McKesson Corporation

Welcome to McKesson's First Quarter Earnings Call. This conference is being recorded. At this time, I'd like to turn the call over to Holly Weiss. Please go ahead.

Thank you, Alyssa. Good morning and welcome everyone to McKesson's First Quarter Fiscal 2021 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, everybody. Thank you for being with us on this morning's call. I hope that you, your families, and your communities are staying healthy and safe. On our fourth quarter call in May, I discussed that we were entering the new fiscal year with macro uncertainties and volatility in healthcare consumption patterns as a result of the COVID-19 pandemic. And our first quarter results clearly reflect the effects of these dynamics. Today, we are reporting results for one of the most complicated quarters in our company's history. Our first quarter adjusted results, while materially down against prior year due to the pandemic, finished significantly above our original expectations. We reported first quarter total company revenues of $55.7 billion and adjusted earnings per diluted share of $2.77, both ahead of our original expectations. Through April and May, trends in the business aligned closely with our original expectations. However, we saw volumes across the business improve significantly over the back half of June, resulting in a strong close to the quarter. Based on our first quarter results and the current shape of the recovery versus our original expectations, we're raising our fiscal 2021 adjusted earnings per diluted share guidance range to $14.70 to $15.50 per diluted share. This is up from our previous range of $13.95 to $14.75 per diluted share. Despite the uncertainty brought on by the pandemic, our focus is on executing against what is within our control. And that execution really underpinned our strong finish to the quarter as customer demand began to improve from the troughs we experienced in April and May. From the beginning, our top priority has been to navigate the challenges and the fluidity of the situation brought on by the pandemic by focusing first on protecting the health and safety of our teams so that we could continue to meet the needs of our customers and keep the healthcare supply chain operating at a high level. We've committed to increased safety measures for our employees and have maintained an unwavering commitment to our customers and our communities. In May, I talked about the essential role McKesson plays in the fight against the COVID-19 pandemic and the need to partner closely with manufacturers and various government entities so that we can react quickly as demand patterns shift with the spread of the COVID-19 virus. One such area that has evolved is the demand for personal protective equipment, or PPE. As frontline workers and our customers work to help treat and keep patients safe, We've worked with supplier partners, federal, state, and local governments to get higher volumes of PPE to areas of critical need. Our partnership with Walmart to produce and deliver medical gowns in the US has continued to increase total gown supply with over 30 million gowns shipped to the US since April. We're also continuing to invest in our communities. Our foundation made contributions to over a dozen food banks in some of the nation's most vulnerable areas. These investments translate into more than 6 million meals for individuals who would otherwise go hungry. Before I expand on our first quarter results, I want to provide just a brief update on the macro environment and the trends we've seen over the past 75 days since we reported our fourth quarter fiscal 2020 results and issued our fiscal 2021 outlook. COVID-19 has continued to progress and persist here in the U.S. in ways we couldn't have predicted when we initially provided our outlook for fiscal 21. Several states, including Texas, where I am today, are experiencing significantly higher numbers of cases, while others, other parts of the country, and frankly the world, are in very different and various forms of recovery. This variability makes predicting an aggregate timeline for the recovery challenging. As we detailed on our fourth quarter call, we expected the most severe impacts to our business in the fiscal first quarter. And as a reminder, our original outlook assumed the pandemic would have the most material impact on our businesses with physician and specialty provider and oncology exposure. We expected a gradual stabilization beginning in our fiscal second quarter and ramping over the remainder of the fiscal year as doctors' offices reopen and patients return to their treatments. Through April and May, our results were largely in line with our original expectations, with volumes across the enterprise materially down versus the prior year and well below pre-COVID levels. What we experienced in June, however, was an earlier than expected pace of recovery, particularly the last weeks of the quarter. resulting in demand acceleration and higher volumes versus our original expectations. These impacts were the most pronounced in the primary care business within our medical segment. Primary care patient visits showed encouraging signs of improvement in June as patients returned to their doctors following the relaxation of shelter-at-home guidelines. Now, turning to the business. I'll summarize the first quarter, and then I'll turn the call over to Britt to elaborate. U.S. pharmaceutical and specialty solutions exceeded our original expectations in the quarter, underpinned by strong execution and improving volume trends in the business in the back half of June. Market stability, our disciplined approach to pricing, and a growing specialty market continue to be foundations for us to build upon. We're very pleased to have recently renewed our distribution agreement with the Buyers Alliance, sometimes referred to as TBA. and doing so while maintaining our disciplined approach to the market. I would remind you TBA is a group consisting of several health systems, retail national accounts, and small and medium chain pharmacies. We're always looking for how we can best serve our customers and help them grow their business. This was evidenced by the growth in our specialty provider business in the midst of this pandemic, driven in small part by improved adoption of biosimilars in the quarter. While our specialty business recovered more quickly than we had assumed following the initial downturns in demand, we have certainly had to adapt to meet the needs of patients. At the onset of the pandemic, the U.S. Oncology Network developed a