Cardinal Health Inc (CAH) — Q3 2026 Earnings Call Transcript

Good morning, and welcome to Cardinal Health's Third Quarter Fiscal '26 Earnings Conference Call, and thank you for joining us. With me today are Cardinal Health's CEO, Jason Hollar; and our CFO, Aaron Alt. You can find this morning's earnings press release and investor presentation on the Investor Relations section of our website at ir.cardinalhealth.com. Since we will be making forward-looking statements today, let me remind you that the matters addressed in these statements are subject to risks and uncertainties that could cause our 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 our discussion today, the comments will be on a non-GAAP basis, unless specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release. For the Q&A portion of today's call, we kindly ask that you limit questions to one per participant so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason.

Thanks, Matt, and good morning, everyone. We are pleased to report another strong quarter for Cardinal Health, building on the momentum we displayed over the past few years. This quarter's performance highlights the durability and resilience of our business and the team's disciplined execution. The results reinforce our conviction in the company's growth trajectory and ability to deliver long-term value creation. Our underlying operating strength continues to be led by our largest and most significant business Pharmaceutical and Specialty Solutions, and is amplified by contributions from our higher-margin growth businesses. Within Pharma, we delivered strong growth, highlighting the strength of our core. We continue to see benefits from our strategic focus on expanding our capabilities across Specialty, both downstream of providers and upstream with manufacturers. We are progressing the expansion of our MSO platforms, in particular with the Specialty Alliance's multi-specialty offerings, delivering differentiated value to a growing network of physicians and enhancing patient care and access. The integration of Solaris into the Specialty Alliance remains on track, and we are taking actions to realize synergistic benefits across our portfolio. In GMPD, we continue to execute against our improvement plan. Our focus on simplification and cost optimization initiatives is producing tangible results, and we continue to see notable strength in our portfolio of Cardinal Health brand products. Our deliberate actions to simplify operations, enhance supply chain resiliency and drive commercial excellence remain strategic priorities as the business navigates the dynamic tariff environment. Our other growth businesses, at-Home Solutions, Nuclear and Precision Health Solutions and OptiFreight Logistics continued to deliver robust results. Their sustained performance is a direct outcome of our continued strategic long-term investments in these areas, which are aligned with a favorable demand environment and positive secular trends in faster-growing areas of health care. The collective strength and sustained momentum across the enterprise, including our financial position, gives us the confidence to again raise our full year outlook for fiscal '26 and highlight our expectations for continued momentum in fiscal '27. And with that, I'll turn it over to Aaron to review our financials and outlook.

