Medical Services Company Gets Booster Shot From Swine Flu Vaccine

• Peter Benesh
• On 6:27 pm EST, Tuesday November 3, 2009

An ill wind is blowing some good McKesson's way.

First, San Francisco-based McKesson (NYSE:MCK - News), the largest health care services company in the U.S., has the contract to distribute swine flu vaccine.

Add to that the government incentive for development of health care electronic records, and the company is in good shape to outrun some 2008 setbacks.

Whatever shape the final health care legislation takes, it's likely to be good news for McKesson. By giving more people coverage, especially for prescription drugs, it will increase demand for McKesson's services, says George Hill, an analyst with Leerink Swann.

A fourth component: increasing use of generic drugs as brand names lose patent protection in the next several years, says Richard Close, an analyst with Jefferies & Co.

About $22 billion in branded drug sales will face generic competition this year and next, he says. Generics bring McKesson higher margins.

"It's an inverse perfect storm," said Leerink's Hill.

Swine Flu Vaccine

H1N1 is the bonus. McKesson has a long-standing arrangement with the Centers for Disease Control to distribute seasonal flu vaccine to physicians and hospitals.

With only $6 million in startup costs, it's able to piggyback H1N1 vaccine distribution onto the existing program.

McKesson will distribute H1N1 vaccine doses to 150,000 doctors' offices and hospitals. McKesson will also distribute 80 million seasonal flu vaccine doses to 40,000 sites.

Depending on how many swine-flu doses the government sends out, McKesson could enjoy an earnings jump of 15 to 30 cents a share in the next six to nine months, Hill says.

"For the most part, the company has tried to control expectations on H1N1 revenues," said Jefferies' Close.

However, the margin for H1N1 distribution will be higher than the general drug distribution business, he says. Another benefit will be increased demand for flu-related supplies, such as test kits and medications, he says.

The company issued its latest quarterly report last week reporting a year-over-year sales jump of 2.1%.

McKesson operates in two divisions: distribution and technology services. Combined, their sales are $107 billion.

The firm was founded in 1833.

It distributes medical supplies and pharmaceuticals to physicians, hospitals, clinics, pharmacies, imaging centers and home health care agencies in all 50 states from 31 centers around the country.

The distribution unit saw revenue rise 2% to $263 billion for the quarter. That accounted for 97% of sales.

Technology services, which include data and business management software for hospitals, clinics and physicians, rose 3.7% year over year, totaling $790 million.

That's less than 4% of revenue, but the information technology sector carries higher margins. Technology services provide 20% of profitability, Hill says.

The second part of the inverse perfect storm is the federal stimulus program.

That provides $19 billion in subsidies to encourage providers to switch from paper to digital medical records.

McKesson can gain business from physicians seeking to digitize records.

The firm already has relationships with hospitals, physician practices and pharmacies that use its information technology.

It promises to streamline clinical, financial and administrative communication among providers, insurers, pharmacies, patients and financial institutions.

The idea is to improve efficiency, safety, reduce costs and make better of use of resources while maximizing clients' revenue.

It offers management and automation technology to more than 10,000 U.S. pharmacies.

It's the largest pharmaceutical distributor in North America. It has a subsidiary in Canada and owns a piece of Mexican distributor Nadro.

McKesson aims to improve back-office functions for doctors with a range of financial, administrative and clinical software.

The company says its analytics improve both regulatory compliance and health care results.

The top 25 managed care organizations use its information technology, the company says on its Web site. Other clients include 90% of Blue Cross Blue Shield plans and more than 50% of hospitals, Medicaid and Medicare, the Department of Defense and the Department of Veteran Affairs.

Growth Despite Challenges

In the Oct. 27 conference call, John Hammergren, chairman, chief executive and president, conceded growth in the main business is not dazzling. But neither was it devastating.

"The fact that we were able to lose nearly $3 billion in revenue and still get some growth out of the business I think is a tribute to the strength of the market," he said.

The company has been signing new clients, Hammergren said. One is Safeway (NYSE:SWY - News), which will use McKesson's information technology in its pharmacies.

The company raised its forecast for 2010 profit. The new target is $4.45 to $4.60 a share, up from $4.15 to $4.30.

McKesson, with a market cap of $16.2 billion, competes with Cardinal Health (NYSE:CAH - News), which has a market cap of $10.3 billion, AmerisourceBergen (NYSE:ABC - News) which has a market cap of $6.9 billion, and Owens & Minor (NYSE:OMI - News), with a market cap of $1.7 billion.

Buzz up!