Cardinal Health 2011 Annual Report Download - page 29

B
randed manufacturer margin refers to compensation amounts under distribution service agreements wit
h
m
anu
f
acturers an
d
to p
h
armaceut
i
ca
l
pr
i
ce apprec
i
at
i
on. Amounts earne
d
un
d
er t
h
e
di
str
ib
ut
i
on serv
i
c
e
a
g
reements compensate us for a ran
g
e of distribution and related services we provide to manufacturers and
c
onsist of a fee based on volume with or without
p
harmaceutical
p
rice a
pp
reciation. In addition, a
m
anu
f
acturer may
i
ncrease
i
ts pu
bli
s
h
e
d
pr
i
ce
f
or a pro
d
uct a
f
ter we
h
ave purc
h
ase
d
t
h
at pro
d
uct
f
or
i
nventor
y
. Our contract price for branded pharmaceutical products to customers is based on th
e
m
anufacturer’s published price at the time of sale. As such, inventory sold following a manufacturer pric
e
i
ncrease w
ill b
e
b
ase
d
on t
h
e
hi
g
h
er manu
f
acturer pr
i
ce.
P
harmaceutical price appreciation refers to amounts we earn from selling inventory at these increased
pr
i
ces
.
Generic manufacturer margin (also referred to as “generic margin”) refers to price discounts, rebates and
ot
h
er
i
ncent
i
ves we rece
i
ve
f
rom manu
f
acturers o
f
gener
i
cp
h
armaceut
i
ca
l
s. Our earn
i
ngs on gener
i
c
pharmaceuticals are
g
enerall
y
hi
g
hest durin
g
the period immediatel
y
followin
g
the initial launch of a
generic product because generic pharmaceutical selling prices tend to decline over time, although this may
v
ar
y
.
Bulk and Non-bulk
S
ales. The Pharmaceutical segment differentiates between bulk and non-bulk sales based
o
nt
h
e nature o
f
our customers’ operat
i
ons. Bu
lk
sa
l
es cons
i
st o
f
sa
l
es to reta
il
c
h
a
i
n customers’ centra
li
ze
d
warehouse operations and customers’ mail order businesses. All other sales, includin
g
all sales to customer
s
l
ocated in China, are classified as non-bulk. Sales to a retail chain pharmacy customer are classified as bulk sale
s
w
i
t
h
respect to
i
ts ware
h
ouse operat
i
ons an
d
non-
b
u
lk
sa
l
es w
i
t
h
respect to
i
ts reta
il
stores. We
f
ormer
l
yre
f
erre
d
to bulk sales as bulk customers and non-bulk sales as non-bulk customers. Other than this chan
g
e in terminolo
gy,
we have not changed how we categorize revenue, segment expenses and segment profit with respect to our bul
k
a
n
d
non-
b
u
lk
sa
l
es.
S
ubstantially all bulk sales consist of products shipped in the same form that we receive them from th
e
manu
f
acturer; a sma
ll
port
i
on o
fb
u
lk
sa
l
es are
b
ro
k
en
d
own
i
nto sma
ll
er un
i
ts pr
i
or to s
hi
pp
i
ng. In contrast,
non-bulk sales require more complex servicin
g
. For non-bulk sales, we ma
y
receive inventor
y
in lar
g
e or full
case quantities and break it down into smaller quantities, warehouse the product for a longer period of time, pic
k
i
n
di
v
id
ua
l
pro
d
ucts spec
ifi
c to a customer’s or
d
er, an
dd
e
li
ver t
h
at sma
ll
er or
d
er to a customer
l
ocat
i
on
.
B
ulk sales generate significantly lower segment profit as a percentage of revenue than non-bulk sales
.
C
ustomers rece
i
ve
l
ower pr
i
c
i
ng on
b
u
lk
sa
l
es o
f
t
h
e same pro
d
ucts t
h
an non-
b
u
lk
sa
l
es
d
ue to vo
l
ume pr
i
c
i
ng
i
n
a
com
p
etitive market and due to lower costs related to the fewer services we
p
rovide. In addition, bulk sales in
a
ggregate generate higher segment cost of products sold as a percentage of revenue than non-bulk sales, because
b
u
lk
or
d
ers cons
i
st
l
arge
l
yo
fhi
g
h
er cost
b
ran
d
e
d
pro
d
ucts. T
h
e
hi
g
h
er segment cost o
f
pro
d
ucts so
ld
as
a
percenta
g
e of revenue for bulk sales is also driven b
y
lower branded manufacturer mar
g
in and manufacturer cas
h
d
iscounts due to the mix of branded products in bulk sales. Segment distribution, selling, general and
ad
m
i
n
i
strat
i
ve (“SG&A”) expenses as a percentage o
f
revenue
f
rom
b
u
lk
sa
l
es are su
b
stant
i
a
ll
y
l
ower t
h
an
f
rom
non-bulk sales because bulk sales require substantiall
y
fewer services to be rendered b
y
us than non-bulk sales
.
3