Thank you, Jason, and good morning. Our team delivered strong financial results in the third quarter, reflecting positive and broad-based demand, operational execution and loyalty to our disciplined capital allocation framework. Our strong operational performance was supplemented by positive discrete tax planning benefits below the operating line and continued share repurchase activity. Given our confidence in the remainder of the fiscal year, we are pleased to be raising our full year fiscal 2026 non-GAAP EPS and adjusted free cash flow guidance. Let's begin with a review of our consolidated third quarter results. Total company revenue increased 11% to $61 billion. This growth was driven by strong demand in our Pharmaceutical and Specialty Solutions segment and in Other. Gross profit grew 18% to $2.5 billion due to benefits from our acquisitions and segment performance. While we maintained our focus on cost management, we also invested in the business with SG&A, inclusive of the impact of our M&A, increasing 17% on a headline basis. When you adjust for the impact of the M&A, our SG&A growth was 7%, reflecting increased volumes and purposeful investments in teams and technology across our business. The combination of these results led to an 18% increase in enterprise operating earnings to $956 million. Moving below the line, we recorded net interest and other expense of $117 million for the quarter driven primarily by the increased financing costs associated with prior acquisitions. Our non-GAAP effective tax rate for the third quarter was 10.2% due to the benefit of discrete tax planning items in the quarter. Included in our Q3 ETR was a multiyear benefit that contributed approximately $0.35 for the quarter. Average diluted shares outstanding were 236 million shares. This reflects the positive impact of the completion of our second quarter ASR program in January as well as the launch of an additional $250 million share repurchase program in the quarter, which was completed in April. This brings our fiscal year '26 total share repurchases to $1 billion, exceeding our fiscal year baseline target by $250 million year-to-date. The net result of these factors was third quarter non-GAAP EPS of $3.17, representing 35% growth. Diving deeper into the businesses, the Pharma segment delivered a strong quarter. Segment revenue grew 11% to $56.1 billion. This was primarily driven by existing customer growth across the portfolio. We continue to see strong overall pharmaceutical demand across product categories, including specialty, generics and consumer health. Within brand, volume growth also remains quite healthy though we did observe some fluctuations in mix that impacted the overall revenue line between GLP-1s, IRA changes and generics. Of note, during Q3, GLP-1s added 6 percentage points to our revenue growth. GLP-1 revenue growth remained robust at over 30%, but moderated from the prior quarter. The growth from GLP-1s was generally offset in the quarter by a 6 percentage point impact to revenue from Inflation Reduction Act WAC pricing adjustments. Segment profit growth outpaced revenue growth significantly, increasing 18% to $784 million. This strong result was primarily driven by contributions from brand and specialty products. As previously shared, we maintained our economics on distribution contracts notwithstanding the impact of WAC changes. We also saw positive performance of our generics program, and we're pleased to again see consistent market dynamics. I want to highlight how our teams adeptly managed through the increased operational complexity resulting from heightened winter storm activity during the third quarter, a testament to the agility of our workforce and fundamental durability of our business model. As a matter of financial transparency, I will note that on a GAAP basis, earnings were impacted by a $184 million pretax goodwill impairment charge related to our Navista business. The noncash impairment charge was primarily due to changes in the risk profile of the business plans, resulting in an increase in the discount rate. These changes reflect business model updates and baseline operational performance. The impairment does not affect our non-GAAP results. Our strong positive outlook for our Specialty business is unchanged. We are pleased with the above-market growth we are seeing in Specialty, including over 20% revenue growth in the third quarter, and we continue to expect our Specialty revenue to exceed $50 billion in fiscal 2026. In our GMPD segment, revenue was $3.1 billion. This was generally flat to prior year reflecting lower distribution volumes, offset by Cardinal Health brand growth. We were again pleased with Cardinal Health brand performance, which grew over 5% in the U.S., including timing shifts into Q2 that we called out last quarter. GMPD segment profit decreased to $25 million due to the adverse net impact of tariffs. That said, our segment results reflect solid underlying operational performance, and the team remains focused on executing our improvement plan driving cost efficiencies and managing the supply chain resilience to serve our customers effectively. As you are aware, our tariff exposure is concentrated in the GMPD segment. In February of 2026, the Supreme Court ruled tariffs imposed under the International Emergency Economic Powers Act unlawful, and work is underway to establish a refund process. Uncertainty remains in the timing and administration of refunds, and we have not recognized any financial impact in the quarter nor reflected potential impacts in our updated guidance. To date, we have paid approximately $200 million in IEPA tariffs and previously noted sharing in these impacts with our customers. As a result, if circumstances change and become more certain, we would anticipate the potential future net benefit to Cardinal to be about half of that $200 million primarily driven by the repayment of the IEPA pricing that we've taken to our customers. Turning to our other growth businesses—at-Home Solutions, Nuclear and Precision Health Solutions and OptiFreight Logistics—we saw strong results. These businesses represent a key element of our long-term growth expectations. Segment revenue grew 31% to $1.7 billion and segment profit grew 34% to $179 million. This performance was driven by robust demand across all three businesses and the acquisition of ADS. The integration of ADS into our at-Home Solutions business is progressing well, and this combination has created a powerful platform for patients with chronic conditions that supports and can be supported by other parts of our business. Our Nuclear and Precision Health Solutions business is executing well and again saw over 30% revenue growth from Theranostics, a key area of innovation and investments. OptiFreight Logistics continues to deliver its unique value proposition, helping health care providers manage logistics with greater efficiency and cost effectiveness, growing revenue nearly 20% in the quarter. Now turning to the balance sheet. Our capital deployment priorities remain consistent: investing organically in the business for long-term profit growth, maintaining our investment-grade credit rating, returning capital to shareholders and opportunistically pursuing value creation through strategic M&A. We ended the quarter with a cash position of nearly $4 billion after generating $1.7 billion of adjusted free cash flow in the quarter and taking several actions that align with our disciplined framework. We continue to invest heavily into the business with CapEx of $385 million so far this year across all of our businesses. We prepaid $100 million on our outstanding term loan, further reducing our Moody's adjusted leverage ratio to 3x. This places us comfortably within our target leverage range of 2.75 to 3.25x and demonstrates our commitment to our BAA2 rating at Moody's. As I noted, we also returned capital to shareholders through an additional $250 million accelerated share repurchase. Let's talk about the rest of fiscal '26. Our strong performance through the third quarter and our confidence in the fundamentals of our business leads us to raise our non-GAAP EPS outlook for the full year to a range of $10.70 to $10.80. That is a $0.50 increase at the midpoint, made up of approximately $0.13 from operational strength at Pharma and in our other growth businesses and the remainder below the line. This new range represents annual EPS growth of 30% to 31%. In pharma, we expect our fiscal 2026 revenue to come in at the lower end of our 15% to 17% range, reflecting the continued strong overall volume growth and the mix dynamics within brands that I referenced earlier. For segment profit, we are pleased to raise and narrow our profit growth outlook to 22% to 23%, an increase from our prior range of 20% to 22%. This change reflects our performance through the third quarter and is indicative of our confidence in the segment's continued operational execution with anticipated high teens profit growth in the fourth quarter at the midpoint. As you model the remainder of the year, please keep in mind that we have not fully lapped our large pharma wins from fiscal '25 and the GIA acquisition. Consequently, Solaris will be the primary inorganic driver to account for in your year-over-year comparisons. Additionally, I will note we are onboarding distribution volumes for GI Alliance and Solaris during Q4, which are reflected in our guidance. For the GMPD segment, we are reiterating our revenue outlook of 1% to 3% growth and holding our profit guidance to $150 million. We remain pleased with the progress against the GMPD improvement plan and are encouraged by both the consistency of our Cardinal Health brand growth and tangible impact of our simplification strategy. With our other growth businesses, revenue guidance is unchanged, projecting the full year between 26% to 28% growth. However, we are increasing our profit growth guidance to a range of 36% to 38%, up from 33% to 35%. This positive revision is driven by strong performance across all three growth businesses to date. As you model the remainder of the year, please continue to remember that we have lapped the acquisition of ADS in April, which will result in more normalized Q4 growth. Focusing below the line, we are updating our outlook for interest and other to approximately $340 million up from our previous estimate of $325 million. This is due to some Q3 adjustments within the other income and expense line, the majority of which was offset in tax and net neutral to the enterprise. Additionally, as a result of the discrete planning benefits in Q3, we are lowering our expected non-GAAP effective tax rate for the full year to approximately 19%, down from our prior range of 21% to 23%. Reflecting the impact of our share repurchase activity, we are updating our outlook for weighted average shares outstanding to approximately 237 million shares from our previous guidance of 237 million to 238 million shares. Finally, we are raising and narrowing our full year adjusted free cash flow guidance to a range of $3.3 billion to $3.7 billion from our previous guidance of $3 billion to $3.5 billion, which reinforces the robust and resilient cash-generating capabilities of our business model. In summary, our third quarter results demonstrate the broad-based strength of our business and the progress we are making against our strategic objectives. Before I close, I'd like to share some initial thoughts on fiscal 2027. The headline is that we remain confident in our long-term targets, and we'll continue to assess the various puts and takes for next year as we progress further through our annual planning process. We look forward to sharing details of our fiscal 2027 outlook during our fourth quarter earnings call, but before then a few items of perspective. While the health care landscape and regulatory environment remain dynamic, we have consistently demonstrated an ability to navigate change, reinforcing the durability and deep resilience of our model and our enduring value proposition. In our Pharmaceutical and Specialty Solutions segment, we anticipate positive demand and demographic trends to persist, supported by strong ongoing operating performance. There are several positive items informing our views. The scale and efficiency of our pharmaceutical distribution operations and our growing position in Specialty, including Specialty distribution, our MSO strategy and biopharma solutions. We will see benefits from the annualization of the Solaris acquisition in the beginning of the fiscal year and anticipate benefits of continued synergy realization. The three businesses in Other are exceptionally well positioned to benefit from secular trends and to win in high-growth innovation areas like Theranostics. We plan to continue to strategically invest and position ourselves to capitalize on those trends. In our GMPD segment, the successful execution of our multiyear improvement plan is on track and gives us confidence in our continued potential to unlock value in this business. We continue to monitor the dynamic tariff environment and broader macroeconomic factors, including fuel and commodity exposure with improved ability to navigate change as a result of our multiyear focus on simplification and efficiency. All of this is supported by the fact that we are completing our third year of long-term, sustained investment in our businesses to ensure that the foundations of future growth are built before we need them. Below the line, we'll have the comparison to the discrete tax benefits this year while continuing to pursue opportunities to drive durable improvements in our tax position. We expect another year of robust cash flow generation and will be sticking to our knitting with respect to our disciplined capital framework, which creates opportunity for accretion through our baseline share repurchases. In closing, we are confident in our ability to achieve our updated higher guidance for fiscal 2026. Our priorities are unchanged, and we are executing against them. Our team is committed to our vision and will remain focused on its achievement while investing for long-term growth and value creation. With that, I'll now turn the call back over to Jason.

