Ensuring a healthy value chain: former P & G Vice Chairman Kerry Clark runs the largest company no one's heard of

Chief Executive, The, March, 2007 by J.P. Donlon

U.S. health care spending is growing by 7 percent a year, running about 16 percent of GDP today and reaching $4 trillion, almost a fifth of U.S. GDP over the next eight years. The industry is perched at an inflection point as it deals with immense cost pressures as well as the growth of generic drugs.

At one end of the industry, drug companies are in a dilemma. Since 1991, the cost to develop a new drug has quadrupled to almost $1 billion, while the productivity of research has fallen. At the same time, generic drugs are growing at twice the rate of the branded drug market. At the other end, hospitals--which gobble up about a third of all health care spending--are caught in a cost vise and under pressure to be productive while improving medical outcomes. In the middle are the health care distributors, such as Cardinal Health, that aggregate demand. Dublin, Ohio-based Cardinal operates like Dell Computer in that it aggregates customers and uses its buying power to provide products or in some cases manufactures its own.

Cardinal distributes a third of all medicines prescribed in the U.S., directly manages 275 hospital pharmacies and dispenses some 5 million doses of medication. Unlike its competitors, McKesson and Amerisource-Bergen, where 95 percent of distribution involves drugs, Cardinal also distributes medical and clinical products and many things besides drugs, which represent about 51 percent of its business. It also enjoys a higher return on sales and better margins.

Founded in 1971 by entrepreneur Bob Walter, Cardinal began as a food distributor, quickly became a growth machine when it shifted to drug distribution and went public in 1983. It has since mushroomed into an $81 billion giant that hardly anyone has ever heard of despite doing business on six continents and employing 55,000 people. Historically, the company grew through acquisitions (93 since 1971 at last count).

Some analysts say the company overextended itself through acquisitions and diversification. Faced with a downturn in drug distribution coupled with an SEC investigation over revenues classified as bulk vs. non-bulk, Cardinal hit major air turbulence that prompted four people to exit the company and a deterioration of managerial focus. The SEC issue has been resolved, but it triggered restating three years of earnings in 2004.

The "perfect storm" also disrupted Walter's plans to find a successor in order to reorganize the company. "I needed someone who could take this company to the next level," he recalls, recounting an introduction to P & G Vice Chairman R. Kerry Clark, with whom he hit it off immediately. "I will carry whatever bucket of water he wants me to carry," quips Walter, who insists that the handoff of power is definite. "I am conscious of the fact that if I don't act well, I could screw up. But he's a take-charge guy so I'm not worried."

When first approached, the Ottawa-born Clark wasn't altogether sure about the fit. "Bob and I talked about the challenges of transforming a company that represented a number of acquisitions to an integrated operating company using shared services as connecting rods--something with which I had had a lot of experience at P & G. That and my international experience made me think this is a place where I could add value."

Former Bank One CEO John McCoy, who serves on Cardinal's board, vetted a number of candidates and liked what he saw in the quiet Canadian. "He's very quick to pick up on people's strengths. He's taken the team and invigorated it to a higher level," he says. "From his very first set of interactions with us as the new CEO, he demonstrated his desire to learn," adds George Conrades, executive chairman of Akamai Technologies and a Cardinal board member. "He never said, 'Well, I'm the new CEO, so here's the new pronouncement.' Instead, he told us, 'I'm going to learn a lot and I'll tell you a little bit about what I'm finding and what I think.' He impressed us all as a disciplined thinker. To my delight, what he learned and proceeded to do seemed right on the money." Sorry to see him depart P & G, CEO A.G. Lafley reckons Clark among "the most capable guys that worked here."

Much is riding on what companies such as Cardinal do. Health care needs to improve productivity and efficacy, and better sourcing and value chain management can contribute greatly. For Clark, the first year hasn't been all late-night analytics. The son of an Ottawa milk delivery business owner is now one of three Canadians on Cardinal's executive team (CFO Jeff Henderson and Global Communications EVP Shelley Bird). Clark kids his team that if they're not careful he may rename the company Maple Leaf Healthcare. CE recently caught up with him at his office in Dublin.

How will you take this company to the next level?

We have put our businesses into two major groups, the distribution businesses, and pharmaceutical and medical products--soon to be clinical and medical products as we divest ourselves of PTS (Pharmaceuticals and Technology Services). I see growth potential in both, but in different ways. In the distribution businesses, including the medical/surgical products and pharmaceutical products, we see a tremendous opportunity to build scale, reduce costs and improve efficiency, by putting these two businesses together, sharing back rooms, sharing logistics, optimizingthe facilities, optimizing the number of managers serving the business and improving our cost structure. Cardinal historically is a generator of cash with good returns on assets in terms of the cash flow from the assets of the business. It's all about aggregating demand and sourcing those products at the lowest possible prices. There are more channels and more parts of the country where we could do better.