Pharmaceuticals distributor and medical products supplier Cardinal Health (NYSE:CAH) plans to make $90 million in acquisitions this year to boost its business in China.

Dublin, Ohio-based Cardinal entered the Chinese market with the $470 million acquisition in 2010 of Chinese drug distributor Yong Yu.

Now, Cardinal is looking to make further acquisitions in the country to expand its geographic reach and further its direct distribution business, chief financial officer Jeff Henderson said in a conference call to discuss the company’s second-quarter earnings.

By the end of Cardinal’s third quarter, the company expects to have grown its Chinese business to 10 distribution centers, with a coverage area that includes 250 million people.

Cardinal also hopes to expand its reach in China as a “platform” for medical equipment companies that are looking to break into the market, Henderson said.

Cardinal’s Chinese business enjoyed strong growth in the second quarter, as it expanded at a rate in the “low 20s,” he said.

“Cardinal Health China continues to perform well, and we’re very optimistic about its future,” Henderson said.

Turning to finances, Cardinal reported diluted earnings per share from continuing operations of 81 cents. That beat analysts’ expectations by 5 cents.

Overall, net earnings rose 22 percent to $262 million on a 7 percent increase in revenue to $27 billion.

Much of Cardinal’s growth was again driven by strong sales of generic pharmaceuticals. The quarter featured the generic launches of blockbuster drugs Lipitor and Zyprexa, both of which “contributed strongly” to 30 percent profit growth in Cardinal’s key pharmaceuticals business, Henderson said.

That was enough to offset an 18 percent decline in profit in Cardinal’s smaller medical equipment segment, which suffered from higher oil costs.

Medical products supplier Cardinal Health (NYSE:CAH) has released a new surgical mask that offers a better fit and features “fog-reduction technology.”

Cardinal’s Smart-Seal surgical mask features a “cinch-and-hug,” single-tie design that creates a custom seal around the wearer’s nose and mouth, according to a statement from Dublin, Ohio-based Cardinal.

The new mask also boasts closed-cell foam and a fog-reducing vapor barrier, according to Cardinal.

“The Smart-Seal mask offers the next evolution in surgical mask protection, addressing not only fog and fit, but also providing the highest level of filtration and fluid resistance,” said Lisa Ashby, president of category management.

Cardinal is scheduled to release its second-quarter earnings information on Thursday.

Cardinal’s new InfusaTrack software is designed to make it easier for community rheumatology practices to offer in-office infusion therapy, which involves administering medication through a needle or catheter for patients whose conditions are too severe to be treated by oral medication, according to a statement from Dublin, Ohio-based Cardinal.

Administrative burdens of managing infusion therapy patients can make doing so difficult for community rheumatology practices, Cardinal said. Rheumatism refers to diseases characterized by pain and stiffness in the joints, such as arthritis.

The new tool tracks inventories of infused medications, simplifies the process of scheduling patient infusion visits and streamlines the billing process associated with infusion, Cardinal said.

“As new breakthrough treatments for rheumatoid arthritis, lupus, psoriasis and other rheumatic diseases lead to an increased demand for infusion therapy, we’re also seeing an increasing need for tools that help community practices streamline the complicated process of offering this important service to patients,” according to Cardinal’s statement.

What’s in it for Cardinal from a business perspective? The more patients rheumatology practices treat, the more drugs they buy and that boosts Cardinal’s revenues.

A Cardinal spokeswoman said the company charges a monthly fee for the service, but declined to disclose the fee.

The offer was originally set to expire today, Dec. 20, but has now been extended until Feb. 6, according to a statement from the two companies.

The reason for the extension is to allow Canadian regulators more time to complete their review of the deal. Regulators asked the two companies for unspecified additional information on the deal, though the companies stressed that the requests “were not unexpected.”

At the time of the deal’s announcement in October, Dublin, Ohio-based Cardinal said the Futuremed purchase strengthened its presence in Canada and offered Cardinal new customers for its existing medical products.

Futuremed specializes in selling consumable nursing home supplies and furniture, and equipment to long-term care facilities. The company sells a wide range of products, from syringes to beds to training stairs used for physical therapy.

If the deal doesn’t go through, Futuremed could owe Cardinal a $4.6 million termination fee, the Canadian Press reported. Still, the companies said they expect the acquisition to close by the end of the first quarter, according to the statement.

Cardinal Health Canada is headquartered in Toronto and has seven distribution centers across the country.

Gartner’s Healthcare Supply Chain Top 25 ranking is based primarily on two metrics: quantitative measures such as financial data and the opinions of industry peers and analysts, according to a statement from Gartner.

The rankings are meant to illustrate which health supply chain companies are enabling high-quality patient care at optimal economic costs, according to the statement.

Dublin, Ohio-based Cardinal earned accolades from Gartner for combining the strengths of a surgical products distributor, a pharmaceuticals wholesaler and a large manufacturer. “Cardinal has the closest thing to a ‘one-stop shop’ in serving providers and gets credit for having a unique ability to support its trading partners,” Gartner said.

Immediately following Cardinal on the Gartner list were Sisters of Mercy Health System in St. Louis, Missouri and Becton, Dickinson and Company.

Photo from flickr user James Bowe

In January, Dublin, Ohio-based Cardinal should know whether it or AmerisourceBergen (NYSE:ABC) or McKesson (NYSE:MCK) has won the giant VA contract, Bloomberg News reported.

Since 2004, McKesson has held a contract to supply pharmaceuticals to not only the VA’s hospitals, but also the department’s mail-order operations. Amerisource held the contract prior to that. It’s possible that the VA could split up the work.

Terms of the existing contract called for McKesson to give the VA a 5 percent discount on wholesale prices in the first year of the deal.

The VA is generally happy with McKesson’s performance, but the San Francisco company still could be vulnerable, Lisa Gill, an analyst with JP Morgan Securities, told Bloomberg.

“If someone bids substantially below them, they may lose the contract,” Gill said. “Price is by far the biggest determining factor.”

