3 Pharma Stocks Getting Fat Off GLP-1: Here's the Best Buy Now

Next to artificial intelligence, one of the biggest investment themes over the past few years has been a class of anti-obesity drugs called glucagon-like peptide 1 (GLP-1) therapies, better known by the brand name Ozempic, which is made by Danish pharmaceutical company Novo Nordisk (NVO).

Since its approval for the treatment of diabetes by the Food & Drug Administration in 2021 and subsequent feature on the Dr. Oz TV show and celebrity testimonials, demand for Ozempic has skyrocketed. Novo Nordisk subsequently developed Wegovy to specifically target weight-loss.

Eli Lilly (LLY) followed in 2022 with Mounjaro, a drug similar to Ozempic, but one that also targets glucose-dependent insulinotropic polypeptide (GIP) receptors. Last year Lilly introduced Zepbound specifically for weight loss and is rapidly gaining market share due to its greater efficacy in weight-loss.

Both pharma giants have had difficulty producing enough of the drugs to meet demand. And though each saw their stocks soar due to GLP-1s, there is a better way to play the market.

Drug distribution is on long trajectory higher

Three companies control virtually the entire supply of pharmaceuticals in the U.S. Cardinal Health (CAH), Cencora (COR) (formerly AmerisourceBergen), and McKesson (MCK) are responsible for 90% of domestic wholesale and distribution, and GLP-1 treatments have fueled a dramatic melt-up in valuation.

Over the past three years, Cardinal Health soared 142%,McKesson surged 133%, and Cencora rose 87%. In contrast, the S&P 500 has gained only 36% and NVO is 74% higher.

While Lilly's stock more than tripled in value as Mounjaro sales took off, the pharmaceutical distributors are the better GLP-1 play because they have a more diversified revenue stream.

Drug development is a risky business and finding blockbusters like Mounjaro and Zepbound are hit-or-miss. With multiple avenues of opportunity available to the distributor, which offer a wide selection of drugs and medical supplies, the risk is minimized.

Each of the trio has been a solid investment, but one is better than the others. Let's look at each to find this winner.

Cardinal Health

Cardinal Health had $210 billion in pharmaceutical and specialty drugs sales in fiscal 2024, up 11% year-over-year, helped in large part by GLP-1 sales. In Q4, segment sales rose 13% to $55 billion, with four percentage points of that growth specifically coming from GLP-1 drugs despite occasional shortages.

Yet these therapies actually contribute very little to Cardinal's bottom line. Most of its profits are derived from its specialty pharma business, especially in oncology, but it recently took measures to expand beyond that.

The distributor made two acquisitions last year, taking a 71% majority stake in GI Alliance, one of the leading U.S. gastroenterology management services organizations (MSOs), and it acquired Advanced Diabetes Supply Group, a leading diabetic medical supplies provider that serves close to half a million patients annually.

McKesson

Similar to Cardinal Health, industry peer McKesson controls about one-third of pharma distribution. It had $278 billion in pharma sales in its last fiscal year, a 16% increase from the prior year. GLP-1 drugs also contributed to that growth, but it also has a strong presence in oncology as well as biopharmaceuticals.

CVS Health (CVS) is its largest customer, accounting for a quarter of all sales, and McKesson has a joint venture with Walmart (WMT) for generics procurement called ClarusONE.

This is a key component of McKesson's profitability because where generics make up about 10% of a distributor's revenue, they can account for two-thirds of profitability. It has significant leverage in negotiating with generic drug manufacturers, and untangling the JV would be exceptionally difficult, meaning Walmart will remain a partner for years to come.

McKesson also won a contract from Cardinal Health with OptumRx, the second-largest pharmacy benefit management firm behind CVS's Caremark.

Cencora

The third player in this oligopoly is Cencora. It is the largest of the three with $279 billion in annual sales, and it boast some of the best strategic partnerships with some of the biggest drug distribution customers, including Walgreens (WBA), Cigna (CI), and Kaiser Permanente.

Cencora had $265 billion in U.S. healthcare solutions sales, up 13%, also driven largely by GLP-1 sales. Yet like Cardinal Health, it has been making acquisitions to expand and diversify its business. In 2021, it purchased European drug distributor Alliance Healthcare, one of the three largest distributors on the continent. In 2023, bought Pharmalex, a biopharma consulting services provider, giving it a new path for growth.

The distribution firm, however, lost a contract with the Florida Cancer Specialists & Research Institute as McKesson acquired a 70% stake in it last year. It could serve as a headwind this year and into fiscal 2026.

However, in November Cencora acquired Retina Consultants of America, a leading MSO of retina specialists, that shows the drug distributor is looking to expand beyond oncology.

The verdict

All three are promising investment candidates and buying the basket of them would be worthwhile. With Wall Street ranking all three a buy, McKesson looks like the one to beat.

Its position in specialty pharmaceuticals, generics, and biopharma give it a competitive edge, plus it has earned major contract wins in the last year. Cencora faces some temporary hurdles, and though I like CAH's 28-year history of increasing its dividend, MCK stock has the clearest path to growth.

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