McKesson Corporation

Good day, and welcome to McKesson's Q3 earnings call. Today's conference is being recorded. At this time, I'd like to turn the call over to Holly Weiss. Please go ahead.

Thank you, Jack. Good morning, and welcome everyone to McKesson's third 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 factor 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 good morning, and thank you, everyone, for joining us on our call this morning. Before I get into our third quarter results, I wanted to take a few minutes to provide a brief update on opioid litigation. As you know, we've been engaged in complex discussions with the state attorney's generals and others about a settlement framework with the goal of achieving a broad resolution of opioid-related claims. Those discussions continue to narrow what's left to address to achieve resolution on all the items that remain. However, to the extent our efforts to reach a broad resolution settlement framework are unsuccessful, McKesson continues to be prepared to litigate and vigorously defend the mischaracterization that our company drove the demand for opioids in this country. McKesson remains firmly committed to being part of the broader solution to this crisis. Given, however, the discussions and litigation are ongoing, I'll be somewhat limited in what I can say. I do appreciate your understanding. Now, let's get to our business results. Today, we reported third quarter total company revenues of $59.2 billion. Our adjusted earnings per diluted share was $3.81, and I'm pleased with our third quarter and year-to-date execution across the majority of our businesses in our fiscal 2020. Also today, we reaffirmed our fiscal 2020 full-year outlook of $14.60 to $14.80 of adjusted earnings per diluted share, which we first provided on January 13th. This update reflects our outlook for growth in our U.S. pharmaceutical and specialty solutions segment, primarily driven by specialty, strength in our medical-surgical segment, lower than anticipated corporate expenses, and the benefit from share repurchase activity in the third quarter. Our U.S. pharmaceutical and specialty solutions segment performed well in the quarter, reflecting stable macro fundamentals and good execution. and was aided by the continued strong growth across our specialty businesses. Let me walk you through the recent trends from an industry fundamental standpoint. For the third quarter, we saw branded price increases tracking in line with our expectations, and we continue to assume mid-single digit branded price increases year over year for fiscal 20. For generics, we remain disciplined in our approach to the market, We are sourcing effectively through our scaled sourcing venture, and the sell side remains competitive but stable. I'd like to take a moment to acknowledge how pleased we are that the VA announced in December it had again selected McKesson to be the prime pharmaceutical vendor beginning in August 2020. We have been the VA's prime pharmaceutical vendor for Veterans Hospitals and the Department's mail order pharmacies for more than 15 years. This is a great point of pride for McKesson, and we're dedicated to hiring veterans and helping them build their careers after their service. At McKesson, we have many employee resource groups celebrating and leveraging the diversity of our workforce. The McKesson Military Resource Group, or MMRG as we refer to it internally, provides opportunities for all employees to recognize and welcome veterans and their families to McKesson. MMRG offers networking opportunities, facilitates personal and professional development, supports McKesson's recruitment, hiring, and retention of veterans, and sponsors events within our communities for active duty military and veterans. I want to thank McKesson's veterans and every veteran, really, for their service. We're very proud to serve the VA, and we look forward to continuing our longstanding partnership. Moving to specialty, as you heard me discuss at several recent events, we have a differentiated portfolio of assets and capabilities that we've built over time with targeted internal and external investments. First, we distribute specialty pharmaceuticals via the traditional wholesale model to retail and hospital pharmacies. And although these products are margin rate dilutive, we benefit from this growth at the top line and in our gross profit dollars. Next, we distribute specialty products that are primarily infused in the community-based setting and typically require special handling, including temperature control. We also provide other services like group purchase organization activities, data and technology services in oncology, and other multi-specialty practices. And then we have our leading practice management business, specifically the U.S. Oncology Network. which now includes more than 1,200 oncology physicians, providing 12 to 13% of all community-based oncology care. We handle all aspects of managing the practice so that the physician can focus on treating the patient. In addition, we're active in clinical trials, research, and formulary development. The practice management business, combined with the wholesale distribution and specialty product distribution and services business, are the scaled channels we leverage to provide services and solutions to our many biopharma partners, including commercialization, hub, and patient assistance services. We help manufacturers find patients that are appropriate and relevant for care, help them get started on that therapy sooner, and work to keep them adherent to that therapy for the course of their treatment. This results in a patient getting the best possible outcome from their treatment. These services not only support better outcomes for patients, but they also provide tremendous value to our manufacturer partners. We're really pleased with the growth we're seeing across these businesses, and we remain focused on specialty as a key tenet of our strategic direction. We're also pleased that we're returning to growth in the U.S. pharmaceutical and specialty solutions segment in fiscal 2020, while continuing to invest in our future. Now, let me turn to Europe. In mid-December, McKesson and Walgreens announced a joint venture agreement that we expect will bring together our respective wholesale operations in Germany. After a review of our business in Germany, we believe this is the right course of action as the combined business will have large reach and scale, driving increased efficiency and performance in a market where scale is vitally important. The transaction is subject to merger clearance and approval, and that process is expected to take at least six months from the time of the announcement. As such, this transaction will not have any impact on adjusted earnings in our current fiscal year. In the UK, we continue