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Cardinal Health, Inc.

Cardinal Health, Inc.

Cardinal Health, Inc.
7000 Cardinal Place
Dublin, Ohio 43017
U.S.A.
Telephone: (614) 757-5000
Toll Free: (800) 234-8701
Fax: (614) 757-8871
Web site:http://www.cardinal.com

Public Company
Incorporated: 1971
Employees: 48,900 (est.)
Sales: $44.4 billion (2002)
Stock Exchanges: NYSE
Ticker Symbol: CAH
NAIC: 422210 Drugs, Drug Proprietaries, and Druggists Sundries Wholesalers; 421450 Medical, Dental and Hospital Equipment and Supplies Wholesalers; 551112 Offices of Other Holding Companies

Named for Ohios crimson state bird, Cardinal Health, Inc., ranks among Americas top wholesale drug distributors, with 50 principal pharmaceutical distribution facilities and 78 medical-surgical distribution facilities in the United States. Under the direction of Robert Walter since 1971, the company has evolved from a rather inconsequential Ohio food distributor into a trend-setting leader of the pharmaceutical industry. A steady stream of acquisitions50 since its inceptionhas helped to multiply Cardinal Healths sales from $429 million in 1986 to nearly $48 billion in 2001. By the mid-1990s, Cardinal came within about $1 billion in annual sales of breaking into the top spot among wholesale drug distributors, having an estimated 18 percent of the $57 billion wholesale market compared to the 19 percent stakes held by leading competitors McKesson Corporation and AmerisourceBergen Corporation.

During the course of its growth spurt, Cardinal diversified from its core wholesale drug distribution business into specialty laboratory and pharmaceutical supplies, computer software, and retail drugstores. While it was not the countrys largest drug distributor in terms of sales in the mid-1990s, Cardinal Health did rank highest in terms of market capitalization and profitability. A.G. Edwards investment analyst Donald Spindel asserted that Cardinal has been the most innovative and the fastest growing. To me, theyre really the top company in the industry. By the end of 2000, three companiesCardinal, AmerisourceBergena, and McKessoncontrolled 90 percent of drug wholesaling.

1971 LBO Presages Transformation of Mid-Ohio Distributor

In 1971, just six months after his graduation from Harvards MBA program, 26-year-old Robert Walter acquired Monarch Foods through a leveraged buyout. Walter hoped to build this small central Ohio grocery distribution companywhich he renamed Cardinal Foodsinto an industry leader through acquisitions, but soon discovered that he was too late: the market had already begun to consolidate. To make matters worse, Cardinal was compelled to withdraw ten tons of salmonella-infected, prepackaged roast beef mid-decade.

Since consolidation within the wholesale segment of the grocery business was out of the question, Walter attempted to shift his growth strategy, launching Mr. Moneysworth warehouse supermarkets. By the mid-1980s, Cardinal had three Mr. Moneysworth outlets and plans to open stores in Ohio, West Virginia, and Kentucky.

But, Walter did not abandon the distribution industry. Rather, he turned to a business segment that was more profitable, more fragmented, and ripe for consolidation: pharmaceuticals. The company made its first foray into pharmaceutical distribution in 1980, when it acquired a drug distributor in Zanesville, Ohio, 60 miles from Columbus, and became known as Cardinal Distribution. Walter used the proceeds of a 1983 initial public offering to launch an acquisition spree that would gain steam over the next decade. During the 1980s, he targeted relatively small, privately-held distributors in adjacent states and regions for his friendly acquisitions. Reasoning that these local managers knew their markets and would work hard to maintain growth, Walter focused on successful companies with managers he characterized as the kings in our company in a 1993 interview with Forbes magazines Reed Abelson. Walter operated Cardinal as a holding company, allowing affiliated companies to continue relatively autonomously. The new subsidiaries brought the parent company geographic growth and economies of scale. He told Abelson, Knowing what I know now, I didnt know what I was doing. But it worked. Key acquisitionsfocused in the eastern United Statesincluded Ellicott Drug Co. (1984); James W. Daly, Inc. (1986); and John L. Thompson Sons & Co. (1986).

Late 1980s Exit from Grocery Business

Walter gave up on the marginally profitable grocery business in 1988, when he sold the Cardinal Foods, Inc., Midland Grocery Co., and Mr. Moneysworth subsidiaries to Roundys Inc., a cooperative wholesaler, for $27 million. Instead of declining, Cardinals annual revenues actually increased by one-third that year, and its net income more than doubled.

