McKesson deepens its relationship with customers through offering marketing merchandising, and administrative support.

Business Strategy & Outlook

McKesson is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. With over $180 billion in annual U.S. drug distribution revenue, McKesson supplies nearly one third of the overall market, comparable to AmerisourceBergen and slightly outpacing Cardinal Health in market share. Together, the three operate as a pharmaceutical wholesale and distribution oligopoly, supplying over 90% of the U.S. market. The highly consolidated pharmaceutical wholesale market reflects the substantial scale-based cost advantages held by the largest players.

Wholesalers play a central role in the pharmaceutical supply chain, bridging the gap between over 1,200 drug manufacturers and pharmacy, health system, and provider customers. The primary value proposition to manufacturers is the simplification in distribution logistics by shipping products to centralized wholesaler locations, as opposed to shipping direct to the tens of thousands of pharmacies or healthcare provider locations. Additionally, since McKesson takes legal ownership over the manufacturer’s product, the company effectively absorbs all credit risk associated with delinquent pharmacies, clinics, and providers. Beyond its role as an intermediator, McKesson offers consulting services directly to manufacturers, from clinical trial support through post approval commercialization. Similarly, wholesalers’ primary value proposition to pharmacy and healthcare provider customers is simplification in logistics. McKesson uses its scale to negotiate more effectively than most of its customers and typically acquires drugs at the lowest available price, most of which is passed along in cost savings. In addition, McKesson bears the burden of substantial working capital outlays associated with its comprehensive drug inventory, delivering smaller quantities directly to customer retail locations as needed. Beyond acting as an efficient supplier, McKesson deepens its relationship with customers through offering marketing, merchandising, and administrative support services to smaller independent pharmacies and providers.

Financial Strengths

As of fiscal year-end 2021, cash and equivalents were over $6.3 billion, offset by $7.1 billion in debt. Fiscal 2021 gross leverage was 1.7 times adjusted EBITDA. Free cash flow generation was $4.1 billion in the same period, but free cash flow growth will be slightly muted in the forecast period, associated with opioid settlement payments over the next 18 years. The McKesson enjoys a position of solid financial strength arising from its strong balance sheet and dominant position in a mature market with substantial scale-based barriers to entry. Working capital requirements are high in the industry, as pharmaceutical wholesalers take title, or legal ownership, over the drugs they distribute. However, McKesson’s favorable cash conversion cycle mitigates this risk and reflects its strong negotiation leverage with manufacturers and customers in establishing payment terms.

Bulls Say

McKesson distributes pharmaceutical products to nearly one third of the industry, leading to substantial negotiation leverage with generic drug manufacturers.

The industry has largely pivoted away from pharmacy owned warehouses and self-distribution, solidifying wholesalers’ role in the supply chain.

Recent data suggests generic drug price deflation and has eased in the past year, relieving a contributing factor toward wholesaler margin compression.

Company Description

McKesson is a leading wholesaler of branded, generic, and specialty pharmaceutical products to pharmacies (retail chains, independent, and mail order), hospitals networks, and healthcare providers. Along with AmerisourceBergen and Cardinal Health, the three account for well over 90% of the U.S. pharmaceutical wholesale industry. McKesson is currently divesting from its pharmaceutical wholesale and distribution in Europe and Canada in order to redeploy capital to strategic growth areas in the U.S. (oncology network and ecosystem, and biopharma services). Additionally, the company supplies medical-surgical products and equipment to healthcare facilities and provides a variety of technology solutions for pharmacies.

(Source: Morningstar)

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