McKesson Corporation (MCK) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to day 3 of the BFA Virtual Healthcare Conference. Michael Cherny, the health care tech and distribution analyst. And I'm thrilled to kick off our day with McKesson. We have senior management, CEO, Brian Tyler; CFO, Britt Vitalone. We're going to jump right into Q&A. As always, any questions you want me to address, feel free to ping me on them. But I figure we might as well get started.

Britt, we had earnings just last week. You put out guidance for your fiscal '22 that came in very robust across the board? Can you maybe just give us some broad strokes of what really stood out with the guidance, in particular, given the fact that you do have a lot of pieces across your organization and all of your segments still tied to the ongoing pandemic?

Yes. Good morning Michael and thanks for having us. We're certainly happy to be here today. We're very -- really pleased with the way we finished FY '21. It was obviously a unique year and a lot of dynamics going up. But we feel like we continued our momentum in the core business. And as we think about our FY '22 guidance, we're really pleased to be able to provide revenue and adjusted operating profit growth of 3% to 6% as well as the adjusted earnings growth, the range of $18.85 to $19.45 represents 9.5% to 13% growth year-over-year. So we're really pleased with the continuing momentum in the business despite some of the dynamics that still exist in the market. And as we talked about, our markets are not fully recovered, but our core business has still remained really strong. As we talked about, there's a couple of things that I think are really important that underpin our guidance. We expect that prescription volumes will continue to make steady improvements through the first half of our year as well as patient engagement in terms of electric procedures and patient visits to their physicians. But we would expect that these levels will get back to a pre-COVID level in the second half of the year. So we're seeing some encouraging signs that lead to that. As we think about our puts and takes for the year, we're really pleased with obviously the momentum that we have in the core business, our role as a centralized distributor for vaccines and kitting and how that will continue through the first half of the year at least. And certainly, one of the upsides to that is our role could be expanded. That will be certainly dependent on what the government and the administration wants to do, but that's an opportunity for us. We think that the timing of the recovery will also play a big impact into this. So volumes recover sooner than we had laid out here. Certainly, that's an upside. So we're going to be watching the pacing and the volumes as the year goes on. Obviously, we played a big role from a lab testing perspective in our medical business, and we think that there's some opportunities there with some volumes in our medical business. And then the last thing I would point out is, from a capital deployment perspective, we guided share repurchase of about $2 billion in FY '22. But as you saw, we finished the year with robust cash flow again in FY '21, a very strong balance sheet. We have ample liquidity. So capital deployment could be an opportunity for us as well. So I think there's a lot of puts and takes in our guidance. But generally speaking, we have good momentum we have a lot of opportunity still in the business.

And I'd love to start on the vaccine side. McKesson jumped into the fray based on your strong work in the past on getting the vaccine distribution network up and running. As you think about the success you've had so far and then especially with an uncertain future where vaccines could lie, can you talk about the infrastructure that you have in place right now and how easy that would be to just keep and maintain in the event that this does go towards a seasonal booster type program like many speculate it will?

Sure. We did -- we have been through this before. And we have a lot of experience in vaccine distribution. We are the largest annual flu vaccine distributor. And in about a decade ago, we ran the H1N1 program. So we have a lot of experience. We brought that experience to bear, Michael, by standing up over 3.3 million dedicated square feet that was custom-built exactly to do the job of distributing the refrigerated and frozen COVID-19 vaccines. And I've been very proud of the team's performances. It's gone -- it's a very complicated undertaking with lots of unknowns. We were literally building as the program was evolving. It's gone quite well. That infrastructure is now in place, been operating for many, many months, and we're prepared to continue operating it for as long as the government sees a role and a need for that infrastructure. So we are engaged in continuous conversation with them, as you might imagine, as they navigate the coming vaccines and changing indications for who's eligible for vaccines and expanding sites of distribution. But overall, I'd say the main takeaway is the infrastructure has been built. It's working quite effectively, and we're prepared to continue it for as long as there's a need for us to provide the service.

And we might come back there, but I have a ton of topics. I want to make sure I touch on all of them. Let's turn to your core U.S. Pharma business. One of the dynamics, I think everyone recognizes is the script volumes being soft and the macro factors in place. The other side of the discussion, obviously, is on the pricing side and the flow pricing, in particular, on generics. The last few years have, I guess, almost decade now has changed the landscape in terms of how you go to market with the creation and rollout -- a successful rollout of ClarusONE. As you think about that now, can you just tell us where ClarusONE sits today heading into '22 and how that factors into what you're seeing from a broad-based pricing dynamic in terms of that buy-sell spread that so many are focused on?

