McKesson Corporation (MCK) Earnings Call Transcript & Summary

All right. Good afternoon, and welcome again to the 2024 Jefferies Global Healthcare Conference here in London. I'm Brian Tanquilut, health care services analyst here at Jefferies. And with us today is McKesson, Inc. They're one of the top 3 drug distributors in the U.S., and they also operate the largest network of oncology clinics among other businesses. Joining us this afternoon is the company's CFO, Britt Vitalone. Again, Britt, thank much for coming. Rachel, thank you as well.

Maybe's I'll start, Britt, like just kind of like state of the union, what's been going on with McKesson and maybe we can share with the audience kind of like the things that are happening in the company today.

Yes. Well, thank you, Brian, for hosting me today, and I'm happy to make a few opening comments. We continue to execute our clear strategy, which is leveraging our differentiated assets and capabilities, primarily across our oncology platform as well as our biopharma services platform. We recently reported our second quarter results, and we're pleased with the performance and execution of another solid quarter for us. In our second quarter, just to remind, we had revenue growth of 21% year-over-year. Adjusted operating profit grew 7% and our adjusted earnings per share grew 13% year-over-year. We also delivered $2.1 billion of operating cash flow in the quarter. And after making investments to support our growth objectives in the business, we had free cash flow of $1.9 billion in the quarter. For the first half of the year, we're really pleased with our performance from an operations perspective. Our adjusted operating profit growth in the first half of the year is up 9%. So as we think about the capabilities that we have and continuing to execute against our strategy, as we go forward for the back half of the year, we've increased our outlook for full year adjusted earnings per share in both the first and second quarter. Our full year adjusted earnings per share now is $32.40 to $33, which represents about 18% to 20% growth over the prior year. And from an adjusted operating profit perspective, which really captures the core operating performance of the business, we now anticipate about 13% to 15% growth year-over-year. So being able to continue to execute against our strategies, focusing on people and culture, our oncology growth platform, our biopharma services platform, our strong core durable businesses, our core businesses as well as continuing to invest for the future, both modernizing and accelerating the opportunities we have across automation, we're really pleased with the position that we're in as we go forward to the back half of this year.

No, that's great, Britt. So maybe I'll use that as a segue to my first real question, right? So I think heading into the earnings release, and you gave us some growth statistics, but -- there were some folks that were concerned about the 12% to 14% long-term EPS growth guidance. Just curious, are you reiterating that? I think you did post earnings and the different moving pieces in terms of the breakdown of what drives that 12% to 14% long-term EPS growth rate?

Yes. I'm happy to answer that. We provided -- the first time we provided long-term guidance was at our Investor Day back in 2021. And at the time, what we wanted to do is to help you think about the business the way we think about the business. So we manage our business for the long term. We don't manage this quarter-to-quarter. We don't guide on the business quarter-to-quarter. We invest for the long term. And what we try to do is break down the pieces as we think about the operating performance of the business. So we gave you a guidance of operating -- adjusted operating profit growth for the long term of 6% to 8% with our strong cash flow performance and consistency of our cash flow and smart capital deployment, we believe that we can grow 6% growth through capital deployment, which leads you to that 12% to 14% range. We've not adjusted that. We think that, again, as we think about these targets, they're long term for a reason. And we believe that we can continue to execute over the long term, delivering that 12% to 14%. So we've made no changes there. And even within the segments, we gave guidance around operating profit growth at each of the segments, and we've maintained that. We don't change these quarter-to-quarter. If there isn't a time to change these either up or down, we'll evaluate that on an annual basis. And in fact, the modest changes that we've made really is around our U.S. Pharmaceutical segment where we increased the long-term growth target rate from 4% to 6% to 5% to 7%. And again, these are long term in nature. They're designed to help assist you with how we think about the business and its growth potential over the long term.

No, that's great. Maybe, Britt, just as we think about the U.S. Pharmaceutical Distribution segment, right? I mean, one of the drivers there is oncology. So one of the strategies that we've seen you do is your partnership we just talked about SCRI, the Sarah Cannon Research Institute. Maybe if you can walk us through what the strategy is with oncology, that partnership? And where do you think that brings McKesson? Or what does it do to the broader enterprise?

