McKesson Corp Pricing Spineometer: 5 of 5 Vertebrae

McKesson Corp, a pharmaceutical medical supply distributor serving primarily the U.S. geography, had a strongly positive Q4 2023. Revenue rose 4.2% to $69 billion while earnings before interest and taxes rose 55% to $980 million over the same period last year.

Did pricing excellence contribute to this performance?  What pricing capability should be expected at a company that sits in the center of the U.S. medical industry?

Pricing for companies like McKesson is the result of a complex myriad of arrangements with manufacturers, medical care providers, insurers, pharmacy benefit managers, and finally patients.  Economic flow models for medical supplies, like the one from Sood, Shih, Van Nuys, and Goldman, demonstrate the many actors engaged in pricing, rebating, and contracting decisions.  To add further complexity, McKesson plays the role of multiple actors within the economic flow diagram.

(Image from Neeraj Sood, PhD, Tiffany Shih, Karen Van Nuys, PhD and Dana Goldman, PhD, “Flow of Money thorough the Pharmaceutical Distribution System”, USC Schaeffer, 6 June 2017.  https://healthpolicy.usc.edu/research/flow-of-money-through-the-pharmaceutical-distribution-system/)

Many challenges facing companies like McKesson will require a thoughtful pricing response.  GLP-1 (a diabetes drug that is increasingly used for weight loss), insulin price legislation, and branded drugs like Humira becoming generics, all impact price, and therefore performance.

Is McKesson prepared to address these challenges?

Comments made by CEO Brian Scott Tyler and CFO Britt Vitalone in their 8 May 2023 earnings call implied pricing excellence is of strategic importance for McKesson.

Britt Vitalone stated: “As we think about the products that we serve across our biopharma partners, our first job there is to think about what is it that our customers need, and then work with biopharma partners to determine the services that they need us to provide on behalf of those products. And when we do that, we work to establish a fair value for those services that we provide, regardless of what the product is. That’s what we do on a constant basis, working with our manufacturers.”

Given these comments, industry challenges, and multiple customer interfaces, we would expect to see a proper role for pricing excellence to extend from many price administrative challenges to strategic ones.

Research into the quality of McKesson’s pricing team yielded inspiring results.  An appropriately large number of professionals are focused on pricing at McKesson.  Pricing professionals were identified at the analyst, lead, manager, director, and vice president levels. Pricing professionals were engaged in deal management, strategic accounts, business development, value capture, product management, marketing, and strategy.  Pricing professionals specialized in oncology, generics, and health systems to name a few, plus the standard of data and data analysis.  Geographically, pricing professionals were concentrated in the Dallas Fort Worth Metroplex near their headquarters but could be identified in most regions where McKesson had significant operations.

Given the importance and capability of pricing at McKesson as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of June ‘23.

McKesson Pricing Spineometer:  5 out of 5 Vertebrae.

MCK (McKesson Corp.) rose from 355 on the day prior to their earnings call to 390 one week later. FY 2023 revenue of $277 B with a 1.6% operating margin and P/E ratio near 18.

Currently, a 1% improvement in price would yield a 63.2% improvement in EBIT holding all else constant for McKesson.

Hear the latest Pricing Spineometer insights and commentary at the next Pricing and Profit Management Luncheon near you.  Visit wiglafpricing.com/events/ for more details.