Well, there's certainly been a lot written in the last couple of months around the generic environment. I would frame it at the highest level as the environment really continues to be in line with what we expect it to be. The unit volume, as you referenced, has been a little soft because the COVID impacts over the course of the year, but the dynamics of the buy, sell and the spread, I think, are largely intact and consistent with what we had expected. We have a terrific scaled business in ClarusONE that we think continues to innovate and help us create go to market -- creative go-to-market sourcing strategies that's very contemporary and competitive. And on the sell side, we do -- we are very disciplined in how we think about maintaining that spread. And so I would characterize the market as generally pretty consistent with what we've seen over the last several, even more than quarters, but probably years.

And along those lines, and it's helpful to make sure we have that context, when you think about ClarusONE, there's been commentary you've made in the past about the potential expansion into other various areas, whether it's OTC or some other product lines. Where do you sit right now relative to ClarusONE and the potential opportunity set you have on a go-forward basis to continue to extract value for your customers?

Well, I'll start on this. Certainly, the foundation of what ClarusONE represents in terms of a scaled entity to be able to do sourcing has only expanded over time. And as we think about that as part of it is integrated into our overall global sourcing and bringing our partners on board to evaluate where opportunities are, whether that be biosimilars or specialty drugs. And so certainly, we continue to evaluate those opportunities. We've integrated that, as I mentioned, into our global sourcing opportunities. Our focus has been on generics. There's still a large opportunity on generics. We're really focused on the stability of supply for our customers as well as at low price. We think that, that is paramount right now. We think that there's great value for our customers there. And so that's where our focus has been. And we think that there is still opportunity there. But the foundation that ClarusONE has in place certainly does allow us to add to that, whether that be oral cells, injectables, biosimilars, those opportunities exist, and we'll continue to evaluate those as they make sense for our business and our customers.

And within that comment, Britt, you touched on biosimilars and specialty, which is good because that was the pivot that I want to make. I remember coming down to Dallas, what feels like a few years ago and you giving a really deep dive on your overall specialty business and breaking out the differential between the wholesale distribution, specialty versus your high-touch physician services. As you think about fiscal '22 and think about this services that a lot of your -- especially pharma -- sorry, physicians need within that business, how do you think about the growth trajectory for biologies and those other high-touch specialty services? And what is the demand curve? Are they seeing the same level of volume rebound in terms of the rest of the book of business? Or are you seeing things come back faster given the necessity of some of the products in those markets?

Yes. I think it's fair to characterize for many of the specialties and particularly oncology, which had -- we happen to be deepest about. I think that those markets did show a little more resilience over the course of this year for the reasons exactly you say. I mean, these are serious -- treating serious diseases that require medical care in a timely fashion. So we think that the market has been a little more resilient. Oncology, in fact, reached pre-COVID levels of utilization at various points in the past year. So we have a terrific business in this space. We serve over 10,000 specialty physicians either distribution or through our GPO. We, obviously, have the U.S. oncology network in those assets. And that foundational business, those foundational services continue to grow. We continue to be excited about them. But as you know, we're also very focused on expanding the breadth of those solutions, particularly in support of oncology and what we call kind of the oncology ecosystem. So we've been investing in that expansion in things like Ontada, which is a data and insights business that we think brings both benefit to the provider base, which helps us continue to grow that provider base by giving them better sets of tools to navigate the increasingly complicated world of oncology care. But then also taking those lessons from the provider side and providing value and insight back upstream to our biopharma customers that we serve. So we're -- we think we have a terrific footprint, a broad set of assets, a leading position in community specialty and particularly community specialty oncology, and it's an area we think we can continue to invest in to keep that growth story going.

And I know it's early on the Ontada launch, but it seems like it fits philosophically with other areas of your business ties back, obviously, tech solutions side of -- on pharmacy. What has been the field reaction to that business? And where do you see the biggest incremental value? Is it -- will we see it in customer retention? Or will we see it in McKesson profitability? Or we'll see in revenue growth? How will that translate into the overall enterprise?

