Prescription for a Turnaround

When George Barrett was named CEO of Cardinal Health in August, the prognosis was grim. The nation's second largest drug distributor, Cardinal had lost a third of its value the previous year. The U.S. Drug Enforcement Administration (DEA) had suspended several of the company's licenses. What's more, the firm, based in Dublin, Ohio, was about to spin off its lucrative medical-tech arm, CareFusion, sparking a further double-digit drop in its stock price. In other words, Barrett deadpans, "we had some challenges."

Indeed. Yet six months later, Barrett is being hailed as the leader Cardinal needed to restore its vigor. It came at a critical time, given that any health care company has to be in a position to pivot off of whatever health care reform plan emerges from Congress. His strategy? Return to basics: strong leadership, better customer service and refocusing on what the $95.9 billion company has always done best--supply-chain management. "This is an entirely different company," says Mike Lynch, who heads Cardinal's medical-supply unit. "We've seen a much needed reinfusion of capital into our core businesses, a clarity of vision, a renewed sense of purpose. The optimism is palpable."

Nearly 4 billion prescriptions are filled at 54,000 pharmacies across the U.S. each year. But getting medications from their makers into the hands of their takers is largely the job of a wholesaling oligopoly. Cardinal and its principal rivals--San Francisco--based McKesson Corp. and AmerisourceBergen, based in Valley Forge, Pa.--control 90% of the market, acting as middlemen to pool purchasing power and to guarantee 24/7 access to millions of medications.

Like much of the rest of the health care sector, the drug-wholesaling industry has proved mostly recession-proof. Revenue rose 8% in 2008, to $386 billion, and an additional 6% bump is expected for last year, according to Pembroke Consulting, a Philadelphia distribution and manufacturing consultancy. Plus, an aging population and reform will be extra boons. "In theory, more insured people should mean more drug utilization," says Adam J. Fein, an economist and the founder of Pembroke. "That means more money in the pockets of wholesalers."

Cardinal's somewhat haphazard acquisition strategy proved difficult to manage, though. Cardinal started as a small Ohio food distributor in 1971, and eight years later, founding CEO Robert Walter moved the company into pharmaceuticals. Over the next two decades, he transformed the firm into a $75 billion conglomerate. "It was a very entrepreneurial company, founded out of the back of this Harvard Business School guy Bob Walter's car," says Lisa Gill, a JPMorgan analyst who has covered Cardinal since 1999. "People talked about Cardinal wanting to be the GE of health care."

Walter stepped down in 2006, and soon after, it became clear that Cardinal's strategy wasn't sustainable. "The old Cardinal Health had so many different businesses, and they could never quite get them all moving in the right direction at the same time," says Lazard Capital market analyst Tom Gallucci. "Huge chunks of the company were being undermanaged or neglected altogether."