Generic Drug Price Deflation Is Weighing On McKesson Shares

McKesson Corporation MCK shares have declined 6.4 percent over the last three months, underperforming the shares of its key rivals.

Argus’ David Toung maintains a Hold rating on the company.

Price Deflation

“We believe that concerns about generic price deflation and reduced price inflation for branded drugs are weighing on the stock,” Toung mentioned.

The analyst believes McKesson is likely to face several earnings headwinds in fiscal 2017, including lower price inflation of branded drugs, deflation in generic pricing and the loss of key customers.

Headwinds

Toung expects the company’s EPS growth to be adversely impact by the loss of two large customers, the contracts with whom have expired recently.

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McKesson also continued to see a decline in operating margins in Q1:17, and the analyst believes that these issues “warrant caution.”

“With regard to drug pricing, we note that price hikes for generic drugs generally benefit distributors such as McKesson by boosting their gross profits and margins. By contrast, reduced inflation hurts both profit dollars and margins,” Toung explained.

Although price inflation for branded and patent protected drugs accounts for only a small portion of the gross profit, lower inflation could pressurize margins.

“We expect this trend to continue as manufacturers of branded drugs limit price hikes amid growing political opposition,” the analyst elaborated.

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