McKesson Corporation

Ladies and gentlemen, and welcome to McKesson's Third Quarter Fiscal 2022 Earnings Conference Call. Please be advised today's conference is being recorded. At this time, I'd like to turn the call over to Rachel Rodriguez, VP of Investor Relations.

Please go ahead. Thank you, Keith. Good afternoon and welcome everyone to McKesson's Third Quarter Fiscal 2022 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 earnings release and presentation slides available on our website at investor.mckesson.com. and 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. Information about non-GAAP financial measures that we will discuss during this webcast, including the reconciliation of these measures to GAAP results, can be found in today's earnings release and presentation slides. The presentation slides also include a summary of our results for the quarter and updated guidance assumptions. With that, let me turn it over to Brian.

Thank you, Rachel, and thank everyone for joining us on our call today. Today we reported third quarter fiscal 2022 results, another quarter with double-digit adjusted operating profit growth in all four segments, reflecting strength in the fundamentals across our businesses. Our focus and execution against our company priorities positions us to consistently generate strong financial results despite fluidity we continue to see in the macroeconomic environment. Before I discuss the business performance, I would like to just quickly remind everyone of our company priorities. We have been sharing with you our strategic transformation to a diversified healthcare services company centered around a set of four enterprise priorities. We believe the execution against these priorities is critical to our ability to generate long-term, sustainable growth, and we want to reiterate our focus and commitment to each one of them. Our first priority is our people, our teams, and our culture. Through our diversified portfolio of assets and operations, we as a company touch and impact many aspects of health and the healthcare system, including patients. Embedded in our daily operations is our purpose. advancing health outcomes for all, and our mission of building an impact-driven organization. We have been focused on enabling change in three areas, improving access to healthcare, advancing health equity, and protecting our environment. In the past year, our employees came together and shared countless moments of impact, finding new ways to get involved and to contribute. In 2021 alone, we completed more than 26,500 volunteer hours and supported nearly 1,500 charities. I couldn't be more proud of what we've achieved so far, and I'm confident in our ability to build a brighter future that in fact offers greater health outcomes for all. Part of our focus on culture is our continued improvement in diversity and inclusion. We put a particular focus on hiring, developing, and promoting what we call a best talent strategy at McKesson. We were recognized as one of the best places to work for LGBTQ equality. The ninth year in a row we've received this honor. Our commitment to diversity and refreshment includes our board of directors. In January, we welcomed James Hinton and Kathleen Wilson-Thompson as new independent directors to our board of directors. Both James and Kathleen have served in multiple senior leadership roles within the healthcare industry. Currently Jim serves as an operating partner for the private equity firm, Welsh, Carson, Anderson and stone. And prior to that, he held the role of chief executive officer at Baylor, Scott and white health. And Kathleen most recently held the role of executive vice president and global chief human resource officer at Walgreens boots Alliance, where she led the human capital strategy, including merger integration and HR transformation through digitization. Their decades of health care experience and proven record leading complicated organizations in executive leadership roles will be instrumental to McKesson, and we are excited to welcome them to our board. Additionally, we announced today that Don Knauss has been elected as the next independent chairman of our board, which will go into effect on April 1st, following a planned transition led by our current independent chair, Edward Miller. I want to thank Ed for his years of steady leadership and invaluable contributions as the independent chair to McKesson's Board of Directors. And I also want to welcome Don to his new role. He brings deep leadership expertise and shares McKesson's values, culture, strategy, and vision, including his commitment to board diversity. We look forward to his leadership and stewardship. Our next priority is to drive sustainable growth in our core pharmaceutical and medical distribution businesses. We have a vast scale distribution network and deep expertise in global supply chain management, which have been a critical and foundational part of our long history. We're proud of our operational excellence and our ability to capture efficiency and deliver consistent and high quality service to our customers while optimizing operating margin. Building off of this core capability, We've been very successful in expanding into new product categories and new adjacent markets like our lab solutions and our government partnership strategies. Our scaled assets and capabilities also enable us to play an integral role in the response to the COVID-19 pandemic. We're proud to serve as the centralized distributor of vaccines and ancillary supplies for the