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Investors love Cardinal Health's $1.3B acquisition of competitor Kinray

|Includes: Cardinal Health Inc. (CAH)

Investors showed their approval of Cardinal Health Inc.’s (NYSE:CAH) $1.3 billion acquisition of drug distributor Kinray Inc., bidding up Cardinal’s shares to their largest daily gain in a year-and-a-half.

Cardinal’s stock price closed up 6 percent Thursday at $36.56. Volume was more than double the average of the previous three months.

A JP Morgan & Co. analyst told Bloomberg news there’s good reason for investor euphoria about the purchase of Kinray, which distributes drugs to independent, community pharmacies around the New York metropolitan area.

“Investors should be happy,” Lisa Gill said. Community-based pharmacies “are much more profitable than retail chains, especially for generics. This improves Cardinal’s customer mix.”

It’s been a wonderful last month for Cardinal shareholders. The company’s share price has surged 14 percent since its Oct. 22 close. Cardinal has wildly outperformed the Dow Jones Industrial Average, which has gained just 0.4 percent over that same time frame.

Much of that climb was driven by a blog-fueled rumor that Cardinal was headed for a sale. In a highly unusual move, Cardinal responded to the market speculation and batted down the rumor, yet the stock strangely continued to climb — perhaps a signal that investors didn’t buy the company’s denial. A lackluster — but certainly not all bad — quarterly earnings report last month didn’t do much to stir investor enthusiasm.

Cardinal CEO George Barrett told Bloomberg the Kinray deal is important to the company because it expands Cardinal’s base of independent retail pharmacy customers by about 40 percent to 7,000.

The deal “will accelerate the earnings growth of our core business and give us the opportunity to expand margins,” Barrett said. “It will be a period of terrific growth in generics and we hope to participate quite fully.”

Cardinal’s generics business already is on the upswing, with sales jumping 19 percent last quarter.

While investors may not have believed Cardinal’s denial of its rumored sale, they seem to believe in the company’s future.

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