McKesson Corporation (MCK) Earnings Call Transcript & Summary

Third day of our Global Healthcare Conference. I'm Ricky Goldwasser, and I'm Morgan Stanley's health care services analyst. And I'm really happy to have here with me this morning McKesson's CFO, Britt Vitalone. McKesson is, as you all know, one of the largest drug distributors in the country who've played a very major role in the distribution of COVID vaccines this year. We have a lot to cover here in the next 25 minutes or so. But before we get started, I just wanted to make sure that everybody knows this webcast is for Morgan Stanley's clients only. The webcast is not for members of the press. And for any important disclosures, you can see our website at www.morganstanley.com/researchdisclosures. And with that, Britt, thanks again for joining us this morning. And let me hand it over to you for some introductory remarks.

Great. Well, good morning, and thank you all for taking the time to join me here and Ricky here this morning virtually. Ricky, thank you again for hosting us. Let me maybe start by making a couple of brief overview comments about McKesson. McKesson, as you mentioned, Ricky, has a long history, and it dates back to 1833. We're a global health care leader, and we have scaled and diverse distribution and services businesses. Our breadth of assets and capabilities touches almost all aspects of health care, and we talk about a few of those here this morning. We've got a scaled U.S. pharmaceutical distribution presence. We deliver roughly 1/3 of all prescription medicines each day. We have leading specialty and oncology presence and capabilities with strength in specialty provider and, of course, our U.S. Oncology Network, where we are the #1 distributor to community oncology. Our Prescription Technology segment has scaled services and transactions businesses serving our biopharma partners and promoting access adherence and affordability solutions. And of course, we have market-leading Medical-Surgical distribution business serving the growing alternate site markets. We're continuing, as you mentioned, Ricky, to provide a key leadership role in the pandemic response efforts, serving as a centralized distributor of the COVID-19 vaccines and ancillary kits distribution for the U.S. government. We've distributed over 200 million COVID-19 vaccines in the U.S. on behalf of the U.S. government. We've also assisted in their international missions. We've partnered closely with manufacturers, government entities and customers to support patients' evolving needs during the pandemic. And recently, we signed a multiyear storage contract with the U.S. government for medical-surgical supplies, which we expect will add $0.15 to $0.25 to adjusted EPS contribution in FY '22, which increases our guidance for kitting contribution this year from $0.35 to $0.45 to a new range of $0.50 to $0.70 of adjusted EPS contribution in FY '22. And through our Canadian and European businesses, we're also distributing and administering COVID-19 vaccines. Let me briefly touch on our recent performance. We're very pleased with a strong first quarter and, of course, our performance to start the fiscal 2022. We're executing against our enterprise priorities, focusing our investments in areas of key differentiation primarily focused on our key growth pillars of oncology and biopharma services. Our balance sheet remains strong, which is underpinned by our investment-grade credit ratings. And this provides us the financial flexibility, which enables us to return capital to our shareholders through a modest but growing dividend and, of course, share buybacks. We're also pleased with the operating momentum we're seeing across the business despite markets that have not yet fully recovered. We remain focused on investing in high-growth opportunities in oncology and biopharma services. And we remain committed to continuing to evolve the portfolio, drive shareholder return, as evidenced by our recently announced exit, a planned exit of Europe. I'm very confident in the fundamentals of the business, very pleased with the strong first quarter and start to FY 2022 and believe that we are well positioned for further long-term growth. And with that, Ricky, I'll turn it back over to you.

Great. Thank you very much, Britt. [Operator Instructions] So Britt, over the last few years, you and Brian really repositioned the portfolio with a greater focus on the core assets and area of outsized markets growth. So how are the pieces of the enterprise are tied together? And when you think about this evolution, what inning are we on?

