Cardinal Acquisition Of Alaris Shows “Business As Usual” During SEC Probe

Cardinal's acquisition of Alaris demonstrates it is "business as usual" for the wholesaler while it responds to a Securities & Exchange Commission investigation of its accounting practices, CEO Robert Walter said during an analysts call May 19.

The $2 bil. acquisition of the medication safety device manufacturer Alaris is "reflective of the management's and board's confidence in the company Cardinal, taking into consideration the transaction itself and the environment in which we are sitting," Walter said. "This is business as usual."

Cardinal expects the acquisition of Alaris to result in an increased European presence (see ¹ (Also see "Cardinal’s Acquisition Of Alaris Further Broadens European Presence" - Pink Sheet, 24 May, 2004.) ).

Cardinal has grown and diversified through a string of acquisitions over the last decade.

The $2 bil. acquisition does offer a strong indication that Cardinal is following a "business as usual" attitude, since it was announced five days after the company disclosed that SEC had initiated a formal investigation into its accounting (² 'The Pink Sheet' May 17, 2004, In Brief).

Cardinal also released a ³ 'chronology' of events surrounding the accounting investigation on Sunday, May 16, apparently to underscore that the investigation has a broader focus than many media reports indicated.

Cardinal received a request for documents from SEC in October as part of an "informal" inquiry. At the time, Cardinal noted that SEC's request included information on the treatment of a $22 mil. settlement of litigation related to vitamin price-fixing claims (⁴ 'The Pink Sheet' Oct. 13, 2003, In Brief).

The chronology underscores that the scope of the SEC inquiry is broader than that: "The SEC investigation is not limited to the accounting treatment of the recovery from the vitamin manufacturers."

Since being contacted by SEC in October, Cardinal "has been collecting and providing to the SEC documents responsive to the October request."

"Due to the scope of the October request and the breadth of the company's operations, the company is cooperating with the SEC to provide documents...on a rolling basis, and that process is ongoing."

In April of this year, Cardinal's "audit committee determined to undertake an internal review, and retained independent counsel."

The internal review was "prompted by documents contained in the production to the SEC that raised issues as to certain accounting matters, including but not limited to the establishment and adjustment of certain reserves and their impact on quarterly earnings, and is not limited to the accounting treatment of the recovery from vitamin manufacturers."

The internal review "is ongoing and has not reached any conclusions."

If the audit committee "determines that any changes are required to the company's disclosure controls and procedures or internal controls, the company will make any necessary modifications."

Depending on the ultimate direction of the SEC inquiry, it could have a significant ripple effect across the industry.

The investigation of Cardinal coincides with a period of transition in the drug distribution sector, as wholesalers enter into inventory management agreements with most manufacturers. The IMA model would mean an end to the price-increase-driven forward buying approach that has historically been the cornerstone of profitability in the distribution sector.

The transition was prompted in part by the fallout from Bristol-Myers Squibb's massive earnings restatement in 2003 related to the timing of sales to distributors. SEC has an ongoing investigation of Bristol's accounting (⁵ (Also see "Bristol Re-Restates: Income Taxes, “Grants” May Be Ongoing Issues" - Pink Sheet, 22 Mar, 2004.), p. 24).

Cardinal expects the audit committee to wrap up its investigation before the SEC.

"The audit committee is complementary to the SEC investigation, and certainly more limited in duration," Walter said during the analysts call. "The audit committee wants to understand fully the intent of any and all documents, and they will be issuing a separate report to the SEC."

"We expect that these investigations will take a while, which is common," Walter said. "I'm not anticipating any meaningful announcement anytime soon."