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Named for Ohio's crimson state bird, Cardinal Health, Inc., ranks among America's top wholesale drug distributors, with 50 principal pharmaceutical distribution facilities and 78 medical-surgical distribution facilities in the United States. Under the direction of Robert Walter since 1971, the company has evolved from a rather inconsequential Ohio food distributor into a trend-setting leader of the pharmaceutical industry. A steady stream of acquisitions--50 since its inception--has helped to multiply Cardinal Health's sales from $429 million in 1986 to nearly $48 billion in 2001. By the mid-1990s, Cardinal came within about $1 billion in annual sales of breaking into the top spot among wholesale drug distributors, having an estimated 18 percent of the $57 billion wholesale market compared to the 19 percent stakes held by leading competitors McKesson Corporation and AmerisourceBergen Corporation.

During the course of its growth spurt, Cardinal diversified from its core wholesale drug distribution business into specialty laboratory and pharmaceutical supplies, computer software, and retail drugstores. While it was not the country's largest drug distributor in terms of sales in the mid-1990s, Cardinal Health did rank highest in terms of market capitalization and profitability. A.G. Edwards investment analyst Donald Spindel asserted that "Cardinal has been the most innovative and the fastest growing. To me, they're really the top company in the industry." By the end of 2000, three companies--Cardinal, AmerisourceBergena, and McKesson--controlled 90 percent of drug wholesaling.

1971 LBO Presages Transformation of Mid-Ohio Distributor

In 1971, just six months after his graduation from Harvard's MBA program, 26-year-old Robert Walter acquired Monarch Foods through a leveraged buyout. Walter hoped to build this small central Ohio grocery distribution company--which he renamed Cardinal Foods--into an industry leader through acquisitions, but soon discovered that he was too late: the market had already begun to consolidate. To make matters worse, Cardinal was compelled to withdraw ten tons of salmonella-infected, prepackaged roast beef mid-decade.

Since consolidation within the wholesale segment of the grocery business was out of the question, Walter attempted to shift his growth strategy, launching Mr. Moneysworth warehouse supermarkets. By the mid-1980s, Cardinal had three Mr. Moneysworth outlets and plans to open stores in Ohio, West Virginia, and Kentucky.

But, Walter did not abandon the distribution industry. Rather, he turned to a business segment that was more profitable, more fragmented, and ripe for consolidation: pharmaceuticals. The company made its first foray into pharmaceutical distribution in 1980, when it acquired a drug distributor in Zanesville, Ohio, 60 miles from Columbus, and became known as Cardinal Distribution. Walter used the proceeds of a 1983 initial public offering to launch an acquisition spree that would gain steam over the next decade. During the 1980s, he targeted relatively small, privately-held distributors in adjacent states and regions for his friendly acquisitions. Reasoning that these local managers knew their markets and would work hard to maintain growth, Walter focused on successful companies with managers he characterized as "the kings in our company" in a 1993 interview with Forbes magazine's Reed Abelson. Walter operated Cardinal as a holding company, allowing affiliated companies to continue relatively autonomously. The new subsidiaries brought the parent company geographic growth and economies of scale. He told Abelson, "Knowing what I know now, I didn't know what I was doing. But it worked." Key acquisitions--focused in the eastern United States--included Ellicott Drug Co. (1984); James W. Daly, Inc. (1986); and John L. Thompson Sons & Co. (1986).

Late 1980s Exit from Grocery Business

Walter gave up on the marginally profitable grocery business in 1988, when he sold the Cardinal Foods, Inc., Midland Grocery Co., and Mr. Moneysworth subsidiaries to Roundy's Inc., a cooperative wholesaler, for $27 million. Instead of declining, Cardinal's annual revenues actually increased by one-third that year, and its net income more than doubled.

In contrast with his entry into the grocery distribution business, Walter's foray into drug distribution proved well timed, for retail drugstores and hospitals were increasing their purchases from distributors. Cardinal's acquisitions, while relatively small, were indicative of a budding trend toward consolidation in the distribution industry. Mergers and acquisitions shrunk the number of participants in this market by more than half, from 135 in 1984 to 80 in 1989 and less than 60 by 1995. By the end of the decade, Cardinal had accumulated a four-percent stake in the $22 billion wholesale drug business. Sales mounted from $429 million in 1986 to $700 million in 1989, while net income grew from $6 million to $9 million during the same period.

Cardinal's profitable growth did not come exclusively from acquisitions. From 1986 to 1989, in fact, the company was able to increase productivity in nearly 80 percent of its operations. Computer automation was an important factor in this program. Cardinal employees developed IBM-compatible software to increase purchasing, inventorying, and distribution efficiency. A company executive told Financial World's Jagannath Dubashi that the AccuNet system "can reduce the administrative costs of [a hospital's] pharmacy operations by as much as 80 percent." AccuNet not only helped Cardinal cut its own operating margins by 20 percent from 1988 to 1991, but also increased its level of customer service, offering its clients automated inventory management and up-to-date drug pricing information. Computer links with customers enabled Cardinal to fill and ship orders within 24 hours of receipt.

