McKesson Corporation (MCK) Earnings Call Transcript & Summary

Good morning. My name is Lisa Gill. I am the health care technology and distribution analyst with JPMorgan. It is with great pleasure that I welcome McKesson this morning. With us from McKesson is Brian Tyler. Welcome back to San Francisco.

Thank you.

We will take all questions after in the breakout room in the Georgian Room across the hall. With that, let me turn over to Brian.

Great. Super. Thank you, Lisa. Good morning, everybody. I suppose this is not too late to still wish you a happy New Year. Welcome to 2020. I'd like you to meet my friend. Okay. Great. Well, before I start, let me remind everybody that I may make some forward-looking statements and discuss non-GAAP measures this morning. Those in the room can see the slide. Those on the webinar, Slide #2 to see our full list of disclosures, and I would remind everybody, there is more information on the Investors section of the McKesson website. I became CEO of McKesson in April 1, 2019, so this is my first official JPMorgan conference as CEO. And one of the first tasks we undertook was to really set the vision for the company. And that vision, you can see in front of you is to improve care in every setting, one product, one partner, one patient at a time and to align the team, all 80,000-ish associates of McKesson around bringing this vision to life through focus on our strategies, through organizational alignment to support those strategies. One of the great experiences or parts of being the CEO is getting the opportunity to get letters and occasionally, to interface with real patients and see the way this vision comes to life. I've shared with some of you before the story about Abby, a 9-year-old girl going through cancer treatment. In the middle of her chemotherapy treatment, her drug went into short supply. Her mother, a courageous, inspiring, unbelievable advocate sought to go out and figure out how she could find therapy because, as you know, in chemotherapy, staying on your regimen, the timing, the dosing is all critically important to the outcome. And through a very random chain of events, a friend of a friend of a friend and somewhere in there, probably LinkedIn, she found somebody from McKesson. And we didn't know her. We had no relationship with her. But the team sprang into action, worked with our partners, worked through our networks, found the product, got the product to Abby so that she could continue her therapy. And when I hosted that family in our Lakeland DC, distribution center, and met Abby and her brother and her sister and her mom, to me, that's what this company is about, and that's bringing the vision to life. And that's what inspires and motivates us at McKesson. So let me talk a little bit about the market environment and I'm not going to drain this. You're probably as familiar with it as I am. IMS would suggest the core pharmaceutical market is going to grow just over 4% for the next 5 years. Obviously, within that macro growth, there are subsegments that have more attractive growth segments. Specialty is certainly one of those. And oncology, even within specialty, is projected to have 2 to 3x growth of the market overall. We think we're very well positioned in these markets, and I'll share with you what some of our assets are and why I'm feeling so good about our positioning in these markets. But beyond just the market growth itself, if you look at the nature of the products and some exciting therapeutics and exciting clinical products coming to market, we know these products are going to require different kinds of services on behalf of the biopharma manufacturers and on behalf of the patients that are going to have to access and utilize this. And so as we look at our capabilities, supporting manufacturer services and these complex medications and the scale we have in these channels, we continue to be very encouraged by the growth prospects they represent for McKesson. McKesson is a big, scaled, complex organization. I thought I would give you a brief snapshot of the various businesses. The first thing I would say is one of our great strengths is the scale and the breadth of our capabilities. We have scale and distribution. Roughly 1/3 of all prescription medicines in North America flow through our supply chain. We have 12,000 owned and franchised or banner pharmacies in Canada and Europe. In the medical business, 25,000-plus SKUs virtually meeting every need of a community-based practitioner in the alternate site setting. We have scale in specialty. We have scale, particularly in specialty oncology. 1/3 of all cancer oncology therapies go through our U.S. oncology research organization. Over 76,000 patients have been enrolled in over 1,600 clinical trials through our clinical trial business, and we are the #1 distributor for community oncology and various other specialties. In manufacturer services, we have relationships and products with over 150 biopharma customers. Over 400 drugs access our co-pay and voucher programs to deliver real savings for patients that help with access and adherence, and we're active in over 90% of all therapeutic areas. We have scale in our connectivity and our technology businesses, 18 billion-plus transactions a year going through RelayHealth, connectivity to over 94% of U.S. prescription volumes via payers. And we're integrated with over 700,000 providers to initiate prior authorization at the point of prescribing. These are differentiated assets, in our view, differentiated assets at scale. Of course, how we leverage this scale is important too. And at the beginning of the year, we set out 3 priorities for the organization. The first was to grow our U.S. Pharmaceutical and Specialty Solutions segment. The second was to invest into these growth segments as we provided that growth. And the third was really to focus on the culture and the organization of the company, raising our focus around our key strategic priorities and raising the speed at which we're able to innovate across the company. Culture is something we probably don't talk enough about at conferences like this, but I think it's really, in many ways, part of the secret sauce of organizations. And I think business is a team sport. Some of you probably spent a little bit of time last night, watching the college national championship game. And I'm sure if