Generic Drug Pricing Taking A Bite Out Of Cardinal Health's Margins

Cardinal Health Inc (NYSE: CAH) is seeing continued margin contraction at its Pharma Distribution segment. An analyst at Argus thinks this trend would continue, pressuring the stock.

The Analyst & The Rating

Argus analyst David Toung downgraded his rating on shares from Buy to Hold.

The Thesis

Toung expressed concerns that price deflation for generic drugs will continue to pressure margins at the company. Margins at the company's Pharma Distribution was already on a downward course, falling for the eighth straight quarter in the fiscal year first quarter 2018, Toung noted.

"We think that Cardinal will continue to face headwinds from generic price deflation, which will in turn pressure profit margins," Toung said in a note.

Based on recent earnings reports and guidance both from generic manufacturers and pharma distributors, Argus expects generic deflation in the mid- to high-single digit range in 2018.

As such, the firm reaffirmed its 2018 earnings per share estimate of $5.08 but lowered its 2019 estimate from $5.60 to $5.55, after the company reiterated its 2018 adjusted earnings per share guidance of $4.80-$5.10.

The valuation of Cardinal Health reflects continued headwinds from generic price deflation, and accordingly a Hold rating is appropriate, Argus concluded.

The Price Action

Cardinal Health shares are down 21.1 percent in the year-to-date period, with the downward trajectory steepening since late October. The earnings release on Nov. 6 did little to revive sentiment toward the stock.

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