McKesson is Friday's IBD Stock Of The Day. Drug distributors are benefiting from overall growth in drug sales, helping MCK stock break out of a seven-month consolidation.
The company is the biggest distributor of pharmaceuticals in the U.S., leading Cardinal Health and AmerisourceBergen, according to JPMorgan analyst Lisa Gill. She estimates McKesson controls 37% of U.S. pharmaceutical drug sales. Further, the company is moving deeper into specialty medicines.
Iqvia, a health technology and clinical research outlet, estimates U.S. spending on medicine will grow by a 1%-to-4% compound annual rate from 2023 to 2027, Gill said in a report. That will be driven by an increase in the volume of medicines used, partially offset by lower prices.
"We point to a favorable backdrop for growth in overall pharmaceutical sales, based on an aging population, increased use of pharmacotherapy, brand inflation and innovative new product launches," she said in a report.
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On Friday, MCK stock broke out of a consolidation at a buy point of 401.78, IBD MarketSmith charts show. A recent handle in the stock chart offered an early entry of 401.53, based on IBD analysis. MCK stock ended the regular session Friday at 406.20.
MCK Stock: Continued Sales, Profit Growth
McKesson continues to report growth in sales and profits. Last year, sales rose 5% while adjusted earnings climbed 9.5%. This year, MCK stock analysts have more conservative expectations. They see profit hitting $26.61 per share on $293.8 billion in sales, up a respective 3% and 6%.
The company reports sales from four segments: U.S. pharmaceutical, international, medical-surgical products and prescription technology services. But its biggest business, by far, is the U.S. pharmaceutical division. U.S. drug sales account for about 87% of total revenue.
In 2022, U.S. pharmaceutical sales increased more than 13%. In the current fiscal year, U.S. drug sales are expected to rise 9% to 11%. But specialty drug sales could drive bigger growth, Gill said. Per Iqvia, specialty drug sales climbed 12% last year to $325 billion, representing more than half of all drug sales. That's up from 35% of all drug sales in 2014.
Specialty drugs include regimens with complex administration or special monitoring needs, plasma and biologic products, and high-cost products with challenging handling requirements. Gill believes McKesson had $42 billion in specialty drug sales last year, making it the second-biggest distributor.
In that vein, McKesson is beefing up its offerings in the oncology space. McKesson offers a variety of services to community oncologists through the U.S. Oncology Network. This allows the doctors to remain independent while using McKesson's services and staff.
McKesson has been "very bullish" on the value of the U.S. Oncology Network and "we believe with good reason," Gill said. There are 15,000 community oncologists in the U.S., meaning that the U.S. Oncology Network includes more than 15% of the population of community oncologists in the U.S. This gives McKesson access to a wide swath of doctors in the country.
Gill rates MCK stock as overweight, or buy.
Prescription Tech Grows Bullishly
Beyond the U.S. pharmaceutical segment, the prescription technology solutions business has grown by double digits in recent years "and is expected to continue at that clip," Gill said. The segment aims to improve access, adherence and affordability in the health care system.
"While distributors offer a variety of technology and automation solutions, we believe this segment is differentiated based on its size and growth profile," she said. "Given that it is expected to be the fastest growing component of the business, we believe it is an area deserving of the investment McKesson has made to it, and an area that will only become a larger component of the business."
Last year, the prescription technology solutions business brought in $4.4 billion in sales. Gill notes sales grew at a compound annual rate of 15% between fiscal years 2019 and 2023. The business faces a large $15 billion opportunity, she said.
Gill has a price target of 442 on MCK stock.
Bullishly, McKesson stock just joined SwingTrader. Shares also have a promising Relative Strength Rating of 83, putting them in the leading 17% of all stocks when it comes to 12-month performance, according to IBD Digital.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