Thanks, Aaron. Our Pharma segment once again led our performance, providing proof points of our strategy to strengthen the core and expand in Specialty. Our continued focus on the core with investments in infrastructure, technology and our people are delivering measurable improvements across the network. As an example, we continue to invest in our existing distribution centers through automation and productivity initiatives, which both improves our cost and expands our capacity. We are achieving record high service levels, which is a testament to our employees and the investments we've made focusing on the core. We continue to see consistent dynamics in generics with our Red Oak partnership and continue to have best-in-class performance in the strength of our generics program. Specialty continues to be an increasingly important driver of our strategy and results. Upstream, our biopharma solutions business is advancing its momentum, providing critical services to our pharmaceutical partners, evidenced by three new pharmaceutical therapies that our SYMEXYS patient support business onboarded this quarter with another ten scheduled to be completed over the next two quarters. This growing pipeline underscores the trust and value we provide to manufacturers, bringing life-changing therapies to market. We continue to see opportunity from our multi-specialty MSO strategy within the Specialty Alliance, which is proving to be a key differentiator in the marketplace, generating value for community-based physicians and their patients. Since last quarter, we closed three tuck-in acquisitions within the Specialty Alliance, adding physicians to our network and further extending our geographic reach into our 33rd state. Our model continues to unlock value through the synergies we create across our businesses. For instance, Specialty Networks and the Specialty Alliance are now partnering to support a pharmaceutical company on a multiyear study focused on understanding real-world outcomes for patients receiving care at community gastroenterology clinics across the country. Specialty Networks will perform the analysis, showcasing how we connect our vast network of partners, physicians and patients to create long-term differentiated value. Turning to GMPD, we continue to demonstrate disciplined execution and make progress on our ongoing improvement plan. The team remained focused on growing Cardinal Health brand and relentlessly simplifying operations, and we made tangible progress on both fronts during the quarter. With the execution of our 5-Point Plan, Cardinal Health brand has now grown at least mid-single digits for five consecutive quarters, outpacing the broader market. Our other growth businesses, which remain an increasingly critical component of our long-term strategy, were again a significant driver of our performance this quarter. In at-Home Solutions, we continue to see a strong demand environment, fueled by the ongoing shift of care into the home. To support the growing demand, we are investing to expand the capacity of our network, the breadth of our offering and in new technology to drive efficiencies and customer experience. We are pleased with the integration progress of ADS, which now marks one year as part of Cardinal Health. We have successfully migrated ADS volume into our distribution centers as well as onboarded nearly 1,000 new employees and nearly 500,000 new patients. This marks a significant operational achievement that positions us for enhanced efficiency and long-term growth. We are well positioned to capture ongoing growth as evidenced by the key synergies between pharma and home health, where we are seeing strong growth of our continued care pathway program, which we announced earlier this year, with the team now serving 165,000 patients and growing nearly 20% since January. This progress is supported by our ongoing investments in technology and our core distribution footprint. To that end, we have signed a lease and are progressing with our new Sacramento distribution center, which will help us serve even more customers on the West Coast. Nuclear and Precision Health Solutions continues to demonstrate its leading position, thanks to our differentiated offerings and specialized expertise. This quarter, we announced a significant expansion of our Actinium-225 production capabilities at our Center for Theranostics advancement, which will substantially increase our capacity to support the rapidly growing demand for novel targeted cancer therapies and strengthen our ability to meet customer needs today and into the future. To date, Nuclear's Actinium-225 has supported more than 15 clinical trials worldwide reflecting broad engagement with pharmaceutical innovators, a clear indicator of our ability to execute and scale in this complex and highly differentiated field. We continue to unlock opportunities for greater connectivity between our nuclear business and our Specialty businesses, exemplified by a recent supply agreement with the Specialty Alliance, which makes our nuclear business' largest user of allusix for prostate cancer imaging. Our OptiFreight Logistics business also continues to perform well and expand its offerings, consistently demonstrating its leading value proposition for health care providers. Launched last quarter, the pharmacy solution from OptiFreight Logistics, inclusive of tech board products, Shipment Navigator and Tracking Beacon provides meaningful shipping process efficiencies and improved tracking visibility via an all-in-one platform to drive confidence, security and clarity for outbound pharmacy shipments. In closing, our results this quarter again demonstrates the clear progress we're making across the business. The relentless focus and dedication of our colleagues around the world underscores the vital role we play in ensuring critical products reach the right place at the right time for our customers, evidenced by the increased complexity our teams managed through to achieve record high service levels for the quarter. Our resilient business model and our foundational role as the backbone of the health care system give us great confidence in our ability to capitalize on opportunities ahead and to deliver sustained long-term value. With that, we will take your questions.

