McKesson Corporation (MCK) Earnings Call Transcript & Summary

All right. Thank you, everyone, for joining. We've got a packed room for the McKesson team today. We've got CFO, Britt Vitalone, and we also have Rachel Rodriguez of IR over in the audience for using the [ common ] stage. Thank you so much for joining.

Thank you. Thanks for hosting us. And any hard questions, you can just direct them to Rachel.

[indiscernible]. It's time.

So I'd love to kick off the conversation with the main focus of last quarter. It was the preliminary FY '25 outlook. Can you talk a little bit about the reason you decided to depart from your norm and guide ahead?

Yes. Well, again, thank you for hosting us here today. Really, we're pleased to be here. First of all, we're pleased with the results that we posted in the third quarter. It was another quarter of solid results really across our entire portfolio. So we're really pleased with the momentum that we're seeing within the business. We are continually looking for ways to provide relevant insights to our shareholders. And I felt like it was a good opportunity, given the results that are evident in our business as well as the momentum we have to take the opportunity to provide some qualitative factors that we see in our business and that we anticipate will continue into fiscal 2025. So again, trying to provide as much insight as we can to our investors about what's happening in the business. We took the opportunity to provide those qualitative factors. And maybe I'll just take a minute and remind you of some of the...

Take it on own.

It's probably me, but maybe I'll just remind you of some of the factors that I talked about with you in our U.S. Pharmaceutical segment. We're very confident in our long-term adjusted operating profit growth rate of 5% to 7%. I'd remind you that, that's increased from 4% that we increased that in May of last year, and that's really underpinned by the strength and efficiency of our distribution operations as well as the growth that we're seeing in our oncology platform. In our Prescription Technology Solutions segment, we indicated that we anticipate to see growth at the high end or slightly above our long-term adjusted operating growth rate of 11% to 12%. And that's underpinned by continued organic growth in the solution set that we have across that segment as well as some of the investments that we're continuing to make to grow our overall biopharma services platform. In Medical-Surgical Solutions, we are very well positioned given the strength of our relationships and the experience that we have across channels and customer sets, across all alternate sites of care. And in our International business, we anticipate continued growth in our Canadian business as we look to continue to exit and fully divest our European business. We have Norway left to exit. We intend to do that. And we talked about some investments that we expect to continue to make in FY '25, not only to help take some of the friction out of the supply chain with our customers, but to enhance the efficiency and automation that we have in the back office.

Maybe let's start on those investments. How should we think about the cadence of it? And what gave you confidence that it was time to make investments versus kind of finish your portfolio cleanup?

Well, as we laid out our strategy and we clarified where we have differentiation, and we have differentiation in both our oncology platform and our biopharma services platform. We're looking to enhance and accelerate the growth that we have and the leadership position that we have in those markets. We can do that in a couple of different ways. But one of the ways that we've done this is to continue to invest in the business organically and to advance some of the capabilities that we have. Obviously, these investments are going to be dependent on time and circumstance of what's -- what we're capable of delivering, what our customers need at that particular time. But over a longer period of time, the level of investments that we've put in both of these segments and businesses has been pretty consistent, and it's been pretty significant, and we expect to continue to do that as we go forward.

And I think I gave you some slack on the call back about how U.S. pharma growth is implied to decelerate. And you said, Stephanie, we just raised it, get over it.

I'm not sure I said get over it, but...

It was implied in the tailwind. But tell me, is that just like a conservatism? You've already raised your guide, so there's new need to? Or what else is in there?

Yes. Well, let's maybe just for context, let's just talk a little bit about this. When we set our original long-term operating profit target rate, we set that at 4%, and that was a result of really looking at the performance in the business and the solution set that we had and the early investments that we were making. We've continued to perform consistently against that. This year, we've performed a little bit stronger against that for a number of reasons. I think you've got prescription utilization has continued to be strong and consistent. We're seeing great operational execution across our operations. And we're continuing to invest in our oncology platform. We're seeing growth in providers in calendar '23, as an example. We added approximately 200 providers to the U.S. Oncology Network across 6 states and 8 geographies, and we expect to continue to do that as well as invest in the business. So we're really pleased with the performance that we've seen. The growth rate that we indicated, obviously, we'll firm up with some details in May, but what we indicated is consistent with the increased level that we had, and we'll certainly continue to evaluate that. And if we think that the performance is going to be stronger than that, as we did in May of last year, we'll indicate that and provide you that insight.

