McKesson Earnings: Strong Prescription Volume and GLP-1 Demand Reinforce Momentum

Narrow-moat McKesson MCK reported a better-than-expected second quarter. Total sales rose 10.1% year over year as increased prescription volumes, buoyed by specialty products and GLP-1 medications (diabetes and weight loss drugs) continued to bolster the top line. We raise our fair value estimate to $400 from $394, after baking in impacts from a slightly raised full-year assumption for U.S. pharmaceutical sales and the time value of money.

U.S. pharmaceutical continues to impress us with solid numbers and the strong momentum doesn’t seem to slow. Sales were up 16.2% during the quarter and were fueled by solid utilization trends and increased contributions from ClarusONE (McKesson’s generic sourcing joint venture with Walmart) and GLP-1s. We think the growth in GLP-1s is a double-edged sword, however, because it creates margin headwinds due to branded drugs carrying lower margins compared with generics—the operating margin for the segment continues to decline and has reached the lowest level it has seen over the last three years. While we believe investments McKesson has made in its oncology and biopharma platforms could boost margin over the long term, we think the segment will continue to face difficult margin dynamics over the next few quarters. On another note, Rite Aid, one of McKesson’s customers, filed for bankruptcy last month, but it was agreed that McKesson would continue to supply drugs to the pharmacy at least until the end of the bankruptcy case. Rite Aid makes up less than 5% of segment sales and management expects no material impacts from this bankruptcy.

Prescription technology solutions also had a strong quarter, with sales up 12.0% year over year. This is yet another of McKesson’s businesses that benefited from the strong GLP-1 demand. One of the solutions that the firm offers is a technology that makes the process of medication prior authorizations more efficient, and the segment saw healthy growth from delivering authorization for GLP-1 medications.