McKesson Corporation (MCK) Earnings Call Transcript & Summary

Hi, everyone, and thank you for joining us today. I'm Ricky Goldwasser, Morgan Stanley's Healthcare Services Analyst, and we are on day 2 of our Global Healthcare Conference. I'm very pleased to have McKesson's CFO, Britt Vitalone, here with us today. McKesson, obviously, the largest drug and medical product distributor in the country, and has played a very important role during the COVID pandemic and is going to play a very important role going forward in facilitating vaccine distribution. So clearly, we have a lot of questions, and looking forward to the conversation with Britt today. Before we get started, I just want to make sure that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. It's not for the members of the press. And if you are a member of the press, please disconnect and reach out separately. And for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com. And if you have any questions, please reach out to your Morgan Stanley representative. And with that, thanks again for Britt, and I'll pass it over to you for some introductory remarks.

Well, thanks, Ricky, and good morning. And I really appreciate you hosting us in this virtual way. Let me make a few opening remarks, and I'm going to start with an overview of McKesson, and then just briefly talk about recent performance. McKesson is a global health care services leader with businesses and assets that really span and touch most areas of health care. Let me just talk about a few of those here this morning. We have a scaled U.S. distribution pharmaceutical business that delivers approximately 1/3 of all prescription medicines in North America each day. We have leading specialty and oncology business presence. We have a strong specialty provider network as well as our U.S. oncology network, and we're the #1 distributor to community oncology. We have market-leading medical-surgical business that serves the alternate care market. We have a prescription technology business serving our biopharma and life sciences partners in patients, and we have extensive distribution in retail assets internationally, in both Canada and in Europe. In this evolving environment, we continue to play a very important role as well as through this pandemic. We continue to partner closely with manufacturers, with our customers and with patients, and we're pleased to have expanded our relationship with the CDC to support Operation Warp Speed as a centralized distributor of COVID-19 vaccines and ancillary supplies. Let me just transition here briefly and talk a little bit about recent performance. As we discussed on our Q1 earnings call in the beginning of August, as we expected, our first quarter results were severely impacted by the global pandemic as social distancing requirements, lockdown restrictions placed unique pressures on manufacturers, customers and patients. We navigated the quarter with a combination of discipline and focus and executed through what we continue to believe are going to be peak levels of the pandemic and restrictions and social distancing requirements. We continue to believe that our first quarter results will be the most severely impacted, and we expect to see sequential improvement through the balance of the year in both revenue and adjusted operating profit. Although we don't believe that the recovery in our business will be linear, our business fundamentals remain solid. And we continue to expect to see growth in the second half of the year as compared to the prior year. We are pleased to finish the first quarter ahead of our expectations, and we remain confident in the guidance that we provided on our first quarter earnings call. We have a strong balance sheet that is underpinned by investment-grade credit ratings. This provides us the financial flexibility to continue to deploy capital in a balanced manner. We prioritize strategic investments in the growth areas that we've outlined: specialty, oncology and biopharma services, leveraging technology, data and analytics. And we remain committed to returning capital to our shareholders through a combination of dividends and share buybacks. So before -- as I wrap it up here for you and turn it back to you, Ricky, in closing, the current environment continues to present many unknowns, but our business remains resilient with a combination of strong execution and very stable fundamentals. So thank you for hosting us today.

Thank you, Britt. And obviously, McKesson has a very unique position with visibility into drug transit pharmacies, digitalization of physician offices, capturing your medical and specialty segments and global perspective. So how were the volumes across the U.S. business been trending in July, August and September to date compared to the pre-COVID baseline and versus your expectation?

Yes. As we talked about on our first quarter earnings call, we did expect that the first quarter would be the most severely impacted, principally in the areas of Primary Care and specialty provider as we thought that the pandemic would have unique restrictions on the mobility of patients. As we went through our first quarter, we saw that the recovery began to improve in all parts of our business, particularly in the second half of June. So the trajectory continued to improve as we laid out. And then it began to stabilize as we got through July. So we're pleased with the trajectory and the recovery. It was ahead of our expectations. We continue to see good interaction of patients with physicians, with their specialty providers, and we're encouraged that we think that this trajectory will lead to sequential revenue and operating profit growth through the balance of the year.

And you talked a little bit about the medical, but can you also talk -- share with us some thoughts on the trends that you're seeing on the pharmacy side? One of your peer was here yesterday and talked about your strength in Medical, more of a softer environment on the pharmacy side. What are you seeing for your book?