Yes, I'm happy to do that. So one of the slides that we showed in our sell-side update, and I think is really important is how we think about building platforms and how we think about building differentiation. Differentiation in terms of scale, differentiation in terms of capabilities. And our oncology platform is one that we've been investing in for over a decade. So we started back almost more than 15 years ago with the acquisition of OTN, and that gave us additional distribution footprint and distribution scale. And from there, we continue to add capabilities. We made the acquisition of US Oncology back in 2010 that brought us into practice management, added additional distribution scale, added additional scale to the GPO services and capabilities that we could provide. And over time, as we've added providers to the platform, that's given us the opportunity to have all the providers practice on one EMR. So data is now in one EMR system. We believe that this helps clinicians practice more efficiently with more data as well as use this information to help drug manufacturers as they're looking to make investments into innovation in their drug pipeline. So we're able to utilize that data to not only help practitioners, but to sell it upstream for commercialization opportunities and partnerships. Our US Oncology business also did research and clinical trials. We accelerated this with the joint venture that we did with Sarah Cannon Research Institute, which we believe is one of the highest quality names out there. It's provided more access to clinical trials. It's accelerated our ability to manage clinical trials in a more efficient way, in a more comprehensive way. And so if you think about the range of services from our distribution to oncology, to specialty providers, our specialty pharmacy, the research and information that we have coming out of Ontada, all the way across over to the clinical research capabilities that we have and particularly in the partnership with Sarah Cannon Research. This is a broad platform that is scaled, it's differentiated. And we're going to continue to add not only providers to the platform but also capabilities.

Maybe, Britt, to follow up on that, you're in the middle of an acquisition, right, FCS, Florida Cancer. You've given some parameters on your accretion expectations for the next 12 months. So maybe if you can walk us through that? And should we expect more deals like that in the future?

Yes. So the -- again, we're looking to continue to expand our differentiation. Florida Cancer is a large set of practices with about 530 providers. So we looked at -- this is a natural tuck-in as an add to the platform. This is subject to regulatory review and approval. So I'll just point that out here. We believe that this is going to add scale to distribution. This is going to add scale and capability to our GPO services. You're going to have more providers practicing on an EMR where we can add insights and analytics to for data for clinical purposes and upstream to manufacturers. And it's going to continue to increase our capabilities around clinical trials and clinical trial research and clinical trial access. Just on the clinical trials piece, I didn't mention this earlier. We now have over 250 sites doing over 1,000 clinical trials this year. And we've seen a continued increase in research and clinical trials. We're now seeing physicians and providers accruing patients into clinical trials at a 20% growth this year. So again, bringing Florida Cancer on just really adds to the capabilities that we have. In terms of accretion, first 12 months post close of this deal, again, subject to regulatory approval, I think there's going to be about $0.40 to $0.60 of accretion. And after 3 years, as we continue to do the integration, continue to add scale, continue to add on to the data platform and continue to accrue patients into clinical trials, we think that there's about $1.40 to $1.60 of accretion. So it's a natural tuck-in. It's a natural add to our strategy. It's a natural add to the differentiation that we have in oncology.

Britt, is there a biosimilars play as well as you grow your oncology practices? Is that kind of like preparation for the wave of biosimilars in oncology coming up?

So biosimilars is -- we think, is a natural add, and it's -- I think about it in 3 ways. Biosimilars are -- provide more clinical choice. They provide better cost to patients. And from a wholesaler perspective, generally speaking, the economics are better than a branded or a specialty drug from a distribution perspective. In areas like oncology and other places where we have more capabilities and services to provide back to the manufacturer, the margins will be better for us than, say, a biosimilar that goes through the retail setting or a Part D drug. So we didn't do this for the biosimilar opportunity. We think the biosimilar opportunity will continue to be there over the long term. And as you add more providers and more services and capabilities, we think there's good economics, both for the providers and the patient as well as McKesson.

That makes sense. Maybe just sticking with oncology, cell and gene therapies have become a greenfield opportunity for you. Can you describe what McKesson is doing to win in cell and gene currently and what the pipeline looks like going forward?

Yes. So we think that we're still early stages in cell and gene therapies. We think that McKesson has built a lot of the capabilities to support cell and gene over the years. We have these in various parts of our U.S. Pharmaceutical segment, whether that be specialty distribution and logistics or specialty pharmacy or the special services that we have to support access and additional support. Bringing those all together in one business, which we call InspiroGene, we think is a good offering for manufacturers to help the commercialization of these new and innovative therapies. So we're excited about the opportunity to bring a lot of the capabilities we have throughout the segment into one business that we call InspiroGene, and we think the opportunities are out in front of us.

So maybe as we think about the US Oncology strategy, we've seen M&A across the industry with other -- your peers, right, acquiring other types of practices, right? We've seen a diabetes acquisition recently out of Cardinal and gastro, we've seen an optometry play out of Cencora. I mean how are you seeing your strategy? Or how do you foresee your strategy in areas outside of oncology?