In contrast with his entry into the grocery distribution business, Walters foray into drug distribution proved well timed, for retail drugstores and hospitals were increasing their purchases from distributors. Cardinals acquisitions, while relatively small, were indicative of a budding trend toward consolidation in the distribution industry. Mergers and acquisitions shrunk the number of participants in this market by more than half, from 135 in 1984 to 80 in 1989 and less than 60 by 1995. By the end of the decade, Cardinal had accumulated a four-percent stake in the $22 billion wholesale drug business. Sales mounted from $429 million in 1986 to $700 million in 1989, while net income grew from $6 million to $9 million during the same period.

Cardinals profitable growth did not come exclusively from acquisitions. From 1986 to 1989, in fact, the company was able to increase productivity in nearly 80 percent of its operations. Computer automation was an important factor in this program. Cardinal employees developed IBM-compatible software to increase purchasing, inventorying, and distribution efficiency. A company executive told Financial Worlds Jagannath Dubashi that the AccuNet system can reduce the administrative costs of [a hospitals] pharmacy operations by as much as 80 percent. AccuNet not only helped Cardinal cut its own operating margins by 20 percent from 1988 to 1991, but also increased its level of customer service, offering its clients automated inventory management and up-to-date drug pricing information. Computer links with customers enabled Cardinal to fill and ship orders within 24 hours of receipt.

Ever Larger Acquisitions Mark 1990s

Cardinal moved steadily up the ranks of the countrys largest drug distributors with revenues exceeding $1 billion for the first time in 1991. It simultaneously increased its geographic reach in the early 1990s via significantly larger acquisitions. Purchase or perish was the theme in the market that by 1993 was dominated by seven major companies which monopolized 78 percent of the industrys estimated $40 billion sales. The addition of four new subsidiaries moved Cardinal from its bulkhead in the Northeast United States into the Mid-Atlantic and Southeastern states. Acquisitions included Ohio Valley-Clarksburg (1990, the Mid-Atlantic); Chapman Drug Co. (1991, Tennessee); PRN Services (1993, Michigan); and Solomons Co. (1993, Georgia).

By the end of 1993, the company was ready to turn westward, but its rapid growth had caught the attention of well-established industry leaders McKesson Corp. and Bergen Brunswig Corp. When Walter made a move to acquire Alabamas Durr-Fillauer Medical, Bergen Brunswig quickly launched a bidding war with the upstart Ohio company. Under pressure from Bergen Brunswig, the price tag shot up from $250 million to $450 million in just four months. Although Walter lost the battle for Durr-Fillauer, he did not leave the contest empty-handed; Cardinal drew five of the target companys top managers to its ranks. Moreover, some industry observers criticized Bergen Brunswig for overpaying and praised Walters self-control throughout the ego-charged competition.

Walter more than made up for this minor setback with several major acquisitions from 1994 to 1996. The merger of Cardinal and Whitmire Distribution in 1994 added over $2.25 billion in annual sales and made Cardinal Americas third-largest drug distributor. With its strong distribution network in the western and central United States, Whitmire was a long-sought piece of Cardinals nationwide puzzle. The parent companys geographic scope32 distribution centers across the countryenabled it to compete for bigger business. In 1994, the company signed a $900 million contract to supply mass merchandiser Kmarts nearly 1,700 pharmacies. And, in 1995, it earned the right to supply pharmaceutical goods to the 175-store Wakefern grocers cooperative.

The acquisition of Medical Strategies in 1994 added Healthtouch computerized kiosks to Cardinals repertoire. These electronic point-of-purchase machines offered pharmacy customers access to up-to-date data on illnesses and treatment options. The kiosks generated income via advertising and promoted featured products with coupons; Cardinal claimed that its more than 1,000 Healthtouch machines increase incremental sales of the featured products by 20 percent on average.

Company Perspectives:

Cardinal Health, Inc., is the leading provider of products and services supporting the health care industry. Cardinal Health companies develop; manufacture, package, and market products for patient care; develop drug-delivery technologies; distribute pharmaceuticals, medical-surgical and laboratory supplies; and offer consulting and other services that improve quality and efficiency in health care. Headquartered in Dublin, Ohio, Cardinal Health employs more than 49,000 people on five continents and produces annual revenues of more than $40 billion. Cardinal is ranked #23 on the current Fortune 50 list and was named as one of The Worlds Best companies by Forbes magazines in 2002.

