卡地納健康 (CAH) 2003 Q1 法說會逐字稿

Good morning.

My name is David and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Cardinal Health first quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer period.

If you would like to ask a question simply press star then the number 1 on your telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you.

You may begin the conference.

Mr. Fishbot (ph): Good morning.

Thanks for joining us today.

Today we will discuss Cardinal Health's fiscal 2003 first quarter results.

First of our remarks will be focused on the business segment attachment of our earnings release.

If you don't have a copy, you can access it over the Internet at www.cardinal.com.

Speaking on our call will be Bob Walter and Dick Miller.

After their formal remarks we will open the phone lines for your question where we will have Jim Malar (ph) and George Fatitis (ph) of pharmaceutical technologies and services.

As always, as we get to questions we ask that you limit yourself to one question at a time.

Before we begin, please remember today's call may include forward looking statements which are subject to risks and uncertainties which could cause actual rules to differ materially.

The most significant are in cardinal's form 10 k and 10 q reports and exhibits to those reports.

Cardinal undertakes no action to update statements.

Information regarding the identity of the persons who may be deemed to be participants in the solicitation of Syncor stockholders is set forth in schedule 14 A as filed with the SCC by Syncor on June 14th, 2002.

In connection with the proposed acquisition Syncor has filed a definitive proxy statement and has mailed that to its stockholders and card hall health filed a related registration statement.

Investors and stockholders of Syncor are urged to read it carefully because it will contain important information about Cardinal Health, Syncor and the proposed acquisition.

Free copies are available from the SCCand can also be obtained from card hall health and Syncor.

At this time, I would like to turn the call over to Bob Walter to begin today's discuss.

Good morning.

The financial momentum that Cardinal Health enjoyed last fiscal year has continued into first quarter fiscal year '03.

The results came in as we expected and they're outstanding.

Let me start by reminding you of a few things.

First of all this is the 77th quarter in a row that I have personally reported to the market on our results.

And each week we met or beat guidance.

This is a start of our 16th year in which we have received growth of 20% or greater with rising returns on sales and capital.

Frankly, it was a wonderful quarter but there were no blockbuster deals, initiatives , announcements or one time events just great solid performance.

There were highlights like the performance of our distribution and provider service segment and the automation and information service segment.

But it was just good performance without.

We have diverse earnings sources all focused on health care with good visibility with no major concentration with any one customer or business segment.

So you might say it was business as usual We delivered what you expected and equally important what our customers and Cardinal Health associates expected.

I suppose that is the exciting part of the Cardinal Health story.

We deliver what you expect and you have good visibility to the future.

Don't take my lack of support as indicative of lack of excitement about the future.

I'm feeling great about our history, or about our industry, about how we are positioned, the adequacy of resources and the opportunities we are pursuing.

We have a leading market position in every one of our businesses.

We have a broader offering than our competitors and more resources.

Dick will provide the financial details and segment rules.

I want to point out up front is something that has been the hallmark of our quarterly earnings announcements record breaking results across the businesses.

In fact we broke all the previous first quarter records in the key consolidated metrics.

Earnings per share rose 22% to 67 cents, operating revenues up to 11.4 billion, up 16%, operating earnings were $486 million up 18%.

At the same time, return on sales committed capital and equity were also new records.

We accomplished all of this while keeping our net debt to capital at only 17%.

And executing a pre-announced stock buyback program and continuing to reinvest significant cash back into our businesses.

We have a strong business model.

We focus on execution and we continue to reinvest for the future.

Our strong business model starts with solid core industry economics and a superior competitive position for Cardinal within the industry.

The industry has attractive growth and returns.

Our strategy has been built -- has been to build a wide range of services to our customers, both manufactures and providers of health care.

This is paying off.

We sit between a highly fragmented group of manufacturers and providers.

And we have an exceptionally unique vantage point from which to develop customized solutions for customers issues.

The competitive position of each of our businesses continues to strengthen.

In each area we are proving the scope and scale of what we do and extending our profitability advantages.

We have leading market positions which is reflected in our superior returns on sales and capital in each of our businesses.

Cardinal offers customers so many unique proprietary products and services by which they each create tremendous value.

Yet the additional advantage is that we pull together these unique offerings to create value for the customer.

Focusing on integration of our business is starting to show some interesting momentum.

