Cardinal Health mulls a spinoff of clinical, medical products units
DUBLIN, Ohio Acting on a long-term plan to streamline its sprawling and complex operating structure and focus more effectively on its core businesses, health care and drug distribution giant Cardinal Health is mulling the breakup of its primary operating and reporting segments. The strategy could involve a tax-free spin-off of the clinical and medical products businesses as a separate, publicly traded company.
Cardinal’s leaders said the company would most likely announce its decision in a 60- to 90-day time frame.
The move follows a long process of self-evaluation for the huge company, which posted sales of $91 billion in fiscal 2008. In July, Cardinal revealed a plan to consolidate its businesses into two primary operating and reporting segments “to reduce costs and align resources with the unique needs of each segment.”
This month’s announcement goes a big step further. “For two years, we have been taking steps to sharpen our focus on health care supply chain services and clinical and medical products, culminating with our announcement in July to operate these businesses in two distinct segments that reflect the unique characteristics and requirements of each,” said R. Kerry Clark, chairman and chief executive officer. “As we now consider a spin-off of our clinical and medical products businesses, our goal is simple: to have two thriving businesses, delivering maximum value to customers and shareholders over the long term.”
Under the consolidation plan announced in July, Cardinal’s $80 billion core business, its network of pharmaceutical and medical product distribution centers and nuclear pharmacies, will form the Healthcare Supply Chain Services segment, led by vice chairman George Barrett. Products for infusion, medication dispensing, respiratory care and infection prevention will be grouped in the Clinical and Medical Products segment under the leadership of vice chairman David Schlotterbeck.
“For two years, we have been taking steps to sharpen our focus on health care supply chain services and clinical and medical products, culminating with our announcement in July to operate these businesses in two distinct segments that reflect the unique characteristics and requirements of each,” said R. Kerry Clark, chairman and chief executive officer of Cardinal Health. “As we now consider a spin-off of our clinical and medical products businesses, our goal is simple: to have two thriving businesses, delivering maximum value to customers and shareholders over the long term.”
Cardinal posted sales of $91 billion in the fiscal year ended June 30, a gain of 5 percent over the prior year, with operating income up 58 percent to $1.3 billion. Those comparisons came against a weakened earnings picture in last year’s fourth quarter, when Cardinal was hit with merger-related charges from the company’s acquisition of VIASYS Healthcare.
“Overall, fourth quarter results were in line with our expectations,” said Clark. “We continued to demonstrate to customers the value of our clinically differentiated medical technologies, where we delivered a year of very strong growth on the top and bottom lines. We also made steady progress throughout the year in our medical supply chain segment and, in particular, are very pleased with the results in our hospital, lab and ambulatory care distribution business.”
Clark also reported progress in its core drug distribution business, which was slapped with Drug Enforcement Administration suspensions at three of its distribution centers for what the DEA charged were inadequate controls over the diversion of controlled substances.
“In our pharmaceutical supply chain segment, we believe we are on the right path to resolve the license suspensions that have kept us from distributing controlled substances from three of our 24 distribution centers,” said Cardinal’s chief executive. “This will be a critical step in our efforts to drive improvements in the business. And while we won’t speculate on the ultimate outcome, we are in constructive settlement discussions with the DEA and have recorded a reserve of $23.5 million in connection with those discussions.
“We have made good progress in enhancing our controls and are eager to return to full service levels for our customers,” Clark added.