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Cardinal Health Shows off Chinese Growth Engine

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Healthcare services and pharmaceuticals distributor Cardinal Health, Inc. (NYSE:CAH) reported a 16 percent growth in its second quarter profits – well ahead of street expectations – but what caught many by surprise was the company’s revelation that it made six acquisitions in China.

This is significant as top line growth of the company has been facing stagnation lately amid a flurry of lower-priced generic drugs. The firm’s worldwide business generated $25.2 billion during the quarter, down from $27 billion in the same period last year. Profits however jumped to $303 million, up from $262 million, a year earlier.

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This financial performance, at first glance, can be dismissed as a fluke with a counterargument that long-term trend of declining revenues will eventually squeeze profits.

To an extent, this argument is true for many of Cardinal’s competitors including McKesson Corporation (NYSE:MCK) and AmerisourceBergen Corp. (NYSE:ABC).

However, beneath the surface, positives are plentiful for Cardinal Health. The firm’s CFO Jeffrey Henderson briefed that four acquisitions have been completed while two are awaiting government approvals. Combined transaction size of the deals would be around $120 million. Revenues in China are growing at a strong rate – north of 35 percent– effectively compensating for the smaller base.

Cardinal Health, Inc.’s (NYSE:CAH) operations in the Asian country aren’t very old as the company started in November 2010 with a big acquisition of pharmaceuticals distributor Yong Yu.

What the company is currently trying to achieve through smaller, multiple buyouts is to boost its geographical coverage in China’s market. Cardinal’s exploits in China indicate the growing demand for personal healthcare in Asia.

This is a market where patients still purchase around 80 percent of their medicines directly from hospitals rather than pharmacies; but with growing income levels, consumers are willing to pay for consumer medicines and are showing immense trust in foreign brands.

The icing on the cake –margins are better too, as competition for foreign brands is less. Although Henderson did not quantify profits of its Chinese operations, he indicated margins are indeed higher that in the U.S.

While Cardinal is making steady inroads in the Chinese market and its efforts are meeting with some success too, the transition has almost gone unnoticed by its U.S. competitors. Instead, its competitors continue to plough resources in the United States.

A few months ago, Cardinal Health, Inc.’s (NYSE:CAH) larger peer McKesson Corporation (NYSE:MCK) announced its plans to acquire PSS World Medical for $1.62 billion.

This is no wonder that McKesson missed analyst expectations when it announced quarterly results earlier this month. Not to suggest that the U.S. market is dead but it is certainly stagnating and with no exposure to growth markets such as China, McKesson is not placed very favorably.

Another competitor – AmerisourceBergen Corp. (NYSE:ABC) – has no presence in China. While AmerisourceBergen managed a strong showing with the latest financial performance and appears to be in a better shape than McKesson, its absence from China is somewhat baffling.

AmerisourceBergen Corporation too bought a number of companies in the U.S. last year including TheraCom and World Courier. Both McKesson Corporation and AmerisourceBergen Corporation are priced steeply when compared to Cardinal – in terms of historical earnings as well as forward earnings. In addition, Cardinal’s undervaluation is also reflected in its higher dividend yield compared to other two.

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