Filed by Cardinal Health, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Syncor International Inc.
Commission File No. 000-08640
A NOTE FROM STEVE FISCHBACH, VP INVESTOR RELATIONS, CARDINAL HEALTH
Yesterday was a curious day in the market for Cardinal Health. What an
understatement! I'd like to provide some perspective on an analyst's note
issued yesterday in response to questions that I have received from many in
the investment community. Questions of particular interest seem to be about the
pharmaceutical distribution industry's structure and top line expectations, and
any perceived changes in the fundamental profit drivers.
In essence, the note acknowledged industry trends we've been talking about for
some time, but included a few misinterpretations. Cardinal Health remains
positive about the pharmaceutical distribution portion of our business and I'd
like to tell you why.
But let me first start with the discussion of the "industry" which was described
yesterday in an analyst's report as the "drug wholesaler segment". As many of
you know, drug distribution is an important part of Cardinal Health and
represents about 45% of our earnings. Medical surgical manufacturing and
distribution, drug delivery and manufacturing, and automation technologies
make up the remaining 55% of our earnings. Cardinal Health's diverse earnings
stream is an extremely important part of the Company's ability to grow across
various market segments and to deliver consistent earnings growth in various
market cycles. We effectively combine our offerings and have consistently
earned higher margins versus our competition because of the broad and diverse
value that we deliver to our customers. The analyst's report yesterday,
however, focused solely on the pharmaceutical distribution business, so I will
primarily address that in my note.
STRUCTURE OF THE INDUSTRY AND TOP LINE EXPECTATIONS
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First, it's important to understand the structure of the pharmaceutical
distribution industry and why we believe it's in one of the best competitive
and structural positions in its long history. Drug distribution firms are now
positioned as a very important and indispensable part of the health care
industry. Today there are primarily three companies that distribute the
majority of product flow in the pharmaceutical industry. The pharmaceutical
industry over the past decade has grown about 13% per year and the projection
for the next five years is for growth of between 11% and 14%. So despite all
the talk of a major slowdown in the industry, revenue growth is still strong and
consistent with the growth of the past decade. The growth is particularly
favorable when you compare it to an overall U.S.economy that is expected to
grow in the 3% range for the next five years. A Medicare drug benefit, under
consideration in Washington, D.C., would add to the top line potential of
pharmaceuticals over the next five years.
Second, positive trends within pharmaceutical distribution could turn out to
be even stronger. Of the approximately $170 billion in volume in the drug
industry, about 65% goes through the pharmaceutical distribution group. The
cost structure of the distribution industry is below 2.5% and the industry
has the potential to bring those costs down even further. As costs continue
to decline, larger warehousing chains and mail order firms will face an
increasingly attractive economic opportunity, namely the opportunity to buy
on a just-in-time basis from the distribution industry where they currently
buy direct into their warehouses. That, we believe, is a real structural
potential change in an industry that already is expected to experience strong
growth.
Finally, real returns on capital in the pharmaceutical distribution industry
are at all-time highs for every player. So this isn't just a high growth
industry but one in which the utilization of capital is improving and where
every major player earns a pretax return on capital that exceeds 20%.
PROFIT MODEL IN DISTRIBUTION - NATURAL EVOLUTION, NOT A REVOLUTION?
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Much was discussed in yesterday's analyst note about the structural change in
how distribution companies earn vendor margins. Certainly, the way Cardinal
Health earns margin today is different than the way we earned vendor margins
even five years ago. But that is a positive trend. The market is constantly
changing and our ability to innovate and work with manufacturers on
new programs has been a competitive advantage of Cardinal Health.
Pharmaceutical price inflation, or the potential deceleration in inflation,
was certainly a hot topic yesterday. While inflation is an element of any
distribution company's profit equation, inflation does tend to change over
time depending on the strength of the pharmaceutical market and the influence of
generic products. Today pharmaceutical price inflation is very strong and is
substantially higher in the past three months versus the same period last year.
The inflation rates reported in the analyst's report yesterday were much lower
than our experience mainly due to the impact of price deflationary products,
namely generics, included in the analyst's data. Given the strength in the
generic market, that would tend to have an unusually high influence on reported
inflation. And keep in mind, distribution companies are generally price
protected from the vendors for price declines. Cardinal's real inflation rate
reflects increases in the fastest moving branded products in the market, or the
products that make up most of our inventory balances.
