Drug Distributing Giant Cardinal Health Will Not Renew OptumRx Distribution Pact, Stock Plunges

Monday, Cardinal Health, Inc. CAH announced that its pharmaceutical distribution contracts with OptumRx, which expire at the end of June 2024, will not be renewed. 

OptumRx is a subsidiary of UnitedHealth Group Inc UNH.

Cardinal Health reaffirmed its fiscal 2024 adjusted EPS guidance of $7.20-$7.35 versus the consensus of $7.29. 

With a market cap of almost $26 billion, Cardinal Health is a distributor of pharmaceuticals, a global manufacturer and distributor of medical and laboratory products, and a provider of performance and data solutions for healthcare facilities.

Despite the nonrenewal of the OptumRx contracts, Cardinal Health reiterated its Pharmaceutical and Specialty Solutions long-term segment profit CAGR target of 4%-6% and its consolidated non-GAAP EPS CAGR target of 12%-14% for fiscal years 2024 to 2026, relative to a fiscal 2023 baseline. 

While Cardinal Health has not yet provided financial guidance for fiscal 2025, the company expects growth in fiscal 2025 in Pharmaceutical and Specialty Solutions segment profit and adjusted EPS. 

The company expects to partially offset the impact of OptumRx through a combination of new customer wins, specialty growth, and other actions.

Sales to OptumRx generated 16% of Cardinal Health’s consolidated revenue of $205 billion in fiscal year 2023. 

Approximately 90% of these sales were serviced by the company’s Pharmaceutical Distribution business and primarily consisted of non-specialty bulk shipments to Optum’s mail dispensing facilities.

Total sales to OptumRx generate a meaningfully lower operating margin than the overall Pharmaceutical and Specialty Solutions segment.

Furthermore, Cardinal Health expects to generate an adjusted free cash flow of approximately $2 billion on average from fiscal 2024 to 2026.

The company anticipates lower-than-average adjusted free cash flow in fiscal 2025 due to the unwinding of negative net working capital associated with the OptumRx contract and day-of-the-week timing.

“We have plans in place to continue delivering profitable growth in fiscal 2025, and we are pleased to reaffirm our long-term targets for the Pharmaceutical and Specialty Solutions segment and enterprise, despite this nonrenewal,” said Jason Hollar, CEO of Cardinal Health. 

“We are excited about the many other opportunities in the marketplace, such as the onboarding of new customers and the additional capabilities from the integration of Specialty Networks in fiscal 2025,” said Debbie Weitzman, CEO of Pharmaceutical and Specialty Solutions. 

Read Next: US Federal Trade Commission Investigates Drug Shortages Amid Allegations Of Market Manipulation.

Price Action: CAH shares are down 4.32% at $103.52 during the premarket session at the last check Monday.

Image: Michal Jarmoluk from Pixabay