McKesson

McKesson and Cardinal Health announced an agreement to extend their partnership with CVS through June 2032. McKesson serves CVS mail-order and specialty pharmacies, and Cardinal serves CVS retail pharmacies. Shares for both firms are up a mid-single-digit percentage.

Why it matters: CVS is the largest customer for both McKesson and Cardinal, making up roughly 24% (over $90 billion) and 28% (over $70 billion) of total revenue in fiscal 2026, respectively, so securing the relationship through 2032 is crucial for both firms' long-term growth ambitions. Major contracts like this typically have a 5-year maturity timeline, and the CVS partnership for both firms was previously set to expire in 2027. We expected McKesson and Cardinal to extend their relationship without a major issue, given they have worked together for well over a decade and Cardinal also has a generics sourcing joint venture with CVS. That said, we have seen cases of large customers leaving their distributor for another in recent years; OptumRx left Cardinal for McKesson and Publix left Cencora for Cardinal, both in 2024. So, we think the CVS announcement, coupled with the affirmation of both fiscal 2027 and long-term EPS targets, looks great for long-term investors.

The bottom line: We maintain our fair value estimate for Cardinal ($235) and McKesson ($930), and both firms' shares look appropriately valued. Locking down such an important partner also underpins narrow moat ratings, as it reinforces McKesson's and Cardinal's position in the distribution marketplace and strengthens the already high switching cost between the distributors and CVS. The timing of the announcement is also worth highlighting since it comes less than two months after Cencora announced that certain prescription volume is leaving Walgreens. We think some of the lost Walgreens volume is shifting to CVS, which would benefit both McKesson and Cardinal.

We are raising our fair value estimate to $930 per share from $910 for narrow-moat McKesson, reflecting the guidance hike and recent cash flows. Our updated valuation reflects 20.8 times EV/2026 adjusted EBITDA.

For fiscal 2027, we expect 7% and 18% in revenue and adjusted EPS growth, respectively, both of which are in line with guidance. Our midcycle revenue growth assumption of 6% is mainly driven by continued growth in its US pharmaceutical distribution. McKesson in 2025 lifted its long-term growth target for the segment to 6%-8% from the previous 5%-7%, and we have conviction that the firm could meet this goal given management's proven track record. Historically, branded drug price inflation has been a key driver behind wholesalers’ revenue growth. Additionally, increased utilization of high-priced specialty drugs and an aging US population are tailwinds for long-term revenue growth.

We forecast McKesson’s gross margin to slowly recover and increase year over year, thanks to trends in the overall US healthcare system and investments in the firm's technology assets. Generic drugs, despite carrying a materially lower price tag compared with their branded counterparts, have an outsize impact on wholesalers’ margins. Since generic drug manufacturers often compete with each other for the same indication, wholesalers have greater pricing power with them than with branded manufacturers. Generic drug prices climbed during the mid-2010s due to increased utilization of generics and an FDA backlog, but prices have dropped since, and so have wholesalers’ margins, as more manufacturers entered the market and the FDA increased approvals. We now see generic drug prices stabilizing and expect wholesalers’ margins to recover accordingly. We also expect some margin tailwinds from more biosimilars entering the market. Biosimilars aim to offer cheaper options to specialty drugs and, although they carry lower prices compared with their branded alternatives, wholesalers can extract higher margins from them. This should foster margin improvement for McKesson, especially since specialty drugs and biosimilars are poised to take an increasingly larger share of dispensed drugs over the next five years.

We assign McKesson a narrow moat rating because we believe the characteristics of the US drug distribution market and McKesson’s customers’ unlikeliness to move to a different distributor (switching costs) should uphold McKesson’s competitive position in the space and continue to support economic profits for at least the next 10 years.

Pharmaceutical wholesalers fill a central role in the supply chain for prescription drugs with over 90% of all prescription drugs in the United States going through wholesalers. While pharmaceutical distribution is their cornerstone, drug wholesalers have a complex role that extends beyond distribution and have developed essential partnerships with their customers. By contracting directly with manufacturers for branded and generic pharmaceuticals (and leveraging their substantial purchasing power), the big three wholesalers (McKesson, Cencora, and Cardinal Health) are able to consistently negotiate for the lowest rates on the market, typically significantly below that of the Wholesale Acquisition Cost, or WAC. Additionally, a full-line wholesaler will typically stock over 20,000 SKUs associated with prescription drugs and negotiate with approximately 1,200 different manufacturers, a task less efficiently accomplished by retail pharmacies on their own.

