Companies involved in the pharmaceutical supply chain – specifically those that distribute opioid-related drugs – have faced mounting pressure as state and local governments seek a scapegoat for the nation's opioid epidemic. Deaths from opioid overdoses increased 491% from 1999 to 2017, according to drugabuse.gov data.
Drug distributors have received more than 2,000 class lawsuits alleging that they contributed to the opioid crisis through the aggressive marketing of prescription painkillers and their lax oversight over drug distribution. After months of denying these allegations, reports surfaced Wednesday that major drug distributors are in talks to pay $18 billion to settle extensive litigation launched by state and local government, per The Wall Street Journal.
People close to the discussions said that three leading pharmaceutical distributors – McKesson Corporation (MCK), AmerisourceBergen Corporation (ABC), and Cardinal Health, Inc. (CAH) – would pay a combined $18 billion over 18 years, according to the Journal, with health care conglomerate Johnson & Johnson (JNJ) also involved in the negotiations to contribute additional money.
Below, we examine each of these three drug distributors in further detail and work through several tactical trading ideas to help traders capitalize on yesterday's news-driven price momentum.
McKesson Corporation (MCK)
McKesson provides pharmaceuticals and medical supplies in the United States and globally. The 186-year-old medical distribution company engages in wholesale pharmaceutical and medical products, servicing acute care hospitals and pharmacies. McKesson reported first quarter (Q1) fiscal 2020 adjusted earnings of $3.31 per share, delivering a 9% bottom-line surprise. The beat marks the fourth consecutive quarter that the company has surpassed earnings estimates. McKesson stock has a market capitalization of $26.78 billion, issues a 1.19% dividend yield, and is trading up 32% on the year, outperforming the medical distribution industry average by 14% over the same period as of Oct. 17, 2019.
The drug distributor's share price broke above a 12-month inverse head and shoulders pattern in July but subsequently pulled back to the 200-day simple moving average (SMA) as profit takers stepped in. Price has since launched its recent upside move from this closely watched indicator, accelerating toward the 2019 high on above-average volume after news of the opioid settlement story broke. Traders who go long should look for a retest of January 2018 high at $175.34 and limit risk by placing a stop-loss order beneath the 50-day SMA.
AmerisourceBergen Corporation (ABC)
Chesterbrook, Pennsylvania-based AmerisourceBergen distributes pharmaceuticals and over-the-counter medical products to health care providers in the United States and Internationally. In April, the New York state Attorney General's office alleged that the drug distributor was selling opioid-related painkillers to "suspicious" pharmacies and should have known better. AmerisourceBergen disputed the allegations, saying that it reports suspicious orders and refuses to serve customers where appropriate. The $17.93 billion firm posted Q3 fiscal 2019 earning per share (EPS) of $1.76 on revenues of $45.24 billion to record respective top- and bottom-line year-over-year growth of 4.9% and 14.3%. Analysts have a 12-month price target on the stock at $95.44, representing an 11% premium to Wednesday's $86.05 close. As of Oct. 17, 2019, AmerisourceBergen shares offer a 1.92% dividend yield and have returned 17.27% year to date (YTD).
Two prominent swing lows – in December 2018 and April this year – stand out on the company's chart, indicating that a double bottom is in place. More recently, the stock has traded within a falling wedge, with the pattern's lower trendline finding support from the 200-day SMA. Wednesday's settlement talks helped propel price above the wedge – a move that may trigger additional buying over the next few weeks. Those who trade the breakout should set a take-profit order near the 2018 high around the $103 level. Think about placing a stop order either underneath yesterday's low at $84.02 or beneath Tuesday's low at $81.86.
Cardinal Health, Inc. (CAH)
With a market value of $14.35 billion, Cardinal Health operates as an integrated health care services and products company. It distributes pharmaceuticals along with over-the-counter health care and consumer products, servicing hospitals, pharmacies, ambulatory surgery centers, clinical laboratories, and physician offices. The company's Q4 fiscal 2019 EPS came in at $1.11, easily topping Wall Street estimates of 93 cents per share. Meanwhile, revenue for the period of $37.35 billion increased by 5.7% from the year-ago quarter. Cardinal cited robust growth from its pharmaceutical distribution and specialty solutions customers for the better-than-expected results. On the valuation front, the stock trades at about 10 times forward earnings, below its five-year average multiple of 13.22 times. As of Oct. 17, 2019, the stock has returned 13.25% YTD and gained 6% over the past three months. Investors also receive an enticing 4.02% dividend yield.
Cardinal shares trended progressively lower between January 2018 and July this year. Sentiment began to shift in August when the price started to rally from a crucial support level at $41 before consolidating in a flag pattern for most of last month. Yesterday's developments acted as the catalyst for a breakout above a multi-year downtrend line. Given that 8.25% of the company's stock is held short, Wednesday's explosive price action has the potential to fuel a short squeeze as traders rush to cover their positions. Those who buy here should anticipate a move to $56, where price encounters overhead resistance from a horizontal line stretching back over the past two years. As this is a momentum play, keep a tight stop under yesterday's low to close out trades that don't immediately follow through.