McKesson Corporation (MCK) Earnings Call Transcript & Summary

Hi. This is Steve Baxter, the health care technology and distribution analyst here at Wolfe Research. We're grateful to be joined today by Britt Vitalone, the CFO of McKesson, for our second annual Wolfe Research Healthcare Conference. Britt, thanks again for the time. I hope you're doing well.

Thank you. Appreciate it, and hope you're doing well also.

Yes. So Britt has agreed to go straight into the question-and-answer portion, which is great for us. There's obviously a ton going on that we can talk about. So just as a reminder, for those of you on the line, there's a box available for you to write in questions. Only I can see these questions. And if you submit a question, I will do my best to address it as we move through the call. All right. So let's get started. So obviously, it's been a very busy 48 hours in the space. There's been some really big news yesterday with Amazon rolling out its pharmacy and Prime offering, something that seemed pretty likely for a couple of years now following the acquisition of PillPack. So let's start there. They aren't a customer of yours. So I guess to the extent that they're successful, it seems like potentially, it could come at the expense of some of your customers. Curious, it's early, but to the extent you have any early thoughts you'd like to share there. And then just broadly, how do you think about the positioning in McKesson, if we were eventually to see material shift from retail pharmacies and mail order?

Yes, great question. And again, appreciate being here. I would agree with one of the things that you just said that when Amazon acquired PillPack back in 2018, I think everybody is anticipating that there would be additional actions at some point in time. So this is not a surprise. I think a lot of people, particularly retailers, independents have been anticipating something along this line. We're still learning what their full intentions are going to be, how far they're going to go with this next step in their journey. So it's difficult to predict at this time exactly what the impacts might be. I would say that retailers and independents, in particular, are prepared for this. They've been continuing to evolve and innovate and build their businesses in anticipation of something like this, whether it be Amazon or anyone else. And I'd say nearly all community pharmacies do offer some form of home delivery or scheduled pickup through an app. Compliance packaging is something that you see being offered by many independents. And independents have continued to evolve with automation capabilities and other services such as medication synchronization and patient adherence programs. So I think independents have continued to invest in their offerings, continued to invest in automation. And I think that they're fairly well positioned to manage additional competition. They're really not very commoditized. I think patients choose independents for very specific reasons, the partnership and the relationship that they have with their pharmacists. So I think from that perspective, retail has been preparing for this. From a McKesson perspective, we'll continue to support our customers as we can. And I would also just point out that we have been very clear about our strategies around oncology and biopharma commercial services. And what -- this move by Amazon doesn't have any direct impact on those at all. We're still -- I'm very excited about the opportunities that we have in both of those areas. So more to come, I'm sure, but just another step that was not really a big surprise.

Yes. Fair enough. Definitely early days here, and I'm sure we're going to be keeping track of this quite closely. I guess just one other question as far as what Amazon has announced. It does seem like another component of it was around the Prime offering, which looks and feels a lot like what GoodRX has already somewhat popularized. If at all, how did these type of cash pay programs impact your business?

I would say that it's -- in the near term, the impact is not very material. We'll see how these things develop. And cash pay is not new. Discount cards are not novel. So I don't see anything really new or unique here. And for that reason, at this point in time, until we learn more about what they might do, I just don't see a material impact.

Okay. So let's talk a little bit about vaccines. The company is obviously going to be serving in a critical role as a central distributor for most COVID-19 vaccines. Can you talk a little bit about what's required operationally to make this vaccine distribution effort possible? How much is already completed? How much sort of remains to do?

Yes. Sure. Look, we're very excited about this. This builds upon a contract that we already have existing with the CDC. And so we're really honored to be able to do -- to perform a service like this in a very similar way that we did H1N1. We're working very closely with CDC and certainly the HHS as we work on kitting and storage programs. It's a top priority for our company. Obviously, we have a very large, dedicated team that's working very closely with the Operation Warp Speed team. There's a lot of really good coordination there. And we've been working and very focused on building the infrastructure and scaling the infrastructure needed in order to pull this off. And we think that we're well prepared to do that. So it's -- operationally, it's a similar approach that you saw with H1N1 in terms of building new and scaling existing infrastructure to handle the surge and the volume and the capacity. We're -- certainly been working hard on that. I feel like we're very well prepared to do that. We've been working very hard on the kitting and storage program. A lot of that production of those kits is already well underway. And certainly, we're coordinating closely on when a vaccine distribution will begin, taking our direction from the administration on what vaccine is going to be delivered to what location, and we're prepared to handle the logistics on that. So more to come, obviously, as the program around vaccines continues to evolve.

