Tuesday, August 02, 2016

McKesson’s Growth Slowdown

Last week, drug wholesaler McKesson released its latest quarterly earnings, which confirmed the slowing revenue growth in its U.S. drug distribution business. The slowdown was not surprising, given the many market changes that I have highlighted here on Drug Channels. If Walgreens Boots Alliance completes its acquisition of Rite Aid, then McKesson will face another year of challenging revenue growth.

McKesson is working to counter the slowdown with acquisitions, cost cutting, its new Walmart deal, a strong oncology presence, and the impressive expansion of its Health Mart franchise. Manufacturers and pharmacies should expect McKesson to become more aggressive as it adjusts to these new realities.

See the chart below for a quantitative perspective on McKesson’s past few years along with my commentary on a few other highlights from the company’s quarterly report.

READ ‘EM AND WEEP

Here are direct links to the information about McKesson’s first fiscal quarter of 2017 (and the second calendar quarter of 2016). As always, I encourage you to read the original source material for yourself.
A CHANGE OF DIRECTION

The chart below shows our estimates of year-over-year growth in McKesson’s U.S. drug distribution business. As you can see, growth in the second calendar quarter of 2016 was only 4.2%.

[Click to Enlarge]

We estimate that U.S. drug distribution revenue would have grown by less than 1% during the quarter without the benefit of: (1) its Biologics/Vantage acquisitions and (2) the addition of Safeway volume from its expanded relationship with Albertsons.

McKesson’s growth slowdown began at the end of calendar year 2015. This decline was mostly due to generic deflation and the loss of UnitedHealth’s OptumRx PBM, which had previously been McKesson’s fifth-largest customer. (Cardinal is now the primary supplier to OptumRx’s mail and specialty pharmacies. See New Cardinal and McKesson Customer Deals Show A Changing Generic Channel.) McKesson also faced unfavorable comparisons to the past two years, during which the pharmaceutical industry’s total revenues had higher-than-usual growth.

Year-over-year growth also is somewhat lower due to CVS Health’s acquisitions of Target and Omnicare, although these deals had a bigger impact on McKesson’s profits that on its revenues. Target and Omnicare continue to source brand-name drugs from McKesson. However, both companies shifted generic purchasing to Red Oak, the CVS Health-Cardinal Health joint venture. For more on the CVS Health-McKesson relationship, see How CVS Health Got McKesson Under Its Thumb.

McKesson’s financial reports combine all North American revenues because…well, actually, I have no idea why the company doesn't separately report its U.S. and Canadian businesses. It’s another example of the opaqueness that plagues most of McKesson’s financial reporting. We estimate that Canadian revenues were about $13.7 billion, or about 9% of its North American revenues. The Canadian share will rise when the Rexall acquisition is completed later this year.

Two more tidbits from McKesson’s first quarter:
  • McKesson expects the impact of its new deal with Walmart to occur mainly in its 2018 fiscal year, which starts on April 1, 2017.
  • The company emphasized that it does not intend to acquire any retail pharmacies. Echoing past comments, McKesson CEO John Hammergren said on the earnings call: “I just don't see us entering the retail space directly in the U.S., but we'll continue to support our customers as we have in the past.” OK!
Finally, there was one mystery (maybe). In its 10-Q filing for the quarter, McKesson briefly refers to "lower compensation from a branded pharmaceutical manufacturer."

On the earnings call, John Hammergren provided this explanation:
"And so when we talk about the year over year change, you can imagine that with that particular manufacturer, we benefited from their previous price increase patterns and in this quarter have benefited to a lesser degree, and that's why we call it out."
Hammergren didn’t identify the company, but does anyone else think the manufacturer’s name might start with the letter V?

No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...