Morningstar | Cardinal Health Maintains Strong Positioning in the Wholesale Drug Distribution Market
We believe Cardinal Health plays an important role within the healthcare market, and as a result, it possesses a wide economic moat. The drug distributor is able to turn its significant size and market share into key competitive advantages. Cardinal is an important cog within the pharmaceutical industry, as many supply-chain participants depend on its services for streamlined product distribution and procurement. We expect the use of pharmaceuticals to increase over the next several years, which should provide a solid platform for Cardinal's continued success.Cardinal is the third-largest pharmaceutical distributor by revenue and is the main supplier to CVS Health's retail pharmacy network. The firm also supplies several large provider GPOs and mass retailers. The razor-thin profitability of these contracts and the enormous amount of capital needed to build a top-tier global drug wholesaling/distribution operation have formed a solid competitive foundation for Cardinal that has largely kept new entrants at bay.Cardinal has also made a few strategic moves that we believe will be beneficial over the long term. For one, it has partnered with CVS Caremark in jointly sourcing generic drug products. This should allow it an opportunity to offset current profitability issues and drive economic value longer-term, as the combined sourcing entity will be able to garner top-tier pricing discounts from generic manufacturers. However, we are not enthusiastic about Cardinal's recent push into medical equipment manufacturing and distribution. As we had initially believed would be the case, these operations have provided significant headwinds as pricing and manufacturing issues have recently formulated. Although healthcare spending growth continues to exceed GDP growth, this is not the case for the low-tech medical and surgical products, which generally experience market growth in the low single digits. We believe these assets could suppress ROICs and detract value from the firm's top-tier core drug distribution operations. Accordingly, we are pleased that the new management team has taken the step of restructuring these noncore businesses.Cardinal Health is a healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories and physician offices. The company's segments include: Pharmaceutical and Medical. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, specialty pharmaceutical and over-the-counter healthcare and consumer products in the United States. The company's Medical segment manufactures, sources and distributes Cardinal Health branded medical, surgical and laboratory products, which are sold in the United States, Canada, Europe, Asia and other markets.
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