C Citigroup Inc

Shares of drug wholesalers were slammed Friday amid signs that a price war has broken out in the sector, following a dour earnings report from McKesson Corp., one of the largest pharmaceutical distributors in the U.S.

McKesson sharply cut its annual profit outlook Thursday afternoon, citing the decelerating rise of drug prices and internal competition among the companies that bridge drug manufacturers with pharmacies.

"We expect the combination of recent competitive pricing and further moderating branded price-increase activity will have a combined negative effect on our business by approximately $1.60 to $1.90 per diluted share…with the larger impact coming from competitive pricing," said John Hammergren, CEO of McKesson, according to a conference call transcript.

"I know at least one company in our sector has been pretty public about growing revenues above market and about regaining market share, particularly in the independent space," Mr. Hammergren said on the call, stopping short of singling out a company by name.

The sounding of the alarm by McKesson triggered a selloff of the sector's biggest players, with McKesson's share price sinking 26%, Cardinal Health Inc. sliding 14% and AmerisourceBergen Corp. retreating 12%. Shares of some drugmakers also declined, with an NYSE index of pharmaceutical stocks falling 1.8% Friday afternoon.

Garen Sarafian, an analyst at Citigroup, said in a research note that AmerisourceBergen has been one source of increased competition, by moving to grow its market share among independent pharmacies.

Representatives from AmerisourceBergen didn't immediately respond to a request for comment.

He added that prices of brand-name drugs trailed previous estimates of a "moderate" slowing pace of price increases. Among the cloudy outlook, he also noted that "price wars can end as quickly as they begin."

David Larsen at research firm Leerink wasn't as optimistic about the sector, saying "these problems are long term and the new normal." In a note to clients, he said manufacturers "will be reluctant to raise prices at aggressive rates for at least...[six] more months, and our data indicate that generic price inflation will likely remain fairly steady." He underscored that "price competition will remain fierce."

Mr. Larsen also noted that price competition was stoked by distribution agreements inked by the major players in the sector like Walgreens Boots Alliance Inc. and CVS Health Corp. One such deal in May had Wal-Mart Stores Inc. partnering with McKesson to source generic pharmaceuticals, fending off fears that Walgreens could snatch the business from McKesson.

"The slowdown in generic inflation is forcing the drug distributors to become more aggressive when competing for business," Mr. Larsen said.

McKesson's warning bodes poorly for large manufacturers, too. With major new drug launches in relatively short supply, price increases have become an important way for pharma and large biotech companies to generate sales and profit growth. McKesson said some companies have unexpectedly delayed price increases.

This news raises the stakes for the last three months of the year. Historically, the fall has been the strongest time of the year for drug sales, because buyers try to load up on inventory before price increases go into effect in January.

Charley Grant contributed to this article

Write to Ezequiel Minaya at ezequiel.minaya@wsj.com

(END) Dow Jones Newswires

October 28, 2016 14:25 ET (18:25 GMT)

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