Acquisitions

Cardinal Health rival lands growth vehicle in Europe

By

October 25, 2014

Cardinal Health rival McKesson announced it has reached an agreement to purchase German distributor Celesio for $8.3 billion, a deal that is expected to create repercussions throughout the drug-distribution industry.

Dublin-based Cardinal, McKesson and AmerisourceBergen are the three dominant U.S. players in the industry, and each has made acquisitions or entered into partnerships recently to expand their U.S. and international reach. Analysts had identified McKesson and Cardinal as bidders for Celesio.

Cardinal’s reaction to the McKesson deal came in a broad statement issued after the Celesio purchase was announced yesterday:

“We’re always actively surveying trends in the global marketplace, which led to moves like our acquisitions in China and, most recently, AssuraMed here in the U.S. We’re confident in our market positioning and have the financial resources and agility to capitalize on opportunities that will meet the needs of our customers and shareholders.”

One analyst said the news raises questions about Cardinal’s international strategy.

“They’ve chosen not to get into Europe (to date) ... and people will ask what they will do to counteract that,” said Ross Muken, an analyst with ISI Group.

Muken thinks Cardinal CEO George Barrett has a plan in place.

“He understands (the international market) as well as anyone, ... and investors have to believe George will figure this out,” he said.

In recent years, Cardinal’s strategy has been to expand outside its core business of drug distribution. It purchased home-health provider AssuraMed for $2.1 billion in February and Chinese drug distributor Yong Yu in 2010 for $470 million.

Cardinal has since acquired six additional Chinese companies for about $120 million and reported revenue there was up 45 percent to about $2 billion annually.

McKesson is the biggest of the three major players in drug distribution. It supplies medicines to half of U.S. hospitals, as well as to doctors and health plans. It has more than 37,000 employees and reported revenue of $122.7 billion last year.

Cardinal Health reported sales of $101 billion for the year that ended in June. It employs 34,000 people worldwide.

The smallest of the trio is AmerisourceBergen, with revenue that exceeds $80 billion and about 13,000 employees.

McKesson investors approved of the deal, sending that company’s stock up $6.95 a share, or 4.9 percent, to $150. Cardinal stock closed up 21 cents, or 0.4 percent, at $55.02.

Cardinal will report third-quarter earnings on Thursday, and revenue is expected to be down because of the end of a $22 billion-a-year contract with Walgreen that concluded at the end of August and is now serviced by AmerisourceBergen.

In recent quarterly reports, Cardinal’s revenue has been down, but profit has been up from higher margins on the sale of generic drugs.

“We’ve taken the past three or four years to reposition and build a business with more balance and strength and one that can take a punch,” Barrett said in August.

Muken conducted an anonymous online survey of institutional investors about the impact of the McKesson acquisition. Forty percent say it will have no impact on Cardinal, while about 35 percent think it will have a somewhat unfavorable impact.

Moody’s Investor Service said the Celesio purchase will increase McKesson’s revenue about 25 percent and “enhance its position as a leading drug wholesaler beyond the U.S. by adding a solid presence in Europe.”

Muken’s anonymous survey had 55 percent of those polled saying the Celesio purchase will have a highly favorable impact on McKesson. However, Moody’s notes that there are risks involved.

The Celesio purchase will add significant incremental debt, and McKesson will “take on increased regulatory and reimbursement risk,” said Diana Lee, Moody’s senior credit officer, in a statement. The rating agency has placed McKesson’s rating on review for a downgrade.

Muken called the Celesio purchase “an exciting step for McKesson, which will further the value McKesson brings to customers and partners.”

swartenberg@dispatch.com

@stevewartenberg