Cardinal Health 2008 Annual Report Download - page 28

The term “pharmaceutical price appreciation” refers to the impact on gross margin in dollars of
pharmaceutical price appreciation for pharmaceutical products sold during a particular period. The impact
happens when the Company is able to purchase inventory, hold that inventory when a manufacturer increases its
published price and, by virtue of the Company’s contract price to customers being based upon the manufacturer’s
designated price at the time of the sale, sell that inventory on hand at a higher price. The Company continues to
generate a portion of its gross margin from the sale of some manufacturers’ products from pharmaceutical price
appreciation without receiving distribution service agreement fees. For these manufacturers, a reduction in the
frequency and magnitude of price increases, as well as restrictions in the amount of inventory available to the
Company, could adversely affect the Company’s results of operations and financial condition.
The term “manufacturer rebates and incentives” refers to discounts the Company receives from
manufacturers as a result of competition among manufacturers, including manufacturers of generic
pharmaceuticals, in pricing their products. Manufacturer rebates and incentives are based on either the
Company’s purchases from the manufacturer or the Company’s sales of the manufacturer’s products to its
customers. The Company generally earns the greatest margin dollars on generic pharmaceuticals during the
period immediately following the initial launch of a generic product in the marketplace because generic
pharmaceutical selling prices are generally deflationary.
Therefore, the Company’s pharmaceutical supply chain business generates gross margin primarily to the
extent that the selling price to its customers, net of customer discounts, exceeds in the aggregate cost of products
sold, net of manufacturer cash discounts, distribution service agreement fees, pharmaceutical price appreciation
and manufacturer rebates and incentives.
With respect to its customers, the Healthcare Supply Chain Services—Pharmaceutical segment
differentiates between bulk and non-bulk customers because bulk customers generate significantly lower segment
profit as a percentage of revenue than that generated by non-bulk customers. Bulk customers consist of
customers’ centralized warehouse operations and customers’ mail order businesses. All other customers are
classified as non-bulk customers (for example, retail stores, hospitals and alternate care sites). Bulk customers
include the warehouse operations of retail chains whose retail stores are classified as non-bulk customers.
See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for
additional information about the pharmaceutical supply chain business model.
Healthcare Supply Chain Services—Medical
Through its Healthcare Supply Chain Services—Medical segment, the Company distributes a broad range of
branded and private-label medical and laboratory products, as well as the Company’s own line of surgical and
respiratory therapy products manufactured or sold by the Medical Products and Technologies segment, to
hospitals, laboratories and ambulatory care customers, such as surgery centers and physician offices. This
segment distributes products both in the United States and in Canada.
This segment helps customers reduce costs while improving the quality of patient care in a variety of ways,
including online procurement, fulfillment and information provided through cardinal.com and supply-chain
management. This segment also assembles and distributes sterile and non-sterile procedure kits under the
Presource®brand name.
Clinical Technologies and Services
Through its Clinical Technologies and Services segment, the Company provides products and services to
hospitals and other healthcare providers. This segment develops, manufactures, leases and sells medical
4