CAH Cardinal Health Inc

Company buys some Medtronic businesses in bid to stem strains on drug-wholesale unit

By Anne Steele and Joseph Walker 

Cardinal Health Inc. struck a deal to buy part of Medtronic PLC's patient monitoring and recovery unit for $6.1 billion, bringing businesses under Cardinal's roof that it has sought for years but also boosting its debt load.

Cardinal said it would fund the acquisition with $4.5 billion in new debt plus existing cash.

Cardinal hopes the acquisition will help offset competitive pressures in its drug-wholesaling business, where the company is lowering generic-drug prices to maintain market share among independent pharmacy retailers. Cardinal said it expects the prices it charges customers for generic drugs to fall in the low-double-digit-percentage range in its fiscal year ending in June 2017.

Due to the pricing pressure and other factors, Dublin, Ohio-based Cardinal now forecasts its adjusted profit for this year will be at the bottom of its previous guidance range of $5.35 to $5.50 a share, and it guided for adjusted earnings in 2018 to be flat to down midsingle digits. Analysts had expected 9.2% growth for next year, according to Thomson Reuters.

Pharmaceutical companies have tempered their price increases somewhat recently in response to growing political pressure in Washington, including criticisms from President Donald Trump. But Cardinal Chief Executive George S. Barrett said the generic pricing pressure it is experiencing is related mainly to the prices it charges its pharmacy customers, rather than unexpected price cuts by drug manufacturers.

Cardinal is still able to "work with our [drug] manufacturing partners to make sure that we're having...an excellent cost position," Mr. Barrett said on a conference call with analysts Tuesday. The pricing pressures are on the "sell-side downstream to the customers. It's still a little bit more than what we modeled."

Shares of Cardinal fell 11.6% to $72.29 midmorning. Shares in competing wholesalers also declined, with AmerisourceBergen Corp. down 4.9% to $82.46, and McKesson Corp. shares off 4.4% to $137.85.

Cardinal's move to take on new debt to finance its deal with Medtronic prompted Fitch Ratings to voice concerns over Cardinal's debt and lower its outlook on the health-care services company.

Fitch, which rates Cardinal's debt at three notches above junk, said it expects the company's leverage will remain elevated for an extended period.

The three businesses included in the deal -- patient care, deep vein thrombosis, and nutritional insufficiency -- generated roughly $2.4 billion in combined revenue over the past four quarters. The transaction also includes 17 manufacturing facilities.

Medtronic, which originally bought the trio of businesses as part of its tie-up with Covidien PLC in 2015, will keep its respiratory and monitoring operations as well as its renal care businesses.

Dublin, Ireland-based Medtronic said it would set aside $1 billion of the after-tax proceeds -- estimated at about $5.5 billion -- for stock buybacks in fiscal 2018, and will use the remainder to pay down debt.

Medtronic said the deal helps its debt leverage ratio, and gives it cash for investment in higher-growth and higher-margin opportunities.

Medtronic's shares were down 0.22% to $80.18.

The transaction is expected to close in Medtronic's fiscal 2018 second quarter, which ends in October, and add between 12 cents and 18 cents to the company's full-year adjusted per-share earnings.

Write to Anne Steele at Anne.Steele@wsj.com and Joseph Walker at joseph.walker@wsj.com

(END) Dow Jones Newswires

April 19, 2017 02:47 ET (06:47 GMT)

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