Cardinal Health 2009 Annual Report Download - page 66

• General and administrative expenses were allocated in proportion to the units of products sold to
bulk or non-bulk customers. These expenses were allocated on the assumption that general and
administrative expenses increase or decrease in direct relation to the volume of sales.
The internal analysis indicated segment expenses as a percentage of revenue were higher for bulk customers
than for non-bulk customers because of lower pricing on sales for bulk customers and higher segment cost of
products sold partially offset by lower segment SG&A expenses. Bulk customers receive lower pricing on sales
of the same products than non-bulk customers due to volume pricing in a competitive market and the lower costs
related to the services provided by the Company. In addition, sales to bulk customers in aggregate generate
higher segment cost of products sold as a percentage of revenue than sales to non-bulk customers because bulk
customers’ orders consist almost entirely of higher cost branded products. The higher segment cost of products
sold as a percentage of revenue for bulk customers is also driven by lower manufacturer distribution service
agreement fees and branded pharmaceutical price appreciation and lower manufacturer cash discounts.
Manufacturer distribution service agreement fees and manufacturer cash discounts are recognized as a reduction
to segment cost of products sold and are lower as a percentage of revenue due to the mix of products sold.
Pharmaceutical price appreciation increases customer pricing which, in turn, results in higher segment gross
margin for sales of inventory that was on-hand at the time of the manufacturer’s price increase. Since products
sold to bulk customers are generally held in inventory for a shorter time than products sold to non-bulk
customers, there is less opportunity to realize the benefit of pharmaceutical price appreciation. Consequently,
segment cost of products sold as a percentage of revenue for bulk customers is higher than for non-bulk
customers and segment gross margin as a percentage of revenue is substantially lower for bulk customers than
for non-bulk customers. Deliveries to bulk customers require substantially less services by the Company than
deliveries to non-bulk customers. As such, segment SG&A expenses as a percentage of revenue from bulk
customers are substantially lower than from non-bulk customers. However, the lower SG&A expenses do not
offset the higher cost of products sold and as a result, segment profit as a percentage of revenue is significantly
lower for bulk customers than for non-bulk customers.
The Company defines bulk and non-bulk customers based on the way in which the Company operates its
business and the services it performs for its customers. The Company is not aware of an industry standard
regarding the definition of bulk customers and based solely on a review of the Annual Reports on Form 10-K of
other national pharmaceutical wholesalers, the Company notes that other companies in comparable businesses
may, or may not, use a different definition of bulk customers.
During fiscal 2009 revenue from non-bulk customers increased $1.9 billion due to increased volume from
existing customers. Segment profit from non-bulk customers increased $6 million during fiscal 2009 due to
increased manufacturer cash discounts and an increase in distribution service agreement fees and pharmaceutical
price appreciation partially offset by an increase in customer discounts.
During fiscal 2009 revenue from bulk customers increased $6.4 billion due to increased volume from
existing customers and new customers. Segment profit from bulk customers decreased $3 million during fiscal
2009 due to increased customer discounts partially offset by an increase in distribution service agreement fees
and pharmaceutical price appreciation and increased manufacturer cash discounts related to sales volume growth.
During fiscal 2008 revenue from non-bulk customers decreased $647 million compared to the prior year due
to the loss of customers, including the impact from the DEA license suspensions and the Company’s controlled
substance anti-diversion efforts, partially offset by additional volume from existing customers. Segment profit
from non-bulk customers decreased $147 million during fiscal 2008 compared to the prior year due to an
increase in customer discounts and the impact of generic launches in the prior year which did not occur in the
current year, coupled with greater generic deflation. The decrease during fiscal 2008 was partially offset by an
increase in distribution service agreement fees and pharmaceutical price appreciation.
During fiscal 2008 revenue from bulk customers increased $3.4 billion compared to the prior year due to
new contracts signed with existing customers which resulted in increased volume from existing customers.
44