Cardinal Health (NYSE:CAH) is on the mend, it seems. Fiscal third-quarter results showed signs of recovery in its core drug distribution business -- although another problem area may crop up in coming quarters.
The company reported that Q3 revenue rose 17% from the same period last year, to $19.1 billion, while earnings from continuing operations declined nearly 15% to $367.6 million. Cardinal noted that its drug distribution business exhibited growth in the quarter. Profitability was especially solid in its generics area, thanks to low expenses derived from high automation in its distribution centers.
Meanwhile, Cardinal continues to wrestle with branded drug distribution. Although earnings suffered in this area, the firm indicated that it is making concrete progress in shifting its operating model away from reliance on branded drug price increases. Specifically, Cardinal expects that by the end of fiscal 2006, the majority of its margins related to branded vendor business will not be contingent on drug price inflation. The most notable recent conversions to fee-for-service contracts include the Japanese company Eisai and drug makerEli Lilly (NYSE:LLY).
Even as drug distribution showed some signs of a rebound, Cardinal struggled in its sterile manufacturing business. In its conference call, the firm indicated that at the beginning of fiscal 2005, it expected sterile manufacturing services to constitute 20% of earnings for its Pharmaceutical Technologies and Services (PTS) unit. However, the company now reports that sterile manufacturing's contribution is only somewhere in the mid-single digits.
Fortunately, the sterile area's weakness may not last. Cardinal admits that the shortfall in this area is largely the result of its missteps, rather than any slump in demand. The company is taking steps to reverse the problems in its sterile area, however, most visibly by closing a plant in Puerto Rico that has been a major drain. Looking ahead, the pipeline for the sterile business is strong, so barring any further stumbles, future results should be good.
Cardinal's troubles are not yet behind it. But as it closes in on the end of its fiscal year, its chances to take wing are looking better.
More Foolish reading on Cardinal Health:
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