you were to look at the coach's comments after that game, he would say what differentiated them was the fact they didn't just play the game with each other but they played the game for each other. And that's what we're trying to do within McKesson, leverage the capabilities broadly across the enterprise together with a real focus on our patients and our customers to deliver meaningful innovation and capture the growth opportunities that lie ahead of us. Let me talk about each of these 3 priorities just briefly. Our first priority is growing the U.S. Pharmaceutical and Specialty Solutions segment. We've been very focused here and we've been talking about our priorities around cost and efficiency and we're on track to deliver that. We've had success renewing customers, big customers, and we're recently happy to be able to announce that the VA has again selected us as their prime pharmaceutical vendor. This is a very working capital-efficient business. Good free cash flow generation, which enables us to fund and execute the other strategies that I'm going to talk about. We were very pleased in December on our call to provide guidance that we thought the segment would grow in the range of 3% to 5%, accomplishing our first key goal. As we provide this growth, we continue to invest in the businesses where we think we have differential capability and the markets provide good growth opportunities. I would point to specialty as an example of that. We continue to participate in the growing pipeline of immuno-oncology and other infusion products, and we've continued to expand the U.S. oncology network, adding over 100 physicians in the last year. So we're very pleased with our progress on our first priority. And we've been talking over the course of the last several quarters about the momentum that we've been feeling and we continue to reiterate that sense of momentum. The second thing I want to talk about is our ability to invest into areas where we think we have differentiated capability and we have growth prospects. And we're really focused on aligning the organization, not just the priorities but the people, the organizational resource and capability around delivering against these opportunities. My first job in McKesson in 2003, my first general manager job, was running our specialty pharmaceutical business, which included our manufacturer services businesses back then. And candidly, we probably weren't too relevant. But over the course of the last years, we've very systematically built great franchises in these markets. And I believe our conviction in the growth they represent for us is as strong today as it was back then. And underpinning some of this is another investment in foundational capabilities for us, which is data and analytics. And the way we talk about data and analytics, and you hear this thrown around a lot, but in a business of the transactional scale of McKesson, using data analytics, AI, all the tools that are emerging in technology, in my opinion, is the next efficiency wave for our company. 10 years ago, we would have talked about Lean and Six Sigma and Process. The next 10 years of efficiency will come through the smart use of technology and data. I do want to double-click a little bit on our specialty portfolio. Specialty is a word I'm sure you're going to hear a lot of times over the course of this conference in a lot of different and nuanced ways. We participate in the specialty segment quite broadly. In December at our analyst call, we talked about and outlined for you some of the key channels that we're in and our key manufacturer services business that leverages off those channels. And I want to just refresh everybody quickly. First, is the wholesale distribution business. Sometimes you refer to it as the core pharma business. This is the distribution of these high-cost products to retail pharmacy and to hospital pharmacy. This is the largest segment. These products offer great growth. They are margin rate dilutive for us. The next segments and the segments that we're really excited about the growth in are our Provider Solutions segment. This is distribution and other services, like GPO services, data services, technology services to the community-based providers, oncology, neurology, ophthalmology. And here, we play an important function not only of distribution and continuity supply but in aggregation. And so as we look at the community setting, we have the great growth but also a better margin profile for the business overall. The third segment we're in is quite unique to McKesson, and this is our practice management business or our U.S. oncology business. And the simplest way to think about this is if you were to present at a U.S. oncology practice as a patient, literally everything that goes on in that practice other than the physical medical provision of care is provided by McKesson. We're active in clinical trials. We're active in research. We're active in formulary development. We're active in scheduling. We're active in patient follow-up, everything that goes on in that practice. And that gives us deep and unique insights into oncology, in our view. Now we leverage off these 3 channels and the relationships that gives us with the manufacturers and the scale and the reach in our biopharma services businesses we call McKesson Life Sciences. This is all about helping manufacturers find patients that are appropriate and relevant for care, getting them started on that therapy sooner, keeping them adherent to that therapy longer so that they get a better outcome. And it provides tremendous value to our manufacturer partners. We think this is a great area of opportunity for McKesson. And I want to talk a little bit first about how we've developed this set of capabilities and then give you an example of how I think it comes to life in innovation and supporting future growth. Back in 2007, we acquired the Oncology Therapeutics Network, which really gave us great scale in our provider base. Then we added the U.S. Oncology Network and the U.S. oncology research network that gave us this deep expertise in oncology. Then as we think about an oncology ecosystem, we bought a specialty oncology pharmacy called Biologics, which has now expanded into other orphan drugs, again, thinking about oncology as an ecosystem and leveraging off the footprint that we had. In 2017, we acquired