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Here's Why Cardinal Health Inc Dropped as Much as 12% This Morning

By Maxx Chatsko - Apr 18, 2017 at 1:19PM

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The drug wholesale leader released preliminary earnings ahead of its fiscal third-quarter 2017 earnings release next month. But that wasn't the only news to drop.

What happened

Shares of healthcare products company and drug wholesaler Cardinal Health (CAH -0.55%) dropped 12% Tuesday morning after providing an update on its fiscal year 2017 earnings guidance. Management prepared investors to expect non-GAAP EPS to come in at the low end of its previous guidance range of $5.35 to $5.50 thanks in large part to lower prices for generic drugs.

The company also provided an early outlook for the 2018 and 2019 fiscal years, which begin each July. Investors will learn more for all three fiscal year updates when fiscal third-quarter 2017 earnings are announced next month.

And finally, although the disappointing guidance update is the major driver for the stock's move Tuesday morning, Cardinal Health also announced the acquisition of the patient product portfolio of Medtronic for $6.1 billion. The massive acquisition is equivalent to nearly one-quarter of its market cap and will provide an immediate boost to the top and bottom lines once the deal closes, which is expected to occur in the fiscal first-quarter of 2018.

As of 11:54 a.m. EDT, the stock had settled to a 11.4% loss.

A man with his face in his palm.

Image source: Getty Images.

So what

Long-term investors should know that the low end of the earnings range provided in management's guidance for the current year is still ahead of performance achieved in fiscal year 2016 (non-GAAP EPS of $5.24), and well ahead of that achieved in fiscal year 2015 (non-GAAP EPS of $4.38). Despite pressure from generic drug prices, Cardinal Health will continue to grow and is well-positioned for healthy long-term performance.

Management highlighted three factors affecting its approach to crafting guidance for fiscal year 2018.

  • First, the medical segment will immediately feel the impact from the Medtronic portfolio acquisition. It included the patient care, deep vein thrombosis, and nutritional insufficiency products and businesses. If the deal closes in the first quarter, then Cardinal Health should realize a non-GAAP EPS lift of $0.21. That includes $100 million in inventory expenses following the acquisition, which hints that the new offerings will prove even more beneficial in years to come.
  • Second, Cardinal Health expects company-specific discrete items will have a negative impact on non-GAAP EPS of $0.50 in fiscal year 2018. Half of that is expected to come from the pharmaceutical segment, which demonstrates that pricing headwinds will persist at least another year.
  • Third, management expects drug pricing headwinds to become less fierce over time. When combined with the company-specific items mentioned above, the pharmaceutical segment could see profits fall next year compared to fiscal year 2017.

And finally, Cardinal Health expects fiscal year 2019 non-GAAP EPS to grow by at least high-single-digits compared to fiscal year 2018. Investors are more concerned about the near-term developments today, though.

Now what

Tuesday's move was influenced by two things: The expectation for current-year earnings to come in at the low end of guidance, and the expectation that the pharmaceutical segment will continue to stare down headwinds from generic drug pricing for at least another year. That's what makes the product portfolio acquisition from Medtronic intriguing for long-term investors. It will have an immediate beneficial impact and help to diversify the company's business for the long haul. Right now, Mr. Market doesn't appear to be willing to wait around for a more detailed update during next month's earnings announcement.

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