Cardinal Expects New Drug Manufacturing Acquisition In December

Cardinal Health expects to announce the acquisition of another pharmaceutical manufacturing plant by the end of December, Chief Operating Officer John Kane told an analysts' meeting Nov. 6-7 in Tampa, Fla.

"Before the end of December, we'll probably be announcing another major facility acquisition that not only brings with it a management team but also brings with it a significant book of business," Kane said.

Kane noted that because of its contract manufacturing capabilities, Cardinal has had "much more significant clout with the manufacturers than we thought, and we were able to get high level meetings and talk strategy with manufacturers."

As Cardinal considers manufacturing expansions, the company can "sit and talk to [pharmaceutical companies] about what they want." Recent manufacturing acquisitions include a facility from Alcon in Puerto Rico and Automatic Liquid Packaging in Illinois (¹ (Also see "Cardinal Health" - Pink Sheet, 9 Aug, 1999.)). "As we continue to grow and invest in the business we will be announcing opportunities in Ireland, which again will help to reduce the tax burden," Kane added.

Cardinal highlighted its growing pharmaceutical service business and opportunities for cross-selling between its contract manufacturing and packaging services (see chart). The company also touted its expansion into product development with the construction of a new $80 mil. development facility in New Jersey. The facility is expected to open by 2002.

Following Kane's retirement at the end of the year, the position of president and COO at Cardinal will be eliminated. Instead, the heads of Cardinal's three main divisions, Pharmaceutical Technologies & Services COO George Fotiades, Pharmaceutical Distribution & Medical Products COO James Millar and Automation & Information Services Exec VP Stephan Thomas will report directly to CEO Robert Walter.

Cardinal's acquisitions in manufacturing are picking up as opportunities for acquisitions in other areas are disappearing. Expanding the distribution network through acquisitions, for example, is no longer likely. "The opportunities are fairly slim when you look at the rest of the marketplace," Millar said. "There is really not a lot in terms of consolidation other than maybe some of the small regional players to fit into our network."

In the distribution area, Millar highlighted the large percentage of business Cardinal has with drug store chains. "Since chain is the fastest growing market segment and independent the slowest, it shouldn't come as a surprise that we focus our resources to the channel that provides us the greatest opportunity."

Chains account for 45% of Cardinal's drug distribution business, compared to an industry average of 28%, Millar noted. Only 15% of Cardinal's business is to independents, compared to 29% for the industry. The company's business is with the "fastest growing, most successful, best capitalized chains in the U.S.," Walgreens and CVS, Walter added.

Responding to a question about how financial troubles at Rite Aid and Eckerd might affect Cardinal, Walter noted that the company has no Rite Aid business and "virtually nothing" with Eckerd.

Walgreens and CVS "are building stores on top of where Rite Aid and Eckerd are located," Walter said. "With our presence, our large market share in the successful chains...we're likely to be a big winner in the breakup of either" Rite Aid or Eckerd, he maintained.

Cardinal also appears to have abandoned the idea of acquiring an information technology company. When McKesson announced its acquisition of HBO & Co. in 1998, Cardinal indicated that it also would pursue a major information services acquisition.

Walter said that although "there is one piece missing that we didn't acquire and one of our competitors did...you can be assured we're not going down that path." Cardinal would be interested in acquiring a data mining company, Walter indicated, although "we haven't seen a company that we can believe in at this point."

See chart.