Cardinal Health, Inc. (CAH): Bulking Up In The Right Places

Cardinal Health, Inc. (NYSE:CAH) is buying privately held AssuraMed, a supplier of products for home use to treat diabetes, wounds, and incontinence, among other things. This is a great fit for a company that has been facing an increasingly difficult business environment. In fact, it could position the company well for the upcoming wave of ailing baby boomers.

Cardinal

Cardinal Health, Inc. (NYSE:CAH) provides pharmaceuticals and medical products to more than 60,000 pharmacies, hospitals, ambulatory surgery centers, and physician offices. It manufactures medical and surgical products, including gloves, surgical apparel, and fluid management products. The company also supplies medical products to clinical laboratories and operates a network of radiopharmacies.

In effect, the company is a sort of middleman, providing its customers with the drugs and supplies they use in their businesses or that they sell to their customers. To that end, the company’s two largest customers are CVS Caremark and Walgreen, which together accounted for 43% of the company’s top line in fiscal 2012. The company’s top five customers accounted for nearly 60% of the company’s top line. That’s a lot of concentration in a competitive industry. Both the CVS and Walgreen contracts are set to expire soon, too.

The Competitive Market

The impact of either company failing to renew its contracts would be large. As an example, Express Scripts (NASDAQ:ESRX) was Cardinal’s third-largest customer in fiscal 2012. When that company merged with Medco Health Solutions to form Express Scripts Holding Company there was an instant question about Cardinal’s contract, because Medco had a supply relationship with a competitor. When the contract was put out for bidding, it wasn’t awarded to Cardinal. That contract expired in September of last year, and accounted for around $9 billion in revenue. That’s a big hit. Losing either CVS or Walgreen, or both, would be an even bigger hit.

The contract for Express Scripts went to Cardinal competitor AmerisourceBergen (NYSE:ABC). While Cardinal lost $9 billion in revenues, AmerisourceBergen effectively doubled the size of its contract with the company. That was a big win for Cardinal’s competitor, though the business depressed margins because of the nature of the products being distributed. Still an additional $9 billion in revenue goes a long way.

AmerisourceBergen is more focused on drugs than either Cardinal or McKesson, the main players in the drug distribution space. After Express Scripts, which is a material customer for AmerisourceBergen, its next largest account was only responsible for 6% of the company’s top line in 2012. The top 10 customers accounted for just 41% of 2012 revenues. That’s a lot more diversification than Cardinal.

The Future