We have more than 120 corporate service agreements in place with providers of health care that combine multiple cardinal health services representing over $1.5 billion in annual volume.

Most of those agreements combine at least three Cardinal Health services.

In the future, we will begin to report on our successes in bundled offerings in our pharmaceutical technology service area for the pharmaceutical manufacturer.

It's specific integration opportunity that, in my opinion, will be significant, is the pending acquisition of Syncor International, the leader in nuclear pharmaceutical services.

Nuclear pharmacy by itself is a great business but Frankly, there are other potentially huge benefits.

And that is in providing manufacturers a more effective way to get unique pharmaceutical pharmaceuticals to market.

Pts sales and market capabilities will play a big role in realizing this potential.

This acquisition is expected to close shortly after the vote of Syncor share holders on November 19th.

Incidentally, Syncor's core nuclear pharmacy business, along with Cardinal's nuclear pharmacy business, are performing exceedingly well.

In the coming months, we will be more aggressively about -- we will be more aggressive about articulating the full value of Cardinal Health to our customers.

You received a little glimpse of that approach in the annual report when we talked about ourselves in terms of broad capabilities not just company products and services.

The new logo signals a shift in the Cardinal Health brand.

We are going to market in the future under one name, one brand Cardinal Health.

You will hear more about that very soon.

A second core element of our business success is execution.

Our business model makes sense, we still must execute.

We have been doing that for a long time, a couple basis points improvement at a time.

This quarter results reflects that focus.

Operational improvements are going well.

Three significant examples are the integration of Benly Western almost 18 months ahead of our original plan and with Synergyies ahead of target.

Secondly, the reorganization of the medical products and service segment, which is delivering significant improvements in cost.

And, third, the change in business model to a build to order theme which has improved both margins and cost structure.

All three of these initiatives are delivering significant improvement.

And it isn't just getting more sales.

It's also about converting existing sales levels to higher profitability.

The third part of our business strategy is reinvestment.

This quarter we invested another $25 million out of current operating earnings on strategic products that will help pave the way for the future.

You will see some exciting new product introductions in both our automation and medical surgical businesses over the next few months all of which are possible because we've invested in product development in the past years.

Our capital expenditures this quarter were $70 million and that was necessary to keep our physical facilities and information technology productive and technologically current.

We are investing for the future all.

Our cash flow is superb.

We will continue to invest in our current operations acquisition opportunities and repurchase stock.

From my perspective in looking at acquisitions, as long as it's strategic, economic and culture fits are right, we're looking.

An acquisition must add value for our customers.

And we do have the management capacity to absorb addition at operations.

Overall this quarter was a continuation of the themes of the past, solid business fundamentals combined with execution and following investing.

I'm really pleased of where the businesses are.

I'll now turn this over to Dick for more details on the financial and business highlights.

Thank you, Bob.

I'm like to echo Bob's sentiments regarding this quarter's results.

As demonstrated by our numbers, particularly during these economic times, the company continues its longstanding tradition of delivering exceptional financial performance.

Before I get into the quarter, I thought I might update you on a few matters that were open when we reported our last quarter's results.

We have filed our 10k with a clean audit opinion from Ernst & Young.

Secondly Bob and I filed our initial certifications attesting to the accuracy of our reporter results.

Thirdly, we have completed the SEC's review of Cardinal's filings as part of the Syncor registration process.

As expected all these items were completed on time and without incident.

Now let me turn to the quarter.

Cardinal has delivered a record breaking quarter to start our new fiscal year.

Today I'd like to share with you my perspectives on the results for the quarter, review our balance sheet and cash flow performance, provide some comments on each of the business segments and then confirm our outlook for the remainder of the year.

Let me remind you that beginning with this quarter all financial information is reported on an apples to apples comparison, considering the impact of adopting statement 142 at the beginning of last year, our fiscal year 2002.

Simply put, we now have no goodwill amortization in either of the periods presented and our growth numbers are just those that are reported.

Additionally all my remarks exclude the impacts of items which are comprised of merger related charges incurred in the current period as a result of our prior acquisitions mainly Benly.

Let me first look on a consolidated basis.

The company once again generated the exceptional financial results that our share holders and customers and employees have come to expect.

Some key observations.

