“Is The Neighborhood Burning Down?”: Healthcare Stocks Tumble After Terrible McKesson Earnings, Outlook

The healthcare sector is under significant pressure this morning following unexpectedly bad results from health-care giant McKesson (MCK) which tumbled over 20% after the company missed earnings and sharply cut its profit outlook for the year as income dropped by half in its latest quarter. The company said the latest results were affected by a “softer pricing environment” in its U.S. pharmaceutical business and said on the call that “when a competitor significantly undercuts our existing pricing, we are compelled to respond.”

Expenses also rose during the quarter. Analysts were surprised by company’s commentary on aggressive price competition from an unnamed competitor.

McKesson said it now expects the year’s adjusted earnings on a per-share basis to be $12.35 to $12.85, down from $13.43 to $13.93.

For the quarter ended Sept. 30, net income was $307 million, or $1.34 a share, compared with $617 million, or $2.63 a share, a year earlier. Adjusted earnings rose to $2.94 a share from $3.17. The latest quarter’s results include a pretax goodwill impairment charge of $290 million, or $1.24 per share.Revenue rose 2.5% to $49.96 billion. Analysts polled by Thomson Reuters expected adjusted earnings of $3.05 a share on $51.21 billion.

The stock this morning is crashing, dragging down the entire sector lower with it:

MCK also suggested at least one party aggressively trying to recapture share in independent pharmacy.As Cowen analyst Charles Rhyee asked in a note this morning ““Is the neighborhood burning down?” noting MCK’s comments on irrational pricing in market will weigh heavily on group and saying that distributors operate at razor-thin margins; unwritten rule among big three players has been that they all make rational pricing decisions.”

Total operating expenses climbed 15% to $2.17 billion. As the WSJ reported, on June, the company said it plans to form a health-care information-technology joint venture that it expected to take public later in an initial public offering. The planned company will combine most of McKesson’s technology segment with the bulk of Change Healthcare Holdings Inc., which is majority-wned by Blackstone Group LP. McKesson would own 70% of the new company, with the rest owned by Change Healthcare’s shareholders, including Blackstone and Hellman & Friedman LLC. The company also unveiled a $4 billion share-repurchase authorization.