Business Overview and History

Established in 1833, McKesson has grown from a small drugstore in New York City to a global healthcare powerhouse. The company's origins can be traced back to John McKesson and Charles Olcott, who founded the partnership that would eventually become McKesson Corporation. Over the decades, McKesson has weathered industry changes, mergers, and acquisitions, emerging as a trusted partner to healthcare providers, pharmaceutical manufacturers, and patients alike.

In the early 1900s, McKesson faced a significant challenge when the Pure Food and Drug Act was passed, requiring more rigorous standards and regulations for the pharmaceutical industry. The company successfully navigated these new requirements, further solidifying its position as a trusted and reliable distributor. During the mid-20th century, McKesson made strategic acquisitions to diversify its offerings, moving into areas such as medical-surgical supplies and information technology services for healthcare providers. This allowed the company to become a more comprehensive solutions provider to its growing customer base.

In the 1990s and 2000s, McKesson confronted the opioid crisis, facing numerous legal claims related to its distribution of controlled substances. The company vigorously defended itself against these claims, while also working to enhance its monitoring and reporting procedures to address the evolving regulatory environment. Despite these challenges, McKesson remained focused on its core mission of advancing healthcare. The company continued to expand its capabilities, entering into new business lines such as specialty pharmacy, biopharma services, and oncology care delivery.

Today, McKesson operates through four reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. The U.S. Pharmaceutical segment is the backbone of the company, distributing branded, generic, specialty, and over-the-counter pharmaceutical products to pharmacies, hospitals, and other healthcare providers. The RxTS segment offers innovative technology solutions to address medication access, affordability, and adherence challenges, while the Medical-Surgical Solutions segment provides medical-surgical supply distribution and logistics services to a wide range of healthcare providers. The International segment encompasses McKesson's non-U.S. operations, primarily in Canada and Norway.

In the second quarter of fiscal 2025, McKesson approved enterprise-wide initiatives to modernize and accelerate the technology service operating model. These initiatives are intended to improve business continuity, compliance, operating efficiency, and advance investments to streamline the organization. They will also include cost reduction efforts and support other rationalization efforts within Corporate, and the Medical-Surgical Solutions, and U.S. Pharmaceutical segments to help realize long-term sustainable growth.

The company recently announced an agreement to sell its Rexall and Well.ca businesses in Canada for an adjusted purchase price of approximately $148 million. This transaction will enable McKesson to further focus and prioritize investments to grow its oncology and biopharma services platforms.

In September 2024, McKesson announced an agreement to acquire a 70% controlling interest in Community Oncology Revitalization Enterprise Ventures, LLC (Core Ventures), an internal business and administrative services organization established by Florida Cancer Specialists and Research Institute, for approximately $2.49 billion. This transaction will accelerate the company's oncology strategy by providing opportunities to enhance and expand patient access to quality cancer care.

Financial Performance and Resilience

In the latest fiscal year ended March 31, 2024, McKesson reported total revenue of $308.95 billion, a 12% increase from the prior year. The company's net income for the same period was $3.16 billion, with a net profit margin of 1.02%. McKesson's strong financial performance is further highlighted by its robust operating cash flow of $4.31 billion and free cash flow of $3.63 billion, showcasing its ability to generate substantial cash from operations.

For the most recent quarter ended September 30, 2024, McKesson reported revenues of $93.65 billion, up 21% year-over-year. This growth was primarily driven by strong performance in the U.S. Pharmaceutical segment, including higher volumes from retail national account customers and specialty pharmaceuticals. Net income for the quarter was $241 million, down 64% year-over-year, primarily due to a $643 million charge to remeasure the assets and liabilities of the Canadian retail disposal group to fair value less costs to sell. Operating cash flow for the quarter was $2.1 billion, with free cash flow of $2.27 billion, both showing year-over-year increases.

Despite the challenges posed by the COVID-19 pandemic, McKesson has demonstrated remarkable resilience. The company's diversified business model and strategic initiatives have enabled it to navigate the evolving healthcare landscape, delivering consistent financial results and creating value for shareholders.

Segment Performance and Growth Drivers

McKesson's U.S. Pharmaceutical segment has been a consistent driver of growth, benefiting from increased prescription volumes, the expansion of specialty pharmaceuticals, and the company's strong customer relationships. In the latest fiscal year, the segment's revenue grew by 15% to $157.44 billion, while operating profit increased by 9% to $1.86 billion.

The Prescription Technology Solutions (RxTS) segment has also been a key area of focus for McKesson, as the company continues to invest in innovative technology solutions to address medication access, affordability, and adherence challenges. The segment's revenue grew by 5% to $2.51 billion in the latest fiscal year, with operating profit increasing by 8% to $408 million.

The Medical-Surgical Solutions segment has experienced more volatility, with revenue growing by 3% to $5.58 billion in the latest fiscal year. Operating profit for the segment, however, declined by 41% to $277 million, primarily due to lower volumes in the primary care channel as the market normalized following the COVID-19 pandemic. To address these challenges, McKesson has implemented a series of business rationalization initiatives aimed at driving operational efficiencies and aligning the segment with evolving customer needs.

