Biotechs aren't the only hot healthcare stocks. Just look at pharmaceutical distributor and healthcare technology giant McKesson Corporation (NYSE:MCK). It's up around 20% so far this year and has more than doubled over the last couple of years. Can these winning ways continue? Here are three reasons McKesson's stock could rise even more.
1. International intrigue
McKesson dominates the North American healthcare market in several ways. The company ranks first in pharmaceutical distribution in U.S. and Canada as well as in generics pharmaceutical distribution and medical-management software and services to payers. Outside of North America has been a different story -- until this year.
In January, McKesson announced its acquisition of Celesio, an international pharmacy retailer and provider of logistics and services to the pharmaceutical and healthcare sectors. The deal has already made a solid revenue impact for McKesson so far in 2014, although Celesio's bottom-line performance during the first half of 2014 wasn't too impressive.
Celesio operates in 14 countries in Europe and in Latin America. That presents opportunities for McKesson to leverage its economies of scale to win new accounts. There's also the off-chance that the company could eventually opt to spin off Celesio's 2,188 retail pharmacies to focus on the distribution business. With smart strategic moves, an expanded international presence could open doors for McKesson's stock to move higher.
2. Drug dynamics
Last quarter, McKesson reported strong revenue growth for its North American distribution and services segment. A big driver of that growth came from two hepatitis C drugs, particularly Gilead Sciences' (NASDAQ:GILD) Sovaldi. An even greater surge for Sovaldi could be forthcoming.
The FDA is scheduled to make a decision on approval for an all-oral combo of Sovaldi and another Gilead drug, ledipasvir, on Oct. 10. Assuming the regimen wins approval, Sovaldi will likely leap into the upper echelons of blockbuster drugs. That should mean higher revenue for McKesson.
Of course, brand drugs like Sovaldi don't yield the higher margins that McKesson can make from generics. Nevertheless, the exceptionally strong demand for the hepatitis C drug translates to earnings growth -- which has the potential to drive McKesson's shares higher.
3. Market momentum
Can the overall stock market continue its upward trajectory? Predictions of a major correction have yet to be fulfilled. The U.S. economy appears to be in decent if not stellar shape. Perhaps more important, the Federal Reserve still hasn't raised interest rates.
Any of those things could change. If they don't, though, it could bode well for McKesson. The company's stock has consistently outperformed the S&P 500 in recent years. So far in 2014, McKesson's shares are up 20% compared to 8% for the S&P 500 index. If the market continues to go up, there's a pretty good chance that McKesson will go up even more.
Looking at the long run, two facts stand out in my view. First, healthcare's importance in the U.S. economy is growing. Second, McKesson's importance in healthcare is growing. The company serves as the distributor for two of the three biggest pharmacy chains in the nation. Over half of U.S. hospitals use its products or services. So do one-fifth of physicians.
Short-term risks exist. The overall market could go down, dragging McKesson with it. Synergies from the Celesio acquisition could take longer to achieve than expected. Over the long-term, however, I like McKesson's prospects. The distribution business might not be very exciting, but McKesson's potential for solid returns should fire up investors.
Keith Speights owns shares of Gilead Sciences. The Motley Fool recommends Gilead Sciences and McKesson. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.