McKesson Corporation

Welcome to McKesson's fourth quarter fiscal 2022 earnings conference call. Please be advised that today's conference is being recorded. At this time, I would like to turn the call over to Rachel Rodriguez, VP of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and welcome everyone to McKesson's fourth quarter fiscal 2022 earnings call. Today, I'm joined by Brian Tyler, our Chief Executive Officer, and Britt Vidalone, 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 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. Information about non-GAAP financial measures that we will discuss during this webcast, including reconciliation of those 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 guidance assumptions. With that, let me turn it over to Brian.

Thank you, Rachel, and good afternoon, everybody. Today, we announced our fourth quarter results, marking a solid finish to our strong fiscal 2022. Thanks to the dedication and excellent execution from Team McKesson, we made outstanding progress against our company priorities and in our transformation to a diversified healthcare services company. We achieved 31% growth in adjusted earnings per diluted share when excluding the impacts attributable to COVID-19-related items, and net gains associated with McKesson Ventures equity investments. We have good momentum across the enterprise. We saw strength in our core distribution business and our strategic growth pillars of oncology and biopharma services. We remain focused on the company priorities which are foundational to our sustainable long-term growth and shareholder value creation. My remarks today will be centered around these themes. Before I jump into company priorities, I do want to talk briefly about the recent developments in opioid litigation. In February, we announced the approval of the proposed opioid settlement agreement. 46 of the 49 eligible states and the District of Columbia and all eligible territories joined the settlement, representing more than 98% of the eligible political subdivisions that have brought opioid-related suits against us, as calculated by population under the agreement. The resolution delivers much needed relief for the impacted communities. It will collectively provide thousands of communities across the United States approximately $19.5 billion over 18 years. The agreement became effective on April 2nd. The approval of the settlement agreement also removed a significant portion of operational and financial uncertainty in the business, allowing us to redirect resources for more focused execution on our company strategies. In addition to the 46 states participating in the previously announced agreement, on April 4th, an agreement was reached in the Alabama matter in which McKesson will pay $141 million and an additional $33 million in attorney's fees and costs to resolve the opioid-related claims of the state of Alabama and its subdivisions. On May 3rd, an agreement was also reached in the Washington matter in which McKesson will pay $197 million consistent with the state of Washington's allocation under the previously announced comprehensive settlement framework as well as certain additional attorney fees and costs. This resolution will result in the settlement of the state of Washington and its litigating subdivisions. That will bring the total number of states settling opioid related claims with McKesson to 48 of 49 eligible states and the District of Columbia. As a company, We remain deeply concerned about the impact the opioid epidemic is having on individuals, on families, and communities across the nation, and we continue to be committed to be part of the solution. This includes our controlled substance monitoring programs, advanced customer purchasing analytics, and many, many other initiatives. Let me now take you through our company priorities and the progress we made in fiscal 2022. We are excited about these initiatives as we continue to deliver strong results and improve our strength as an organization. After our fiscal 2022 discussion, I'll walk you through each of the operating segments and lay out how they are positioned for growth as we head into fiscal 2023. For the last several years, the enterprise has centered its strategic, its operational, and financial decisions around our set of company priorities, and the results have been outstanding. We fundamentally changed the trajectory of the company from declining financial performance to sustainable growth across the business. Through the focused execution of the priorities, we improved efficiency, we defined our differentiated and strong market positions, and we established the right to play and win in oncology and the biopharma services markets. Now, let me briefly walk you through the progress on each of them. I'll start with our first priority, which is our focus on people and culture. Our iCare values, our enterprise-first mindset, and our commitment to Team McKesson, our commitment to each other, were critical to successfully navigating the last few years. We are committed to being the best place to work in healthcare, and our best talent strategy is accelerating our business momentum. In fiscal 2022, we made investments in our workforce, including the frontline workers through additional labor investments in the U.S. pharmaceutical and medical-surgical segments in the back half of our fiscal year. Our company culture, our purpose, our mission, and the investments we've made in our teams underpin our performance as a business. Our people and culture strategy is integrated with our continued focus on ESG initiatives, ensuring we not only do good business, but we do business the right way. As an impact-driven organization, we embrace our responsibility to enable lasting changes in the communities we serve. Over the past year, we've made great progress in many areas, particularly around advancing access to care, health equity, and climate action for health. To promote diversity, equity, and inclusion, we have set specific and measurable goals to increase representation of both women and people of color amongst our leadership ranks. We released our employment information report, including our EEO-1 data, to improve transparency and accountability and equal employment opportunities. We also launched company-wide inclusion training, fostering positive behaviors and teaching ways to address bias in the workplace. Our commitment to diversity starts with our board, as evidenced by the recent successful completion of our board refreshment. In April, we announced the election of Roy Dunbar as the new director of the board. Mr. Dunbar brings decades of experience in technology, operations, and healthcare, and will be instrumental in guiding the company's strategic priorities. In addition to the appointment of Mr. Dunbar in fiscal 2022, we elected a new independent chair of the board and introduced three other