Cardinal Health Tumbles As Lower Generic Drug Prices Hurt Outlook: Wall Street's Take

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Cardinal Health tumbled the most in almost six months after the healthcare product distributor warned its outlook would be toward the lower end of its forecast range for this year and gave initial fiscal 2018 guidance that missed analyst estimates.

The company is grappling with lower prices for generic medicines, a trend that several sellside analysts warned is likely to also hit competitors McKesson and AmerisourceBergen. After the poor guidance, CAH fell as much as 12%, most since Oct. 28; Comps ABC and MCK were down as much as 6.2% and 5.7%, respectively. Prior to today, CAH was up 14% YTD vs S&P 500 Health Care Index up 7.6%; ABC had gained 11%, MCK was up 2.7%.

Additional CAH announced today it would acquire the patient care, deep vein thrombosis and nutritional insufficiency businesses of Medtronic for $6.1 billion in cash. The deal would give Cardinal Health access to 23 product categories that “are used in nearly every U.S. hospital,” the company said. The divisions have more than 10,000 employees and generated $2.3 billion in revenue in the 12 months ended in October, with more than 70 percent of sales in the United States.

Here is a brief summary of Wall Street’s responses courtesy of Bloomberg:

Mizuho (Ann Hynes)

  • Weaker forecast raises concerns for drug distributors; expects generic deflation also will be headwind for MCK and ABC heading into their earnings
  • CAH sees FY18 EPS growth flat to down mid-single digits, implies range of $5.03-$5.35; at the midpoint, that’s 12% below average analyst ests. and includes 21c of gains from purchase of MDT businesses
  • Says CAH-MDT deal was largely expected
  • Rates CAH neutral, PT $79

Baird (Eric Coldwell)

  • CAH trimmed FY17 forecast for third consecutive quarter as generic deflation now seen down low-double digits vs previously down high-single digits
  • Initial FY18 outlook is ~18% below Street on apples-to- apples basis excluding gains from purchase of Medtronic businesses
  • Neutral, PT $80

Evercore ISI (Ross Muken)

  • Initial FY18 outlook is major surprise, says shame that solid MDT deal is being completely overshadowed by guidance
  • Modestly more confident about CAH conf. call; appears that majority of revisions in generic deflation expectations is due to handful of highly profitable products
  • While slope of decline doesn’t seem to have gotten worse, recovery will probably take much longer than projected when CAH was upgraded to outperform on April 6
  • Outperform, cuts PT to $77.50 from $91.50

Cowen (Charles Rhyee)

  • Near-term challenges to pharma segment remain as fewer branded drugs go generic
  • CAH’s outlook for FY18 generic deflation to improve y/y suggests macro environment is starting to stabilize but will take longer than expected
  • Market perform, PT $89

Leerink (David Larsen)

  • CAH cited generic pricing and sell-side pressure for EPS views missing expectations for FY18 and FY19
  • CAH facing other challenges including loss of Prime Therapeutics as a client; Leerink believes this deal was won by ABC, says shares could rally if co. meets earnings ests. this quarter
  • Incrementally more cautious on MCK
  • Rates CAH market perform, ABC outperform, MCK market perform

Source: Bloomberg

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