McKesson Corporation (MCK) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Day 3 of the Bank of America Healthcare Conference. I'm Mike Cherny, the health care tech and distribution analyst at BofA. It's my pleasure to kick off the day with McKesson, fresh off a very newsworthy earnings and guidance update. But we have Brian Tyler, the CEO; Britt Vitalone, CFO. They brought no slides, which is what I'm thrilled with because it allows us to keep this a little more informal. But maybe just to kick things off, especially because I know it's been a busy week with earnings and our conference going on, maybe just level set on some of the key highlights you had from the quarter in the guidance earlier this week before we jump in.

Sure. I'll start. We wrapped up very strong Q4 and I think a really good fiscal '23. We were pleased that the growth in the business was really across all of our segments, each of our segments outperforming the long-run growth targets that we had established for them. So it's really kind of broad-based success. We saw good growth in [ PSS ], including our oncology business. We had a terrific year in the U.S. oncology network, adding over 450 providers. Q4 was a big, big quarter for our Technology Solutions business, our so-called blizzard season. We set records for a number of patients that we helped and assisted. Medical business continued to go well. We think we feel good about kind of where volumes are overall in terms of just health care overall. So it was a really good balanced year for us and one that I'm really proud of what the teams were able to accomplish.

Yes. Maybe I'll just add on to that. We've generated record cash flow this year, continue to invest in our business, but continue to have strong cash flow generation out of our core businesses. And that continues to allow us to have a lot of flexibility. We have a very strong balance sheet. And with strong cash flow generation, we have plenty of flexibility to invest in the business and to return capital to shareholders.

And so before we get into recent trends in short term, one of the highlights as well is you updated long-term targets. You tweaked up the medical surg target tweaked up pharmatech solutions. But then the pharma business went from, I think, the official was 4-plus percent to 5% to 7%. So maybe, especially given timing and where you've been growing, talk about some of the recent drivers that allow you to have the confidence to take up those numbers that were first given, I believe, in December of '21?

Yes. well, I think, first of all, what we try to do is be as transparent as we can. And I think it was important for us, the momentum that we're seeing, the growth that we're seeing in our core installed bases, whether that be the scale distribution platform in oncology, like Brian talked about, we're seeing a lot of momentum, consistent, stable momentum. There's good utilization underlying that. We're adding a lot of providers and a lot of scale in the network. So if you put all of that together and we think about the performance and the execution that we've had against our strategies, we thought it was incumbent upon us to increase our targets based on our optimism and our outlook and to be very transparent about that. So we could have waited until another Investor Day, certainly could have done that. But we felt, given the momentum and the outlook that we have in the business, that it was appropriate for us to do that.

And I know it's still 3 days old at this point. But as you think especially about the pharma side, which is obviously the biggest part of the EBIT, 5% to 7% is a pretty decent range when it comes to EBIT dollars. So maybe talk about the characteristics in the dynamics that would get you to, on a long-term basis, the 5% versus the 7%.

Want me to start?

Sure.

Yes, I'd start. Again, some of the building blocks on that are we've had good, strong, stable utilization. And if we look at the second half of the year, the second half of the year, utilization was even a little bit better than the first half of the year. So that, for us, gives us confidence that we do have stable utilization going into the future. We're also seeing good transaction and patient volume in our oncology business as well, and that supports the growth that we're seeing there. Strong generics platform and program, very scaled, very strong sourcing operations. And so -- those are the building blocks for us that allow us to feel good about the execution and the momentum that we have.

And along those lines, I mean maybe we'll pick a little further into oncology. It's something you talked about plenty for years, but it seems like -- and correct me if I'm wrong here, the U.S. Oncology has got a bit more focused, a bit more kind of prime time spotlight recently. You talked about the 450 providers. How do we think about the growth of that business and the potential for the new trend line of provider adds, especially given that, obviously, there's other competition in the market that's looking to grow as well?