Got it. And maybe could you touch on how these investments have impacted the P&L during the first half of the year? I know that you are being reimbursed by the federal government for some of this. Like has there been a net impact to your P&L? Just kind of how has that been impacting the financials thus far?

Yes. We -- it didn't have an impact through our second quarter. Obviously, we're -- as you mentioned, there is a reimbursement set aside for the vaccine program in terms of reimbursing our new and scaled existing infrastructure. So from that perspective, as we go through the first half of the year, we've not had an impact. And as we get into the second half of the year, we've talked about the $0.15 to $0.20 of AOP that we expect to add for the kitting and the storage program in our Medical-Surgical business. As I mentioned, a lot of that production is already underway and still a little bit too early for us in terms of providing any guidance on the vaccine program. That program is still evolving with the coordination with the CDC.

Got it. Understood. And in terms of the $0.15 to $0.20, just was wondering if you could equate that into like potentially some number of doses or vaccinations or people vaccinated. I'm just trying to understand whether like as far as the kitting and supplies component of this goes, is this sort of the entire opportunity, this $0.15 or $0.20? Or are we looking at something, I'm not sure whether it'd be larger or smaller, obviously, but whether we'd be looking at some kind of earnings contribution as we move into your next fiscal year?

The $0.15 to $0.20 is the visibility that we have in terms of what's going to be required to support vaccine distribution for the balance of this year. I think that it's possible that the program around kitting and certainly storage could extend beyond FY '21. But what we've guided to is the visibility that we have in terms of the kits that are going to be necessary to be built and distributed for FY '21. That's really the only visibility that we have at this point.

Got it. Okay. So then as we kind of come back to the core sort of U.S. pharma business, you guys spent a lot of time talking about the nonlinear pace of recovery for both prescription volumes and also provider visits. Unfortunately, we've seen an intensification of COVID-19 cases across most of the country. I guess what's the latest you can share about the pace of recovery and how it's been impacted by the recent upswing?

Yes. So what we've seen, we saw a recovery faster than we had anticipated in our first quarter. And that really began in the second half of June. And really in through the majority of Q3, we saw really better volumes than we had anticipated. As I talked about on our call, we saw that begin to stabilize in terms of the volumes and begin to flatten out. And that's really been the trends that we've seen since that point in time. So I think that's very supportive of the comments that I made on the call where we expect that the full recovery is going to extend beyond this year and that it's going to be -- there's going to be some bumps along the way. We do expect a full recovery to occur. But given the fact that we've seen volumes and patient mobility begin to flatten out, that really supports that extension of a full recovery beyond this fiscal year.

Got it. Yes, that makes sense. And then you guys were pretty clear on the most recent earnings call that guidance does embed a couple of assumptions around COVID, one of which is that there isn't a second wave that leads to shelter-at-home and like other rounds of economic lockdowns. Fortunately, it feels like we're kind of at that point to a certain degree. But just wondering if you could speak a little bit about how the company approached the development of guidance for second half. And then just general level of comfort with the trends you're seeing today kind of fitting in with that qualification you met.

Yes. So when we're putting together -- that's a great question. As we were putting together our second quarter guidance, we weren't seeing these significant spikes in really hotspots across the country. And that's why we really reiterated the fact that we're not going to be guiding to a second wave, which -- it's hard for us to predict that. And so what we're trying to do is give you a sense for building guidance around the trends that we were seeing around prescriptions, the trends that we were seeing around patient utilization and mobility and some of the momentum that we were seeing in the underlying business. And obviously, we've seen a faster recovery in the first half of the year. Our core business has continued to perform quite well, and that was supportive of the raise that we did to the full year. We couldn't really predict the significant increase that we've seen in cases. And it's -- I think it's still hard to really judge what those cases are going to translate into in terms of prescription volumes and patient visits. We've seen those really just sort of flatten out. So I think we'll know a little bit more as we get through the next 6 or so weeks of the quarter and should have a better perspective on what the impact in this second wave, if you will, has had. I just don't think that the country is going to lockdown like it did before. I think we've learned a lot. I think we've learned how to manage through this better than we originally did. But again, I think we'll know more in about 5 or 6 weeks.

