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McKesson Fights Back With Strong Earnings, Revenue Gains

The drug distribution business has gotten fierce recently, with new competitive threats adding to pressure from lawmakers and consumer advocates about the high cost of prescription drugs. McKesson (NYSE: MCK) has had to take steps to protect its business not just in the U.S. but also in other areas like the U.K., where the National Health Service has sought to reduce the amount of money it pays as reimbursements to retail pharmacies.

Coming into Thursday's fiscal second-quarter financial report, McKesson investors had braced for further earnings declines as the market environment continued to look unfavorable. Yet the drug distributor was able to give those investors a positive surprise, and it's confident in its efforts to fight back against political and competitive pressures in order to generate long-term success. Let's look more closely at what McKesson said and whether it can keep doing well.

Image source: Getty Images.

McKesson heals itself

McKesson's fiscal second-quarter results were strong. Revenue rose 4% to $52.1 billion, topping the consensus forecast among investors by about $330 million. Goodwill impairment charges almost entirely wiped out the company's GAAP net income, but adjusted earnings of $3.28 per share were up 11% from year-ago levels and crushed the $2.80 per share that most of those following the stock had expected to see.

McKesson explained that organic growth throughout several of its business units helped power its overall results higher, specifically noting the ClarusONE strategic sourcing services business as a driver of performance. That growth helped to overcome tough year-over-year comparisons, as well as higher price competition in its independent pharmacy business and reduced reimbursements for the U.K. retail pharmacy unit.

McKesson's distribution solutions segment led the way higher with 5% revenue gains. International results were the biggest growth driver, posting 8% gains through a combination of market growth and recently acquired businesses. North American pharmaceutical distribution revenue climbed 5%, while the medical-surgical unit posted a more modest 2% rise in its top line. Adjusted operating profit for the segment was up double-digit percentages and outpaced the overall gains for the company.

The technology solutions segment continued to lose importance, with sales falling by more than four-fifths because of the move of most of its related businesses into the Change Healthcare joint venture, which produced adjusted income of $75 million during the quarter. The remaining enterprise information services business contributed only minimally to overall operating profit for the segment.

CEO John Hammergren was generally pleased with the company's ongoing progress. "We took important actions during the quarter to better position our business in light of reimbursement pressures levied by the National Health Service across our retail pharmacy operations in the U.K.," Hammergren said.

What's next for McKesson?

McKesson also said that it sees good times ahead. Execution across its businesses remains strong, according to Hammergren, and McKesson kept its adjusted earnings guidance unchanged for the full year. The drug distributor still sees its bottom line coming in between $11.80 and $12.50 per share on an adjusted basis, with what the CEO called "a strong finish to our fiscal 2018" likely to come in the next couple of quarters.

One thing to keep an eye on, though, is the impact of the Walgreens Boots Alliance (NASDAQ: WBA) purchase of Rite Aid (NYSE: RAD) stores on McKesson. Hammergren noted that McKesson expects to see impacts beginning in the fiscal fourth quarter based on the time frame that Walgreens has set out, because Rite Aid stores will progressively migrate to Walgreens during the transition period. McKesson has continued to talk to Rite Aid about how the two companies can work together to find mutual success. Yet it's important to understand that Rite Aid represents only a modest influence on McKesson's financials, and the company isn't concerned about the transaction.

McKesson investors were happy with the news, and the stock jumped 6% in the morning session following the announcement. As long as the drug distributor can avoid terribly adverse regulatory moves from government regulatory agencies, McKesson is still seeing fundamental strength in its core business.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends McKesson. The Motley Fool has a disclosure policy.