Coverage: Cardinal Health falls despite medical supplies deal

Shares of Cardinal Health Inc. fell by 12 percent on Tuesday after the company said earnings this year will be on the low end of projections and despite it announcing a deal to acquire Medtronic’s medical supplies business for $6.1 billion.

Ankur Banerjee and Akankshita Mukhopadhyay of Reuters had the news:

The company’s shares tumbled 12 percent to $72.13, while rivals McKesson Corp and AmerisourceBergen Corp fell about 5 percent.

The forecast overshadowed Cardinal Health’s move to add heft to its growing medical products business through a $6.1 billion deal for Medtronic Plc’s medical supplies units.

Cardinal Health, which had forecast adjusted profit in the range of $5.35-$5.50 per share, expects generic price deflation to be in the low-double digits for its year ending June 30.

The company had earlier expected a high single digit deflation.

“The weaker guidance, which includes the positive accretion from Medtronic’s supply business, is concerning for the distributor sector,” Mizuho Securities USA analyst Ann Hynes said.

Speedier approvals of generic drugs by U.S. regulators have ramped up competition, piling pressure on many generic drugmakers.

Alex Kacik of Modern Healthcare reported that the deal gives Cardinal products used in virtually every hospital:

The cash deal would give the Dublin, Ohio-based company access to Medtronic’s 23 product categories in its patient care, deep vein thrombosis and nutritional insufficiency business, which “are used in nearly every U.S. hospital,” Cardinal said.

Medtronic’s product portfolio has been on Cardinal Health’s radar for many years, said George Barrett, Cardinal Health chairman and CEO. While the transaction will expand Cardinal’s reach into the operating room and long-term care, it will also increase its debt load. The deal will be financed with a combination of $4.5 billion in new senior unsecured notes and existing cash and is expected to close in the first quarter of 2018.

“Given the current trends in healthcare, including aging demographics and a focus on post-acute care, this industry-leading portfolio will help us further expand our scope in the operating room, in long-term care facilities and in home healthcare, reaching customers across the entire continuum of care,” Barrett said in a news release.

The portfolio has more than 10,000 employees working across 17 manufacturing facilities. It had a total combined revenue of $2.3 billion in the last four reported quarters with more than 70% of total sales in the U.S.

Medtronic’s medical supplies business sells products such as prefilled syringes, bandages and catheters, featuring brands such as Curity, Kendall, Dover, Argyle and Kangaroo. It acquired the medical supplies business two years ago in its $50 billion Covidien deal.

Christopher Snowbeck of the Minneapolis Star Tribune reports that Medtronic had wanted to sell the business:

The products came to Medtronic via its January 2015 megamerger with Covidien PLC. Medtronic surrenders about $2.4 billion in annual revenue plus related earnings, but retains the higher-tech Covidien products that analysts say are a better match with Medtronic’s heart devices, surgical tools and insulin pumps.

“The divestiture will provide Medtronic with balance sheet flexibility to pursue higher-growth initiatives that are more in line with its current focus,” wrote Joshua Jennings, an analyst with Cowen and Company, in a note to investors. “Given investors’ scrutiny of Medtronic’s top-line growth in recent quarters, we view this latest move as strategically sound.”

Based in Ireland, Medtronic has its operational headquarters in Fridley and about 9,500 workers in the state. Historically, the company has operated large businesses selling pacemakers and a related heart device called implantable cardiac defibrillators.

The product lines being sold fall under the heading of “patient care/deep vein thrombosis/nutritional insufficiency” and have been part of Medtronic’s unit for patient monitoring and recovery products. They were acquired in the $48 billion deal for Covidien, which also brought technology for catheter-based medical procedures that are a closer fit with Medtronic’s product lineup, said David Heupel, senior analyst with Thrivent in Minneapolis.