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McKesson Buys RxCrossroads from CVS Health for $735 Million

Zacks

McKesson Corp. MCK recently announced that it has completed the acquisition of RxCrossroads from CVS Health Corp. RxCrossroads is a provider of tailored services to pharmaceutical and biotechnology manufacturers. The transaction is valued at $735 million and has been entirely funded by cash on hand.

RxCrossroads will become part of McKesson's Specialty Health business. McKesson expects this transaction to be accretive to adjusted earnings per share by approximately 20 cents within the third year following the close of the transaction. McKesson’s specialty pharma business will be a strong growth driver over the next several years.

The buyout is expected to enhance McKesson's existing commercialization solutions for manufacturers of branded, specialty, generic and biosimilar drugs, including comprehensive patient support services, custom pharmacy solutions and third-party logistics. This will also allow the company to expand end-to-end offerings for manufacturers.

RxCrossroads was founded in 1986 as Medical Distribution company, which was later acquired by Omnicare in 2005 and then acquired by CVS Health in 2015.


McKesson has been actively pursuing deals, divestitures and acquisitions to drive growth. Recently, McKesson divested Enterprise Information segment recently for approximately $185 million in cash, which indicates the company’s focus on core strength. Notably, the Enterprise Information Solutions portfolio included a robust set of clinical and financial solutions supporting full scope of care delivery processes including Paragon (EHR solution); STAR and HealthQuest (Revenue Cycle solutions); Lab Analytics and Blood Bank; and OneContent (Content Management solutions). The company also signed an agreement to acquire privately-owned company CoverMyMeds for approximately $1.1 billion.

However, McKesson’s pharmaceutical distribution business, which contributes almost 99% to the company’s top line, is witnessing sluggish growth since the last few quarters due to weak pricing trends and customer consolidation. Distribution Solutions faces stiff competition in terms of price and service from various full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution, third-party logistics companies and large-payer organizations.

Price Performance

Over the last three months, McKesson has been trading below the industry. The company’s shares have gained 2.1%, lower than the industry’s rally of 5.4%. The current level also is lower than the S&P 500 index’s return of just 6.6%.

McKesson Corporation Price

Zacks Rank & Other Picks

McKesson has a Zacks Rank #2 (Buy).

Other top-ranked stocks in the broader medical sector are Integer Holdings Corp. ITGR, Bio-Rad Laboratories, Inc. BIO and Intuitive Surgical, Inc. ISRG.

Bio-Rad Laboratories flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.The company has a long-term expected earnings growth rate of 25%.

Integer Holdings has a long-term expected earnings growth rate of 15%. The stock carries a Zacks Rank #2.

Intuitive Surgical has a long-term expected earnings growth rate of 9.2%. The stock carries a Zacks Rank #2.

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