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McKesson (MCK) Q4 Earnings Lag, Revenues Top Marginally

McKesson Corporation MCK reported fourth-quarter fiscal 2016 (ended Mar 31, 2016) earnings of $2.44 per share, lower than both the Zacks Consensus Estimate of $3.01 and the year-ago figure of $2.94.

Revenues grew 3.9% to $46.7 billion and were slightly ahead of the Zacks Consensus Estimate of $46.6 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 4.1% to $45.9 billion. Revenues from North America pharmaceutical distribution and services came in at $38.7 billion, up 5%, primarily reflecting market growth and growth from existing customers. Revenues from International pharmaceutical distribution and services, however, were down 1.4% to $5.8 billion. Medical-Surgical distribution and services generated revenues of $1.5 billion, which were relatively flat due to the completed sale of the ZEE Medical business in the second quarter.

During fiscal 2016, McKesson expanded its global pharmaceutical sourcing and procurement scale, and grew its health-mart franchise to more than 4,600 members and remains on track to achieve synergies from the Celesio acquisition.

Revenues from the Technology Solutions business dropped 5.4% to $734 million due to the divestiture of the nurse triage business and the anticipated year-over-year decline in the hospital software business.

During the fourth quarter, McKesson completed a $650 million accelerated share repurchase program, bringing the value of total shares repurchased to $1.5 billion.

In Jan 2016, the company undertook a review of its cost structure across the enterprise to lower its operating costs. Per the plan, the company will reduce its workforce and realign its business process initiatives in three years.

Fiscal 2017 Outlook

McKesson expects earnings in the range of $13.30–$13.80 per share. The guidance excludes approximately 12–15 cents of expected charges related to the cost alignment plan. Generic pricing trends in the pharmaceuticals business and negative impact from customer consolidation in the healthcare supply chain are anticipated to adversely impact results.

The company expects a nominal contribution from increase in prices of generic pharmaceuticals. The company also expects a decline in contribution from the launch of new oral generic drugs in the U.S. market. Nevertheless, Distribution Solutions revenue growth is expected to increase in the high single-digit percentage range driven by market growth and acquisitions.

Moreover, the company remains on track to achieve the full run rate of procurement-related synergies from the Celesio acquisition, more than a year ahead of schedule. McKesson also expects to retain its existing sourcing and distribution relationship with Rite Aid Corporation RAD, which would contribute approximately $13 billion in revenues.

On the other hand, Technology Solutions revenues are projected to decline slightly year over year, as growth in connectivity, payer solutions, medical imaging, and provider revenue cycle businesses will be more than offset by an anticipated revenue decline in the hospital software business.

Our Take

McKesson’s fiscal fourth-quarter results were disappointing, as the company’s earnings missed estimates by a wide margin. However, fiscal 2016 was a challenging year for the company. Drug pricing trends and customer consolidation are expected to continue impacting the company’s core distribution business.

Nevertheless, management believes that core strength and competitive position of its pharmaceutical business in the U.S. will offset the impact of a shift in generic pharmaceutical pricing trends and customer consolidation. The recent acquisitions (Biologics and Vantage Oncology) will further expand the company’s pharmaceutical distribution's scale and expand its oncology-focused pharmacy offerings.

McKesson currently carries a Zacks Rank #4 (Sell). A couple of better-ranked stocks in the healthcare sector include Shire SHPG and Nektar Therapeutics NKTR. Both the stocks carry a Zacks Rank #2 (Buy).

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NEKTAR THERAP (NKTR): Free Stock Analysis Report
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