As profit falls, Cardinal Health lowers outlook

Cardinal Health's profit declined 56 percent in its fiscal second quarter on the sale of a division last year, the health-care giant reported Tuesday.

The Dublin, Ohio, company, which employs more than 450 people in the Triangle, also lowered earnings expectations for the year because of pricing and regulatory issues for its core pharmaceutical distribution business. Shares were up as earnings beat analysts' expectations.
Cardinal (NYSE: CAH) earned $325 million, or 89 cents per diluted share, on $23.3 billion in sales for the quarter ended Dec. 31. That's a drop of 56 percent from earnings of $739 million, or $1.80 a share, on sales of $21.8 billion in the year-ago period.

The company last year sold its Pharmaceutical Technologies and Services division, under which it manufactured drugs for pharmaceutical companies. That division, which had accounted for $1.03 of the quarterly share earnings, sold for $3.3 billion to the Blackstone Group private equity firm.

Analysts polled by Thomson Financial, on average, had expected Cardinal to post earnings per share of 87 cents. Shares closed up 5.2 percent, to $58.77, after hitting a 52-week low of $54.51 in early trading Tuesday.

But shakiness in one of its business units led Cardinal to revise its earnings outlook for the fiscal year downward to between $3.75 and $3.85 per share, a 10 percent to 13 percent increase over $3.42 in 2007. The company said its pharmaceutical supply-chain business, which sells drugs to pharmacies, would suffer from regulatory issues and lower price increases than it had expected.
As recently as a Jan. 8 investors conference, the company told analysts it was expecting earnings-per-share growth of 12 percent to 16 percent in fiscal 2008.

"We have three of our four operating segments performing on track, showing favorable revenue growth, expanding margins and segment profit that is at or above our guidance for the current year," CEO R. Kerry Clark said in a news release. "Within our supply chain pharmaceutical segment, we have revised our forecast to account for the impact of anti-diversion measures for controlled substances, changes in our expectations for branded price increases and the generics market, and the effect of contract repricings.

"We still expect double-digit (earnings-per-share) growth for the year and are resolved to strengthen the business as we fix the issues that have hampered our performance," he said.
The U.S. Drug Enforcement Administration in November and December suspended the controlled substances licenses for three of Cardinal's 25 distribution centers over allegations that customers were distributing the drugs to rogue Internet pharmacies. Clark said security improvements will cost up to $30 million for the year.

"In the past 45 days, we have been working to put in place an enhanced system of controls across our network to address the security threat that diversion poses to the pharmaceutical supply chain," he said.

Sales for the pharmaceutical supply division grew 6 percent for the quarter to $20.4 billion, with most of the growth due to bulk customers, but profit for the segment declined by 21 percent to $258 million. Cardinal attributed the fall to price increases for brand-name drugs, market conditions for generics and repricing of several large contracts.

Meanwhile, the company also announced it has renewed its three-year deal to distribute drugs to more than 6,000 Walgreen Co. (NYSE: WAG) stores. The contract had been set to expire this summer.

Earlier this month, Cardinal announced it had hired the head of a generic drug maker to turn around its two troubled supply divisions, which also include medical/surgical supplies. George Barrett started Monday, replacing Mark Parrish, who left in November after a year in the job.

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