Can you hear me? Okay. Perfect. Just one quick housekeeping and then one broader question. First, on the housekeeping side, is there any way to quantify the accelerated SG&A investment that you mentioned in the quarter relative to positioning for future growth? And then broadly speaking, great to hear all the progress on Specialty. As you look at the portfolio now, where do you think—if there are any kind of holes or shortfalls—that you continue to see the opportunity to build out either organically or inorganically from here?

Great. Thanks for the question. Happy to address them. We did call out in the prepared remarks that while SG&A was up 17% across the enterprise overall, if you exclude the impact of the M&A, it was up 7%. And I can assure you we are being quite purposeful and disciplined in thinking through our SG&A structure to ensure that where we are investing, particularly in technology and team, as I called out, it's focused on setting us up for success going forward. With respect to the Specialty portfolio, I guess I'll start and just observe that we are really pleased with the continued strength we're seeing in our specialty business. Indeed, across the pharmaceutical demand overall. But as we think about the Specialty portfolio, that was a key contributor to the excellent results that our Pharma business had. GIA, Solaris, ION, all of the businesses that we've acquired have certainly partnered well with the existing Specialty capabilities, Specialty Networks, et cetera, and are performing as we expected when we brought them into the portfolio. As far as where to next, if your question is really about the inorganic opportunities, what I would observe is, while we will continue to be focused on Specialty, we have prioritized autoimmune and urology, and we'll remain focused there. But we are going to be quite disciplined as well: the right assets at the right timing at the right price. We will continue to lean in to support our growing Specialty platforms. Jason, anything to add?

