Cardinal Grabs Chinese Distributor - Analyst Blog

Cardinal Health (CAH) has expanded its foothold in the lucrative Chinese pharmaceutical distribution market with the completion of its $470 million acquisition of privately-held Zuellig Pharma China (locally known as “Yong Yu”), the largest pharmaceutical importer in China. The newly acquired entity will be integrated into the Ohio-based Cardinal's pharmaceutical segment.

Yong Yu has more than $1 billion in annual sales and serves all major multinational pharmaceutical companies in China. The entity has an extensive nationwide distribution network and supplies pharmaceutical to roughly 49,000 hospitals and clinics and more than 123,000 pharmacies.

The Yong Yu acquisition expands Cardinal's presence in the fast-growing Chinese health care market by extending its distribution and services coverage. The Chinese pharmaceutical distribution market is expected to grow 20% annually through 2014 and is poised become the second-largest pharmaceutical market (after the U.S.) by 2015.

Cardinal expects the acquisition to be modestly accretive to its fiscal 2011 earnings and make a more meaningful impact in fiscal 2012. Under the terms, the company has assumed roughly $60 million in net debt and financed the remainder of the purchase price with cash.  

Cardinal is one of the largest global health care companies that help pharmacies, hospitals and ambulatory care sites to focus on low-cost patient care.  It is also a leading manufacturer of medical and surgical products. Cardinal has a diversified product portfolio, which is a natural hedge against the risk of revenue shortfall in testing times. The spin-off of CareFusion (CFN) has enabled Cardinal to increase focus on its core health care supply chain business.

Cardinal has been involved in back-to-back acquisitions. The companyacquired a privately-held specialty pharmaceutical services company Healthcare Solutions Holding in July 2010 for $667 million. The acquisition has expanded its foothold in the fast-growing specialty pharmaceutical services segment.

Moreover, Cardinal recently announced its plans to purchase Kinray Inc, a leading pharma distributor with a presence in the New York metropolitan area. The cash deal will enhance the company's ability to cater to retail independent pharmacies in the northeastern U.S. markets.

However, Cardinal is facing tough competition across all its business segments, which may pressure pricing. Its major competitors in the pharmaceutical supply chain segmentare McKesson Corporation (MCK) and AmerisourceBergen Corporation (ABC). Moreover, Cardinal is experiencing margin pressure in its bulk pharmaceutical business.

Nevertheless, Cardinal is making prudent use of cash by going for various tuck-in acquisitions. Moreover, it remains committed to boosting shareholder returns as it continues share repurchases and pays incremental dividends. We currently have a Neutral recommendation on Cardinal, which is supported by a short-term Zacks #3 Rank (Hold).

 
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