September 29, 2008 / 12:24 PM / 10 years ago

UPDATE 3-Cardinal to spin off medical products units

(Adds executive interview, stock close)

By Susan Kelly

CHICAGO, Sept 29 (Reuters) - U.S. drug wholesaler Cardinal Health Inc (CAH.N) on Monday said it would spin off its high-margin clinical and medical products businesses as a stand-alone medical technology company.

The company also said Chief Executive R. Kerry Clark, 56, would retire after the spinoff, and it reaffirmed its outlook for fiscal 2009.

Analysts said the spinoff would allow a slimmed-down Cardinal Health to focus on turning around its underperforming drug distribution business, while potentially attracting a higher stock valuation for the publicly traded stand-alone med-tech company.

“The clinical technology side is really the crown jewel,” said Jeff Jonas, portfolio manager at Gabelli Health and Wellness Trust Mutual Fund, which owns Cardinal shares. “So that would presumably get a much higher multiple in the market as a stand-alone company.”

He predicted the two entities, post-split, would have a combined valuation of $60 a share.

Shares of Cardinal Health, which initially reacted positively to news of the spinoff, fell $1.16, or 2.3 percent, to close at $48.54 on the New York Stock Exchange as declines in the broader stock market deepened.

Cardinal said Clark would be succeeded by George Barrett, 53, the company’s vice chairman and head of its health-care supply chain services unit.

Cardinal has struggled with declining revenue growth in its wholesale drug business due to increased pricing power of large U.S. drugstore chains such as CVS Caremark Corp (CVS.N) and a tougher environment for its generic drug business.

Cardinal competes with AmerisourceBergen Corp (ABC.N) and McKesson Corp (MCK.N) in the drug wholesale business, with the three distributing most of the drugs dispensed in the United States.

The company grew to its current size through a series of acquisitions, and the integration of those business has lagged, Barrett said in an interview.

“We will now have a business that is clearly and totally centered around improving the productivity and safety of health care through the supply chain,” Barrett said.

The spinoff, which the company said in August it was considering, is expected to be completed by mid-2009.

“While there is still considerable work to be done on Rx distribution, we believe this is a positive step in the right direction,” Deutsche Bank analyst Ross Muken said in a note to clients.

Cardinal named David Schlotterbeck, 61, who is head of its clinical and medical products group, to be CEO of the spinoff med-tech company, which will be based in San Diego.

Key medical products that will be part of the new company include the Alaris line of drug infusion pumps, AVEA and LTV respiratory ventilators and Pyxis automated drug-dispensing systems for pharmacies.

Cardinal Health will keep certain products made for the operating room, such as fluid management and surgical drapes and gloves.

The streamlined Cardinal Health would have fiscal 2009 revenue of more than $90 billion after adjusting for the spinoff, and the newly formed company would have revenue of more than $4 billion, the company said.

Cardinal reiterated its fiscal 2009 outlook for revenue growth of 6 percent to 7 percent and earnings from continuing operations of $3.80 a share to $3.95 a share, before special items.

The company also expects to continue its quarterly dividend of 14 cents per share until completion of the spinoff and to pay regular dividends afterward. (Reporting by Susan Kelly in Chicago and Esha Dey in Bangalore; Editing by Amitha Rajan, Gerald E. McCormick, Gary Hill)

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