Our operating revenues increase 16 percent driven by increases across each of our business segments with exceptional performance from the pharmaceutical distribution and provider services and automation and information segments.

Productivity management which is a hallmark of our business model delivered exceptional operating earnings leverage resulting in a first quarter record return on sales of 4.26%.

Our expenses only increased 4% on 16% revenue growth and were basically flat in terms of absolute dollars in our two largest segments.

Our earnings per share rose 22% during the quarter exceeding our guidance of growing earnings per share by 20% annually.

While these results are impressive, they are not at the expense of growth to be generated in the future.

As Bob mentioned, investment spending for future growth continues with approximately $25 million of the current quarter's operating earnings, reinvested to fund R & D and strategic business initiatives across the organization.

Our confidence in the strength of our financial performance is further demonstrated in our commitment to deploy a total of over $100 million in investment spending during this fiscal year.

In addition to our investment spending, we also spent over $70 million for capital additions.

Primarily focused on increasing our operational scale and efficiency as well as keeping our I.T. systems updated.

You should expect to see our capital expenditures continue at about this level throughout the year as we continue to reinvest in our businesses.

The combination of our outstanding earnings performance and focus on leveraging capital deployed in each of our businesses culminated in record first quarter return on committed capital of 33% That's a 340 basis point improvement from the prior year.

Focused execution and attention to detail is a Cardinal tradition that has long been engrained into our business model.

This philosophy drives strong asset management and working capital efficiency across the company.

That resulted in increasing inventory turns in the quarter and first quarter record lows in receivable days of only 19 days, and first quarter record low net debt to capital ratio of only 17%.

Our return on equity increased 70 basis points from the prior year period to a first quarter record of 19%.

Which is particularly compelling considering the company's low debt levels.

September 30th our balance sheet remains as strong and conservatively positioned as it has ever been.

The company used operating cash of only $14 million for the quarter.

That's an improvement of $467 million from the prior year period despite this being a period when you might expect to see a seasonal use of cash.

While our receivables increased in the quarter by $259 million, that's only an 11% increase in a quarter when revenues grew 16%.

Especially notable were the declines in our day sales out standing in both the pharmaceutical distribution and provider services and the medical surgical products and services segment.

On the inventory side, we actually reduced inventory levels by $111 million during the quarter.This was driven by three factors.

First, as we have continued integrating Benly operations we have consciously focused on reducing safety stock levels and achieving working capital Synergies from the merger.

Our investment in large scaleable facilities has allowed us to absorb the Benly operations and free up working capital to economies of scale.

I ask you to recall that at the time of the merger, which was less than two years ago, our combined company had 41 pharmaceutical distribution is a facilities.

Today that number has been reduced to 28.

Secondly, as we expected, the shift from branded to GENERIC pharmaceuticals has reduced our investment and inventory.

We estimate the fact that the effect of the transitions that occurred in the current quarter allowed us to reduce the dollar value of our inventory investment by about $500 million.

This is all part of the reason why the shift to GENERICs is good for our businesses.

And the third reason is that there are general timing issues around when inventory gets received and paid for.

We remain confident in our ability to deliver between $900 million and $1 billion of operating cash flow for the full fiscal year consistent with previous guidance.

In summary our balance sheet and capital capacity is well positioned to continue to be a competitive asset for our business strategy.

Recognizing the value of a properly share repurchase program to deliver to our share holders the company continues its strategy of repurchasing stock.

During the current quarter approximately 6.6 million shares were repurchased, having a cost of approximately $393 million which averages out to less than $60 per share.

As of September 30th, approximately $280 million remains available under our currently authorized share repurchase program.

And over the past 12 months we've repurchased 11.7 million shares, having an aggregate cost of approximately $720 million.

Let me turn to the segments.

While the consolidated results deserve the limelight here, they are made all that more impressive by the fact that they were achieved as a result of strong balance performance in all of our business segments.

I have often said that it's not just the numbers but the underlying quality of the earnings that needs to be considered.

Let me give you some highlights that will emphasize that.

Let me start our segment discussion with pharmaceutical distribution and provider services, which represents 51% of the company's operating earnings.

This segment experienced strong revenue growth of 17% during the quarter, which was leveraged to 21% operating earnings growth and a first quarter record return on sales of 2.86%.

Some of the highlights would include we had strong revenue performance driven by 19% growth in our chain store and 25% growth in our alternate care customer classes.