Sure. Look, we've been at this oncology business for 12 or 15 years. So it's been part of the underlying strategy. I think what we've tried to do the last few years, looking at the market that we play in, we would size the opportunity in oncology is like a $50 billion-plus market opportunity considering all elements of it from distribution all the way to data services. And what we're really trying to do is lever off some, we would call, pretty differentiated assets, one being the U.S. oncology network itself, which is now approaching 2,400 providers, the largest oncology practice management group in the country. Then we complement that with things that extract value from the insights we get running a practice like that. So whether that's our Sarah Cannon joint venture in clinical trials or the Ontada business that we've been building out, investing in and building out over the last several years, to take those insights and package them so that they're really actionable for our biopharma partners that are developing these products. And so we used to call it an ecosystem, you could call it an environment, but the idea being that each of these reinforce each other. So as we scale the U.S. oncology network, that gives us more data, and it gives us more access points for clinical trial recruitment and things of that nature. And so it's this element of this virtual cycle to it. Now we're in 25 or 27 states today. We have a network that acts like a network. And that's a really important element to us that you join the U.S. oncology network that you're going to operate the same way to operate and we can move together. There's a lot of value in that. And including part of that is you have to be on our EHR, which is iKnowMed. So we've got standardization. That lets us move with speed. And so as we -- as we build out the U.S. oncology network, as you probably know, we have a really big unaffiliated oncology distribution business as well. So we've got practices. We have business relationships, we support with distribution, GPO services. We may sell them from a la carte services. As we grow and learn those practices, it's sort of a natural pipeline to help us identify who fits into this ecosystem that we're building.

And how do you think about that dynamic of the de novo buildout? You've had 2 notable press releases this year adding new groups versus the individual hires within your network already. Like what should we consider as a new run rate for -- should we be expecting like monthly press releases now on new partner groups, maybe I'm getting ahead of myself, but...

You are getting excited, but I like that. We do both. So in an existing practice, we are constantly looking to add individual docs or smaller practices as long as they fit our model and our culture and the way we operate. But clearly, as you've seen this past year, we will look to new geographies where we think the landscape fits us. It's a combination of patient demographics, payer landscape, competitive landscape, but where we think we can bring our model to a new geography, and then they will in turn, begin to add local practitioners to their practice. So we grow both ways.

And you mentioned Ontada, I know it's been a big focus from a build perspective. How should we think about the contribution to McKesson. I think about the internal value it provides versus the potential external revenue and profitability. Which do you see as the more important component of what Ontada is becoming?

Well, I think they're both very important. I mean, don't forget the backbone of Ontada is iKnowMed. It is the oncology EMR. It's a leading oncology. It's how we manage our practices. It's how we make our oncologists more efficient, get better patient throughput and then extract the data out of that, and that's really -- we talked more about the -- recently about Ontada data analytics insights, but it's all based off of this core engine that's called iKnowMed. And we're really pleased with the traction that we've been having. We've got large strategic partnerships with Amgen and BeiGene and Merck. We start -- we have a long-term project called the MYLUNG Consortium with 7 leading oncology partners. We've launched a first couple of products. So -- but I would characterize Ontada as we're still investing. We still see opportunity. We're going to expand the product offering and portfolio over time. And again, as that network continues to build and scale, that's just more data and insight and breadth for Ontada to leverage off of.

Okay. We'll probably come back to oncology, but I want to make sure I hit on a bunch of other topics before we run out of time. So maybe on the core pharma distribution side, it seems like you and your peers are seeing very stable performance. I feel like there's one theme at this conference, it's utilization is strong and it feels like it's continued to be strong. Maybe give us a sense on the push and pull of utilization and also just general broad-based pricing. Because your business tends to work best when utilization is growing and pricing is stable, at least in the time I've covered your stock. So maybe give us an update on what you're seeing now and how that factors in especially to the '24 guidance?

