卡地納健康 (CAH) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2008 Cardinal Health Incorporated earnings conference call.

My name is Lauren, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr.

Bob Reflogal, Vice President of Investor Relations.

Thanks, Lauren.

Good morning everyone and welcome to Cardinal Health's fiscal 2008 first quarter conference call.

Our remarks today will be focused on the company's consolidated and business segment results for the quarter which are included in the press release and attached financial tables.

If any of you have not yet received a copy of our earnings release or the financial attachment you can access it over the Internet at our investor page at www.CardinalHealth.com.

Additionally, there are a handful of slides that we will be reviewing, which can also be found on the website.

After the formal remarks, we will open up the phone lines for your questions.

As always, we ask that you limit yourself to one question at time.

During the course of this call we may make forward-looking statements.

The matters addressed in these statements are subjects to risks and uncertainties that could cause actual results to differ materially from those projected or implied.

Please see our press release and SEC filings for a description of those risk factors.

In addition, we will reference non-GAAP financial measures.

Information about these non-GAAP measures is included at the end of this presentation and posted on Cardinal Health's investor page.

At this time, I would like to turn the call over to Kerry Clark.

Kerry?

Good morning, everyone.

Before I get to our Q1 results, I want to mention the announcement we made this morning about a management change in our Healthcare Supply Chain Services sector.

Mark Parrish will be leaving the company.

And Jeff Henderson, Cardinal Health's CFO, will serve as interim CEO of this sector while we conduct an external search.

We have a focused agenda to improve our performance in this sector and both Jeff and I are already very involved in supporting Scott Storrer, who joined Cardinal Health in May, to lead our Supply Chain Pharma business, and Mike Kauffman, who was appointed in February to lead our Supply Chain Medical business.

Jeff is here with me this morning.

Dave Schlotterbeck, CEO of our Clinical and Medical Products sector is on the phone from our CMP headquarters in San Diego and will be available for Q&A.

We have a lot to talk about this morning, so let me get started by providing my perspective on the quarter and the year.

Overall, Cardinal had a solid quarter, with sales up 5%, operating earnings up 9%, and EPS up 15%.

Our non-GAAP guidance remains unchanged for fiscal '08 at $3.95 to $4.15, which translates into EPS growth of 15% to 21%.

As I look at Cardinal Health overall, I believe we have a very strong business model in a vibrant and growing industry.

We are differentiated by our portfolio of technologically superior, high growth and high margin Clinical and Medical Products in one sector and our Supply Chain Services that deliver excellent cash flow in a growing market in the other.

We also have very strong long-term relationships with premier partners and customers throughout the chain of care.

During Q1, we met our expectations in three of our four segments with strong momentum in clinical technologies and services.

In Medical Products and Technologies, the Viasys integration continues to be ahead of plan, and we are making good progress on the turnaround of our Supply Chain Medical segment.

However, we performed below our expectations in the Supply Chain Pharma segment.

We foresee this continuing through Q2, but we expect to return to target performance toward the latter part of the second half.

We see two factors influencing this performance.

First, dynamics in both our traditional and radio pharmaceutical markets and poor execution on our part.

Let me expand on each of these.

As we said in September, we continue to see some near term market factors dampening the traditional Pharmaceutical business.

For example, the rate of Pharmaceutical sales growth is slowing.

There are timing differences in branded price increases when compared to last year, and there are fewer generic introductions and accelerated generic deflation in the first half of our fiscal year.

But importantly, our top line growth and operating margins are not meeting our expectations because we have not been executing as well as we should be.

We had some business losses last year that we had expected to offset this year but did not.

This has depressed our core direct store door growth.

We did not get the planned levels of generic penetration, which is impacting our generic sales growth.

And we have not adjusted our costs as quickly as we should have, given the impact of recent contract repricings on our gross margins.

In our radio pharmaceutical or nuclear pharmacy business, which today accounts for approximately 10% of supply chain's pharma profitability, we have been experiencing competitive pressure on Cardiolite prior to the launch of generic [sesta] maybe next summer.

In addition, there has been a slight slowdown in cardiac imaging procedures.

But, again, we have been slow to adjust our cost structure as quickly as we should have.

As a result of these factors, we now forecast segment profit for Supply Chain Pharma will not meet the 7 to 10% target range for the year, primarily because of Q1 and Q2 issues.

Jeff will help quantify each of these factors for you in his remarks.

However, as I said earlier, we are reaffirming our full year EPS guidance.

We are forecasting an improved picture in the second half as a number of factors will come into play.

In Pharma distribution, we are expecting a significant increase in generic introductions that we expect will increase our margins, particularly in Q4.

It is encouraging to note that calendar year '08 is expected to be a good year for generics with approximately $20 billion in total branded patent expirations.

And of course, where are improving our operations and market execution.

As I mentioned earlier, we have made a management change in our Healthcare Supply Chain Services sector.

In the Supply Chain Pharma segment under Scott Storrer's leadership, we have a number of activities already underway, including cost reductions, improvements to our retail product offering, and our selling organization.

Along with better account analysis to enable us to serve customers more profitably.

