McKesson Corporation ($MCK)

All right. Good afternoon, everyone. Thank you for joining us here. For those of you who don't know me, I'm Glen Santangelo. I'm the analyst at Barclays that covers the drug wholesaling group. And for our next presentation, we're very excited to have McKesson here with us today. And to my right is a very special guy, Britt Vitalone, who I think most of you know is the Chief Financial Officer of the company, but only for a couple of more months. We got some very sad news that Britt has -- well, happy news for him, sad news for us that Britt has decided to retire, but he'll be around for a couple of months. And let me just say thanks for everything, and we're obviously very sorry to see you go. And if it's any indication, you saw the way the stock reacted the day that press release came out. So that should give you some indication of how valuable people thought of you at the company. So we wish you nothing but the best in retirement in Sarasota, right? And your golf game. So best of luck to you.

So I think right off the bat, it's kind of important to say there's nothing behind your retirement or anything like that. There's no change to the guidance or anything like that. So we could just move on from that retirement conversation and let you retire in peace. Is that fair?

First of all, thank you for having us here and for your kind words. We did reaffirm guidance. We gave the dates for our May earnings event as well as conferences upcoming. And so we reaffirmed our guidance there. Our long-term guidance or targets that we provided are still in place today. So it's just a good time for me after 20 years with the company and 8 years as the CFO for the company. It's a good opportunity for me to do some retirement things like work on my golf game, but also to continue on as an adviser to the company, particularly focused on the separation of MedSurg. And I was saying this morning that when I joined the company 20 years ago, I joined the MedSurg business. That's how I came to McKesson, and I get to be an adviser on the way out as we separate it. So it's a good way to kind of close things out.

But you'll be in your seat until May 29, so that will incorporate the fiscal 4Q results and conference call and the fiscal '26 guidance and stuff like that?

Yes.

Or '27 guidance, rather?

That's right.

Okay. Excellent. All good. So we'll have you around for a little bit.

You will have me around for a little bit.

All right. So maybe, okay, with all that sort of put aside -- and sorry, I felt like it was important to spend a couple of minutes on that. But why don't you maybe just sort of give us a quick recap? I mean, the company a couple of weeks ago reported fiscal 3Q, stock obviously had a positive reaction. Maybe you just want to sort of recap some of those highlights from the quarter, maybe some of the things that might have surprised you on the upside or maybe things that maybe didn't play out as you expected.

Yes. We had another good quarter of financial results and performance. And this is just an extension of many quarters over really a multiyear period now where we've continued to operate with operational excellence and deliver strong performance again in all of our segments as well as a company. We had 16% adjusted EPS growth over the prior year. We had 13% adjusted operating profit growth versus the prior year. So very strong operating performance. We saw a strong performance in our North American pharmaceutical distribution business, and we saw very strong performance in our core strategy pillars of both oncology and multi-specialty and in our CoverMyMeds business, which had 18% growth in adjusted operating profit year-over-year. We continued along the path of portfolio management, which I think we have done a really great job over the last several years and made some good progress on our separation activities related to MedSurg and continue to execute against a disciplined and strong balance sheet and capital deployment. So it's just -- for us, it was a continuation of many quarters of strong performance. And really, the focus that we have and the consistency of executing against our strategy really played out into another strong quarter.

Okay. All right. So why don't we sort of dive in on the North American pharma business, you sort of talked about that. I mean the revenue growth, I think, was 9%. The operating profit, a little bit slower at 6%, but I think there were some unusual items in there that maybe you could just help us sort of think through. But I think when you factor those out, you were looking at almost 9% of operating profit growth. When you sort of unpack the performance in that division this quarter, anything stick out to you in terms of just volume growth, sort of generic performance? Like what's -- help us think through the core and what's driving that above-average growth in the cores to help us assess kind of the durability of those trends?

Let me first address the year-over-year. Last year, in Q3, we had held-for-sale accounting in our Canadian business related to our exit of Rexall. And so when you account for that, we really had much stronger growth, closer to the revenue growth that you cited here. We're seeing good performance across North American Pharmaceutical, both in our U.S. Pharmaceutical business as well as in Canada, where utilization remains stable and growing. Our scaled networks and capabilities continue to deliver good operating performance. We're seeing operating leverage being delivered across the business through the efficiency of our capabilities. And we continue to see strong growth in specialty. And specialty revenues are still growing faster than any other area. And within health care, we're seeing our customers, our largest customers are growing faster in this area. And that really is playing to the scale distribution capabilities that we have. So across the board, the performance is very strong. And again, I would just emphasize, we continue to see efficiency gains within the business, and that's leading to operating leverage.

