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Cardinal Health’s turnaround evident to credit rating agencies

Credit rating agency Standard & Poor’s has revised its outlook for Cardinal Health Inc. (NYSE: CAH) to “positive” from “stable” and maintained its corporate credit rating — a nod to the Dublin, Ohio, company’s continuing turnaround. Drug and medical product distributor Cardinal Health got a similar acknowledgment from Moody’s Investors Service in May when that […]

Credit rating agency Standard & Poor’s has revised its outlook for Cardinal Health Inc. (NYSE: CAH) to “positive” from “stable” and maintained its corporate credit rating — a nod to the Dublin, Ohio, company’s continuing turnaround.

Drug and medical product distributor Cardinal Health got a similar acknowledgment from Moody’s Investors Service in May when that rating agency revised its outlook to “stable” from “negative.”

Both agencies cited Cardinal Health’s better-than-expected cost savings and profit margins at a time when the company is dealing with operating challenges such as renewing contracts with its largest customers, absorbing lower prices from new customers and spinning off its CareFusion clinical and medical products division a year ago.

In June when Ohio’s largest corporation said it would buy Healthcare Solutions Holding LLC for $517 million in cash with the potential of paying another $150 million over three years, Moody’s Baa3 long-term rating on the company’s debt didn’t waver. Neither did S&P’s BBB+ corporate credit rating. Cardinal completed the Healthcare Solutions acquisition today.

Standard & Poor’s said its ratings reflect Cardinal Health’s “important position as one of the three largest drug distributors, its exceptional liquidity and its history of maintaining a modest financial risk profile.”

Ongoing challenges for Cardinal are its “dependence on large customers, the need to restore and build relationships with independent pharmacies, and generic drug price deflation,” Moody’s said in its May report.

In March, seven Medicine Shoppe and Medicap independent pharmacy franchise owners sued Cardinal Health and its two franchising companies, seeking to undo agreements renegotiated last year through Cardinal’s “heavy-handed ways” and “predatory pricing on pharmaceuticals.” Cardinal Health said the claims have no merit.

The lawsuit came when Cardinal was beginning to see positive results from an operational turnaround that included paying $34 million to settle Drug Enforcement Agency claims that it filled fake prescriptions, strengthening its nuclear medicine program and reorganizing its retail pharmacy franchise model.

The company’s financials are turning around, too. In late January, Cardinal Health beat security analysts’ earnings expectations for the second fiscal quarter and raised its own earnings expectations for fiscal 2010.

Despite a mediocre fiscal third quarter, the company again raised its earnings expectations to between $2.15 and $2.20 a share, after projecting a range of $2.08 to $2.18 in January. The company expects to announce fiscal fourth quarter and fiscal 2010 earnings on Aug. 5.

Standard & Poor’s sees more strategic acquisitions, as well as stock buybacks, in Cardinal Health’s future. The agency also said it would consider upgrading the company’s credit ratings over the next two years if it “operates without any significant operating surprises while maintaining its existing modest financial risk profile.”

Cardinal Health shares were down 6 cents to $35.63 in late afternoon trading on the New York Stock Exchange.