The chain store and alternate care customers are approximately 47% and 27% of our distribution customer mix respectively.

Continued revenue growth to these customers who reside in the fastest growing segments of the market, coupled with the operating expense leverage afforded to us by serving them will be a primary driver of operating earnings growth for this segment.

Growth margins continue to be favorable impacted by vendor margin programs, offset by the margin impact of the continued shift to larger customers.

The Benly merger continues to pay Synergies dividend.

While expense Synergies continue to benefit our cost structure, contributing to our first quarter record low SG&A rate of 2.06%, we're also achieving significant capital Synergies by integrating our operations.

When combined with the capital efficiency generated by the switch to GENERICs and continued focus on asset management we were able to hold our committee capital flat compared to a year ago and drive our return on committee capital to an all time record 34.7% in our segment.

Let me now move to the medical surgical products and services segment which represents 27% of our operating earnings.

This segment generated a 6% revenue increase for the quarter which was leveraged to 10% operating earnings growth and a first quarter record return on sales of 8.70%.

The highlights for this segment would include our self-manufactured products represented approximately 34% of the revenue mix for the quarter.

And grew at a slightly slower pace than the growth experienced in distribution.

This is a typical trend that we see when we're adding new distribution business with our strategy of increasing the self-manufactured products as the customer relationship matures.

The reorganization that we announced in the fourth quarter last year has had a positive impact on expense leverage within the segment.

This as well as other productivity improvements drove our SG&A expense ratio to a record low 12.21%.

The expense dollars in this segment declined by nearly $2 million versus last year.

While we see the overall market growth rate for medical surgical remaining in the mid single digits, the combination of continued strong demand for higher margins self-manufactured products, cross selling opportunities with other Cardinal businesses and continued productivity enhancements will allow us to increase the earnings growth rate in this segment as the year progresses, consistent with our prior guidance.

Let me next deal with pharmaceutical technologies and services which represents 13% of the company's operating earnings.

This segment delivered strong revenue growth of 18% during the quarter.

The segment continues to embrace the Cardinal Health brand by integrating specific acquisitions and executing a cohesive go to market strategy.

Some of the highlights for the quarter, sterile manufacturing, development and analytical services as well as sales and marketing services continue to perform well.

We're very confident and excited that the strategic investments made in this segment will drive significant opportunities in the future.

The impact of the business and product mix calls upward trends to occur in our gross margin and expense ratios.

However our return on sales stayed relatively flat.

As expected, the timing of the launch certain pipeline products and staging of performance for certain strategic investments in this segment will cause the first half of the fiscal year to be slow relative to the second half.

We continue to expect earnings growth to exceed 25% for the full fiscal year.

The integration of ads and Borne Lepor (ph) both of which were just acquired in the third quarter last year is proceeding very well.

Both of these businesses made a positive contribution to earnings in the current quarter.

Since these were purchase acquisitions they also contributed to the growth experienced by the segment.

Our reported 16% operating earnings growth was negatively affected by the impact of a net one time benefit in the first quarter a year ago.

That was primarily related to a pricing adjustment for claims against vitamin manufacturers for amounts overcharged in prior years.

This negative impact was offset by the additional earnings from Magellen and Borne Lepor (ph) in the current quarter such that on a fully adjusted basis the organic growth rate remained at 16%.

Last but certainly not least is our automation and information services segment which represents 9% of the company's operating earnings.

This segment had a fantastic quarter with strong revenue growth of 24% which was leveraged up to 55% operating earnings growth and a first quarter record return on sales of 34.51%.

The key highlights in this segment resolve around the operational changes that we made.

As a point of reference, remember it was a year ago that we implemented the changes to a made to order manufacturing process and streamlining sales and customer service processes.

As I look back at that decision which changed the way we operate and control this business, it was clearly a great decision for our people, our customers and our share holders.

When we announced the change last year we estimated that the impact would be an improvement in our return on sales of 115 basis points.

That was split between 55 basis points of margin improvements and 60 basis points of expense reduction.

I'm happy to report that we are excel well exceeding those expectations.

To illustrate that point we need to look no further than the current quarter.

Gross margins aided by a strong product mix increased 394 basis points, while operating expenses declined 308 basis points.

Importantly, the improvements don't stop with our profitability.

