Value-Added Services Top Off Cardinal Health’s Core Distribution Business

Multinational health care industry services provider Cardinal Health Inc., regarded as one of the most successful companies in the sector, has long espoused growth through acquisitions. While many of Cardinal’s early health care acquisitions were focused on building scale and market share in its core distribution business, the company’s recent acquisition activity has focused mainly on gaining value-added service businesses that play off the strengths of its drug distribution operations. Founded in 1971 as Cardinal Foods, a small food distributor in Columbus, Ohio, the company’s early years were spent building market share in the food distribution arena, and in a matter of years the company had grown into a strong regional player. By the late 1970s, however, the industry had consolidated into a handful of sizeable, national players, which limited Cardinal’s growth potential. While growth prospects for regional food distribution firms looked dim, the drug distribution market offered strong growth prospects. Building on its strength in distribution, Cardinal expanded into pharmaceuticals distribution with the 1980 acquisition of Bailey Drug Co., a drug distributor based in Zanesville, Ohio. The firm changed its name to Cardinal Distribution to reflect its presence in the two markets. The company continued to grow both businesses – relying heavily on acquisitions – until the late 1980s, when Cardinal’s drug distribution operations had grown considerable larger than its food distribution business. Cardinal sold the food business in 1988 and adopted its current name, Cardinal Health. Focusing solely on drug distribution, Cardinal carved out a position for itself as a leading, national player in drug distribution. Expansions are rooted in the core Cardinal’s evolution into one of the country’s leading providers of health care products and services includes more than 50 acquisitions in the health care sector. Cardinal companies develop, manufacture, package, and market health care products; distribute pharmaceuticals and medical supplies; develop drug delivery technologies; and offer consulting and other services. In the last few years Cardinal has been using acquisitions to add higher-margin units to the solid pharmaceuticals distribution platform it has built over the years, says Russ Hagey, a managing director for Bain & Co. in Los Angeles and co-head of the firm’s health care practice on the West Coast. “Cardinal has almost a dual strategy of entering new markets while partly staying anchored in its core business,” he says. Cardinal has a clear set of screening guidelines for its acquisition candidates, and has never pursued a hostile takeover. The company looks to buy the No. 1 or No. 2 player in either a region or a market, and very often keeps the existing management in place after a deal has closed, Hagey notes. “Cardinal Health is one of the better-run companies in the health care sector, primarily because it has had a very clear focus on its core business and has been systematic about adding adjacencies on top of that business. It uses acquisitions as a vehicle to do that, and with great success, in my opinion,” he adds. Cardinal has added a number of value-added service businesses to its portfolio, including Pyxis Corp., which provides medication and supply dispensing systems to hospitals, nursing homes, and other health care facilities; R.P. Scherer Corp. and Automated Liquid Packaging Inc., which develop drug-delivery systems and provide contract manufacturing services; Allegiance Corp., a medical and surgical products manufacturer and distributor; Owen Healthcare Inc., a provider of pharmacy management and information services for hospitals; PCI Services Inc., a supplier of contract manufacturing and packaging services to the health care industry; and Medicine Shoppe International Inc., which provides pharmacy franchising services. Top spot in the nuclear pharmacy market Most recently, Cardinal picked up Syncor International Corp., the leading provider of nuclear pharmacy services, for approximately $1.1 billion. The deal provides Cardinal with a leadership position in the high-growth and profitable nuclear pharmacy, or radiopharmacy, business. Syncor’s radiopharmacy business will enhance Cardinal’s current radiopharmacy business, Central Pharmacy Services, a segment acquired through its acquisition of Bindley Western Industries Inc. last year. A nuclear pharmacy is a highly specialized, licensed facility that supplies radioactive compounds that are used to diagnose, monitor, and treat cancer and heart disease. The deal gives Cardinal about a 58% market share in the $1.1 billion nuclear pharmacy business in the U.S. On its own, Syncor had operated 130 radiopharmacies in the U.S. with a 52% market share. “The radiopharmacy business leverages Cardinal’s expertise in distribution. Since there are there are a number of services involved in the process of supplying radiopharmaceuticals, from mixing, transporting, and dispensing the isotopes to providing waste removal services after the radiopharmaceuticals have been used, radiopharmacy provides another value-added service business for Cardinal,” says Hagey. Diagnostic imaging is a growth market, says Hagey, although nuclear medicine makes up one of the smallest portions of the sector, trailing magnetic resonance imaging (MRI), computed axial tomography (CAT) scanning, and ultrasound, says Hagey. Yet, nuclear medicine represents one of the fastest-growing diagnostic methods, because radioactive isotopes are used in cardiology and oncology diagnoses, which, because of the aging of the population, are one the upswing, he notes. Industry experts have also pointed out that Syncor is well positioned in the emerging positron emission tomography (PET) scanning market, currently estimated at $25 million but expected to exceed $600 million by next year. A PET scan measures the emission of positrons from the brain after a small amount of radioactive isotopes have been injected into the patient’s blood stream. According to news releases, Syncor has been allocating resources to build PET cyclotron production facilities, hire additional sales and marketing staff, and purchase supplies that its pharmacies need to mix and deliver PET compounds. Syncor also comes with an exclusive agreement to dispense Cardiolite – a diagnostic imaging agent developed by DuPont Co. that is used in heart disease and breast cancer screening. Cardiolite is now sold by Bristol-Myers Squibb Co., which acquired rights to the product through its 2001 acquisition of DuPont Pharmaceuticals. Followers of the industry estimate that about 95% of all Cardiolite is currently provided through Syncor. The company’s Cardiolite contract with Bristol-Myers expires at the end of next year, but Hagey believes that as part of the Syncor acquisition strategy, Cardinal anticipated putting its negotiating muscle into the Cardiolite contract renegotiations, providing for better odds of a resolution in Syncor’s favor. While Cardinal has branched out into higher-margin niche markets, Hagey sees potential for the company to use the wealth of information at its fingertips to provide new services to customers. “Cardinal must have access to a great amount of information, such as what products and services hospitals use and what they cost. I would think there is a source of value in that type of information, with applicability to monitoring product and service usage and managing costs.”