Got it. Yes, that's fair. And then the other guidance assumption, just kind of continuing off of that, there's no systemic customer insolvency events. I think you previously had made a comment that you hadn't really seen any type of issues on the credit side there. Can you just give us an update on what you're seeing on this front like big picture sort of the health of your customer base and the trends you're seeing there and what you're hearing?

Absolutely, and that is correct. We have not seen any impacts to our -- material impacts to our customers at this point. Our customers have been quite resilient. We've partnered very closely with them. I think some of the programs that were put in place at the beginning of the year really helped really the spike that we saw from the initial phase of COVID. Our customers have really responded quite well. And again, we're encouraged by the resilience that we've seen. We're encouraged that the risks that we could see from a situation like this, we've just not seen yet. So we'll just continue to work very closely with our customers. But at this point, we've not seen any material impacts at all.

Got it. Okay. And then maybe we'll move on to talk about Med-Surg a little bit. Obviously, the company has seen a pretty material benefit from short-term drivers around like PP&E and lab. I guess as we think about the margin profile of that opportunity versus the margin profile of the core base medical business, how do those things compare to each other? Is there any kind of noticeable difference we should be thinking about in terms of the performance this year?

Yes. So I'd just maybe make a couple of comments here first. The lab business itself is one that we've invested in over the last several years. We've made a small acquisition a few years ago. We've continued to develop programs in coordination with many of the manufacturers. So we have a very strong lab business that existed. It's benefited from not only the investments that we've made but certainly, the increased volume from COVID testing. PP&E is one that certainly spiked at the beginning of the year as I think there was a lot of fear that there's going to be scarcity in supply. That's a component of our business that is at a lower margin than the core business. It is a component of our primary care business, which we talked about earlier on in the year of being roughly 60% of the total medical business, but it is at a lower margin than the rest of the business. It's an important part to the business, obviously, that is supportive for our customers and we've seen it spike. But again, like I talked about earlier, we've seen that sort of stabilize and flatten out as well. So certainly, the volumes that we're seeing are from the continued performance of the core, which has been very solid. And the foundations and fundamentals are continuing to be strong but also additive from PPE volumes and COVID testing.

I see, okay. And then maybe you could just give us an idea of -- obviously, like sourcing for PP&E has been a bit of a challenge across the industry. It seems like you guys have managed it fairly well. Can you maybe talk a little bit about what you've seen in terms of sourcing costs for PP&E throughout the year? And then in general, just kind of refresh us on to the extent you experience higher PP&E cost, what's the contractual arrangement with the customer? Are you able to pass those higher costs through to the customer and maintain your margin? Is that a difficult thing to do in this environment? Any color there would be helpful.

Let me try to unpack those questions. They're all great questions. If I miss one, you can certainly remind me, I'll come back to it. But I would just say a few things here. Certainly, the significant demand increases that we saw at the beginning of the year put some stress on the overall system. I think this is an area where we've built tremendous amount of relationships over the years, not only with our national brand suppliers but with our private brand suppliers. And I think that was very supportive for our ability to secure the supply necessary to meet our customer demand. I would also just point out that we are not a manufacturer of these products. We source these products on behalf of our customers. We don't manufacture these products like others do. So for us to strengthen and maintain the relationships that we have allowed us to really secure that supply. Certainly, as we've seen price increases, we are able to pass some of those on. I mean, obviously, this is just a basic economic supply and demand as you would expect. But as suppliers have taken price increases, we've been able to pass some of those on, some we've been unable to pass on. It really just depends on the product and the demand for that product. But overall, we've not seen a significant impact to our margins from pricing changes to this point.

Okay. And then another question that's been coming up a lot is that President-elect Biden seems to want to take a very different approach to PP&E, like a very coordinated national approach, potentially continuing to utilize Defense Production Act. At this point, what insight do you have into what changes we might see as the new administration comes in? Any insight into that would be great.