Cardinal Health 2008 Annual Report Download - page 64

Healthcare Supply Chain Services—Pharmaceutical Performance
During fiscal 2008, Healthcare Supply Chain Services—Pharmaceutical revenue grew and segment profit
declined compared to the prior year. Revenue growth was primarily a result of additional volume from existing
bulk customers and pharmaceutical price appreciation partially offset by a decrease in volume from non-bulk
customers. The decline in segment profit was primarily a result of the repricing of several large customer
contracts in the past 18 months. Lost customer revenue and expenses from the DEA license suspensions and the
Company’s controlled substance anti-diversion efforts also adversely affected revenue from non-bulk customers
and segment profit during fiscal 2008. The contract repricings and DEA license suspensions and anti-diversion
efforts referenced above are expected to continue to adversely affect segment revenue and segment profit into
fiscal 2009, although to a lesser degree.
Healthcare Supply Chain Services—Pharmaceutical revenue growth of $2.7 billion or 4% during fiscal 2008
was primarily due to additional volume from existing bulk customers and pharmaceutical price appreciation,
which was 7.7% for the trailing 12 months ended June 30, 2008. The combined impact of pharmaceutical price
appreciation and increased volume increased sales in fiscal 2008 by $4.2 billion. Negatively impacting growth in
revenue was the loss of customers ($1.9 billion) in the current year compared to the prior year and slower
pharmaceutical market growth, partially offset by the addition of new customers ($496 million). 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—Pharmaceutical segment profit decreased $178 million or 14% during
fiscal 2008 compared to the prior year as a result of a $172 million decrease 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 in the last 18 months 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. As compared to fiscal 2007, revenue growth in fiscal 2008 was lower and weighted more
toward growth in revenue from bulk customers. The Company expects a certain level of continued customer
discounting due to the competitive market in which it operates. 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 manufacturer cash discounts ($72 million) due to increased sales
volume. The growth of distribution service agreement fees, pharmaceutical price appreciation and manufacturer
cash discounts was less than the growth in fiscal 2007 due to slower revenue growth.
SG&A expenses remained relatively flat for fiscal 2008 compared to the prior year and was positively
impacted by a change in the allocation of corporate costs as well as spending controls. During fiscal 2008, a
change in the methodology for allocating corporate costs for the Healthcare Supply Chain Services—
Pharmaceutical and Healthcare Supply Chain Services—Medical segments to better align corporate spending
with the segment that receives the related benefits resulted in decreased expense ($22 million) allocated to
Healthcare Supply Chain Services—Pharmaceutical.
During fiscal 2007, Healthcare Supply Chain Services—Pharmaceutical segment revenue increased
$6.5 billion or 9% primarily from revenue from bulk customers. Segment profit increased $157 million due to
revenue growth, increased generic pharmaceutical margin and increased distribution service agreement fees and
pharmaceutical price appreciation, offset by increased customer discounts and increased SG&A expenses.
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