Well, I think I would just start by talking about the evolution that we've really been undergoing as a business rather than speaking about what inning we're in. We have really been building and focusing on integrated ecosystems that leverage, as we've talked about many times, our scale and our differentiated capabilities and assets. Primarily, we're focused on investing in oncology and biopharma services. We have really differentiated assets and capabilities in both. They represent high-growth, high-margin businesses. And we certainly have market-leading capabilities. We have market-leading specialty capabilities. And of course, our oncology ecosystem has been well positioned and strategically built over many years. As an example, today, we are supporting over 14,000 specialty providers through our distribution and our GPO services. And of course, we're the leading distributor to community oncology. And our U.S. Oncology Network has over 1,400 providers within the practice. We also continue to focus on the evolving needs of our biopharma services partners, again, an integrated ecosystem that we've built over many years. We've made acquisitions of unique assets such as RelayHealth Pharmacy, CoverMyMeds and RxCrossroads. And again, we have scaled transaction in services businesses. We are connected to over 750,000 providers. We do over 19 billion transactions through RelayHealth. And our services are providing savings to patients. We -- our services provided over $5 billion of out-of-pocket savings to patients last year. And so we believe that the continued focus on these differentiated assets and capabilities provides us the opportunity to continue to grow in the future. Our discipline and our focus in the streamlining of our assets in our portfolio is adding to growth in each of our segments. Our U.S. Pharmaceutical business, our Medical business, also very scaled businesses. It represents stable fundamentals. And I'd remind you that we guided to core growth in each of those businesses this year. So we're really pleased with the focus. We're pleased with the execution. And we're really confident in the opportunities that lie ahead of us in these really evolving and innovative markets.

Let's start with specialty. I mean you were really ahead of the market in understanding the strategic importance of owning care delivery as a way to influence, shape behaviors in the marketplace. And U.S. Oncology has been a really important contributor to your success in specialty. So when we think about the differentiated strategy, the value add for manufacturers, can you also talk about sort of that recent investment that you made in oncology and how it kind of like fits together?

Yes. Again, if you go back over many years, this is an integrated set of capabilities and assets. It started with our acquisition of OTN many, many years ago. I think from that, we continue to develop scale within oncology distribution. Over time, we added the U.S. Oncology Network, which gave us the insight into care delivery at the clinic level. And we've added capabilities such as our GPO services. More recently, we made the announcement of Ontada, which is our clinical data and insights business. And we think that our life sciences capabilities and the data that we're gathering through our EHR program and through the clinicians within our oncology ecosystem provides us the opportunity to enrich the data and provide insights back to clinicians for better practice and certainly for biopharma for development of products and certainly for research. So we're excited about the opportunity that we have in Ontada. We recently signed an agreement, a long-term agreement with Amgen for better cancer care over the long term. And Ontada is just another component of this integrated oncology ecosystem. Now it's getting us into the data and helping to enrich that data for our clinicians and for biopharma.

So if we talk about data and integration and really kind of like understanding workflows, I think it's been a little over a year since you've created a Prescription Technology Solutions segment that combined Relay and CoverMyMeds and RxCrossroads. So when we think about it, what were the top pain points of your customers that you are addressing in creating this business unit? And how do you do it?

Yes. So we -- really appreciate that. We identified many years ago the opportunity to become more embedded in the workflow of providers, of pharmacies certainly through the scale and the reach that we have through the rest of our distribution business. And we acquired some really unique capability starting with RelayHealth and then furthering that with CoverMyMeds and, more recently, RxCrossroads. As I talked about earlier, the connection that we have with over 750,000 providers and over 50,000 pharmacists, the opportunity to further enhance that connectivity for using data and technology, technology really embedded in assets like CoverMyMeds, is allowing us now to connect biopharma with providers, payers and patients. We think we're doing that in really some unique ways through things like e-prescribing and electronic prior authorization. And so what we're really focused on here is access adherence and affordability solutions, helping biopharma get their products adhered to faster and with stronger adherence longer term and certainly helping patients get on their medicines more quickly. So there's pain points across the entire spectrum. Our ability to really identify assets that help make those connections and promote access, affordability and adherence is an opportunity for us that we think we uniquely fit into given our footprint and certainly represents higher growth opportunities. The difference, I think, we are bringing to this rather than the old traditional manual hub services model is bringing technology, which I think is automating the process in a more innovative and evolving way.

So Britt, we have a few questions here that we got from the audience. First one is really about that portfolio. So how do you maintain an optimal portfolio of businesses? And do you see new areas for growth in additional areas that you're considering to be pruning?

