Cardinal Exploring Spinoff as Prior Sale Dampens 4Q Earnings

Cardinal Health Inc. is exploring whether to spin off the smaller but more profitable side of its business making medical supplies and equipment, the company said as it released its fourth-quarter financial results.

Profit for the Dublin, OH-based health-care products and services company tumbled 64% for the quarter ended June 30 to $326.6 million, or 91 cents a share, from $902.2 million, or $2.33 a share, in the year-ago period. The company attributed the decline largely to a $680 million gain in 2007 from the sale of its former pharmaceutical technologies segment.

Revenue for the quarter rose 3% to $22.9 billion from $22.3 billion a year earlier. Excluding special items, earnings from continuing operations were $330.2 million, or 92 cents a share, a 39 percent increase from $238 million, or 61 cents a share, in the 2007 quarter.

For the year, Cardinal’s earnings were down 32% to $1.3 billion, or $3.60 a share, from $1.9 billion, or $4.77 a share, again because of the effects of the discontinued operation. Annual revenue increased 5% to $91.1 billion, from $86.9 billion, keeping Cardinal firmly as Ohio’s largest publicly traded company.

Cardinal last month consolidated its four operating units into two, and its board of directors has since supported a management recommendation to consider a tax-free spinoff of the clinical and medical products division into a separate publicly traded company, Cardinal said. The company plans to make a decision on the proposal in 60 to 90 days.

A spinoff would leave Cardinal with its original business of distributing pharmaceuticals and medical supplies, which accounts for 94% of revenue and 57% of profit.

“Our goal is simple: To have two thriving businesses delivering maximum value to customers and shareholders over the long term,” R. Kerry Clark, Cardinal CEO, said in a release.

For the 2009 budget year, Cardinal projected revenue growth of 6% to 7% and operating share earnings of $3.80 to $3.95, excluding special items.

Many analysts were surprised by just how bad 2007-08 was for many players in the drug industry, said John Kreger, an analyst with Chicago-based William Blair & Co. LLC, but Cardinal’s guidance for the upcoming year was still below expectations.

“The U.S. pharmaceutical market is in one of the worst downturns we’ve seen in a long time, and it’s a prolonged one,” Kreger said. “It’s not surprising that Cardinal as a major player in that market would be suffering.”

Divergent Fortunes

However, the company said earnings would be hurt by a planned $100 million investment in strengthening research for its clinical and medical products business and improving information technology for the distribution division, which it said will continue struggling for the first half of the year.

The company expects distribution, which includes pharmaceuticals and supplies such as gloves and scalpels, to struggle for the first half of the fiscal year. It projects overall profit growth in distribution will be flat to negative for the year on a 6% increase in sales.

In contrast, the company projects 10% sales growth and 20% profit growth for clinical products.

In the clinical technologies sector, which makes complex hospital equipment such as infusion pumps and computerized drug-dispensing systems, fourth-quarter operating earnings were up 8% to $156 million on sales of $780 million. Medical products, which includes supply staples such as gloves, surgical drapes and feeding tubes, saw profit soar 63% to $95 million on $727 million in sales, largely because of newly acquired companies.

Kreger said he welcomed the idea of the split, but added the feelings are tempered by the company’s poor performance overall.

“The most successful part of the business really has been kind of buried,” he said.

Investors in conference calls over the past year occasionally have asked why Cardinal doesn’t unload all or part of its supply business, and executives have replied that it remains a strong base despite lower profit margins. Also, they’ve said the company benefits from distributing the medical supplies it makes.

Cardinal earlier has said it is exploring divesting some smaller operations, including specialty product makers, a pharmacy benefit manager and Earth City, Mo.-based Medicine Shoppe International, the nation’s largest franchisor of independent pharmacies.

SOURCE: Columbus Business First