The changes we have made have also contributed to enhanced working capital management with lower investments in receivables and inventories, which yield improvements in our return on committee capital to 27.1% versus 20.3% last year.

Picksisis (ph) is the pioneer and they continue this legacy of innovation and the new products and enhancements that they bring to the market.

Their service offerings coupled with the chronic shortage of health care professionals in the urgent need for patient safety initiatives to reduce the incidents of medication errors will continue to be the primary drivers of growth in this segment.

In closing I'd just like to comment on our outlook for the rest of the year.

We finished our fiscal 2002 with a lot of momentum throughout our businesses and we've seen that momentum man fast itself in our outstanding first quarter results.

While the overall economic situation continues to be unpredictable, we believe that the health care industry in general and our place in that industry specifically give us an extremely positive position for the future.

We enter the second quarter with a great deal of confidence and our ability to continue to deliver the consistent balance financial performance that you have come to expect from Cardinal.

We remain comfortable with the guidance of the year that we provide during our August investor conference.

That' calls for 20% earnings per share growth supported by strong growth in performance in each of our operating segments along with rising returns on sales and capital with continued investment spending.

Thank you for your attention.

Operator, we'd now like to open the call up for questions.

Thank you.

I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone key pad.

We'll pause for just a moment to compile our q & a roster.

Your first question comes from Robert Wiliby (ph) of Credit Suesse First Boston.

Robert Wiliby (ph): Bob or Dick I guess you did about $1 billion in cash from operations last year to guidance for that range again this year despite what should be stronger earnings and $465 million swinging cash flow in the first quarter, yet where is the big spend on cash flow coming here going forward?

Morning, Bob.

Well, we're obviously headed where we thought we would be which is good news.So some of that swing, Bob, is just timing of investment and inventory, but our cash flow is coming in better than what we thought at this point, and so we might have good news in terms of cash flow by the time we get to the end of the year.

I think accounts receivable management is really excellent and the two big participants there, because that's where the big dollar volume is pharmaceutical distribution and medical surgical guidance.

We're executing there well.

We're realizing savings in inventory management as we consolidate facilities.

But you know we feel strongly about meeting or exceeding what we laid out in terms of what our cash flow was projections.

Dick, anything else you would want to add?

Only thing, Bob, would just a reminder that last year's numbers did have about $150 million benefit from the securitiation we did last year that's not included in our guidance for the first fiscal year.

And the other thing that's that chains every year is the timing of some of our tax payments, some of our deferred taxes turn around.

I think we've been talking a lot about our rising returns and our rising returns are turning and excellent asset management and turning into great results.

And so you'll see terrific performance on the cash side for the year.

Next question?

Your next question comes from Larry Marsh of Lehman brothers.

Thanks, Bob.

Good morning.

Just wanted to maybe follow up a bit.

Dick, you did a good job breaking down the components of what wasn't the typical build in inventories from June to September.

Then you elaborate more about that.

How much of an impact on your cash flow was this whole switch to generics and are we going to see any more benefit in terms of inventory build with further reduction in Benly Safety stock?

And would we anticipate the building inventories at the end of the calendar year, so would we be a cash user in q2 and the traditional pattern in the second half.

I'm just wondering if the seasonalty of cash flow has changed a little bit or is this just a particularly good quarter?

If you elaborate on that.

Let me turn it over to Dick.

As I said, we're performing well and we're headed where we thought we would be.

There's a little bit of seasonalty.

There's always a little bit of timing, and Dick said that in his comments.

It's not exactly predictable between quarters.

But overall, I don't see a change in our pattern, substantial change in our patterns, other than I see a general improvement in our cash flow.

Same as on the expense side, we're getting more efficient on the expense side.

We are getting even better on the asset management side.

Dick do you want to comment on that?

I guess in terms of your question about the impact of the generic switch in the quarter, it's difficult to predict with absolute accuracy but just based on the increase in generics as a percentage of our overall inventories, we estimate that was $500 million in the September quarter.

Depending on the degree of additional switching and levels of generics versus the remainder of the inventory during the rest of the year, there could be some additional future impact there as well.

We would anticipate, you know, to build inventories in the December quarter as you've seen in the past.

Larry, I think we saw most of the stuff with the August quarter is coming in better than we thought.

