With the ongoing uncertainty surrounding healthcare reform, it’s no surprise that U.S. drug distributor Cardinal Health is looking to expand operations and protect itself against any change (or lack thereof) to Obamacare. What is surprising though, is the money which Cardinal Health announced Monday that the company is paying to acquire some of Medtronic’s operations — a whopping $6.1 billion. Will Medtronic’s patient operations bring big dividends for traders?
Is Cardinal Health Stretched Too Thin?
Cardinal Health, Inc. announced that it will buy Medtronic’s patient monitoring and recovery unit for $6.1 billion. And while some call it a sound investment, bringing in new business opportunities for Cardinal Health, no one is thrilled with how Cardinal Health is going about the acquisition.
The U.S. drug distributor is expanding into patient care, but at a cost. Cardinal Health doesn’t have $6.1 billion laying around for acquisition. So, to come up with the money to take on Medtronic’s operations, Cardinal is taking on $4.5 billion in new debt.
Cardinal definitely has to take some risks, since it can’t maintain profits in its generic drug business, as the company has to keep lowering prices to maintain market share. Cardinal expects its generic drug prices to fall by more than 10% this fiscal year. It’s difficult for drug makers and distributors to raise prices as they’ve been doing following the public outcry surrounding Mylan and its price gouging scandal with Epipens. As a result, Washington –including President Trump — has criticized big pharma as a whole.
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The combination of political pressure paired with mounting debt has caused analysts to downgrade Cardinal. But there is hope for the company. The three businesses Cardinal is purchasing from Medtronic have combined for $2.5 billion in revenue over the last year. In addition to that, the deal also includes 17 manufacturing facilities, meaning that Cardinal could expand into not just distributing, but manufacturing prescription drugs. That would raise revenues since it eliminates the need for Cardinal to partner with outside manufacturers.
Watch this video from Cardinal Health to know more about this company:
But while there is hope for Cardinal in the long term, it’s the short term that has investors worried as the stock has trended sharply down. Taking on so much new debt, while at the same time having to figure out how to tie the new businesses into existing operations is just too many red flags. Shares will eventually bounce back up, but for now, expect Cardinal Health, Inc. (CAH) to continue DOWN.
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