A Cardinal spokeswoman confirmed that the Ohio company is competing for the contract.

The contract could boost its winner’s revenue by about $4 billion annually.

Now — after the $470 million acquisition last year of Chinese drug distributor Yong Yu and the recent opening of a new logistics center in Shanghai — Cardinal just needs to figure out which of those opportunities to pursue.

In addition to growing its drug distribution business, China could represent a large market for Dublin, Ohio-based Cardinal to boost its medical devices, nuclear pharmacy and retail pharmacy businesses, said Chief Financial Officer Jeff Henderson.

“There are a lot of thing we could pursue in the country, and we need to be able to prioritize over time which of those can be the most economically attractive,” Henderson said.

Still, any missteps could be costly, simply because China is so important to Cardinal’s future.  Henderson called China “one of our most significant growth platforms over the next 3 to 5 years and well beyond that.”

To achieve that growth, Cardinal will need to begin consolidating what Henderson called a “fragmented” and “inefficient” Chinese drug distribution industry in a rapidly shifting healthcare market — and Cardinal’s starting from a small base. Using its drug distribution infrastructure and personnel as its growth platform, Cardinal can then begin exploring other business opportunities in China.

But it’s Cardinal’s core pharmaceuticals distribution business that represents the biggest and most obvious opportunity in China. And judging from the market’s growth rates, it’s not difficult to see why the opportunity is extremely attractive to Cardinal.

China’s drug distribution industry grew an average of 15 percent per year from 2000 to 2009, with sales increasing 17 percent to about $104 billion last year, China Daily reported.

And then there are the broad trends that make China appealing to Cardinal, or virtually any healthcare company, for that matter.

“There’s a large opportunity, given the size of the population in China, as well as the economic growth and what’s likely to be much faster growth in the pharmaceuticals market over there” compared with the U.S., said Matthew Coffina, an equities analyst with Morningstar in Chicago.

Even better for Cardinal, the distribution industry is ripe for consolidation and that’s exactly what’s likely to happen; in its latest 5-year plan, the Chinese government said it aims to have between one and three large-scale drug distributors in the country.

Most of Cardinal’s Chinese acquisitions will target other drug distributors, Henderson said, and the Ohio company will have plenty of choices due to the market’s fragmentation.

Yong Yu, Cardinal’s acquisition, is the 9th-largest drug distributor in the country, with just a 2 percent market share, so clearly Cardinal has lots of room to grow. Perhaps the greatest illustration of the Chinese drug distribution market’s fragmentation is that the top 10 Chinese distributors account for just 34 percent of the overall market, Henderson said.

“That entire framework will change over time as consolidation happens,” Henderson said.

In that respect, Cardinal’s greatest opportunity could also be its greatest challenge: the fact that it’s starting from such a small base in China with Yong Yu’s miniscule market share. That likely translates to acquisitions, and lots of them — at least in the early going.

“In order to get some regional scale and expand into new areas of the country, I’d think they’d start with acquisitions, but further down the line the hope would be to grow organically,” Coffina said.

Cardinal has already acquired one small distributor for a price that Henderson put at less than $10 million, giving the company a presence in seven Chinese cities.

So Cardinal is already off to a strong start in China. But because it’s starting so small, it’ll likely be awhile before its Chinese operations have a big effect on its overall business, according to Coffina.

“All of this is a 10-year story, more so than the next couple years, at least when it comes to the overall impact on the company,” he said.

Photo from flickr user poeloq

Cardinal’s partnership with CareFirst BlueCross BlueShield involves adding rheumatoid arthritis (RA) to its P4 clinical pathways program, an initiative that helps insurers and physicians to work together to develop evidence-based clinical protocols, or pathways, to improve the way care is delivered to patients with complex diseases, according to a statement from Dublin, Ohio-based Cardinal.

Previously, Cardinal’s P4 pathways had mostly focused on cancer care. The idea behind P4 is to align incentives between doctors, drug companies, patients and insurance companies to deliver higher-quality, lower-cost care.

By strengthening Cardinal’s relationships with physicians and drug companies, P4 could help Cardinal acquire new customers for its specialty drugs distribution business, which could be a significant growth area for Cardinal in the coming years.

In the RA program, Cardinal and CareFirst have engaged 70 rheumatology practices and more than 100 rheumatologists to participate. CareFirst has nearly 3.4 million members in Maryland, the District of Columbia and portions of Northern Virginia.

Broadly, the clinical pathways program aims to improve cost and quality in three ways, Bruce Feinberg, chief medical officer for P4, told MedCity News in August.

First, the program aims to convert the use of branded drugs to generics when appropriate. Second, the clinical pathways program emphasizes dropping treatment regimens that aren’t supported by today’s best-available medical evidence. And third, the program is aimed at reducing the variance that occurs in treatment regimens for the same condition, Feinberg said.

Cardinal acquired the P4 business as part of its $517 million acquisition of Healthcare Solutions Holding last year.

Photo from flickr user gfoster67

Cardinal reported adjusted earnings from continuing operations of $256 million, or 73 cents per diluted share, compared with $231 million or 66 cents per diluted share a year earlier, according to a statement from the Dublin, Ohio-based company.

Cardinal’s results beat analysts’ projections by a penny.

However, a strong earnings report from rival McKesson (NYSE:MCK) took some luster off Cardinal’s financials, as did Cardinal’s reiteration of its fiscal 2012 outlook of earnings per share between $3.04 and $3.19.

“We believe investors may be disappointed, especially after the very strong quarter reported by McKesson yesterday, that management has maintained guidance for fiscal 2012,” JP Morgan analyst Lisa Gill wrote in a research note, according to Reuters.

In early afternoon trading, Cardinal’s shares were up 1 percent to $44.62, while McKesson’s had risen more than 3 percent to $84.52. For the sake of comparison, the Dow Jones Industrial Average was up about 3 percent.

Although investors may not have been thrilled with Cardinal’s performance, CEO George Barrett pronounced himself “pleased” with it.

