Analyst: Sourcing Agreement with Wal-Mart Gives McKesson a ‘Meaningful Win’

McKesson's (MCK) - Get Report sourcing agreement with Wal-Mart Stores (WMT) - Get Report , announced Monday, "provides McKesson with a meaningful win," according to analysts at Raymond James.

With the deal, McKesson continues to "offset contract losses and generic deflation with new deals and M&A," wrote Raymond James analyst John Ransom in a Monday note.

McKesson and Wal-Mart announced a sourcing agreement for generic pharmaceuticals and an expanded long-term distribution agreement. The companies will collaborate on sourcing generic pharmaceuticals for their respective U.S. operations.

The two companies have worked together for decades. "Expanding our relationship to include a sourcing partnership for generics makes economic and strategic sense for both of us-by bringing together our respective scale and sourcing expertise, we will make our businesses stronger and create more value for our customers and patients," said Mark Walchirk, president, McKesson U.S. Pharmaceutical, in a statement.

"The dynamics of health care continue to change, and we're changing with it," said George Riedl, senior vice president and president, Health and Wellness, Walmart U.S., in the announcement. "It's why we are taking our relationship with McKesson to the next level, using our combined size and scale to drive efficiencies, something that is core to our business."

Shares of McKesson were trading at $172.72, up 4% and Wal-Mart shares were trading at $65.69, up 1% at midday on Monday.

In recent months, McKesson "has suffered contract losses from Omnicare and Publix, along with partial contract losses from Optum and Target and the probable loss of Rite Aid in 2018," Raymond James' Ransom wrote on Monday.

Meanwhile, McKesson "has made headway in offsetting these losses by winning the Safeway/Albertsons contract and through acquiring UDG Healthcare, Sainsbury, Vantage Oncology, Rexall, and Biologics," he wrote.

In a phone interview, Ransom said that the sourcing deal is a win for Wal-Mart as well, as they save money by doing this.

He also noted that the arrangement was "old school," with McKesson buying for Wal-Mart.

The old-school arrangement "is probably one of the things that's good for McKesson," he said, as McKesson keeps 100% of the economics.