McKesson Corporation

And welcome to McKesson's Q2 Earning Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Haya Weiss. Please go ahead.

Thank you, Suzanne. Good morning, and welcome, everyone, to McKesson's second quarter fiscal 2020 earnings call. Today I'm joined by Brian Tyler, our Chief Executive Officer, and Britt Vitalone, 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 factor section of our periodic SEC filing 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-GAP financial measures. Additional information about our non-GAP financial measures, including a reconciliation of those measures to GAP results, is included in today's press release and presentation slides, which are available on our website at .mckesson.com. With that, let me turn it over to Brian.

Thank you, Holly. Good morning, everyone. Thanks for joining us on our call today. Today we reported second quarter total company revenues of $57.6 billion. Our adjusted earnings per diluted share was $3.60, which was in line with our expectations. And when excluding the 33-cent prior year benefit from the reversal of a contractual liability associated with McKesson's investment and change healthcare, second quarter results per diluted share increased more than 10% year over year. Our first half fiscal 20 results give us confidence in our reaffirmed fiscal 20 full year outlook of $14 to $14.60 of adjusted earnings per diluted share. This continues to reflect year over year adjusted operating profit growth in each of our segments. Before I go deeper into our second quarter results, I want to take a few minutes to discuss one topic I know is top of mind for everyone, and that is opioid litigation. Last week, McKesson, along with two other distributors, reached a collective $215 million settlement with two Ohio counties, Cuyahoga and Summit, in the first track of the multi-district opioid litigation. McKesson's portion of the settlement was $82 million, which was recorded in our second quarter results. We strongly dispute the allegations made by these two counties. However, settling the Bellwether trial was in our view an important stepping stone to achieving a broad resolution to opioid litigation and to accelerating relief efforts for the people and communities impacted by this public health crisis. Over the next few months, we'll be working hard with other parties on the settlement framework that includes states and their subdivisions. While we have made good progress, there are many details and variables that remain open and still need to be addressed. We're optimistic that a broad resolution can be achieved, and that remains our goal. All along we've said the goal is to ring-fence the risk. However, to the extent the broad resolution settlement framework is unsuccessful, McKesson is prepared and continues to be prepared to litigate and to vigorously defend the mischaracterization that our company drove demand for opioids in this country. The litigation process, if necessary, will be costly and could take many years to conclude, causing a significant and substantial delay to crisis mitigation efforts. I've stated this before, McKesson remains firmly committed to being part of the broader solution to this crisis. And while I appreciate there are many, many questions on this topic, given that discussions are ongoing, we'll be somewhat limited in what we can say, and I'm sure you can appreciate this and we thank you for your understanding. I also want to provide a brief update on our Board of Directors. In mid-October, our Board of Directors welcomed Maria Martinez as a new independent director. Maria has served as Executive Vice President and Chief Customer Experience Officer for Cisco since April 2018. She brings deep experience in customer experience, technology, and innovation, which we look forward to benefiting from. Maria's appointment, in addition to Ken Washington joining our Board of Directors in July, demonstrates our continuing commitment to refresh our Board and add valuable expertise and new perspectives. Now, let's get to the business results and share why I'm so confident in McKesson's positioning and our outlook. If you step back from a macro perspective, trends continue to support growth in healthcare. We have an aging population as well as increase in chronic conditions. We're also seeing growth in innovative specialty medicines. The pipeline is rich with such medicines, including biosimilars. Our U.S. pharmaceutical and specialty solutions segment reflected solid execution in the quarter against this macro backdrop. Branded pricing is tracking in line with our fiscal 20 assumption of -single-digit price increases. For generics, consistent with prior quarters, our Clarus One sourcing venture is performing in line with expectations, and the sell side remains competitive but stable. Independent pharmacies continue to demonstrate resiliency and remain an important customer of McKesson. Recently, our McKesson RX ownership team partnered with the National Community Pharmacist Association to sponsor its 10th annual ownership workshop series. RX ownership supports the future of pharmacy ownership by giving pharmacists the knowledge, the support, and the tools required to achieve their ownership goals. In the past year, RX ownership assisted more than 725 owners in launching a new pharmacy, and since 2008, our team aided in the ownership or transfer process of roughly 6,000 community pharmacies. We're proud of the long-term investments we've made in helping independent pharmacies deliver exceptional care to their patients and communities. I'm also pleased with the strength we continue to see from our specialty businesses, where we have a broad array of assets and capabilities. When I talk about our specialty businesses, I'm largely referring to our provider solutions and practice management businesses that serve the community setting, primarily in oncology, but also in other ologies like ophthalmology, rheumatology, and neurology, and our life sciences business that leverage our provider footprint and differentiated services to drive solutions upstream for our manufacturer partners. These businesses are organized in three strategic areas. First, provider solutions, which is the largest of the three businesses, include the distribution and GPO services that are core to McKesson and to the needs of our physician customers. Also in this business, we have technology and tools that enhance value-based care delivery and products and services to help expand practice revenue. Next is the practice management business. We discuss the U.S. oncology network quite often. This organization supports more than 1,400 physicians across 450 sites of service. We provide a unique value proposition which allows the physician to remain independent while utilizing McKesson services and staff to ensure the practice is running efficiently and effectively. This allows the physician to focus his or her time on treating patients. McKesson has 15 practices in the U.S. oncology network that are participating in the oncology care model, or OCM. The Centers for Medicaid and Medicaid Innovation recently released results for the fourth performance period related to the OCM. I'm pleased to report that all 15 practices earned high remarks for quality performance. The practices improved care and provided an enhanced patient experience and also saved approximately $35 million during the performance period as compared to the established benchmarks. We are committed to ensuring that community practices have access to all the resources necessary, including access to clinical trials, to successfully accomplish the challenging