I think the generic formula most people have focused on both margin, the close margin percentages of generics.

We've all been trying to talk about our investments.

Our investment receivables is less and investment to support the generic program.

So we tried to give you a little flavor and when you get to be the size we are, it's, I think Dick cited it's almost $500 million impact.

Jim, any comment from your standpoint on inventory levels or building, anything unusual you're seeing?

Jim Malar (ph): I think again it's the Benly consolidation and also can't forget about the receivable side of the equation since we've got less capital tied up there.

Your next question comes from Chris Mcfadden from Goldman Sachs company.

Thanks.

Nice quarter, everyone.

Could we drill down a little bit.

Chris, we're having trouble hearing you.

Is this better?

A little bit.

Could we drill down a little on the med surg business?

Two of your largest competitors have been reporting less than ideal results, slower revenue growth than you've reported, not as strong in some of the key operating trends.

I was interested in an update on what you see is going on in that market and how you expect to think about the alternate site channel as you move through the balance of '03.

Thanks.

Let me see if I can field this, pieces of it on the med surg side.

One, we're just doing better.

Obviously there's three major competitors in that marketplace and if we do better, there's only so much business to go around and so we outgrew them on the top line.

We have been performing extremely well for a long period of time in med surg.

Frankly our 10% operating earnings improvement isn't up to what we expected it to be.

Go forward.

You'll see that get even better.

Let me let Jim say a few things that he may want to talk about on the med surg side.

Chris, the revenue line is certainly -- we're pretty impressed with that.

And we feel that our initiatives are paying us big returns in terms of our corporate sales.

I think the other side from an earnings standpoint is we took a charge for restructure at the end of the third quarter and you start seeing it in results of the expenses.

We've got -- we think we're positioning the business on a go forward basis in the better -- in a better position on cost side of it.

On the other, site market, we continue to focus in this area and looking at both the physician market as well as, you know, the associate surgi-center business and long term care.

So those are our areas of focus outside that is a faster growing market segment and we look forward to the reward that that's gonna pay us.

Jim, where would you hope the receive manufacturing penetration rate would be as you exit the fiscal year?

If it's 34% in the first quarter.

Jim Malar (ph): Well, I would hope it would be certainly improving.

A lot of that is -- we've gotten a great deal of the conversion over the past 12 to 15 months of the Bergen acquisition in converting out what we could.

That incrementally does grow as we add in new capabilities, new products, such as bone cement which happens to be a new product launch.

We've got a new thermal product that's also out in the marketplace.

As we develop new products that helps.

It's also an issue of we are introducing a new fabric strategy in our converters line to get really into the it ins and naturals that we think is a super home run.

It's hard to speculate what the impact is.

The customers that have been testing it for us as we move this into production here this quarter, I have nothing but super reviews on it.

Thank you.

Next question?

Your next call comes from Glenn Santangelo from salomon smith barney.

My question resolves around the technologies and services division.

If you could strip out so.

Acquisitions and maybe sort of comment on your organic growth within that division maybe vis a vis some of the bullish comments you made.

If I call correctly, the guidance was that the business was going to accelerate going forward throughout the year.

What sort of events or milestones should we look for in order to track the performance as we move throughout the year.

George, I'm going to ask him to comment.

Let me first set it up by saying that we -- the investors conference, in August or -- said that we thought first half would be slower and accelerate the second half.

That we thought the overall growth rate for the year would be in the 25% range, which, dick confirmed.

Dick also broke out an effort to make sure you understood internal growth verse what we call organic growth verse acquisitions.

We reported 16% operating earnings growth.

Dick pointed out that it was a one-time benefit last year in the same quarter.

And if you strip that away and take away the earnings from the two acquisitions, magellen, and Bourne Lepor (ph) our internal growth rate was still 16%.

It's just about cancels -- kind of sets up, you understand?

So let's talk about around 16% operating growth in q1.

George, why don't you talk about what you think the events are and what we're looking forward to for the rest of the year.

George Fatitis (ph): Let me start with the base.

Generating about 16% growth rate so we're -- we feel very good about the base business, particularly some of the key pharmaceuticals like CaletraZalatan (ph), Detrol.

It's a lot of good strong brands.

The piece that contributed significantly to the 25 plus percent guidance that we gave that would accelerate in the second half traces to the launches.

