McKesson Corporation (MCK) Earnings Call Transcript & Summary

I think we're live now. This is great. So good afternoon, everyone. This is Eric Coldwell. I cover pharma services and health care supply chain stocks for Baird. It's our pleasure this afternoon to have McKesson with us. Speaking today will be Britt Vitalone, EVP and CFO of the company. And Britt, I think you're going to make a few introductory comments, and then we'll jump straight into the fireside chat, okay?

Sounds great. Eric, thank you. And good afternoon, everyone. And thank you for hosting us in this remote environment. Appreciate it. Maybe I'll just make a couple of comments, and maybe I'll just start with a brief overview about McKesson. And McKesson is a global leader with a diverse set of health care assets and capabilities. And our history dates back to 1833. Our breadth of assets and capabilities really touches pretty much all aspects of health care. And maybe I'll just highlight a few of those to start. We have a scaled U.S. pharmaceutical distribution business that delivers approximately 1/3 of all prescription medicines in North America every day. And we have leading specialty in oncology presences in particular. We have a strong specialty provider business. And we have a growing U.S. oncology network business, and we're the #1 distributor to community oncology. We have a market-leading position in Medical Surgical and we service all of the alternate site -- settings of care. Our prescription technology business focuses on key strategies of our biopharma service partners and life science partners and patients. We have extensive reach in distribution and retail assets internationally in both Canada and Europe. We also play an essential role clearly in times like these with the pandemic, in this evolving environment. We continue to partner very closely with manufacturer partners, government entities, our customers and patients. And we're pleased to have expanded our relationship with the CDC as a centralized distributor for future COVID-19 vaccines and ancillary supply. So a very broad-based set of capabilities and assets. Let me just talk a little bit and transition to some recent performance. As we discussed in our Q1 earnings call at the beginning of August, as we expected, our first quarter was more severely impacted by the pandemic as restrictions and lockdowns really impacted and put unique pressures on our customers, our partners and patients generally. We were able to navigate that first quarter with a combination of discipline and focus in what we continue to believe will be peak levels of global lockdowns and restrictions. We were pleased to finish the first quarter ahead of the expectations that we set on our Q4 earnings call, and we continue to believe that the first quarter will be peak levels of these restrictions and lockdowns. And we expect that we'll continue to see sequential revenue and adjusted operating profit improvement through the balance of our fiscal year. As I talked about on our first quarter earnings call, while we don't expect that the recovery in our business will be linear, we do expect that the business will grow in the second half of the year as compared to the first half of the year and that the fundamentals in our business are -- remain solid and our business continues to be resilient. We remain confident in the updated guidance that we provided on our FY '21 call. As I've talked just briefly about our balance sheet, our balance sheet remains strong. It is underpinned by our investment-grade credit ratings, and this provides us the financial flexibility that allows us to continue to execute against a balanced capital deployment approach. We prioritize investments in strategic growth areas, such as biopharma services, specialty, oncology, leveraging technology in our business and leveraging data and analytics. And we remain committed to continue to return capital to our shareholders through a mix of dividends and share buybacks. So as we kind of wrap up here my opening comments, we certainly are seeing a unique time. We're very pleased with the ability to continue to perform in a disciplined manner and execute against our strategic priorities. Our business remains resilient, and we're looking forward to the balance of the second half of the year as we expect that the trajectory will continue to improve. So Eric, those were just a few opening comments.

Great. Thank you very much. You hit on one of the main topics, one of the more recent topics, which is your relationship with CDC to help with our Operation Warp Speed with the COVID vaccine as a centralized distributor. One of the main questions we've been getting from investors is, do you have a sense of [ if other distributors will not ] be involved? Do you think there will be other centralized distributors? Or will you be primarily shipping to other distributors that may be pulled in over time?

Yes, it's a great question. And maybe I'll just step back and frame the relationship for one. And again, we've been able to expand on an existing contract that we have with the CDC, our Vaccines for Children Program, which we won through a competitive bid process in 2016. And we've been named a centralized distributor for refrigerated and up to minus 20-degree temperature vaccines as well as ancillary supplies. The government will direct all of the administration of the vaccine. They will also direct the vaccines that will be distributed in the program. And it will be the government's decision if they choose to bring other distributors into the process. But we will be the centralized distributor for the program, for the vaccines that I referenced to you as well as ancillary supplies.

Great. And one more quick technical one on that. We did see a release from Health and Human Services that McKesson will receive $178 million in funding for the program. I did have some initial questions from investors about whether that was the totality of the revenue or the profit, which of course, it isn't. But I'd love it if you could take a second and address what that $178 million is, when you might see it and what it relates to.

Yes. Sure. There's really 2 aspects to the program. The first has been announced, which is the $178 million. And this is to reimburse McKesson for expenses incurred to build new and to scale existing infrastructure to support really an unprecedented size of a program here. So we will build new DCs, and we will scale existing infrastructure to meet the demand on both the vaccine side and the supply side. And then separately, as we perform third-party logistics services, we will -- we expect that we will be compensated a fair value for the services that we provide. It's still early in the process. We don't have any other information beyond that but 2 aspects. The $178 million is a reimbursement for expenses incurred.

Last quick one on this. Obviously, you participated in the H1N1 vaccine program around a decade ago. It actually wound up being fairly material to earnings, I believe, fiscal '10, if I remember correctly. Is there any reason to think this program operates differently other than, if and when the vaccine gets approved, the ultimate price, the ultimate volume? Is there any other nuance that would make this program different from H1N1?

