Cardinal Health 2013 Annual Report Download - page 19

Cardinal Health, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Acquisitions
On March 18, 2013, we completed the acquisition of AssuraMed, Inc.
("AssuraMed") for $2.07 billion, net of cash acquired, in an all-cash
transaction. We funded the acquisition through the issuance of $1.3 billion
in fixed rate notes and cash on hand. The acquisition of AssuraMed, a
provider of medical supplies to homecare providers and patients in the
home, expands our ability to serve this patient base. We expect the
amortization of acquisition-related intangible assets to be a significant
expense in future periods. Excluding the impact of amortization of
acquisition-related intangible assets, this acquisition had a positive impact
on operating earnings in fiscal 2013 and we expect it to have a positive
impact on operating earnings in future periods. See Note 2 of the “Notes
to Consolidated Financial Statements” for additional information on the
AssuraMed acquisition.
Other Trends
Within our Pharmaceutical segment, we expect continued strength in our
generic pharmaceutical programs as well as continued price appreciation
from branded pharmaceutical products in fiscal 2014.
Within our Medical segment, variability in the cost of commodities such
as oil-based resins, cotton, latex, diesel fuel and other commodities can
have a significant impact on cost of products sold. Although commodity
prices fluctuate, we do not expect changes in commodity prices to have
a significant impact on our year-over-year results of operations in fiscal
2014. We also expect a continuation of relatively flat procedural-based
utilization in fiscal 2014.
Results of Operations
Revenue
Revenue Change
(in millions) 2013 2012 2011 2013 2012
Pharmaceutical $ 91,097 $ 97,925 $ 93,744 (7)% 4%
Medical 10,060 9,642 8,922 4 % 8%
Total segment revenue 101,157 107,567 102,666 (6)% 5%
Corporate (64) (15) (22) N.M. N.M.
Total revenue $ 101,093 $ 107,552 $ 102,644 (6)% 5%
Fiscal 2013 Compared to Fiscal 2012
Pharmaceutical Segment
Revenue for fiscal 2013 compared to the prior year was negatively
impacted by the expiration on September 30, 2012 of our pharmaceutical
distribution contract with Express Scripts (approximately $6.7 billion), the
revenue from which was classified as bulk sales. Revenue from existing
pharmaceutical distribution customers decreased by approximately $3.6
billion, primarily as a result of brand-to-generic pharmaceutical
conversions. Brand-to-generic pharmaceutical conversions impact our
revenue because generic pharmaceuticals generally sell at a lower price
than the corresponding brand product and because some of our customers
primarily source generic products directly from manufacturers rather than
from us. The decrease was partially offset by increased pharmaceutical
distribution revenue from new customers (approximately $3.8 billion) and
revenue growth within our Specialty Solutions division ($961 million).
Revenue from bulk sales was $29.8 billion and $40.2 billion for fiscal 2013
and 2012, respectively. Bulk sales for fiscal 2013 decreased by 26 percent
driven primarily by the expiration of our contract with Express Scripts and
brand-to-generic conversions. Revenue from non-bulk sales was $61.3
billion and $57.7 billion for fiscal 2013 and 2012, respectively. Non-bulk
sales for fiscal 2013 increased by 6 percent driven by growth from new
customers. In light of the reduction in bulk sales after the expiration of our
pharmaceutical distribution contract with Walgreens, we do not expect the
distinction between revenue and profit from bulk sales to be meaningful
in the future. As such, in the future, we do not expect to present separate
information on bulk and non-bulk sales to investors.
Medical Segment
Revenue for fiscal 2013 compared to the prior year reflects the benefit of
acquisitions ($459 million).
Fiscal 2012 Compared to Fiscal 2011
Pharmaceutical Segment
Revenue was positively impacted during fiscal 2012 compared to the prior
year by acquisitions ($2.3 billion) and increased sales to existing
customers ($2.0 billion).
Medical Segment
Revenue was positively impacted during fiscal 2012 compared to the prior
year by increased volume from existing customers ($335 million), including
the positive impact from sales of self-manufactured and private brand
products and the transition during the fourth quarter of fiscal 2011 of our
relationship with CareFusion from a fee-for-service arrangement to a
traditional distribution model ($131 million).
Cost of Products Sold
Consistent with the change in revenue, cost of products sold decreased
$6.8 billion (7 percent) during fiscal 2013, and increased by $4.5 billion (5
percent) during fiscal 2012. See the gross margin discussion below for
additional drivers impacting cost of products sold.
Gross Margin
Gross Margin Change
(in millions) 2013 2012 2011 2013 2012
Gross margin $ 4,921 $ 4,541 $ 4,162 8% 9%
Fiscal 2013 Compared to Fiscal 2012
Gross margin increased in fiscal 2013 compared to the prior year driven
by strong performance in our generic pharmaceutical programs ($350
million) and acquisitions ($131 million). Increased margin from branded
pharmaceutical distribution agreements (exclusive of the related volume
impact) also had a positive impact on gross margin ($81 million). Pricing
changes, including rebates (exclusive of the related volume impact),
adversely impacted gross margin ($211 million), driven in part by customer
and product mix. The adverse impact of these pricing changes is offset
by sourcing programs and other sources of margin. As a result of significant
market softness, gross margin from our Nuclear Pharmacy Services
division decreased by $71 million in fiscal 2013.
The cost of oil-based resins, cotton, latex and other commodities used in
our Medical segment self-manufactured products had a slightly favorable
impact on gross margin. As described above, while the expiration of the
Express Scripts contract resulted in lower revenue, it had a slightly
unfavorable impact on gross margin.
Fiscal 2012 Compared to Fiscal 2011
Gross margin increased in fiscal 2012 compared to the prior year primarily
due to strong performance in our generic pharmaceutical programs ($344