Medtronic plc is set to sell its patient care, deep vein thrombosis and nutritional insufficiency businesses within the Patient Monitoring & Recovery (PMR) division of its Minimally Invasive Therapies Group to Dublin, Ohio-based Cardinal Health Inc. for $6.1 billion. The transaction could close sometime by the end of Medtronic's second fiscal quarter in October.
Combined, the businesses expected to be divested in the transaction generated about $2.4 billion in revenue over the last four reported quarters. Among the product lines included in the transaction are the company's dental/animal health, chart paper, wound care, incontinence, electrodes, Sharpsafety, thermometry, perinatal protection, blood collection, compression, and enteral feeding offerings. The transaction also will include 17 dedicated manufacturing facilities.
Dublin-based Medtronic will retain its Respiratory & Monitoring Solutions business, which includes its airway, ventilators, monitors, sensors and health informatics product lines, as well as its Renal Care Solutions business, both of which are within its PMR division.
Medtronic obtained much of the PMR division when its $43 billion acquisition of Covidien plc closed in 2015. (See Medical Device Daily, Jan. 27, 2015.)
"Ultimately, we came to the conclusion that these products – while truly meaningful to patients in need – are best suited under ownership that can provide the investment and focus that these businesses require," said Omar Ishrak, Medtronic's president and CEO. "At the same time, we can put these proceeds to work, investing over the long-term in higher returning internal and external opportunities that are more directly aligned with our growth strategies of therapy innovation, globalization and economic value."
Cardinal Health distributes some of the incoming businesses' products and has been collaborative partners with the leadership of the business.
"Given the current trends in health care, including aging demographics and a focus on post-acute care, this industry-leading portfolio will help us further expand our scope in the operating room, in long-term care facilities and in home health care, reaching customers across the entire continuum of care," said George Barrett, Cardinal Health chairman and CEO.
A HIGHLY FAVORABLE DEAL FOR MEDTRONIC
Medtronic said it plans to use $1 billion of the proceeds for share repurchases in fiscal 2018, with the remainder slated for debt reduction.
The transaction with Cardinal Health is expected to result in dilution on a net basis to Medtronic's fiscal year 2018 non-GAAP earnings per share (EPS) in the range of about 12 cents to 18 cents with the exact amount primarily dependent on the closing date of the transaction.
Larry Biegelsen, a Wells Fargo analyst, said the divestiture "better positions Medtronic to achieve its goal of mid-single-digit top-line growth, while allowing the company to focus on higher return opportunities."
Cardinal Health plans to issue long-term debt to finance the transaction and has obtained a commitment letter from Goldman Sachs Bank USA and Goldman Sachs Lending Partners LLC to provide a $4.5 billion unsecured bridge loan.
Joshua Jennings, an analyst for Cowen and Co., said the acquisition isn't surprising and noted the deal was favorable for Medtronic.
"We think that, despite the associated EPS dilution, the divestiture will provide Medtronic with balance sheet flexibility to pursue higher-growth initiatives that are more in line with its current focus," Jennings said. "Given investors' scrutiny of Medtronic's top-line growth in recent quarters, we view this latest move as strategically sound and think it will be well received by shareholders."
The acquisition comes a few months after Medtronic revealed strong sales in its most recent earnings, distancing itself from previous bleak quarters. (See Medical Device Daily, Feb. 23, 2017.) The company's revenue grew about 6 percent during the three months ending on Jan. 27 compared to the same period last year. Strong sales also boosted Medtronic's adjusted income up 3.3 percent to $1.5 billion, on total sales of $7.28 billion during the quarter.
TOUGH DAY AT THE OFFICE
The acquisition comes hot on the heels of Cardinal Health updating its fiscal guidance. The company said it sees fiscal 2017 EPS at the low end of earlier guidance of $5.35 to $5.50 – a proclamation that caused shares to plummet as much as 11 percent on Tuesday. Even its rivals, San Francisco-based Mckesson Corp. and Chesterbrook, Pa.-based Amerisourcebergen Corp. saw shares dip about five percent throughout Tuesday.
Shares of Cardinal Health (NYSE:CAH) closed at $72.39.
Cardinal Health executives said the weaker EPS is a result of drug distribution going through a challenging phase as the industry continues to see a decline in the number of branded drugs going generic.
Charles Rhyee, a Cowen and Co. analyst, said the acquisition fits well with Cardinal and helps it diversify its business away from pharmaceutical distribution.
"But to fully benefit from the diversification, we need to see stabilization in the macro environment for drug distribution, which appears to be on the horizon but is further out than we had expected," Rhyee said.
Cardinal Health made a huge step toward expanding beyond drug distribution markets about two years ago when it revealed it would acquire New Brunswick, N.J.-based Johnson & Johnson Corp.'s Cordis unit for $1.9 billion (See Medical Device Daily, March 3, 2015.) The transaction gave the company greater access to the cardiovascular and endovascular markets.