For Cardinal Health (NYSE:CAH), the story looks to be one step back, one step forward.
On Friday, Reuters reported that the Dublin, Ohio-based drug distributor has not been able to reach an agreement with Japanese pharmaceutical firm Eisai to distribute the company's U.S. medicines. The companies continue to negotiate, but Cardinal has reportedly informed its customers that they can purchase products that compete with Eisai's from Cardinal, or they can reach Eisai directly for information on where to buy the drugs.
Cardinal's difficulty with Eisai is just the latest development in the drug wholesaler's effort to get pharmaceutical manufacturers to accede to a fee-for-service system for drug distribution. Last month, Cardinal achieved a nice victory on that front by signing up Eli Lilly (NYSE:LLY) under a fee-based system. But in light of its problems with Eisai, the drug distributor can't expect every pharma outfit to fall in line. And the bad news is that while Cardinal's 2004 sales came in at $65 billion, Eisai's products reportedly account for $700 million to $800 million of that amount. So even though the loss of Eisai isn't the end of Cardinals' world, it will inflict some damage.
Fortunately for investors, Cardinal is not standing still. Days after announcing its deal with Lilly, it disclosed restructuring plans that include staff cuts and facility closures as well as other cost-saving measures, including consolidation of administrative functions and a more integrated marketing strategy for the company's business units. All together, the firm expects that the changes will improve its bottom line by $500 million.
Cardinal could be in for a bumpy ride in the short term. It has little choice but to adhere to a fee-for-service scheme, though, and its capturing of Lilly does indicate that the model has some traction. Further, Cardinal's diverse range of services should keep its earnings aloft as the drug-distribution business continues to evolve.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
