We continue to have a Neutral recommendation on
McKesson Corporation
(
MCK
) with a target price of $87.00. The company operates through two
segments: Distribution Solutions and Technology Solutions.
McKesson is a major player in the pharmaceutical and medical
supplies distribution market. The company's Distribution Solutions
segment continues to perform well, with sales increasing to $108.9
billion in fiscal 2011 (ended March 31, 2011). This segment caters
to a wide range of customers and businesses and should benefit from
increased generic utilization and an aging population. Due to the
economic slowdown, a large number of patients are shifting to
higher-margin generic drugs, and the use of generic drugs should
increase significantly over the next few years as several branded
prescription drugs are scheduled to go off patent, like
Johnson & Johnson
's (
JNJ
) Concerta (patent expired) and
Pfizer
's (
PFE
) Lipitor (November 30, 2011). We believe that the Distribution
Solutions segment should continue witnessing growth and will remain
a major contributor to total revenue.
We note that McKesson has been making acquisitions regularly to
supplement organic growth. In December 2010, the company acquired
US Oncology, which has helped McKesson expand its specialty
services, particularly in oncology. Moreover, in July 2011, the
company acquired management solutions company, Portico Systems. We
believe that the integration of Portico's technology with the
company's Technology portfolio will help McKesson achieve
accountable and collaborative care along with reducing
administrative costs. Additionally, in March 2011, the company
announced its plans to acquire British IT company System C
Healthcare. System C manufactures Medway software, which is used in
40 National Health Service and private hospitals in the UK. Going
forward, we believe the company will continue to pursue
acquisitions, which will help drive growth.
However, McKesson faces stiff competition in both the
Distribution Solutions and Technology Solutions segments. The
Distribution Solutions segment faces strong competition from
national, regional and local full-line, short-line and specialty
wholesalers, service merchandisers, self-warehousing chains,
manufacturers engaged in direct distribution and large payor
organizations. Besides, the Technology Solutions segment faces
competition from many firms, including certain computer services
firms, consulting firms, shared service vendors, certain hospitals
and hospital groups, hardware vendors and Internet-based companies
with technology applicable to the healthcare industry.
We are also concerned about McKesson's dependence on a small
number of customers to generate a significant portion of its
revenues. During fiscal 2011, McKesson's ten largest customers
accounted for 51% of the revenues. The loss of a significant
customer would have an adverse impact on the company's revenues and
operations. In fact, the company lost two customers in fiscal 2009,
representing $3 billion worth of business, which impacted the
performance of the Distribution Solutions segment.
McKesson's contract with Veteran's Administration (one of the
important customers) is due for renewal in the near future. The
non-renewal of this contract would be a setback for the company.
Going forward, we expect investor focus to remain on the outcome of
the VA contract renewal, and prefer to remain on the sidelines
until further visibility is obtained on the issue.
JOHNSON & JOHNS (
JNJ
): Free Stock Analysis Report
MCKESSON CORP (
MCK
): Free Stock Analysis Report
PFIZER INC (
PFE
): Free Stock Analysis Report
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