Yes, I mean, there are -- I can certainly see the correlation between the 2 programs. They're very different in many respects. Certainly, the size of this program is going to be quite different. I would say that, operationally, that the CDC has taken a similar approach to this program as they did H1N1. But it's still fairly early in the process. There are still some things that are unknown. And if you're drawing a correlation, I would just say the operational approach is similar, but that's all that we can really disclose at this time.

That's fair. One of the big announcements recently also was an internal realign -- announcement of a realignment. You adjusted your organizational and reporting structure, expanded into 4 newly aligned segments. That made a lot of sense to us. We like the move. I thought it was very common sense. But it didn't seem like there was a lot behind it other than moving some businesses, a little bit of a leadership change. I'm curious how you see that realignment really helping you [indiscernible].

Yes, it's a great question. There's a lot of work that goes in to a realignment. There's a whole host of mechanics and teams that are involved with doing such a realignment. So it's not trivial in any respect. I think if you step back and you look at FY '20 as a starting point, when we announced the IPO of Change Healthcare and then the eventual exit of Change Healthcare, we really started to focus in on the strategic priorities around specialty, oncology, biopharma services and really leveraging technology. And so the exit of Change Healthcare, that really was the impetus, if you will, to really provide some more transparency on businesses that we are moving forward with and the strategies that we are moving forward with. And so we felt that it was important and that it would provide good transparency. We felt that it would be better transparency than having assets in another segment to really align those assets and the reporting around the strategy that we're moving forward with. So I think that's really the -- what was behind this. And hopefully, it will give the right visibility to our investor base.

So it sounds like perhaps the thought process was in place. Change was part of the initial stages. Oftentimes we see realignments and down the road, we hear the company is changing their investment strategy or they're getting ready to divest noncore or what are now seen as noncore assets. This seems like more of an evolution of something that's been ongoing for a period of time as opposed to a precursor to something really big ahead. Is that a fair statement?

Yes. I think we've been talking about -- for the past couple of years about the focus areas in the business, and then we really crystallized the strategy at the beginning of FY '20. And that really culminated FY '20 with the exit of Change Healthcare. So it's really been an evolution. And as we've gone through that path, we've tried to provide additional transparency into some of our businesses. We think that the realignment of our segments is going to help bring even more visibility and transparency to investors and the areas that we're focusing on from a strategic perspective.

Last quarter, you -- and in the prepared remarks as well -- mentioned about how some of the businesses that were initially impacted the most recovered quickly, perhaps even faster than you really expected. I want to hit on a couple of those. First one was Primary Care. And obviously, you commented on the very strong recovery in June compared to what you were seeing in the prior 2 months. Since that date, we've seen some conflicted national information on volumes and utilization. Some sources say volumes have sort of stagnated since July, August. Others are seeing a little bit of improvement. I'm curious if there's anything unique to the mix of your Primary Care business, either geography, products, et cetera, that would lead your experience to be different than what perhaps people are seeing on a national average when it comes to utilization.

Yes. I think if you start back with the guidance that we provided, certainly, the timing of our guidance was challenging for us, right, really in the beginning stages of the pandemic. And we highlighted that we thought that areas around Primary Care, elective procedures, some specialties would be the most impacted. That turned out to be true. Certainly, the trajectory of those businesses recovered faster than we had originally anticipated. We saw that, that trajectory continued through June and then begin to stabilize through the end of the quarter. We are still seeing that trajectory improve. As we talked about on our first quarter call, we expect that there will be an improvement sequentially in both revenue and adjusted operating profit. We still continue to believe that, that will be the case and that the first quarter will be the peak levels of this. We did talk, though, at the beginning of the year and I think it's important to just point out again that we do not expect the recovery in our business or even parts of our business to be linear. And this is going to be a year of really nonlinear trajectory, if you will. And in some parts of our business, it will be even more dramatic than others. But generally speaking, we still feel that the trajectory of our business is up. We still believe that the second half of the year will be growth as compared to the first half of the year and that the patient volumes and visits that we were seeing, in particular, our Primary Care business, will continue to improve throughout the balance of the year.

In a similar vein, your oncology platform in total had a nice recovery. And oncology was generally seen as one of -- if not the, perhaps one of. It's not the most resilient of all the therapeutic classes for obvious reasons. If I heard you correctly on your second -- on your first quarter, fiscal first quarter call, I think you were back to about 5% of baseline on total visits, although a component of that was telemedicine. Question is, have you seen [ a movement ] back to live visits, the actual patients going to the site? And then tied to that, can you maybe spend a minute giving us a sense on how economics vary between a live visit and a telehealth visit? [ Any nuances? ]

Yes. Let me unpack those questions in order. We did see -- oncology generally is more resilient. Cancer patients are going to generally continue on therapy. Certain aspects of oncology were more impacted than others. And so visits did kind of drop off through the pandemic period. Visits have been continuing a positive trajectory throughout the first quarter. We did see that telemed -- telehealth as a component of that recovery. I think on the first quarter, I called out about 15% of all visits that we were seeing in the quarter were telehealth visits. We think that, that's actually adding a lot of efficiency to the practices. And we think that it's adding more time that doctors can spend with patients and more patients that they can see. So we think that there are some definite benefits to telemedicine. In terms of the economics from a reimbursement perspective, there's not a material difference between telemedicine and a live visit. And I would expect that we will continue to see a mixture of the 2. Will it get higher than 15%? I think time will tell. But generally speaking, the economics are relatively consistent from a reimbursement perspective.