They are the most significant being the GENERIC of Isotrentinol (ph) and generic Acutane, clarinex Zitis (ph), also CLARITIN otc zitis (ph) Those were the clarinex and the Isotretinol (ph) were launches that we had expected to happen earlier in the year.

When they weren't happening that's when we said in our guidance we would still do 25% but these would happen later in the fiscal year rather than earlier.

With respect to Isotretnolan (ph) This is a product which came GENERIC in February of 2002.

It's been at the FDA.

We are through basically the labeling of that product and are able to once approved, be able to ship it within -- have it on shelves within two weeks.

There's a citizens petition filed by the originator earlier this fiscal year that has to do with patient tracking upon GENERIC substitution.

The FDA cannot approve the ADNA (ph) until once they deal with the citizens petition, which we would have expected to have been dealt with by now but hasn't.

So we consider the launch to be imminent but I can't predict the exact timing.

Clarinex will -- we're comfortable a launch for this allergy season and the CLARITIN otc product like wise plans are for it to launch for this allergy season.

If all the launches happen and there are some others in the sterile side that I can't articulate specifically, but are progressing well, all of those happen, we will comfortably meet our guidance.

Thanks a lot, George.

I appreciate the comments.

Your next question comes from Lynn Yaffy of bank of America.

President Bush proposed some regulations and I have wondering if you could discuss them if they are implemented following the 60 day common period.

What effect do you see as that possibly having on your business as it relates to generics?

And are you still finding the generic business is more profitable from a dollar standpoint as you would have expected?

Question is about the president's announcement on generics we've commented that generics are more profitable to us.

We've shown you a little bit of the effect on the balance sheet, too.As you know, we turn on capital as an important measurement for our success.

Anything that helps GENERICs grow, is both good for the consumer and good for us.

On the other hand, I wouldn't expect that this is going to have major impact upon generic conversion.

I think, you know, as you pointed out there's a lot of hurdles and legitimate issues.

And SOY would view this is not exactly nonevent, but you know not a major thing that I worried about whether they were going to get the announcement out yesterday.

With regard to profitability, generics, Jim, any comments you want to make.

Jim Malar (ph): I think you said it.

More generics is more money for us.

As you know, we've got a great position in the sense that you know, we have bonded with our customer and we are collector of buying power and we have the ability to determine which manufacturer of generic product will be used.

That's why we have that power.

And we obviously need to pass some of those advantages on to our customers that transfers as purchasing power to us.

So we do that.

But so it's important to our customers that we have a successful generic program.

They do better on margins on generics.

I think I have also said that I believe the overall business model, not just at retail, but at wholesale, business model, which has to do with the profitability of generics versus the profitability of branded, that the branded manufacturers travel through our distribution channel too cheaply and that I think that our profitability will need to be raised there for branding.

But that's a different issue than, you know, our current profitability of generics.

Thank you.

Our next question comes from John Kreger of William Blair.

Bob, sounds like the Syncor acquisition is now about a month away.

Can you expand on what your expectations are from that acquisition, what you think it can do to expectations both financial and strategically over the next year or two?

Okay.

This took us a little bit longer to complete just to go through the regulatory processes as we mentioned we've completed the -- all the regulatory approvals, which included a review by the sec of all of our proxy information.

That's all completed.

So this is going to get completed shortly after the announcement on the 19th.

We've got put out any guidance yet on Synergies and things like that for a couple reasons.

First of all, it's a little more complicated.

As you know, they have several businesses.

They have an imaging business and other businesses in addition to their core business which is nuclear pharmacy.

We fully intend and are Marching down the path to sell other businesses, sell off all other businesses other than our nuclear pharmacy business.

That will happen.

Our nuclear pharmacy businesses are doing extremely well.

And so as -- we're already in that business, as you know.

And it is a growth business, with strong returns and we will be the market leader combining Syncor's business with our business.

So as a basic business, what it does, that business is growing.

The -- there are now not only diagnostic opportunities, but therapeutic opportunities.

I think the most significant strategic thing I might let George comment on, which is where else could we stretch our nuclear pharmacy capability in terms of services other manufacturers.

George Fatitis (ph): If you look at the nuclear pharmaceutical business today, the service they provide.

They take a drug that is not quite yet complete, add value to it just before having to go to the patient and get to it the market in a short period of time.

