KEY EXECUTIVES:
R. Kerry Clark, Chairman and CEO
Jeffrey W. Henderson, CFO
Michael A. Duffy, President, Medical Supply Chain
Michael A. Lynch, Group President, Clinical and Medical
Products
David L. Schlotterbeck, Vice Chairman and CEO, Clinical
and Medical Products
Dwight Winstead, Group President, Clinical and Medical
Products
GLOBAL HEADQUARTERS: Dublin, Ohio
Cardinal Health spent a good portion of fiscal 2008 preparing for a major restructuring that occurred at the start of fiscal 2009. In early July 2008, the company announced the consolidation of its four businesses into two segments, Healthcare Supply Chain Services and Clinical and Medical Products.
Cardinal had five distinct divisions before it sold its Pharmaceutical Technologies and Services arm in 2007 and came up with a plan to restructure the remaining businesses.
Cardinal’s nuclear pharmacies and its distribution centers for pharmaceuticals and medical products comprise the Healthcare Supply Chain Services segment, while products related to medication dispensing, respiratory care and infection prevention are included in the Clinical and Medical Products segment.
“About two years ago, we began to focus Cardinal Health to serve customers in these two distinct areas of the healthcare industry,” R. Kerry Clark, Cardinal chairman and CEO, told shareholders in a letter published in the company’s 2008 annual report. Clark was named chairman and CEO after company founder Robert D. Walter retired at the end of fiscal 2008 (June 30).
“This evolution of our structure is important, because over time, it has become clear that Healthcare Supply Chain Services and Clinical and Medical Products have very different characteristics and need the flexibility to deploy resources and manage operations that optimize their business models and deliver value to customers,” Clark said.
As part of the restructuring, Cardinal is separately reporting results through a third segment for a group of businesses that include an outsourced pharmacy manager; an orthopedic implant and instrument firm; an enteral device and airway management product manufacturer; and a pharmacy company.
Though they are valuable to the company, executives are nevertheless evaluating these businesses to determine “their fit in the existing segment structure.”
As a result of the restructuring, Cardinal cut 600 jobs, or about 1.5 percent of its work force. Those job cuts will cost the company $63 million in restructuring charges, which it will recognize in fiscal 2009.
Cardinal incurred $65.7 million in restructuring charges in fiscal 2008, a 63.8 percent jump compared with the $40.1 million in restructuring expenses the company reported in fiscal 2007. Acquisition charges were cut in half, while litigation and other expenses fell substantially, going from $630.4 million in fiscal 2007 to $19.4 million in fiscal 2008. Cardinal’s high legal bill in fiscal 2007 was triggered by the settlement of a lawsuit filed by shareholders that accused the company of accounting irregularities and inflated earnings. Cardinal denied any wrongdoing and established a $600 million reserve for the settlement.
Total consolidated revenue rose 5 percent in fiscal 2008, reaching $91 billion. Operating earnings jumped 54 percent to $2.1 billion, and non-GAAP operating earnings climbed 3 percent. Cardinal reported diluted earnings per share (EPS) of $3.61, a 74 percent increase compared with a diluted EPS of $2.07 in fiscal 2007. Non-GAAP diluted EPS from continuing operations in fiscal 2008 rose 11 percent to $3.80.
In his letter to shareholders, Clark said his company made “steady progress” in fiscal 2008 in Healthcare Supply Chain Services, while the Clinical and Medical Products segments experienced “very strong top and bottom line growth.” About halfway through the fiscal year, Cardinal executives hired George S. Barrett to lead the Healthcare Supply Chain Services sector. Barrett was corporate executive vice president of global pharmaceutical markets for Teva North America, a Jerusalem-based pharmaceutical firm. Barrett replaced Mark W. Parrish, who stepped down from the post in November 2007.
In addition to getting a new leader, the Healthcare Supply Chain Services sector also got the first glimpse of its new home in fiscal 2008. Cardinal began building a $50 million, 250,000-square-foot expansion at the company’s headquarters in Dublin, Ohio. The new addition, dubbed West Campus by Cardinal executives, has its own cafeteria, coffee shop and a fitness center. The layout features a “progressive open office environment designed to foster collaboration among employees and teams,” according to a news release about the expansion.
Cardinal’s Healthcare Supply Chain Services-Pharmaceutical and Healthcare Supply Chain Services-Medical segments reported a combined revenue of $87.3 billion, a 4 percent increase compared with the $84 billion both segments posted in fiscal 2007. Combined profit for the two segments fell 12 percent to $1.4 billion; Kerry attributed the decline to anti-diversion investments, large chain customer contract re-pricings and a decline in overall pharmaceutical market growth.
The Healthcare Supply Chain Services-Medical segment generated $8 billion in revenue in fiscal 2008, a 7.5 percent increase compared with the $7.5 billion in revenue the segment reported in fiscal 2007. Company executives attributed the growth to increased volume from existing hospital, laboratory, and ambulatory care customers, as well as new customers and favorable foreign exchange rates. Profit in this segment fell 4.7 percent to $303 million.
Revenue in Cardinal’s Clinical Technologies and Services segment grew 7.5 percent, going from $2.68 billion in fiscal 2007 to $2.88 billion in fiscal 2008. Profit totaled $496.6 million, a 25.7 percent increase compared with the $385.7 million the segment posted in fiscal 2007.
The most significant segment growth in fiscal 2008 occurred in Medical Products and Technologies, where revenue rose 46.8 percent to $2.69 billion and profit jumped 52 percent to $300 million. Many factors contributed to the growth including the acquisitions of Pleasantville, N.Y.-based Viasys Healthcare ($680 million) and Enturia Inc. in Leawood, Kan. ($21 million), international revenue growth ($100 million, of which $62 million came from favorable foreign exchange rates), higher sales from existing customers ($35 million) and new product launches ($32 million).
Some of those new product launches included the Esteem Micro Powder-Free Synthetic Surgical glove in August 2007. Made from a polyisoprene formula that is nearly identical to natural rubber latex, the Esteem Micro glove contains no protein allergens and is designed for procedures that require a more refined touch. The glove also can be used as an outer glove for medical procedures that require double gloves.
Cardinal also introduced a line of hemorrhage control bandages to hospitals, surgery centers and doctors’ offices in the United States during fiscal 2008. The company signed a four-year agreement with HemCon Medical Technologies Inc. in Portland, Ore., to distribute the bandages, which have been used by the U.S. military since 2003. Used to control severe arterial bleeding, the HemCon bandages are thinner, more flexible and sized differently than the original version. The bandages have been 97 percent effective in controlling bleeding on the battlefield, according to Cardinal.
As Cardinal rolled out its new products though, it was forced to issue a worldwide recall for the Alaris Pump module, model 8100 (formerly known as the Medley Pump module). The company recalled the device due to a defect that could lead to over-infusion. Cardinal became aware of the defect after reviewing customer complaints and service data; the company received one report of an injury and two reports of patient deaths that could have been linked to the defective pumps.