Yes. I'd just add that we're very pleased, Aaron just used the word platform. I think that's an important distinction of the investments we've made to date. We're clearly much more focused on the bolt-ons. We believe we have the capability, the business and perhaps most importantly, the teams in place to execute this strategy. And we see that there's a lot of opportunity, not just within each of these platforms, but how these platforms work together. You even heard in this call already some of the examples of the areas that we're working, not just between the MSOs but the MSOs and the rest of the Specialty business, between MSOs and what we're doing with nuclear or our at-Home Solutions business. We have a lot of interconnectivity there, and it's all a component to our broader strategy to drive overall Specialty growth, which we reinforced again today is growing at over 20%. Still expect to exceed $50 billion of revenue this year. The only other thing to add outside Specialty—clearly our highest priority—we've been very clear on that point. The other acquisition that we've done in the last year that we just anniversaried here April 1 is the at-Home Solutions business. So the other businesses are the other areas of potential opportunity for us. Secular growth trends that are part of the market that's growing very quickly. We are very well positioned in each of those three spaces. And if the right opportunity presents itself, I would use similar words as Aaron just said: we will be very disciplined as to how we approach those opportunities. But we think the market is growing and we're well positioned.

I wanted to dive into Other. Obviously, that continues to grow very nicely, and you just reseed the guidance for the fourth quarter. Are you seeing any sort of changes in trend there that give you the confidence to do that? Or how should we think about that as we sort of think about the back half of the year and then into 2027?

Thanks for the question. We saw a strong performance across all three of the growth businesses affectionately known as Other. Revenue was up 31%. Profit was up 34%. But if you really unpack that, Jason referenced the strong secular trends, the competitive positioning we have, that's contributing to good results within the business and indeed lots of positive perspective on where those businesses are going to take us as we carry forward. Strong demand has also been a key part of why those businesses have succeeded the way they have. I would highlight a couple of things. The core business within at-Home is doing well, and it has been reinforced by the ADS acquisition. The integration that Jason referenced earlier is going very well. We had highlighted in an earlier earnings call that we had a plan with opportunities to overperform, and we continue to see the goodness coming from the at-Home business supported by the ADS acquisition. We pivoted from the integration of the supply chain and distribution to now being focused on the systems, the back office and ensuring that we're providing the best-in-class customer experience that we aspire to for the patients being served by our at-Home business. Within Nuclear, that Theranostic growth just keeps coming. The investments that we're making in supporting the 70 different therapeutics that are coming our way really have created a pipeline of success for the business, some of which we're now starting to see, particularly within urology and oncology. So we're excited about that. And then OptiFreight continues to perform, providing excellent services to its customers with another good quarter as well. And so we were pleased to deliver a good quarter, and this business will, of course, contribute to our raise to our guidance and achieving our long-term targets.

Great. So some of the commentary on 2027 and the moving pieces was helpful. When we dig into that core pharma and Specialty distribution segment and the AOCI growth assumptions that we should be considering remains strong, but how do we think about sustaining momentum into 2027? What would make you deviate from the long-term growth algorithm in that segment? And how do we kind of reconcile with underlying utilization trends that you're seeing or you're expecting into 2027? And then also those continuing Specialty drivers?

A couple of thoughts there. First, we remain confident that our business is quite resilient and has demonstrated durability notwithstanding a fair amount of change in the industry. And I think it's important to keep that in mind as we talk about fiscal '27 as well. That's part of why we're able to express the confidence in the long-term targets that we have really across the enterprise, but particularly within the pharma business. We have a strong core to our business. We have seen consistent positive demand; we saw it again this quarter. The business is supported by positive demographic trends that aren't going away as we get one more quarter into our business. And so we think those are all things that are going to support the trajectory of that business. We will also continue to benefit from the Specialty expansion that Jason and I have just commented upon. One thing we're particularly excited about as well is how the pieces are all now starting to fit together: Specialty Alliance working with Nuclear, Biopharma really working with the broader portfolio. So there's a lot of goodness there within the pharma business that we think is supportive of the long-term target. And of course, we'll provide more perspective as we get through our planning cycle at the Q4 earnings call.

I wanted to stick with Pharma and Specialty. I'd like to get a little bit more on Navista and ION and the impairment. And I know you called out changes to the risk profile relative to a business plan. Can you give us a feel for whether that was near-term versus long-term changes? And does it alter at all the oncology MSO strategy or economics of the platform?