CoverMyMeds, which is a technology business, focused on connectivity and automating manual processes like the prior authorization process. We think this business gives us tremendous reach and insight and ability to innovate and drive efficiencies and better uptake for our manufacturer partners. And then in 2018, we acquired RxCrossroads, which just brought additional scale to a business that we were already in. So we've got this great collection of assets and they're important each by themselves. But we think what's really exciting is the opportunity to leverage these independently scaled businesses in new ways to drive innovation, better patient outcomes and uptake for our biopharmaceutical service partners. Now I don't want to overemphasize this particular program. I want to just use this as an illustration of where we see our ability to connect these tools and these capabilities to drive innovation and we think, improve on the tools that are out there today. This first -- the product I'll highlight is one that's called AMP, Access for More Patients. And this is where we take the 20-plus years of experience in patient access and adherence programs and combine it with the innovation and the technology and the reach and the connectivity of CoverMyMeds to enable, through this technology and automation, earlier identification of patients, get them started on the therapy quicker, be more successful in keeping them adherent to this. Now I will highlight this for 2 reasons, not just the example it shows of how we leverage our capabilities across our business but the speed at which we can do this. This was an idea 8 months ago. This is a product that's live in the marketplace today, and our early results suggest a material increase in the speed to which we can get patients to therapy. This is particularly exciting. Our third priority is really to simplify the business. We've talked a lot about our cost savings. And while the cost savings metrics is important, the reality is it's a lot of the underlying alignment and effectiveness, organizational effectiveness that excites me the most. And we are on track to deliver our savings. And we've done that in some mundane ways by leveraging our scale, spend smart programs, really just being rigorous stewards of the resources that we have. We've done it organizationally by centralizing some functions, getting again, alignment and simplification in the portfolio and the way we go to market. So the standardizing of some of our functional capabilities. And the real key to this, to me, is the focus and the speed that it enables. We've been evolving our portfolio. We continue to look where we can supplement businesses we're in that we think have great opportunities, but we bring a really rigorous view to our portfolio with the goal of alignment to our strategy, focus and simplification. And the last thing I'd come back to is the focus on invigorating the culture and getting the alignment of 80,000 people focused around a strategy, that strategy itself focused on the patient, delivering innovation at speed. And we've really leveraged our relocation of our headquarters to Irving. We've leveraged the refreshment of the management team. We've leveraged the refreshment and the diversity that we've brought to the Board to bring this heightened focus and alignment around these growth initiatives that I've talked about. Now I couldn't finish a discussion, certainly at an investor conference, of McKesson, without talking about our discipline and our balanced approach to capital allocation. I'd say our first and foremost objective here is to maintain our investment-grade credit rating. We think that gives us great flexibility on our balance sheet as we navigate the growth opportunities that are in front of us. You can see on this chart over the last -- the 3 fiscal years concluding in fiscal '19, we've generated over $13 billion of free cash flow. This story, I would say, we allocated about 70% of that to internal investment and growth-related M&A, returned the other 25-or-so percent to shareholders. This story is a little more nuanced than that. If you were to wind the clock back to fiscal '19 to today, you'd see we've really -- as we've internally focused on alignment to our strategy, and as we've internally focused on the growth priorities I've said and we've reflected on the value we think our stock brings, we've actually been returning more of that capital to shareholders. We'll always and continue to be interested in growth and M&A as long as it's aligned to our strategy and invest it in areas we think we have differential capability with good growth prospects. So yesterday we've provided an update to our fiscal '20 adjusted EPS guidance. We raised and narrowed the range from $14.60 to $14.80. Again, we've talked about the momentum that we felt in the business the last several quarters. We've talked about our ability to execute in a very focused way our strategic priorities and our cost initiatives. We continue to feel good about the progress that we're making. We continue to feel good about the way we're positioned for future growth, and that we're able to continue to invest into these growth areas as we deliver this adjusted outlook. We have a healthy, strong, free cash flow generating business. And we're very excited as we enter the new year to signal that over the course of the next coming half year. We think we'll be able to execute our change exit, which has been a long time coming, but we look forward to concluding that in the first half of our calendar 2020. I want to close my remarks by just reiterating our focus on accelerating growth. Part of that growth will come through our ability to work together, to execute, to use the capabilities and assets across McKesson to innovate in new and different ways. We'll continue to be disciplined in our capital deployment as we execute this strategy. I think it would only be appropriate though for me to conclude my remarks by thanking the nearly 80,000 employees of McKesson for their commitment to our customers, for their commitment to our patients, for their commitment to really leverage our diverse and inclusive environment to work together on behalf of our patients and customers. We certainly thank you for your interest in McKesson, and look forward to taking your questions across the hallway in the Gregorian Room?

