McKesson Corporation

Good day and welcome to the McKesson Q1 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Holly Weiss. Please go ahead.

Thank you, Justin. Good afternoon and welcome everyone to McKesson's first quarter fiscal 2020 earnings call. Today, I'm joined by Brian Tyler, our chief executive officer, and Britt Vitilone, our chief financial officer. Brian will lead off, followed by Britt, and then we will move to a question and answer session. Today's discussion will include forward-looking statements such as forecasts about McKesson's operations and future results. Please refer to the cautionary statements in today's press release and our slide presentation and to the risk factors section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements. During this call, we will discuss non-GAAP financial measures. Additional information about our non-GAAP financial measures, including a reconciliation of those measures to GAAP results, is included in today's press release and presentation slides, which are available on our website at investor.mckesson.com. With that, let me turn it over to Brian.

Thank you, Holly, and thanks to everyone for joining us on our call today. We're pleased today to be able to report a strong start to our fiscal year 2020 and For the first quarter, we achieved total company revenues in excess of $55 billion and adjusted earnings per diluted share of $3.31, ahead of our original expectations. On our fourth quarter call in May, I discussed that we were entering the fiscal year with positive momentum, and I feel really good about this, underpinning our first quarter results. We're seeing healthy growth across many parts of our business, which is a direct result of the actions we have been and are taking to execute on our strategic imperatives, which are enabling us to become a more focused and efficient company. And our balance sheet remains strong, giving us the flexibility to deploy capital that can differentiate McKesson and create shareholder value. As a result of our first quarter performance, combined with our confidence in the business as we look ahead, We're raising our fiscal 2020 adjusted EPS guidance range to $14 to $14.60. This is from our previous range of $13.85 to $14.45. Now turning to the business. I'll summarize our first quarter results and then turn the call over to Britt to elaborate. The U.S. pharmaceutical and specialty solutions had a good start to the year. driven by our broad set of specialty biopharmaceutical capabilities focused on both providers and manufacturers. I'm particularly pleased as this demonstrates the progress we're making on one of our three key strategic imperatives. We continue to see biopharma dynamics that are trending in line with our annual guide of mid-single-digit price increases on branded drugs. In addition, given our presence in the provider space and particularly oncology, where we are well positioned as biosimilars continue to become prevalent. Talking about generics for a moment. Similar to the last few quarters, our CLARIS-1 sourcing platform continues to deliver yield in line with our expectations. With its scale, we're able to buy at prices that are competitive with our peers. On the sell side, we continue to see a market that is competitive but stable. A few comments on Europe. Our UK retail business performance was impacted primarily by temporary wide NHS underfunding, which we believe should improve in the second half, and to a lesser extent, volume weakness. Performance in the other European countries was not enough to fully offset these challenges. Britt will speak to the expected full year impact. Before I address the NHS more specifically, let me remind you of the actions we've previously taken in the UK and across Europe to reposition the business for long-term profitability. With new leadership at the helm, we're making solid progress towards further rationalizing our store footprint and streamlining our back office functions, and we continue to evaluate our cost structure as we do in all our businesses. Turning back to the NHS, we're pleased by recent announcements first to increase the retail tariff beginning in August, and we would expect to see further upward revisions in tariffs later in the year, which should make up partially for any underfunding. The NHS also announced the new five-year community pharmacy contractual framework. This framework brings greater clarity and long-term certainty by maintaining the current level of industry funding for community pharmacies for the next five years. While certain elements of the funding allocation are yet to be fully defined and could evolve over the five-year time horizon, we view this as an incrementally positive development for our European business. McKesson remains active in its support of and direct discussions with the UK government on the future of community pharmacies and healthcare in the UK. Turning to MedSurg, our medical surgical business continues to generate above-market strong organic growth with its focus on delivering care in low-cost patient settings and we have now lapped the medical specialties distributor, or MSD, acquisition, which is delivering results in line with our expectations. We saw good growth across multiple markets and product categories, including lab, pharmaceutical, and McKesson private label. The non-acute space continues to be an encouraging area for us. Like others in healthcare, we continue to see care shift to these non-acute settings where we currently operate. With investments such as MSD and our new technology and our distribution centers, we're continuing to expand our services to these providers and to their