RegulationAugust 9, 2019

Louisiana Pension Sues Cardinal Health over Cordis Acquisition

Class action suit alleges company misrepresentations led to ‘artificially inflated’ share prices.

Reported by Michael Katz

The Louisiana Sheriffs’ Pension & Relief Fund has filed a securities class action lawsuit against health care company Cardinal Health, and certain of its senior executives, alleging they misled investors with misrepresentations and omissions relating to the company’s 2015 acquisition of medical device manufacturer Cordis Corp.

In March 2015, Cardinal Health announced plans to acquire Johnson & Johnson’s Cordis business, a manufacturer of cardiology and endovascular devices, for over $1.94 billion in cash. At the time, the company said it expected the acquisition to be increasingly accretive thereafter, and assumed synergies would exceed $100 million annually by the end of fiscal 2018.

Lawyers for the pension fund allege Cardinal misrepresented and omitted information relating to the company’s integration of Cordis Corp. The complaint alleges that the company and some of its executives misled investors by stating that Cordis would benefit from Cardinal’s advanced inventory management and supply chain information technology solutions.

The complaint also accused the defendants of falsely representing that the company properly “reserved for inventory obsolescence” and that “inventories presented in the consolidated balance sheets [were] net of reserves for excess and obsolete inventory.”

The suit says that as a result of these misrepresentations, Cardinal shares traded at artificially inflated prices throughout the class period, which is from March 2, 2015, through May 2, 2018.

“The first indication that Cardinal had misled investors came on Aug. 2, 2017, when the company reported weak earnings for its fourth quarter and fiscal year 2017 and lowered its earnings guidance for fiscal year 2018,” says the complaint. “Defendants blamed these disappointing earnings on ‘higher-than-planned write-offs for excess inventor’ at Cordis.’”

The suit says the company further explained that the cost of moving manufacturing and standing up Cordis’s back-office services had been more expensive than Cardinal had anticipated. However, the complain adds that during the Aug. 2, 2017 earnings call, the defendants attempted to downplay concerns about Cordis.

“Despite defendants’ attempt to soften Cordis’s poor performance,” says the complaint, “the price of Cardinal stock declined from a closing price of $77.33 per share on August 1, 2017, to a closing price of $70.99 per share on August 2, 2017, or over 8%.”

As of the writing of this article, shares of Cardinal Health were trading at $42.20 a share.

The complaint goes to say that company continued to release confirmatory information regarding higher-than-expected costs and inventory issues at Cordis. For example, on May 3, 2018, it says Cardinal announced disappointing results for its third quarter fiscal year 2018 and cut its fiscal year 2018 earnings guidance, explaining that the “biggest variable driving these results” was the “disappointing performance” of the Cordis business.

The lawsuit argues that contrary to the company’s prior statements that it had visibility into Cordis’s inventory and that the company properly reserved for obsolete inventory, “the company revealed that after launching a new global supply chain IT platform over the last quarter at Cordis, it discovered millions of dollars of unsellable and expired heart stents and catheters stationed overseas that had to be written off.”