We expect further progress on generics penetration and contract compliance through a new program we introduced in July to our retail independent pharmacy customers.

On the sourcing side of generics, we announced a proprietary joint venture with Alliance Boots during the quarter to bring the Almus brand to our retail independent customers.

This partnership will give us valuable experience that we expect will be another point of differentiation for us going into fiscal '09.

We were also awarded substantial new business from our largest customer, CVS, through our recent contract renewal.

In addition to CVS, we recently reviewed our contracts with KMart, Kroger, and a number of regional chains.

We also expanded our business with several key buying groups serving regional chains and retail independent pharmacies.

All of these will improve our business in the balance of the year.

On another front, we signed an exclusive contract with Central Data Systems to provide 340B services to healthcare facilities in the U.S.

The federal 340B program enables healthcare facilities to optimize reimbursement for Pharmaceuticals when serving the uninsured or the underinsured population.

This program is highly differentiated and our roll-out is under way.

In nuclear pharmacy services, we'll begin to see the benefit of cost reductions and generic Cardiolite will be introduced into our channel in calendar 2008.

While difficult to fully value at this time, we are forecasting this will be a good pickup for the Supply Chain Pharma segment.

We have an excellent platform in Radio Pharmaceuticals, with a leading position supported by more than 150 Cardinal-owned specialized pharmacies across the country.

Turning to Supply Chain Medical, we are making good progress on turning this business around.

Top line revenue is back on track in the supply business with lots of activity focused on improving our category management, our sales programs and customer service.

Our program to transfer the location of this business from Illinois to Ohio is going well, and we're pleased with the management talent we are attracting.

Our presource operations are being converted to Lean manufacturing, which we expect will deliver a range of short and longer term benefits.

Net net, this segment is making good progress and remains in position to return to consistent, profitable growth in the second half.

The Clinical and Medical Products sector was again an exceptional value driver and continues to differentiate us in the market.

In Q1, CMP accounted for almost one-third of our total profit.

So it plays an increasing role in our overall results.

We have a leadership position in patient safety and infection prevention products, both essential and rapidly growing segments of healthcare.

While I'm sure you've been reading about this in the press, let me just mention a few key points about why this is so important to our hospital customers.

Hospital acquired infections you affect one in every 20 patients admitted to hospitals in the U.S.

Likewise, there are at least 1.5 million preventable adverse drug events in the U.S.

each year.

Hospital-acquired infections and adverse drug events are estimated to kill tens of thousands of patients and cost hospitals tens of billions of dollars every year.

I recently hosted a round table of top hospital CEOs, where we talked about their patient safety initiatives.

This is a priority for them, and many are seeing healthcare quality initiatives as a strategy to also lower costs.

Cardinal Health is an essential partner to make this happen because of our proprietary product technologies, especially in medication management with Pyxis, Alaris and CareFusion, and in infection prevention, with our gloves, gowns, drapes and med-mind infection surveillance systems.

So we hold an important position in a critical market to our customers.

For example, we protect against medication errors for more than 8 billion doses administered and dispensed annually through our Alaris and Pyxis systems.

This strong position is reflected in our Q1 revenue growth for the CMP sector, which increased 25% and profits which rose 60%.

Within the sector, our CTS segment had a great quarter.

We saw more than 20% sales growth in medication technologies, led by strong demand for our infusion and dispensing products.

Segment profit was up 91%, and gross margins expanded significantly due to a favorable product mix and the comparison to Q1 of last year when we had the SE pump recall.

About 70% of Alaris contracts for the quarter were the result of displacing our competition, including new accounts at Banner Health in Arizona and the University of Colorado.

Our Pyxis products are also displacing competitors, like at St.

Anthony's Medical Center where we began with a competitive displacement by our Supply Chain Pharma segment in June and recently signed a contract for Pyxis MedStation 3500 and Pyxis C2 safe products.

In addition to winning new accounts, we continue to renew and expand our business at current customers.

Our proprietary software platforms of MedMined and CareFusion are gaining momentum.

MedMined is serving nearly 250 customers across the United States and we are seeing a trend moving from single hospital implementations of our infection surveillance service to system-wide implementations.

For example, Clarion Health in Indiana recently signed on for a MedMined services for all five hospitals within their system and Erlanger Health Systems in Tennessee signed for all four of their hospitals.

In October alone, CareFusion signed contracts with four new customers to provide bedside patient identification and verification technology, including Kingman Regional Medical Center in Arizona, who has made error reduction a key priority.

In conjunction with our current VA Hospital contract, we're on the path to being the industry leader in bedside verification with CareFusion.

Finally, we have identified the first pilot site for the implementation of a system that connects Pyxis, Alaris and CareFusion technologies.

This approach will help facilitate the collection, transmission and accuracy of patient and medication information at the point of care.

In Medical Products and Technologies, we are ahead of our internal schedules for the integration of Viasys and it showed in the results for the quarter.

MPT segment profits were up 24%.

MPT also benefited from new product introductions, most notably our steam micro surgical gloves made from a proprietary latex-free material and the new LPV1150 ventilator from Viasys.

We have a strong product pipeline in our combined respiratory business with 13 new product introductions planned in calendar 2008.

