Cardinal Health Inc., the Dublin, Ohio-based drug distributor, said it plans to buy closely held Kinray Inc. for $1.3 billion to expand in retail pharmacy distribution.
The deal may enhance earnings in the fiscal year ending next June, and will add 12 cents a share or more to adjusted profit in fiscal 2012, depending on the timing of the closing, Cardinal said today in a statement. The company expects to complete the transaction this year or early in 2011.
Kinray, a distributor of both branded and generic medicines based in Whitestone, New York, primarily operates in the New York metropolitan area and has annual revenue of more than $3.5 billion, Cardinal said. The acquisition will increase Cardinal’s retail independent pharmacy base by 40 percent to about 7,000. It will also boost distribution of generic drugs, which are more profitable than brand-name therapies.
“Conceptually this makes sense,” said Helene Wolk, an analyst at New York-based Sanford C. Bernstein & Co., in an e-mail today. “Given that the acquisition is fully cash financed, it should be immediately accretive.”
Cardinal rose $2.09, or 6.1 percent, to $36.56 at 4 p.m. in New York Stock Exchange composite trading, for the biggest daily gain since March 10, 2009. The shares increased 6.9 percent this year before today.
Independent pharmacies, unlike big-box retailers such as Walgreen Co. and CVS Caremark Corp., use distributors such as Cardinal to buy supplies of generic drugs, said Ross Muken, an analyst at Deutsche Bank Securities Inc. in New York. The acquisition will allow Cardinal to improve profitability, especially after 2012 when many drugs come off patent and open new opportunities for generic-drug sales, he said in a telephone interview.
“This is really consistent with our strategic goal of expanding our customer base,” said George Barrett, Cardinal Health’s chairman and chief executive officer, in a telephone interview. “This gives us a chance for a significant move to increase that base by over 2,000 pharmacies.”
The transaction “will accelerate the earnings growth of our core business and give us the opportunity to expand margins,” Barrett said. “It will be a period of terrific growth in generics and we hope to participate quite fully.”
Cardinal had $2.71 billion in cash and short-term investments as of Sept. 30, according to data compiled by Bloomberg. Cardinal announced 15 pending or completed acquisitions in the past five years, with an average size of $1.04 billion and an average premium of 31 percent, according to Bloomberg data.
On July 15, Cardinal completed the purchase of Healthcare Solutions Holding, the parent of P4 Pathways and P4 Healthcare, for an upfront payment of $517 million, said Troy Kirkpatrick, a Cardinal spokesman. Primarily in oncology, Healthcare Solutions provides services to doctors and drug companies.
Barrett said he plans for grow in specialty pharmacy services, especially in biologic medicines used in the treatment of chronic diseases such as cancer. He said the company is also looking to expand services in ambulatory care and surgery centers.
Lisa Gill, an analyst at JPMorgan Chase & Co. in New York, said Kinray is a good fit for Cardinal.
“Investors should be happy” with the Kinray deal, Gill said in an e-mail. Community-based pharmacies “are much more profitable than retail chain especially for generics. This improves Cardinal’s customer mix.”
During July and August, the company bought back $250 million of its shares, the final purchase under a $500 million authorization, Kirkpatrick said. On Nov. 3, Cardinal authorized $750 million in new buybacks over three years, he said.
“Our capital-deployment strategy remains the same,” Barrett said in the interview today. “Our overall approach will be one of balance.”