The Georgian Room.

The Georgian Room. Thank you.

Good morning. This is the breakout session for McKesson. My name is Lisa Gill, and I'm the health care technology and distribution analyst with JPMorgan. To my right is Brian Tyler, CEO. Welcome, Brian. And to his right is Britt Vitalone, CFO. Good morning, Britt.

Good morning.

So Brian, welcome back, year 2 on the stage. You've been now CEO for 9 months?

9 months.

What would you say have been the biggest accomplishments under your leadership and what's really changed?

Well, I think we have a lot to feel good about in terms of accomplishment. We've really been talking about them for the last several quarters. We've talked about our focus on cost and efficiency and ability to harvest some of that cost benefit of savings and invest in the growth areas in the business. I think we feel really good about our ability to do that. We feel great about some key renewals and some awards we've got. We really love our positioning in specialty. But quite honestly, if I reflect back over the last 9 months, I think the thing that we're most proud of is the way we've navigated my transition, to build an executive team that's really coalesced quickly and aligned around an enterprise strategy and a set of very focused growth initiatives and then to see the energy within the organization and they buy and that taking the life, to me, that's what kind of gets me the most fired up.

You brought up key renewals, and you recently renewed the VA contract, which is at 15 years now, right? I think it was 2004...

Yes. 2004. 2004. Right.

Almost 16 years, right? 2004 was when it was first awarded to McKesson. When I look at that public information, it's really hard to make heads or tails of what it's telling us around the pricing of the contract and how we think about what that means financially to McKesson. Can you help us to better understand how we think about the VA contract and the pricing?