And we were most recently selected during the quarter to be the sole supplier of latex-free gloves to a very large, very well-known health system in the Midwest.

This is not only a significant business win but strong validation of our proprietary latex-free technology.

Our performance in CMP in Q1 and over the past 12 months is a clear reflection of how hospital customers value the high quality, clinically differentiated products and services we offer.

To wrap up, Cardinal's Clinical and Medical Products continue to win in the market based on our leadership in patient safety and infection prevention offerings and our supply chain medical segment is on track with its turnaround for this year.

We are clearly disappointed in the execution of our Supply Chain Pharma segment but we do have a very strong core business.

We have made or are in the process of making the necessary changes to improve execution that will begin to bite as we move through the second half of the year.

Now, let me turn it over to Jeff.

Thanks, Kerry.

Good morning, everyone.

And thanks for joining us.

I would like to cover two topics during my formal remarks today.

The first of course is our quarterly results and outlook.

As Kerry mentioned, Q1 was a solid quarter with our clinical and medical products sector once again delivering outstanding results.

For the second topic I would like to change hats and briefly discuss our HSCS sector, as a newly appointed Interim CEO of that business.

Up front, let me assure you that this is a great business with great people and I'm excited about the opportunity to work with Scott, Mike and the entire HSCS team as we return Cardinal back to its place at the top of healthcare distribution.

Now let's turn to the first quarter results on slide 5.

Please note that my comments reflect the financial results from continuing operations on a non-GAAP basis.

Consolidated revenues were up 5%, to $22 billion, and operating earnings were up 8%, to $512 million, reflecting improved gross margin and strong demand across several of our industry-leading businesses.

This also includes the impact of our recent acquisition of Viasys Healthcare and reflects a slower first half growth we are seeing in our Supply Chain Pharma segment.

Earnings from Continuing Operations for the quarter were $318 million, up 3% over prior year.

This compares impacted by higher interest expense this year and a meaningful increase in our tax rate versus Q1 of FY '07.

Diluted EPS was up 15% to $0.86, reflecting leverage we are able to deliver to shareholders via our share repurchase programs.

Operating cash flow for the quarter was $409 million, and return on equity was 17.5%, up 390 basis points over the same period last year.

Now, turning to the next slide, during the quarter, special items totaled $23 million which impacted diluted EPS by $0.04.

$15 million of the $23 million were restructuring charges of which $11 million was related to the transfer of our HSCS medical segment to Dublin, Ohio.

The remaining $8 million was split between acquisition charges and litigation and other.

There were no material impairment charges for the quarter.

Now I'd like to turn to the performance of the individual business segments.

Within Healthcare Supply Chain Services Pharmaceutical, revenue for the first quarter increased 4% to $19.2 billion.

Revenue from bulk customers was up 11% and non bulk revenue was down 2%.

Key factors influencing year-over-year Q1 revenue include new bulk business from existing customers, brand-new price inflation, DSD customer loss from FY '07, lower pharma market sales growth and soft demand within the nuclear business.

Segment profit was $305 million, an increase of 6% over the prior year period, driven primarily by branded price inflation, improved operating leverage as SG&A margin declined 7 basis points versus the same quarter last year and a $14 million reduction to a specific vendor related reserve.

Fewer generic launches versus the same period last year and higher generic inflation also put pressure on overall segment profits.

Segment profit was somewhat impacted by the previously mentioned market slowdown, customer losses in DSD and the market environment in nuclear.

As many of you are aware, our nuclear business is experiencing a fair amount of market volatility and the market's largest product, CardioLite is facing patent expiration in calendar year 2008.

Cardinal distributes approximately three quarters of the CardioLite doses in the U.S., and while this is impacting new-term profitability, we expect the generic opportunity to have a positive impact on nuclear's profitability once this occurs.

On a slightly different note, as I mentioned in our investor conference, effective use of capital is an important lever we use to improve economic returns and we continue to see progress in this area.

Capital was down approximately 15% over Q1 of last year.

And economic profit margin increased 3 basis points to 88 basis points compared to 85 basis points in the same period last year.

Turning to slide 8, our Healthcare Supply Chain Services medical segment's revenue for the quarter was $1.9 billion, up 6% over the prior year.

This represents a return to strong top line growth in our hospital distribution business where we are seeing both improved penetration with existing customers.

We view this as confirmation that our turnaround is on track and investments we've made in the business are paying off.

Our lab and ambulatory businesses also delivered strong growth year on year.

Total segment profit for the quarter was $58 million, down 10% over Q1 '07.

Profit in the quarter was impacted by operational investments, particularly in Customer Service, higher costs within our operations, and the refined corporate cost allocation which negatively affected growth in the quarter by approximately 9 percentage points.

As Kerry mentioned, our [Mogapar] transition is on track and there is real momentum in the business.

We continue to expect to return to positive growth in the second half of fiscal 2008, particularly as we work through the operating improvements we are making in our kitting business.

Medical prOducts and Technologies delivered a strong quarter.

Revenue increased 47% to $623 million.