Well, maybe I'll just -- again, we've talked about utilization, so I won't hit that one again. I mean it's important and it has been consistent and stable. In the pricing environment, what we've seen over the last several years now, and I'd say, not just several quarters, several years, it is a pretty stable market backdrop. In the branded pricing world, for the last several years, we've seen branded price increases or inflation in that mid-single-digit range. It's a little bit stronger this year, but not something that we think is going to repeat. But in that mid-single-digit range, that's a very stable backdrop. You combine that with how we've gone and evolved the contracts that we have with branded manufacturers, so I'd say 95% or more of the branded compensation we get is fixed fee for service, combine those elements, and that's a stable backdrop for us to operate in. In the generics world, we've had a stable market backdrop for many years, a very competitive environment, but a stable environment. and combine that with our ClarusONE sourcing engine, again, it's a scaled sourcing engine. We think that we source as well as anybody in the marketplace today. We provide stability of supply and low cost for our customer base. And then on the sell side of that, we are very disciplined in terms of how we go about doing that, providing value to our customers and a disciplined approach to that. That's a very stable backdrop for us. It's a scaled operation. We're well positioned across many different channels. And I think that's one that is adding to the performance and the execution that we have.

And on both the buy side and the sell side for generics, you're constantly going through recontracting phases because, obviously, no one is all cliffed at one time. Are you seeing any changes in the dynamics that you're being asked for either on the buy side or the sell side qualitatively as in terms of how you contract, maybe volume for price trade-offs, anything like that, that's evolved over the last couple of years, especially now that ClarusONE has become such a mature business?

I wouldn't say there's anything unusual. But as time evolves, there are things that you listen to from your customers. So as we've gone through the last few years, one of the things that's important to customers is that stability of supply. So we factor that in. It's part of the sourcing engine that we have anyways. But we factor that in. There may be specific molecules that customers are looking at versus another, but there's nothing unusual about that. And so -- as we think about the market and how it's evolving, we work with our manufacturers. We have hundreds of manufacturers within ClarusONE. And that allows us to really continue to focus on stability of supply, low cost for our customers. And the results have been stable and consistent, and we're really pleased with it.

And it is an ongoing discussion to your point. It's not like there's an annual event. I mean we're in dialogue with all these manufacturers continuously throughout the year, helping them understand what their issues are for access and growth and finding ways we can use our tools to help support them.

And with regards to ClarusONE, obviously, there's the iterative process of just the generic sourcing side. But especially now this business has been around almost 8, 9 years, I think, I've lost track of time. What other opportunities are there to further expand ClarusONE, either with additional customers or additional services purchasing capabilities?

We're always looking at that. We're looking at opportunities within generics. There's opportunities with injectables as an example. So there's other product categories within generics that we're looking at. But again, we're looking -- we're working with our customers. We're working with our supplier partners. What is the need? And ClarusONE is a strong base now that we can do a lot of different things in that. We've looked at some OTC capabilities and opportunities. So it's a very mature, stable operation that continues to scale and perform well. So there's lots of things that we can do. But we want to focus on what our customers' needs are.

And sticking on the manufacturer side, you touched on this a little bit when going through the piece of Ontada, but the whole dynamics of manufacturer services going more upstream, I think, has become a big theme. Maybe you can you just remind us and level set how broad-based your manufacturing services portfolio is and what you do versus don't need to do, don't want to do for those manufacturer partners?

Well, we talked a lot earlier about oncology and how we use the assets we have, the network, the clinical trial business, the Ontada business, the reach and breadth. And we've organized it that way because we have such uniqueness in our capabilities in oncology, but there is an element of selling to biopharma services to oncology development companies there. Put that aside for a second and talk about the other part of our biopharma services business, which is our Prescription Technology Solutions segment. There, we're really focused on things that enable access, affordability and adherence to medications. And so in that business, which sort of in parallel to oncology, we've been at for 10-plus years, starting with our RelayHealth network, which connects to 50,000-plus pharmacies, we added the CoverMyMeds business itself, which is connected to over 700,000 providers connected into workflow. And then we take traditional hub services and the clinical depth we've had across multiple therapeutic areas. And as we brought that business together, we're just continually looking for ways to leverage that access to workflow to get insights, to find patients that should be on therapy that would benefit from therapy, remove the barriers to get them started on that therapy and then support them through the patient journey to keep them on that therapy. And that's highly valued to manufacturers.