Yes. Well, I think we -- our expectation is you'll see it in all of those things. As we focus on better tools and broader sets of capabilities and opportunities to participate in research and clinical that, that will help us attract and continue to expand the network and our community provider base. And so we think that's a key piece of it. We also think that the insights that we'll be able to take back upstream to biopharma or ultimately, those are commercial opportunities for us, too. And so it's really, I think, all of the components working together and that's why we kind of call it an ecosystem. It's a big self-reinforcing.

Perfect. Pivoting to your MedSurg business, and let's leave testing aside for a second. Can you give us a sense of -- as you have gone through COVID, clearly, PPE has been demand some offset tied to all things elective related. As you kick off '22, particularly within your guidance for the MedSurg profitability, where do you think are the biggest points of variability in terms of the balance between utilization versus the variability that has come industry-wide on stuff like gloves and other PPE products?

Well, I'll start. Certainly, we saw the dynamic of elevated demands at the beginning of the pandemic for PPE and then later on in the year as it went on COVID tests. And as I mentioned earlier, in our opportunities, if you will, certainly, our position in lab within the medical space and some of the investments that we've made over the years positioned us quite well for that. We do expect that these elevated levels will continue to moderate, and that's included in our guidance. But underneath all of that, our core markets are really going to be dependent on the pacing and the timing of the recovery around visits, electric procedures and all the things that are going to support our primary and extended care businesses. We do expect that the timing of that recovery back to pre-COVID will be in the second half of the year. And that will just support the investments that we've made and the positions that we have in lab in pharmaceutical within the physicians' offices, our private brand and really the broad base of services and capabilities that we provide to the entire alternate site marketplace. So the underlying core business, the fundamentals are still very strong. Certainly, the impact of COVID had a bigger impact on the medical business. We talked about that at the beginning of the year. But as we see that patients begin to engage again at levels that are similar to the pre-COVID levels, that will really just support the underlying core business. And as we talked about our core growth year-over-year, we talked about a 10% to 16% core growth in adjusted operating profit. I think that speaks to the level of performance that we had pre-COVID and the capabilities and the fundamentals that are still in place for that business.

And along those lines, the success pre-COVID when you ex out testing and PPE and all the COVID-related items had been incredibly strong, outpacing virtually any utilization driven trend tracker you could follow. As you think about getting back to that 10% to 16% core growth, what does that invoke in terms of the dynamics of elective demand shift away from the hospital to these alternate types of care, where you've been so strong. How do we think about the market conditions that support such a strong level of growth versus the broader macro dynamic that we're seeing across health utilization as a whole?

Well, I think -- look, first off, I think this business, it's important to remember, it does primarily serve the alternate site for that non-acute segment. And from the most global or macro perspective, right, we think care is going to continue to migrate into lower-cost settings, whether that's the home or the clinic or a surgery center or even urgent care clinics, things of that nature. We've seen a long-term migration of care towards these settings, and we think that's only going to continue as we continue to pursue transparency, access and better cost for patients. So I think the business is situated in the right markets. And I think one of the lessons we take away from this year is, we've got big scale and reach across many of these segments, which gives us great opportunities in steady times to grow across all those channels. And in times like we had last year, to really be able to pivot to follow where the opportunity is. Lab is a perfect example. We've built a lab channel over the last several years, and we leverage that heavily this year and capture the opportunity that this past year brought. As we migrate back into a "more normal," I do think you'll continue to see, a, some of the visits that didn't happen last year, we'll get back to normal routines and cycles of consuming health care in these settings. And then I think as the PPE comes back down and COVID normalizes, we'll see the other categories we've historically been strong in be the stabilization and the growth in the business.

I think the takeaway, Michael, is the breadth of this business, not only from a customer segment perspective, but breadth of capabilities and services is differentiated in the marketplace. And as Brian talked about, we've been adding those capabilities over time, whether that be private brand or we talked about our lab business. There's opportunities for us to continue to add capabilities as our customers' demands and needs shift. And so the scale and the breadth of the business really allows us to continue to grow in a very healthy way.

And on the lab side, you've always had a presence there, and it's been a natural overlay to your MedSurg business as a whole. Should we start to think about this as a more strategic driver of growth over time from something that you really want to actively expand? Or is this more you catching the demand that comes from the traditional channels that happens to have that lab connectivity?