Sure. Thanks, Eric, and I'll go ahead and start and then turn it over to Aaron to walk through the mechanics. First of all, I'll just reinforce what Aaron already said: the broader strategy, we're very pleased with the execution, not just this quarter but this year and the last several years. Exceeding $50 billion this year and continuing to see over 20% growth in Specialty highlights our strategy is working within the collective assets that we have put in place. I'll remind you that that 20% growth is pretty consistent with what we said over the last two quarters, which was an acceleration from the mid-teens growth that we saw in the prior several years. So we've seen our Specialty growth be strong and it has accelerated this year into very strong competitive positioning. Within oncology, it was even stronger this quarter, continuing on those trends as well, over 30% growth in oncology. As a reminder, Specialty has a lot of components to it. Within Specialty, MSO is just one component and within MSOs, oncology is just one component. And then we have Navista within that. Navista is a component of that, and it was a combination of an acquisition but also organic business. We had a couple of different strategies in place. We had the equity strategy working with physicians to create long-term cooperation and collaboration agreements with an equity component. And then we had the non-equity where it was more transactional and contractual. What we've seen is that while physicians like to have choices and different alternatives, ultimately the market is voting for the equity arrangement, and that's where the market has moved. That's why we're prioritizing our strategy to that component. It does not change the broader strategy of either the MSO strategy or the broader Specialty strategy. The underlying data certainly supports that. It's all coming together in a very accretive way. But with this pivot in strategy, it did have some knock-on effects that Aaron can walk through.

I won't belabor the point, just to observe that this is one piece of Specialty and one piece of oncology, and we're keeping score on ourselves. As we've always committed, we would tell you what we're going to do, do it and report back. In this case, we have increased the discount rate applied to a small part of the oncology business. But we remain pleased with the contribution that the specialty M&A is adding to our portfolio overall—the roughly eight percentage points or so within fiscal '26, consistent with the prior guidance that we've given.

Aaron, big free cash flow raise with a quarter to go. You mentioned or called out that revenue was maybe a little bit lower than your expectations. I think you called out IRA and maybe a little bit from GLP-1. We know that IRA is maybe more a headwind on the revenue side, but you were able to raise the free cash flow guidance. Can you talk about what gave you the confidence for what you're seeing? Was it better than expected? Was there a mix shift with a movement more towards those IRA drugs that was actually a positive contributor to free cash flow? Was it more generics? Just trying to understand what mix shift, if at all, impacted the free cash flow guide that was maybe a little bit better than you expected?

Allen, thanks for the question. What I would observe is that it's amazing how what gets measured gets done. I can't point to just one factor across the enterprise as being the single source of success for our ability to generate the adjusted free cash flow we did or indeed drive the increase of the guidance. It was driven really across all of our businesses with the management teams focused on the intersection between our customer service levels and our inventory positions, ensuring that we're collecting what's due to us from an AR perspective and focusing on the appropriate levels of AP with our suppliers. There were a series of initiatives that have been underway now for several quarters that are really generating the success that we are able to call out. I do want to seize on your question to maybe answer a point I haven't gotten yet or emphasize a point in the broader pharma results, which is you called out the revenue. The revenue growth within the pharma business was 11%, which I understand some were maybe expecting a little bit more than that. It's important to understand that we're in a quarter where a couple of things are going on. Firstly, of course, we have the IRA WAC changes, which were a negative relative to the overall growth rate. And similarly, GLP-1s are also in a period of change. While GLP-1s are growing extensively—still over 30%—they're growing less than they were before. So we saw a 6 percentage point uplift from growth within GLP-1s offset by a similar level of downdraft from IRA WAC. And there are some other brand dynamics like LOEs to generics, which is a positive for profit. That's really what's going on within the revenue line: even though demand was very strong, and the profit line was very strong, those mix dynamics impacted revenue. So I just wanted to take this opportunity to reference what was going on there.

Jason, I just want to follow up on some of those comments you were just making because I think there is obviously a lot of focus on the IRA impact on the pricing and the revenue line. I guess the concern that some may have is, as these prices come down, it seems like on the fee-for-service side, you're clearly being made whole, but maybe some are concerned about the buy margin on the 2% discount and then ultimately downstream when you look at practice profits if the price of these drugs are coming down, whether these practices inherently become less profitable. Can you get squeezed in any way at the distributor level from the IRA price reductions beyond just the fee-for-service agreements? I think that's what we're all trying to figure out: the different components of the profitability there and if there's any vulnerability?

Yes. Thanks for the follow-on question on that. Let's break it into the two components because I think you're right to talk about this in two different pieces. Aaron's comments were very much focused on the distribution side. That's by far the biggest component of our business, and it's relevant to start there. We remain incredibly confident in our underlying business model. When you think about the fees that we receive today for the services we provide, that should not change. The services are certainly not changing, and we remain the lowest paid component of the supply chain. So we feel very good about continuing to receive the fees that we currently receive for that work. As a reminder, we announced the completion of the renegotiation of these contracts at the very beginning of the quarter at an analyst conference. So this was all done prior to the quarter. It executed exactly consistent with that announcement because those agreements were already in place. Very similar to what happened with the insulin repricing the year before that. So there's a lot of precedent and frankly it just makes sense, and it is consistent with being right to renegotiate the vast majority of our contracts for situations like this. So I continue to feel very, very confident with that. Now when you talk about other components of our business, MSOs in particular, as a reminder, the drug spend for our roughly $4 billion to $4.5 billion of revenue in MSOs is pretty diversified. We have only about one-third of that being drug spend. And within that, we have a very diverse payer mix. So we feel very confident that the implications to our MSOs are going to be very manageable, if any at all, because ultimately, what we're all looking for is exactly what is the administration's intent for providers as it relates to these go-forward initiatives. We don't think the intent is to harm community providers that provide excellent service to their patients, excellent care at the lowest cost already today. So it all makes sense for them not to be harmed, but we recognize actions need to be taken. Even if they do occur, we believe this is very manageable for Cardinal Health.

