Cardinal Health 2008 Annual Report Download - page 65

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Revenue from bulk customers, described below, increased $4.0 billion during fiscal 2007 with additional volume
from existing customers ($2.7 billion) and new customers ($1.3 billion). Revenue from non-bulk customers
increased $2.5 billion. Growth in revenue from non-bulk customers was driven by additional sales volume from
existing customers and pharmaceutical price appreciation ($4.0 billion). The pharmaceutical price appreciation
index was 6.3% for fiscal 2007. Acquisitions ($1.2 billion), mainly Dohmen and ParMed, also had a favorable
impact on the year-over-year revenue comparison. Negatively impacting growth in revenue from non-bulk
customers was the loss of existing customers due to competition ($1.0 billion) and the sale of a significant part of
the specialty distribution business ($1.7 billion) in the fourth quarter of fiscal 2006.
Healthcare Supply Chain Services—Pharmaceutical segment profit increased $157 million or 14% in fiscal
2007. Gross margin increased segment profit by $202 million primarily due to the segment’s revenue growth and
increased generic pharmaceutical margin ($192 million) due to new product launches and competitive vendor
pricing. Gross margin also was favorably impacted by increased manufacturer cash discounts due to sales volume
growth ($187 million) and distribution service agreement fees and pharmaceutical price appreciation (combined
impact of $171 million). Gross margin was negatively impacted by increased customer discounts ($319 million)
due to increased sales volume and competitive pressures. Increases in segment SG&A expenses negatively
impacted segment profit by approximately $45 million for fiscal 2007. Increases in SG&A expenses were in
support of the increased sales volume and due to the impact of acquisitions ($37 million). Favorably impacting
SG&A expenses was the reduction in equity-based compensation expense ($14 million). Segment profit was
negatively impacted by the prior year sale of a significant portion of the specialty distribution business
($43 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 exceeds its historical rate, or pharmaceutical price appreciation on branded products decreases from its
historical rate. 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 from its historical rate, or pharmaceutical price appreciation on branded products
exceeds its historical rate.
Bulk and Non-Bulk 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, pharmacies, hospitals and alternate care sites). Bulk
customers include the warehouse operations of retail chains whose retail stores are classified as non-bulk
customers. A single retail chain pharmacy customer may be both a bulk customer with respect to its warehouse
operations and a non-bulk customer with respect to its retail stores. Bulk customers have the ability to process
large quantities of products in central locations and self-distribute these products to their individual retail stores
or customers. Substantially all deliveries to bulk customers consist of product shipped in the same form as the
product is received from the manufacturer, but a small portion of deliveries to bulk customers are broken down
into smaller units prior to shipping. Non-bulk customers, on the other hand, require more complex servicing by
the Company. These services, all of which are performed by the Company, include receiving inventory in large
or full case quantities and breaking it down into smaller quantities, warehousing the product for a longer period
of time, picking individual products specific to a customer’s order and delivering that smaller order to a customer
location.
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