Driven by the Viasys acquisition, new product launches, increased penetration of existing customers, and the favorable impact of foreign exchange.

Segment profit was $57 million, up 24% with a profit margin dampened by the purchase accounting adjustments associated with the Viasys acquisition.

The integration of Viasys is going extremely well.

In fact, synergy capture for FY '08 is ahead of schedule, with the accelerated close of the Viasys headquarters and other initiatives.

Moving on to slide number 10, Clinical Technologies and Services had an excellent quarter.

Segment revenue was $649 million, up 9% over prior year Q1.

Driven by continued strong demand for infusion and dispensing products.

Segment profit was $98 million, up 91% compared to the prior year, well in excess of our guidance.

Driven by favorable mix of higher margin products, improved operating leverage, and the benefit of our IPS selling organization.

We also benefited from a favorable compare versus Q1 of fiscal 2007 due to a $13.5 million charge in that period related to our SE pump.

From a margin perspective, segment profit margin was up 640 basis points over the prior year.

During our investor conference, I discussed the key financial levers we focus on to drive both growth and returns for the business and our shareholders.

Those are balance sheet management, capital deployment and our capital structure.

During the quarter, we made meaningful progress along all these dimensions.

Days of inventory decreased year on year, declining from 30 to 28 days.

Accounts were approximately $250 million in capital, this is not insignificant.

Last fiscal year, we made significant progress with respect to portfolio optimization with the divestiture of PTS.

This is a continuing and ongoing process here at Cardinal.

We will continue to look at opportunities to improve our offer and shed non strategic businesses or underperforming units.

A good measure of how we are doing in our efforts to manage our Balance Sheet is return on invested capital.

We are not where we want or expect to be, I'm happy to report that non-GAAP return on invested capital is up 157 basis points.

For Q1 we repurchased almost $600 million in share, and since July 1st, share repurchases have totaled $720 million.

During the investor conference, I also mentioned our philosophy for our capital structure.

Simply put, it's to minimize our cost of capital to improve our economic profits while ensuring we have the financial flexibility to manage the business.

For Cardinal we believe a capital structure in the range of 28 to 35 debt to total capital strikes the best balance between these two guide rails.

We ended Q1 with a ratio at the top end of our range at 35% and net debt-to-cap tall of 26%.

Both ratios are significant changes from prior year and reflect our commitment to utilize multiple levers to maximize shareholder value.

Finally, our non-GAAP effective tax rate for the quarter was 32.3%, versus the 29.4% in the same quarter last year.

This increase is primarily due to adjustments associated with FIN 48 and the addition of the Viasys business, both of which impacted Q1 '07.

And the one-time favorable tax impact we saw -- I'm sorry, Q1 '08 and the one-time favorable tax impact we saw in Q1 '07.

Of the impact of FIN 48, we now expect our effective tax rate to be in the range of 32 to 32.5%.

At the end of the day, our financial strategy and goal is to maximize returns.

I'm happy to say we were able to deliver a non-GAAP return equity in Q1 of 17.5%, an increase of 390 basis points over last year.

Moving on to our outlook, I want to recon firm our guidance for non-GAAP diluted EPS of continuing operations for 395 to 415 per share.

We believe that our ability to hold EPS guidance in light of Supply Chain Pharma's challenges speaks volumes to the strength of our diversified business model.

As previously discussed, three of four segments are performing generally in line with expectations.

As such, current guidance for CPS, NPT and supply chain medical remains unchanged.

As Kerry mentioned earlier, we are lowering guidance for our Supply Chain Pharma segment to below range.

I want to build on that by giving you more specifics for how we expect numbers to play out for the rest of the year, in particular the factors that will make Q2 a very difficult compare versus last year.

Before I discuss Q2 I know that most of you are wondering where we went wrong on our forecast for HCS Pharma and exactly what could have changed over the past four to five months to make us significantly change our FY '08 profit outlook for this segment.

Let me lay that out for you as transparently as I can.

First, let me emphasize what didn't change.

One, we were expecting meaningful sell margin erosion due the impact of the customer repricings that happened last year and that has rolled out as expected.

We were anticipating a certain level of brand and price increases for the year.

Always difficult to predict exactly which quarters those will land in, generally those seem intact.

Third, there were certain DD customer losses that happened last year, and they obviously impact our year on year compares in that part of our business.

Those have happened but we have not lost any of our large accounts this year.

Now, clearly we expected other items to more than offset the year on year impact from the customer pricings and DSD losses and they haven't quite panned out as well as we had planned.

First, due to some execution problems, we have not made the types of customer gains we would have hoped, either in terms of new DSD business or generic penetration in certain accounts.

Secondly, generic inflation, specifically on some large products that came off patent last year, have been much more steep than we had anticipated.

As you know, those products were not replaced by new generic launches yet this year.

Third, .

the overall Pharma market is expected to grow more slowly than many of us were forecasting.

Finally, our nuclear pharmacy business is experiencing an unprecedently level of volatility as we approach the generic event.

As we go through these factors, I don't want you to per receive us as making excuses.

The reality is that for several of them, we did not react quickly enough to address market needs or adjust our own operational and cost issues in order to compensate.

