Public outcry is forcing pharmaceutical companies to reconsider price increases, and that is leading to residual effects for other healthcare firms like McKesson Corp.
The San Francisco-based drug distributor and technology company dropped its profit estimates heavily for the rest of its fiscal year. McKesson now expects to record $8.95 to $9.80 in earnings per diluted share for the fiscal year, which began April 1, down from the range of $10.70 to $11.60 announced last quarter.
McKesson's stock dropped more than 23% Friday morning. The company was trading around $123 a share, down from an opening price of $129.80. The decline in guidance, which includes one-time charges throughout the year, comes after a 50% drop in profit this past quarter.
McKesson said it lowered earnings projections because branded pharmaceutical prices have risen less than expected this year. CEO John Hammergren said during a conference call that fewer drugs are increasing in price this year when compared to past years, and some manufacturers are delaying price increases. That affects McKesson's distribution agreements, many of which are based on the percentage of manufacturer revenue that McKesson handles.
“While we work to actively respond to these market forces, we remain focused on our long-term strategy of innovation and value-added solutions,” Hammergren said. “And though we responded quickly to maintain market share and mitigate these pricing challenges, we recognize the near-term impact requires a revision to our outlook.”
Hammergren separately has expressed concern about generic-drug price deflation, as has Steve Collis, CEO at rival distributor AmerisourceBergen.
McKesson also has observed competition that is broader and more aggressive than expected, Hammergren said. McKesson slashed its workforce by 4% earlier this year and has been working to cut costs as industry consolidation affects its business. It lost a contract with Optum around this time last year and could lose another major client, Rite Aid Corp., if the drugstore chain successfully merges with Walgreens Boots Alliance, an AmerisourceBergen customer.
Second-quarter earnings also include a $290 million pre-tax charge related to the declining value of McKesson's Enterprise Information Solutions business, a subset of its technology division that develops back-end software for providers. Though McKesson plans to eventually divest most of its technology business through a proposed joint venture with Nashville-based Change Healthcare, the company has said it will retain the Enterprise Information Solutions business for a potential sale separate from the venture.
McKesson reported second-quarter revenue of about $50 billion, up 2% from the same time the year before. Distribution revenue grew 3% while technology revenue once again dropped, down 6% as the result of previously expected, persistent declines in the company's hospital software business. However, McKesson said that decline was somewhat offset by growth in other technology businesses.
Revenue for the first half of McKesson's fiscal year totaled $2.9 billion. Profit was $849 million, down 29% from the same time the year before.