Cardinal Health and Industry Competition the Pharmaceutical

Cardinal Health and Industry Competition

The pharmaceutical and generic drug industries are highly competitive and, simultaneously, tremendously risk oriented. Both of these characteristics are significantly present in the current outlook for Cardinal Health. The producer of generic drugs is a Fortune 500 company which, according to Leger (2012), pulls in roughly $103 billion in revenue on an annual basis. However, the company is also the target of fierce competition from fellow pharmaceutical giants such as the McKesson Corporation and Amerisource Bergen and is the target of troubling legal charges that threaten to impact both its reputation and its profitability. As the discussion here will demonstrate, the above-noted competitors have seized a relative competitive advantage over Cardinal Health. The discussion assesses the nature of the challenges thereby imposed upon Cardinal Health.

First and foremost among the challenges facing Cardinal Health is its own internal and legal crisis. At present, the company is facing a destructive indictment spearheaded by the Drug Enforcement Agency (DEA). According to charges against it, "the DEA accused Cardinal Health. . . Of endangering the public by selling excessive amounts of oxycodone to four Florida pharmacies. The charges came in an immediate suspension order served Feb. 3 when the agency suspended Cardinal's license to distribute controlled substances from its Lakeland, Fla., hub, which serves four states." (Leger, p. 1)

A litany of irregular procedures including accepting inordinate amounts of cash for prescriptions and logging exponentially greater sums of oxycodone sold than any other pharmacies in the nation demonstrate that Cardinal Health exploited lax Florida prescription drug laws in order to profit from the addictive properties of its generic pain-killer. In doing so, Cardinal Health has created a number of monumental obstacles to be overcome in facing the competition of McKesson and Amerisource. Particularly, while the injunction against the Lakeland hub is currently on hold while Cardinal attempts to deflect legal charges, any interruption in its operation would be a significant impediment to the company's immediate profitability.

Additionally, it is clear that ethical failures on a number of levels are responsible for Cardinal Health's behavior. The case demonstrates the importance of a clearly defined and well-maintained sense of ethical propriety in the distribution of such substances as prescription painkillers. Indeed, the article by Leger reports that in concurrence with a tenfold spike in prescription painkiller sales, there has been a 5% spike in deaths resulting there from. Indications that Cardinal Health may have capitalized on such trends will undermine its reputation in a marketplace that truly only has three major players.

This could be seriously problematic given the nature of this business. For Cardinal, its function as a middle man purely engaged in drug distribution rather than in any actual research, development or patenting means that its profitability depends almost entirely on large-scale contracts with pharmaceutical chains like Walgreen's or CVS. This means that in a fiercely competitive market, the decision for any one of its major buyers to defect based on recent ethical and legal transgressions could critically damage the company's entire operation, reports the article by Alexander (2010). Alexander note that this is where the competitive advantage of McKesson and Amerisource enter into the fray. According to Alexander, "McKesson runs a higher margin healthcare technology business that juices profit margins and provides cross-selling opportunities in both directions. AmerisourceBergen is a pure play like Cardinal, but its customer roster is skewed more towards independent and small-chain pharmacies." (p. 1)

These conditions tend to insulate Cardinal's competitors from the risk of any single devastating blow. Indeed, the dependency of Cardinal on its own role as a middleman could be perceived as increasingly risky as the U.S. government is given incentives to tighten up its standards on who may and may not distribute potentially hazardous or addictive substances such as painkillers. That said, Cardinal is also engaged in what Zirnbibl & Jordan (2012) describe as being the most diversified company among the three in terms of the distribution of its revenues within the context of the generic drug business. According to their report, "Cardinal Health has built a comprehensive portfolio of higher margin services over the past few years. At the beginning of fiscal 2007, it split into five reported segments (one has since been divested and will be excluded): 1) Clinical Technologies and Services; 2) Medical Products Manufacturing; 3) Supply Chain Services - Medical; and 4) Supply Chain Services- Pharmaceutical." (Zirnbibl & Jordan, p. 1)