McKesson's Upcoming Earnings - Cardinal Health Harbinger?

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

McKesson Corporation (NYSE:MCK) reports Q4 2017 numbers on the 18th of May after the market close. McKesson has been very volatile after the last handful of earnings announcements, and I don’t expect this earnings announcement to be any different. There’s been a tremendous amount of pressure on the pharmaceutical supply chain players in terms of pricing competition and potential erosion of the pharmaceutical wholesaler model. Additionally, social and political pressures over drug pricing have exacerbated these issues to the point of fierce pricing competition and the slowing of drug price increases which negatively impacts McKesson’s ability to take larger dollar amount cuts from the volume of business. The pharmaceutical supply chain cohort started a nascent rally as of recent however Cardinal Health (CAH) threw cold water on this rally and sent the cohort lower after it reported in April. McKesson has missed its revenue numbers for five consecutive quarters. The stock sold off shapely as a result of its recent revenue miss, sliding 8.3% or $12.55 per share. McKesson has paid dearly for this string of revenue misses, shedding over $102 per share or 42.5% from its all-time highs in May of 2015 falling from $240 to roughly $138 as of its recent Q3 2017 miss (Figure 1). Will this time be different or did Cardinal Health serve as a potential proxy for McKesson’s quarterly numbers? McKesson has made a string of acquisitions over the past year, and the sentiment is negative therefore I feel if these already low expectations are not met, the stock will revisit the $130s. Conversely, if McKesson surprises to the upside, the stock could easily revisit the $150s.

Google Finance 12-month chart for McKesson
Figure 1 – Google Finance 12-month chart for McKesson

Pharmaceutical Supply Chain and Cardinal Health’s Proxy

The pharmaceutical supply chain cohort has been faced with an increasingly challenging healthcare landscape as political posturing, drug pricing scrutiny, overall negative sentiment towards pharmaceutical companies due to price gouging allegations and the overall rotation out of healthcare related stocks. McKesson was faced with drug pricing concerns along with the negative social and political backdrop. Pharmaceutical distribution companies have been under tremendous pressure as of late due to political pressures regarding the pharmaceutical supply chain and drug pricing concerns.
The middleman portion of the pharmaceutical drug supply chain model is slowly shifting away from the traditional means of delivering drugs to hospitals and pharmacies in a more economically-friendly manner. More often than ever hospitals and pharmacies are establishing direct relationships with manufacturers thus buying direct such as the recent CVS deal to supply the generic EpiPens. Manufacturers have increased their use of direct accounts thus disrupting the traditional distribution model long dominated by companies such as McKesson. This action hits distributors particularly hard since they make their money by moving product within the supply chain where greater than 95% of McKesson’s revenue comes from this distribution space. After last quarter McKesson stated that competition and a slowdown in price inflation for brand-name drugs would reduce its profits. McKesson said it has been forced to lower the prices it charges to independently owned pharmacies to match the prices charged by competing wholesalers looking to gain market share. “We have made a very significant change in our pricing practice to match where the market is today,” McKesson CEO. McKesson contracts with manufacturers to distribute drugs to customers including retail pharmacies and hospitals. A slowdown in price increases is beginning to hurt its profit margins.

Cardinal Health’s Disappointing Earnings

Recently, upon the earnings announcement from Cardinal Health, shares of all the major pharmaceutical supply chain stocks sold off. This included McKesson and AmerisourceBergen (ABC) as collateral damage when Cardinal Health reported earnings. Cardinal Health provided a softer guidance for non-GAAP 2017 numbers and mentioned that generic price deflation was a significant headwind for the industry. Shares of Cardinal Health sold off 12% on the news and others in the cohort sold off as well hitting McKesson and AmerisourceBergen with sell-offs of 4% and 4%, respectively. McKesson eluted to the drug price deflation in its previous conference call which mirrors the news from Cardinal Health. My concern here is that these issues may be far from over and may take a few more quarters for these negative headwinds to subside.

McKesson’s Acquisitions – Potential Catalysts For Growth

Despite these issues, McKesson has made a series of acquisitions and partnerships over the last two years to position itself for future growth. Albeit concerns regarding the traditional distribution model are being challenged and pricing competition has taken hold in the space, McKesson has been highly acquisitive, growing dividends over time and buying back its shares to drive shareholder value. Despite its major acquisitions and partnerships (UDG Healthcare plc, Sainsbury's pharmacies, Vantage Oncology, Biologics, Rexall Health, Albertsons, Wal-Mart, and CoverMyMeds) in an effort to position itself for growth, these efforts have been overcome by drug pricing concerns, political backdrop, middleman pressures, pricing competition and declining revenues. McKesson recently announced intended acquisition of Canadian pharmacy group Uniprix. Uniprix operates 330 independent pharmacies, and in 2009 it rejected McKesson’s takeover offer. All of these negative issues have ostensibly been priced into the stock now, and with the stock trading at 2013 levels I feel McKesson is a buy if it sells off after earnings.

Conclusion

McKesson Corporation (NYSE:MCK) has been very volatile after the last handful of earnings announcements, and I don’t expect this earnings announcement to be any different. This multi-year sell-off was justified as McKesson has missed revenue targets for five consecutive quarters. In addition to the missed revenue targets, McKesson along with others in the space have been faced with an increasingly challenging healthcare landscape as political posturing, drug pricing scrutiny, overall negative sentiment towards pharmaceutical companies due to price gouging allegations and the overall rotation out of healthcare related stocks. Despite these issues, McKesson has made a series of acquisitions and partnerships to position itself for future growth. Despite these moves, growth has been difficult. Considering the drug price deflation environment and Cardinal Health’s earnings, could this serve as a proxy for McKesson’s upcoming results? Its major acquisitions and partnerships (UDG Healthcare plc, Sainsbury's pharmacies, Vantage Oncology, Biologics, Rexall Health, Albertsons, Wal-Mart, and CoverMyMeds) were made in an effort to position itself for growth and diversification. As these collective measures stabilize revenues and potentially reaccelerate growth, then this stock could be poised for a rebound over the intermediate term. This upcoming earnings announcement will be a barometer for this potential turn in the business. If McKesson sells off on the announcement of its upcoming earnings, then I’d be a buyer.