I'm going to dovetail right off of what Glen just asked. How would you guys characterize your fee-for-service pricing power as it relates to distribution agreements, especially in the face of some falling drug prices? And then as a follow-up, how have you guys analyzed that in the face of BFS risk as that's supposed to roll out and get recalculated in the back half of this year?

As it relates to unified service fees, I think it's just too early to talk about the exact implication for the whole industry. This is far from just a distributor type of process change, if at all. We feel very comfortable with the value we're providing. Similar to the initial shift to fee-for-service in the first place, which maintained those economics, we would expect there to be a similar type of transition if a transition is required. In terms of pricing power, it's quite simple. We have low single-digit margins; branded products are at the low end. This is a blended margin. We have the right to renegotiate these rates. We get paid a certain dollar fee today for the service we provide. It's clearly the best value for all those in the supply chain or they wouldn't be using the distributors in the first place. So nothing changes in terms of the value we're providing tomorrow. We fully expect, and we fully demand to be paid the same amount going into the future.

I appreciate the early comments on next year at this stage. I'm trying to boil down some of the business commentary and the below-the-line commentary. I guess I'm trying to understand whether you're suggesting that the benefits from lapping deals and ramping synergies you think could potentially offset the below-the-line items that we're going to be comping against as we move into next year and therefore leave the kind of typical EPS long-term growth rate intact? Or do you think people need to be modeling maybe something more conservative at this stage? I just want to make sure I understood that right.

It's a great question. Our job is to manage the entire income statement year-over-year. What I want you to take my comments as being is providing initial perspective that we believe there are good reasons to believe in our long-term targets overall—the 12% to 14% non-GAAP EPS growth. We've talked about some of the operating reasons: demand, demographics, industry positioning, et cetera, all supportive of the overall position. As we do in every year and every quarter, we will continue to go looking for ways to optimize our below-the-line items, whether it's finding further durable ways to ensure we have the appropriate tax rate or also looking at our share repurchase plans. We have a lot of planning yet to do in our cycle but we are confident in our long-term targets.

If you can talk about what's happening and have the volumes improved in April if it was a macro thing? And then secondly, you talked about the potential clawback on the tariffs. How do you account for that? You mentioned it's potentially upwards of $100 million versus the maybe the $200 million impact. How does that get accounted for? Does that drop through the P&L? Is it something that you're reserving for on the balance sheet now? I just want to understand from an economic perspective, from a modeling perspective, from an accounting perspective, how that all works.

Sure. I'll go ahead and start, and Aaron will clean up after that. In terms of volumes, I think the underlying industry volumes are fairly resilient. One area that is not materially driving our numbers but is relevant is that we had called out in the past a large government customer, the VA, that we did lose earlier in the year. That was a relatively low-Cardinal-branded-product customer. We also had a large customer that went through a significant merger, and we did not carry over that piece of the business. Also a relatively low Cardinal-branded mix customer, which is why you're seeing over 5% Cardinal brand growth in the quarter even though the top line was a little bit weaker. So we feel pretty good about the underlying industry strength and the underlying positioning we have, and we're seeing continued strength on the most valuable parts of our business, which is Cardinal-branded product. We're at the best service levels we've ever been at and are in a strong position. As it relates to the tariffs, the message should be simple and clear: we have the potential for a $200 million refund based upon the tariffs that we paid up to the IEPA announcement. None of that has been put into our P&L at this point in time. Aaron commented that we have directly received price increases from our customers over the last year as a result of these tariffs. We would expect to share about half of any recovery with our customers, implying that, if realized, we may have roughly a $100 million earnings benefit. But it is still too uncertain for us to put through any of that into the P&L. So we have not recognized any of that.

Yes, I'm just going to emphasize that last point. We haven't recognized impact in Q3. We've also provided an update to our guidance reflective of that. The amount of any recovery, the manner by which the recovery occurs and the timing of the recovery are all uncertain at this point. I'm not going to get ahead of ourselves and provide you with a specific accounting and treatment until we have more clarity.

And while we're on the topic of tariffs, unrelated to the tariff refund, but the ongoing tariffs that are still in place and the 232 study that's ongoing, we would anticipate that from a year-over-year perspective, there is some opportunity as it relates to tariffs for the GMPD business, but fuel prices are higher at this moment in time and that flows through to some commodity exposures within our products. These impacts are modest compared to the hyperinflationary environment we saw several years ago. We believe there is a likely operational tailwind associated with tariffs at this moment, and commodity and fuel impacts are manageable and somewhat offsetting. We'll provide more specifics when we provide our '27 guidance, but overall, we think it's manageable for the GMPD business and for the enterprise.