“While we’re pleased with the performance of our business in this first quarter, we’re even more excited about the growth in strategic priority areas including specialty, positron emission tomography, generics, ambulatory, preferred medical products and China,” he said. “Our progress in these areas provides increasing confidence that we’re positioning well for future growth.”

The purchase of Futuremed Healthcare Products strengthens Dublin, Ohio-based Cardinal’s presence in Canada and offers Cardinal new customers for its existing medical products.

Futuremed specializes in selling consumable nursing home supplies and furniture, and equipment to long-term care facilities, according to a statement from Cardinal. The company sells a wide range of products, from syringes to beds to training stairs used for physical therapy.

It recently added a dedicated sales force to sell to the physician supply market and offers similar products to doctors.

“We expect to generate significant synergies as we build off our existing platforms and business-partner relationships, enabling more efficient offerings to our customers,” said David Lees, president of Cardinal’s Canadian division.

The deal is subject to the approval of shareholders of Futuremed, which is traded on the Toronto Stock Exchange. The transaction is expected to close in the first quarter of 2012, according to the statement.

In exchange, Dublin, Ohio-based Cardinal has provided MicroPhage with an unspecified amount of operational funding for development and commercialization of new products, according to a statement from MicroPhage.

Reached by phone, MicroPhage officials declined to specify the amount of Cardinal’s investment. “Most of it was an equity investment,” said CEO Don Mooney.

Colorado-based MicroPhage markets the test as the first test for Staphylococcus aureus infections that is able to quickly identify whether the bacteria are methicillin resistant (MRSA) or methicillin susceptible (MSSA).  S. aureus is the most common cause of staph infections and can lead to serious conditions like pneumonia and meningitis.

MRSA infections are resistant to antibiotics and often are found in people who have spent time in hospitals or other healthcare settings.

The blood test is capable of delivering results in five-and-a-half hours, compared with current methods that can take up to 72 hours, according to the company.

The test was cleared for marketing by the (pdf) U.S. Food and Drug Administration in May.

The test “not only saves time in diagnosing potentially life-threatening infections but also allows healthcare professionals to optimize treatment and start appropriate contact precautions to prevent the spread of the organism,” said Alberto Gutierrez of the FDA’s Center for Devices and Radiological Health, at the time.

As part of the deal, Cardinal also gets distribution rights to other MicroPhage products in development for testing blood culture specimens for S. aureus, according to the statement.

In particular, positron emission tomography  (PET) radiopharmaceuticals — which are used to aid in imaging scans for cancer, heart disease and brain disorders — are poised to be a big growth area for Cardinal, Columbus Business First reports.

Cardinal’s been in the nuclear medicine business for several years. It built its business on single photon emission computed tomography (SPECT) drugs, which incorporate radioactive metals that emit low-energy radiation detected by a type of gamma camera. But PET is where the future of nuclear medicine lies for Cardinal.

“The PET business can be equal if not larger than what we’ve seen in the low-energy side … in a pretty near-term horizon,” John Rademacher, president of nuclear and specialty pharmacy services at Cardinal, told Columbus Business First.

To get an idea of why nuclear medicine is important to Cardinal, look no further than the margins associated with the business. A Deutsche Bank analyst estimated that Cardinal’s revenue from the business is just $750 million — less than 1 percent of Cardinal’s overall revenue — but margins for the nuclear medicine business are in the high single digits.

Contrast that with margins from the biggest part of Cardinal’s business, drug distribution to bulk customers like big pharmacies, that posted razor-thin margins of 0.3 percent.

Plus, the market for PET and SPECT radiopharmaceuticals is expected to enjoy healthy growth in the coming years. U.S. sales of SPECT and PET radiopharmaceuticals reached $1.2 billion in 2010 and are expected to rise to $6 billion by 2018, according to a recent report from Bio-Tech Systems.

In light of the emerging radiopharmaceuticals, Cardinal has been striking collaborations with universities and drug companies “to assist these innovators in developing their products,” Rademacher told MedCity News last year. Such collaborations will likely give Cardinal the first shot at commercializing any drugs that result from the partnerships.

Specialty drugs are typically complex, injectable biologics that are used to treat somewhat small groups of patients for specific conditions like multiple sclerosis, cystic fibrosis and certain types of cancer, for example. They often require special handling throughout the supply chain and are usually distributed to patients at doctors’s offices rather than through traditional pharmacies.

Sales of specialty drugs are expected to explode in coming years — and therein lies the opportunity for Dublin, Ohio-based Cardinal and competitors AmerisourceBergen (NYSE:ABC) and McKesson (NYSE:MCK). The specialty drug market is expected to expand to twice the size of the traditional pharma market within a few years, hitting $100 billion by 2013, according to research firm IMS Health.

Given those numbers, it’s no surprise that Meg Fitzgerald, president of Cardinal’s specialty solutions group, calls the specialty business “very important to Cardinal Health’s future” and says the company is “committed to continue to invest in this market.”

But it’ll take a big commitment for Cardinal to make inroads in the specialty distribution market. Adam Fein, president of Pembroke Consulting and operator of the insightful Drug Channels blog, estimates that Cardinal controls a very small portion of the specialty distribution market for physicians’s offices, while AmerisourceBergen holds about half the market and McKesson controls roughly 25 percent.

“Cardinal is in some sense a little bit of an also-ran in the market for specialty drug distribution for physicians’s offices,” Fein said.

Still, Cardinal has made some recent progress in the area, with one notable recent client acquisition coming in the form of South Carolina Oncology Associates, the state’s largest community oncology practice.

“While we are still in the early stages with respect to our specialty distribution business, we are building momentum and competing effectively, as seen through some of our key customer wins,” Fitzgerald said.

Plus, the company reported year-over-year revenue growth of 30 percent in its specialty solutions group in its most recent quarter. It is important to note that Cardinal’s specialty solutions business includes a number of initiatives and that specialty distribution is just one part of that business.