Cardinal entered the retail drug industry late in 1995, when the parent company traded $348 million worth of its stock for full ownership of St. Louis-based Medicine Shoppe International, a pharmacy franchiser with over 1,000 stores. Less than six months later, Cardinal announced its $870-million stock swap for Pyxis, the nations leading manufacturer of automatic drug dispensing machines used in hospitals. Pyxis subsidiary Allied Pharmacy Management Inc. gave Cardinal entree into the health care information network business. PCI Services, Inc., a pharmaceutical packager, was acquired in July 1996 for $145 million in cash and $56 million of borrowed money. Reflecting on his companys recent activities, Walter noted, Cardinal has been progressively expanding its business beyond the purely logistical side of drug distribution to providing a full range of value-added information, marketing and educational services to our customers.

These acquisitions helped make Cardinal virtually impervious to the recession that gripped the country in the early years of the decade. For while customers like hospitals and drugstoresthemselves under pressure from managed health care plans and other cost-conscious insurerswhittled away at drug distributors gross profit margins, reducing them from over 17.5 percent in 1960 to 6.5 percent by 1992, Cardinals increasing share of the market and high level of efficiency helped it maintain consistent growth in sales and profit.

Cardinal also maintained healthy margins by focusing on the most profitable segments of its business. In the 1980s, for example, the company targeted independent drugstores that could not demand the volume discounts sought by larger chains. But, as these retailers began to disappear from the pharmaceutical landscape, Cardinal sought out new profit centers: Pyxis groundbreaking dispensers, Medicine Shoppes retail pharmacies, and Healthtouch information systems, for example. Nevertheless, Cardinal was not completely impervious to the cost-cutting pressures that plagued the industry; its gross margins declined from 7 percent in 1992 to about 5.8 percent in 1996.

Fueled by its record-setting acquisitions, Cardinals sales and net income multiplied rapidly in the early 1990s. Revenues doubled from $874 million in 1990 to almost $2 billion by 1993, then nearly quadrupled to $7.8 billion by 1995. Net income made similar advances, growing from $13 million in 1990 to $34 million in 1993 and $85 million in 1995. Employment more than tripled during this period and Cardinals distribution centers nationwide increased from 6 to 32. In an early 1995 profile, Financial Worlds Jennifer Reingold characterized Cardinal as by far the healthiest of the drug distribution industrys five largest companies. Although it was not the sales leader at that time, Cardinal topped the industry in profits and market capitalization. Cardinal Health stockholdersCEO Walter among the largest with about 8 percent of its stockwere well rewarded. According to Forbes magazines 1996 analysis of U.S. companies 10-year total return, Cardinal ranked 25th.

Cardinal evolved beyond drug distribution into total health care by acquiring companies that serve health care manufacturers and providers of patient care. In 1997, Cardinal acquired Owen Healthcare, of Houston, Texas, a leading provider of pharmacy management and information services for hospitals. In 1998, the Federal Trade Commission blocked Cardinals attempt to buy competitor Bergen Brunswig and McKessons attempt to acquire AmeriSource Health. The decision was upheld by a federal judge. Cardinal did acquire R.P. Scherer, the worlds largest maker of soft-gels and other drug-delivery solutions, located in Basking Ridge, New Jersey. The following year, Cardinal bought Allegiance, the largest medical-surgical products distributor in the United States. Also acquired in 1999 was Automatic Liquid Packaging, a Woodstock, Illinois-based custom manufacturer of sterile liquid Pharmaceuticals and other health care products.

Another record-breaking year followed for Cardinal in 2000. Operating revenues reached an all-time high of more than $25 billion. Net earnings grew 24 percent to $730 million. Contributing to the success were enhanced operations resulting in an improved market position and increased productivity, as well as the continuing implementation of a focused acquisition strategy. In August, Cardinal completed the acquisition of Bergen Brunswigs medical supply distribution business, a distributor of medical, surgical and laboratory supplies to doctors offices, long-term care and nursing centers, hospitals and other providers of care. Bergen Brunswig Medical Corporation was acquired for approximately $180 million. Other 2000 acquisitions included Rexam Cartons, Inc.; Enhanced Derm Technologies, Inc.; ENDOlap, Inc.; Ni-Med kit manufacturing; CurranCare, LLC; VegiCaps Division (from American Home Products Corporation); and a manufacturing facility in Humacao, Puerto Rico. Cardinal also established a two-pronged Internet strategy with the launch of cardinal.com, a comprehensive, web-enabled site for health care product procurement, fulfillment, support and information; and NewHealthExhange.com, an independent, Internet-based business-to-business electronic health care exchange with McKesson, AmerisourceBergen, Fisher Scientific, and Owens & Minor.

