Less than six years after acquiring Cordis Corp. from Johnson & Johnson, Cardinal Health Inc. is selling the troubled cardiovascular device manufacturer to private equity firm Hellman & Friedman LLC for roughly $1 billion. Shares of the medical products and drugs distributor (NYSE:CAH) were up 2.93% to $57.35 at close on Friday.
Cardinal Health bought Cordis from J&J for $1.9 billion in October 2015, but the merger was plagued by integration problems. In 2019, Cardinal investors sued Cardinal alleging the Dublin, Ohio-based company misled shareholders about the integration issues as well as the benefits of the acquisition.
On Friday, Mike Kaufmann, Cardinal’s CEO, said the decision to divest Cordis would allow Cardinal Health to focus its resources in “strategic growth areas where we are an advantaged owner.” He stressed that the company remains committed to its medical distribution and global medical products businesses.
Cuts medical segment profit by $60M+
Kaufmann didn’t offer any additional insight into the decision to sell Cordis, but in a March 9 investor call with Barclays Bank plc, the exec noted Cardinal has $1.4 billion of debt coming due in fiscal 2022. “Our goal would be to continue to retire that debt as part of our overall balance sheet improvement,” he said.
During the call with Barclays, he also said Cardinal will be looking at “repo and M&A,” including beneficial tuck-in acquisitions.
The sale is expected to reduce Cardinal’s medical segment profits by about $60 million to $70 million on an annual run-rate basis. While most assets and liabilities associated with the Cordis unit will transfer to H&F following the close of the deal, Cardinal will retain full authority for lawsuits related to inferior vena cava filters in the U.S. and Canada.
Cardinal’s medical segment had revenue of $15.4 billion in fiscal year 2020, down slightly from $15.6 billion the prior year. The segment includes a wide range of products, including exam and surgical gloves, needles and syringes, compression, wound care, fluid suction and collection systems, urology and cardiovascular and endovascular, among others.
Product liability lawsuits
In July 2020, the company was named as a defendant in 334 product liability lawsuits coordinated by in Alameda County Superior Court in California involving claims by roughly 4,280 plaintiffs alleging injuries associated with the use of Cordis’ Optease and Trapease inferior vena cava (IVC) filter products. An additional 31 lawsuits involving similar claims are pending in other jurisdictions, according to Cardinal’s FY 2020 annual report.
The litigation has been costly for Cardinal. As of June 2020, the company had a “total of $468 million, net of estimated insurance recoveries, accrued for losses and legal defense costs related to the Cordis IVD filter lawsuits,” the report says. The company estimated a high-end range of about $919 million.
According to a Form 8-K detailing today’s deal, the SEC subpoenaed Cardinal in February requesting documents from 2015 to 2019 relating to inventory in the Cordis business, among other matters. The company said it is cooperating with the inquiry, but did not provide any details.
Pre-tax loss of up to $120M
Cardinal will classify the Cordis business as held for sale, resulting in an expected pre-tax loss of up to $120 million in the third quarter of fiscal year 2021. The company also anticipates up to $125 million in costs associated with the plan.
“Cordis has a long history of innovation in minimally invasive cardiovascular technology, and we are confident that with H&F as its owner, Cordis will be well-positioned for growth, innovation and success,” Kaufmann said.
Duke Rohlen, CEO of Ajax Health and Zeus Health, partners to H&F in the transaction, and executive chairman-designate of Cordis and CEO of Cordis Accelerator, expressed his enthusiasm for the deal.
“We at Ajax Health and Zeus Health are ecstatic about injecting growth into Cordis’ powerful platform and will do so through investments in the core business and through an independent R&D engine – the Cordis Accelerator – to develop and commercialize a new pipeline of Cordis products,” he said. “We see an unparalleled opportunity to partner with both existing Cordis leadership and H&F to combine a best-in-class innovation engine with a strong and robust commercial chassis.”
Ajax Health and Zeus Health are both located in Menlo Park, Calif., not far from Cordis’ Santa Clara headquarters.
The transaction is expected to close in the first half of Cardinal’s FY 2022, pending regulatory approvals.