health care spending is growing by 7 percent a year, running about 16 percent of GDP today and reaching $4 trillion, almost a fifth of U.S. GDP over the next eight years. The industry is perched at an inflection point as it deals with immense cost pressures as well as the growth of generic drugs.
At one end of the industry, drug companies are in a dilemma. Since 1991, the cost to develop a new drug has quadrupled to almost $1 billion, while the productivity of research has fallen. At the same time, generic drugs are growing at twice the rate of the branded drug market. At the other end, hospitals-which gobble up about a third of all health care spending-are caught in a cost vise and under pressure to be productive while improving medical outcomes. In the middle are the health care distributors, such as Cardinal Health, that aggregate demand. Dublin, Ohio-based Cardinal operates like Dell Computer in that it aggregates customers and uses its buying power to provide products or in some cases manufactures its own.
Cardinal distributes a third of all medicines prescribed in the
Founded in 1971 by entrepreneur Bob Walter, Cardinal began as a food distributor, quickly became a growth machine when it shifted to drug distribution and went public in 1983. It has since mushroomed into an $81 billion giant that hardly anyone has ever heard of despite doing business on six continents and employing 55,000 people. Historically, the company grew through acquisitions (93 since 1971 at last count).
Some analysts say the company overextended itself through acquisitions and diversification. Faced with a downturn in drug distribution coupled with an SEC investigation over revenues classified as bulk vs. non-bulk, Cardinal hit major air turbulence that prompted four people to exit the company and a deterioration of managerial focus. The SEC issue has been resolved, but it triggered restating three years of earnings in 2004.
The “perfect storm” also disrupted Walter’s plans to find a successor in order to reorganize the company. “I needed someone who could take this company to the next level,” he recalls, recounting an introduction to P&G Vice Chairman R. Kerry Clark, with whom he hit it off immediately. “I will carry whatever bucket of water he wants me to carry,” quips Walter, who insists that the handoff of power is definite. “I am conscious of the fact that if I don’t act well, I could screw up. But he’s a take-charge guy so I’m not worried.”
When first approached, the Ottawa-born
Former Bank One CEO John McCoy, who serves on Cardinal’s board, vetted a number of candidates and liked what he saw in the quiet Canadian. “He’s very quick to pick up on people’s strengths. He’s taken the team and invigorated it to a higher level,” he says. “From his very first set of interactions with us as the new CEO, he demonstrated his desire to learn, ” adds George Conrades, executive chairman of Akamai Technologies and a Cardinal board member. “He never said, Well, I’m the new CEO, so here’s the new pronouncement.’ Instead, he told us, I’m going to learn a lot and I’ll tell you a little bit about what I’m finding and what I think.’ He impressed us all as a disciplined thinker. To my delight, what he learned and proceeded to do seemed right on the money.” Sorry to see him depart P&G, CEO A.G. Lafley reckons
Much is riding on what companies such as Cardinal do. Health care needs to improve productivity and efficacy, and better sourcing and value chain management can contribute greatly. For
Source : Goldman Sachs
Source : FactSet, Goldman Sachs
How will you take this company to the next level?
We have put our businesses into two major groups, the distribution businesses, and pharmaceutical and medical products-soon to be clinical and medical products as we divest ourselves of PTS (Pharmaceuticals and Technology Services). I see growth potential in both, but in different ways. In the distribution businesses, including the medical/surgical products and pharmaceutical products, we see a tremendous opportunity to build scale, reduce costs and improve efficiency, by putting these two businesses together, sharing back rooms, sharing logistics, optimizing the facilities, optimizing the number of managers serving the business and improving our cost structure. Cardinal historically is a generator of cash with good returns on assets in terms of the cash flow from the assets of the business. It’s all about aggregating demand and sourcing those products at the lowest possible prices. There are more channels and more parts of the country where we could do better.
In the clinical and medical products area, there are a number of changes happening in how hospitals are operating and getting reimbursed that represent opportunities. Infections, for example, are a serious issue. A hospital patient has a one in 20 chance of being infected, which is not good. Infections cost hospitals money. Medicare will likely not reimburse them for these in the future. We also just bought a company called MedMined, which mines hospital lab data extensively for critical markers showing a rise or potential rise in hospital infections.
The other area we are excited about is medication safety-getting the right medicine to the right patient at the right time. We’re already in that space with our Alaris (infusion systems) and Pyxis (automation system for medicine and supplies). But there’s still plenty of unmined territory, particularly in oral medications. The next frontier is the last 100 feet to the patient-from the dispensing of the medication on the floor, to what actually is verified and gets to the patient.
How will you do this?
We just bought Care Fusion, which uses bar-coding technology to verify bedside whether the nurse has been authorized to dispense the medication and that the patient is supposed to get the medication at that time, completes the billing exercise and alerts the system to order replacement products. Historically, distribution took product from the manufacturer and put it in the back office of the hospital. We’re now providing complete safe and reliable passage from the pharmaceutical manufacturer to the patient bedside. We’re also looking at other technologies that help ensure the safety and verification of treatment at the bedside.
A third area of opportunity is in improving the hospital’s productivity and overall costs. We can make a big difference in the medical/surgical part of the business. Today we provide complete surgical kits with gowns, gloves and everything needed for a particular operation, customized for any doctor. So if a tonsillectomy is scheduled for tomorrow, we know exactly what the doctor wants and it’s delivered to the surgery before the operation. The same technology we use for controlling and managing oral pharmaceuticals on the nursing floor can be used to help hospitals control and manage the stocking of highly expensive stents, catheters and other things. We can provide end-to-end inventory replenishment that helps hospitals improve their productivity.