U.S. government. We've also been working closely with our partners, suppliers, and manufacturers to navigate the complex supply chain system. These relationships have allowed us to continue to provide stability of supply and low cost for our customers. And as a result, we've been able to manage through some of the challenges that the market has been seeing. Our third priority is to streamline the business, which includes initiatives like the split off of change healthcare and our strategic intent to fully exit the European region. We recently announced the sale of our Austrian business, which was completed on January 31st, and we have agreements to sell 10 of the 12 countries where we operate. As a reminder, Norway and Denmark remain the only countries that we have not entered into an agreement to sell. We continue to work towards the closing of the other pending divestitures. These transactions are the result of our intentional effort to evaluate and assess our portfolio for strategic alignment. We believe that by fully exiting the Europe region, we'll be able to better focus our human and financial capital into higher growth and higher margin areas, which leads me naturally to our next company priority. The last company priority is our strategic growth pillars, oncology and biopharma services. Over the past few years, we set out to accelerate the growth in these two areas and build out what we refer to as ecosystems. As we shared at our investor day in December, these are both large and growing markets that have significant unmet needs and opportunities, and we are tackling some of the most complex problems in the healthcare system with the goal to bring efficiency and benefits to all stakeholders across these ecosystems. In the oncology ecosystem, our growth strategy is centered around our support for the large, growing, and diversified U.S. oncology network. With the reach of over 1,400 physicians, the U.S. Oncology Network treats 15% of all new cancer patients in the U.S. at one of its 500 sites of service. One of the U.S. Oncology Network's important initiatives is its participation in the Oncology Care Model, which is a five-year experimental payment model with the goal of bringing down the cost of cancer. Based on the latest results, the U.S. Oncology Network practices participating in the program achieved high marks on quality metrics and provided significant cost savings to Medicare. By representing approximately one-fourth of all providers participating in the program, the U.S. Oncology Network demonstrated its leadership role in transitioning healthcare to a more value-based approach. Building upon our deep reach in the community oncology space, we're creating an oncology ecosystem with multifaceted service offerings that are all interconnected. At the center of this connectivity is Ontata, an oncology, technology, and insights business dedicated to help advance cancer research and advance patient care. We recently highlighted this business at our Investor Day. Since its launch in December of 2020, the team has made great progress transforming ideas into realities. Untada signed two agreements with strategic partners to improve patient outcome and quality of patient care, and it was instrumental in the launch of the My Lung Consortium, which through real-world research and study provides clinical information to improve the patient's journey. Within our biopharma ecosystem, we build a set of differentiated assets and capabilities, including businesses like Relay Health Pharmacy, CoverMyMed, and RxCrossroads. They're combined under the prescription solutions business with a shared goal to improve access, adherence, and affordability of medicines. One of the key customers of our business is biopharma companies. Through our scaled and interconnected technology network, we provide biopharma a range of commercialization services. And by automating and simplifying the process of prior authorization, we reduce prescription abandonment and provide biopharma access to new patients. Our unique technology capabilities also generate insights into patients' needs and challenges, enabling greater ability to impact patient actions and get better outcomes. We support over 650 brands today, covering 94% of the therapeutic areas, and we're connected to all the major insurance companies and most of the regional payers in the United States. The reach of our network is deep and broad, which is why it's the foundation of our biopharma ecosystem, and we are incredibly excited about the market opportunities it brings. Our progress with each of the company priorities has been truly outstanding. And we see the strategies working. The strong conviction in these priorities will be our North Star as we seek to advance and win in the marketplaces as a diversified healthcare service company and to drive long-term sustainable growth for our shareholders. Now, before I turn to our third quarter results, I want to provide a brief update on the progress made towards a broad resolution of governmental opioid-related claims. To date, 46 States, all five us territories and Washington DC have joined the proposed settlement. The sign on period for political subdivisions and participating States to join the previously announced proposed opioid settlement agreement ended on January 26th. We have now entered into the evaluation period. The deadline for our decision is February 25th, 2022. We continue to work with all parties to bring meaningful relief to affected communities and towards resolutions which will allow us