Well, look, I think we got into -- we really started focusing on this business 4 or 5 years ago based on our strategy assessment kind of pain of the landscape. We saw this as an attractive area that was very adjacent and natural for us to expand into. We don't expect a COVID-like year every year. I mean, it was a little bit unprecedented. Now was it opportunistic that we had a terrific channel and great lab partnerships, and we were working early with people on their commercialization strategies, and we were really going to the right places to capture it? Absolutely. But even as that moderates, I think we continue to look at the landscape for lab and think this is going to be an important part of the business going forward. For this year, there's probably still going to be a lot of shifts and market entry, when you talk about testing, whether that's going to be home testing and does that get uptake or doesn't get uptakes? We do think the absolute level will moderate as COVID itself moderates and vaccines drives and COVID falls, hopefully. There should just be naturally less demand for COVID test kits. But overall, we think we have a terrific channel in lab, and we think that, that's going to be an ongoing important part of the business.

Turning to the international markets, some of the areas that maybe don't get touched on as much. Clearly, strong presence in Europe, incredibly strong presence in Canada. We see from press reports, the dynamics of volatility on the COVID recovery what are you seeing on the ground there in terms of the demand curves, especially in the retail side in both? And how that shapes your comfort factor in the improvement in growth to '22?

Yes. It's a great question. I mean I think we can take the U.K. and set that aside a little bit. They've had a pretty strong COVID vaccine response plan. But as we look across the rest of our European countries, Michael, it really is a country-by-country story. And they will tend to track similar trends of spikes in recovery, but the cycles are different. So we get a little bit of a portfolio effect. Some may be recovering and rising, others may show some weakness just depending on the disease progression. But it does feel to us like Europe, from a vaccination standpoint, is beginning to catch up, is beginning to get more organized. And so we're hopeful that, that continues, obviously, not just for our business, but for the health of those nations and the return of the world to really global health. But in and of itself, I think the important thing is it's more of a portfolio effect. It's probably not a one-country story, it's a Europe story.

And would the same hold true let's say for Canada as well, given especially what seems like some regionalized reclosing of terms?

Yes. I mean, honestly, Canada is probably been and has -- still has the most -- some of the most restrictive mobility and shelter measures in place still. Now they are too accelerating and beginning to get some momentum and traction in vaccination. And we expect over the coming quarters that will continue to relax, and we'll continue to see progress there. But overall, we're -- we still think we're pretty well positioned in Canada. We've got a big footprint. We serve community pharmacy. We have obviously the Rexall banner ourself. And we're also availing all our capabilities to the various provinces as they develop their COVID response plans.

And sticking on the spread and maybe turning back to last week's call. Britt, I know you made some specific comments around Celesio and the put option that you have relative to the investment. Can you just remind everyone, especially some of these things can get lost among the overall guidance, but how to think about that option? And where it will impact both your P&L as well as your cash position?

Sure. I'd be happy to. I think just start as a reminder, McKesson originally acquired 77% of Celesio. The remaining shareholders retained a put right option on their shares. And they also paid a fixed dividend of EUR 0.83 per year. And so what we wanted to call out here is that the put right option exercise for these noncontrolling shareholders expires during our fiscal first quarter. It will expire sometime actually in mid-June. And so as we thought about our guidance, we wanted to provide some transparency, not only to that, but also the fact that, that could mean that there would be a cash outlay for those options that are put back to us of up to $1.3 billion. In our guidance, certainly, we've laid out the cash impact. But in terms of the NCI line, that would mean that there would be an impact to that so the NCI itself would be lower than we've seen in prior years. The Celesio component is not the entire NCI, but when we think about that, we thought about a majority of the shareholders are likely to put their options back before this option expires. And so as we think about our adjusted earnings guidance, we expect that NCI would be in the range of about $170 million to $190 million.

Perfect. I appreciate that clarity, Britt, just to make sure we're all level set. Finally, to round out the business and maybe the most underappreciated asset you have, might be a long statement, but your tech solutions business. If you think about the history of this business and the focus you had historically on electronic health record business, that was just a small piece of the overall company. Now you're really focused around the pharmacy and pharmacy-related services. Can you just remind us how broad this business is right now? And how you think about that -- the opportunities growth in what is a very nicely contributing EBIT business to the enterprise as a whole?

