Cardinal Health slides as Morgan Stanley says sell on Amazon risk
Shares of Cardinal Health (CAH) are sliding after Morgan Stanley analyst Ricky Goldwasser downgraded the stock to Underweight, a sell-equivalent rating, as he believes Amazon (AMZN) is looking to scale its medical supply distribution efforts and Cardinal's potential earnings risk from the e-commerce giant's effort is larger than its peers. Patterson (PDCO) and Henry Schein (HSIC) are also lower following Morgan Stanley's comments on Amazon's entry into healthcare. SELL CARDINAL HEALTH: In a research note to investors, Morgan Stanley's Goldwasser downgraded Cardinal Health to Underweight from Equal Weight, saying the company has an "outsized exposure" to Amazon risk compared to its peers. Recent hires and public statements make it clear that Amazon is looking to scale its medical supply distribution efforts by deepening existing infrastructure and relationships with hospitals, the analyst contended, adding that it is only a matter of time until it competes head-to-head with primary source distributors such as Cardinal. Further, Goldwasser believes that Cardinal's potential earnings risk is still underappreciated despite the recent selloff. The analyst also lowered his price target on the shares to $51 from $72. AMAZON DISRUPTION OF HEALTHCARE: Meanwhile, Morgan Stanley's U.S. Internet and Healthcare teams collaborated on a report exploring Amazon's entry into healthcare, stating that it will likely take time but that the e-commerce giant's "disruption of healthcare is a foregone conclusion." Healthcare distribution, encompassing medical, dental and drug distributors, drug retailers, and pharmacy benefit managers, has the best fit with the Amazon playbook, the firm contended, adding that manufacturing and specialty players look insulated but may invite Amazon to disintermediate distribution. While retail plays to Amazon's strengths with the highest profits and lowest barriers to entry, retailers like CVS (CVS) and Walgreens (WBA) have the most opportunities to adjust their business models and lower costs to defend against Amazon, the teams told investors. Medical supply and Life Sciences distribution are "less rich" targets, but look like "low-hanging fruit," the analysts added. Morgan Stanley noted that Cardinal Health has the most exposure via its medical supply distribution segment, while McKesson (MCK) also has some, but less, risk. AmerisourceBergen (ABC), which does not distribute medical supplies, remains immune in the near-term, the firm concluded. Others in healthcare distribution facing the most share and/or margin risk from Amazon include Thermo Fisher (TMO), Henry Schein and Patterson, the team of analysts pointed out. Overall, Morgan Stanley envisions Amazon entering the supply chain in four phases, namely opening a retail pharmacy and establishing an infrastructure, contracting with generic manufacturers, building relationships with branded manufacturers, and building out claims processing capabilities. In this scenario, the e-commerce giant could transform the drug supply chain, unlocking savings for patients and plan sponsors while putting drug retailer, distributor, and PBM profit pools at risk over time, the analysts added. PRICE ACTION: In morning trading, shares of Cardinal Health have dropped 3.5% to $55.53, while Patterson has slipped about 3% and Henry Schein has slid more than 2%.