Key Dates:

1971:
Robert Walter acquires Monarch Foods in leveraged buyout.
1980:
Walter acquires drug distributor in Zanesville, Ohio
1983:
Company goes public as Cardinal Distribution.
1988:
Walter sells food group to Roundys Inc.
1991:
Cardinals revenues exceed $1 billion.
1994:
Cardinal acquired Whitmore Distribution and Medical Strategies; company name changed to Cardinal Health.
1995:
Cardinal acquires Medicine Shoppe International.
1996:
Cardinal acquires Pysix and PCI Services, Inc.
1997:
Cardinal acquires Owen Healthcare Inc.
1998:
FTC blocks Cardinals purchase of Burgen Brunswig; Cardinal acquires R.P. Scherer.
1999:
Cardinal acquires Allegiance.
2000:
Cardinal acquires Bergen Brunswig Medical Corporation; Cardinal establishes Cardinal.com and NewHealthexchange.com.
2001:
Cardinal acquires Bindley Western Industries and forms ArcLight Systems, LLC.

In January 2001, Cardinal celebrated its 30th anniversary and began another banner year in financial records and value to customers. Stock prices rose 40.2 percent and sales rose 28 percent to $38.7 billion. Chairman Walter credited the companys success to strong internal growth combined with meaningful acquisitions and significant partnerships. For the year, nearly $30 billion was spent on 13 acquisitions, with each company meeting the companys standard of being outstanding by itself, fitting closely into our strategy, and making Cardinal collectively stronger for the future. Bindley Western Industries, Inc., an Indianapolis, Indiana-based wholesale distributor of Pharmaceuticals and provider of nuclear pharmacy services, was acquired in February. Other acquisitions included International Processing Corporation; Critical Care Concepts; American Threshold; FutureCare; SP Pharmaceuticals, LLC; Professional Health-Care Resources; and a manufacturing facility in Raleigh, North Carolina. To foster long-term partnerships with providers and manufacturers, Cardinal formed ArcLight Systems, LLC, a venture between Cardinal and several retail chain pharmacies to provide real-time pharmaceutical sales data to pharmaceutical manufacturers.

As of August 2001, Cardinal had 48,900 employees in twenty-two countries on five continents. Forty-two percent of Cardinal employees lived outside the United States. The companys U.S. facilities were located in 41 states and Puerto Rico. Cardinals operations were organized based on the products and services offered, comprising four reporting segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. Through innovative products and services to tens of thousands of customers in the health care industry, Cardinal has more than adequately survived in its highly competitive industry. It received such accolades as number 23 on Business Weeks list of 50 Best Companies, and among the top 100 of Internet Weeks top commercial web innovators.

A Look to the Future

In his 10 Reasons for Our Optimism, Chairman Walter sees a bright future for Cardinal that starts with a favorable health care environment and includes some of Cardinals strengths that enable us to be particularly successful, like market-leading positions, superior scale and resources, and propriety offerings. Coupled with past investments, a diversified business model, a seasoned management team, and risk and ownership orientation, the tradition and culture continue as Cardinals blueprint for success.

Principal Subsidiaries

Allegiance Healthcare; ALP (Allied Liquid Packaging); Bergen Brunswig Medical Corporation; Cardinal Distribution; Medicine Shoppe International, Inc.; Pyxis Corporation; R.P. Scherer.

Principal Competitors

AmerisourceBergen Corporation; McKesson Corporation.

Further Reading

Abelson, Reed, Its My Money, Forbes, March 29, 1993, pp. 5657.

Americas Largest Corporations, Fortune, April 15, 2002.

Appleby, Chuck, Betting Against Health Care, Hospitals & Health Networks, June 20, 1996, pp. 3437.

Autry, Ret, Cardinal Distribution, Fortune, June 3, 1991, p. 104.

Byrne, Harlan S., Cardinal Distribution Co.: Acquisitions Carry Drug Wholesaler South and West, Barrons, November 11, 1991, pp. 4748.

Cardinal Health Inc., Hoovers Handbook of American Business 2002, 2001, pp. 320321.

Cardinal Health Plans to Buy Drugstore Franchiser, New York Times, August 29, 1995, p. C3.

