McKesson Shares Fall After VA Deal
Shares of the three largest drug distributors slumped Friday after McKesson Corp. won a large government contract, wresting it from AmerisourceBergen Corp. and raising concerns that all the wholesalers would have to lower prices to win future business.
Several investment companies downgraded their ratings on the three largest drug wholesalers -- AmerisourceBergen, McKesson and Cardinal Health Inc. -- which account for 90% of the industry’s sales.
Shares of AmerisourceBergen fell $2.15, or 3.8% to $54, McKesson was off $1.30, or 4%, at $30.86, and Cardinal fell $1.48, or 2.4%, to $59.68, all on the Big Board.
McKesson said Wednesday that it won a contract worth $3 billion a year to provide medicine to the Department of Veterans Affairs, taking it from AmerisourceBergen, which had served the VA for five years.
Although the companies have not detailed the determining factors in the switch, analysts have speculated that McKesson significantly lowered the price it would charge the department.
A trend of lower bidding could result in profit margins being hurt across the drug distribution sector, which already has thin margins.
Merrill Lynch cut its ratings on AmerisourceBergen and Cardinal to “neutral” from “buy.” Raymond James cut its rating on AmerisourceBergen to “market perform” from “strong buy,” and Jefferies & Co. downgraded McKesson to “hold” from “buy.”
“Some on the Street have become concerned that McKesson severely undercut its competition in pricing to procure the VA contract,” said Deutsche Bank Securities, which cut its rating on AmerisourceBergen shares to “hold” from “buy.”
“The feared implication of this is that the three major distributors will embark down the path of irrational pricing for contracts in the future to maintain and/or increase market share.”
Deutsche Bank added, however, that the three companies seemed committed to maintaining a level of pricing discipline.
J.P. Morgan, which maintained its “overweight” rating on AmerisourceBergen shares in generally positive comments about the company, acknowledged that profit margins in the drug distribution sector would be squeezed.
“Even with the loss of the profitable VA contract, we expect the margin decline for AmerisourceBergen to still be less than competitors over the next 12 months,” J.P. Morgan said.
