Cardinal Health 2010 Annual Report Download - page 29

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• distributes specialty pharmaceutical products and provides third-party logistics support services t
o
m
anufacturers; an
d
• franchises retail
p
harmacies under the Medicine Sho
ppe
®
and Medica
p
®
brands, and
p
rovide
s
p
harmac
y
services to hospitals and other healthcare facilities
.
The pharmaceutical distribution business is a full-service wholesale distributor to retail customers (including
chain and independent drug stores and pharmacy departments of supermarkets and mass merchandisers),
hospitals, and alternate care providers (including mail order pharmacies) located throughout the United State
s
and in Puerto Rico. Pharmaceutical distribution maintains
p
rime vendor relationshi
p
s that streamline the
p
urchasing process resulting in greater efficiency and lower costs for our customers. Pharmaceutical distribution
also helps pharmaceutical manufacturers with services including distribution, inventory management, data/
r
eporting, new product launch support, and contract and chargeback administration
.
T
h
ep
h
armaceut
i
ca
ldi
str
ib
ut
i
on
b
us
i
ness
g
enerates
g
ross mar
gi
npr
i
mar
ily
w
h
en t
h
ea
gg
re
g
ate se
lli
n
g
pr
i
c
e
to our customers excee
d
st
h
ea
gg
re
g
ate cost o
f
pro
d
ucts so
ld
, net o
f
manu
f
acturer cas
hdi
scount,
b
ran
d
e
d
manu
f
acturer mar
gi
n, an
dg
ener
i
c manu
f
acturer mar
gi
n
.
“
Manu
f
acturer cash d
i
scounts” are price reductions that manufacturers may offer to us for prompt
payment of purchased products.
“
Branded manufacturer mar
g
i
n
” (also referred to as “branded mar
g
in”) refers to compensatio
n
a
mounts under distribution service a
g
reements with manufacturers and to pharmaceutical price appreciation.
C
ompensation under the distribution service a
g
reements ma
y
be a fee based on volume with or without
pharmaceutical price appreciation. A manufacturer ma
y
increase its published price for a product after w
e
h
ave purchased that product for inventor
y
. Our contract price for branded pharmaceutical products t
o
c
ustomers is based on the manufacturer’s published price at the time of sale. As such, inventor
y
sol
d
followin
g
a manufacturer price increase will be based on the hi
g
her manufacturer price. “
P
h
a
rm
aceu
ti
ca
l
p
rice a
pp
reciation
”
refers to amounts we earn from sellin
g
inventor
y
at these increased prices.
“
Generic manufacturer mar
g
in
”
(a
l
so re
f
erre
d
to as “
g
ener
i
c mar
gi
n”) re
f
ers to pr
i
ce
di
scounts
,
re
b
ates an
d
ot
h
er
i
ncent
i
ves we rece
i
ve
f
rom manu
f
acturers o
fg
ener
i
cp
h
armaceut
i
ca
l
s. Our earn
i
n
g
son
g
ener
i
cp
h
armaceut
i
ca
l
s
g
enera
lly
are
high
est
d
ur
i
n
g
t
h
e per
i
o
di
mme
di
ate
ly f
o
ll
ow
i
n
g
t
h
e
i
n
i
t
i
a
ll
aunc
h
o
f
ag
ener
i
c pro
d
uct
b
ecause
g
ener
i
cp
h
armaceut
i
ca
l
se
lli
n
g
pr
i
ces ten
d
to
d
ec
li
ne over t
i
me, a
l
t
h
ou
gh
t
hi
sma
y
v
ar
y.
B
ulk and Non-bulk Customer
s
.
The Pharmaceutical se
g
ment differentiates between bulk and non-bulk
customers. Bulk customers consist of retail chain customers’ centralized warehouse o
p
erations and customers’
mail order businesses. All other customers are classified as non-bulk customers. A retail chain pharmac
y
customer ma
y
be both a bulk customer with respect to its warehouse operations and a non-bulk customer wit
h
r
es
p
ect to its retail stores
.
Bulk customers can process large quantities of products in central locations. Substantially all deliveries t
o
bulk customers consist of
p
roducts shi
pp
ed in the same form that we receive them from the manufacturer; a smal
l
p
ortion of deliveries to bulk customers are broken down into smaller units prior to shipping. In contrast, non-bulk
customers require more complex servicing. For non-bulk customers, we may receive inventory in large or ful
l
case quantities and break it down into smaller quantities, warehouse the product for a longer period of time, pick
individual
p
roducts s
p
ecific to a customer’s order, and deliver that smaller order to a customer location.
Bu
lk
customers
g
enerate s
ig
n
ifi
cant
ly l
ower se
g
ment pro
fi
t as a percenta
g
eo
f
revenue t
h
an non-
b
u
lk
customers. Bu
lk
customers rece
i
ve
l
ower pr
i
c
i
n
g
on sa
l
es o
f
t
h
e same pro
d
ucts t
h
an non-
b
u
lk
customers
d
ue t
o
vo
l
ume pr
i
c
i
n
gi
n a compet
i
t
i
ve mar
k
et an
dd
ue to
l
ower costs re
l
ate
d
to t
h
e
f
ewer serv
i
ces we prov
id
e. In
3