Cardinal sells drug manufacturing biz and doubles Q2 profit

By Emilie Reymond

- Last updated on GMT

Related tags: Cardinal health, Investment, Blackstone group, Medicine

Cardinal Health is about to sell its drug manufacturing arm to an
international private investment firm, only two months after
announcing its decision to divest the segment, while its second
quarter earnings doubled as a result.

The US-based firm announced last week that it will sell its Pharmaceutical Technologies and Services (PTS) business to The Blackstone Group for approximately $3.3bn (€2.4bn) in cash.

"We made very rapid progress in less than two months to reach an agreement with such a quality organisation as The Blackstone Group,"​ said Kerry Clark, president and chief executive officer of Cardinal Health.

"The move allows us to accelerate the repurchase of Cardinal Health shares and focus our full attention on our mission to help make health care safer and more productive through our supply-chain and clinical products businesses."

The PTS division, which mainly performs contract manufacturing and packaging for oral medicines and sterile liquids, currently generates $1.8bn in annual revenue.

Among its core offerings, PTS develops and manufactures oral and sterile medication in nearly all dosage forms, and holds patents for Softgel and Zydis fast-dissolve technologies used in many prescription and over-the-counter (OTC) drugs. The segment is also the largest contract packager of pharmaceuticals.

However, manufacturing problems in the unit have persistently dogged Cardinal, dragging the profit of the whole company down, and Cardinal announced last November its intention to divest the vast majority of the segment to focus on its health-care business which offers services for hospitals and pharmacies.

For the past few years, the company has acquired a number of companies in order "to create the world's best contract manufacturer"​, but PTS remained an outlier strategically for the company, a spokesperson told back in November

"We also didn't believe PTS was providing a sufficient return on invested capital to warrant our continued focus on this segment,"​ said Jeff Hendersen, Cardinal Health's CFO at a JPMorgan healthcare conference earlier this month.

"And we made a determination that shareholder value was best realised by pursuing a sale of the segment and using those proceeds to buy back shares. So that's exactly what we've announced."

Morgan Stanley analyst David Veal said last week that the divestiture of PTS is a watershed event for Cardinal.

"While management has committed a substantial portion of the excess capital and PTS proceeds toward share repurchases, we also believe the company will step up the pace of its acquisition activity, a trend we view favourably,"​ said Veal in a research note.

He added that the decision to divest PTS is yet another indication that the company is now "walking the walk" toward a more focused operating platform and that the inflection point has arrived.

Cardinal will retain two of its businesses that support the generic pharmaceutical market, Martindale and Beckloff Associates.

Martindale develops generic intravenous medicine that is complementary to Cardinal's hospital business and generics strategy, while Beckloff provides regulatory consulting services, including for the company's generic products.

Meanwhile, Cardinal said its net profit for the second quarter of 2007 totalled $739.3m, compared with $304m in the same quarter last year. But $423.6 million of its profit came from discontinued operations in the PTS segment.

The company's operating profit rose 12 per cent from the previous year to $512.1m, the Ohio-based company announced last week. Revenue in the quarter totalled $21.8bn, a 13 per cent jump compared with $19.4bn in the second quarter last year.

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