Yes. So today, we actually do service a lot of other specialties through our specialty provider business through distribution services and in some cases, GPO services. What we look to do is, as we're building a platform like an oncology platform. For us, it starts with where is their investment in innovation and drug development. That is core to leveraging our distribution services and some of the scale capabilities we have around buying and purchasing. And then where you have this scale around drug pipeline and drug innovation, you can add research capabilities, you can add data capabilities. Building out a broad platform is what is interesting to us. So where there is a lot of investment in drug innovation is going to be ripe for that. If you don't have a lot of drug innovation or a lot of investment in the drug pipeline, then what you're really doing is just managing providers. And we don't think that, that is in and of itself, really a solid business, but where you can wrap around other capabilities like sourcing and distribution and data and research, that is something that's very interesting to us. We think that there will be opportunities in some other specialties where we're starting to see some more drug innovation and investment in the pipeline, and that could be an opportunity for us.

That makes sense. Maybe pivoting to the -- another area of your business. Medical has been a focus recently given a bit of a slowdown there and some actions to recapture margin in the current year. So maybe if you can walk us through what you're seeing from a demand perspective in Medical? And then what do you think would be some of the benefits from the cost actions you've taken this year? How should we think about all that?

Yes. So the Medical business has one that has been a great business for us for a long period of time. We really focus on all of the alternate sites of care. So think about anything outside of the acute setting. And again, we're a very full-line distributor for not only medical-surgical supplies, but we've added lab solutions to physician -- small lab solutions to physicians, whether that be the equipment and then the consumables that go with that. Rx is certainly something that we do very well and where there is in-office prescription and in-office dispensing or surgery center settings, leveraging our expertise from a pharmaceutical distribution, all the way down to private brand across all of the alternate sites of care. This business has grown over the last 5 years from a profit perspective, compound annually at 10%. So very consistent and strong growth. We've continued to add to some of the capabilities that continue to help that growth through adding private brand capabilities. And we don't manufacture our own products, but we do partner with dozens and dozens of manufacturers to provide choice to our customers. That choice is something that our customers ask for, provides them better cost solutions, better economics for McKesson. So we're very well positioned across many different capabilities in the medical-surgical side, across all the alternate sites of care. We have seen a little bit of a slowdown in terms of visits to primary care settings on the other side of COVID. whether that be less visits for illnesses or other types of treatments that you would have seen, a higher prevalence for during COVID. We've seen a little bit of a slowdown, some weakness in the primary care setting over the last few quarters. We came into the year and we set our adjusted operating profit target rate for the year at 6% to 8% growth. We have reaffirmed that at the low end of 6% to 8% growth. So we still think that we're very well positioned competitively across a large solution set. We did take some cost optimization actions that we announced at the end of our first quarter, and we executed on in our second quarter. We anticipate that those cost actions are going to generate about $100 million of savings in the second half of this fiscal year. So those savings will begin with our fiscal third quarter and deliver about $100 million of savings in the second half of the year.

And then maybe, Britt, just looking at the long-term growth outlook for that business, do you still think it's a 10% to 12% grower longer term?

So again, we won't change our growth rates in the middle of the year. We don't think that's appropriate to do either, up or down. Again, the history -- if you look at the history of this business over the last 5-plus years, we have grown this business at 10% compounded annually. And so we'll continue to evaluate all of our businesses, both for increases or to stay -- to reaffirm the growth rates. I believe we're very well positioned across all alternate sites of care, physician offices, retail clinics, surgery centers, skilled nursing, assisted living, all the way to home care. And the set of solutions that we have and the choice that we provide from a product perspective, I think it positions us very well for continued growth.

Got it. Makes sense. Maybe shifting gears to RxTS, and it's another business that has seen a little bit of lumpiness, right? I mean GLPs obviously contributed to some of that. Maybe if you can walk the audience through what the composition of that business is and how you expect these different business lines within RxTS to trend going forward?

