having the capabilities, I am confident that we can do that anywhere, even up until including, if it’s a smaller company that’s launching a drug and need services all the way from soup to nuts. The third-party logistics business we have is from performing incredibly well in our specialty space. So, someone that needs customer service, shipping, billing collections, etcetera we can do that too. As far as the COVID vaccine, as you know, as far as Phase 1 has been, one of our competitors has been chosen to do that in Phase 1. We continue to have daily conversations with the folks in the government around being part of it. We have the absolute capabilities to do it. We have been shipping many different types of vaccines for years. So, we have both ambient and cold chain storage capabilities and shipping capabilities to do that. And my belief at least from what I think is probably best from making sure that the product is available for our customers and the fact that we are going to our customers every day is that down the line, I think it would make the most sense for all the key distributors to be part of the Phase 2 of this when the products become more readily available and we stand ready to do that when that happens.

[Ricky Goldwasser, Morgan Stanley]

Thank you.

[Jason Hollar, Chief Financial Officer]

Next question?

[Operator]

And our last question today will come from George Hill with Deutsche Bank.

[George Hill, Deutsche Bank]

Hey, good morning, guys. Thanks for sneaking me in. And Mike, I apologize if you touched on this already, but as you think about the guidance for the balance of the fiscal year, can you quantify what your guidance implies in the core drugs business I guess as a percent of return to baseline from pre-COVID like I guess the guidance assume that we get 95% back, 98% back, just be interested in any color you could provide around that?

[Mike Kaufmann, Chief Executive Officer]

Specifically, well, I can talk specifically to pharma, we really feel like we are tracking very similar to the IQVIA data and that RX trends, remember our year end being June 30 would be at or near pre-COVID levels by the time we exit the year. And so that’s kind of how we would see it progressing over the next three quarters, again with the caution of being some potential lumpiness as things happen specific to RX’s. Does that answer your question, George?

[George Hill, Deutsche Bank]

Yes, it does. And maybe if I could just do a quick follow-up, one of the things that we have also seen from the IQVIA data that flu vaccine volumes have been strong, I guess have you guys participated in that and the kind of the derivative follow-up there, have you seen any change in mix as we think about kind of what is been going on in the drug business over the last 3 to 6 months?

[Mike Kaufmann, Chief Executive Officer]

Yes, it’s an interesting question. It’s flu vaccines have been significantly up this year and we do distribute those and we have distributed significant more blue vaccines this year than we have in historical years. Probably, for the combination of the fact that more people are getting vaccinated as well as practicing distancing, wearing masks, washing hands, etcetera, we would expect much lighter flu season this year than historically, but we are not seeing any big necessary mix changes in our pharma business at this time, but we are keeping an eye on it, because as different physicians get back into work and people start visiting them, we may see a little bit of mix, but right now, nothing I would call out as material. But again, I just keep focused on that where we do expect it to be nonlinear, a little bit lumpy over the rest of the year.

[George Hill, Deutsche Bank]

Helpful. Thanks, Mike.

[Operator]

And ladies and gentlemen, this will conclude your question-and-answer session. I will turn the call back over to Mike Kaufmann for any closing remarks.

[Mike Kaufmann, Chief Executive Officer]

Yes, I want to thank all of you for joining us this morning and then on behalf of all of us at Cardinal Health, I hope you and your family stay safe and well and we look forward to speaking to all of you that sometime soon. Take care.

[Operator]

Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation and you may now disconnect.