First, set up distribution centers for different types of vaccines. Next, manage shipments from five different manufacturers to the 50 states so they can vaccinate the most at-risk people. It sounds like a playbook for early 2021 as the COVID-19 vaccine rolls out, doesn't it? Instead, it's how McKesson (NYSE:MCK) -- the leading healthcare logistics provider -- responded to the swine flu crisis in 2009. Now the company is again tasked with getting vaccines distributed to administration sites across the U.S. to curb a virus outbreak.
A history of supporting medical distribution
McKesson partnered with the Centers for Disease Control (CDC) in 2006, three years before the H1N1 swine flu outbreak. Since then, the company has been responsible for distributing more than 150 million vaccines each year, for illnesses such as the seasonal flu, polio, chickenpox, measles, and more.
Vaccines are only one part of the business. McKesson also provides medical and surgical supplies. Through the company's 117 distribution centers, it supplies more than 150,000 items to end users like hospitals, pharmacies, clinics, and doctor's offices. As benign as it sounds, this role in the supply chain has put the company in some legal jeopardy for non-vaccine drugs.
Despite being just a middle man, McKesson could still be forced to pay a large sum in the industry's reckoning from the opioid crisis. Last month, the company said it may have to pay $8 billion as part of a settlement with four states' attorneys general over its role in distributing opioids. The settlement would resolve 3,200 cases accusing the company, and its competitors, of ignoring warning signs that the deadly drugs were being redirected illegally. The company's role in bringing a COVID-19 vaccine to the masses is a welcome distraction from controversy.
Supporting COVID-19 vaccine distribution
In August, the company's traditional vaccine deal with the CDC was expanded as part of Operation Warp Speed. For $178 million, McKesson will leverage its expertise to get COVID-19 vaccines to selected administration sites across the country. Under a September contract, the company was awarded an additional $568 million to supply kits for vaccine administration. The kits contain enough needles, syringes, alcohol pads, vaccination record cards, and other items to conduct 100 vaccinations.
To achieve this logistical feat, McKesson is standing up several new facilities and adding employees. The company isn't sharing any additional details about its plans. But one challenge it won't face is managing the super-cold requirements of the Pfizer vaccine. That vaccine requires storage at negative 94 degrees Fahrenheit, so the blue-chip drugmaker has decided to manage its own distribution. Moderna's vaccine, on the other hand, will be distributed by McKesson. The drug presents fewer challenges as it remains stable between 36 degrees and 46 degrees Fahrenheit.
Analysis and conclusion
Initially, CEO Brian Tyler said the work for the CDC was unlikely to be financially material for the company. After the deal for kits, Tyler sounded more upbeat, raising the midpoint of guidance for 2021 earnings per share by almost 8%. The deals are a win for McKesson, as competitors AmerisourceBergen and Cardinal Health have no involvement in COVID-19 vaccine distribution.
With the positive outlook, McKesson stock trades at its highest level in more than four years. Despite the higher price, the company's valuation is still cheap relative to its history. It seems investors are giving McKesson credit for the additional earnings the vaccine rollout brings, but not willing to forget about the possible massive settlement the company could be on the hook for.
The company is playing a critical role in getting a COVID-19 vaccine to millions of people across the country. It's a trusted CDC partner and has experience from the H1N1 crisis that will serve it well in the coming months. The legal overhang is ominous, but those are usually one-time events that don't damage a company long term. With the healthcare stock trading at a historically cheap valuation, and the potential for a new annual vaccine to add to its business, McKesson represents one of the safer ways to profit from the COVID-19 vaccine rollout.