McKesson to Buy US Oncology - Analyst Blog

McKesson Corp. (MCK) recently announced its intention to purchase US Oncology, an integrated oncology company. McKesson will acquire all the outstanding shares of US Oncology for cash. The company will also absorb US Oncology's debt of $1.6 billion, valuing the entire deal at $2.16 billion. The companies are looking to close the deal by the end of 2010. The closing is subject to regulatory approval.

Excluding transaction and integration costs, McKesson expects this acquisition to be neutral to fiscal 2011 earnings, and modestly accretive in fiscal 2012.

McKesson intends to combine its Specialty Care Solutions business with US Oncology following the completion of the acquisition. We believe that this acquisition will help McKesson expand its specialty services, particularly in oncology.

The news of the US Oncology acquisition comes on the back of McKesson's second quarter fiscal 2011 earnings results, announced last week, whereby the company reported earnings of $1.03 per share on revenues of $27.53 billion. On the second quarter earnings call, McKesson reaffirmed its fiscal 2011 earnings guidance range of $4.72 to $4.92 per share. The Zacks Consensus EPS Estimate for fiscal 2011 is $4.79.

Neutral on McKesson

We currently have a Neutral recommendation on McKesson, which is supported by the Zacks #3 Rank (short-term Hold rating). McKesson is a major player in the pharmaceutical and medical supplies distribution market, and we believe that several factors like an aging population, increased use of generics, and growing demand for specialty pharmaceutical products, especially oncology drugs, should help drive growth in the Distribution Solutions segment in fiscal 2011. However, the company faces tough competition. Moreover, with the swine flu pandemic turning out to be less severe than expected, we believe McKesson will continue pursuing business opportunities to help sustain a similar level of growth in fiscal 2011.