Cardinal plants flag in China with $470 million deal

By Esha Dey

NEW YORK (BestGrowthStock) – U.S. drug wholesaler Cardinal Health Inc (CAH.N: ) has bought a Chinese distributor in a $470 million deal, establishing a foothold in a booming pharmaceutical market.

Cardinal announced the completion of the transaction on Monday for privately held Zuellig Pharma China, known locally as Yong Yu. Cardinal assumed about $60 million in net debt under terms of the deal and funded the remainder with cash.

Shares of Cardinal were down 2 percent to $35.08 in afternoon trading on the New York Stock Exchange on a down day for the market.

“Cardinal has done quite a few deals lately and the market is apprehending that maybe their appetite is bigger than their capability,” Sanford Bernstein analyst Helene Wolk said.

Cardinal earlier this month said it planned to buy Kinray Inc for $1.3 billion to diversify its customer base, while in June announced it would buy Healthcare Solutions Holding LLC for more than $500 million to expand in the fast-growing area of specialty medicines.

China is set to overtake Japan as the world’s second-largest pharmaceutical market behind the United States in 2015, pharmaceutical market information company IMS Health told the Reuters Health Summit earlier this month.

Yong Yu has annual sales of more than $1 billion and its offerings include distribution to about 49,000 hospitals and clinics, and more than 123,000 pharmacies, according to Cardinal.

While the deal was viewed by analysts as a positive over the long term, they were less confident about the more immediate impact of the transaction given the completely different nature of the Chinese market and regulatory issues.

“Given the ability of China’s government to dictate prices for drugs and reimbursement for healthcare providers, there is some more risk here on how these changes could impact drug distributors longer-term,” Susquehanna Financial Group analyst A.J. Rice said in a research note.

Rice also said that while Yong Yu gets the majority of its sales from branded drugs, about two-thirds of the Chinese market is dominated by generics.

“As more drugs go generic, it is a long-term headwind for Cardinal’s China business,” Rice said.

The analyst also noted that the acquisition marked the first move by one of the big three U.S. drug wholesalers, which also include McKesson Corp (MCK.N: ) and AmerisourceBergen Corp (ABC.N: ), outside of North America.

On a conference call with analysts, Cardinal said Yong Yu’s operating margin compares “very favorably” with the typically low-margin U.S. drug distribution market.

Dublin, Ohio-based Cardinal expects the transaction to slightly add to earnings in its fiscal 2011 year.

(Reporting by Lewis Krauskopf and Esha Dey; Editing by Derek Caney)

Cardinal plants flag in China with $470 million deal