Cardinal Health 2009 Annual Report Download - page 63

Healthcare Supply Chain Services segment profit increased $5 million during fiscal 2009 compared to the
prior year. Segment profit was positively impacted by an increase in gross margin of $56 million and negatively
impacted by a $51 million increase in SG&A. The increase in gross margin was primarily due to increased
distribution service agreement fees and pharmaceutical price appreciation (combined impact of $164 million) and
increased manufacturer cash discounts ($157 million). The increased distribution service agreement fees and
manufacturer cash discounts were primarily the result of increased sales volume. Gross margin was negatively
impacted by increased customer discounts ($356 million) as a result of sales growth, including faster growth
(17%) of sales to bulk customers which tend to have larger customer discounts and customer repricings. The
Company expects a certain level of continued pricing pressure due to the competitive market in which it operates.
SG&A expenses for the twelve months ended June 30, 2009 increased slightly compared to prior year primarily
due to increase in bad debt expense ($38 million) based on the general economic conditions impacting certain
customers and bankruptcy filings by four regional chain customers partially offset by disciplined cost controls.
The increase in segment profit during fiscal 2009 was also partially due to the impact of acquisitions ($11
million).
The Company’s results could be adversely affected if sales of pharmaceutical products decline, competitive
pricing pressure intensifies, the frequency of new generic pharmaceutical launches decreases, generic price
deflation increases, or pharmaceutical price appreciation on branded products decreases. Alternatively, the
Company’s results could benefit if sales of pharmaceutical products increase, competitive pricing pressure
subsides, the frequency of new generic pharmaceutical launches increases, generic price deflation decreases, or
pharmaceutical price appreciation on branded products increases.
The Company expects certain factors to negatively impact fiscal 2010 including the timing of generic launches
and price deflation, the repricing of certain customer contracts and strategic positioning moves (such as
repositioning Medicine Shoppe and transitioning a significant vendor relationship to a distribution service
agreement).
Fiscal Year Ended June 30, 2008 Compared to Fiscal Year Ended June 30, 2007
Healthcare Supply Chain Services revenue growth of $3.3 billion or 4% during fiscal 2008 was primarily
due to additional volume from existing customers and pharmaceutical price appreciation (the combined impact of
these two factors was $4.8 billion). The pharmaceutical price appreciation index was 7.7% for the trailing twelve
months ended June 30, 2008. Revenue was also positively impacted by the addition of new customers ($583
million) and the impact of foreign exchange ($65 million). Revenue growth was negatively impacted by the loss
of customers ($2.1 billion) and slower pharmaceutical market growth. The DEA license suspensions and the
Company’s controlled substance anti-diversion efforts resulted in non-bulk customer losses and adversely
affected the Company’s ability to acquire new non-bulk customers.
Healthcare Supply Chain Services segment profit decreased $188 million or 12% during fiscal 2008
compared to the prior year as a result of a decrease of $146 million in gross margin. The decline in gross margin
was primarily due to increased customer discounts ($307 million) which resulted from the repricing of several
large customer contracts and faster growth (10%) of sales to bulk customers which tend to have larger customer
discounts. Also contributing to the decline in gross margin was a 2% decline in sales to non-bulk
customers. Compared to fiscal 2007, revenue growth in fiscal 2008 was lower and weighted more toward growth
in revenue from bulk customers. Lost customer revenue from the DEA license suspensions and the Company’s
controlled substance anti-diversion efforts also adversely affected gross margin during fiscal 2008. Gross margin
was also negatively impacted by decreased generic margin ($35 million) primarily due to the impact of generic
launches in the prior year which did not occur in the current year. The Company generally earns the greatest
margin dollars on generic pharmaceuticals during the period immediately following the initial launch of a generic
product to the marketplace because generic pharmaceutical selling prices are generally deflationary. Offsetting
the negative impact on gross margins described above were higher distribution service agreement fees and
pharmaceutical price appreciation of $84 million year over year due to increased sales volume and benefit from
pharmaceutical price appreciation. Gross margin was also positively impacted during fiscal 2008 by increased
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