Cardinal’s Profit Prescription

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.

In February, you announced the $2 billion-plus acquisition of the direct-to-home medical supply distributor AssuraMed. How does that purchase fit into your strategy?

If you look at the number of patients being cared for at home and the incentives to reduce hospital stays today, it’s pretty clear that more care is going to be delivered in the home. AssuraMed allows us to serve that market. This direct-to-consumer part of our business represents a significant move in our history toward being more directly engaged with the patients we serve—from elderly patients or patients recuperating from surgery, who need certain care in the home to insulin-dependent diabetics. It also allows us to work with our independent pharmacy customers with whom we can collaboratively serve patients.

You’ve done five acquisitions in China. What are your goals there?

China is an extraordinary market, facing meaningful challenges as it tackles the issue of how to provide health care to this enormous, [migrating] population. It’s also a market that is strategically important to our upstream partners, global pharmaceutical and medical-device companies, so we felt the ability to serve them in China could be an important value driver for us. Still, if we had not had the opportunity to acquire a business that we knew with a leadership team we knew, we might not have made that move into China because I think having a robust base there is important.

What advice do you have for other CEOs expanding into China?

If you are going to compete in China, you have to be ready to learn quickly and course correct quickly. For example, we are a major player in nuclear medicine here in the U.S., and we saw that as an opportunity in China, where there is no mature industry providing cardiologists with the tools to do advanced, diagnostic imaging. However, we discovered in our first month there that, despite the need, there wasn’t really a financing system to tackle it.

On the flip side, we discovered another opportunity that we had not planned on, which had to do with the fact that unique specialty products of global pharmaceutical companies were being counterfeited and not getting to patients. We set up specialty pharmacies to ensure the pharma companies that their products would be under control from the moment they hit the border until they were in patients’ hands. This meant their patients could be sure they were getting the product they thought they were going to get. So, while our first plan ended up not being a priority, the second that had not been on our radar became one.

The industry has changed significantly in the five years you’ve been at Cardinal. What do you see on the horizon?

One thing we can say about health care is that we know demand will not diminish. We also know that it will have to be delivered in different ways—the system is going through all kinds of corrections. For us, that old Wayne Gretsky cliché of going where the puck is going has been a big part of our strategy. That’s why we felt we needed a bigger position in generic drugs, an IT platform that could enable growth and a presence in the delivery of care outside of hospitals—which led us to expand into ambulatory settings and to acquire AssuraMed.

What have you found most challenging about leading a company through change?

It is always an interesting dynamic when you have to be sure you are competing in the present in the world you know today and at the same time anticipate change in future. You must serve your customers’ distinct needs today but also with a clear sense that change will come. We don’t know all the changes that will take place in health care; we just know directionally that we will need to deliver care in a more integrated, cost-controlled way and with a greater focus on outcomes. Trying to build our business in a way that we can constantly adapt to those changes—not all of which are predictable—is an exciting leadership challenge.

" Jennifer Pellet : As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.."