Cardinal to Buy Daly, Drug Wholesaler, Supermarket News, September 30, 1985, p. 14.

Cardinal to Buy PCI in Stock Transaction Valued at $201 Million, Wall Street Journal, July 25, 1996, p. C20.

Dubashi, Jagannath, The Tie that Binds, Financial World, April 30, 1991, p. 66.

Freudenheim, Milt, Cardinal Health to Buy Pyxis in Stock Swap, New York Times, February 8, 1996, p. Cl.

Heun, Christopher T., Pharmacies Band Together to Share and Sell Drug Data, Company Business and Marketing, 2001.

Jereski, Laura, Cardinal Health, Its Red-Hot Growth Slowing, Defends Its Flighty Price with Wider Margins, Wall Street Journal, January 16, 1996, p. C2.

Marsh, Barbara, Bergen Brunswig to Take Goodwill Charge of $87 Million, Los Angeles Times, October 8, 1998, p. C2.

Maturi, Richard, and Melynda Dovel Wilcox, Small Stocks with Big Ideas, Changing Times, March 1990, pp. 5961.

Mehlman, William, Cardinal on Cutting Edge of Wholesale Drug Boom, Insiders Chronicle, June 11, 1990, pp. 14.

Murray, Matt, Cardinal Health Takes Pulse of New Arenas for Growth, Wall Street Journal, February 28, 1996, p. B4.

Pearlman, Andrew, Cardinal Distribution: Popping Pills, Financial World, July 24, 1990, p. 18.

Reingold, Jennifer, Cardinal Rule, Financial World, January 31, 1995, pp. 3638.

Reitman, Valerie, Cardinal Sets Whitmire Deal for $303 Million, Wall Street Journal, October 12, 1993, p. A2.

Rose, Frederick, Bergen Brunswigs Shares Jump 10 Percent on Rumors Cardinal Health May Bid, Wall Street Journal, February 27, 1995, p. B6.

Siwolop, Sana, Cardinal Doesnt Need Any Medicine, Financial World, September 19, 1989, p. 18.

Speer, Tibbett L. Just Say Grow, Hospitals & Health Networks, August 5, 1996, pp. 3435.

The Best Performers, Business Week, Spring 2002.

Ukens, Carol, Wholesalers Push Inventory Consignment for Cost Efficiencies, Drug Topics, July 8, 1996, p. 108.

Vecchione, Anthony, Cardinal Health Signing Merger Deal with Pyxis, Drug Topics, February 19, 1996, p. 25.

Wright, J. Nils, Whitmire to Merge with Cardinal, Business Journal Serving Greater Sacramento, January 31, 1994, pp. 23.

Zimmerman, Susan, Roundys to Buy Cardinal Food Unit, Supermarket News, March 28, 1988, p. 1.

April Dougal Gasbarre

update: Carol D. Beavers

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Cardinal Health, Inc.

Cardinal Health, Inc.

655 Metro Place S., Ste. 925
Dublin, Ohio 43017
U.S.A.
(614) 761-8700
Fax: (614) 761-8919
Web site: http://www.healthtouch.com

Public Company
Incorporated:
1971
Employees: 4,800
Sales: $8.9 billion (1996)
Stock Exchanges: New York
SICs: 5122 DrugsWholesale; 5047 Medical EquipmentWholesale; 6719 Holding Companies, Not Elsewhere Classified

Named for Ohios crimson state bird, Cardinal Health, Inc. ranks among Americas top three wholesale drug distributors, with 36 distribution facilities in 24 states. Under the direction of Robert Walter since 1971, the company has evolved from a rather inconsequential Ohio food distributor into a trend-setting member of the pharmaceutical industry. A steady stream of acquisitions13 from 1979 to 1995helped multiply Cardinal Healths sales from $429 million in 1986 to nearly $9 billion by 1995. By mid-decade, Cardinal came within about $1 billion in annual sales of breaking into the top spot, having an estimated 18 percent of the $57 billion wholesale market compared to the 19 percent stakes held by industry leaders McKesson Corp. and Bergen Brunswig Corp.

During the course of its growth spurt, Cardinal diversified from its core wholesale drug distribution business into specialty laboratory and pharmaceutical supplies, computer software, and retail drugstores. While it was not the countrys largest drug distributor in terms of sales in the mid-1990s, Cardinal Health did rank highest in terms of market capitalization and profitability. A.G. Edwards investment analyst Donald Spindel asserted that Cardinal has been the most innovative and the fastest growing. To me, theyre really the top company in the industry.