patients. Turning to the other segment, which primarily consists of Canada, McKesson Prescription Technology Solutions, or MRXTS, and our investment in Change Healthcare. We see improving prescription trends in our own Canadian retail business, which reflects our focus on the retail customer experience. We've made investments in people and in reconfigured pharmacy formats. With strengthening fundamentals, we believe this can reinforce the role that community pharmacy plays in Canadian healthcare. Within MRXTS, we continue to see good growth in Cover My Meds and the Relay Health Pharmacy, driven by unique technology offerings that resonate with both our retail and biopharma partners. We continue to make investments in this business to position us for future growth. Change Healthcare achieved an important milestone with the completion of its initial public offering in June. Britt will speak more about this and what we can expect going forward. We're also investing in platforms that enhance our data and analytics capabilities. We realize benefits across the enterprise in the first quarter, and we expect to see expanding benefits in the future. I now want to touch upon drug pricing reform and the policy landscape. I had the opportunity recently to spend a few days in Washington, D.C. McKesson continues to engage as a key stakeholder in educating policymakers to address issues that may impact patients, our industry, and community-based pharmacy and medical practices, and helping to drive the necessary change to support access, quality, and affordability for a sustainable healthcare system. These objectives align with the administration's goals and we're committed to continuing the dialogue with policymakers and industry partners on sound, sustainable, and pragmatic solutions. It remains a dynamic environment, yet we remain confident in McKesson's path forward. The critical role of the services we provide to the healthcare industry today and our ability to identify and apply solutions to address the most pressing challenges to the healthcare system globally. Let me address two of the most recent developments. The Senate Finance Committee published a package of measures last week. We anticipate there might be further modifications as the package makes its way through the legislative process. So at this point, we're not in a position to go into great detail on specific provisions. However, we will continue to engage with policymakers and industry partners to ensure that these reforms support the efficiency, sustainability, and security of the supply chain as we seek to improve cost, quality, and access. Finally, earlier today, the U.S. Department of Health and Human Services, or HHS, and the U.S. Food and Drug Administration, or FDA, announced a safe importation action plan. Given how recent this announcement is, we haven't yet had the full time we'd like to digest or study this plan, but maybe a few just quick preliminary thoughts. Obviously, McKesson's presence in both U.S. and Canada gives us a unique perspective on supply chain considerations and the impacts to stakeholders and patients as we navigate this complex question of importation. There are legitimate concerns that importation could potentially introduce counterfeit or fraudulent products into the U.S. Importantly, we have a primary responsibility to maintain a safe, secure, and efficient supply chain and to ensure that we conform to FDA safety and efficacy standards in addition to the safeguards put in place by the 2013 passage of the Drug Supply Chain Security Act. These objectives are paramount as we evaluate the two pathways announced in today's plan. Before I wrap up, I'd like to spend a couple of minutes on the opioid epidemic. We continue to believe distributors are being disproportionately targeted Given our important but limited role in the supply chain, filling orders from licensed pharmacies who are in turn filling prescriptions written by licensed health care providers, any suggestion that McKesson drove demand for opioids in this country would reflect a fundamental misunderstanding and mischaracterization of our role as a distributor. We will continue to fight that mischaracterization in the multiple venues, both state and federal, where lawsuits have been filed by thousands of plaintiffs. These are clearly novel, complex, and unprecedented claims that must be navigated. I remain deeply concerned about the impact of this crisis on families and communities across the U.S. and are passionately committed to using Kesem's capabilities to be part of the solution. This includes partnering with government, industry, social institutions, and other players to help bring this crisis to an end. I've spoken about it before, but let me remind you of the investments we've made and continue to make in our programs, our processes, our technologies dedicated to preventing diversion, and our corporate initiative announced last spring to help address the epidemic. Those include educating the pharmacies and hospitals to whom we deliver about the importance of compliance with DEA regulations, creating a nationwide clinical alert system that uses patient prescription history to identify patients at risk of opioid overuse, abuse, addiction, or misuse. and actively advocating for public policies that will help address the opioid epidemic. In addition, we contributed $100 million to establish the Foundation for Opioid Response Efforts, a foundation dedicated solely to driving solutions to the epidemic. I'm proud of our teams and our team members who ensure the safety and security of our supply chain day in, day out. With that, let me turn the call over to Britt.