That has to change.

Now, let's move on to our outlook for Q2 and why this will be a difficult compare versus last year.

Obviously, the factors I just discussed will have a real impact on our Q2.

In fact, disproportionately so versus the other quarters in FY '08.

We expect our second quarter segment profit results in HSCSP to be 10 to 20% below last year.

The basic drivers of this in Q2 are the following.

Approximately $20 million of reduced profit from branded price increases versus what was a pretty robust quarter in that regard last year.

About a $20 million year on year decline due to the higher deflation on some specific generic drugs that were launched last year and an approximately $20 million negative net impact that relates to the sale margin declines and DSD losses we've already spoken about netted against other income statement items.

As we talk about rebuilding momentum in the second half of FY '08 for SCSP, our current expectation is that profit growth will be heavily weighted towards Q4, given generic launch timings and other factors, including the forecasted impact from many of our improvements.

Now I would like to turn to our financial targets and goals.

I mentioned much of this on prior slides but I do want to highlight a few key points again.

For fiscal 2008, we expect overall company revenue growth to be in range.

Based on lowered expectations in our Supply Chain Pharma segment, we now expect operating earnings growth to be in range.

And again, EPS is expected to be in the range of 395 to 415.

As always, this guidance excludes any potential impact from the ongoing portfolio optimization reviews we referenced before.

Turning to slide 14, I want to highlight some of our plans to deliver improved results in HSCS in the near .

First, let me reiterate that we are competing in some very attractive and growing markets and we have a strong market position in all of the major businesses in which we compete.

We have a strong new leadership team driving our two segments in Mike Kauffman and Scott Storrer.

My job is to support them, to drive through our improvements and deliver on execution.

Now, let me step through some specific priorities in each of the two segments.

First, in HSCS Medical, we need to continue the momentum we established with the hospital market, to drive an ever-improving customer offer and our own profitability.

We will continue to better leverage our scale to lower product and operating costs, including expansion of our offshore sourcing.

Importantly, we need to finish driving through the operational improvements in our presource kitting business and leverage our strong market position here and we need to complete the transition of our medical business from Agopar to Dublin.

All these initiatives are well under way under Mike's leadership.

Within Pharma, we need to accelerate the initiatives we have put in place to improve operational performance with respect to cost reductions improvements to our retail selling operation and product capabilities.

We also need to leverage our port foal folio and use that portfolio to enhance customer profitability.

On the nuclear side, we will restructure our operating model to deal with the volatility we are seeing in this market and longer term make certain we are best positioned to take advantage of the upcoming patent expiration.

Finally, we need to accelerate the ongoing restructuring of our overall operating platforms, maintain our best in industry cost position and relocate resources where they can best drive customer value and profitability.

The good news is that most if not all of these initiatives are well under way.

Now we need to deliver and drive them to fruition.

I am very confident that Scott and his team can do this.

That come completes our formal remarks.

I would like to thank everyone for their time this morning and open up the call for

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Larry Marsh with Lehman Brothers.

Thanks.

And good morning.

Not great news, obviously, but could you elaborate on your new guidance in your drug or your HSCS drug business?

You talk about I guess below the 7 to 10% range.

If I'm just sort of looking at the second quarter being down 10 to 20%, I'm wondering can you elaborate, do you think the operating profit in that business is going to be up this year versus last year?

Or is it too soon to say?

Just on top of that, why do you think you'll still hit the 7 to 10% revenue growth in that segment or are you suggesting that that might be a bit below your expectations as well?

Thanks, Larry, for the question.

Let me cover those in reverse order.

I don't want to get too specific on our revenue assumptions, although we do expect it to pick up over the course of the year as some of the new accounts that we're taking on and our increased penetration in some of those accounts take effect.

So I feel pretty positive about the slope over the revenue growth increase over the remainder of the year.

In terms of the actual earnings growth for the segment, I don't want to give a specific number at this point, although let me just sort of give you some further idea of how we see the rest of the year unfolding.

As I indicated, we do expect Q2 to be down in the 10 to 20% range.

We then expect a significant improvement from that in Q3.

Then I would say in Q4, we expect some very meaningful profit growth for the reasons I mentioned earlier, such as the generic launches we have anticipate, as well as the roll-out of some of the significant operational improvements that will really start to take effect.

You think you'd be up year-over-year for that segment as you see it, Jeff?

It's Kerry.

We fully expect to be up versus year ago on the year.

On the revenue, I'd just point out, everybody's book of business is very different and doesn't really imply -- look at the IMS numbers.

Looking 4 to 5% on our fiscal year basis and we tend to sort of -- we think we'll be moving in line with that with a slight upward mix because of our range of customers.

Okay.

Just one quick clarification then, Kerry.

I know back at the analyst day, Mark at the time, I guess, talked about the opportunity for generic Cardiolite introduction as early as January.

You're now suggesting June and are you giving any sense of how far down the profits were in nuclear for you this quarter versus last year?

Larry, just on the patent expiration could come as early as January, but there's usually something called the pediatric extension which is going to take it in the summer and at this point we believe the pediatric extension is likely to be granted so we're really moving into next summer and we will be totally ready to do that.

