Rising Drug Demand Boosts McKesson Corporation

By Markets Fool.com

McKesson Corporation delivers roughly one out of every three prescription drugs taken in the United States and it is also one of the nation's top health care IT firms. That suggests that McKesson -- and its $188 billion in annualized revenue -- is a great proxy for the health care sector. If so, then McKesson's fiscal third quarter and fiscal nine month results indicate that aging baby boomers and rising health insurance enrollment continue to drive demand for prescription medicine higher.

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Source: McKesson Corporation

By the numbers
In the fiscal third quarter, McKesson's total revenue jumped 37% to $47 billion. The company's adjusted earnings per share, or EPS, totaled $2.89, up 95% from last year.

In the first nine months of its fiscal year, McKesson's revenue has grown by 36% from $99.5 billion last year to $135.8 billion. Importantly, the company's gross profit has climbed even more quickly, increasing by 49% to $8.7 billion. Through the first nine months of its fiscal year, McKesson's EPS total an adjusted $8.17, up 34% year-over-year.

Additionally, McKesson continues to generate plenty of shareholder-friendly cash. In the third quarter, McKesson's operating cash totaled $1.2 billion, which allowed the company's cash stockpile to increase from $3.8 billion in the previous quarter to $4.6 billion exiting December.

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Behind the numbers
McKesson gets most of its sales from its drug distribution business and after adjusting for currency conversion, revenue for that unit surged by 39% to $46.3 billion during the quarter.

The company's acquisition of the international drug intermediary Celesio is the major reason behind McKesson's sales surge, but sales at the company's North American business still grew by a more than respectable 17%.

Although revenue from the drug distribution segment is growing quickly, it remains a very low profit margin business. The segment's operating profit totaled just $785 million on a GAAP accounting basis last quarter, which works out to an operating margin of only 1.7%.

The performance from McKesson's much smaller health care technology solutions business wasn't nearly as good, with revenue slipping 7% to $755 million.

Market share leaders Epic Systems, Cerner Corporation , and AllScripts continue to battle with McKesson over health care IT market share, and that is eating into sales for McKesson's Horizon technology products, which are used by health care providers to create patient electronic health records and manage operations. However, with an operating margin of 14.7%, the unit still remains solidly profitable with the business posting an operating profit of $111 million last quarter.

Looking ahead
The Celesio acquisition accounts for the lion's share of the company's growth and profit expansion, and Celesio's benefit to McKesson's bottom line should continue. The company estimates that Celesio will add between $1 and $1.20 to the company's earnings during the first 12 months following the deal and that annual cost savings should reach an annualized run rate of between $275 million and $325 million by the fourth year following the acquisition.

McKesson's sales and profit should also continue to benefit from demographic tailwinds given that 10,000 baby boomers are turning 65 daily and that the number of prescription per year written for seniors is double the number that is written for people under age 55.

Ongoing increases in insurance enrollment tied to the health insurance exchanges and Medicaid expansion also support prescription volume. As of last week, the Department of Health and Human Services reports that nearly 7.5 million Americans have enrolled in health insurance through the federally run health care.gov website. Additionally, the Centers for Medicare and Medicaid Services have announced that 10.1 million more people are covered under Medicaid than were covered by the program prior to the institution of Medicaid expansion in 2013.

For these reasons, McKesson is boosting its guidance for fiscal 2015 EPS from between $10.50 to $10.90 to a new range of between $10.80 and $10.95. That suggests that the company is likely to have plenty of financial flexibility to reward investors through its dividend and buyback programs over the coming year.

The article Rising Drug Demand Boosts McKesson Corporation originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. The Motley Fool recommends McKesson. 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.