The three big wholesalers act as an oligopoly. They make up over 90% of the overall US drug distribution market, effectively servicing the market, and they have done so for the past 20-plus years. We anticipate most of the market to continue to be serviced by these three players over the next 10 years, with minor changes in market share among them.

Drug distributors work extremely efficiently and effectively to service their customers. Their largest customer base is chain pharmacies/stores but they also serve independent pharmacies, hospitals, long-term care centers, and mail service pharmacies. Most of the top 15 pharmacies by sales in the United States, which make up nearly 75% of the overall pharmacy industry prescription revenue, have some sort of partnership with one or more of the three big wholesalers that has lasted for many years.

McKesson covers roughly one third of the US drug distribution market. CVS (pharmacies inside Target stores, and CVS Caremark’s mail and specialty pharmacies) is McKesson's largest customer and has been for the past decade; McKesson generates one-quarter of its total revenue, or over $85 billion in fiscal year 2025, from CVS. McKesson extended its pharmaceutical distribution partnership with CVS through June 2027. This is a mutually beneficial situation for both McKesson and CVS for a multitude of reasons. Knowledge that is gained over the years of partnership is hard to replicate with a new wholesaler. This is especially true for big retailers because we estimate that McKesson has a specific coordination and management system that could take months to develop for a new distributor. Furthermore, it is highly unlikely that a customer will get better pricing by switching from McKesson to either Cencora or Cardinal Health because the cost of time lost during a transition and restructuring phase would not make it viable for a new distributor to offer better rebates than the original distributor. Distributors also offer consulting, logistics, as well as data and analytics services to its customers. We estimate that McKesson caters different and customized services to its customers, especially its big retailer customers, so both the distributor and customers can work at maximum efficiency and effectiveness. And we believe these services make the relationship between McKesson and its customers stickier. For customers, switching to a new distributor would mean loss of operational expertise that they have achieved over the years of working with their original distributor. In our view, these combined reasons act as a catalyst behind big retailers sticking with their distributors and locking down their relationships with long partnerships. This can be seen from the fact that there have not been any major retailers switching their distributors during the last 10 years, and we expect this trend to continue for the next 10 years.

Beyond distributing pharmaceutical drugs, McKesson also started a generics procurement joint venture with Walmart in 2016 named ClarusONE. This generic drug sourcing program combines the scale and purchasing power of McKesson and Walmart to absorb healthy buy-side margin from generic drug manufacturers. This is crucial for a drug distributor’s profitability because while generic drugs make up roughly 10% of a wholesalers’ top line, they make up over two thirds of its gross profit. Since there are multiple generic drug manufacturers that aim to effectively produce the same drug, they have to compete with each other to win over a contract with one of the three big wholesalers. This provides major pricing power to McKesson, compared with when they purchase branded drugs, which helps them drive a significantly higher margin from generic drugs. Switching costs would entail unraveling of the joint venture and result in pharmacies facing higher acquisition costs for generics—which account for a vast majority of dispensing volumes. Since Walmart has a financial stake in this relationship, it is highly unlikely that it will stop working with McKesson and move over to a new distributor, especially in the next 10 years.

McKesson distributes pharmaceutical products to nearly one third of the industry, leading to substantial negotiation leverage with generic drug manufacturers.

Continued investment behind specialty assets and managed service organizations enables McKesson to deepen its relationship with key customers and offer opportunities to expand its margin-accretive segments.

New innovation—both on the branded side, like with GLP-1s, and off-patent side, like with biosimilars—supports McKesson's healthy long-term revenue growth outlook.

Scrutiny from the public and politicians over exorbitant branded and specialty drug list prices could result in lower price inflation long term, slowing McKesson’s top-line growth.

Falling behind its peers in specialty areas could stagnate growth in McKesson's non-distribution high-margin businesses like prescription technology solutions and can weigh down future earnings.

Uncertainty around pharmaceutical-specific tariffs and policies such as most-favored-nation pricing could muddy McKesson's near- and midterm revenue and earnings power.