The International segment, comprising operations in Canada and Norway, has also been a source of growth for McKesson. In the latest fiscal year, the segment's revenue increased by 7% to $7.40 billion, while operating profit grew by 16% to $418 million, driven by strong performance in the Canadian distribution business.

Strategic Initiatives and Future Outlook

McKesson's commitment to innovation and strategic initiatives has been a key driver of its success. In recent years, the company has made significant investments to modernize its technology infrastructure, leverage artificial intelligence and automation, and enhance the customer experience. These efforts are expected to deliver meaningful benefits and savings over the long term, further strengthening the company's competitive positioning.

One such initiative is the acquisition of a controlling interest in Community Oncology Revitalization Enterprise Ventures (Core Ventures), an internal business and administrative services organization established by Florida Cancer Specialists and Research Institute. This transaction, which is subject to regulatory approval, represents a significant step in McKesson's strategy to expand its oncology platform, improve patient access to quality cancer care, and drive long-term growth.

Additionally, the company has announced a series of companywide initiatives focused on accelerating and modernizing the enterprise, which are expected to generate approximately $250 million in benefits over the next five years, with an annual run rate of $100 million by the end of fiscal 2030.

Looking ahead, McKesson remains well-positioned to capitalize on the evolving healthcare landscape. The company's diversified business model, innovative technology solutions, and strategic investments position it as a trusted partner in the industry, poised to drive sustainable growth and create value for its shareholders.

Risks and Challenges

While McKesson has demonstrated resilience and adaptability, the company faces several risks and challenges inherent to the healthcare industry. These include regulatory changes, pricing pressures, supply chain disruptions, and ongoing litigation related to the opioid crisis. The company's ability to navigate these challenges and continue executing its strategic initiatives will be crucial to its long-term success.

Financials

McKesson's financial performance has been strong, with total revenue of $308.95 billion in the latest fiscal year, representing a 12% increase from the previous year. The company's net income for the same period was $3.16 billion, with a net profit margin of 1.02%. These figures demonstrate McKesson's ability to generate substantial revenue and maintain profitability in a competitive industry.

For the most recent quarter ended September 30, 2024, McKesson reported revenues of $93.65 billion, up 21% year-over-year. Net income for the quarter was $241 million, down 64% year-over-year. The company's operating cash flow for the quarter was $2.1 billion, with free cash flow of $2.27 billion.

For the six months ended September 30, 2024, McKesson reported revenues of $172.93 billion, up 14% year-over-year. Gross profit for this period was $6.40 billion, up 5% year-over-year, while total operating expenses were $4.79 billion, up 19% year-over-year. Net income attributable to McKesson Corporation for the six-month period was $1.16 billion, down 29% year-over-year, with diluted earnings per common share of $8.89, down 26% year-over-year.

Liquidity

McKesson's liquidity position remains robust, as evidenced by its strong operating cash flow of $4.31 billion and free cash flow of $3.63 billion in the latest fiscal year. This healthy cash flow generation provides the company with the financial flexibility to invest in growth initiatives, return capital to shareholders, and maintain a strong balance sheet.

As of September 30, 2024, McKesson had $2.51 billion in cash and cash equivalents. The company also has a $4 billion revolving credit facility, which was undrawn as of the same date. McKesson's debt-to-equity ratio stands at -1.98, while its current ratio is 0.91 and quick ratio is 0.50.

Guidance and Outlook

McKesson has increased and narrowed its fiscal year 2025 adjusted earnings per diluted share guidance to a range of $32.40 to $33.00, representing growth of 18% to 20% compared to fiscal year 2024. This is an improvement from the previous guidance range of $31.75 to $32.55.

For the U.S. Pharmaceutical segment, McKesson anticipates revenues to increase 16% to 19% and operating profit to increase 9% to 11%. The Prescription Technology Solutions segment is expected to see revenue growth of 8% to 12% and operating profit growth of 11% to 15%. The Medical-Surgical Solutions segment is projected to have revenue growth of 1% to 5%, with operating profit at the low end of the initial guidance range of 6% to 8%. The International segment is anticipated to see revenue growth of 5% to 9% and operating profit growth of 16% to 20%.

McKesson expects corporate expenses to be in the range of $510 million to $560 million. The company anticipates free cash flow of approximately $4.8 billion to $5.2 billion and plans to repurchase approximately $3.2 billion of shares in fiscal 2025. Overall, McKesson projects revenue growth of 15% to 17% and operating profit growth of 13% to 15% compared to the prior year.

Conclusion

McKesson Corporation has a rich history of innovation, adaptability, and value creation. The company's diversified business model, strategic initiatives, and commitment to technological advancement have positioned it as a leading player in the healthcare services industry. With a focus on driving sustainable growth, enhancing operational efficiency, and expanding its oncology and biopharma services platforms, McKesson is poised to continue unlocking value for its shareholders in the years to come.