{LONGTERMINVESTORS} India Pharma-Price Deflation Sets In (Jubilant, Claris, Sun, Dishman To Get Hit)-BOAML

Customer price pressure reinforced, but more quantifiable Perhaps the biggest takeaway from CAH's earnings cc was acknowledgement from mgmt. that they were also witnessing an acceleration in price aggression (similar to MCK) from some competitors, particularly in relation to independent retail customers. CAH suggested one primary reason why the impact to themselves may not have been as negative as it was for MCK (as discussed last week) is that CAH simply may have had less independent retail GPO customer contracts up for renewal in the qtr than MCK (Neutral, $124.3). That being said,

 CAH said they were still seeing some pressure on pricing on "generics only" with some existing customers on the portion of Rx volume that is not mandated under primary wholesaler contracts (i.e the 'tiered' part where generic buying 'compliance' is critical for customers, as pricing will change depending on whether 70%/80%/90% or more of generics are purchased from the primary wholesaler). CAH seems well-equipped to deal with this given Red Oak JV (no cost disadvantage vs. peers). 

CAH 'doesn't have a ton of upcoming customer renewals' As discussed in our note this morning, the majority of CAH's EPS guidance reduction was related to generic pricing instead of brand pricing, but no quantification was provided. CAH also did not break down how much of the reduction was related to soft generic 'mfr' pricing vs. generic 'customer' pricing (like MCK did), but overall it seemed to us CAH likely did not lose customers due to pricing, but just some volume. 

From here, it seems positive that CAH mentioned it 'does not have a ton of RFP activity' over the next few years. CAH now sees +0-3% EPS coming from business growth (vs. +3-6% prior), and +3-4% from capital deployment (vs. +2-3% previously). We are encouraged that CAH still aspires to +10-15% EPS growth beyond the +3-7% expected growth in FY17. Trim FY17 EPS a little further, mainly on F2Q guidedown To reflect customer pricing and F2Q drug EBIT 'down as much as F1Q', we trim our FY17 EPS a little more from $5.57 to $5.47 (in the context of new $5.40-5.60 guidance). Full guidance details on pg 3. Same $80 PO on lower CY17 EPS of $5.75 (was $5.86). Reiterate Neutral due to our view drug pricing will remain an industry overhang this year.

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