to further focus on the strategic priorities of our business. Now, let me get to the results. We're pleased to report a strong third quarter with total company revenues of $68.6 billion and an adjusted earnings per diluted share of $6.15, ahead of our expectations. As a result of our performance in the underlying business and the contribution from COVID-19 related items, we are raising our adjusted earnings per diluted share guidance to $23.55 to $23.95. This is from the previous range of $22.35 to $22.95. The third quarter was another example of the nonlinear nature of the recovery from the pandemic. At the beginning of the quarter, Volume and utilization trends were recovering as COVID-19 cases continued to decline across the country. Although we expected a nonlinear recovery trend, the emergence and the spread of the Omicron variant in December was unexpected. Since then, we've been closely monitoring its impact. One thing we've learned in the past two years is the resilience of our business and our communities. Regardless of the trajectory of the pandemic, we're confident about our ability to adjust and adapt to support our customers and their patients in these challenging times. Let's turn to the US pharmaceutical segment. US pharmaceutical segments saw 12% adjusted operating profit growth, which was underpinned by the contribution from COVID-19 vaccine distribution and increased specialty volume. Through the third quarter and into January, Branded pharmaceutical pricing is tracked in line with our original expectations and consistent with our experience over the past several years. For generics, we continue to benefit from the success and strength of our sourcing operation with Claris One. We have not only the scale but the procurement expertise to consistently source products at low cost while protecting the integrity and the safety of the supply chains. We are also proud of our role in supporting the US government's pandemic response effort as the vaccine and booster recommendations for various age groups continues to expand and evolve. Through January 31st, our US pharmaceutical business has successfully distributed over 370 million Moderna and Johnson & Johnson COVID-19 vaccines to administration sites all across the United States and in support of the US government's international donation mission. In January, the U.S. government extended the existing COVID-19 vaccine distribution contract through July of 2022, which is roughly in line with the first quarter of our fiscal 2023. In prescription technology solutions, the segment had excellent momentum and delivered an 11% increase to segment-adjusted operating profit in the third quarter. As I mentioned earlier, we offer a range of commercial services primarily to biopharma companies. And this quarter, the growth was led by third-party logistics services and our access, adherence, and affordability solutions, including our Access for More Patients product. This segment aligns with our focus on developing the biopharma services ecosystem. The market that we're focused on presents many exciting opportunities. and we estimate the total addressable market to be around $15 billion with good growth potential and an attractive margin profile. We are pleased with the financial performance and expect to continue to drive growth and innovation for McKesson. In medical-surgical, we're navigating a dynamic market while growing the business. With surging demand and a complex supply chain, our employees are working tirelessly to secure and deliver key products playing an important role in the fight against the pandemic. The dedicated team in MedSurge is the foundation to our business growth, and we continue to invest to ensure operational continuity and excellence. As it relates to our international segment, we continue to benefit from COVID-19-related programs in our European operations in Canada. Through December, we've distributed over 81 million vaccines to administration sites in select markets across our international geographies. As we look forward to fiscal 2023, I'm most excited about the progress on the four company priorities. Since the rollout of these multi-year strategic initiatives in our fiscal 2019, we've been very focused on execution, making impact, and delivering results. While the pandemic continues to present unknowns, what is certain is that fiscal 2023 will be another year in which we focus on strong execution and strategic advancement. Our continued progress towards these four priorities will be a key driver to our sustainable profit growth, strong cash flow, and shareholder value creation. We continue to focus on the things that matter most, most to our customers, to our patients, to our employees, and to our shareholders. In closing, we continue to be excited about our future growth prospects as we meet the opportunity as a diversified healthcare services company. We have unique and differentiated assets in oncology and biopharma services with unmatched scale and connectivity, and we're strategically positioned to win in these growing markets. And lastly, before I conclude, I want to take a moment to thank our dedicated team, including every one of the 76,000 employees that make up Team McKesson. We share a mission to improve healthcare in every setting, and that will be achieved only with the dedication and the commitment from our people. And for the opportunity to work alongside this amazing team, I continue to be humbled and deeply grateful. Thank you for your time this afternoon. Britt, I'll toss it to you.