Cardinal’s Profit Prescription
July 24 2013 by Jennifer Pellet
When George Barrett joined Cardinal Health in 2008, both the company and the health care industry were at a crossroads. Founded as a private entity in the ’70s, the Dublin, Ohio-based drug distributor had grown into a Fortune 500 behemoth, commanding the No. 2 spot in the drug distribution business and also operating a lucrative—and growing—medical-device business. However, while both were successful, the two businesses were different enough that Cardinal was struggling to reconcile their distinct needs.
“They were at different states of maturity and had different requirements for investment in R&D, different approaches to capital deployment and different needs for talent management,” recounts Barrett. “We needed to do some work to reinvigorate our strategy, our portfolio of businesses and our approach to talent management and culture.”
Meanwhile, of course, the nation was grappling with skyrocketing health costs and the related controversy of how to fix an increasingly unsustainable health care system. Amid that maelstrom of turmoil and uncertainty, Cardinal needed a strategic direction that would position it to succeed—whatever the future might hold.
After weighing the options, management opted to spin off the medical-device division into its own entity, a publicly traded company called CareFusion. The move was somewhat risky, leaving Barrett as CEO of Cardinal to coax the company’s mature drug distribution business—at the time heavily dependent on relatively low-margin contracts with large national chains like Walgreens and CVS Caremark—back into growth mode. Further complicating that challenge was a steady siphoning off of drug market share by generic products, which Cardinal’s largest customers bypass the company to purchase in bulk, directly from manufacturers.
To Barrett, who came to Cardinal from the generic drug-making powerhouse Teva, the path was clear: Diversify the company’s customer base and expand in generic and specialty drugs. The effort proved prescient recently when Walgreens, one of the company’s largest customers, chose to end its contract with Cardinal in favor of partnering with a competitor. Shortly after that development, Chief Executive caught up with Barrett to talk about the nation’s health care crisis, the challenges of leading transformation and Cardinal’s expansion into China.
In transforming Cardinal, you looked to serve more pharmacies, expand your specialty and generic business, move into the B2C arena and expand into new markets, including China. Is this diversification and pursuit of scale a response to the reform going on in health care in America today?
It is not just about the legislative change; it is [a broader] evolution of change. The Accountable Care Act (ACA) has to be put in the context of big adaptations that we were going to have to make one way or another as a society to deal with some interesting challenges. We have an extraordinary demographic swing occurring, with nearly 10,000 patients reaching Medicare eligibility age a day, which is an incredible number. We have a public health issue in the growing community of patients suffering from chronic disease, much of that driven by public health issues such as obesity and the cumulative effects of smoking. These are all having a profound effect on health care. We recognize that we can and need to play a role in helping enable the cost of effectiveness of the system.
All these moves—expanding our role in generics, ensuring that we can follow patients as they move from acute care to more cost-effective treatments in ambulatory clinics, in doctors’ offices and in the home—were changes we were seeing regardless of legislative agenda. In many ways, the legislative agenda is a response to these challenges we face as a society. We wanted to make sure our strategy was aligned with the direction of how we saw health care unfolding, which is a focus on greater coordination, on integrating care, on making sure patients are treated in the right setting by the right caregiver at the right time and in the right way. Our strategy has really been organized around that thinking.
What impact did the loss of the Walgreen contract—which represented $22.6 billion in 2012 revenue—have on your strategy?
Had we felt that we could sustain a partnership with Walgreens in a way that was value-creating for both sides, we would gladly have done that. We had come to believe that we could not really align effectively with their direction. So, in many ways, while we shed a large revenue customer, ultimately we will be a healthier company as we come through this transformation.
This expansion into [a] higher-value, higher-margin setting and into higher-value, higher-margin products and services is a course we have been on for a number of years.
While it has its pain points, directionally, we are rebuilding our portfolio in a way that gives us a stronger platform and a more robust base off of which to grow.