October 26, 2017 / 11:44 AM / 2 years ago

Wal-Mart tie-up helps McKesson top profit estimates

(Reuters) - McKesson Corp (MCK.N), the biggest U.S. drug distributor, posted a better-than-expected quarterly profit after a tie-up with Wal-Mart Stores Inc (WMT.N) helped it buy generic drugs at lower prices, sending its shares up nearly 6 percent on Thursday.

The results come as the industry is coping with a slump in generic drug pricing and a slowdown in the pace of price hikes for branded drugs, with rumors of Amazon.com Inc’s (AMZN.O) entry into the supply chain adding to anxieties.

McKesson does not take the entry of any competitor in the drug supply chain lightly, Chief Executive John Hammergren said, drawing similarities between the company and Amazon, especially in terms of logistics.

“To some extent, we were Amazon before it was cool to be Amazon,” Hammergren said on a conference call.

McKesson and Wal-Mart came together in 2016 to exert their combined negotiating power when buying generic drugs, a tactic also followed by Walgreens Boots Alliance Inc (WBA.O) and other large U.S. retail pharmacies.

“We’re purchasing pharmaceuticals at lower prices than we’d expected when we first put the plan together,” McKesson Chief Financial Officer James Beer said.

Stubbornly low prices for generic drugs have weighed on the market for copycat drugs and U.S. health regulators’ move to speed up approval of more such drugs is only going to increase the pressure.

The alliances between major U.S. retail pharmacies and U.S. drug distributors have allowed wholesalers such as McKesson to avail large discounts on buying generic drugs.

ClarusONE, the entity formed by McKesson and Wal-Mart’s tie-up, “is a positive operation for McKesson for sure,” Morningstar analyst Vishnu Lekraj said.

With the pace of price increases for branded drugs unlikely to bounce back in the next few years, analysts expect drug distributors will continue to face pressure on their margins.

McKesson said its latest second quarter got a boost as some revenue related to branded drugs was recorded in the period, rather than the current third quarter.

The company’s revenue rose 4 percent to $52.06 billion in the second quarter.

Profit plunged to $1 million, from $307 million, due to goodwill and other long-lived asset impairment charges as well as restructuring costs.

Excluding such items, McKesson earned $3.28 per share, sailing past analysts average estimate of $2.80, according to Thomson Reuters I/B/E/S.

McKesson’s shares were up 5.8 percent at $160.12. Rivals AmerisourceBergen (ABC.N) rose 3.8 percent and Cardinal Health (CAH.N) 2.6 percent.

Reporting by Anuron Kumar Mitra and Ankur Banerjee in Bangalore; Editing by Maju Samuel and Savio D'Souza

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