Following profitable Q3, Cardinal prepares for what may be a challenging FY2013
DUBLIN, Ohio — The recent loss of business from a key specialty pharmacy customer and the continued deluge of generic introductions will represent significant challenges for Cardinal Health in fiscal year 2013 as it approaches the year-end of its fiscal 2012, company executives told analysts during a conference call Thursday morning.
"It's quite an extraordinary time in the industry, we're probably looking at the potential of total system-wide generic penetration exceeding 80% sometime next year, which is really a sort of mind-boggling number," Cardinal CFO Jeff Henderson told analysts.
The generic wave also will continue impact year-ago comparisons. For example, the No. 1 branded product Lipitor realized $7.7 billion in U.S. sales through 2011, according to IMS Health. That therapy alone represents a significant volume of revenue that will be reduced by generic introductions.
"We all recognize that our 2013 is going to be an interesting year with respect to revenue just given the shear volume of large branded products that have and will come off patent," added George Barrett, chairman and CEO of Cardinal Health.
With the branded-generic mix skewing decidedly generic, top-line revenue numbers may be slightly negative to flat next year even as margins are significantly enhanced.
Conversely, the loss of specialty business from one significant customer will have a significant impact on margins, Henderson noted, but the company is confident specialty revenue will continue to grow through 2013 with the acquisition of new business.
Regarding Cardinal's wholesale business with significant retail pharmacy customers, Barrett reported the company renewed Kmart and Kroger to contracts that extend beyond fiscal year 2015. Both CVS Caremark and Walgreens contracts run through the summer of 2013, Barrett said. Barrett also confirmed Cardinal's recent signing of Safeway to a multiyear agreement.
Cardinal Health is presently bidding for Express Scripts future business; its current contract has been extended through September.
Cardinal Health on Thursday reported a 3% increase in third-quarter revenue for fiscal 2012 to $26.9 billion and a 16% increase in non-GAAP diluted earnings per share from continuing operations to 94 cents.
Net earnings were up 36% for the third quarter to $333.4 million. The company raised the lower end of its guidance resulting in a revised range of $3.15 to $3.20 for fiscal 2012 non-GAAP diluted earnings per share from continuing operations.
"Our pharmaceutical segment continued its robust profit performance. Our medical segment fundamentals showed continued momentum, but as anticipated, profit was negatively impacted by the cost of commodity inputs," Barrett said. "However, we see the year-over-year impact of this dynamic subsiding in the fourth quarter of fiscal 2012 and into fiscal 2013."
Barrett also introduced Don Casey, the new CEO of Cardinal's medical segment, to the analyst community. Cardinal named Casey to the role on April 10, following the departure of Mike Lynch.
Casey started with McNeil Consumer Products in 1985 and served the next 24 years at Johnson & Johnson, during which he worked as company group chairman of LifeScan and Animas, group chairman and president of J&J's vision care franchise, president of the Johnson & Johnson-Merck joint venture and president of eJNJ. Casey most recently was CEO for the Gary and Mary West Wireless Health Institute, a nonprofit research organization focused on lowering the cost of health care through technological solutions.
Casey will manage Cardinal's medical-surgical products and services for hospitals, physician offices, clinical laboratories, ambulatory surgery centers, long-term care facilities and other health care providers.
Casey succeeds Lynch, who will be leaving Cardinal Health to pursue his ambition to lead a company on his own in the Chicago area, Cardinal had announced last month.