In addition to the inflation topic, yesterday we were exposed to the idea of
"less favorable trading relationships" developing between manufacturers and
distributors in the form of Inventory Management Agreements or "IMAs". The fact
is that IMAs have been part of the wholesale pharmaceutical industry for over
five years and today Cardinal has a significant number of IMAs in place, all
entered into for the benefit of both Cardinal Health and the manufacturer. These
agreements, as correctly stated in yesterday's note, entail a limit on "spec"
buying in exchange for payments of various forms. The implication that this is
a major change in the structure of the industry is simply erroneous. The
industry has evolved to include IMAs as a major way of doing business and the
economics of the agreements have been favorable to Cardinal Health. We earn
similar profits on these agreements while gaining the benefit of reducing
capital investments. Hence, for Cardinal over the past several years, IMAs have
contributed to our profit expansion and improving returns on capital.
CONCLUSION
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I am not sure that we learned anything more yesterday about the structure
of the industry than was evident over six months ago. It is common knowledge
that the pharmaceutical market has slowed this year to a growth rate in the
low double digits. It's hard to determine from very recent data that there is
a major change from the widely predicted growth rates in the industry.
Cardinal Health is well positioned to grow even faster than the markets in
which we compete as we bring unique solutions to our manufacturer and provider
customers. In addition, our cash flow generation over the next five years
should provide an opportunity to continue to invest in the long-term growth of
our businesses, expanding both the scale and the proprietary nature of what we
do.
If you have an questions about the information in this email please call either
Suzie Stoddard (614-757-7542) or me (614-757-7067).
Thanks,
Steve Fischbach
VP Investor Relations
Cardinal Health, Inc.
* * *
Except for historical information, all other information contained herein
consists of forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected, anticipated or implied. The most significant of
these uncertainties are described in Cardinal Health's Form 10-K, Form 8-K and
Form 10-Q reports and exhibits to those reports, and include (but are not
limited to) the costs, difficulties, and uncertainties related to the
integration of acquired businesses, the loss of one or more key customer or
supplier relationships, changes in the distribution outsourcing patterns for
health-care products and/or services, the costs and other effects of
governmental regulation and legal and administrative proceedings, and general
economic conditions. Cardinal undertakes no obligation to update or revise any
forward-looking statements.
Information regarding the identity of the persons who may, under SEC rules, be
deemed to be participants in the solicitation of stockholders of Syncor
International Corporation ("Syncor") in connection with the proposed merger, and
their interests in the solicitation, is set forth in the definitive proxy
statement/prospectus dated October 16, 2002 mailed by Syncor to Syncor
shareholders on October 17, 2002 and filed with the SEC. Cardinal Health, Inc.
("Cardinal Health") has filed a registration statement on Form S-4 in
connection with the transaction. Investors and security holders of Syncor are
urged to read the definitive proxy statement/prospectus because it contains
important information about Cardinal Health, Syncor and the transaction.
Investors and security holders may obtain a free copy of the proxy statement/
prospectus at the SEC's website at www.sec.gov. A free copy of the proxy
statement/prospectus may also be obtained from Cardinal or Syncor. Cardinal and
Syncor and their respective executive officers and directors may be deemed to be
participants in the solicitation of proxies from the stockholders of Syncor in
favor of the transaction. In addition to the registration statement on Form S-4
filed by Cardinal Health in connection with the transaction, and the proxy
statement/prospectus mailed to the stockholders of Syncor in connection with the
transaction, each of Cardinal and Syncor file annual, quarterly and special
reports, proxy and information statements, and other information with the SEC.
Investors may read and copy any of these reports, statements and other
information at the SEC's public reference room located at 450 5th Street, N.W.,
Washington, D.C., 20549. Investors should call the SEC at 1-800-SEC-0330 for
further information. The reports, statements and other information filed by
Cardinal Health and Syncor with the SEC are also available for free at the SEC's
web site at www.sec.gov. A free copy of these reports, statements and other
information may also be obtained from Cardinal or Syncor. Investors should read
the proxy statement/prospectus carefully before making any voting or investment
decision.