All right. Just to lean on that topic a little bit. I mean, when we think about the volume trend that you've been seeing, to your point, it's been kind of strong. When we were coming into this year, just thinking about the macro, I think people were somewhat excited about tax refunds and the benefit to the consumer. Maybe there was some concern around ACA reforms and how that might ultimately impact utilization. We've seen some wobbling in the job market and maybe some companies are laying people off. Anything macroeconomic-related that makes you -- that catches your eye with respect to volumes or anything along those lines?

I wouldn't say anything that stands out. I mean, utilization has been steady and stable and continues to grow. And as we had anticipated when we were putting together our guide last year, it is strongest still in specialty. So those kind of macro factors are playing out really in line with the building blocks that we had for our guidance.

All right. Maybe just sort of thinking about the continued strong generic performance. One of the things we do is we're always trying to assess generic pricing and the impact and how that ultimately filters down to your business. And through some of our work and some of the consultant conversations we've had, it sort of feels like to us that generic pricing has probably gotten maybe 1 turn a little bit better as opposed to -- or I should say less bad as opposed to maybe what it was, call it, a year or 2 or 3 years ago. And I'm just kind of curious, when you think about the generics performance, is pricing something that's playing a role in that solid performance? Or is there something else that we should be thinking about? And are you seeing this improving generic pricing trend?

Yes. I would say that what we use is we leverage the capabilities we have at ClarusONE to provide us a really strong position in terms of the scale, the partnerships that we have across hundreds of manufacturers that allows us to source as effectively as anybody else. And we do that with really two key goals in mind. One is surety of supply for our customers, and the second is the best low-cost quality product available. And we do that, we sell that back into our customers at a low-cost way with that high surety of supply, and that allows us to create a spread for McKesson as well at the same time. And we've seen some stability in that over the last year. It's -- obviously, generics continue to be a competitive marketplace, but I would say competitive and stable. And it's one of many capabilities that we provide to our customers, along with specialty products and specialty distribution and cold chain capabilities, one of many things that a full-line wholesaler does really well like McKesson.

One of the things when I -- I mean, we picked up coverage of the stock, as you know, back in December. And having been away from it for a few years, having covered it for a long time before that, it was interesting sort of getting back up to speed. And it felt like to me, most investors had a positive view of the space. But one of the things that they were concerned about is sort of the IRA pricing implementations and maybe the reduction of some pricing across the branded spectrum in '26 and '27. And I guess the concern might have been, right, has McKesson been able to renegotiate all their fee-for-service contracts effectively, how do we get comfortable that there's not going to be any hiccups along the way. Would you say the company had adequate time to sort of respond to those changes? And how would you sort of describe the negotiations around your fee-for-service contracts to account for the IRA in '26 and '27? And do you feel comfortable with the actions McKesson may have taken?

Well, first of all, this is a normal part of our operations is to work with manufacturers to understand what their pipeline is, to understand where those drugs are going to be distributed into what channels and what services are needed by McKesson to do that. And we work with our supplier partners as we have for as long as I've been with the company on exactly those things. And we work with them to establish a fair value for the services that we provide, and we get paid a fixed fee-for-service for that. So this is nothing unusual. It's something that we've done for as long as I can recall and a natural part of our operating platform. In the case of IRA, we had more time because the drugs were selected back in 2023. So we had more time to work with the manufacturers on what their strategies were and what services they needed and to establish that fair value. But it's no different than the process that we've gone through for years and that we will continue to go through. We provide a select set of activities that the manufacturer needs, and we've set a fair value for those services, and we're paid a fixed fee for that.

Okay. All right. Maybe shifting gears, why don't we talk about the oncology and multi-specialty business for a second. Going back to last quarter, I mean, revenue growth, 37%, and operating profit, 57%. And obviously, that's somewhat influenced by an M&A benefit. But when you think about the core organic trends in there, still very strong. Could you strip out the M&A piece for people to help us think about how fast that business is actually growing?

Yes. So we're really pleased with the oncology and multi-specialty adding not only our oncology platform centered on U.S. oncology and the addition of Florida Cancer at the beginning of our fiscal year, but now the build that we're doing on our retina platform with PRISM. And then adding to that, we added the Spokane Eye Clinic is a good example of that later in the year. The full year guide that we've given for the segment is AOP growth of 51-or-so percent, 50% to 53%. And we've guided that 30% to 34% of that is going to come from acquisitions this year. So underneath the acquisition performance, which has been really good, and we're really pleased with the integration that we've seen thus far, the core business is continuing to grow in a very solid way. The platform has practice management, has drug distribution. It has GPO services. Ontada, which is our data and insights business, as well as some of the clinical trials and clinical trial research business that we have. So it's a very broad set of capabilities. It's growing at a very healthy pace, and we're excited about what's going to happen in the future. And the other thing that I would say that I think it's lost a little bit, even outside the strength that we have in oncology and now in our Vision platform, we are still providing distribution and GPO services to over 14,000 providers across a multitude of specialties. So it's a very scaled and effective network of drug distribution, GPO services and other types of capabilities for those providers.