Ever Larger Acquisitions Mark 1990s

Cardinal moved steadily up the ranks of the country's largest drug distributors with revenues exceeding $1 billion for the first time in 1991. It simultaneously increased its geographic reach in the early 1990s via significantly larger acquisitions. Purchase or perish was the theme in the market that by 1993 was dominated by seven major companies which monopolized 78 percent of the industry's estimated $40 billion sales. The addition of four new subsidiaries moved Cardinal from its bulkhead in the Northeast United States into the Mid-Atlantic and Southeastern states. Acquisitions included Ohio Valley-Clarksburg (1990, the Mid-Atlantic); Chapman Drug Co. (1991, Tennessee); PRN Services (1993, Michigan); and Solomons Co. (1993, Georgia).

By the end of 1993, the company was ready to turn westward, but its rapid growth had caught the attention of well-established industry leaders McKesson Corp. and Bergen Brunswig Corp. When Walter made a move to acquire Alabama's Durr-Fillauer Medical, Bergen Brunswig quickly launched a bidding war with the upstart Ohio company. Under pressure from Bergen Brunswig, the price tag shot up from $250 million to $450 million in just four months. Although Walter lost the battle for Durr-Fillauer, he did not leave the contest empty-handed; Cardinal drew five of the target company's top managers to its ranks. Moreover, some industry observers criticized Bergen Brunswig for overpaying and praised Walter's self-control throughout the ego-charged competition.

Walter more than made up for this minor setback with several major acquisitions from 1994 to 1996. The merger of Cardinal and Whitmire Distribution in 1994 added over $2.25 billion in annual sales and made Cardinal America's third-largest drug distributor. With its strong distribution network in the western and central United States, Whitmire was a long-sought piece of Cardinal's nationwide puzzle. The parent company's geographic scope--32 distribution centers across the country--enabled it to compete for bigger business. In 1994, the company signed a $900 million contract to supply mass merchandiser Kmart's nearly 1,700 pharmacies. And, in 1995, it earned the right to supply pharmaceutical goods to the 175-store Wakefern grocers' cooperative.

The acquisition of Medical Strategies in 1994 added Healthtouch computerized kiosks to Cardinal's repertoire. These electronic point-of-purchase machines offered pharmacy customers access to up-to-date data on illnesses and treatment options. The kiosks generated income via advertising and promoted featured products with coupons; Cardinal claimed that its more than 1,000 Healthtouch machines "increase incremental sales of the featured products by 20 percent on average."

Cardinal entered the retail drug industry late in 1995, when the parent company traded $348 million worth of its stock for full ownership of St. Louis-based Medicine Shoppe International, a pharmacy franchiser with over 1,000 stores. Less than six months later, Cardinal announced its $870-million stock swap for Pyxis, the nation's leading manufacturer of automatic drug dispensing machines used in hospitals. Pyxis subsidiary Allied Pharmacy Management Inc. gave Cardinal entree into the health care information network business. PCI Services, Inc., a pharmaceutical packager, was acquired in July 1996 for $145 million in cash and $56 million of borrowed money. Reflecting on his company's recent activities, Walter noted, "Cardinal has been progressively expanding its business beyond the purely logistical side of drug distribution to providing a full range of value-added information, marketing and educational services to our customers."

These acquisitions helped make Cardinal virtually impervious to the recession that gripped the country in the early years of the decade. For while customers like hospitals and drugstores--themselves under pressure from managed health care plans and other cost-conscious insurers--whittled away at drug distributors' gross profit margins, reducing them from over 17.5 percent in 1960 to 6.5 percent by 1992, Cardinal's increasing share of the market and high level of efficiency helped it maintain consistent growth in sales and profit.

Cardinal also maintained healthy margins by focusing on the most profitable segments of its business. In the 1980s, for example, the company targeted independent drugstores that could not demand the volume discounts sought by larger chains. But, as these retailers began to disappear from the pharmaceutical landscape, Cardinal sought out new profit centers: Pyxis' groundbreaking dispensers, Medicine Shoppe's retail pharmacies, and Healthtouch information systems, for example. Nevertheless, Cardinal was not completely impervious to the cost-cutting pressures that plagued the industry; its gross margins declined from 7 percent in 1992 to about 5.8 percent in 1996.

Fueled by its record-setting acquisitions, Cardinal's sales and net income multiplied rapidly in the early 1990s. Revenues doubled from $874 million in 1990 to almost $2 billion by 1993, then nearly quadrupled to $7.8 billion by 1995. Net income made similar advances, growing from $13 million in 1990 to $34 million in 1993 and $85 million in 1995. Employment more than tripled during this period and Cardinal's distribution centers nationwide increased from 6 to 32. In an early 1995 profile, Financial World's Jennifer Reingold characterized Cardinal as "by far the healthiest" of the drug distribution industry's five largest companies. Although it was not the sales leader at that time, Cardinal topped the industry in profits and market capitalization. Cardinal Health stockholders--CEO Walter among the largest with about 8 percent of its stock--were well rewarded. According to Forbes magazine's 1996 analysis of U.S. companies' 10-year total return, Cardinal ranked 25th.