Well, I'm glad you touched on the oncology part because that was kind of the biggest head scratcher for me. As if you back out some of the new revenues that you've had, it implies some pretty healthy growth in specialty oncology. So is it just not assuming the same level of growth as you had recently?

Well, I think there's a few things. So let's start with the oncology business itself. If you think about our oncology business, again, we've built this over a long period of time. We started with drug distribution and really building that into the scaled efficient distribution operations that we have. We added practice management with the acquisition of U.S. Oncology, and that has continued to grow over time. We've continually added providers to the U.S. Oncology Network. Last year, we added approximately 200, and we'll continue to look for that. We have capabilities around GPO services that are going to help the network and nonaffiliated providers within the oncology space. We certainly have data and analytics that are coming off of that. We've been building our Ontada business really organically, and we're starting to see some good results from the relationships that we have with biopharma and some of the data that is continuing to grow and the insights off of that. And then the joint venture that we have with SCRI around clinical trials in clinical trial management. So we've seen really healthy growth here. We're going to continue to invest to have that growth be sustainable over a longer period of time. This is one of the largest networks of its type in terms of community oncology practice. And we think that we're well positioned to continue to invest and grow that going forward really across a broad spectrum of capabilities.

It's funny. When I was in marketing around my launch, I had a lot of folks taking in your model and say I will move up. They don't own an oncology network. That's still random. But can you talk about the value of having that kind of verticalization and where you're going to go with that on the data?

Yes. So there's a number of reasons -- a number of factors that I think add to what we do in McKesson. First of all, as I mentioned, we have a scaled and efficient distribution network. So adding distribution scale through the provider network itself is additive to that. We can create GPO capabilities and services that are adding capabilities back to the practices, helping them operate their practices more efficiently and profitably. And we believe that, that positions us well for things like biosimilars as biosimilars continue to grow. We have services and capabilities that are going to be helpful for manufacturers from a channel perspective, but also very helpful to our providers. The data and analytics, all of the providers within the U.S. Oncology Network practice on a single EMR. Historically, as you -- probably many of you know, there are many EMRs out there. We used to own many of those when we had our Change Healthcare assets. But all of these providers -- yes, we're not going to talk about that. But all of these providers are operating on a single EMR. And that provides not only good data for insights and analytics upstream to manufacturers as they think about developing their drug pipeline, but it also provides good insights for clinical purposes as they operate their practices in Practice Oncology. And then finally, providers have been doing clinical trials for a number of years. We partnered with HCA and Sarah Cannon Research to create a joint venture to accelerate our capabilities around clinical trials and clinical trial research. So as you think about the network, it's very broad. There's a lot of capabilities within it. It is helping from a clinical perspective. It's providing data upstream to manufacturers for drug development. And we believe that the entirety of the network itself is self-reinforcing and that more providers want to join that because there's a broad spectrum of capabilities and benefits that they get.

We just had one of your competitors up on stage, and they also were very jazzed about the other ologies beyond oncology. How are you viewing that side of the world given your dominance already in oncology side?

Well, I appreciate that question. We have a strong specialty provider set of businesses. First of all, we provide distribution services for the Medicaid -- the specialty medications to pharmacies and health systems and other sites of care. But we also have a growing specialty provider business where we provide drug distribution, GPO services and capabilities. And we believe that as drug development pipelines grow and develop in some of these other ologies like retinology and neurology, nephrology and so forth, that there will be an opportunity to continue to enhance the services. We do not see anything today that has a practice network capability like oncology, just given the scale of the oncology drug distribution pipeline. But there's an opportunity for that depending on how these continue to grow, and we're well positioned given the strength that we have and the growth that we've seen in our specialty provider business.

And you touched on Ontada. I was a little disappointed when I was taking you guys up as I thought you were done with all the health tech [indiscernible]. That's always been kind of my bread and butter. And it looks a lot like your strategy goes more and more into tech again. So can you talk about the difference between prescription tech and what you want to do there versus kind of your legacy in more IT services?