practice transformation required by the OCM and the other value-based alternative payment models. The third business is our McKesson Life Sciences business. This business includes third-party logistics, specialty pharmacy solutions for oncology, and other rare and orphan products, patient access, adherence and affordability solutions, clinical education services, and a suite of data services providing commercial insights and real-world evidence. These services help ensure biopharma manufacturers are successful in the post-launch commercialization of their products. These three businesses are well positioned as innovative specialty products, including biosimilars, are coming to the market, and McKesson is often the partner of choice throughout the life cycle of a therapy. As you can see, two of our strategic imperatives, supporting specialty and the manufacturer's services value proposition, are underpinned by the strong portfolio of our existing offerings. And we consistently look at ways to expand those offerings and create new value-added services for our customers. We are investing in these businesses, specifically in the areas of oncology and biopharma services. We're making these investments in order to further expand our capabilities and support our future growth. Let me turn now to Europe. As a reminder, last quarter in our UK retail business, we experienced industry-wide underfunding by the NHS. Consistent with our expectations in July, we did see a nominal tariff increase in the month of August. And we do expect a further upward tariff revision later this fiscal year, which should result in a partial recovery of the underfunding we've experienced year to date. Outside of the UK, in Europe, we continue to see an aggregate -to-date performance in line with our expectations for that segment. Britt will discuss our full year outlook for this segment in a few minutes. A few words on our medical surgical business. We continue to see above market growth as we operate in strong markets and care shifts out of the hospital to alternate sites of care. McKesson has a full range of products and services for our physician, health system, post-acute and home care provider customers. So we can serve their needs comprehensively and our customers benefit from our enterprise mindset as our MedSurg team partners closely with our US Pharmaceutical and Specialty Solutions business to ensure physicians receive the pharmaceuticals they need to run their practices. This continues to be an area of growth for our business. And the MSD acquisition, which we fully lapped in the first quarter, is on track with its integration as we work to consolidate the business and position ourselves to effectively scale. Turning to the other segment, which primarily consists of Canada McKesson Prescription Technology Solutions, or MRXTS, and our investment in change healthcare. As we evaluate ways to further leverage the scale and expertise of our businesses in Canada, we've recently streamlined our leadership team structure into a retail and wholesale operations focus. We've introduced two new senior vice president positions responsible for leading the core operating businesses of retail, which includes digital and loyalty programs, and our distribution solutions and specialty health business in Canada. This strategic change will enable our Canadian operations to work even better together as we deepen relationships with manufacturers and retail partners and drive real value for patients. I believe we have the right talent to move the company forward and contribute to a better healthcare system for all Canadians. Moving on to MRXTS, the business continues to show strong growth in both new and existing products. In addition, our Cover My Meds business, which is focused on electronic prior authorization, continues to innovate across the organization. During the quarter, Cover My Meds and RX Crossroads by McKesson announced the launch of AMP, which stands for Access for More Patients, a first in class technology driven patient support solution that transforms how patients access, afford, and adhere to their medications. This collaboration brings together the robust technology platform and established provider network of Cover My Meds with the deep specialty experience and commercialization expertise of RX Crossroads by McKesson and is designed to automate access to specialty medications for physicians and patients. The traditional hub model has had complex requirements and many times relied on time consuming manual processes, which typically delay treatment sometimes significantly. In our pilot case study, McKesson's AMP solution enabled patients across the U.S. to access their specialty medications 27% faster than traditional hub programs, fundamentally improving the way patient support is provided. AMP also provides high touch services for patient cases that need intervention support beyond the automated technology platform, such as proactive clinical support, behavioral coaching, and financial assistance. Improving adherence and helping to support better outcomes for patients. We're very excited about this cross collaboration as it again exemplifies our mission to improve patient care by providing innovative service offerings and demonstrates the value of our McKesson team and our broad set of capabilities. This represents another example of how we're investing in our differentiated businesses. Let's move on to change healthcare. Our value creating transaction with change healthcare provided McKesson with a cash payment upfront that allowed us to retain 70% ownership of the new company. It created a scaled healthcare software and analytics and technology enabled services company that will unlock the value of our legacy MTS businesses. We have begun activities to exit the investment in the next 6 to 12 months in a tax efficient manner. This drove certain charges that impacted our results for the second quarter. Britt will walk you through these accounting details later in the call. In the change healthcare transaction, we found a way to create value while exiting businesses that weren't core to our McKesson strategy. It's a great example of how McKesson regularly evaluates our portfolio to ensure we have the right set of assets for the present but also for the future. I'm very pleased by the execution across our businesses in the second quarter. That execution included the impact of our cost savings initiatives across the enterprise. Britt will get into more of the details but I think from my remarks you can see evidence of not only the savings efforts but the partnership across the businesses and overall cultural change happening across the organization. For example, we centralized our IT organization, implementing a center-led hub model to increase efficiency. In MedSurg, I talked about the partnership with the US pharmaceutical and specialty solution segment to ensure physicians receive the pharmaceuticals they need to run their practice in an easy way. And in MRXTS, I talked about the partnership with RX Crossroads business to launch AMP. Overall, we're evolving behaviors as it relates to company collaboration and spending and are focused on moving with speed in an ever-changing healthcare landscape. We're building upon our strong culture, leveraging our diverse perspectives to make decisions with an enterprise-first team McKesson mindset. I feel confident in the execution I've seen across our businesses in the first half of fiscal 20 and I feel great about the future of McKesson. And with that, let me turn the call over to Britt to go over the financials and some of the details I alluded to. Britt?