Distributor also cites Albertsons, Rite Aid agreements in fiscal outlook

SAN FRANCISCO — McKesson Corp. announced a new distribution pact with CVS Health for Target pharmacies in updating its earnings outlook for fiscal 2016 and providing preliminary guidance for fiscal 2017.

John Hammergren

McKesson said that for the 2016 fiscal year ending March 31, it now projects adjusted earnings per diluted share of $12.60 to $12.90, compared with $12.50 to $13.00 previously.

The updated fiscal 2016 outlook, in part, reflects McKesson’s expectation that operating profit from generic drug pricing trends will be weaker in the second half versus earlier expectations, the company noted.

“While we continue to drive growth across our broad and diverse businesses, we now expect the operating performance in our U.S. Pharmaceutical distribution business in the second half of fiscal 2016 will be below our previous expectations,” McKesson chairman and chief executive officer John Hammergren said in a statement.

“Despite our revised assumptions related to generic pharmaceutical pricing trends and the impact of recent customer consolidation, our company is performing well, both domestically and internationally, and we continue to focus on our customers’ success in this dynamic environment,” Hammergren continued. “In fact, I am pleased to report that in late December, we signed a new agreement with CVS Health to serve as the distribution partner for their recently acquired Target in-store pharmacies.”

CVS announced in mid-December that it closed its $1.9 billion acquisition of Target Corp.’s pharmacy and retail clinic business, which includes 1,672 pharmacies (to be rebranded as CVS/pharmacy) and 79 Target clinics (to be rebranded as MinuteClinic).

McKesson will supply the 1,600-plus Target pharmacies, being rebranded as CVS/pharmacy.

“We also continue to prepare for the implementation of our new sourcing and distribution agreement with Albertsons, which begins on April 1, 2016,” Hammergren added. “While our company has not been immune from the impact of consolidation within the health care supply chain, our customers continue to expand their relationships with us, driven by our ability to provide exceptional service and value,” he added.

McKesson also reported that it expects weaker generic pricing trends, specific to its mix of business, and recent customer consolidation to impact its fiscal 2017 outlook.

The company said it’s in the early stages of its budget development process and has a preliminary target of 7% to 12% growth in adjusted EPS (diluted) for fiscal 2017, compared with the fiscal 2016 guidance of $12.60 to $12.90, less 48 cents per diluted share related to gains on business dispositions and favorable discrete tax items in fiscal 2016.

Among key factors for fiscal 2017, McKesson said its current sourcing and distribution relationship with Rite Aid will continue through the end of the fiscal year, contributing sales of about $13 billion to the Distribution Solutions segment. The distributor also expects an adjusted earnings headwind of about 85 cents per diluted share due to continued weakness in generic pricing for its mix of business, the expiration of its contract with Optum, and the transition of its contracts with Omnicare (acquired by CVS Health) and Target.

In addition, McKesson forecasts pricing for branded drugs for its mix of business to be modestly below the level in fiscal 2016.

“While we expect certain challenges in the near term, I am very confident in the strength, scale and global competitive position of McKesson,” Hammergren stated. “With our deep culture of operational excellence, you should expect us to continue our relentless focus on efficiency and innovation.”