Bigtime medical distributors like McKesson (MCK +0.39%) and Cencora (COR -0.24%) make money by moving drugs and supplies to clinics and pharmacies worldwide. While investors usually look to such companies for steady returns that are relatively safe, sometimes there's surprisingly a bit more growth than expected for an evergreen stock.
Now is one of those times. Thanks to a hot new trend in healthcare that you've doubtlessly heard of by now, both businesses are reporting stronger-than-expected sales, and they also anticipate that the good times will continue for at least a bit longer. Here's what you need to know.
NYSE: MCK
Key Data Points
You've heard of this growth driver before
What popular new medication starts with "O" and ends with "zempic"? If you guessed Ozempic, the medication made by Novo Nordisk for type 2 diabetes, you're correct. Along with the drug's other formulations called Wegovy and Rybelsus, which are indicated for helping people to lose weight, Ozempic belongs to a class of medications called GLP-1 agonists. Don't worry about what that means for now -- just appreciate that Ozempic and Wegovy brought in nearly $5 billion in sales for just the third quarter alone.
Eli Lilly also makes a GLP-1 agonist, with one formulation called Mounjaro, which is for type 2 diabetes, and with another formulation called Zepbound, which is indicated for weight loss. Mounjaro pulled in $1.4 billion in the third quarter, and Zepbound was just recently approved, so it hasn't had time to report a full quarter of revenue yet.
More importantly, both Eli Lilly and Novo Nordisk are scrambling to scale up their manufacturing facilities for both medicines, with the pair investing billions in 2023 alone. The expectation is clearly that demand will continue to swell as more and more people look to lose weight more easily. And that's the tailwind bolstering medical suppliers and healthcare stocks like McKesson and Cencora.
NYSE: COR
Key Data Points
In total, McKesson's Q2 sales in the U.S. pharmaceutical segment were close to $70 billion, which is 16% more than the same quarter in the prior year. Management explicitly attributes the unexpectedly high rate of growth to a burgeoning demand for GLP-1 medicines. With more prescriptions needing to be filled, its customers need the company to deliver them. For a business with trailing-12-month revenue of more than $291 billion, it takes a huge volume of additional demand to move the needle, but it looks like Ozempic and its peer medications are up to the task.
Cencora is experiencing the same trend. In its fiscal fourth quarter, its U.S. Healthcare Solutions segment reported sales of nearly $62 billion, up 13% from the same period a year before. But Cencora's management sees the demand for GLP-1 medicines as somewhat of a mixed blessing, as it claims that they tend to sell for lower margins, thereby putting some pressure on its profitability.
NYSE: NVO
Key Data Points
The fundamental thesis for these two stocks remains
Both Cencora and McKesson are anticipating that the GLP-1 gold rush will continue to boost their top lines for at least the near future. Beyond that, the businesses are likely in the same boat as everyone else, in the sense that nobody knows precisely what the long-term picture for GLP-1 drug demand will look like, especially with regard to the formulations indicated for weight loss.
After all, patients will probably not want to continue taking a medicine that helps them to lose weight once they've lost the weight they were originally interested in losing. Therefore, at present the GLP-1 tailwind is not a reason in and of itself to buy the shares of either of these two companies, though it does marginally contribute to the bull thesis.
The rise of a class of drugs that may prove to be a fad does not imply any enduring boost to either player's ability to compete. But that doesn't mean they're poor choices for conservative investors. If anything, rising demand for Wegovy and Zepbound is likely to continue to be a bonus for long-term shareholders, juicing a bit more growth than what's normal for these two stalwart stocks.
So if you're considering investing in either of them to round out the safer part of your portfolio, invest away, and enjoy the ride with the GLP-1 drugs for as long as it lasts.
