Cowen Downgrades Cardinal Health, McKesson Amid Limited Near-Term Growth Drivers

Cowen & Company’s Charles Rhyee downgraded the ratings for Cardinal Health Inc CAH and McKesson Corporation MCK from Outperform to Market Perform, citing continued headwinds from declining generic introductions and reversal of generic inflation to deflation.

Analyst Charles Rhyee noted that drug distributors had benefited significantly from the introduction of newer generics over more than 15 years. This wave of generic introductions is now expected to end shortly, resulting in a deceleration in benefits in 2016, and its conversion into a headwind in 2017 and thereafter.

Rhyee expects the rate of generic penetration to decelerate as well in the near future. He commented, “Additionally, we don't expect generic inflation to return anytime soon given the FDA's recent clearance of the ANDA backlog, which we don't think will accumulate again.”

Drug distributors are expected to continue benefiting, however, from the growth of specialty drugs, capital deployment and generic procurement, although these factors are unlikely to offset the decline in benefits from generic introductions, the analyst mentioned.

Cardinal Health

The price target for Cardinal Health has been reduced from $99 to $90. Rhyee expects the company to continue benefiting from generic procurement, especially the “onboarding of OCR and TGT generic volumes.”

Cardinal Health is the least dependent among all distributors. The company’s Medical strategy is expected to prove successful over time and represent a greater portion of its operating profits. The analyst added that the company’s China business is expected to emerge as a major profit contributor.

McKesson

The price target for McKesson has been reduced from $208 to $173. The company’s stock valuation is compelling relative to its peers, but there are limited near-term catalysts apart from out-of-the-box M&A.

Management expects capital deployment to drive y/y adjusted EPS growth of 3-4 percent in FY17. The company has decided to pursue acquisition as a means of deploying capital, Rhyee added.