I mean, it's -- these are big, complicated -- this is a big complicated book of business. Lots of drivers that have to be considered. Look, I should have started by saying we're thrilled to be able to continue to serve the VA. It's a really big point of pride in our organization. We have a big focus on military and veterans, and so we're super proud and couldn't be more excited to have the opportunity to continue to support the VA. I mean, this is a government bid process, which is a little unique from a normal customer renewal cycle. But as we looked at that business and our experience managing it and contemplated the various elements, the product mix and segment mix and manufacturer relationships, we put forth a bid that we thought was very responsible and we feel very happy if we had the opportunity to continue to serve, and that's how it played out.

Are the payment terms different for the VA versus a traditional contract, just given the level of discounts that are in those contracts?

Yes. Look, we go through all these -- every contract is different and unique. This is a public contract so I don't really want to go into a lot more detail on customer-specific information. The only thing I would add to Brian's point is, historically, and I think this year is very similar, we renew about 1/3 of our contracts every year. Some of those are a little bit larger and get a little more public highlight, if you will, like CVS this year and certainly with the VA next year, but about 1/3 of our book comes up every year. We're able to renew the VA with terms that we're satisfied with, and we don't expect it to be a material impact to our FY '21 results.

So Brian, when we sat here last year, you said one of your directives was to look at the whole portfolio of all the assets that McKesson has. You were working in the organization when they bought Celesio. It has struggled over the last few years. Since that time, you have signed an agreement with WBA for -- to create a German wholesale JV. So can you talk about the benefit to McKesson in one, creating that JV? And two, how do you think more broadly about the EU strategy?

Right. So relative to the German joint venture, we've talked repeatedly about the disciplined, dispassionate view we bring to our portfolio, asking ourselves what is our capability? What's our market position? What's our right to win? What kind of growth prospects do we think it have? What's happened in the competitive landscape? What do we think will happen? And as we reflected on Germany, I mean, it's been pretty clear to us for a few years now. We've had a #3, #4-ish market share position. WBA was more or less in the same. Distributions very much continues to be and will be a scale game. And so we thought the best thing for that business was to combine to create a scaled market leader that will enable it to capture growth, and frankly, just have a more successful future than we thought we could accomplish independently and on our own. So where we see opportunities to make moves like that, that deliver better growth by taking that action than we would have on our own, we do it. I mean, the read-through to the EU, I'd say that was a German-based decision. I mean, as we look at our portfolio in Europe, it's no secret we've been very challenged in the U.K. The reimbursement environment would be -- has been, in multiple times, more difficult than we would have thought when we executed this acquisition. We continue to work through that by doing the right things, rationalizing our physical store count, optimizing management structures, repositioning where we think the script growth is in that business. And we'll continue to always reflect in our businesses and look at the landscape and make decisions like you've seen us make.

As we think about strategic business decisions, I think a lot of people in this room know that I thought maybe you would have announced something around Change today. And so we saw Change earlier this morning. We saw in your presentation, you said the first half of 2020...

Yes. Britt wants to talk about that.

And so as we think about exiting Change, have you made a decision around a spin versus a split? And maybe, what are the merits of either one? And I know both are different shareholder-friendly ways of doing this.

Yes. So just to come back to the timing on this. What we said at our second quarter earnings is that we would anticipate exiting our investment in Change in 6 to 12 months from that time point. It could occur within this fiscal year so that time frame still is in place. A lot of the exit activities are underway. One of those exit activities is to consider whether a spin or split is appropriate. We'll do the right thing for our investors and to set up the shareholder base for Change in the right way. We haven't made that decision. Obviously, that's one of the things that we'll obviously talk through with our Board of Directors. So the exit activities are underway, 6 to 12 months from the point of our second quarter earnings release, but it could occur this fiscal year.

And as you think about the activities being underway, what are some of the things that still need to be done in order to move forward?

There's a lot of mechanics. There are certain filings that need to take place. There's -- obviously, there's pricing decisions. There's also just the structure of whether it is a spin versus a split. And so those are things that we're having discussions with our Board on. Obviously, there's interaction and alignment with Change. And so all of those activities are underway.

Okay. Great. So we'll stay tuned.

Yes. Stay tuned.