to monitor the retail pharmacy funding dynamics. As we detailed earlier in the fiscal year, the retail pharmacy industry experienced underfunding by the NHS in our first quarter. While there was a modest improvement in our fiscal second quarter, further upward revisions have not yet been implemented. We continue to monitor the situation in the UK closely. and engage in active dialogue with the NHS related to industry funding and the role pharmacy can play in managing NHS's overall cost, quality, and access challenges. Outside of the UK, we're continuing to see performance in line with our expectations for the other countries in this segment. Next, our medical surgical business. Again, this quarter, we had good growth across multiple markets, such as our home care delivery business and product categories. including pharmaceutical sales into the primary care space. Customers are repeatedly choosing McKesson because of our relentless focus on providing what they need to take care of their patients. We differentiate ourselves in the marketplace through innovation and a focus on operational excellence, breadth of product and service offerings, along with one of the largest and most tenured sales forces in the industry. We also saw an early start to the influenza season in the third quarter, which we are continuing to monitor for severity and duration. In addition, our results continue to reflect the integration of the MSD acquisition, which we lapped during our first quarter, and our focus is now on driving synergies. This acquisition continues to perform in line with its business case. Turning to other, which primarily consists of Canada, McKesson Prescription Technology Solutions, sometimes referred to as MRXTS, and our investment in Change Healthcare. In Canada, we're now capturing the benefits of previous actions we've taken, including our investments in people and in reconfigured pharmacy formats as community pharmacy plays an important role in Canadian healthcare. And market fundamentals are stable, which help to drive growth in our wholesale operations year over year. In addition, McKesson Canada also has broad specialty assets and capabilities, and we are well positioned to participate in the growth of specialty in the Canadian market. Moving on to MRXTS, which is a key area of investment. We're making investments to ensure we have the right product and personnel resources in place to support the growth trajectory of these businesses, and we're looking to launch new products that leverage our existing technologies and build upon them. As we look at how MRXTS is performing year-to-date, we're pleased with the growth in the business, which is net of several investments we are making to drive and support our future growth. Let's move on to Change Healthcare. As we've discussed previously, we continue to take the customary steps toward an exit of our investment in Change Healthcare. As part of the exit process, registration statements were filed today with the SEC. The previously discussed timing expectations are unchanged, and this is simply a necessary step as we move through the process of exiting our investment in change healthcare. Recently, you've heard me talk about aligning McKesson under one vision to improve care in every setting, one product, one partner, one patient at a time. We've been transforming and energizing the culture at McKesson. We've got a great collaborative workspace at our new headquarters in the Dallas area, We've rolled out new enterprise behaviors, building on the already strong foundation of our eye care and eye lead values, and getting everyone aligned around our strategy and how we want to work together to execute it. We're looking to become a simpler, more focused, and nimbler organization. We've centralized some of our functions and are looking at ways to work more efficiently and to utilize technology for day-to-day tasks that can be automated, freeing up time to focus on strategy, work that drives value for the organization and better leverages our teams. We're seeing great execution across the enterprise, including cost savings, as we track towards our target of $400 million to $500 million in gross pre-tax savings by the end of our fiscal 2021. Our organization has rallied around these efforts and it's showing in the culture and the results. I could not be prouder of the McKesson team. And with one quarter to go in fiscal 20, I'm confident in our reaffirmed adjusted earnings outlook of $14.60 to $14.80 per diluted share. As we look forward, we're in the initial stages of planning for our fiscal 2021. Let me walk through some of the things we're thinking about. The timing and impact of the exit of our investment and change healthcare as exit activities are currently underway. For customer renewals, the VA contract goes into effect in August 2020. As a reminder, we've stated that this new contract will not be a material headwind to our fiscal 2021 outlook. We are continuing to progress against our cost savings target with a portion of those savings falling to the bottom line and a portion being reinvested for growth. And finally, from a capital allocation perspective, we would anticipate benefits from share repurchases completed in fiscal 2020. As you think about the market and the macro perspective in the U.S., we're entering an election year and we'll make assumptions related to any potential impact we might expect based on our analysis, including related to drug pricing trends. McKesson will continue to engage with policymakers and industry partners to ensure that any reforms support solutions to improve cost, quality, and access. The policy landscape remains a dynamic environment, and we remain confident in McKesson's path forward. As it relates to the UK, we're continuing to monitor the market environment and NHS funding, as well as Brexit activities. We will review our businesses and expectations, including the impact of external factors, and we'll provide our fiscal 2021 outlook in May when we report fourth quarter and full year fiscal 2020 earnings. Before I turn the call over to Britt, I want to take just a moment to thank Kathy McElligott, who just retired from McKesson. In her role as Chief Information and Technology Officer, she helped McKesson increase its focus on data and analytics and accelerate our technology modernization. Kathy, thank you for your contributions to McKesson. And on the flip side, I'd like to also welcome Nancy Flores, who is succeeding Kathy as CIO and CTO. Nancy has a long track record of success in healthcare IT, and we look forward to utilizing her experience as we remain focused on our mission to improve healthcare in every setting by leveraging technology solutions for our company, our customers, and our business partners. And with that, let me turn the call over to Britt to go through the financials.