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Cardinal Health to buy Medtronic units; forecast disappoints: Reuters

U.S. drug distributor Cardinal Health Inc (CAH.N) agreed to buy medical device maker Medtronic Plc’s (MDT.N) medical supplies units for $6.1 billion and said it expected full-year adjusted earnings at the lower end of its forecast.

Shares of Cardinal Health were down 13.2 percent at $71 in premarket trading on Tuesday. Rivals McKesson Corp (MCK.N) and AmerisourceBergen Corp (ABC.N) were down about 3 percent.

Cardinal Health, which had forecast adjusted profit in the range of $5.35-$5.50 per share, blamed generic price deflation for the revised forecast.

The company now expects price deflation to be in the low-double digits for its full-year ending June 30, worse than its earlier expectation of high single digit deflation.

“The weaker guidance, which includes the positive accretion from Medtronic’s supply business, is concerning for the distributor sector,” Mizuho Securities USA analyst Ann Hynes said.

The U.S. drug supply chain, including pharmaceutical benefits managers and drugmakers, has come under pressure in recent years, from increasing scrutiny over high drug prices.

Cardinal Health has looked to reduce the impact by boosting its medical products business, which is on track to reach mid- to high-single-digit revenue growth.

The company is acquiring Medtronic’s patient care, deep vein thrombosis and nutritional insufficiency businesses, which encompass 23 product categories across multiple market settings.

“We view the strategic rationale as highly sound, given 70 percent of the products are sold in the U.S. and many are quite basic, allowing for an easier sell-through with Cardinal’s existing consumables business”, Evercore ISI analyst Ross Muken wrote in a note.
Product lines include dental/animal health, wound care, incontinence, electrodes, thermometry and blood collection offerings as well as 17 dedicated manufacturing facilities.

Combined, the units generated about $2.4 billion in revenue in the past four reported quarters, Medtronic said.

Medtronic and Cardinal Health had entered into exclusive talks for the business, Reuters reported earlier in the month.

Cardinal Health plans to issue long-term debt to finance the transaction and has obtained a commitment letter from Goldman Sachs Bank USA and Goldman Sachs Lending Partners LLC to provide a $4.5 billion unsecured bridge loan.

Medtronic’s financial advisers are Piper Jaffray and J.P. Morgan Securities LLC and legal advisers are Wachtell, Lipton, Rosen & Katz and Baker McKenzie.

Goldman Sachs & Co and Perella Weinberg Partners LP provided financial advice to Cardinal Health and its legal advisers are Skadden, Arps, Slate, Meagher & Flom LLP and Jones Day.