Feb 19 - Fitch Ratings has assigned a 'BBB+' rating to Cardinal Health,
Inc.'s $1.3 billion proposed senior unsecured notes. Proceeds will be used to
fund a portion of the acquisition of AssuraMed, Inc. (AssuraMed). A full list of
Cardinal's ratings is provided at the end of this release. The ratings apply to
approximately $2.9 billion of debt at Dec. 31, 2012.
KEY RATING DRIVERS
-- Planned funding for the proposed AssuraMed acquisition is appropriate for
Cardinal's 'BBB+' rating;
-- Addition of AssuraMed is strategically sound, and Fitch expects the
acquisition to bolster Cardinal's intermediate-term growth outlook;
-- Steady pharmaceutical demand and oligopolistic market position support stable
operating profile, profit margins, and core cash flows;
-- Profitability improvements due to branded-to-generic conversions have been
robust, with another sizeable round of generic conversions expected in calendar
-- Liquidity is solid and cash flows are strong.
INCREASED DEBT LOAD APPROPRIATE FOR 'BBB+' RATINGS
Planned funding for the approximately $2.07 billion acquisition of AssuraMed
will be provided by $1.3 billion of new debt and approximately $770 million of
cash on hand. Fitch expects pro forma debt leverage (total debt-to-EBITDA),
based on Dec. 31, 2012 figures, to approach 1.7x. This figure represents the
upper end of the range Fitch deems appropriate for Cardinal's 'BBB+' ratings.
Subsequent deleveraging will be the result of EBITDA growth, driven primarily by
generic conversions and growth in the higher-margin AssuraMed business, and the
repayment of $300 million of debt due in June 2013.
Steady pharmaceutical demand and the oligopolistic nature of the healthcare
distribution industry contribute to exceptionally stable operating profiles for
Cardinal and its peers. Cardinal's profit margins have grown significantly in
recent years, owing primarily to an unprecedented wave of generic conversions
and improved customer mix. Fitch forecasts EBITDA margin expansion of
approximately 30 basis points (bps) in Cardinal's fiscal 2013, mostly due to the
loss of the lower-margin Express Scripts contract effective Oct. 1, 2012.
Material margin expansion will also result from another round of generic
conversions in calendar 2014 and 2015.
STRATEGICALLY SOUND, INTERMEDIATE-TERM GROWTH DRIVER
AssuraMed is a leading provider of medical-surgical distribution services to
home health customers. As such, the proposed deal allows Cardinal to gain
immediate and significant exposure to the fast-growing home healthcare industry,
which it currently lacks. The addition of AssuraMed could also aid Cardinal's
efforts to increase its exposure to other types of healthcare delivery (e.g.
physician offices and other post-acute care) that require the delivery of
smaller medical-surgical product units.
Fitch expects the AssuraMed business to continue to benefit from the rapid
growth of the home healthcare industry attributable to the aging U.S. population
and to payors' search for less costly methods of healthcare delivery. This view
is further supported by AssuraMed's relative scale, which will become even more
significant as a business unit of Cardinal. Significant synergies are expected
due to product portfolio overlap, Cardinal's stronger negotiating stance with
suppliers, and the ability to consolidate certain logistic, delivery, and other
Fitch has noted its concern regarding Cardinal's lagging position in U.S.
specialty pharmaceutical distribution and the resulting lack of a sufficient
intermediate-term growth driver. Despite recently reported strong growth in
Cardinal's specialty distribution business, Fitch estimates that Cardinal still
holds less than 5% of the specialty distribution market in the U.S., compared to
approximately 55% and 25% by AmerisourceBergen Corp. and McKesson Corp.,
respectively. Though not fully alleviating this concern, the proposed
acquisition of AssuraMed could represent a material driver of profits growth in
the intermediate term.
STRONG CASH FLOWS, SOLID LIQUIDITY
Fitch expects strong funds from operations and free cash flow of approximately
$1.5 billion and $400 million, respectively, in fiscal 2013. Fitch notes that
cash flows will be somewhat depressed by a negative working capital impact from
the Express Scripts contract loss and from certain tax settlements in fiscal
Fitch expects Cardinal to maintain a solid liquidity profile subsequent to the
transaction. Liquidity at Dec. 31, 2012 was provided by $2.26 billion of cash on
hand and an undrawn $1.5 billion unsecured revolver due 2016. Cardinal also
maintains a $950 million accounts receivable securitization facility due 2014.
Long-term debt maturities are as follows: $300 million in fiscal 2013, $500
million in 2015, $787 million in 2017, and $1.07 billion thereafter.
The increased debt load resulting from the proposed transaction will limit
Cardinal's flexibility at its current 'BBB+' ratings. Maintenance of a 'BBB+'
Issuer Default Rating (IDR) will require debt leverage generally maintained
between 1.2x and 1.7x, accompanied by continued robust cash flows and stable or
growing margins over the ratings horizon.
An upgrade to 'A-' will require the company to demonstrate a commitment to
operating with debt leverage below 1.2x-1.3x, combined with evidence of the
successful integration of AssuraMed and an overall improved intermediate-term
growth outlook. A sustained commitment to Cardinal's core U.S. drug distribution
business, especially in light of several recently added areas of growth, will
also be necessary to support the consideration of an upgrade.
A downgrade to 'BBB' could result from an additional leveraging transaction that
pushes debt leverage to above 1.7x for more than 12-18 months. Debt-funded
shareholder-friendly activities could also precipitate a negative rating action.
Evidence or anticipation of material pricing pressure greater and more direct
than currently expected would also pressure ratings.
Fitch rates Cardinal as follows:
-- Long-term IDR 'BBB+';
-- Short-term IDR 'F2';
-- Senior unsecured bank facility 'BBB+';
-- Senior unsecured notes ratings 'BBB+';
-- Commercial paper rating 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-- 'Corporate Rating Methodology' Aug. 8, 2012;
-- 'Short-term Ratings Criteria for Non-Financial Corporates' Aug. 8, 2012;
-- 'U.S. Healthcare Stats Quarterly - Third Quarter 2012' Jan. 8, 2013;
-- 'Fitch Affirms Cardinal Health at 'BBB+', Outlook Revised to Stable' Nov. 6,
-- 'Fitch: Express Scripts Contract has Moderate Effect on ABC & Cardinal's
Credit Profiles' Aug. 1, 2012
-- 'Navigating the Drug Channel - Distributors: A Deeper Dive' March 13, 2012;
-- 'Fitch: Cardinal Health's Ratings Not Immediately Affected by DEA License
Suspension' March 2, 2012.
Applicable Criteria and Related Research:
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
U.S. Healthcare Stats Quarterly - Third-Quarter 2012
Short-Term Ratings Criteria for Non-Financial Corporates
Corporate Rating Methodology