Cardinal Health to buy N.Y. drug distributor Kinray for $1.3B

The acquisition of Kinray Inc. for $1.3 billion will allow Cardinal to significantly expand its retail business with independent pharmacies and offers the Dublin, Ohio-based company access to the lucrative New York metropolitan area market.

Cardinal Health Inc. (NYSE:CAH) has reached a deal to acquire New York-based pharmaceuticals distributor Kinray Inc. for $1.3 billion.

The acquisition will allow Cardinal to significantly expand its retail  business with independent pharmacies and offers the Dublin, Ohio-based company access to the lucrative New York metropolitan area market, according to a statement.

Privately held Kinray’s annual sales exceed $3.5 billion, and the company has more than 2,000 retail independent pharmacy customers. The deal expands Cardinal’s base of independent retail pharmacy cutstomers by 40 percent to about 7,000, according to the statement.

“Adding Kinray to the Cardinal Health Pharmaceutical Segment portfolio will enable us to build on our increasing presence in community pharmacy and accelerate our growth in this important channel,” said George Barrett, Cardinal’s CEO.

Cardinal estimated that the addition of Kinray would add about 12 cents to its non-GAAP earnings per share from continuing operations in 2012. Cardinal expects the deal to close by the end of this year or early next year.

Whitestone, New York-based Kinray bills itself as “the largest privately held distributor of pharmaceutical, generic, health and beauty, and home health care products in the world.”

Cardinal no doubt hopes the deal will be a shot in the arm for its pharmaceuticals segment, which saw it sales slide 1 percent last quarter to $22 billion. The company blamed the drop on reduced sales to existing bulk customers and contract terminations from two large customers.

However, it wasn’t all bad news for the company’s pharmaceuticals segment, as profits jumped 42 percent and sales of generics rose 19 percent. Perhaps most significantly for Cardinal, its margins in the segment expanded to 1.33 percent from 0.92 percent. Any increase in margin is a big deal for Cardinal, because the nature of its business is high volume and low margins.

Cardinal’s business model in the segment is to act as a middleman between pharmacies and drug companies — obtaining, repackaging, warehousing and distributing drugs to retailers. Because the company’s margins are so thin, scale and efficiency are key to its success. At the very least, the Kinray deal adds to Cardinal’s scale.

It’s likely that smaller, independent retailers like the ones Kinray serves will become increasingly important to Cardinal over time, according to Morningstar Inc. analyst Matthew Coffina.

“Larger customers have bargaining power over Cardinal, and have the scale to bring most procurement and distribution activities in-house if it would save them money,” Coffina wrote in a research note. “We think the consolidation trend will continue, which will further pressure [Cardinal’s] margins.”