McKesson Earnings: GLP-1 Products Fuel Robust Sales Growth, but It Comes With Margin Headwinds

Narrow-moat McKesson MCK kicked off fiscal 2024 with better-than-expected first-quarter results. Total sales were up 10.9%, driven by strong performance from its base distribution business. Management raised both top- and bottom-line guidance for the year as a result of a strong three-month performance and a healthier outlook. After updating our near-term assumptions and accounting for the time value of money, we raise our fair value estimate to $395 from $375.

Positive overall prescription utilization trends and particularly strong commercial demand for GLP-1 products (diabetes or weight loss drugs) fueled growth for U.S. pharmaceutical and prescription technology solutions, up 17.9% and 16.7% respectively. Since GLP-1 drugs are branded, they have high price tags, which allowed for a robust top-line growth for the distribution business, but they are also lower-margin products, resulting in a material gross margin decline. To account for this, we have raised our top-line expectations for both segments but lowered our margin expectation for the firm for the rest of fiscal 2024.

McKesson further expanded its U.S. oncology business by adding more than 100 providers to its network. While oncology assets make up a significantly lower portion of the top line compared with the distribution business, they offer higher margins and synergistic opportunities that we believe could provide tailwinds for growth. Beyond oncology, we believe McKesson is also well positioned to enjoy further growth in specialty distribution thanks to plasma-derived products and biologics.

Medical-surgical solutions sales were relatively flat. Similar to other distributors, McKesson faces a tough year-over-year comparison in the segment due to declining contributions from COVID-19 items, and management expects immaterial impacts from these products for the year. McKesson was able to offset lower COVID-related sales with growth from equipment and specialty pharmaceuticals.