Cardinal Health (CAH, Financial) shares experienced a downturn, approaching their lowest levels since 2024, following the announcement that its lucrative distribution contracts with OptumRx (UNH, Financial) will not be renewed post-June. This development was particularly significant given the absence of updates from management since February, despite OptumRx's status as a major, long-standing client.
The termination of the OptumRx contract, valued at over $30 billion and essential for CAH in 2023, poses a considerable loss. Nonetheless, CAH has reaffirmed its adjusted earnings per share (EPS) forecast for FY24 at $7.20 to $7.35 and maintains its long-term profitability goals, including a 12-14% consolidated adjusted EPS compound annual growth rate (CAGR) and a 4-6% segment profit CAGR in its Pharmaceutical and Specialty Solutions segment.
Despite reiterating certain financial targets, CAH did not update its previous revenue growth projection of 10-12%. This omission likely leads analysts to revise their forecasts to reflect the anticipated revenue shortfall from the OptumRx contract expiration.
- OptumRx contracts accounted for 16% of CAH's FY23 revenue, predominantly benefiting its Pharmaceutical Distribution division. The loss of these contracts not only impacts this division significantly but also increases CAH's dependency on other major clients like CVS Health (CVS, Financial) and Kroger (KR, Financial).
- CAH's reiterated profitability targets may seem promising, but the OptumRx sales generated a lower operating margin compared to the overall Pharmaceutical and Specialty Solutions segment, diminishing their impact.
- Although CAH expects to maintain an average adjusted free cash flow of around $2.0 billion from FY24-FY26, the end of the OptumRx contract is likely to result in below-average adjusted free cash flow in FY25. This situation puts additional pressure on the financial performance in FY24 and FY26, potentially affecting the company's ability to increase or accelerate share repurchases as part of its $3.5 billion buyback program.
The expiration of the OptumRx contracts raises concerns among investors regarding CAH's future revenue growth, especially amidst other challenges like direct-to-consumer mail services and government regulations. However, as one of only three pharmaceutical distributors in the country, CAH is in a strong position to navigate through this period of uncertainty and volatility.