new board members with diverse backgrounds and experience. Women and people of color now represent 50% of our board of directors, and we look forward to benefiting from their leadership and their stewardship. Moving to our second priority, which is driving sustainable core growth. At the core of our offering is the pharmaceutical and medical surgical distribution solutions. Building upon the momentum in fiscal 2022, we continue to innovate and invest in our distribution assets and capabilities. Some of the latest advancements over the past year include automated picking and packing solutions and robotics, which help us improve productivity so we can pick more accurately, pack medications faster, and ultimately serve our customers better. We're also expanding the reach of our core business by entering adjacent markets while maintaining operational excellence. A great example of this is our patient home delivery service. Leveraging our scaled distribution network, we help our partners deliver medical surgical products directly to patients' homes nationwide. With an increasing demand in virtual and home care, we've seen significant growth in this channel in the past few years. Our best-in-class customer service and deep expertise in distributing medical surgical products enables us to capture the market opportunity, ensuring the right product to the right patient at the right time. We also continued to partner closely with the US government in its COVID-19 response effort. It's been more than a year now since we started shipping the COVID-19 vaccine and ancillary supplies. Through March 31st, we have successfully distributed over 380 million Moderna and Johnson and Johnson COVID-19 vaccines to administration sites across the United States and in support of the US government's international donation mission. Although the contract with the US government to serve as a centralized distributor is expected to end in July. This experience has been a strong testimony to our vast and scaled supply chain capabilities. And I'm incredibly proud of the way our employees rose to the challenges brought on by the pandemic through our focus on meeting the needs of the healthcare community. In early fiscal 2022, we announced our intent to exit the European market, which aligns with our company priority to streamline and simplify the business. Over the past 12 months, we've made significant progress as we have successfully entered into agreements to sell the operations in 10 of the 12 countries. We've completed the divestiture of the Austria and UK businesses and our German joint venture with Walgreens Boots Alliance. Bringing all the in-process transactions to closure and exploring strategic alternatives for the remaining countries is a top priority in fiscal 2023. The actions we're taking in Europe build upon our deliberate efforts over the past years to maximize the organization's operational efficiency and focus our resources on the highest growth opportunities. The last company priority that we're excited about is the expansion of our oncology and biopharma services ecosystem. At our Investor Day in December 2021, we shared details about our differentiated assets and capabilities in these two areas. We believe that these ecosystems can help solve complicated problems and, importantly, improve patients' lives. The goal to help ease the frictions and eliminate inefficiencies in the healthcare system and to improve patients' lives is what motivates us continuously to innovate and to execute. Our biopharma ecosystem represents a scaled network of assets and capabilities that are highly differentiated. Within the ecosystem, we're expanding the reach of our products and services that aim to improve access, affordability, and adherence. In the past year, we helped patients save more than $6 billion on branded and specialty medications. We helped prevent more than 9 million prescriptions from being abandoned due to affordability challenges, and we helped patients access their medicine more than 67 million times. We created an ecosystem that's more efficient and more valuable to the customers and patients, then each of the pieces would be standing alone. The cohesive business strategy and coordinated go-to-market solutions are both critical enabling continued growth in this segment. In our oncology ecosystem, we're strategically positioned to improve cancer care with a range of services and solutions. Our distribution and GPO capabilities continue to provide patients access to life-saving drugs, including biosimilars. Combined with our reach through the U.S. Oncology Network, we help promote awareness and bring more affordable treatment options to both providers and patients. A great example is our U.S. oncology research, which continues to play a central role in accelerating research and science. As one of the largest community-based oncology research programs, it has contributed to more than 100 FDA-approved cancer therapies. Last year, nearly 900 physicians actively accrued patients to clinical trial. And through Oncata, We're leveraging the reach and resources across the ecosystem to generate real-world data and evidence. We've published more than 200 real-world studies in leading industry publications for over 70 oncology indications. We're now serving the top 15 global life sciences companies, providing them valuable services to accelerate research and commercialization. As I reflect on our progress against the company priorities, I am very excited to see the meaningful impact it's brought to our business, our customers, and to patients. The strategy is working and will continue McKesson's growth journey into fiscal 2023. I'm confident in our ability to continuously execute, innovate, and deliver sustainable profit growth for the long term. Now, let me turn to the performance over the past 12 months and how we're positioned for success heading into fiscal 2023. First, I want to share an exciting update on our ESG initiatives. At the beginning of fiscal 2022, we committed to set science-based greenhouse gas reduction targets. We have already submitted our targets to the science-based targets initiative for official validation. Through initiatives across operations and supply chain management, we're setting measurable and specific goals to reduce both scope one and scope two emissions, building a more sustainable business and ultimately serving the health of patients and communities. Next, let me provide some observations on volume and utilization trends. We're encouraged by the prescription volume and medical visit levels across the business. We've seen continued improvement in pharmaceutical prescription volume, oncology visits, and primary care patient visits. While recovery in certain markets, like extended care, may be lagging, we are seeing other markets recover close to pre-COVID levels. We anticipate the positive trends to continue in fiscal 2023.