Well, I think when you think about our technology businesses, what we're doing is we're building capabilities that are technology enabled. So in our Prescription Technology Solutions segment, as an example, we not only have a pipe like RelayHealth where over 19 billion transactions are going through annually, and it's connected to over 50,000 pharmacies. But we acquired a business like CoverMyMeds that looked at some of the problems in the health care supply chain and address those problems with -- by enabling technology. So our solutions are looking at the problems of access, affordability and adherence, and we're addressing those through technology-enabled solutions that are directly in the workflow of providers into pharmacies. And so it's a more efficient way of attacking some of the problems that we see today. And our Prescription Technology Solutions business, our biopharma services platform, more generally, is really focused on access, adherence and affordability problems and solutions. And our goal very simply is to get patients on their medications, help them afford their medications and keep them on their medications. And ultimately, that will drive better patient outcomes. So again, I think the difference is, historically, we looked at technology to drive clinical capabilities. Our businesses today are attacking solutions across the supply chain around the challenges of access, affordability and adherence.

When you think about the future of prescription tech, what adjacencies look most attractive? And what adjacencies you look and think, no, not this time around?

Well, again, I think it's going to be continuing to enhance the capabilities to drive those outcomes for patients. We talk about the factors of getting patients on med, helping them afford it. Those are key and critical solutions that we're addressing today, helping them stay on their medication. But ultimately, the adjacencies or the capabilities are going to help us deliver better outcomes. And so that's an opportunity for us, for many companies going forward is to provide a higher return on the solutions and programs for providers, for payers, for biopharma is ultimately not only keeping patients on their medication, but helping deliver better outcomes.

Because we're talking about the tax side of things, should we touch on Change Healthcare?

We can talk about that if you want.

There's been some headlines recently. It's been a thorn in the side. I think of a lot of folks in the health care system. How far removed are you now that you're through multiple transactions with them?

Well, we're still -- well, first of all, we had a set of assets that we had a partnership, a joint venture with Blackstone, which we spun off a set of solutions that really didn't fit the strategy that we had going forward, and we thought we could create more value for our shareholders, and we weren't really the natural owner of those assets going forward. So we spun those assets off. We retained RelayHealth. We thought RelayHealth was really important for access and affordability-type solutions as we were going forward, not only that, but also the size of the transactions that are going through that pipeline. The Change Healthcare set of businesses, which is a different set of businesses, a lot of point solutions and the solutions that we have today are more cohesive, and they're more collaborative across the solutions, again, attacking these problem sets that I've talked about, and we believe are core to our long-term biopharma platform.

I noticed you didn't talk about the prior auth solution at a time when we talked about prescription tech, but it's -- I could not ramp up on this name without constantly hearing about that and the GLP-1 opportunity. So could you touch on that a bit? And I guess I was really surprised that you actually have an acceleration in that side of the business. Is that still driven by prior auth?

So prior authorization solutions are part of the access set of programs that we have. Certainly, as a large portion of the access capabilities was part of the acquisition we made of CoverMyMeds back in 2017. Prior authorizations have grown principally as GLP-1 medication growth has grown. We support the programs for the vast majority of the GLP-1 medications on behalf of biopharma. We've certainly seen growth in transactions over the last few years. We anticipate that the growth in GLP-1 medication transactions will continue, although we expect at a slower rate of growth going forward just given the inflection that we've already seen. But again, we support the prior authorization programs when they are needed and that includes GLP-1 medications.

Could we also see a lasting impact of workflows as folks become more used to -- using the solution and maybe have it be more incorporated beyond just the GLP-1 side of the world?

Yes. Well, we support many brands today across many different product categories. GLP-1 certainly have had some explosive growth. So they're contributing at a higher rate today. But our prior authorization services are really built to support brands anywhere that a prior authorization is needed because of a payer or a PBM type of requirement. So we think that it's a good business that we've had for a long period of time that has been accelerated as a result of GLP-1s and the requirements around prior authorization services for those medications.

And on the GLP-1 side, what are some of these newer medications coming out mean for you? Is it another tailwind on pharma?

Well, as pharma continues to develop programs, it could be for migraines. It could be for a specialty drug. Whatever the specialty drug is, that a payer or PBM requires a prior authorization first before a patient can get on that medication. We have the solutions, they're technology enabled that help connect those drugs to the patient and we support many brands across many different drug categories.

We have about 5 minutes left. We haven't talked about International. I know there are a lot of moving pieces. What is going on with Europe? What is going on with Canada?

