Combating medical infections in healthcare settings is proving to be profitable for Cardinal Health, which is considering splitting its clinical and medical products units off from the troubled - and much larger - drug distribution business.
The Dublin, Ohio-based vendor announced Thursday that its fiscal fourth-quarter net income had fallen 64 percent, in part because of its pharmaceutical segment, and the company expects that segment to continue to struggle through the first half of 2009. The company is the second largest U.S. distributor of prescription medicines, behind McKesson.
Net income for the fiscal fourth quarter fell to $326,6 million, or 91 cents a share, down from $902.2 million, or $2.33 a share, just one year earlier. Part of that decrease was caused by the $3.3 billion sale of a drug-packing unit, Catalent Pharma Solutions, Inc., which inflated last year's earnings.
Just last month, the company consolidated its businesses into two primary operating and reporting segments - the healthcare supply chain services segment, which includes the company's network of pharmaceutical and medical product distribution centers and nuclear pharmacies, and the clinical and medical products segment, which includes products for infusion, medication dispensing, respiratory care and infection prevention. The company also announced that it would cut about 600 jobs, or 1.5 percent of its workforce.
Company officials said they would decide within 60-90 days whether to spin off the clinical and medical supply products businesses into a separate, publicly traded company. Those segments combined to generate 72 percent of earnings in the fourth quarter.
Cardinal Health's pharmaceutical segment, its largest segment by far, offers distribution services for prescription medicine and medical products throughout North America and posts annual revenues of more than $80 billion. The clinical and medical products segment posts annual revenues of approximately $5 billion.
In May, Cardinal bought a line of infection-control products from Enturia, Inc. for $490 million. Cardinal also paid $1.5 billion in June 2007 for Viasys, adding a respiratory-equipment business with sales in western Europe and the Middle East.
"For two years, we have been taking steps to sharpen our focus on healthcare 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, the company's chairman and chief executive, in a press release. "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."
During a conference call Thursday with investors, company officials forecast fiscal 2009 earnings of $3.80 to $3.95 a share. It predicted earnings from its drug-distribution unit could range from no growth to a 5 percent loss, while the clinical and medical products units, the ones it may spin off, are expected to grow by more than 20 percent.
Chief Financial Officer Jeffrey Henderson said the company is expecting "relatively weak" earnings of 70 cents a share for the current quarter, well below analysts' estimates of roughly 94 cents a share. Henderson said less-profitable contract renewals, increased tax rates and additional spending on research and development will eat into earnings for the quarter.
"The comparisons will be challenging before we get back on track in the second half of the year," he said.
Cardinal lost some customers after the U.S. Drug Enforcement Administration said the company was serving drugstores that might be filling fake prescriptions for controlled substances such as painkillers. The agency suspended the company's shipments of such substances from three warehouses, and Cardinal did the same voluntarily at a fourth.
Is Cardinal Health choosing the right path in mulling a spin-off? What other options are available to the company? Send you comments to Managing Editor Eric Wicklund at eric.wicklund@medtechpublishing.com.