rollout plan for telemedicine, and within four weeks, 80% of our network physicians were able to initiate telemedicine follow-up visits and new consultations with their patients. To date, more than 120,000 telemedicine visits have taken place with over 1,250 providers. Our improved outlook for fiscal 2021 in the segment reflects the positive trends we saw in the quarter across the portfolio versus our original expectations. Let me make a few comments on Europe. While each of the 13 countries we operate in have had different responses and recoveries during the pandemic, were encouraged by the segment's results in the first quarter. We also continue to take actions to better position the business for future growth, as evidenced by our ongoing efforts to evaluate our footprint and cost structure in our largest market, the UK. In the UK market, I'd remind you that our owned retail pharmacies are very healthcare focused, with up to 90% of our mix coming from pharmaceutical volumes. While lower foot traffic through our pharmacies was a headwind in the quarter, our downside was limited due to our relatively small exposure to the front shop categories. A good example of how we're evolving this business is our 2019 acquisition of a company called Echo, now operating as Echo by Lloyd's Pharmacy. This is an online prescription fulfillment business in the U.K., It was a timely acquisition for us, particularly given the impacts of the pandemic. To meet customer demands in uncertain times, our investment in our digital healthcare strategy in the UK has helped position the business to benefit from movement of patients to home and to omni-channel services. Let me move on to medical. As I discussed earlier, in June, we experienced a sharp increase in demand across our primary care sites. This directly correlates to the reopening of physician offices and resumption of performing elective procedures as patients started to feel more comfortable returning to their doctors and healthcare providers. In addition to a stabilization in primary care volumes as the quarter closed, our leading position in our lab business also puts us in a good place to respond to customer and patient needs during the pandemic. We have a strong history in this channel. And as customers need solutions for COVID-19, and as our manufacturer partners develop and launch testing solutions, we remain a partner of choice and a leader across alternate site settings of care. The trends we witnessed in June, combined with our improved outlook for the business over the remainder of this fiscal year, give us confidence in our significantly improved outlook for this segment. Turning to other. which now primarily consists of Canada and McKesson Prescription Technology Solutions following the separation of our investment in Change Healthcare in fiscal 2020. We're encouraged by the trends we saw in Canada to end the quarter as volumes began to approach pre-COVID levels in our distribution and retail businesses. Within the retail setting, our focus remains on building an enhanced customer experience through investments in people, and reconfigured pharmacy formats. This has helped to strengthen our fundamentals and the role that community pharmacy plays in the Canadian healthcare system, which is especially important in times like these. Our own Canadian pharmacies are continuing to evolve and will soon offer e-commerce and e-prescribing platforms, creating additional options for Canadian consumers who want both a physical and digital shopping experience. Within MR-XTS, We're making progress with our investments to create technology offerings that resonate with our retail and biopharma customers. Since launching in September of 2019, access for patients, a product we call AMP, has helped automate access to therapies for complex and chronic diseases, reducing the time to therapy by 18 days on average, and we're continuing to expand the brands taking advantage of this offering. The collaboration between our RX Crossroads and CoverMyMed's businesses to develop AMP is a good example of how our business evolves to meet the needs of our customers. As part of our ongoing evolution, on July 1st, we announced the resegmentation of our businesses effective in the second quarter of this fiscal year. We believe that this new organization structure better positions McKesson to focus and execute against our growth strategies and to meet the changing needs of our customers. With this resegmentation, two new segments have been established, international and prescription technology solutions. Kevin Kettler has assumed responsibility for the new international segment, which combines McKesson Europe and our Canadian business. Nathan Mott will lead the new prescription technology solution segment, which has been expanded to include the RX Crossroads business formerly reported as part of McKesson Life Sciences within our U.S. Pharmaceutical and Specialty Solutions segment. In the quarter, we also appointed Tom Rogers as Executive Vice President and Chief Strategy and Business Development Officer. Tom brings more than 25 years of experience working in both emerging companies and large healthcare environments. In summary, we certainly faced unprecedented headwinds to begin fiscal 2021. but we're encouraged by the signs of recovery across our businesses as we exit our first quarter. We still believe the first quarter will be the trough of the recovery curve with the most material impacts in the business. We are pleased our first quarter results exceeded our expectations, reflecting great execution by our teams. The path to recovery over the remainder of our fiscal year is unlikely to be linear, and we will continue to closely monitor the progression of COVID-19 through our communities, and its implications for our business. The pandemic has reinforced the need for us to be agile in response to both customer demands and the ways in which patients choose to consume health care. One theme through the pandemic has been change, and I believe McKesson is well positioned to respond to change. As the macro environment around us continues to evolve, McKesson will continue to evolve. I believe we have exited the quarter in a much stronger position than we entered it, Stable fundamentals across the business paired with focused execution against our strategic growth initiatives give me confidence that McKesson will adapt to the near-term uncertainties and ultimately be positioned to thrive long-term. Thank you very much for your time. With that, I'll hand it over to you, Britt. Thank you, Brian, and good morning, everyone.