McKesson Corporation MCK has reiterated its earnings guidance for the fiscal year ending Mar 31, 2016.
Recap of FY16 Outlook
We remind investors that the company had provided its outlook for fiscal 2016 at the time of announcing its fourth quarter and full year fiscal 2015 results. McKesson continues to expect adjusted earnings in the range of $12.20–$12.70 per share in fiscal 2016. The Zacks Consensus Estimate of $12.60 per share is well within company’s targeted range. Distribution Solutions revenue growth is expected to increase by mid-single digits driven by market growth. The company expects North America pharmaceutical distribution and services revenues to grow in high-single digits. While International pharmaceutical and distribution services revenues are anticipated to remain flat on a constant currency basis, Medical-Surgical distribution and services are expected to deliver mid-single digit revenue growth in fiscal 2016. Technology Solutions revenues are expected to fall in mid-single digits due to an anticipated revenue decline in the hospital software business and the impending sale of a business line in fiscal 2016.
Factors Affecting Growth in FY16
McKesson has reaffirmed its outlook for fiscal 2016 on the basis of several factors. The company expects to assume approximately 76% ownership position in Celesio in fiscal 2016. Until now the Celesio AG acquisition has helped the company gain a strong foothold in Europe and geographically expand its core operations. Coupled with the Feb 2013 acquisition of PSS World Medical, Inc., this buyout should further scale up the company’s activities on a global level. Moreover, the synergies achieved through the acquisition of Celesio and PSS World Medical should be a major boost to the company’s growth trajectory.
Meanwhile, the company is making efforts to achieve growth in its Distribution Solutions segment. McKesson is working on the development of its U.S. and Canadian Specialty distribution and services business and targeting healthy organic growth in the medical-surgical business. The company is also attempting to boost its services related to relay connectivity, payer-facing, revenue cycle management and imaging solutions.
Additionally, McKesson continues to benefit from generic launches. However, the company estimates generic drug prices (outside an exclusivity period) in the U.S. to remain slightly below the fiscal 2015 level. The company also considers that issues like currency fluctuation as well as regulatory and pharmaceutical reimbursement environment in Canada and Europe may affect its performance in fiscal 2016. Weak economic growth in France and a highly competitive market for hospital software may also have an impact on the bottom line.
Our Take
The distribution solutions segment at McKesson continues to perform well driven by market growth (both newly launched drugs and price increases) and a healthy mix of business. Sales of hepatitis C drugs should continue to boost the top line. Additionally, we are pleased with the company’s efforts to pursue deals and acquisitions to drive growth. We believe that the Celesio acquisition will allow McKesson to strengthen its foothold in Europe and facilitate growth going forward.
McKesson currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the health care sector include Valeant Pharmaceuticals International, Inc. VRX, AmerisourceBergen Corporation ABC and Acorda Therapeutics, Inc. ACOR. While Valeant carries a Zacks Rank #1 (Strong Buy), AmerisourceBergen and Acorda hold a Zacks Rank #2 (Buy).
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