Cardinal Health: Competition, Legal Crisis, and Market Position

Introduction: Cardinal Health in a Competitive Landscape

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 and distributor of generic drugs is a Fortune 500 company which, according to Leger (2012), generates 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 AmerisourceBergen, and faces troubling legal charges that threaten to impact both its reputation and its profitability. As the discussion here will demonstrate, these competitors have seized a relative competitive advantage over Cardinal Health. The discussion assesses the nature of the challenges thereby imposed upon Cardinal Health.

DEA Charges and the Oxycodone Distribution Crisis

First and foremost among the challenges facing Cardinal Health is its own internal and legal crisis. At present, the company faces a destructive indictment spearheaded by the Drug Enforcement Administration (DEA). According to the 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 February 3, when the agency suspended Cardinal's license to distribute controlled substances from its Lakeland, Florida 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 — demonstrates that Cardinal Health exploited lax Florida prescription drug laws in order to profit from the addictive properties of its generic painkiller. In doing so, Cardinal Health created a number of monumental obstacles to be overcome in facing competition from McKesson and AmerisourceBergen. In particular, while the injunction against the Lakeland hub was temporarily on hold as Cardinal attempted to deflect the legal charges, any interruption in its operation would represent a significant impediment to the company's immediate profitability.

Ethical Failures and Reputational Risk

It is clear that ethical failures on a number of levels are responsible for Cardinal Health's conduct. The case demonstrates the importance of a clearly defined and well-maintained sense of ethical propriety in the distribution of substances such as prescription painkillers. Indeed, Leger (2012) reports that concurrent with a tenfold spike in prescription painkiller sales, there has been a 5% spike in deaths resulting from them. Indications that Cardinal Health may have capitalized on such trends will undermine its reputation in a marketplace that has only three major players.

This could be seriously problematic given the nature of the business. Cardinal's function as a middleman — 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 such as Walgreens or CVS. In a fiercely competitive market, the decision of any one of its major buyers to defect based on recent ethical and legal transgressions could critically damage the company's entire operation (Alexander, 2010).

Competitive Advantages of McKesson and AmerisourceBergen

Alexander (2010) notes that this is where the competitive advantages of McKesson and AmerisourceBergen enter into the fray. According to Alexander, "McKesson runs a higher-margin healthcare technology business that boosts 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, Cardinal's dependency on its role as a middleman could be perceived as increasingly risky as the U.S. government has growing incentives to tighten its standards on who may distribute potentially hazardous or addictive substances such as prescription opioids. McKesson's diversified technology revenues and AmerisourceBergen's diffuse customer base each provide structural buffers that Cardinal currently lacks, making the legal and reputational damage Cardinal has suffered particularly acute in competitive terms.

Conclusion

These steps were undertaken in order to insulate the firm against large-scale changes in the industry and have helped to keep Cardinal competitive with McKesson and AmerisourceBergen. With that said, the competitive advantages available to these competitors may well play a greater role in defining the hierarchy within the generic drug industry as the dust clears on the current legal, ethical, and economic obstacles standing before Cardinal Health.

Works Cited

Alexander, S. (2010). Why Cardinal Health is the best of the bunch. Seeking Alpha.

Leger, D. L. (2012). DEA aims big in Cardinal Health painkiller case. USA Today.

Zirnbibl, M. & Jordan, G. (2012). Cardinal Health (CAH). Wikinvest.com.