McKesson (MCK) Beats On Q1 Earnings, Maintains Guidance

McKesson Corporation (NYSE:MCK) reported first-quarter fiscal 2017 (ended Jun 30, 2016) earnings of $3.50 per share, higher than both the Zacks Consensus Estimate of $3.35 and the year-ago figure of $3.14.

Revenues increased 4.6% from the year-ago quarter to $49.7 billion but failed to meet the Zacks Consensus Estimate of $50.1 billion.

All growth rates given below are on a year-over-year basis.

The Quarter in Detail

McKesson operates through two segments: Distribution Solutions and Technology Solutions.

Revenues from the Distribution Solutions business grew 4.7% to $49.0 billion. North America pharmaceutical distribution and services increased sales of $41.2 billion, up 4.2%, reflecting market growth, acquisitions and customer mix across the retail, institutional and independent channels. Revenues from International pharmaceutical distribution and services were up 8.4% to $6.3 billion driven by acquisitions and market growth. Medical-Surgical distribution and services generated sales of $1.5 billion, up 2% backed by the sale of ZEE Medical in the second quarter.

However, revenues from the Technology Solutions business declined 1.6% to $724 million due to the divestiture of the nurse triage business and an anticipated decrease in the hospital software business. McKesson has collaborated with Change Healthcare Holdings to create a new healthcare information technology company. McKesson will offer majority of its Technology Solutions businesses for the new company. It will, however, retain RelayHealth Pharmacy and Enterprise Information Solutions. McKesson’s Technology Business has been facing challenging conditions for quite some time now as revenues continued to decline. Hence, a spin-off of the business was around the corner as the company was looking to focus on its core distribution business. The company is also evaluating strategic alternatives for its Enterprise Information Solutions business.

Fiscal 2017 Outlook Reiterated

McKesson expects earnings in the range of $13.43–$13.93 per share. The guidance excludes approximately 12–15 cents of expected charges related to the cost alignment plan. The company expects revenues from the Distribution Solutions to grow in the high single digits. The company expects a nominal contribution from increase in price of generic pharmaceuticals. Branded pharmaceutical pricing trends are expected to be modestly below the fiscal 2016 levels. The company anticipates foreign exchange impact of approximately 10 cents per share during fiscal 2017.

Our Take

McKesson reported mixed results for the fiscal first quarter, with earnings surpassing estimates but revenues missing the same.

McKesson’s acquisitions of Biologics, Vantage Oncology and UDG Healthcare have strengthened its portfolio to a large extent. The impending Rexall transaction (scheduled to close later in 2016) will further strengthen the company’s portfolio.

However, the operating performance of Celesio was disappointing. Management stated that while scheduled reimbursement cuts were expected, there were more unanticipated cuts made effective by the UK government in April and June. These cuts impacted the first quarter and continue to do so through the rest of the year. The UK’s decision to exit the EU will also impact reimbursement results. Weaker generic pricing trends will significantly impact the first half of fiscal 2017.

McKesson currently carries a Zacks Rank #2 (Buy). Other favorably placed stocks in the healthcare sector include AmerisourceBergen Corporation (NYSE:ABC) , Johnson & Johnson (NYSE:JNJ) and Bristol-Myers Squibb Company (NYSE:BMY) . All the three stocks carry the same rank as McKesson.