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MD&A Results of Operations
Cardinal Health | Fiscal 2015 Form 10-K 10
Significant Developments in Fiscal 2015 and Trends
Acquisitions
Harvard Drug
On July 2, 2015 we completed the acquisition of Harvard Drug for
$1.1 billion, net of cash acquired, using existing cash and proceeds
from the debt offering in June 2015. The acquisition of Harvard Drug,
a distributor of generic pharmaceuticals, over-the-counter healthcare
and related products to retail, institutional and alternate care
customers, is expected to enhance our Pharmaceutical segment's
generic pharmaceutical distribution and services businesses. Harvard
Drug also manufactures and repackages generic pharmaceuticals
and over-the-counter healthcare products.
Cordis
On March 1, 2015, we entered into a binding offer letter with Ethicon,
Inc., a wholly-owned subsidiary of Johnson & Johnson, to purchase
its Cordis business for a purchase price of $1.9 billion in cash, subject
to certain adjustments. On May 27, 2015, Ethicon accepted the offer.
The acquisition of Cordis, a manufacturer and distributor of
interventional cardiology devices and endovascular solutions, is
expected to expand our Medical segment's portfolio of self-
manufactured products and its geographic scope. Cordis is a global
company, with operations in more than 50 countries. The acquisition
is expected to close in approximately 20 principal countries during
the second quarter of fiscal 2016 and in the remaining countries
afterward, subject to regulatory approval and customary closing
conditions. We expect this acquisition to significantly reduce GAAP
operating earnings and earnings before income taxes and
discontinued operations in fiscal 2016, largely due to the expected
impact of amortization and other acquisition-related costs.
Generic Sourcing Venture with CVS Health
In July 2014, we established Red Oak Sourcing, LLC ("Red Oak
Sourcing"), a U.S.-based generic pharmaceutical sourcing venture
with CVS Health Corporation (“CVS Health”) with an initial term of 10
years. Both companies have contributed sourcing and supply chain
expertise to the 50/50 venture and have committed to source generic
pharmaceuticals through arrangements negotiated by the venture.
Red Oak Sourcing negotiates generic pharmaceutical supply
contracts on behalf of both companies. We are required to pay 39
quarterly payments of $25.6 million to CVS Health which commenced
in October 2014. Due to the achievement of a milestone, the quarterly
payment to CVS Health will increase by $10 million beginning in fiscal
2016. In addition, if an additional milestone is achieved, the quarterly
payment will increase in fiscal 2017 by a further $10 million resulting
in a maximum quarterly payment of $45.6 million if all milestones are
met.
Trends
Within our Pharmaceutical segment, pharmaceutical price
appreciation on brand products and some generic products positively
impacted our earnings during fiscal 2015, but, as is generally the case,
the frequency and magnitude of future brand and generic product
price appreciation is uncertain and the impact on earnings may be
less in fiscal 2016 than in fiscal 2015.
Additionally within our Pharmaceutical segment, as is generally the
case, the impact and timing of future generic pharmaceutical product
launches is uncertain and the impact on earnings may be less in fiscal
2016 than in fiscal 2015. See the Pharmaceutical Segment discussion
within the "Business" section for additional information regarding
pharmaceutical price appreciation and generic pharmaceutical
product launches.