Cardinal Buyout Adds Value, But Payoff Will Take Time
Friday March 7, 5:56 pm ET
Vance Cariaga
When you're a $90 billion company, a $490 million buyout doesn't tend to move the needle much on Wall Street.
Such was the case last week for Cardinal Health (NYSE:CAH - News), the nation's second-biggest distributor of drugs and medical products by annual sales.
On Tuesday Cardinal announced plans to acquire privately held Enturia for $490 million. The deal, expected to close within a couple of months, brings Cardinal the ChloraPrep line of infection prevention products.
ChloraPrep will be added to Cardinal's medical products and technologies segment. Cardinal Health expects the deal to reduce earnings this year before boosting the bottom line in 2009.
Rising Demand
Though the deal didn't have much positive impact on Cardinal's stock price -- shares actually fell last week -- most analysts offered an upbeat assessment of the buyout.
"The acquisition is consistent with Cardinal's capital deployment strategy, and we view it favorably in light of current attention surrounding infection prevent products," analyst Eric Coldwell wrote in a report for Robert W. Baird & Co.
Citigroup analyst Charles Boorady noted that the deal complements Cardinal's infection prevention strategy -- a niche he singled out as a growth driver in a recent upgrade of the company.
Boorady says hospitals are willing to invest in infection prevention products because of changes in how Medicare and managed care firms reimburse treatment of some preventable infections.
Beginning in October, the Centers for Medicare and Medicaid Services will no longer reimburse hospitals for the additional cost of treating certain infections acquired during hospital stays.
"(This) puts new financial pressure on hospitals to reduce infections," Boorady said. "The cost of products like Enturia's ChloraPrep are in the single-digit dollar area per use, a small relative price to pay to cut expensive and risky infections."
In a press release, Cardinal said ChloraPrep products are widely used in U.S. hospitals and surgery centers to disinfect the skin before surgical and vascular procedures.
That helps prevent blood stream and surgical site infections -- two of the most common types of health-care-associated infections (HAI) among patients.
"The technology is well-aligned with our mission to improve patient safety," Cardinal Chief Executive R. Kerry Clark said in a statement. "This is another good example of a tuck-in acquisition that complements our clinical and medical products sector and advances our strategy to help health care providers reduce HAIs."
Analyst Coldwell pointed out that in studies comparing ChloraPrep with traditional iodine antiseptic, ChloraPrep "killed microorganisms more rapidly and more persistently, helping prevent cross-contamination."
Cardinal plans to accelerate sales of ChloraPrep products to both hospital and alternate-care customers through its own U.S. and international sales networks.
Street Gives A Cold Shoulder
Management will have to do a lot of accelerating if the new unit is to have much impact on the top line.
Cardinal is expected to post about $93 billion in revenue this fiscal year, which ends in June. Enturia's 2007 revenue was about $140 million, analysts estimate.
"We don't expect a significant impact on Cardinal's overall performance," Coldwell wrote.
That's one reason Wall Street reacted with a shrug to the news. Cardinal shares fell 1% on the day the Enturia deal was announced and continued to sell off most of the rest of the week.
The stock traded near 56 early Friday, down 9% from its closing price on Feb. 26 and about 27% off a 52-week high set in late April.
Cardinal's sell-off has followed a general industry decline. The 10 stocks in IBD's wholesale drugs and supplies distributors group are down 12% since mid-January and hit a five-and-a-half month low on Friday.
Steep recent declines also have been reported by Cardinal's other two "Big Three" industry competitors, McKesson (NYSE:MCK - News) and AmerisourceBergen (NYSE:ABC - News).
On the bright side, all three firms are expected to post double-digit earnings gains in three of the next four quarters. Coldwell sees a few favorable trends for the sector, including improving drug pipelines and stable pricing.
"(The Big Three) are relatively insulated from many macroeconomic perils (while) also being less exposed to many consumer-specific (and other) risks present for many other health care entities," Coldwell wrote.
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