Cardinal’s biggest bet on its specialty business came in the form of its $517 million acquisition of Healthcare Solutions Holding last year. That acquisition brought the lynchpin of Cardinal’s specialty strategy, its P4 Healthcare business. Focused on oncology, P4 works with doctors to develop best practices called “clinical pathways” for treating cancer patients.

The idea behind P4 is to align incentives between doctors, drug companies, patients and insurance companies to deliver higher-quality, lower-cost care. Broadly, the clinical pathways program aims to improve cost and quality in three ways, according to Bruce Feinberg, chief medical officer for P4.

First, the program aims to convert the use of branded drugs to generics when appropriate. Second, the clinical pathways program emphasizes dropping treatment regimens that aren’t supported by today’s best-available medical evidence. And third, the program is aimed at reducing the variance that occurs in treatment regimens for the same condition, Feinberg said.

By strengthening Cardinal’s relationships with physicians and drug companies, P4 could help Cardinal acquire new customers for its specialty distribution business, Fitzgerald said. Plus, Cardinal’s plan is to apply P4′s business model to other therapeutic areas in the future.

“While P4 Healthcare primarily focuses on the field of oncology, we believe that its model is scalable and brings significant growth potential to broaden its reach to other specialty areas such as urology, rheumatoid arthritis, dermatology and others,” Fitzgerald said.

Cardinal scored another recent win when it contracted with large health insurer Aetna to offer P4′s services to Aetna’s member physicians in four states and Washington, D.C. That deal focuses on three types of cancer: breast, lung and colon.

As for Cardinal’s specialty distribution business, Fein is skeptical that P4 will give it a big boost. For one thing, AmerisourceBergen and McKesson already control most of the business, so Cardinal will have to strip customers away from its competitors. Plus, the number of private physician practices in the U.S. is shrinking, so Cardinal will be competing for a slice of an ever-smaller pie.

“It’s going to be slow going to penetrate the specialty distribution market for Cardinal,” Fein said. “They’re very behind right now.”

The good thing for Cardinal investors is that the company’s executives seem to know that and aren’t afraid to admit it.

“We knew that specialty distribution was going to be a building process and I would still describe it as that,” CEO George Barrett said earlier this month in a conference call with analysts. “We’ve begun to feel some momentum recently, but it does take a while to get rolling.”

Generics — as well as acquisitions that have allowed the company to sell more generics — contributed to a 9 percent increase in fourth-quarter revenue to $26.8 billion, according to a statement from the Dublin, Ohio company. That number slightly exceeded analysts’s expectations of $26.1 billion.

The “generic wave” will continue to be a boon to Cardinal as several new generic launches are expected to help Cardinal in its fiscal 2012, which began in July. In particular, cholesterol drug Lipitor loses patent protection in November and generic versions of the popular drug are expected to be available shortly thereafter.

The company’s pharmaceutical segment, by far its largest, enjoyed year-over-year revenue growth of 10 percent to $24.5 billion and an impressive 30 percent increase in profits to $295 million. Those numbers were helped by Cardinal’s acquisitions last year of Chinese distribution business Yong Yu and a U.S. distributor focused on the East Coast, Kinray.

Overall, it was a solid quarter for Cardinal, with adjusted earnings per share from continuing operations coming in at 59 cents, 1 cent above the consensus analysts’s estimate.

If there was a negative for the company, it came from its medical segment, which distributes surgical kits and low-cost healthcare supplies like gloves, gowns and scrubs. While the segment’s revenue rose 7 percent to $2.3 billion, profits plunged 24 percent to $78 million.

CEO George Barrett blamed the decline on increasing commodity costs and “sluggish utilization” of surgical products.

One area for improvement that Barrett cited is Cardinal’s specialty pharmaceuticals business, which involves distributing specialty drugs and a group purchasing organization for community-based physician practices. “We would’ve liked it to accelerate faster, but we feel good about the fact it’s picking up steam,” Barrett said.

On the year, Cardinal reported 4 percent revenue growth to $1.4 billion.

Adjusted diluted earnings per share from continuing operations was $2.67, a 20 percent increase over the prior year. That beat analysts’s expectations by a penny. The company expects the number in 2012 to come in between $3.04 and $3.19.

Cardinal scientists, engineers and manufacturing experts will work with clients in the pharmaceutical and academic research industries at Cardinal’s Center for the Advancement of Molecular Imaging in Phoenix, Arizona, according to a statement from Dublin, Ohio-based Cardinal.

The center’s opening represents a strategic investment by Cardinal in the future of the molecular imaging and pharmaceuticals industries, according to John Rademacher, president of the company’s nuclear and pharmacy services. “By helping pharmaceutical companies and academic research institutions accelerate innovation and reduce the time it takes to get new imaging agents to market, we can more accurately diagnose diseases earlier in their onset,” he said.

Cardinal is among the nation’s largest distributors of radiopharmaceuticals and operates  more than 150 nuclear pharmacies  nationwide. Radiopharmaceuticals are radioactive drugs that are ingested or injected to help doctors detect and diagnose abnormal cellular functions that can be associated with diseases. The drugs are typically used in conjunction with imaging devices.

The U.S. market for certain types of radiopharmaceuticals, such as Positron Emission Tomography (PET) imaging agents, is expected to grow substantially in the coming years and reach $4.8 billion in 2017 from $1.2 billion in 2009, according to a report last year by Bio-Tech Systems.

For Cardinal, partnering with drug companies and researchers to develop radiopharmaceuticals could enable the Ohio company to more easily win distribution deals with those clients once those radiopharmaceuticals reach the market.

The center will house stand-alone laboratory space to allow the company’s partners to conduct confidential radiopharmaceutical and PET imaging agent experiments. The center will also focus on improving the manufacturing processes around PET agents.

The giant drug distributor – and Ohio’s largest company – does not plan to lease space in the planned Cleveland medical mart or its counterpart in Nashville, spokeswoman Corey Kerr said. So don’t expect to see Cardinal Health products in any medical convention center — an untested concept that would house under one roof product showrooms from numerous companies that sell to the healthcare industry.