The one way to think about nuclear sort of on the whole scheme of things, it's about 10% of our supply chain profitability in this time and so -- and it's sort of playing its fair share in the reductions that we've been working our way through.

Thanks, operator.

Next question.

Your next question comes from the line of Eric Coldwell with Robert Baird.

Good morning.

My first question relates to the commentary that the company did not respond quickly enough to the challenges in SCS Pharma by taking cost control and increasing cost effectiveness.

I'm curious if you can give us some details on what type of activities you think are possible and very specific analysis on what you're going to be doing in that division to get the costs in line with the current opportunity.

And then secondarily, if you could comment on what is the competitive disadvantage that you're facing in the market now that is not allowing you to win these new competitive awards in DSD that you mentioned, not picking up new business in that segment?

Thanks.

Hi, Eric, this is Jeff.

Thanks for your questions.

The cost restructuring side, there are a number of areas both within the sector and the segment that we have taken a look at.

We have taken a substantial amount of our management infrastructure that existed in the sector in the segment and really streamlined it through increasing spans of controls and moving some people around and in many cases eliminating management jobs that as we went through the change to one sector became apparent that they were redundant or inefficient.

Secondly, we've been looking through each of our distribution operations to ensure, given the current book of business and the services that we're committed to provide to our customers, that they are appropriately sized and in some cases that hasn't been the case and we will take appropriate action to make sure they're in line with market needs.

I think the third area is ensuring that our sales and marketing resources are being allocated to the right areas.

In some cases we have replaced some underperforming people in that regard and in other cases we reduced selling resources and most importantly I think we reallocated resources to for example retail independent where we have a real opportunity to increase our penetration and drive value.

On a competitive side, you know, the honest answer is Eric, I believe we have a very competitive set of offerings to all of our customers, both at the hospital retail chains and independent level.

We were working very closely to assist our customers in their operations to make them more profitable.

We offer very competitive generic and branded pricing and in fact have expanded our generic offering to our customers.

We also offer front end help in systems such as LeaderNet for managed care and CIM for inventory optimization.

So I believe very much that we have a very competitive offering and again, it's really just up to us to get out there, sell it and drive penetration through the market.

On top of that, we are offering new programs.

We have the 340B program for hospital customers that Kerry referenced earlier which is a very unique proprietary technology that we've been able to offer.

We need to continue to launch customer friendly products like that and drive those through, whether it be hospital customers or pharmacies.

Thanks for the comments.

I guess I'm trying to figure out when you had a book of business that you thought you could bring in this year and that didn't transpire, what was the feedback from the customers on those awards that you did not capture?

I don't want to get into specific customer contracts, but it's a competitive business out there and obviously you win some and lose some, based on the total value proposition, including pricing.

Thanks, Eric.

Next question.

Your next question comes from the line of Tom Gallucci with Merrill Lynch.

Thank you.

Just one or two clarifications and a question.

First, based on your comments, Kerry, regarding the timing of generic CardioLite, is it safe to assume then, Jeff, that that is not really a part of the ramp-up that you expect later in your fiscal year and it's more of a fiscal '09 event for you all.

That's correct, Tom.

Okay.

Then the $14 million vendor reserve reversal there, can you maybe expand on that a little bit and was it expected?

My final question is on generic compliance, we've actually seen some of your competitors talking about better compliance and grabbing more market share there.

What are some of the things you think you're going to be putting in place to grab your fair share of that piece of the business.

The question with respect to the vendor related reserve.

We were anticipating it happening in Q1.

Specifically what it was was that we had a certain reserve for some inventory that was relatively short dated.

And we did not anticipate we would be able to sell it before it expired.

However, during the quarter as anticipated, our manufacturer was able to ship us longer dated products and as a result of that, we were able to return the short-dated product and reverse the reserve for that amount on our books.

That's what it was.

It was anticipated.

In terms of driving generic penetration and compliance, first of all, we have -- we have introduced a new offering into the market as of July.

You really our sales force is just driving that right now into the market and we expect to see the impact of that very shortly.

As I said, that will start to manifest itself in the latter part of the year.

We're also reorganizing our sales force to put greater emphasis on the smaller chains and retail independents to ensure that we are achieving a level of penetration that it appears that some of our competitors are.

And you know, there's some additional accounts coming online later this year that we believe now that we have access to those accounts we'll be able to drive generic sales and increase penetration and compliance.

So we feel quite positive about the steps that we've taken and about the opportunity that's we have and now we need to go out and do it.

Tom, Kerry here, just one comment on the generic compliance.

It's a lot of what we got back to sort of operating excellence and really making sure that we are keeping on track of this and we'll just say we're not on top of the ball as we should have been.

Thanks.

Operator, next question.

Your next question comes from the line of John Kreger with William Blair.

Thanks very much.

Jeff, you just mentioned reorganizing the Pharma distribution sales force a bit.

Can you just refresh our memory about your customer mix in that business and how you've seen that change if at all over the last year or two?

Sure.

