Cardinal Health's $6.1 Billion Deal for Some Medtronic Operations Raises Debt Concerns--Update
April 18 2017 - 11:55AM
Dow Jones News
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 18, 2017 11:40 ET (15:40 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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