Two years ago, Cardinal was one of 11 tenants announced by a New York medical mart project that fizzled out shortly afterwards. Cardinal seemed enthused by the New York project, which was to be called the World Product Centre, at the time.

“The development of World Product Centre provides a transparent, neutral location for healthcare providers to evaluate products and services from a variety of manufacturers and distributors,” Mark Rosenbaum, Cardinal’s chief customer officer, said at the time.

But now, Cardinal Health is singing a different tune. Kerr reiterated a quote she gave to The Tennessean for an article on the Nashville Medical Trade Center’s progress.

“Our customers have made it clear to us that they prefer our continued participation in industry trade shows and events that they’ve come to know and respect,” she said. “It’s important to maintain personal interaction with our customers in locations that are convenient to them.”

Not having Cardinal Health products  in its showrooms – let alone the Cardinal Health company endorsement – is an early setback for the convention centers. But property developers behind the Cleveland and Nashville medical marts have to hope that Cardinal’s change of heart isn’t indicative of a general disinterest in the medical mart concept on the part of big healthcare firms.

To counter that notion, Nashville would almost certainly point to a recently signed big-name tenant: furniture maker Steelcase. Cleveland, meanwhile, would argue that more than 60 companies have shown interest in signing leases for its medical mart, including publicly traded Northeast Ohio medical device manufacturers Invacare (NYSE:IVC) and Steris (NYSE:STE).

Sister Helen Prejean

The capital punishment-opposing nun prominently featured in the movie “Dead Man Walking” has asked Cardinal Health (NYSE: CAH) to recall a drug that’s used in the execution of prisoners.

But Sister Helen Prejean isn’t likely to be pleased with the response from the Dublin, Ohio-based pharmaceuticals distributor. A Cardinal spokeswoman was asked multiple times whether the company would yield to the nun’s wishes and she wouldn’t directly answer the question. Instead, she repeated the following statement:

As a distributor, our role in the healthcare supply chain is to ensure the safe and efficient delivery of products from manufacturers to customers holding the appropriate federal and state licenses. We do not play a part in the determination made by prescribing physicians, legislators, or regulators regarding the use of the products we distribute.

Sorry, Helen. The spokeswoman said that the statement above was essentially the message that Cardinal CEO George Barrett sent to Prejean in a letter the company faxed and mailed to her earlier today.

In Prejean’s letter, she asked that Cardinal recall the drug Nembutal, also known as pentobarbital, in one specific death penalty case involving a Georgia prisoner.

“Two of Cardinal Health’s core values are its commitment to acting in the best interests of the patient and improving patient safety,” Prejean wrote.  “The sale of Nembutal for use in executions appears to violate both the letter and spirit of [Cardinal's] code of ethics and your standards of business conduct.”

Before that she wasted little time in getting to her point, writing in the letter’s second sentence: “This sale was not for the purpose of  ’improving people’s lives’ as you say on your website, but to kill people, i.e., persons sentenced to death.”

Ouch. Probably not the kind of publicity Cardinal’s looking for, and no doubt a subject it’d rather avoid — but it’ll likely be forgotten soon enough.

“Dead Man Walking” was released in 1995, grossed $39 million in the U.S. and starred Sean Penn as a convicted killer who was executed and Susan Sarandon as the character based on Prejean.  Sarandon won an Oscar for Best Actress in a Leading Role for portraying Prejean. The movie was based on a book by Prejean.

It featured the following line from Penn’s character that Prejean would likely agree with: “I just wanna say I think killin’ is wrong, no matter who does it, whether it’s me or y’all or your government.”

Dublin, Ohio-based Cardinal now expects adjusted full-year earnings per share from continuing operations between $2.61 and $2.67, according to a statement from the company. CEO George Barrett cited strong year-to-date financial performance for the increase.

Cardinal’s third-quarter earnings from continuing operations rose 11 percent to $250 million, or 71 cents per diluted share. That beat Wall Street analysts’ expectations of 69 cents per share.

Revenues increased 7 percent to $26.1 billion. That barely topped Wall Street’s expectations of $25.8 billion.

The company’s pharmaceutical segment, by far its largest, posted an impressive 25 percent year-over-year increase in profits to $384 million. The gain was driven by strong sales of generics, an increasingly important part of Cardinal’s business, and acquisitions. The segment’s revenues grew 7 percent to $23.8 billion.

Cardinal’s medical segment — which sells items like gloves, gowns, surgical drapes and scrubs — faced “pressure” from rising commodities costs, Barrett said. Increased commodity prices, plus “sluggishness” in surgical procedure volumes, caused profits in the segment to decline 1 percent even though sales grew 5 percent.

Dr. James Mongan’s resignation comes “due to health-related reasons,” and “is not the result of any disagreement with [Cardinal] on any matter relating to the [its] operations, policies or practices,” according to a regulatory filing.

Mongan joined Cardinal’s board in January 2010. Mongan retired in 2009 from his post as CEO of Boston’s prominent Partners HealthCare System, a role he’d held since 2003. Massachusetts General Hospital and Brigham and Women’s Hospital founded Partners.

Modern Healthcare named Mongan as the No. 1 most powerful physician-executive in 2008. He’d been ranked in the top 10 since 2004.

He was a member of the audit committee of Cardinal’s board.

Craig Cowman of Cardinal Health

Cardinal Health (NYSE:CAH) and pharmaceuticals distributors of its ilk will have few better friends over the coming years than generic drugs.

The so-called “generic wave” — created by scores of brand-name drugs whose patents are expiring between this year and 2015 — is expected to be a huge boon to drug wholesalers like Dublin, Ohio-based Cardinal, boosting sales, but more importantly driving profits.

“Generic drugs are much more profitable for wholesalers than traditional branded drugs,” said Adam Fein, president of Pembroke Consulting and operator of the insightful Drug Channels blog. “That’s a surprise to many people because branded drugs are so much more expensive.”