A big theme, obviously, at this conference the last few years has been around specialty pharmacy. You've talked a lot about it. I think there are a lot of questions last quarter as we think about the different components of your specialty business, the wholesale component versus the provider as well as some of the other services. Can you help us to better understand the size of each of those businesses and margin profile?

Yes. So I think if you go back a few years, what we'd talked about several years ago is that our specialty business was around $24 billion and we updated that at some point to $30 billion. That's not really a relevant number when you think about the way that Brian has described the business. Left to right on the slide that Brian showed, you start with your wholesale distribution business, which is the largest component of the business, and it's typically margin rate dilutive. As you go across left to right, you've got the provider segment. You've got our differentiated U.S. oncology segment. We haven't sized this because we just don't think those numbers are really relevant. But as you think about moving up the chain, the influence that we have from wholesale distribution, where we have less influence all the way through the U.S. oncology practices where we have more, certainly, the growth rates are different and certainly, the margin opportunities are different. So we have a very scaled business, as Brian talked about, in distribution. We've got differentiated assets as you move up the chain in terms of our ability to influence. And we're certainly pleased that, that scale across gives us the opportunity to really participate in some manufacturer services.

So Britt, we saw lumpiness in the first and second quarter. You preannounced yesterday a positive number going into your fourth quarter, right, so update in the second half. Will we continue to see that lumpiness going into the second half of the year? And as we think about your expectations in the first quarter versus what you delivered and then as you think about the second quarter, were they in line? And I know you don't give quarterly guidance. So was it more of, I'll put myself in this camp of the sell side, not modeling it correctly versus the way that the business is actually going? Or were there are things that actually kind of move between the quarters?

Sure. Well, I think if you start back to last year. We started to see some of this improving performance and momentum that Brian's talked about in the second half of our last year. That allowed us to set an annual guide. It was a return to growth in not only our U.S. pharmaceutical segment, across all of our segments. We've continued to affirm that. And we feel good about that continued improving performance and more confidence in the momentum that we see in our business. We don't provide quarterly guidance, given the size and the breadth of our business. There are a number of items that are going to be volatile on a quarter-to-quarter basis. Those things tend to balance out over the course of the year. And so as you think about our guidance for the full year, it's really been quite consistent, improving performance. We did have a small raise in Q1. But as we've gone through the year, we have -- we're continuing to see this performance not only in specialty. We're seeing good performance in our medical business. And we've seen a little bit of an early flu season. The performance has been very broad-based and it's been largely operational, and that's really what led us to the announcement last night. But we do expect that this lumpiness is going to continue. Some of the items that create some of this volatility, our customer volumes and customer mix and product mix, brand inflation, although a smaller component of our economics, it still is more weighted towards the back half of the year. And so that's going to create the lumpiness. We do expect that there's going to be lumpiness quarter-to-quarter in the back half of the year. But again, as you think about this on an annual basis, they tend to balance out.

As we think about -- you talked about price inflation on the branded side being fourth quarter, we're, what, 14 days now into the new year. We heard Walgreens talk about 6% inflation according to their calculations. I think Wall Street Journal and others have written kind of mid-single digits. One -- is that, one, what you're seeing? And two, if I remember correctly, I think that's what you've talked about, right, kind of consistent with what you saw the previous year in kind of that mid-single-digit range? And as we think about your book of business, I know that most of it is not contingent on price increases. But the component that still is contingent on that, do you see that changing over time where it becomes less contingent? And even the part that isn't contingent, isn't there still some component because a lot of the pricing is based off of the average wholesale price that would have an impact based on price increases?

That's a lot of questions.

Sorry about that.