Yes, that's a great question, and I think that plays into some of the comments that I made earlier. Certainly, we've identified higher-growth, higher-margin capabilities that leverage the differentiated assets that I've already mentioned here today. We are also really focusing the portfolio, and I think this is underpinned by the decision that we've made to exit Europe. We're focusing now on oncology, on biopharma services and advancing some of the core assets we have such as the strength we have in Medical-Surgical Solutions, where we are serving all the alternate site markets. And the breadth of customers and products that we have there is certainly market leading. So the discipline that we've shown in really shaping the portfolio and being really focused on where we're allocating capital has allowed us to reinvest in areas such as oncology and biopharma services. Ontada is a good example of that. AMP, which is the Access for More Patients, which is an automated capability to connect patients to biopharma and get patients on therapy faster, is another good example of that investment. So disciplined focus and really leveraging those differentiated higher-margin assets and capabilities.

I have a couple of numbers questions for you. One, on the opioid expenses, when we think about the $155 million in litigation expenses that are included in your fiscal year '22 guidance, is it fair to assume that this will move lower over time when the settlements are in the rearview mirror?

First of all, we're really pleased with an important first step which we announced here recently. So we have made the important first step, but we're not to a final settlement at this point. So at the point in time where we can get through and get a final global settlement, we'll reevaluate at that time what is still outstanding. Certainly, if a global settlement were to happen, we would certainly expect some level of reduced expenses. But until such time as we get there, it's a little premature to help guide you on a number for ongoing annual expenses.

So can you remind us what's sort of the time line to reach that final global settlement? I mean obviously, last week, you announced an important milestone as it refers to it. What are the next steps from here?

Yes. So the next step from here is for the states to take back to their subdivisions the opportunity for them to opt into the settlement. So they'll have roughly 60 days -- or sorry, 120 days to do that, where these subdivisions will then have that opportunity to opt into the settlement. At that point in time, each company independently will evaluate the number of states and subdivisions that have signed on to the agreement and make a decision whether or not there's sufficient subdivision participation in that to move forward. If the distributors do agree to do that, then there'd be 60 days from there for where the agreement would actually take hold. So 120 days will get you to January 2. At that point in time, if the distributors do agree independently to accept the agreement based on the participation, there would be 60 days before the agreement would actually take hold.

Okay. Another numbers question refers to the kitting contribution of $0.50 to $0.70 that's included in the MedSurg contract. And the specific question, is that incremental versus the prior guidance of $0.35 to $0.45 or was that some of it already included in that guide?

Yes, thanks for that question. As I mentioned, our last updated guidance was kitting contribution would be $0.35 to $0.45 in FY 2022. The additional contract that we signed here recently would add to that so that the total amount of kitting contribution this year would be the $0.50 to $0.70.

Great. And another question here, which goes back to specialty and oncology, does the oncology ecosystem that you build creates opportunities for you to get digital advertising revenue for manufacturers because -- when we think about some of the different revenue and market opportunities over time?

Look, we're really focused on the ecosystem that we're building, which is based on the distribution, the management of the practices within the U.S. Oncology Network and the GPO services and capabilities that we're providing and now the data services and the data insights that we're providing back to biopharma and to the clinicians. There's nothing beyond that, that is contemplated in our current ecosystem.

Great. So some additional follow-up questions here from me. We -- I don't think we can have a meeting or a presentation when we don't ask about generics, so here's the obligatory generic question. They are -- generic trends are a very big driver for investor sentiment. When we think about a diversified portfolio now, when we think about generic contribution to the portfolio, should it be?

Generics has certainly received a lot of attention here recently. And we've been saying now for several years that generics are a component to a balanced set of products and solutions that we provide our distribution customers. We placed a lot of emphasis on a balanced portfolio, which includes brand specialty generics, biosimilars now in OTC products. And so our approach to this is to have a balanced approach for our customers, a balanced set of economics. As it relates to generics itself, I think it's important to separate the fundamentals of generics in the pricing environment and what we're seeing around volume. The fundamentals of generics remain competitive yet stable. And there's -- certainly, the performance that we've seen around generics this year from the fundamentals of the market have played out according to our expectations. We have a scaled and strong sourcing engine in ClarusONE. We believe that we source as competitively as anybody in the marketplace. And we're very focused on sourcing competitive price and stability of supply. We combine that with our disciplined approach to the sell side. And that disciplined approach to pricing on the sell side and the strength that we have on the buy side with ClarusONE and our sourcing capabilities yields a net positive spread. So generics are important, but they're a component of a balanced set of products and solutions for our customers. And we've really been talking about focusing on this balance for many years now.