The generic wave could mean big money for Cardinal and top competitors AmerisourceBergen (NYSE:ABC) and McKesson (NYSE:MCK). Fein estimates that over the next five years, more than $100 billion of branded-drug revenue will be lost to generic competition.

The reason for generics’ enhanced profitability for Cardinal is simple: clout. Cardinal and its competitors have it, and generics manufacturers — who are often competing with many other generic companies for prized  distribution deals — don’t. Fein puts it more succinctly: “Generic drugmakers must offer significant price concessions to win supply contracts with large wholesalers.”

In contrast, with a branded drug there’s just one manufacturer, meaning that drugmakers can’t undercut each other on price, and that means that distributors like Cardinal can negotiate only razor-thin margins on branded drugs.

“There are concessions [generics] manufacturers are looking to make to win a position,” acknowledged Craig Cowman, senior vice president of sourcing for Cardinal’s pharmaceuticals segment.

The numbers certainly bear that out. While just 10 percent of the sales for Cardinal’s pharmaceuticals distribution business come from generics, a staggering 50 percent of the business’ profits come from generics. (A Cardinal spokeswoman stressed those numbers apply to the company’s pharmaceuticals distribution business, not its larger pharmaceuticals segment.)

And Cardinal’s generic sales are headed up. In its last two quarters, year-over-year sales of generics have jumped 19 percent and 13 percent, respectively. Generic sales have climbed by double-digit rates for five consecutive quarters, the spokeswoman said.

“Generics are an important growth driver for us and we see the opportunities that exist over the next several years as positive for the market,” Cowman said in an understatement.

A recent key acquisition illustrates the emphasis Cardinal’s management has placed on growing its generics business. In November, Cardinal struck a $1.3 billion deal to buy New York-based drug distributor Kinray. The Kinray acquisition expanded Cardinal’s base of independent retail pharmacy customers by 40 percent to about 7,000.

Small, independent pharmacies are important customers for Cardinal because that’s where the Ohio company’s generic profits live. Through Cardinal’s SOURCE Generics program, the company negotiates deals with generics manufacturers on behalf of its retail customers. That’s good for Cardinal because independent pharmacies provide higher margins, and good for small pharmacies because Cardinal can pool its purchasing power and negotiate lower generic prices than the pharmacies could on their own.

Big pharmacies like CVS and Walgreens, on the other hand, have enough size to bypass Cardinal and directly negotiate their own contracts with generic drugmakers. For big customers, Cardinal essentially just loads and delivers generics, a much lower-margin business.

While the next few years of generic sales look likely to be very kind to Cardinal, Cowman warned that predicting with any accuracy the ebbs and flows of the generic wave could be a futile pursuit. A number of factors play a role in determining how valuable a particular generic will be to Cardinal, particularly the number of manufacturers producing a given generic, and how complex (and hence expensive) it is for manufacturers to produce a generic version of a drug.

“It could be that a very large and valuable branded drug doesn’t translate into a large and valuable generic,” Cowman said.

There’s certainly plenty of investor interest in the company. Neoprobe’s shares are up a whopping 77 percent on the year, thanks largely to their listing on the NYSE Amex market as of early February. And the company seems to be hitting its major clinical milestones, having reached the accrual goal of a Phase 3 study of Lymphoseek last month.

Perhaps most significantly, the company expects next quarter to file with the U.S. Food and Drug Administration a New Drug Application (NDA) for Lymphoseek, a tracing agent that helps surgeons identify cancerous lymph nodes in patients with breast cancer and melanoma. If the NDA is approved, Neoprobe could begin marketing Lymphoseek and start raking in sales. The company estimates Lymphoseek’s market value at (pdf) $450 million.

And let’s not forget that another radiopharmaceuticals developer, Avid Radiopharmaceuticals, just cashed in with a sale of up to $800 million to Eli Lilly — albeit for an entirely different clinical indication than anything Neoprobe is pursuing. But the deal shows there’s certainly market interest in radiopharmaceuticals development companies. The market for radiopharmaceuticals in the U.S. and Europe is expected to reach $5.4 billion in 2015, according to a report from Global Industry Analysts.

So what’s not to like about Neoprobe? It’s only a matter of months before strategic acquirers start kicking Neoprobe’s tires, right? Maybe not.

Steve Brozak, president of  WBB Securities, said pharmaceuticals companies are far more comfortable making acquisitions of companies that already have sales — even if that means waiting until an acquisition target is much more expensive.

“The pharma industry buys things based on revenues,” said Brozak, who said his company holds equity in Neoprobe.”They’d much rather pay 20x based on current revenues than pay 3x based on future revenues.”

Plus, big-company CEOs have a very strong reason to avoid making risky deals with pre-revenue companies: job security.

“No one has ever lost their job for saying ‘no’ to a deal, but plenty have lost their jobs for saying ‘yes’ to a deal that didn’t work out,” Brozak said.

If Neoprobe were to be acquired, the most obvious candidate would be fellow Dublin, Ohio, company Cardinal Health (NYSE:CAH). Not only is Cardinal a huge player in the radiopharmaceuticals market, but it’s entered into a distribution deal with Neoprobe for Lymphoseek. Under the terms of the deal, Cardinal will be the exclusive U.S. distributor of Lymphoseek for five years after approval of the NDA, and the two companies would split sales of the drug.

Both well-informed speculators like Brozak and largely uninformed speculators on blogs and stock message boards have long opined that Cardinal is the top candidate to buy Neoprobe, and the deal may well come to fruition some day.

But it looks less likely to happen this year. There’s a good chance Neoprobe won’t generate any sales from Lymphoseek this year as the FDA takes its time reviewing the drug’s application, so — following Brozak’s logic — 2012 would seem a more likely time for a deal. Cardinal competitor Covidien (NYSE:COV) has also been rumored to be a potential Neoprobe acquirer.