Yes, sure. We're really excited about this business. And this business really underpins our biopharma services growth strategy. We've recently done some realignment internally to put this segment together. We've got our RelayHealth Pharmacy business in here. This is a business that connects over 50,000 pharmacies in the U.S. It's really the electronic network or backbone for adjudicating prescriptions and we're integrated into workflow -- the pharmacy workflow in that business. So we're focused on things that bring efficiency to the pharmacy, bring information that help them provide better clinical care to their patients. It's a channel that helps us deliver programs and services to biopharma through co-pay offset programs, access and adherence programs and it's a business that does about 19 billion transactions a year. So that's one component. The next component is our CoverMyMeds business, which is really a business that's about automation. It's about connectivity to 750,000 providers. We all know healthcare can be very complicated. So its business using that integration in the workflow providers is focused on taking some of that friction out. So take something like a prior authorization, which used to be very manual, facts intensive, patient fills out a form, physician office has to fax it to the payer, the payer has to evaluate it, fax it back. We've automated large parts of that, which brings a lot of value to the chain. And it importantly puts us in the workflow and connected to 75% of the EHRs. The third piece of the business is our access and adherence business, which we've been in for 20 years. That's a business where we work with biopharma customers to design programs to help find the right patients, get them started on their therapy quickly and keep them on their therapy. We think by bringing these 3 together, we really have not only a terrific value proposition to the provider and the pharmacy, but also to biopharma through using access to workflow, automation, technology, to take efficiency out, help find the right patients, get them on therapies faster. So that's where we -- putting these together, we've got a much more cohesive go-to-market story now. Don't think about it as a suite of products, think about it as a suite of solutions.

Perfect. We're running short on time, but Britt, I want to go back to your capital deployment commentary. You outlined exactly how much you plan to spend at least targeting spend within guidance on buyback. Obviously, there's an ongoing opioid dynamic, and you have your reserve on the potential for a settlement if you get that signed. As you think about the other legs of capital deployment and whether that's M&A or some other components, maybe just remind us how you think about M&A, kind of characterize some of the recent deals that you have done, which, to me, have taken on a bit more of incremental growth contribution to your business versus maybe core? And how we should think about the landscape now in terms of broadening out your business against the backdrop of what is a very strong core growth profile?

Yes. Thanks for the question. I mean, I think capital deployment for us starts with strong and consistent cash flow, which we've been able to demonstrate over a long period of time in our guidance for FY '22 affirms that further. As we think about the M&A component of our capital deployment, and again, we -- priority for us is to grow the business. And so M&A is a way for us to do that, accelerate the strategies that we've laid out, the strategies that Brian's talked about here again today, whether that's building out our oncology ecosystem or building on developing our biopharma services capabilities. We're looking at M&A that is on strategy and that has financial returns that are above other options that we have for deploying that capital. So we do want to grow the business. We think that M&A can accelerate those strategies and opportunities. But we're going to be very disciplined about how we do that and what returns that we're looking for. We're also going to look for tuck-in opportunities. We certainly have a broad and scaled business. And so where there's opportunities for us to tuck in an additional capability into something that we're already in and is working very well for us, we'll do that. Again, the same parameters around financial returns are going to be important to us. So I think that's generally at a high level how we think about M&A. It's important, can accelerate our strategies, but it needs to have superior financial returns to our other options.

And just to make sure I couch that appropriately. As you think about the recent deal that you've done, outside Celesio, they have been more of the tuck-in bolt-on variety, whether it's MSD or Biologics, Vantage. Are those the type of assets that fit the best within your broader portfolio? I'm not -- specifically to those markets, but like the conceptual component of size, scale, growth, et cetera?

We don't look at size as a limiting factor to this. Again, we go back to what's the financial return, is it on strategy? Or does it bring the capability and add to a capability that we already have? So I think if there's an acquisition that is of a different size, we'll consider that underneath the same parameters of on strategy, existing capability or service and financial return.

Awesome. Well, I see a lot of red zeros on my screen, so I think we can cut it there. But Brian, Britt, as always, thanks for your time. Congratulations on really strong results and guidance last week, and thank you for all the work you're doing as well on all things COVID-oriented for your customers.

Thanks, Michael.

Thank you.

Thanks, everyone, for joining us.