Noah Kiedrowski
INO.com Contributor - Biotech

Disclosure: The author relinquished his shares of Visa and is waiting to initiate another long position or secured put position. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of stockoptionsdad.com a venue created to share investing ideas and strategies with an emphasis on options trading.

Preview Issue #11: J&J $30B Acquisition, Humana/Aetna Blocked and Allergan Sued

INO Health & Biotech Stock Guide

Preview Issue #11 - February 28, 2017

BIOTECH, HEALTH & PHARMA NEWS

Johnson & Johnson and McKesson make a big splash in merger and acquisition activity, courts block Humana/Aetna merger and Allergan and Endo sued by FTC. The healthcare cohort has witnessed several key events in the face of a political backdrop that’s put the entire industry on edge. The overall healthcare umbrella has become sensitive to any tweet from President Trump as he vows to bring down drug prices. As he pursues his crusade against drug pricing, much of these threats may have already been priced-in as seen in many healthcare-related stocks (i.e. McKesson, CVS, ABBV and AGN) that have seen sharp and sustained sell-offs that coincide with the 2017 presidential campaign cycle.

WHAT'S NEXT

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McKesson's Misses For 5th Consecutive Quarter - Buying Opportunity?

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

McKesson Corporation (NYSE:MCK) missed Q3 2017 numbers and this marks the fifth consecutive quarter in which McKesson has missed its revenue targets. The stock sold off shapely as a result of its recent revenue miss, sliding 8.3% or $12.55 per share. McKesson has paid dearly for this string of revenue misses, shedding over $102 per share or 42.5% from its all-time highs in May of 2015 falling from $240 to roughly $138 as of recent trading (Figure 1). There’s been a tremendous amount of pressure regarding the pharmaceutical supply chain in terms of pricing competition and potential erosion of the pharmaceutical wholesaler model. As if this wasn’t enough, social and political pressures over drug pricing have exacerbated these issues to the point of fierce pricing competition and the slowing of drug price increases (negatively impacting McKesson’s ability to take larger dollar amount cuts from the volume of business). As the negative sentiment is priced into the stock and acquisitions starting to bear fruit, will this finally be the turning point? Continue reading "McKesson's Misses For 5th Consecutive Quarter - Buying Opportunity?"

Is McKesson Investable Again?

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

Is McKesson Corporation (NYSE:MCK) investable again now that the fallout over its missed Q2 2017 numbers has been absorbed and the negative sentiment priced into the stock. Although this was the fourth consecutive quarter in which McKesson has missed revenue targets, McKesson has sold off by ~$100 per share or 42% from its all-time highs in May of 2015 falling from $240 to roughly $140 as of recent trading (Figure 1). In February I wrote a piece on McKesson stating that I felt McKesson presented a buying opportunity when the stock sank to a 52-week low of $148 per share. As that call began to come to fruition, I wrote a series of follow-up articles voicing caution as the share price appreciated. As shares appreciated ~30% by reaching the ~$200 level in the summer, I was hesitant due to pressures regarding the pharmaceutical supply chain and earnings from other pharmaceutical wholesalers such as Cardinal Health. At that time, I had relinquished my position in McKesson due to the run-up in share price and the growing concerns of the business model in combination with social and political pressures. As these pressures mounted the stock witnessed another double-digit fall from the ~$200 level to ~$125 during the back half of 2016. Now that the stock has stabilized at the $140 level, boasts a reasonable P/E ratio, more certainty surrounding the political backdrop and acquisitions coming full circle, McKesson may be an investable stock once again. Continue reading "Is McKesson Investable Again?"

McKesson Craters - Misses Q2 2017 Estimates and Lowers Guidance

Noah Kiedrowski - INO.com Contributor - Biotech


Overview

McKesson Corporation (NYSE:MCK) recently reported Q2 2017 numbers that missed analysts’ expectations on both EPS and revenue, missing by $0.11 per share and $1.25 billion, respectively. This was the fourth consecutive quarter in which McKesson has missed revenue targets. As a result of the most recent miss, shares of McKesson sank by ~$40 per share or 23% beginning in after-hours trading and through the next trading day (Figure 1). In February I wrote a piece on McKesson stating that I felt McKesson presented a buying opportunity when the stock sank to a 52-week low of $148 per share. As that call began to come to fruition, I wrote a series of follow-up articles voicing caution as the share price appreciated. On March 21st I framed my thesis as being well intact as the shares appreciated to the mid $150s. On May 29th I stated that concerns remained despite the solid Q4 2016 quarterly earnings as shares appreciated to the low $180s. On July 20th I stated that shares had appreciated 34% by reaching the ~$200 level and at that point, I was hesitant due to pressures regarding the pharmaceutical supply chain and earnings from other pharmaceutical wholesalers such as Cardinal Health. At the writing of the July 20th article, I had relinquished my position in McKesson due to the run-up in share price and the growing concerns of the business model in combination with social and political pressures.

Chart of McKesson Corporation (NYSE:MCK)
Figure 1 – McKesson’s free fall after missing Q2 2017 earnings and lowering guidance

Continue reading "McKesson Craters - Misses Q2 2017 Estimates and Lowers Guidance"