And one question that we get on the sell-side pricing on that topic, and one of your competitors has been flagging for the last couple of years that there are annual headwinds from contract renewals. It's such a -- part of the cost of doing business. Do you agree with that view? And when we think about those levers that help offset pricing headwinds, is it really as simple as a negotiation upstream on the buy side?

Yes, I don't really want to comment on what my competitors have commented on. We've talked for many, many years now that about 1/3 of our book will renew each year. And that set of renewals is included in our guidance each year. There's nothing that is out of the ordinary this year. There's nothing that I would call out around that. Renewals are part of the business. And it's an opportunity really to reengage with the customer, to find out how the customer has evolved their business and to find other opportunities that we may be able to provide to them. So there's nothing material that I would call out here. Certainly, any of the renewals that we have within our business this year are within our guidance.

And on the MedSurg business, clearly, there are -- if we think about the uptake in biosimilars or in specialty, right, all of that is happening in physician offices. Given your relationships with physicians, are there synergies between the 2 businesses, between sort of drug distribution, specialty and MedSurg?

We haven't seen anything that will go through the MedSurg segment of a material nature to date. Our business, though, is very integrated across not only products and services but even between segments. There's a lot of overlap certainly between our Medical-Surgical business and our specialty provider business. The economics today are going through specialty, our Health Systems business, in U.S. Oncology and U.S. Pharmaceutical. Certainly, as there's opportunities within the physician practices, we have a leading market presence, and we'd certainly be prepared to service those customers in that way. And I think that as our business continues to grow and evolve, those opportunities will certainly avail themselves. But today, the economics are going through our U.S. Pharmaceutical segment primarily through specialty provider and oncology.

Great. And thinking about capital deployment, when we ask you about capital deployment, you always refer to it as balanced, right, between internal investments, M&A, returning cash to shareholders. But we've seen you kind of in the process of divesting assets that don't fit within the portfolio. If we think about the next 12 to 24 months, how should we think about sort of those priorities of capital deployment for you? And sort of what's holding you back from allocating more cash towards returning cash to shareholders than in the past?

Yes, let me unpack those. There's a couple of comments in there. We're very pleased with our balanced approach to capital deployment over the long term. In any 1 year, we may be more towards M&A or internal growth opportunities or we may be more tilted towards returning capital back to our shareholders. Over the last 3-plus years, we've been very focused on evolving and focusing, simplifying our portfolio. And so we've returned more capital to our shareholders in the last couple of years than certainly doing M&A transactions. We've got one M&A transaction that I would call out in the last few years in our Medical-Surgical segment, which is the MSD acquisition, which we're very pleased with. Our priority begins with growth. We want to grow the company. We want to grow the company where we have differentiated assets, differentiated capabilities and leadership. Again, that falls in the areas of oncology and biopharma services. We'll do that through either internally investing in areas like Ontada; or if we can find M&A opportunities that are on strategy or accelerate current core capabilities and are accretive to the business, we will certainly look for that. If we can't find those opportunities, we're going to continue to allocate capital back to our shareholders. I would remind you that at the beginning of the year, we guided to $2 billion of share repurchases. In the first quarter, we completed $1 billion of share repurchases. And that compares to about $770 million last fiscal year FY '21. So our commitment to returning capital to our shareholders remains strong. But we will look to grow the company along those areas of higher-growth, higher-margin opportunities where we have accretive opportunities.

Great. And we have time for one more question. You're holding an Analyst Day in a few months for the first time in a couple of years. What should we expect out of the day?

Yes, so we're certainly excited about that. The Analyst Day is scheduled for the afternoon of December 8. And we are certainly going to be bringing leadership from the company to talk about the growth opportunities in the portfolio and certainly the execution that we've been providing over the last several years. And we think that this is an opportunity for us to show the analysts an updated view of the company certainly since the last time we did an Analyst Day. And we would expect to provide you some insight into the long-term growth algorithm and trends for the company. So certainly more information to come, which would include an agenda, but it's an opportunity for us to update you from the last Analyst Day and provide you certainly the excitement and the confidence that we have in the company of how we're evolving, focusing and simplifying the company around growth. This is another year of growth for the company in each of our segments, and we're certainly excited about that.

Sounds great. Really looking forward, Britt, to listen and learn more about sort of those long-term growth targets. I think that's one of the things that investors that we've been speaking with are really looking forward to.

Sure. Great.

Well, thank you very much, Britt. And for everybody that are listening, thank you for joining in.

Thank you, Ricky.