8. Cardinal Health
$8.8 Billion ($99B total)
KEY EXECUTIVES:
George S. Barrett, Chairman & CEO
Jeffrey W. Henderson, Chief Financial Officer
Michael A. Lynch, CEO, Medical Segment
Michael C. Kaufman, CEO, Pharmaceutical Segment
Mark R. Blake, Exec. VP, Strategy & Corporate Development
NO. OF EMPLOYEES: 31,200 (total)
GLOBAL HEADQUARTERS: Dublin, Ohio
“The journey of a thousand miles begins with one step.”
— Lao tzu, Chinese philosopher
Cardinal Health Inc. embarked on a transformational journey in fiscal 2010, one that began with a single, but nevertheless important step: the spinoff of its clinical and medical products businesses into an independent, wholly owned entity named CareFusion Corporation. The spinoff ended 12 months of planning, strategizing and restructuring by Cardinal Health executives, thus enabling the company to start a new chapter in conjunction with its 40th anniversary.
“With the spinoff of CareFusion complete, we began this journey with a commitment to reinvigorate our performance, our strategic positioning and our internal culture,” Cardinal’s Chairman and CEO George S. Barrett told shareholders in the company’s fiscal 2010 annual report. “And while the journey continues in fiscal 2011, the extent and rate of our progress on these dimensions was better than we anticipated.”
Better than anyone anticipated, really. Total revenue in fiscal 2010 rose 3 percent to $98.5 billion, or $1.62 per diluted share, and operating earnings grew 1.5 percent to $1.3 billion. The company only barely managed to increase its gross margin, edging out its FY2009 total by $33.2 million, or 0.89 percent, but it returned more than $500 million to shareholders and climbed a notch on the Fortune 500 list, moving from number 18 to number 17. While such feeble growth may not be the norm for a company that has branded itself a healthcare services industry leader, it proves the firm can stand on its own without the support of its surging medical products division (which, in 2008, posted an incredible 46.8 percent revenue increase).
Cardinal survived quite well in its first year without its reliable growth engine, considering it incurred $76 million in spinoff costs and net earnings plummeted 44 percent to $642.2 million. The firm generated $2.1 billion in cash from operations and its two main operating segments, Medical and Pharmaceutical, both posted revenue gains in fiscal 2010, ended June 30. The company’s Medical segment manufactures and sources such products as sterile and non-sterile procedure kits; single-use surgical drapes, gowns and apparel; exam and surgical gloves; and fluid suction and collection systems, while the Pharmaceutical sector distributes brand-name, generic and specialty drugs; operates nuclear pharmacies and cyclotron facilities; franchises retail pharmacies under the Medicine Shoppe and Medicap brands; and provides pharmacy services to hospitals and other healthcare facilities.
Cardinal’s Medical segment outperformed its Pharmaceutical division in FY2010, thanks to newfound areas of growth that executives inend to cultivate into future revenue boosters. Those areas include a burgeoning medical distribution business in Canada, which scored double-digit revenue and profit growth, and a steadily rising hospital supply business. Barrett insists that his firm is well positioned in the hospital supply space with a footprint across all customer channels and a rebuilt sourcing model for medical products.
Investments in the company’s ambulatory and clinical laboratory businesses also contributed to the solid performance of the Medical segment in 2010, though executives did not provide sales or revenue figures for either one. In the annual report, Barrett said only that the clinical laboratory business delivered “top- and bottom-line growth, helped in part by the irregular flu season in the first half of the fiscal year.”
Efforts in recent years to improve the performance of its Presource surgical kitting business finally paid off for Cardinal in FY2010. Through Lean Six Sigma initiatives and expansion into more surgical centers, the business once again generated profits, giving the firm precisely the sales pitch it needs to build upon that growth. Cardinal’s Presource kitting business helps customers create and maintain an efficient operating room supply chain and improve patient safety.
Each of Cardinal’s budding new offshoots of growth—from its Canadian medical distribution business to its Presource surgical kitting program—helped fuel a 7.2 percent rise in Medical segment revenue and an 11 percent surge in profit in fiscal 2010. The company’s annual report shows that revenue totaled $8.8 billion compared with fiscal 2009’s $8.16 billion (all FY2009 financial data reflects the reclassification of CareFusion to discontinued operations and the change in reporting segments).
Segment profit came to $428 million, a $43 million increase compared with the previous fiscal year.
Such solid growth did not infiltrate the Pharmaceutical segment, which recorded a 2 percent overall revenue increase and a 3 percent drop in profit. Still, the segment captured the lion’s share of revenue, garnering $89.8 billion, or 91 percent of Cardinal’s total revenue in fiscal 2010. Executives attributed the decrease in profit to a spate of generic drug launches and a shortage of Technetium-99, an isotope used by doctors 40,000 times a day to detect cancers and heart disease. Eighty percent of nuclear medicine scans use the isotope, derived from molybdenum-99 and combined with a substance to target a specific bodily organ or tumor. The shortage was triggered by the shutdown of a Canadian nuclear reactor in Chalk River, Ontario, that produces half the U.S. supply of molybdenum-99 and another in the Netherlands that was closed for maintenance.
Compensating for such unexpected headwinds wasn’t easy, but Cardinal did its best by strengthening partnerships with major pharmaceutical clients and shifting the company’s focus to programs that better address the needs of independent retail pharmacies. Other moves helped as well, namely the August 2009 acquisition of Biotech, a privately held operator of positron emission tomography (PET) cyclotrons and nuclear pharmacies in the southwestern United States, and the public-private collaboration Cardinal formed with the University of Washington to advance the use of molecular imaging in clinical investigations and trials. The partnership calls for the university’s radiology department to relocate a portion of its on-campus molecular tracer laboratories into Cardinal’s PET manufacturing facility in Seattle, Wash. Executives are hoping the shared space will inspire the two organizations to develop new molecular imaging agents.
Not all of Cardinal’s strategic moves were good for business, though. The company’s attempt at enhancing its Medicine Shoppe franchise backfired, triggering a class-action lawsuit filed by more than 600 franchisees who claimed the Dublin, Ohio-based firm used “heavy-handed tactics” and “predatory pricing” to renegotiate their agreements in 2009. Executives contend the firm simply gave franchisees the option of switching to an alternative model that offered a more flexible, fee-based structure (as opposed to the royalty-based standard). But the suit alleges that some franchise owners were required under a new contract to pay an early termination fee of $1 million or more. In addition, they also were forced to agree to purchase goods only from Cardinal for more than a dozen years.
The suit further accuses Cardinal of accepting tens of millions of dollars in prepaid franchise fees, and then reducing services. Owners who did not sign the new agreement were damaged by the “arbitrary reduction” of services, the suit asserts, whileCardinal undercut them by offering drastically lower fees tonew franchisees.