Sure. So our International business, the Canadian business -- I'll start with the Canadian business. Today, it represents roughly 90% of the segment today. Our Canadian business has been a part of McKesson for a very long period of time. It is a scaled and efficient distribution operation within Canada. We have a footprint in retail through the Rexall brand as well as some technology-enabled capabilities through Well.ca. So our Canadian business has shown nice growth. We're really pleased with the growth that we've seen there, and we anticipate that, that growth will continue going forward. In Europe, we have exited 11 of the 12 countries that we operated in. There is one country that we continue to evaluate, but are committed to exit, that is Norway. There's no further update on any timing around that other than to say that it is not a material component of the International business, and it is one that we do intend to exit to complete our European divestiture.

Well, when you think about your cost structure in International, you have one very scaled business, and you have one business that now I imagine is much less scale because it's just Norway. Could we see an improving cost profile on a forward basis after this as you kind of focus more on streamlining of Canada?

Well, we've always been focused on operating costs. We have -- we gained great operating leverage across our scaled distribution operations, and we're pleased with the discipline that we put in several years ago around operating costs, more generally. We are continuing to invest in the business, and that is investments that are intentional that we're making to support accelerated growth. So we believe that our cost structure is in a good spot. We are always looking at ways to enhance and get efficiencies out of the business, whether that's adding technology or data and insights, but being a North America-focused business on health care services and health care capabilities, that is where our focus is today and not in Europe.

It's a unique animal, right, with a lot of synergies. So we have only a few minutes left. I'm sure you could actually maybe distract and get out of this question. But on your last call, you talked a bit about stepping back from share repos. Tell me about this.

Yes. So let me just talk about capital deployment, and I see I have 3 minutes and 30 seconds. So I think I can do this, but let me just talk about it more generally. There's really 3 key elements to our capital deployment strategy. First, we want to grow the company. And it's important for us to continue to grow the company along our strategic growth pillars. We can do this organically. We've talked about investments already, both that have gone into our oncology business and biopharma services. And we can do this through M&A. And so we want to grow the business, but we're going to do it in a very disciplined way. We're going to do this where it is going to enhance the capabilities of our growth pillars or there's an opportunity to accelerate a core capability that we already have with leading market position. The second aspect is returning capital to shareholders. And we've been, I think, very focused on this. First of all, we can do that through our growing, but modest dividend. We are committed to our dividend. We're committed to increasing the dividend in relation to earnings growth. Last July, we increased our dividend 15%. So we'll continue to focus on increasing that in relation to earnings growth. And then there's share repurchases. And we've done a significant amount of share repurchases over the last several years. We think that's been value creative for our shareholders. We're going to continue to be in the market to repurchase shares. We have some principles around that though. We -- first of all, where there's excess cash that can't be deployed against growth opportunities, that's going to be an opportunity where we look at to the share buyback. And secondly, we're going to continue to be disciplined about looking at the price of the buyback in relation to intrinsic value. But we want to be in the market. We want to continue to return capital to shareholders. We believed in our long-term growth prospects of the business, and so we think continuing to repurchase shares is a good value-creating opportunity for shareholders. So stepping back, as you think about our exit of Europe, one of the ways that we offset some of the dilution of Europe was buying back shares. And so that's why we had an increased level of share repurchases really over this last couple of years as we've been divesting. But share repurchases will continue to be a tool for us in capital deployment. The third piece that I think is important is maintaining our investment-grade credit rating, and that's very important to us. We have a strong balance sheet, good access to liquidity and good flexibility. All of this is underpinned by a strong and growing free cash flow. We've got a long history of strong free cash flow generation. Now in this current period with the Change Healthcare incident that has impacted many companies across health care, that is going to have an impact on our free cash flow. It is temporary. It is short term. But the timing of this is going to overlap with our year-end. Well, it's -- you can't control these things. So it will overlap with our year-end. We expect this to be temporary. We expect this to start to clear out in April. But again, it will impact our year-end cash flow generation. We believe now that we'll be at the lower end of the guide that we provided for fiscal '24. But again, long term, the cash flow generation of this business remains solid, and we expect to continue to grow cash flow going forward.

And I want to clarify that last point. It's just a timing...

Yes, I believe it is just timing and temporary.

It's a clearing house and then we'll see 1Q will have, I imagine, a much better cash flow then?

Yes. And we'll evaluate what that impact is further, but we do expect some impact as many companies have been impacted by that.

Fantastic. Well, thank you all the time we have today, but I appreciate the extra disclosure.

Great. Thank you.