Yes. Well, we've seen that trajectory continued to improve from the early days of the pandemic. And we've seen it not only improve through the first quarter, but we've seen it begin to stabilize as we got into our Q1 earnings call. So we're encouraged that the trajectory is on the line that we had anticipated, that it is -- continue to come up to those pre-pandemic levels, and we expect that we'll see sequential improvement through the balance of the year. And in fact, as you may recall, we talked about growth in our pharmaceutical business in the second half of the year as compared to the prior year. So we expect that the trajectory that we're seeing will continue through the balance of the year.

In -- if we think about these last 6 months and structural changes to behavior, from what you've observed in the marketplace, are there any structural changes to behavior that you can point to whether it's from trends in independent versus national accounts or how individuals interact with physicians? And are there any new opportunities that you can build on, on a post-pandemic world?

Yes. I would hesitate to talk about any structural changes. Structural changes, to me, happen over a long period of time. And I think that we're still in the early days of this evolving environment. That being said, what we have seen is that our independent customers continue to be resilient. They continue to innovate. And the performance that we've seen in the independent segment has been relatively similar to the other channels that we serve. And so we're encouraged by that. Clearly, we've spent a lot of time supporting our independent customers. Whether that's through innovation, opportunities that might be available to them and certainly helping them understand other needs that they might have. There have been no credit issues thus far. So they've held up very well, and we're very pleased with that. And they've continued to innovate along the areas of things like digitization and how they interact with their customers. So the independents have held up well. We've seen all channels really continue to integrate. So as an example, we talked about telehealth in our oncology practices. That has added what we think is efficiencies in the practices. And we've seen up to 15% of all visits now being telehealth, and that has been additive to the practices. And I would expect the telehealth and telemedicine will continue to have a place going forward. Certainly, the way that we operate, we've become more of a remote environment. We find necessity, but certainly, we found some efficiencies through that over the last 6 months as well. So I think in the areas of working with technology and working from a back-office through technology, interacting with patients in a more digitized manner, those have accelerated. And I think that they'll have a place long term. And certainly, it's an opportunity for McKesson to support its customers through that.

Let's talk about the vaccine. Obviously, you've been selected by the CDC as the centralized distributor for COVID-19 vaccine. And you had a similar role with the H1N1 vaccine back in 2009, 2010. Quality vaccine distribution is expected to expand beyond the traditional health care side. So can you maybe walk us through the logistics of it all?

Yes. So a couple of things. Certainly, McKesson has the capabilities, the assets to support a program of this type and of this size. We've demonstrated that through our long history. The H1N1 situation is a good example of that, where we were the centralized distributor for the H1N1 vaccine in the ancillary supplies. So we've demonstrated our capabilities in the past. We were able to expand an existing relationship that we have with the CDC. This is a contract now that we've been the exclusive distributor for the last 13 years. So clearly, we've demonstrated our ability to distribute vaccines. And we were selected here by the government to be the centralized distributor for a refrigerated and up to minus 20-degree vaccines as well as ancillary supplies. As we think about this program specifically, there's still a lot to learn. It's still early on in the process. The government will make all the decisions on the administration of the vaccine. They'll make all the decisions in terms of where the vaccine is distributed and which vaccines will be distributed and along what timetable, and we will provide our services as a third-party logistics provider. And we expect to be paid a fair value for the services that we provide through that. So clearly, we're pleased with the opportunity to expand our relationship. We think that it really fits in the capabilities. And certainly with the assets that we have within McKesson, we can certainly leverage some of the operational aspects that we learned through H1N1. But beyond that, I think there's still a lot to learn, particularly around the financial aspects of the arrangement.

And then, obviously, there are specific vaccine candidates that have lower storage temperature requirements than the minus 20. So are you investing in technology to be able to handle those vaccine candidates? Or do you envision other industry players stepping in to fill the role, and you have more sort of kind of like a centralized role to manage all of the different components of it?

Yes. Well, look, McKesson has the capabilities to distribute vaccines. We've done that for -- certainly throughout our history. Our contract with the government is for refrigerated and minus 20. That is the scope of this contract. It will be the government's decision if they decide to bring other distributors into the program, but our role will be the centralized distributor for those refrigerated and up to minus 20 as well as ancillary supplies.

I think that HHS has committed about $178 million to fund investments ahead of vaccine distribution. So what investments are you making to prepare?

Yes. Certainly, this program is unprecedented in terms of its size. And the $178 million represents a set of funds to reimburse McKesson for investments that we will make to scale and build new distribution centers and put assets in place to handle really the size and the scope of this contract. So it is a -- it is to reimburse us as we build to handle the size and the scope of the program.

I got one more vaccine question, and then we're going to move on to another topic from the audience. If you can just talk about the partnership that you have with Cryoport. And are you using them for storage?

I'm sorry, could you just repeat the last part of that, our partnership?

With Cryoport. And are you using them for storage?