1971 LBO Presages Transformation of Mid-Ohio Distributor

In 1971, just six months after his graduation from Harvards MBA program, 26-year-old Robert Walter acquired Monarch Foods through a leveraged buyout. Walter hoped to build this small central Ohio grocery distribution companywhich he renamed Cardinal Foodsinto an industry leader through acquisitions, but soon discovered that he was too late: the market had already begun to consolidate. To make matters worse, Cardinal was compelled to withdraw ten tons of salmonella-infected, prepackaged roast beef mid-decade.

Since consolidation within the wholesale segment of the grocery business was out of the question, Walter attempted to shift his growth strategy, launching Mr. Moneysworth warehouse supermarkets. By the mid-1980s, Cardinal had three Mr. Moneysworth outlets and plans to open stores in Ohio, West Virginia, and Kentucky.

But Walter did not abandon the distribution industry. Rather, he turned to a business segment that was more profitable, more fragmented, and more ripe for consolidation: pharmaceuticals. The company made its first foray into pharmaceutical distribution in 1975, when it acquired Zanesville Distribution. Walter used the proceeds of a 1983 initial public offering to launch an acquisition spree that would gain steam over the next decade. During the 1980s, he targeted relatively small, privately-held distributors in adjacent states and regions for his friendly acquisitions. Reasoning that these local managers knew their markets and would work hard to maintain growth, Walter focused on successful companies with managers he characterized as the kings in our company in a 1993 interview with Forbes magazines Reed Abelson. Walter operated Cardinal as a holding company, allowing affiliated companies to continue relatively autonomously. The new subsidiaries brought the parent company geographic growth and economies of scale. He told Abelson that Knowing what I know now, I didnt know what I was doing. But it worked. Key acquisitionsfocused in the eastern United Statesincluded Ellicott Drug Co. (1984); James W. Daly, Inc. (1985); and John L. Thompson Sons & Co. (1986).

Late 1980s Exit from Grocery Business

Walter gave up on the marginally profitable grocery business in 1988, when he sold the Cardinal Foods, Inc., Midland Grocery Co., and Mr. Moneysworth subsidiaries to Roundys Inc., a cooperative wholesaler, for $27 million. Instead of declining, Cardinals annual revenues actually increased by one-third that year, and its net income more than doubled.

In contrast with his entry into the grocery distribution business, Walters foray into drug distribution proved well-timed, for retail drugstores and hospitals were increasing their purchases from distributors. Cardinals acquisitions, while relatively small, were indicative of a budding trend toward consolidation in the distribution industry. Mergers and acquisitions shrunk the number of participants in this market by more than half, from 135 in 1984 to 80 in 1989 and less than 60 by 1995. By the end of the decade, Cardinal had accumulated a four percent stake in the $22 billion wholesale drug business. Sales mounted from $429 million in 1986 to $700 million in 1989, while net income grew from $6 million to $9 million during the same period.

Cardinals profitable growth did not come exclusively from acquisitions. From 1986 to 1989, in fact, the company was able to increase productivity in nearly 80 percent of its operations. Computer automation was an important factor in this program. Cardinal employees developed IBM-compatible software to increase purchasing, inventorying, and distribution efficiency. A company executive told Financial Worlds Jagannath Dubashi that the AccuNet system can reduce the administrative costs of [a hospitals] pharmacy operations by as much as 80 percent. AccuNet not only helped Cardinal cut its own operating margins by 20 percent from 1988 to 1991, but also increased its level of customer service, offering its clients automated inventory management and up-to-date drug pricing information. Computer links with customers enabled Cardinal to fill and ship orders within 24 hours of receipt.

Ever-Larger Acquisitions Mark Early 1990s

Cardinal moved steadily up the ranks of the countrys largest drug distributors and simultaneously increased its geographic reach in the early 1990s via significantly larger acquisitions. Purchase or perish was the theme in the market that by 1993 was dominated by seven major companies which monopolized 78 percent of the industrys estimated $40 billion sales. The addition of four new subsidiaries moved Cardinal from its bulkhead in the Northeast U.S. into the Mid-Atlantic and Southeastern states.