In terms of changes over the last couple years, I would say there has been a greater shift to the large chains with CVS and Walgreens particularly giving some of the acquisitions that CVS has made and what we're seeing as really larger growth from some of those large customers versus some of our other customers.

I would say that over the past six months or so, we have probably seen some volume drops in some of our independents and smaller chains as a result of some of the customer losses and less than optimal execution that we've talked about.

But again, we expect that to turn around as we head to the second half of the year and beyond.

Thanks, John.

Operator, next question.

Your next question comes from the line of Lisa Gill with JPMorgan.

Thank you and good morning.

Jeff, could you just talk a little bit about the guidance range.

Could you maybe just give us an idea of what's still implied in the upper end of the range.

Maybe you could give us some thoughts around what's happening with your share repurchase program and how much of that is included.

And then secondly, on an area that continues to perform well, which is on the clinical technology side, maybe Kerry or Jeff, if you could just or Dave, if you're on the call, talk about where you're taking the market share on the infusion pump business and also maybe talk about if there's any opportunities around large contracts that are up, since Baxter appears to still be out of the market.

Good morning to you.

I'm going to have Dave talk to the infusion pump piece.

I'll have Jeff just talk to the share repo.

Why don't I start.

I'll turn it over to you, Dave.

First of all, the assumptions in the guidance range, first of all, we've indicated that we expect to continue our capital deployment philosophy of returning about 50% of our operating cash flow to shareholders.

As you know, our board approved a new $2 billion authorization back in August.

So I think a rough assumption of about $1 billion repo for the year, in addition to the $300 million or so that was done under the remaining PTS proceeds is an appropriate assumption.

In terms of the major factors that could swing where we end up in the range, there's a couple things that are always fairly unpredictable in our business.

First of all, the exact timing and magnitude of generic launches, clearly if the Cardiolite generic event happens sooner than July 1st that could have a meaningful upside for the business.

We're not counting on that right now.

You're never quite sure what's going to happen with that pediatric extension.

Our strong performance of our Viasys business and our ability to continue to accelerate that integration and capture those synergies is a variable.

Good news there so far.

Exactly what happens in some of the larger contracts that we're going after is another variable that remains somewhat in play.

Dave, you want to take the second part of that question?

I will.

I'd just comment that the folks at Alaris products continue to perform very strongly, about 70% of all of the current business that's being booked is from competitive accounts.

And that bodes very, very well for the future, since it means that being in a razor razor blade business, that we have five to seven years of additional disposables that we didn't have before.

So my expectation is that not only will the clinical differentiation continue to make a difference in the marketplace, but I think you can count on a long time period where we're going to see some very, very strong profitability performance.

Thanks, Lisa.

Operator, next question.

Your next question comes from the line of Randall Stanicky with Goldman Sachs.

Thanks very much for the question.

In case I missed it, did you guys quantify or give some sense of relative impact from the various components, to some of the challenges in the Pharma distribution business?

By that, I mean, thinking about sales mix, what you call the generic market conditions and then nuclear on top of the moderation.

Go ahead.

I mean, I think that there's a lot of different ways, Robert, to cut this.

One of the ways we kind of have sliced it a bit is if you choose 100% of the issue, about 15% of that is going to come from nuclear.

About 15% from sales reductions and market forecasts and the balance mostly from gross profit reductions which relate to DSD as well as generics.

I think that's about the best way we can kind of quantify it for you in those various pieces.

Are there any of those pieces, I guess, do any of those pieces have a longer leg to resolution than the others or is this something that we should think about obviously some of the broader market issues are outside of your control, but is this something that largely begins in the back half of the year you look to hope to be behind you.

Nuclear will completely flip to a positive accretive activity when we get to generic CardioLite and however those plans develop and as we mentioned, we're seeing that as an FY '09 item.

We have to carry the burden of nuclear for a bit this year.

Before we -- we need to understand that nuclear is really still quite a nice business with very good margins here on about $1 billion in sales.

It is a nice business.

It will have a very attractive profit accretion in the second half.

The market growth numbers, you've seen them as well as I do.

In the sense that when we get out past '08, '09, the forecasts are increasing again a lot, depending on what happens with generics.

A lot of what we're experience in the market growth for the Pharmaceuticals tends to be looking like we're in a little bit of a trough and certainly over the coming years we'll move, depends on what happens with generics.

Overall there is a lot of very positive demographic variables that give us a lot of confidence with Pharma distribution business is going to be a business that we want to be in and a business that we think we can perform with the top of the pack, but we believe we can do that.

And I think that within the rest, I think we can manage the gross margin pieces by improving our mix of products and services that we're bringing to our customer and I think the -- so we have opportunities there by better blending our product and service portfolios.

I think the one that's just a little bit up in the area of not really sure is the focus of what's going to happen, some of the retail independents, they tend to be the ones that will be affected by amp and like and right now nobody is putting any of the forecasts for amp.

I think the independent piece is one that is probably not as clear on the visibility.

Great.

Can I just follow-up to Lisa's question just ask, and I don't know if you're able to answer it but if you thing about what sounds like some still moving parts in the upcoming quarter, what you've talked about being a -- obviously, a seasonally stronger back half with some generic launches coming, current consensus numbers have a roughly 45% 55% split in distribution.

