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Cardinal Health falls on Walgreen nonrenewal

NEW YORK (AP) -- Shares of Cardinal Health dropped more than 7 percent on Tuesday after Walgreen said it is replacing the drug distributor in favor of an expanded supply deal with rival AmerisourceBergen.

THE SPARK: Drugstore chain Walgreen Co. said that AmerisourceBergen Corp. will replace primarily Cardinal Health Inc. in supplying pharmaceuticals. Previously, pharmaceutical wholesaler AmerisourceBergen had supplied only some specialty drugs for Walgreen. The agreement also gives Walgreen and Alliance Boots an ownership stake in AmerisourceBergen.

Shares of Walgreen, which also reported better-than-expected quarterly results, rose $2.52, or 5.9 percent, to $44.95 in morning trading, while AmerisourceBergen's stock gained $3.35, or 6.9 percent, to $51.65.

THE BIG PICTURE: Cardinal Health said Tuesday it has come up with strategies to help lessen the impact of Walgreen not renewing the contract, but it did not provide specific details. The contract is set to expire in August.

Sales to Walgreen made up about one-fifth of Cardinal Health's revenue in fiscal 2012.

Cardinal Health said that it does not expect its fiscal 2013 earnings to be hurt by Walgreen's decision, as the current deal with the drugstore chain is in place for all of fiscal 2013.

The Dublin, Ohio company anticipates fiscal 2014 adjusted earnings from continuing operations will be at least similar to its fiscal 2013 outlook for adjusted earnings between $3.42 and $3.50 per share. Analysts polled by FactSet expect 2014 earnings of $3.82 per share, on average.

THE ANALYSIS: George Hill of Citi Investment Research said in a client note that the deal is clearly a blow to Cardinal Health, as Walgreen was its second-biggest customer. The analyst said that the expanded supply agreement could be transformational for AmerisourceBergen, creating a wholesaler with the broadest global reach.

Lazard Capital Markets analyst Tom Gallucci lowered his rating on Cardinal shares to "Neutral" from "Buy." But the analyst also said in a note the loss of the Walgreen contract could free up capital that Cardinal could use toward a share repurchase. That may soften the impact from the Walgreen loss on Cardinal's earnings per share.

SHARE ACTION: Cardinal Health Inc.'s stock fell $3.40, or 7.4 percent, to $42.73 in afternoon trading. The shares have traded in a 52-week range of $36.91 to $47.23. For the year to date, the stock is up about 11percent.