Cardinal Health Finally Resolves DEA Issue

Implications: Last week, Cardinal Health (CAH) announced agreements with the Drug Enforcement Adminstration (DEA) regarding its license suspensions for controlled substances. These suspensions had a negative impact on the company's sales and market position. The company even publicly apologized for its actions during the suspensions. (See Cardinal Health Apologizes to Customers - Council Site). With the formal agreement, it can now get back to business and focus on the core problems with its pharmaceutical distribution business.

Analysis: Congratulations to management for (finally) resolving the DEA issues that have been plaguing the company since last November. This issue has reduced the company’s market position with independent pharmacies and small chains, as indicated in part by the company’s FY2008 10-K:

•    Overall revenue growth for the pharmaceutical distribution segment was 3.5%, which is below the company’s estimated rate of drug price inflation of 7.7% during the same time period. In other words, Cardinal’s revenues declined in real (inflation –adjusted) dollars.

•    Revenue declined by $1.9 billion due to a “loss of customers.” The net effect was smaller because of price inflation, general volume growth, and the gain of new customers.

•    Cardinal’s revenues from its smaller (non-bulk) customers declined by 1.6% ($680 million), while revenues from its bulk customers – such as CVS Caremark (CVS) and Walgreens (WAG) – grew by 10% ($3.4 billion).