Do you think it is likely to be more back end weighted than that.

I couldn't catch that.

Are you expecting a more back end weighted earnings distribution that what's perhaps currently implied which is about 45%, 55% in terms of EPS.

If you're referring to what's currently implied by general --

Consensus numbers.

I would say we expect more back end weighted than what most analysts are predicting.

Are you able to put an approximate percentage on it.

I don't want to be nailed down that closely, Randall, but generally, that's the trend we'll be expecting.

Next question, please.

Next question comes from the line of John Ransom with Raymond James and Associates.

Hi.

Looking at your distribution business and stripping out -- I don't know if this is exactly correct, but say 100 basis points or excuse me, 10 basis points for the contribution of nuclear pharm, looks like you're running 1.35, 1.4% range and since you don't break out gross margin and G&A, assuming the mix doesn't change, is there a level of G&A that you're operating with that doesn't need to be there in six months?

Is that something that will happen quickly or is this just something we'll hold down the growth as our book of business grows?

John, it's Jeff.

Obviously given the nature of this business, focus on cost control and SG&A efficiency is something we need to continually do.

And you know, as I mentioned earlier, there are a number of areas that we already have initiatives under way to address those.

I would expect SG&A growth as it was in the first quarter to be relatively flat and perhaps even down in certain quarters as we continue to drive efficiencies.

This is not only a reaction to the current situation.

But quite frankly, it's a reality of our business.

This is a business as you know has relatively thin margins, just by the nature of it and we need to ensure that we maintain our best industry cost structure.

We've held that advantage for some time.

We need to make sure we continue to drive it through our operational excellence initiatives and the various other programs we have in place to leverage our scale and continue to become more efficient.

So yeah, it will happen over time but it will happen over time as long as we're in this business, because that's the nature of the business.

Okay.

And then when you talk about sales force reorganization, does that mean more structural incentives to improve the mix?

Does that mean hiring new salespeople?

Does that mean reorganize how they're reporting?

I'm struggling to understand how that's going to translate into a better mix on the sell through side.

It's making sure that we have the right people and the right quantities of people both focused on retail independents and our hospital customer.

We have the greatest opportunity to drive value added to the customer and drive our own profitability.

We have gone through our sales forces and ensured and make sure we have our best performing reps on the right customers.

In some cases that's meant replacing some customers.

In some cases that's meant shifting position that were focused on other customers to retail independents and hospitals, particularly the most potentially profitable accounts to ensure that we're driving profitability there.

We'll continue to adjust the incentives for those reps to ensure that they're rewarded based on the right incentives including profitability of their account.

Thanks, John.

Thank you.

Next question?

Your next question comes from the line of Robert Willoughby with Banc of America Securities.

Kerry, is your enthusiasm for the supply chain medical business, the rebound you're experiencing here an indication now that you're happy with the business, content to keep it, or are we still exploring alternative.

Similar to the last couple conversations we had on this, we continue to believe this is a business that has reasonably good growth propects, and higher margins than Pharma.

We also see our way clear to improvements in how we're operating our presource business, how we're operating the end-to-end supply chain within supply chain medical.

I think it's going to be a business that we'll be happy with the returns and as I mentioned before, it's a very important part of our total hospital offering, and it gives us critical scale and mass that is frankly having an improvement on what we're doing Clinical and Medical Products.

In other words, I think some of the good results we're seeing in CMP is because of our broad based strength within the hospital market.

So you know, as I commented to you before, I think this business has the capabilities to provide decent returns.

I think the market dynamics for this segment are favorable, particularly compared to some of the other businesses we are involved in distribution.

So my goal is to make sure we get to what we promised on this and we're feeling on the way.

We've got top line growth back at 6%, some business that has higher margins on a going basis than we see in Supply Chain Pharma.

And so we're comfortable.

Thanks, Bob.

Operator, next question.

Your next question comes from from the line of Charles Boorady with Citi.

My question is on Supply Chain Pharma.

First, can you tell us what your same customer growth trends are versus any new customer wins or customer losses?

Charles, Kerry here.

I mean, I think we -- we have pretty stable books of business with CVS.

So I think our business with CVS moves a lot in line with their same store Pharma sales, likewise for Walgreens.

So I think we pretty much track in line with those customers as their business goes.

Charles, if your question was, you know, if you strip out wins and losses what is sort of the organic growth of our existing customers, it's about 4%.

Okay.

And you mentioned CVS and CVS and CareMark's merger has led to speculation whether they might bring some functions in house or switch some functions from one of the wholesaler relationships to another.

Are you seeing any change at all in that relationship so far?

As one of our colleagues says, we're just privileged to be able to serve CVS.

I think the key point I would say is we recently renewed the contract and received an increased award of business.

I think that's encouraging of our relationship with CVS.

We value them immensely and we are looking forward to continuing a relationship with that customer.

Thanks, Charles.

Operator, we have time for one more question.

There are no further questions in the queue.

I'll now turn the call back over to Mr.

Reflogal for closing remarks.

I just want to thank everyone for your participation today and this concludes our earnings call.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Good day.