Image source: McKesson.
The healthcare industry has transformed itself in recent years, and drug wholesale specialist McKesson (MCK 0.84%) has worked hard to capture its share of opportunities in the space by offering solutions to address rising demand for prescription drugs. The stock, however, has struggled during the summer months, and although competitor Cardinal Health (CAH 0.26%) has also seen poor performance in its stock price, McKesson's losses have been more substantial.
Coming into Thursday's fiscal second-quarter financial report, McKesson investors wanted to see evidence that the company would sustain the growth that has helped make it a long-term success story. In McKesson's results, the drug wholesaler was able to post large gains in revenue and earnings that exceeded what most investors were looking to see. Let's take a closer look at McKesson and how well it has performed over the past few months.
McKesson posts another quarter of growth
McKesson's fiscal second-quarter results continued a long trend of solid increases in the top and bottom lines. Revenue jumped 10% to $48.8 billion, which was considerably higher than the 7% growth rate that most investors were expecting. GAAP net income from continuing operations rose by nearly a third to $617 million, and after taking into account the typical set of extraordinary items that McKesson often includes, adjusted earnings of $3.31 per share topped the consensus forecast among investors by more than 10%.
A closer look at McKesson's results reveals a familiar disparity across the company's key segments. The distribution solutions business saw healthy growth in revenue, climbing 11% to $48 billion despite facing a headwind from the strong U.S. dollar of 3 percentage points. In North America, pharmaceutical distribution and services revenue climbed 16% to $40.6 billion, while its international counterpart reported a 13% drop due entirely to foreign currency impacts. On a constant currency basis, international drug distribution and services sales climbed 2%. Operating profits climbed 8% on an adjusted basis to $1.1 billion.
By contrast, the technology solutions business saw further declines. Revenue dropped 6% to $721 million, with continued weakness in its hospital software business adding to the downward impact of the sale of McKesson's nurse triage business last quarter. Nevertheless, the unit enjoyed solid gains in its adjusted operating profit, which rose 13% to $157 million.
CEO John Hammergren was happy with McKesson's results for the first half of its fiscal year, noting how further acquisitions are bolstering its growth. He also celebrated a big win, stating that "we were also privileged to be selected by Albertsons as its pharmaceutical sourcing and distribution partner across all its U.S. brands."
What the future holds for McKesson
As we saw last quarter, McKesson responded to its strong results by upgrading its guidance for the fiscal year. The company now expected adjusted earnings to come in between $12.50 and $13 per share for fiscal 2016, a rise of $0.14 per share from its previous guidance last quarter.
In addition, McKesson continues to return capital to shareholders, using share repurchases in order to take advantage of declines in the stock price. The company spent $500 million during the quarter to buy back about 2.5 million shares, and McKesson's board authorized a new $2 billion buyback program that should help it accelerate future repurchases.
Yet the drug distribution business remains extremely competitive. Even as McKesson integrates its recent acquisitions, Cardinal Health has made M&A moves of its own, with acquisitions of Harvard Drug Group aiming to consolidate its hold on a share of the lucrative industry. Cardinal Health has also supported the medical side of its business with its recent buyout of Cordis, demonstrating its commitment to maintaining diversified exposure to healthcare even as it sees its prescription business as a key part of its overall success.
To succeed, McKesson will need to keep working hard to improve its internal efficiency while capturing as much business as it can. Deals like the Albertsons partnership will contribute strongly to future growth, and as long as McKesson can get its fair share of similar arrangements in the future, it should be able to sustain its current trajectory and eventually see its share price start to follow suit.
