Drug and medical supplies distributor Cardinal Health will spin off its medical device division this week, streamlining operations after more than a decade of diversified growth, a strategy which analysts say never quite panned out.
Beginning Tuesday, Cardinal's medical technology division will begin operating as a separate company called Carefusion, containing nearly two dozen device businesses that were acquired since the mid-1990s.
Wall Street analysts have almost unanimously approved of the plan, predicting both companies will report higher earnings after working through initial reorganization.
''Fundamentally, distributing pharmaceuticals and medical supplies is a completely different business from developing medical technology,'' says David Schlotterbeck, newly appointed chief of Carefusion. ''We really felt that because these two businesses are so different, they could each thrive more productively on their own.''
Carefusion's business, which had a fiscal 2009 profit of $448 million, focuses on drug infusion pumps, respiratory equipment and medication dispensing systems. The new company will be headquartered in San Diego.
The spinoff marks the end of Cardinal's long-term strategy of using cash from its core business to expand into faster growing health care segments - a strategy that has challenged other competitors in the drug distribution field.
Competitor AmerisourceBergen followed a similar path with its 2007 spin off of PharMerica, an institutional pharmacy that was originally acquired to broaden the company's services for hospitals and other health care facilities.
Beginning in 1996, Dublin, Ohio-based Cardinal began a steady series of purchases ranging from medical device companies to pharmaceutical packaging providers.
According to analyst John Kreger of William Blair & Co., the goal was to diversify revenue while cutting costs by combining administrative functions.
''I think the decision by management to spin off Carefusion is an admission that the synergies for creating this health care conglomerate never really materialized,'' Kreger says.
Analysts say the new Cardinal Health will be able to concentrate more on its core distribution business, after several high-profile stumbles in recent years.
In 2007 the company temporarily lost its license to distribute highly addictive medications in three states, after allegedly failing to report suspicious sales of controlled substances. The company ultimately paid $34 million to the Justice Department to settle the claims.
A few years earlier, the company weathered an accounting scandal after an internal review found Cardinal had been overstating earnings since 2000, which resulted in investor lawsuits, criminal investigations and the company's stock losing half its value.
''There have been some operational challenges,'' says Lazard Capital Markets analyst Tom Gallucci. ''You're now going to have a lot more focus from management on issues at hand, instead of dividing their attention between many businesses.''
In a recent note to investors, Gallucci said the company will face near-term pricing pressures but should be positioned for stronger earnings in the long term. He has a ''Hold'' rating on the stock.
Analysts are similarly optimistic for Carefusion, which represented less than 10% of Cardinal's revenue but nearly 40% of earnings. According to Jefferies analyst Richard Close, Carefusion has been hamstrung by Cardinal's distribution-focused business model, which did not heavily invest in research and development.
''For Carefusion it creates their own brand, a sizable company with very good products,'' Close says. ''And now they won't be weighed down with core distribution business.''
Analysts point out that several medical device companies have been successfully spun out of larger health care conglomerates in recent years, including Covidien, which was spun off from Tyco International in 2007, and Hospira, which spun off from Abbott Laboratories in 2004.