McKesson Corp (MCK)

Earnings are growing about 12-14% per year, revenues over 10%. Trades about 15x earnings. Exited European operations, so now a pure play on a domestic company and a hedge against international exposure. Yield is 0.59%.

This has been a very successful operation. The 5th largest corporation in the US, and doing extremely well. 60 Minutes recently did a profile on their distribution of opioids to pharmacies/dispensaries where the DVA thought they should have known there were some orders that were not legitimate and were going to cartels and illegal drug distribution networks. He thinks this has some legs, so he would not venture into this company.

Why is this down?60 Minutes did a story on the 3 large drug distributors, Mckesson, Cardinal Health (CAH-N) and Amerisourcebergen (ABC-N), that they are contributing to the opioid crisis. Or it could be that there hasn’t been much earnings growth over the past year because of pricing pressure, especially on generic drugs. He is bullish on drug distributors over the long run, and doesn’t think these stocks are going to turn around anytime soon.

He sold last year. They are one of the bigger drug distributors. They own Rexall. They diversified their business. They are mostly a wholesale drug distributor, taking the drug from the manufacturer to the hospital or retail pharmacy. He is bothered by generic pricing. Drug spending is about 10% of healthcare expenditures. The next leg of political rhetoric is the pharmacy benefit managers and distributors. This is his favourite, but he is on the sidelines.

He looked at this very intensely a couple of years ago, and decided not to invest. There was no question that the generic inflation trend that had propelled the bottom line, the margin, in many of these companies was coming to an end. Since then, many of these companies have had to deal with significant headwinds. Prefers others.

This has 2 main business lines. They are a wholesale distributor, and as well, they own some pharmacies. A couple of quarters ago, they indicated they were seeing price pressures, and then he listened to the Amerisourcebergen (ABC-N) and it wasn’t quite the same language. This gave him a little pause, and sold his position in January. They are exposed to generic drug prices, which are coming down. Expect this is a sector that will be getting more scrutiny from the US political regime.