Introduction
McKesson Corporation (NYSE:MCK) along with other pharmaceutical distribution companies such as Cardinal Health and AmerisourceBergen have been under tremendous pressure as of late due to political pressures regarding the pharmaceutical supply chain and drug pricing concerns. I recently wrote an article “McKesson Jumps 34% Off Lows – Now What” stating that the easy money had been made from the ~$150 level to the roughly ~$200 level. I also pointed out that greater than 98% of McKesson’s revenues come from pharmaceutical distribution and services domestically and abroad. Thus any impact to this business model will likely have direct negative implications with regard to revenues and EPS. At the closing of that article I stated that currently, McKesson’s P/E ratio sits at the top of its peer cohort and considering the stock has risen over 34% along with the potential erosion of the middle model, I’d be cautious buying at these levels despite additional upside based on its 52-week high of $240. Now enter the latest EpiPen fiasco and subsequent drug price scrutiny being thrusted into the spotlight. Due to a Tweet by Hillary Clinton regarding her distain for Mylan’s price increase, McKesson saw a $7 per share drop or roughly 4% drop in that same session. Since any disruption in this business model will negatively impact McKesson disproportionally compared to the insurance, pharmacy and pharmacy benefit manager (PBM) companies, I’d avoid McKesson especially after the ~30% move to the upside.
McKesson - Pharmaceutical Supply Chain Complexities
The interplay within pharmaceutical supply chain players can be a challenging dynamic to grasp. McKesson positions itself on the distribution side of the network, essentially serving as an intermediary between the drug manufacturer and the pharmacy. McKesson and other middlemen such as Cardinal Health and AmerisourceBergen purchase drugs directly from the manufacturer and then sell them to the pharmacy and capture the spread between the price they pay (to the drug marker) and the price they sell (to the pharmacy) the drugs. Below is a step-by-step breakdown of the pharmaceutical supply chain steps (Figure 1): Continue reading "McKesson Pressured Over Drug Pricing Concerns"