By the end of 1993 the company was ready to turn westward, but its rapid growth had caught the attention of well-established industry leaders McKesson Corp. and Bergen Brunswig Corp. When Walter made a move to acquire Alabamas Durr-Fillauer Medical, Bergen Brunswig quickly launched a bidding war with the upstart Ohio company. Under pressure from Bergen Brunswig, the price tag shot up from $250 million to $450 million in just four months. Although Walter lost the battle for Durr-Fillauer, he did not leave the contest empty-handed; Cardinal drew five of the target companys top managers to its ranks. Moreover, some industry observers criticized Bergen Brunswig for overpaying and praised Walters self-control throughout the ego-charged competition.

Walter more than made up for this minor setback with several major acquisitions from 1994 to 1996. The merger of Cardinal and Whitmire Distribution in 1994 added over $2.25 billion in annual sales and made Cardinal Americas third-largest drug distributor. With its strong distribution network in the western and central United States, Whitmire was a long-sought piece of Cardinals nationwide puzzle. The parent companys geographic scope32 distribution centers across the countryenabled it to compete for bigger business. In 1994, the company signed a $900 million contract to supply mass merchandiser Kmarts nearly 1,700 pharmacies. And in 1995, it earned the right to supply pharmaceutical goods to the 175-store Wakefern grocers cooperative.

The acquisition of Medical Strategies in 1994 added Healthtouch computerized kiosks to Cardinals repertoire. These electronic point-of-purchase machines offered pharmacy customers access to up-to-date data on illnesses and treatment options. The kiosks generated income via advertising and promoted featured products with coupons; Cardinal claimed that its more than 1,000 Healthtouch machines increase incremental sales of the featured products by 20 percent on average.

Company Perspectives:

With annual sales of almost $9 billion, Cardinal Health is one of the countrys leading health care service providers. With its nationwide network of distribution facilities, the company is one of the largest wholesale distributors of pharmaceuticals and related health care products in the country. Cardinal Health has further extended its operational focus to include related businesses with several recent mergers. In fiscal 1996, the company acquired Pyxis Corporation, the largest manufacturer of unique, point-of-use systems which automate the distribution, management, and control of medications and supplies in hospitals and alternate care facilities; Medicine Shoppe International, Inc., the largest franchiser of independent retail pharmacies in the United States; and Allied Pharmacy Service, Inc., one of the largest providers of pharmacy management services to hospitals in the country.

Cardinal entered the retail drug industry late in 1995, when the parent company traded $348 million worth of its stock for full ownership of Medicine Shoppe International, a pharmacy franchiser with over 1,000 stores. Less than six months later, Cardinal announced its $870-million stock swap for Pyxis, the nations leading manufacturer of automatic drug dispensing machines used in hospitals. Pyxis subsidiary Allied Pharmacy Management Inc. gave Cardinal entree into the health care information network business. PCI Services, Inc., a pharmaceutical packager, was acquired in July 1996 for $145 million in cash and $56 million of borrowed money. Reflecting on his companys recent activities, Walter noted that Cardinal has been progressively expanding its business beyond the purely logistical side of drug distribution to providing a full range of value-added information, marketing and educational services to our customers.

These acquisitions helped make Cardinal virtually impervious to the recession that gripped the country in the early years of the decade. For while customers like hospitals and drugstoresthemselves under pressure from managed healthcare plans and other cost-conscious insurerswhittled away at drug distributors gross profit margins, reducing them from over 17.5 percent in 1960 to 6.5 percent by 1992, Cardinals increasing share of the market and high level of efficiency helped it maintain consistent growth in sales and profit.

Cardinal has also maintained healthy margins by focusing on the most profitable segments of its business. In the 1980s, for example, the company targeted independent drugstores who could not demand the volume discounts sought by larger chains. But as these retailers began to disappear from the pharmaceutical landscape, Cardinal sought out new profit centers: Pyxis groundbreaking dispensers, Medicine Shoppes retail pharmacies, and Healthtouch information systems, for example. Nevertheless, Cardinal was not completely impervious to the cost-cutting pressures that plagued the industry; its gross margins declined from 7 percent in 1992 to about 5.8 percent in 1996.

Fueled by its record-setting acquisitions, Cardinals sales and net income multiplied rapidly in the early 1990s. Revenues doubled from $874 million in 1990 to almost $2 billion by 1993, then nearly quadrupled to $7.8 billion by 1995. Net income made similar advances, growing from $13 million in 1990 to $34 million in 1993 and $85 million in 1995. Employment more than tripled during this period and Cardinals distribution centers nationwide increased from 6 to 32. In an early 1995 profile, Financial Worlds Jennifer Reingold characterized Cardinal as by far the healthiest of the drug distribution industrys five largest companies. Although it was not the sales leader, Cardinal topped the industry in profits and market capitalization. Cardinal Health stockholdersCEO Walter among the largest with about 8 percent of its stockhave been well-rewarded. According to Forbes magazines 1996 analysis of U.S. companies 10-year total return, Cardinal ranked 25th.

