All successful businesses need to reinvent themselves from time to time.
Cardinal Health, one of the largest drug and medical distribution companies, is no exception to the rule. A few years ago the company lost its Walgreen contract to AmerisourceBergen and that prompted the need to rebuild the business, explains Steven Halper, senior vice president of equity research with FBR Capital Markets & Co. in New York, in a recent interview.
One of the manifestations of that change has been how the medical segment of the business has evolved. Cardinal Health made a big splash in announcing the acquisition of the Cordis unit of Johnson & Johnson for $1.95 billion in cash and the deal is set to close by the end of the year.
"The Cordis acquisition is sort of a direct outgrowth of the need to reinvest and grow the business," Halper states.
Cordis, of course, is known for being the pioneer of the drug-eluting stent business from which it stunningly withdrew being unable to compete with the likes of Medtronic and Boston Scientific a few years ago. But the company still has a large portfolio of interventional cardiology products not to mention a wide global footprint and a name in the marketplace. In 2014, Cordis had sales of $780 million with 70% of revenue coming from overseas all of which was attractive to Cardinal Health.
But the company's device strategy is much broader than simply acquiring a company with a storied history.
Halper explains that Cardinal is unique in the way that it is both a medical products distributor and also a manufacturer of certain physician-preference item products such as screws, rods and drill bits and other items.
"The company is looking to disrupt some of the device segments, specifically the physician preference items category. They are going with the generic approach to PPI where they are going in to areas that have very little technology innovation or differentiation and going to market with products that are 30% lower than their competitors," he says.
Cardinal Health's Don Casey, CEO of the company's medical segment, explained the strategy in more detail. The company began to think about "How do we look at categories that have strong physician preference, diminishing clinical differentiation, low intellectual property barriers and is a pain point for the hospital?"
Interventional cardiology, orthopedics and negative wound pressure are areas that the company has hit upon to answer that question. In May the company launched Cardinal Health-branded wound care products including SVED Wound Treatment System, which is a negative pressure wound therapy powered suction pump along with other wound care products.
Cardinal Health also manufactures commodity items - gloves, drapes and other items that are used routinely within the hospital.
"We have actually quite an extensive manufacturing base," Casey says. "We have 10 manufacturing facilities and a very large sourcing engine that focuses on these commodity oriented items."
For example, there are three to four makers of drapes and gowns and the category has not seen much innovation, Casey says. Manufacturing these items cost effectively and selling them cheaply to hospitals that Cardinal already has a relationship with as a distributor of these very same products, then, appears to be a no brainer.
"It's easier and cheaper [for hospitals to switch to our products]," Casey declares.
What's more while Cardinal has been manufacturing some products for several years, the number of products that it makes has now dramatically increased.
"We sell close to 900 categories," he says.
But Casey is eminently aware that selling widgets at a cheaper price is only tackling one piece of the healthcare conundrum facing hospital customers. In order to deliver better patient care, hospitals need to be both cost effective and operationally efficient.
That's where the services piece of the strategy comes into play.
"If you look at the evolution of the medical business within Cardinal Health, you can see what we’ve done is basically say, 'Look we really think our distribution gives us unique access to the materials managers side; it gives us unique perspective to how we can bring more efficiencies to what are increasingly large acute-care organizations'" and then ask how the company can provide additional services to them, Casey says.
One such service is RFID tagging of inventory, the technology of which comes to Cardinal from its WaveMark acquisition. Through this inventory management solution, the company helps hospital track high-price products as well as commodity items.
"So we can answer questions like 'Can you cut inventory in half? Can you reduce lost items? Can you reduce dated and stock out items?'" Casey says. "We believe the answer to that is 'Yes.' And if we can do this smart distribution system, we believe that it will be much more cost effective to the whole system, not only to the hospital but also to the manufacturers."
The focus on services has also triggered another realization: Hospitals must keep connected to patients in their homes as the healthcare system moves to reward providers that care for patients across the continuum of care and not just on an episodic basis within the four walls of a hospital.
Cardinal now provides medical supplies directly to a patient's doorstep through its acquisition of AssuraMed.
"We bought [AssuraMed] because we believe that the acute care customers are going to need to be able to follow a patient from the hospital to the home," Casey says.
So innovating to disrupt certain medical segments, leveraging the brand name and overseas commercial infrastructure of Cordis, being indispensable to patients expecting medical supplies at home and providing effiency solutions to hospitals are key to the overall business strategy for devices (and indeed for the overall company) at Cardinal Health.
And Cardinal has been delivering on this strategy.
"The fact that Cardinal wants to be in the distribution and manufacturing business is unique," says the research analyst Halper, who has an "outperform" rating on Cardinal's stock. "From my perspective, it’s about effective use of capital and as long as they generate sufficient returns on that use of capital, it’s good."
[Photo Credit: iStockphoto.com user shylendrahoode]