Yes. Thank you for all those really great questions. Let me see if I can unpack that a little bit. As we came out of last year and we set our guide for FY '20, we talked about our expectation was mid-single-digit branded inflation. We reaffirmed that in the second quarter. And what we're seeing through 14 days, 14 days doesn't make a quarter, but what we've seen thus far is branded price inflation is in line with our expectations. It's in line with what we were seeing so far through this year. So we're comfortable that branded price inflation is in that mid-single-digit number and it's in line with what our expectations are. Over the last several years, we've continued to evolve our relationships with the manufacturers such that about 95% of our branded compensation is more fixed fee-for-service basis. As you mentioned, there is a roughly 5% that is contingent on price actions by the manufacturers. So it's less impactful than it has been historically. We don't anticipate that, that will change in the near future but we continue to have conversations with manufacturers. And it's important that those conversations really lead to a set of relationships that reflect the services that we provide for the manufacturers. And so we'll continue to evolve as necessary, but I think the 95-5 split of fixed versus contingent is appropriate.

It's been in that range for a while now.

And how about on the generic side? Again, a 2-part question here. First off, our understanding is that generic price deflation has been kind of in that mid-single range as well. But what are you seeing from a procurement perspective with ClarusONE?

Yes. So what we've seen in the generics side now for several quarters is a more stable environment overall. We have a great sourcing operation. We think that we source as well as anybody. And we're pleased with the performance of our sourcing operations. It's in line with what we had anticipated coming into the year. On the sell side, it's stable but competitive. It's been a competitive environment for as long as I can remember. I expect it to continue to be competitive. But the ability for us to source effectively as well as anyone in a stable environment with good pricing discipline allows us to continue to create that spread. And as I talked about on our second quarter earnings call, we've been able to grow our generics profit through the first half of the year.

You talked about the sell-side margin and it being competitive but stable. I think a lot of us still have -- we have a lot of memories of 2015 when that wasn't the case. When we think about what's happening with the -- especially the independent customer, we hear from CVS and Walgreens and Rite Aid, the continued pressure on reimbursement. We would have to think that the independents are feeling this even more than the big guys, just given the size and structure of the large players. Are they pushing back? Are they putting pressure on the drug distributors to try to get some of that margin back as we think about reimbursement pressure? Are there programs that you're putting in place to be able to help them? How do we think -- 2 things, right, like how do we think about that coming under pressure and...

I mean, independents are small business people so they're always going to want to be driven to enhance their own P&L as best they can. I mean, the real key for us, I think, is that we don't lead with a generics and price-based sell. We really focus on the independent. We focus on all 5 lines in their P&L. How do we help them drive revenue, footfall traffic? How do we help them with gross profit? Certainly, our procurement programs are a really important part of that. How do we help them market to docs? How do we help manage their store more effectively? I'm not -- the reimbursement question is -- really also depends on what contracts do you want to opt into? What's the -- what's your -- what's the patient mix and your catch fall or your footfall area? How much of that can you attract and pull into your store? So I think, as you might expect with 20,000 independents, you get a little bit different experiences based on what contracts you went in and how effective you are pulling those through. By and large, if we look at our data through our access health business, we see a pretty normal bell curve. We see a few losers who are on the wrong end of opting in or to decide to opt out of a contract that have more reimbursement headwind. We see some who are actually ahead and doing better. So it's very nuanced. And as we've talked over the years, the independents have -- when I started 23 years ago, there was just less than 20,000 of them and everyone was forecasting them to go away. And this year, I think there's a little over 20,000. So there's actually more now. So these guys are very adept at finding where their market opportunities are and how they fit into providing health in the communities they serve.

We spent a lot of time talking about specialty and your pharmaceutical business. We don't spend as much time talking about your medical business. And so I'd like to just spend a couple of minutes there. For many of you in the room, you may remember that they bought PSS back a few years ago. And in fact, the growth in that business has been a nice additive to the growth of McKesson. So really just a couple of questions. One, what are you seeing in the market today around physicians being bought by hospitals? So I know a lot of the customers you have are independent. Two, they're under a lot of reimbursement pressure as well. So how do you continue to grow that business and expand the margins?

