Medical device woes torpedo Cardinal Health’s results

Costly infrastructure expansion is one of several problems related to Cordis. (Cardinal Health)

The Cordis medical device business that Cardinal Health bought for $1.9 billion is proving to be a millstone for the company. Cordis, a former Johnson & Johnson subsidiary, ran into a raft of difficulties in the third quarter (PDF), driving down Cardinal’s stock price to its lowest point in almost five years.

Cardinal, a healthcare services company, bought the business in 2015 to expand its global footprint and the portfolio of products it can offer its customers. Cordis has indeed brought those things to Cardinal’s business. Cardinal now provides a broader portfolio of products, does more business outside the U.S. and has built out its infrastructure accordingly. That is the source of one problem. 

“Building of that infrastructure has been more expensive than we thought. It hasn't gone as well as we thought,” Cardinal CEO Michael Kaufmann told investors on a quarterly results conference call. “So we're clearly disappointed and absolutely will own up to that.”

The costly infrastructure expansion is one of several problems related to Cordis. The other two stem from the difficulties the company is having managing its inventory reserves. 

Cardinal has started to introduce IT systems designed to give it a clearer picture of the inventory it has accross its network. In the long term that should help Cardinal, but for now it is causing financial problems. Gaining visibility “created a large inventory write-off,” Kaufmann said. 

The fallout of poor visibility into the inventory is amplified by the fact Cordis deals in products that have expiration dates. Kaufmann was frank in his analysis of the extent to which Cardinal grasped the implications of Cordis’ visibility shortcomings. 

“I think we clearly underestimated the needs and requirements of being able to have inventory visibility at a deeper level,” Kaufmann said.

The inventory issues have created problems for Cordis’ manufacturing plants. Without a reliable set of demand signals, Cordis has struggled to maximize the efficiency of its facilities.  

Cardinal expects the situation to improve as the rollout of its IT system continues. If all goes to plan, the Cordis unit “will be on a path to profitable growth” by the end of the 2019 fiscal year. For now, it is facing a headwind.

Shares in Cardinal fell 19% following the release of its results.