Cardinal Health to Lose OptumRx Contracts, Shares Drop 6%

Cardinal Health Loses OptumRx Contracts, Shares Drop 6%

In a surprising turn of events, Cardinal Health announced on Monday that its contracts with UnitedHealth Group’s OptumRx, one of its largest customers, will not be renewed after they expire at the end of June. This news sent the drug distributor’s shares down about 6%, causing concern among investors and analysts.

Analysts speculate that rival McKesson may be the beneficiary of Optum’s contracts, although McKesson has not yet responded to requests for comment. The loss of the Optum contracts came as an “unexpected disappointment,” according to Leerink Partners analyst Michael Cherny. However, he believes that Cardinal Health will be able to recover from this setback through strategies such as buybacks, deals, cost cuts, and acquiring new customers.

The Optum contracts, which were initially signed in 2015, accounted for 16% of Cardinal’s total revenue in fiscal year 2023. Despite this significant contribution, the majority of the shipments consisted of non-specialty medicines, according to Cardinal Health. The company is now looking to offset the impact of losing the Optum contracts by focusing on customer additions and growth in its more profitable specialty pharmacy business.

Cardinal Health is banking on the sales of high-priced specialty medicines to make up for the loss of the Optum contracts. These medicines are used to treat diseases such as cancer and rheumatoid arthritis. However, the company’s medical devices distribution unit is facing challenges such as rising transportation and labor costs, as well as supply constraints.

As a result of losing the Optum contracts, Cardinal Health anticipates lower adjusted free cash flow in fiscal 2025. EvercoreISI analyst Elizabeth Anderson estimates that this loss could impact Cardinal’s 2025 profit by 45-50 cents. Despite these challenges, Cardinal has not yet provided guidance for its fiscal 2025, which ends in June 2025.

Cardinal declined to provide further comment on the OptumRx contracts, and UnitedHealth did not respond to requests for comment. OptumRx is a pharmacy benefit manager that acts as an intermediary between insurers and drugmakers to negotiate the prices of prescription drugs.

Overall, the news of Cardinal Health losing its OptumRx contracts has raised concerns among investors and analysts, as the company looks to navigate this unexpected setback and find ways to mitigate the impact on its business moving forward.