Yes. So I mean, this -- I mean, this business is probably one we haven't talked about enough. And I think Britt and I were both in that business in 2006 when we were really just a pretty focused physician office and nursing home business. And what we've really been able to do over the years is kind of follow the patients, if you will, and expand into new channels as they emerge. Urgent care would be an example, then expand our selection or the breadth of our products, get into lab, get into pharmaceuticals. So we've really done a good job expanding to meet the needs of those community-based providers. And this is an instance in this market, in contrast to an independent pharmacy, where pharmaceuticals are 90-plus percent of cost of goods. Medical products is a very, very small part of the overall practice expense. And so they really look for a high value-add provider. I mean, you saw 275,000-plus SKUs. Well, that's a lot of product to sort through and decide. And so our reps and our teams are actually quite helpful in managing the products that, that particular practice would need and should be using. So the medical business has done a terrific job kind of following demand and expanding our footprint in the alternate sites. We do have growth in the health provider setting. I mean, as these integrated systems expand into the communities. And what we find there is they oftentimes realize that their physicians need to be serviced in a much different way than kind of bulk distribution to the doc. And so we continue to evolve our capabilities and our services in that segment as well.

And one thing that I would just add, we talk about updating our guidance and some of this confidence in the full year to be able to do that. The medical business is a part of that. Operationally, they continue to perform quite well. We've guided to high single to low double-digit operating profit growth. And they're certainly one of the contributing factors to the performance.

One of the areas that we do hear that Amazon is present would be on the medical supply side and trying to go after some of those single docs and even some of the hospital relationships, et cetera. Do you come across them as a competitor today, one? And two, when we think about how those physician offices are ordering products from McKesson today, do you feel like the platform you have is competitive with something like an Amazon?

Yes. I mean, look, we certainly hear the same things you hear. I think the growth that Britt just pointed out, would suggest that it's not impeding our business and that our value proposition is very strong and very healthy. And in fact, we participate on Amazon and Walmart and various other marketplaces in the medical business as well. So we've got kind of both sides of that relationship. But I think we feel very confident in our ability to service our customers. We understand the needs. A health system doesn't really want their physicians making independent decisions about what products and where and buying them kind of through the commercial marketplace as opposed to sticking to the formulary of what they've designed. So we think we actually have a pretty strong value proposition in that segment, too.

There's always a lot of focus around what's happening in D.C., especially around drug pricing. As we think about potential changes to Part B and reference pricing, how do you think about how that, one, impacts your business? Do you think that it has an impact around the shift in sites of care if we start to take away for the bill and buy for the physician, number one? And then reimportation would be the second component.

Well, relative to IPI and CAP, I mean, clearly, we think any policy that advances that, that hurts the incentive for care to be provided in the community is a step backwards. We know that, that's the low-cost setting. We know it's got equal quality and we know it's got better access. So our view is, and we have come out to say we see some problems at the CAP IPI and I think most people would say that. And so how that evolves and where it goes, I'm not sure, but anything that would move us away from community-based care is a step backwards, and I think the numbers of scoring when that comes out, will probably support that. Reimportation is an interesting one for us because we obviously have a big scale business in Canada and we have a scale business in the U.S. I personally have a hard time thinking how the pharmaceutical supply chain in a country of 30 million people will address the cost and access issues in a country of 350 million people. And I think that the -- there's a lot of steps between taking a product available in Canada and even the regs or the white paper that you've seen written, the fact that it's going to have to be FDA approved, it's going to have to get relabeled. It's going to have to go through QC, I mean, that closes a lot of the arbitrage and the pricing, I think. I'll tell you, our first and foremost commitment is to the integrity of the supply chain in every country we serve, whether that's Canada or the U.S. and so we have tremendous capabilities if this emerges. We think we're as best positioned as anybody, but protecting the quality of the supply chain in both countries will be our overarching objective.

So we have just a little over a minute left here. And I've been closing all the sessions with, when we're sitting here a year from now in 2021, what do you hope that investors will better understand about McKesson that they don't understand today?

Well, I hope that they will see the manifestation of the strategies that we've talked about, the cultural transformation that we've talked about, the momentum that we've been signaling is just continuing to build on itself and that we'll be recognized for the breadth and scale of the capabilities we have in distribution, in community presence, in technology, and we're able to bring that in a very meaningful way to impact the health care system and outcomes for patients.

Great. Thanks very much, everybody.

Thank you.