This is Keith in on Charles. I just wanted to go back to the IRA topic real quickly. Given that you said you expect to be at the lower end of your rev guide for pharma, is it a fair extrapolation to say that the IRA impact so far this year has maybe been a bit larger than your expectations?

No. I think what I would observe is there are a series of things going on within the revenue line or the revenue guide that we had provided, and we're trying to be transparent that as you model, on the one hand there's strong demand—which is positive—but also understand the impact of GLP-1 growth given that those are relatively low-margin dollars for us, and the impact when branded products convert to generic; we're seeing notable LOE examples this year. Those LOEs are a downdraft on revenue but a positive for profit. We're just trying to provide some of the puts and takes that are going on within that revenue line.

Hopefully I didn't miss this, but it seems like some investors believe the softer distribution volumes were tied to weather impact. That was prevalent in some public hospital patient volumes. Can you clarify whether weather was a volume headwind in either GMPD or Pharma in the quarter, and how significant that dynamic was?

Thanks for the question. We didn't dwell on that point because our team did a fantastic job of maintaining record high service levels across the enterprise in a complicated environment. There were some global supply chain challenges, of course, but weather had a slight financial impact across the enterprise. It popped up here and there—very little within our traditional distribution businesses—some excess costs associated with getting the right people in the right spot and transportation reroutes, but it was very slight and not material. The MSOs had a little more impact given the nature of physician visits and procedures; lost physician visits are harder to make up for than distribution volumes. So there was a small impact on MSOs, but overall slight in the big picture for the Pharma segment.

You mentioned that the ION distribution contract began transitioning in 2Q and the GIA and Solaris distribution contracts will again ramp this month. I'm curious how the ramp of distribution volumes have tracked versus your initial expectations? And then on the Solaris contract, I don't believe that was previously included in guidance. Can you confirm that and comment on how much of the pharma profitability guidance lift was driven by the Solaris distribution onboarding?

Yes, Daniel, we can confirm that Solaris distribution volumes are now in the process of ramping up with our Pharma business. We're pleased with that development as we were when we achieved the GIA distribution contract and the ION distribution contract as well. When we talked about acquisitions originally, we do not include the impact of distribution contracts in our financial models; that is a separate part of our business. The volumes coming in are positive, but it is late in the year—our fourth quarter—and the impact to fiscal '26 will not be material; otherwise we would have called it out. As you think about the puts and takes for next year within our Specialty business, having Solaris ramping up is a positive for our outlook.

You've got Jack Slevin on for Brian. Maybe just one: there's been some reference to energy cost and shipping trends that created headwinds in 2022. Can you speak to whether any of that applies right now given the volatility in energy prices or input costs like polypropylene? What's different now versus 2022? Is there anything to be worried about related to those trends across the business?

Sure. What's different now is the shock is more focused on oil, which takes time to filter through to products like polyethylene and polypropylene. What we're seeing is an oil shock that translates to fuel, which we commented on earlier. The excess inflation we saw several years ago was broader: container cost and international freight were by far the biggest pieces, along with high labor inflation. Since then, we've structured our agreements to be more flexible with carriers and customers. It's not perfect protection, but it's made the situation much more manageable. The product cost increases we've seen mainly involve exam gloves; that's one category where costs have increased notably. PPE is a relatively small category for us—exam gloves are less than 5% of our Cardinal-branded product—so it's manageable. Fuel impacts distribution activity and tends to show up quicker; product cost impacts take a couple quarters to flow through the P&L. We've not seen a lot of product cost inflation yet other than exam gloves. When we do see it, we'll have quarters to understand mitigation opportunities and industry pricing responses.

I'll just close on that point by observing that we're better positioned than we ever have been before in this business, and we are not backing away from our longer-term guidance with respect to the GMPD business either.

I think most of mine were covered. But I just want to circle back on two quick ones. First, on Navista and ION and the changes you're making: I want to tie the bow on this. The impairment and the changes you're making—is that 100% Cardinal-specific, about how you're going to market and how you're interacting with the MSOs? This is not a broader comment on the overall oncology or MSO marketplace, correct? Second, the discrete tax item: could you tell us what that multiyear capture was—the actual nature of that tax item?

Absolutely. As I highlighted in my comments and as Aaron referenced, this is entirely a Cardinal-specific focus on prioritization of the equity model within our MSOs. It is not a broader statement about the oncology or MSO marketplace. On the tax item, we are not in the practice of disclosing our individual tax positions. I will say it was a multiyear opportunity that we did take in the quarter, which was about $0.35 per share of benefit, as we noted earlier in Aaron's prepared remarks.

Yes. We're pleased with another strong quarter. Of course, we're looking to finish the year strong. But more importantly, as always, we're focused on the long term, doing the right things today to make sure we're successful tomorrow. So thanks for joining us today, and have a great day.