If you take that model to other drug opportunities, Zevlon which is from Idek, which is one that needed a manufacturing service provided before going to the patient.

Looking ahead to other biotech or oncology products.

It would require some form of special handling or pharmacist operation or manufacturing intervention or compounding or services that these pharmacists could uniquely provide on a national basis and we're the only ones that are in that sort of position to be able to provide that for specialty pharmaceuticals such as these.

Thank you.

I think we have time for two more questions if there are any.

Your next question comes from Lisa Gill of J.P. Morgan.

Dick I was wondering if you could talk about the investment spending?

You had said you expected it for new product introduction.

Also, what's the expectation for the year?

I think it was about 100 million for last year.

Along those same lines, are we seeing any new business sign for the New Jersey development center?

Thank you very much.

Lisa, our investment spending which includes research and development, new products, new initiatives, things like that was about $25 million this quarter.

I think we gave guidance that it would exceed $100 million for the year.

And I think that's good news for you all which means we have the earnings capability to also spend currently funds to produce future results rather than just record profits for the current quarter.

So that's the range we're talking about.

In terms of area, for example, Jim mentioned earlier some new product introductions out in -- on our medical surgical area that were really excited about.

And so you're going to see the benefit come in the second half of the year as the products are launched.

At pixis I met with Steve Thomas last night.

We have a new product offering patients stations which is both a clinical offering and patient satisfaction offering at bedside.

We are ramping up on that big time and Steve's been talking about the back log building to that.

So when I meant with him last night I said show me how many people I have got on that.

As it turns out our development staff for that product line is actually bigger than the development staff we had for our supply station product line.

You know how big we think that is.

So I said, I'm pleased about that.

I'm pleased we're spending the money to bring product out.

With regard to other initiatives, George any you want to comment around pts?

George Fatitis (ph0: Lisa asked about the New Jersey development center.

It opened in the first quarter.

We've started doing analytical laboratory work.

The pilot plant itself or the larger money is made opens in late November, early December given the holiday period.

I wouldn't expect that we start generating the real income until we get into the third quarter.

We've integrated that under.

Magellen.

They're bringing their procedures in the place there.

The way they've managed pharmaceutical development.

In total today we now have with Magellan and New Jersey center around the world 1100 people, 10% of pts work force is in off stream pharmaceutical development.

New Jersey center still being an investment mode from a pnl standpoint for the year working its way to break even by the time we get to the end of the year which sin credibly good given the magnitude of what we put in place and the uniqueness it gives us with respect to the industry.

Great.

Thank you.

There's time for one more call.

Your last question comes from John Soder of SG Cowan.

John Sondor (ph): Can you tell us if there's been any change in the structure of sourcing deals from pharmaceutical companies?

The question, is there any change in our buying relationship with pharma manufacturers?

John Sondor (ph): In the structure of the deals maybe elongated payment terms in exchange for slightly smaller size deals?

Let me just kind of see if I can hit that.

Jim, you want to say anything, you're welcome.

I think overall I have been saying for ten years that how we deal with both our customer downstream, the provider, and how we deal with the pharma manufacturer changes from quarter to quarter.

It's built around the fact if we have a key service that we provide which is logistics information, buying power.

There's lots of thins like that.

And there's unique opportunities that are seasonal or new product introductions, whatever.

So it's always different.

But I said earlier that we are in an excellent position in the industry right now.

And will be.

And so I don't see any significant change or even meaningful change in our buying relationship with the pharma manufacturer.

Jim, anything you want to add to that?

Jim Malar (ph): No.

It's been pretty much the same.

The model does shift from time to time.

Terms are not as valuable today as they were at one point in time.

With excess capital readily available most of the big players were cash generators.

We don't need capital.

So the manufacturer giving us term trading it off in exchange for profits is not as attractive as it might have once been say 10, 12 years when rates were much higher.

Materially, there hasn't been any significance.

Vendor margin comes to us in a variety of ways and the pharma manufacturer recognizes that's how we make our money to facilitate this down channel.

John Sondor (ph): Great thanks a lot.

Thank you for participating in the call.

We feel confident about the future and look forward to conversations with you all over the next several months.

And the call at the end of our second quarter.

Thank you.

Ladies and gentlemen, this concludes today's Cardinal Health first quarter earnings conference call.