Cardinal evolved beyond drug distribution into total health care by acquiring companies that serve health care manufacturers and providers of patient care. In 1997, Cardinal acquired Owen Healthcare, of Houston, Texas, a leading provider of pharmacy management and information services for hospitals. In 1998, the Federal Trade Commission blocked Cardinal's attempt to buy competitor Bergen Brunswig and McKesson's attempt to acquire AmeriSource Health. The decision was upheld by a federal judge. Cardinal did acquire R.P. Scherer, the world's largest maker of soft-gels and other drug-delivery solutions, located in Basking Ridge, New Jersey. The following year, Cardinal bought Allegiance, the largest medical-surgical products distributor in the United States. Also acquired in 1999 was Automatic Liquid Packaging, a Woodstock, Illinois-based custom manufacturer of sterile liquid pharmaceuticals and other health care products.

Another record-breaking year followed for Cardinal in 2000. Operating revenues reached an all-time high of more than $25 billion. Net earnings grew 24 percent to $730 million. Contributing to the success were enhanced operations resulting in an improved market position and increased productivity, as well as the continuing implementation of a focused acquisition strategy. In August, Cardinal completed the acquisition of Bergen Brunswig's medical supply distribution business, a distributor of medical, surgical and laboratory supplies to doctors' offices, long-term care and nursing centers, hospitals and other providers of care. Bergen Brunswig Medical Corporation was acquired for approximately $180 million. Other 2000 acquisitions included Rexam Cartons, Inc.; Enhanced Derm Technologies, Inc.; ENDOlap, Inc.; Ni-Med kit manufacturing; CurranCare, LLC; VegiCaps Division (from American Home Products Corporation); and a manufacturing facility in Humacao, Puerto Rico. Cardinal also established a two-pronged Internet strategy with the launch of cardinal.com, a comprehensive, web-enabled site for health care product procurement, fulfillment, support and information; and NewHealthExhange.com, an independent, Internet-based business-to-business electronic health care exchange with McKesson, AmerisourceBergen, Fisher Scientific, and Owens & Minor.

In January 2001, Cardinal celebrated its 30th anniversary and began another banner year in financial records and value to customers. Stock prices rose 40.2 percent and sales rose 28 percent to $38.7 billion. Chairman Walter credited the company's success to "strong internal growth combined with meaningful acquisitions and significant partnerships." For the year, nearly $30 billion was spent on 13 acquisitions, with each company meeting the company's standard of being "outstanding by itself, fitting closely into our strategy, and making Cardinal collectively stronger for the future." Bindley Western Industries, Inc., an Indianapolis, Indiana-based wholesale distributor of pharmaceuticals and provider of nuclear pharmacy services, was acquired in February. Other acquisitions included International Processing Corporation; Critical Care Concepts; American Threshold; FutureCare; SP Pharmaceuticals, LLC; Professional Health-Care Resources; and a manufacturing facility in Raleigh, North Carolina. To foster long-term partnerships with providers and manufacturers, Cardinal formed ArcLight Systems, LLC, a venture between Cardinal and several retail chain pharmacies to provide real-time pharmaceutical sales data to pharmaceutical manufacturers.

As of August 2001, Cardinal had 48,900 employees in twenty-two countries on five continents. Forty-two percent of Cardinal employees lived outside the United States. The company's U.S. facilities were located in 41 states and Puerto Rico. Cardinals' operations were organized based on the products and services offered, comprising four reporting segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. Through innovative products and services to tens of thousands of customers in the health care industry, Cardinal has more than adequately survived in its highly competitive industry. It received such accolades as number 23 on Business Week's list of "50 Best Companies," and among the top 100 of Internet Week's top commercial web innovators.

A Look to the Future

In his "10 Reasons for Our Optimism," Chairman Walter sees a bright future for Cardinal that starts with "a favorable health care environment and includes some of Cardinal's strengths that enable us to be particularly successful, like market-leading positions, superior scale and resources, and propriety offerings." Coupled with past investments, a diversified business model, a seasoned management team, and risk and ownership orientation, the tradition and culture continue as Cardinal's blueprint for success.

Principal Subsidiaries:Allegiance Healthcare; ALP (Allied Liquid Packaging); Bergen Brunswig Medical Corporation; Cardinal Distribution; Medicine Shoppe International, Inc.; Pyxis Corporation; R.P. Scherer.

Principal Competitors:AmerisourceBergen Corporation; McKesson Corporation.

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Source: International Directory of Company Histories, Vol. 50. St. James Press, 2003.