For Neoprobe’s part, company executives say exactly what anyone in their position would say: They’re focusing their energy on getting all they can out of the business and don’t spend time thinking about the prospects of an acquisition (or the 6,000-square-foot mansions they’d move into shortly thereafter.)

“The decision as to whether we get sold is in the hands of our shareholders,” CFO Brent Larson said.  “Our job is to grow the business,  identify pipeline opportunities and enhance shareholder value.”

That’s what Brozak wants to hear, because he would rather see Neoprobe remain on its own. He thinks it’ll better maximize its value by staying independent and raising cash through the public markets. And for Neoprobe to remain independent, one very important thing must happen: “I’m hoping the large pharma companies stay as stupid as they are right now,” Brozak succinctly said.

Isn’t that a bit harsh? Not to Brozak. He suggests — and once again, quite bluntly — that big pharmaceuticals and device companies’ true goal of optimizing their finances costs them when it comes to getting the most out of their clinical innovations.

“The pharmaceuticals industry and medical device industry is not designed to maximize discoveries,” he stated emphatically.  “It’s designed to do one thing: Provide maximum EBITDA in the short term.”

A recent report by consulting firm The Hay Group — which  found that 80 percent of the metrics used by the largest drugmakers to determine CEO salary incentives were financial measurements, but only 12 percent were tied to progress involving drug development and commercialization — would suggest that Brozak is right.

Cardinal expects full-year earnings excluding one-time items of between $2.54 and $2.60 a share, up from a previous range of $2.38 to $2.48 a share.

The Dublin, Ohio, company reported second quarter earnings per share of 69 cents from continuing operations, 8 cents above the consensus analysts’ estimate. Earnings per share from continuing operations including one-time items stood at 61 cents. Those one-time items include acquisition-related costs, and prior-year gains from the sale of stock and a litigation benefit.

“Overall we view the quarter’s results very positively,” said Lisa Gill, an analyst at J.P. Morgan in a research note, according to Reuters. “Operating metrics point to continued improvement in drug distribution as the company sells more generics to customers and continues to improve their customer mix.”

Sales in the quarter grew 2 percent to $25.4 billion. The company’s pharmaceuticals segment accounted for the vast majority of its revenues, $23.2 billion, up 2 percent compared to the like period last year. Profits in the segment grew 11 percent to $289 million.

Revenues in Cardinal’s medical products segment fell slightly to $2.2 billion.

In addition to its drug distribution business, Cardinal makes surgical gowns, gloves, scrubs, and surgical devices, plus other medical supplies.

Cardinal’s stock price was down slightly in mid-day trading at $41.55.

Barclays shared the report with Adam Fein, a pharmaceuticals industry consultant/blogger/“tough, cynical hard-ass,” who discussed the report on his excellent blog, Drug Channels.

The report draws two key conclusions, according to Fein: First, Dublin, Ohio-based Cardinal and its top two competitors — McKesson Corp. (NYSE:MCK) and AmerisourceBergen Corp. (NYSE:ABC) — in fiscal 2013 will experience their “first-ever” decline in top-line revenues.

That sounds bad until you get to the second conclusion: The three companies stand to realize big benefits as patents expire on brand-name drugs and those drugs are replaced with generics, which are far more profitable for the three big wholesalers.

McKesson’s operating margins (operating profits as a percentage of revenues) are expected to benefit the most of the three, rising by 29 percent from 2010 to 2013. Cardinal’s operating margins are predicted to grow by 27 percent over the same time period, while Amerisource’s are pegged to increase by 13 percent, according to Fein.

Fein even goes a step further than the report, noting that return on invested capital (ROIC) is a better measure than operating profits for drug distributors, because “97 percent of a wholesaler’s revenues are pass-through dollars.” The gains in ROIC look even more favorable than operating margins for the three companies, Fein wrote.

Cardinal, a pharmaceuticals distributor and medical products supplier, upped its federal lobbying spending by 39 percent over the prior year, publicly filed lobbying reports revealed. Cardinal’s total spending pales in comparison to what some leading medical trade groups spent, however. The American Medical Association, a physicians’ group, and PhRMA, a drugmakers’ group, each spent about $22 million on lobbying last year. Most big companies belong to trade groups that lobby on their behalf.

Like last year, federal health reform spurred much of Ohio health organizations’ spending on lobbying, and issues surrounding Medicare and Medicaid reimbursement always draw lobbying dollars, too.

When asked to mention a few top lobbying priorities for Cardinal Health in 2010, Connie Woodburn, senior vice president of government relations, replied, “Health reform, health reform, health reform.” Woodburn said Cardinal looked at health reform through four “prisms”: its effect on the healthcare industry as a whole, its impact on Cardinal’s customers, its impact on Cardinal’s own business units and its implications for Cardinal as an employer of more than 20,000 people worldwide.

“There’s a lot in health reform to like and a lot not to like,” she said.

One provision that Cardinal doesn’t like and has lobbied against is a tax on medical device manufacturers. Like many other big companies affected by the tax, Cardinal must perform the delicate balance of being generally supportive of health reform while speaking out against one of the law’s funding mechanisms. The 2.3 percent tax on revenues is designed to raise $20 billion over 10 years.

One aspect of the tax that Cardinal objects to is that it treats simple medical devices such as surgical gloves and masks the same as complex ones like defibrillators. That means the tax has a “disproportionate impact” on generic or low-cost suppliers, Woodburn said. A number of Republicans in the House and Senate are working to repeal the device tax, plus it could be an attractive political target for Democrats in swing states that are home to major device firms, so we’ll likely hear plenty more about it in 2011.

“Certainly, we’ll continue to work on that issue going forward,” Woodburn said.

Last year’s leading spender among Ohio health organizations, Elyria-based home health products manufacturer Invacare (NYSE: IVC), spent $970,000 on federal lobbying in 2010, down 19 percent. For Invacare, in particular, lobbying on Medicare reimbursement issues is hugely important because the company’s products are used largely by the elderly. Like Cardinal, the medical device tax was a big concern for Invacare, and has drawn a sharp public rebuke from Chairman Mal Mixon.