A Look to the Future

Although Cardinal appeared likely to continue its profitable growth pattern into the latter years of the decade, several uncertainties loomed. First, the companys bulk was likely to attract increased attention from antitrust regulators. Cardinal also faced the possibility that its success would make it a takeover target of one of the major pharmaceutical companies. A 48-year-old Robert Walter appeared to be paving the way for his retirement when he hired Abbott Labs John Kane as president and chief operating officer in 1993. Walters upcoming (although not necessarily imminent) retirement was another unknown; would the company survive in its highly competitive industry without the leader who guided it to the top ranks?

Principal Subsidiaries

Cardinal Distribution; Cardinal Specialty Companies; Allied Pharmacy Service, Inc.; Medicine Shoppe International, Inc.; Pyxis Corporation.

Further Reading

Abelson, Reed, Its My Money, Forbes, March 29, 1993, pp. 5657.

Appleby, Chuck, Betting Against Health Care, Hospitals & Health Networks, June 20, 1996, pp. 3437.

Autry, Ret, Cardinal Distribution, Fortune, June 3, 1991, pp. 104.

Byrne, Harlan S., Cardinal Distribution Co.: Acquisitions Carry Drug Wholesaler South and West, Barrons, November 11, 1991, pp. 4748.

Cardinal Health Plans to Buy Drugstore Franchiser, New York Times, August 29, 1995, p. C3.

Cardinal to Buy Daly, Drug Wholesaler, Supermarket News, September 30, 1985, p. 14.

Cardinal to Buy PCI in Stock Transaction Valued at $201 Million, Wall Street Journal, July 25, 1996, p. C20.

Dubashi, Jagannath, The Tie that Binds, Financial World, April 30, 1991, p. 66.

Freudenheim, Milt, Cardinal Health to Buy Pyxis in Stock Swap, New York Times, February 8, 1996, p. C1.

Jereski, Laura, Cardinal Health, Its Red-Hot Growth Slowing, Defends Its Flighty Price with Wider Margins, Wall Street Journal, January 16, 1996, p. C2.

Maturi, Richard, and Melynda Dovel Wilcox, Small Stocks with Big Ideas, Changing Times, March 1990, pp. 5961.

Mehlman, William, Cardinal on Cutting Edge of Wholesale Drug Boom, Insiders Chronicle, June 11, 1990, pp. 14.

Murray, Matt, Cardinal Health Takes Pulse of New Arenas for Growth, Wall Street Journal, February 28, 1996, p. B4.

Pearlman, Andrew, Cardinal Distribution: Popping Pills, Financial World, July 24, 1990, p. 18.

Reingold, Jennifer, Cardinal Rule, Financial World, January 31, 1995, pp. 3638.

Reitman, Valerie, Cardinal Sets Whitmire Deal for $303 Million, Wall Street Journal, October 12, 1993, p. A2.

Rose, Frederick, Bergen Brunswigs Shares Jump 10 Percent on Rumors Cardinal Health May Bid, Wall Street Journal, February 27, 1995, p. B6.

Siwolop, Sana, Cardinal Doesnt Need Any Medicine, Financial World, September 19, 1989, p. 18.

Speer, Tibbett L. Just Say Grow, Hospitals & Health Networks, August 5, 1996, pp. 3435.

Ukens, Carol, Wholesalers Push Inventory Consignment for Cost Efficiencies, Drug Topics, July 8, 1996, p. 108.

Vecchione, Anthony, Cardinal Health Signing Merger Deal with Pyxis, Drug Topics, February 19, 1996, p. 25.

Wright, J. Nils, Whitmire to Merge with Cardinal, Business Journal Serving Greater Sacramento, January 31, 1994, pp. 23.

Zimmerman, Susan, Roundys to Buy Cardinal Food Unit, Supermarket News, March 28, 1988, p. 1.

April Dougal Gasbarre

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"Cardinal Health, Inc.." International Directory of Company Histories. . Encyclopedia.com. 14 Dec. 2017 <http://www.encyclopedia.com>.

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