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Investing.com -- S&P Global Ratings has revised its outlook on McKesson Corp (NYSE:MCK). to positive from stable, while affirming its ’BBB+’ rating. The updated outlook is based on anticipated growth in McKesson’s U.S. pharmaceutical segment and its prescription technology business. This growth is expected to generate robust free cash flow and maintain the company’s leverage below 2x.
The U.S. pharmaceutical segment is set to benefit from increasing demand for pharmaceutical products, an aging population, and the growth of biosimilars and biopharma services. Meanwhile, the prescription technology business, which generates higher margins, is expected to see robust growth supported by prescription drug growth and provider additions. The company has exited most of its international business, which has previously contributed to earnings volatility.
The deflation in generics has stabilized, allowing McKesson to purchase generic drugs at lower prices, thus limiting profit declines. Over the past few years, the company’s leverage has generally remained below 2x, and this is expected to continue due to strong free cash flow generation. As of September 30, 2024, the adjusted debt-to-EBITDA was 1.5x.
McKesson has recently announced plans to acquire a controlling interest in PRISM Vision Holdings LLC, an ophthalmology practice with 180 providers, for $850 million. It also plans to acquire Florida Cancer Specialists & Research Institute for $2.5 billion this year. These acquisitions align with the company’s strategy to add higher-margin specialty services to its business.
In the industry, acquisition activity has increased. Competitors like Cardinal Health Inc (NYSE:CAH). and Cencora Inc. are also actively pursuing acquisitions, primarily in specialty services. Despite the expected spending on acquisitions and share repurchases, McKesson is anticipated to generate at least $4 billion in cash flow annually, maintaining average leverage below 2x.
McKesson’s U.S. pharmaceutical distribution business is expected to see 19% revenue growth in fiscal 2025 (ending March 31, 2025), benefitting from a large customer win, growth in biopharma services, and growth of GLP-1s. McKesson, along with Cencora and Cardinal Health, collectively control more than 90% of the U.S. drug wholesaling sector.
The positive outlook on McKesson reflects expectations that the company will continue to grow steadily and generate solid free cash flow, maintaining leverage below 2x, even considering likely capital allocation towards acquisitions and share repurchases.
S&P Global Ratings noted that the outlook could be revised to stable if acquisition activity increases such that the company’s leverage is not expected to remain below 2x over the longer term. However, the rating could be raised over the next two years if spending on acquisitions and share repurchases remains moderate and leverage stays below 2x.
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