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Cardinal Health forecast drags down sector

April 18, 2017

Cardinal Health Inc said on Tuesday it expected full-year adjusted earnings at the lower end of its forecast, underscoring the U.S. drug distribution industry’s struggles with declining generic drug prices.

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.

Cardinal Health, which expects preliminary fiscal 2018 adjusted earnings to be flat to down mid-single digits, said increasing competition is contributing to the price deflation.

The acquisition of Medtronic’s units will give the drug distributor access to 23 product categories across multiple markets including dental/animal health, wound care and blood collection. The deal also adds 17 manufacturing facilities.

“We like the acquisition of Medtronic’s supplies unit, which we believe fits well into Cardinal Health’s strategy in medical, and continues to diversify the business away from pharma distribution,” Cowen & Co analyst Charles Rhyee wrote.

The units generated about $2.4 billion in revenue in the past four quarters, Medtronic said.

Medtronic and Cardinal Health had entered into exclusive talks for the business, Reuters reported earlier in the month.

However, analysts said investors are likely to focus on the generic price deflation.

While the deal looks strategically and financially sensible, it is likely not enough to offset the ongoing generic deflation headwinds, Leerink Partners analyst said.

Cardinal Health plans to issue long-term debt to finance the transaction and has obtained a $4.5 billion unsecured bridge loan.

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