Cardinal and its two major competitors, McKesson and Amerisource- Bergen, represent 90 percent of the distribution business. What will be your unique selling point going forward?
What made Cardinal unique in the past was its ability to aggregate demand, and buy and distribute effectively. This still shows up today when you look at profit margins. Ours are still higher than our competitors’ and this is a very competitive business at retail. This will continue to be an important part of the business, but it will extend into more areas. Part of our “secret sauce” going forward is our ability to connect supply chain solutions for our hospitals, more end-to-end coverage of the supply chain with accuracy and reliability.
What will it take to do this?
Two things. We need to continue to build our suite of technology systems and services. For us, this means working across divisions. For example, when our team initially came to talk to us about the Care Fusion product-the hardware is not that unique, but the software is proprietary with unique abilities-I said, “Great. So have you talked to the pharmaceutical division about getting the right type of bar-coded products into the hospital system to enable that?” There was sort of a look. “Well, no.” We said, “Well why don’t you get the two groups together, sit down and figure out exactly what medications we will need to have bar-coded so when the customer buys the solution, we provide them with a complete solution?”
Second, we need to develop the tools and the portfolio of products, whether they are specific solutions like Care Fusion and MedMined, in ways that offer better solutions for customers.
Will we see a P&G-type branding overhaul at Cardinal?
We will approach this slowly. Early on, some Cardinal folks were showing me disposable gowns that they put on patients. I said, “Wow, they do everything but display advertising on that. Did you ever think about Have you tried our latest gloves? “People were completely horrified at that idea, and we haven’t gotten quite that far yet.
The reality is we have a lot of work to do in integrating all the various brands and products that we provide, particularly in our medical/surgical business. Some of those brands come from companies we bought. We’re starting to work in the med/surg area in particular. We like to say it’s the biggest company that nobody ever heard of.
You have placed a high priority on leadership development. How is that working out?
We’re trying to do a couple of things concurrently. We are taking a deep look at our talent process, division by division. [
In our review of the top 100 global leadership team, we identified strengths and weaknesses and focused on the keepers and the developers, their ultimate career destination, their potential, how long we think that person would need to get there, and what are the key next steps that we need to take to get them ready. We’re focused on the group that is four or five levels down, what at P&G we called our business unit general manager. We’re going through all of those. One of the things we’re finding is that some people have been moved into those jobs as a reward for having done well elsewhere. We need to move the age down in that group, because they tend to be older. But we need to get people in their 20s and their 30s in these entry-level general manager positions. For the first time now, we are having very clear discussions on the candidates, their destination job, and what exactly is the plan over the next three to five years to move that person closer to their destination job.
We are also focused on identifying people who could be gatekeepers and moving those people out of the way. When you open doors you must let people go through. Concurrently, we’ve had to rework the infrastructure inside the company. Titles and job levels from one division to another have not been compatible, which makes it virtually impossible to move people from one division to another. Today we have a system that’s transparent, allowing us to move people around enabling them to get the right experience.
We also had very low differentiation in ratings. On a four-point rating scale we had 5 percent ones and zero fours, and everybody else was in the middle. Going forward we will find the 15 to 20 percent who are the stars, who have future potential in this company. Let’s get to know them. Let’s get a career plan and make sure we track it.
As the company’s second CEO after its founder, who now serves as chairman, aren’t you in a delicate position?
The process to date has been going extremely well. Bob has been eager to stay in the background and help me. This office in which we’re sitting was his. It is the founder’s office. It was Bob’s idea to move out. Took his furniture down the hall to the former president’s space. That was a tangible symbol. Also, Bob stays out of a lot of the meetings so as not to send unintentional signals.
And sometimes when he is in a meeting it’s like pulling teeth to get him to speak because he’s very conscious that his whisper is like a thunderclap. We spend 90 minutes together every month, just the two of us, where we talk and share my ideas. He has been helpful on every turn.
There have been very few things where we have disagreed. A classic example of this would be that after doing the PTS strategy review I walked into his office and said, “Bob, I just finished the PTS strategy review and think it’s time we divested this business. He said, “You’re right. It’s time to move on.” He has the ability to step back and be incredibly objective about where we are, what our status is, what’s good, and what’s bad. It’s refreshing.
CEO Kerry Clark and founder Chairman Bob Walter
What expectations are there?
I expect to take the board through our long-term plans and strategy on an annual basis. Recently, we reviewed the supply chain strategies. I enjoy the feedback. In fact, sitting on the other side as I do when serving on Textron’s board, you see a different perspective. For example, I’ve had some enlightening conversations with George Conrades (executive chairman, Akamai Technologies) who shared some of their challenges in pricing their products, and their markets are very similar.
What advice would you give other freshly minted CEOs?
I had the luxury of spending a lot of time with Bob getting to know this place. In fact, we spent so much time that sometimes I had to break off saying, “I have to get back home!” But there are always things you will not fully appreciate until you are in the job. I would say recognize that you won’t know everything about the company, but acknowledge what you do know and where you can make a difference. For example, reasonably early on, it became very clear to me that we would have to focus more on organic growth and that we had a tremendous opportunity to leverage our scale. Also, it was easy for me coming from the outside to understand that because the company had come together from many acquisitions Cardinal needed to value people in a more systemic way. The lesson learned is that one has to formulate some key opinions rather quickly.