One big Medicare issue last year for Invacare revolved around competitive bidding for durable medical equipment (DME), such as walkers, oxygen and power wheelchairs. The idea behind the competitive bidding program, which took effect on Jan. 1 in nine cities, is to implement a market-based pricing system, which resulted in reimbursement cuts to DME that averaged 32 percent. The home healthcare industry didn’t take kindly to that, arguing that the lower prices would put some companies out of business and threaten seniors’ access to the products they need. Opponents of the program also argue that it’d actually lead to higher Medicare spending, by pushing patients deprived of the supplies they need into hospital beds and emergency rooms.

Cleveland Clinic is top hospital lobbying spender
Among Ohio hospitals, the Cleveland Clinic was the biggest spender on lobbying at $740,000, an exact match of its total from the prior year. The Clinic listed a wide variety of broad issues it lobbied on, including health reform, childhood obesity, nonprofit tax policy, health information technology and graduate medical education.

The tax-exempt status of nonprofit hospitals is a perennial issue for the Clinic and other such hospitals, with Congress occasionally making noise about whether to require hospitals to provide a minimum level of charity care to justify their tax exemptions. The Clinic’s ability to “remain financially viable” hinges in large part on its ability to “understand and shape” legislation surrounding hospitals’ tax exemptions, Oliver “Pudge” Henkel, the Clinic’s chief of government relations, said last year.

The Clinic also discussed with legislators plans surrounding the “Dartmouth Collaborative,” a data-sharing group that’s aimed at improving quality and reducing cost. In addition to the Clinic, six health organizations joined the Dartmouth Institute for Health Policy and Clinical Practice with the goal of establishing best practices for treating eight common health conditions and treatments, including knee replacement, diabetes, heart failure and asthma.

In health information technology, the Clinic lobbied the U.S. Department of Health and Human Services on final rules surrounding the definition of “meaningful use” of electronic medical records. The definition is important, because hospitals and doctors must prove “meaningful use” of EMRs in order to qualify for federal subsidies that would help defray the costs of the software.

Other leading lobbying spenders among Ohio hospitals include: Nationwide Children’s Hospital in Columbus ($405,989), University Hospitals Case Medical Center in Cleveland ($296,400) and Cincinnati Children’s Hospital Medical Center ($170,485). Issues Nationwide Children’s included on its lobbying disclosure forms include: Medicaid reimbursement, telemedicine and research funding from the National Institutes of Health.

Those top two customers — Walgreen (NYSE:WAG) and CVS Caremark Corp. (NYSE:CVS) — account for a far larger share of Cardinal’s revenues than do the two largest customers of either of its biggest competitors: McKesson Corp. (NYSE:MCK) and AmerisourceBergen Corp. (NYSE:ABC).

Cardinal’s dependence on its Big Two leaves it “vulnerable” primarily in two ways, according to Matthew Coffina, an equities analyst with Morningstar in Chicago. First, Walgreen and CVS have enormous power over Cardinal when negotiating prices. “These companies are so important to Cardinal that they’re the ones who wield the bargaining power,” Coffina said.

Second, in the admittedly somewhat unlikely event (for now, at least) that one of the Big Two decides to terminate or scale back its relationship with Cardinal, the Dublin, Ohio, company would take a serious hit to its top line and likely be in big trouble.

“We like Cardinal the least out of the three and the main reason is that they’re so aligned with CVS and Walgreen,” Coffina said, comparing Cardinal to McKesson and Amerisource.

In Cardinal’s fiscal 2010, Walgreen (24 percent) and CVS (22 percent) combined for a 46 percent share of revenues. That’s up from a combined 43 percent in 2008.

Adam Fein, a pharmaceutical industry consultant with Pembroke Consulting, stated on his blog Drug Channels: “The data show a company that’s increasingly at the mercy of its two dominant customers.”

By way of comparison, the top two customers for McKesson and Amerisource account for no more than 28 percent of the companies’ revenues. Amerisource’s top customer, Medco Health, accounts for 18 percent of the company’s revenues, while no other customer accounts for more than 10 percent, said spokeswoman Barbara Brungess. McKesson’s two largest customers accounted for 27 percent of revenues this year — CVS (15 percent) and Rite Aid (12 percent), spokeswoman Catherine Brew said. (McKesson operates a technology division in addition to its distribution division, so it’s probably not as much an “apples-to-apples” comparison to Cardinal as Amerisource is.)

Certainly, it can’t be news to Walgreen and CVS that they’re so important to Cardinal. “These companies have enormous economic power over Cardinal to extract as much value as they can,” Fein said in an interview.

But ceding pricing power may not be Cardinal’s greatest weakness when it comes to Walgreen and CVS. The fact is Cardinal’s bulk distribution business — that is, deliveries to centralized warehouses operated by the big chains like Walgreen and CVS — just isn’t that profitable and is becoming even less profitable over time.

The profitability of the company’s bulk distribution business was a mere 0.26 percent of revenues in 2010, down from 0.42 percent two years ago. Non-bulk customers, in contrast, provided a profit margin of 1.94 percent, according to Cardinal’s annual report.

It’s a combination of two trends — an increasing reliance on its big customers at the same time that those customers are becoming less profitable for Cardinal — that represent the most troubling long-term “weakness” in Cardinal’s business, Coffina said.

A Cardinal spokesman didn’t return a call. But the company seems focused on mitigating the problem. Fein said several recent acquisitions by Cardinal — an oncology services company and a Chinese drug distributor, for example — would help diversify Cardinal’s revenue base in the future and reduce its vulnerability to Walgreen and CVS.

Plus, at least in the near-term, the public doesn’t seem concerned. While Cardinal’s stock dipped under $37 two days after the Walgreen announced, the stock is up more than $1 since the announcement: from $37.41 on Dec. 7 to $38.75 earlier today.