Morningstar | McKesson Remains Entrenched in the Wholesale Drug Distribution Industry
The pharmaceutical supply chain encompasses many firms, but McKesson stands out as a top-tier player. We believe the firm has a wide economic moat as its scale and needed services support competitive advantages. McKesson plays a critical role in the pharmaceutical industry, as many supply chain participants depend on its services for streamlined product distribution and procurement. Despite near-term pricing headwinds, we believe the firm has made the right strategic moves to offset its near-term issues and is positioned to thrive over the next several decades.McKesson is the largest pharmaceutical distributor by revenue and is the main supplier to large pharmacy outlets CVS Health mail order pharmacy and Walmart. However, with the acquisition of half of Rite Aid stores by Walgreens, McKesson has lost a material portion of its revenue. In addition, the firm has experienced major pricing pressure, which has weighed on profits. Nevertheless, we believe McKesson has correctly adjusted its cost basis, reformulated the pricing of its contracts, and largely worked through these issues.While McKesson faces some material issues, we believe it is in the process of offsetting most of these headwinds. First, the firm has been able to backfill a good amount of lost generic wholesale volume through the expansion of its Albertsons and Walmart client relationships. Second, we believe the drug distributor's recent restructuring enhanced the efficiency of its procurement and distribution operations. The firm was able to reduce its cost structure through a head count reorganization and has divested itself of its struggling healthcare IT segment. These tactical moves have preserved operational efficiency and keep McKesson in a prime position in the overall healthcare market.McKesson provides pharmaceuticals and medical supplies and services to its customers. The company's segments include: U.S. Pharmaceutical and Specialty Solutions, which provides distribution and logistics services for branded, generic, specialty, biosimilar and over-the-counter pharmaceutical drugs and other healthcare-related products to customers; European Pharmaceutical Solutions, which provides distribution and services to wholesale, institutional and retail customers in European countries where it owns, partners or franchises with retail pharmacies; and Medical-Surgical Solutions, which delivers medical-supply distribution, logistics, biomedical and other services to healthcare providers.
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