Yes. We really like this business a lot, again, because over a long period of time, we have built a platform that is clearly differentiated. So if you think about starting back in 2007 with RelayHealth, now you have a solution that is really the pipes to the pharmacies and connects over 50,000 pharmacies and all the data that runs through that. That was the beginning of building out these set of automated solutions that really are focused on helping advance access, affordability and adherence for drugs. And we think that we do that better than anybody else given the set of solutions that we have. Our focus in this segment is to help patients get on their drugs, afford their drugs and stay on their medications. And so we support biopharma through that process. We have really 3 key areas of this business. We have a business, which is third-party logistics, where we're providing basically logistical services on behalf of manufacturers. That could be a title program or a non-title program. That's about 50% of the revenue of this segment. The profitability is, as you would expect, they're lower -- it's a lower margin, more distribution-like margin. And so the profitability of the third-party logistics is a little less than 5% of the segment. Outside of that, we have a set of access solutions and affordability solutions. So within our affordability suite, again, supporting biopharma and biopharma's drug development and pipeline, through affordability programs. So it might be a discount card. It could be a manufacturer buy-down program, whatever the affordability program is, we do that in an automated way, many times right at the pharmacy counter. In some cases, we do it at the provider setting itself. Again, all of our automated solutions are connected within workflow of the provider, the payer, the pharmacy itself. And then within our access solutions, we certainly have specialty hub solutions where we can support the launch of a specialty drug through -- you can think about call center. And in many cases, we've automated a lot of the aspects of a call center to support those programs. And then our prior authorization services. So our prior authorization services today, as an example, we not only help many of the drugs that are launched that have specialty capabilities or requirement for a prior access through the payer. But in terms of GLP-1s, that's another good example where we support all of the major manufacturers and their products for prior authorization services for GLP-1. And so we do that again also in a very automated way. You think about the connectivity that we have. We connect, as I mentioned, over 50,000 pharmacies, over 950,000 providers. And again, we're connected through the workflow of both providers, pharmacies, payers and again, to support biopharma and their drug development.

That's great. Maybe as I think about your free cash generation, it's been very healthy. Part of your long-term guidance calls for 6% EPS growth contribution from capital allocation. So how should we think about your strategy? Or how do you allocate capital between M&A, internal investments and its capabilities and share buybacks and dividend?

Yes. So there's 3 aspects to capital deployment that we think about. Our #1 focus is to grow the business. And so we can grow the business through making investments in the business to support growth. We can make investments to add adjacencies to products that we have currently in place. We can invest in new products through building those products and one of our core growth strategies of either oncology or biopharma services is Ontada, which is the data platform and data business within oncology is one that we actually built internally and invested in that over a series of years. And obviously, the other piece is inorganic growth, and we can do that through M&A. And we're going to do that in areas that are advancing our core strategies of oncology and biopharma solutions. And we're going to do that where there is a good financial return. There are many places that we can allocate capital to high returns. Certainly, M&A is one, but it has to pass the bar of being on strategy and having an appropriate and high return. We're going to continue to allocate capital back to shareholders. We're going to return capital to shareholders. We can do this through our growing dividend. We're committed to our dividend. We've talked about being committed to a dividend that grows in relation to earnings growth. Our Board approved a 15% dividend increase this past July as an example of that commitment. And certainly, we can do it through share repurchases. This year, we've started the year by talking about doing $2.8 billion of share repurchases. We've increased that to $3.2 billion. We're going to be in the market to repurchase shares and return capital that way on a consistent basis. But again, our priority is to grow the business. If we're not able to find opportunities to invest for that growth, we're going to look to continue to return capital through share repurchases. Underpinning all of this is the strength of our balance sheet and being committed to investment-grade credit rating. And our credit rating has continued to improve over the last year, year plus as we've continued to focus on the strength of that balance sheet and having good flexibility and access to capital at the lowest possible rate. So priority is growth. Inorganic or organic, returning capital to shareholders is the second component of this, and we'll continue to do that, all underpinned by the strength of our balance sheet and financial foundation.

Great. We've got less than 2 minutes left. So any closing remarks, any thoughts that you want to leave the audience with as they think about McKesson?

Yes. Look, I think the strength of our business over the last 6-plus years has been consistent across each of our segments. We've grown at or above our long-term growth rates, not only for the enterprise, but in each of our segments. We have a healthy set of businesses that are generating significant amount of consistent cash flow. That cash flow, we're able to reinvest, as I talked about in our capital deployment strategy in a very smart way. We think in a very value-creating way. So our focus is on returning value to our shareholders and creating value. We think that executing our strategy, which is, number one, focused on people and culture. The second aspect that I talked about is our growth pillars of oncology and biopharma services, continuing to invest in and support our durable core businesses. Think about our distribution businesses within North America and then continuing to accelerate and modernize the business. We're focused on making investments for automation and efficiency. We're making -- we're early stages of investing in AI. We think longer term, there's a lot of opportunity there. So investing to modernize and accelerate that modernization, we think will continue to drive growth from our core businesses. So we believe we're in a very strong position. I think the results that we've shown and our outlook for the rest of the year would also support that.

Awesome. Britt, thank you so much. Really appreciate you coming.

Thank you.