A Shot in the Arm for Cardinal?

By Mara Der Hovanesian

Patents on drugs that currently produce a massive $34 billion in sales will expire soon, starting this year with premier names such as Prozac and the diabetes drug Glucophase. That's more than twice the amount that has come off patent in the past 10 years--and good news for distributors such as Cardinal Health (CAH ). While Cardinal also distributes brand-name drugs to retail chains and hospitals--CVS, Walgreen, and the Mayo Clinic, for example--it makes more gross profit from generics. Anticipating the boom, investors have bid up Cardinal's stock, which has doubled in a year. It trades at 96--down from 105 in December. But "the best times are still ahead," says analyst Leonard Yaffe of Banc of America Securities. He has rated Cardinal a "strong buy" since 1995 and has a one-year price target of 130. Jonathan Green at Dresdner Kleinwort Wasserstein reiterated his "buy" rating on Apr. 12; his 12-month target is 120.

A strong balance sheet and revenue growth account for the upbeat forecasts. Cardinal's distribution business, which accounts for 80% of revenues, is growing at twice the industry average of 12%, as it continues to snatch market share from such rivals as McKesson. It also operates higher-margin services, including Pyxis, an automated drug-delivery system--rather like an ATM. "That mix can sustain a 23% earnings growth rate," says Yaffe. Merrill Lynch's analyst Owen Hughes notes that Cardinal's price-earnings ratio is 28, based on 2001 earnings per share of $3.40, and 23, based on next year's expected $4.07--a ratio 10% less than most large-cap drug stocks.

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