I mean, McKesson clearly deserves a lot of credit for being early in the specialty game. I mean, I can't remember when that original oncology deal was -- somewhere around 2010, but it's just amazing. When you think about sort of here we are all these years later and you're still growing that business close to 20%, right, ex acquisitions, it's pretty impressive. So how do we think about the maturation of that business and the outlook for that business without giving any sort of guidance or anything? But like where do you think we are in terms of the growth curve of that business?

Well, I would just step back for a minute and talk a little bit about the strategy. What we're looking to do here is build platforms and build platforms where there is high drug innovation, high drug investment, which leads to high drug spend. And then we can service that drug spend on behalf of biopharma and the providers in a very efficient and effective way. And on top of that, we can build a set of GPO services that is going to, again, benefit providers and their patients through quality and low-cost access to products and services. We've got data capabilities. If you think about our oncology business, all the providers -- and there are now almost 3,400 oncology providers within USON -- they're clinically providing care on 1 EHR. So you're enriching the data with insights and additional analytics to 1 EHR for clinical support purposes. Also, it can be used for -- by manufacturers as they're developing their drug pipelines with clinical research and insights there. And then, of course, the clinical aspect of it in terms of clinical trials and clinical trial research and site management, that's also a part of the platform. So a very broad platform of services and capabilities that's providing additional access, low-cost quality products and services and affordability to both clinicians and their patients.

Right. So when you think about how diverse these platforms are that you just sort of described and all the different services that you're providing, it seems like there would be ample sort of M&A opportunities to continue to augment these platforms, right, and build upon these services and deepen your penetration within them. And so how do you think about the M&A landscape and just sort of given you kind of maybe created the blueprint and other companies are maybe trying to follow in that blueprint? I mean, essentially, how do you think about the M&A market at this point? And are you starting to see greater competition, upward pressure in acquisition multiples? Like how should we think about the evolution here in the next sort of couple of years?

Well, again, I would just come back to we are going to look to build platforms where there's high drug innovation and investment spend. So it's not on strategy for us to just go out and buy a bunch of providers. It's -- practice management economics are -- they don't really meet our threshold, and managing a bunch of providers is difficult. And so when you can do a lot of other things to support the providers and support their clinical decisioning and clinical choices and so forth with all these other services, that's a better economic output for all in that platform. We will continue to look to add providers to both oncology and to our Vision platform to continue to augment that. And I think we will continue to look at capabilities that support our clinical capabilities, whether that be clinical trials or site management capabilities, not only in oncology, but potentially on our Vision platform as well.

All right. One of the areas that maybe doesn't get enough attention -- you talked about all these biopharma services that the company provides, and it's clearly becoming increasingly emphasized in the communications with the company. How do we think about the contribution from these services? And how meaningful is it? And where can it ultimately be?

Yes. So I think you're talking about our Prescription Technology Solutions. Yes. So that business now is going to generate over $1 billion in AOP, adjusted operating profit. And what we have done over a long period of time is a lot of the hard work in plumbing. We've put together a set of capabilities that is connected inside the workflow of providers and payers and pharmacies, all supporting capabilities and products and services that biopharma needs for their drugs. And we have over 1 million providers now on our platform. We have over 50,000 pharmacies. There's over 23 billion transactions going through Relay every year. And that's all interconnected. So what we have in a very differentiated way is the scaled platform that is connected in the workflow of providers and payers and pharmacies, providing them capabilities to better drive access, affordability and adherence solutions. And we think that, that is really the hard work and the differentiation is that scaled set of integrated networks.

Just maybe two more direct questions on Prescription Technology because I think it's important to sort of hear from the company. One of the big drivers last year and even last quarter, 18% operating profit growth in that division. You talked about the demand for access solutions, right? And I think investors have focused on the evolution of the GLP-1 market and maybe that demand for those access services or pre-authorization and eligibility checks and things might be less going forward than maybe what they've been historically. Do you see any potential degradation in the demand for some of these products, just sort of given the evolution of that market? Or is that not the right way to think about it?

Well, we haven't seen it, and GLP-1s continue to grow. GLP-1 prior authorizations remain steady, stable and growing and an important part of the business. I think we've talked about this before. GLP-1s are an important program for us for prior authorization, but they represent about 11% of the segment's revenue. So there's lots of other products and services and solutions within the portfolio. We -- in our access capabilities, we supported over 700 brands so far until today. So there's certainly the GLP-1 products, but there's over 700 other brands that we have provided access solutions for. So it's a broad set of solutions across pharma and their needs. We've got affordability solutions that we provide. Again, our focus on access, affordability and adherence solutions across these product solutions in a very scaled way. So I think the growth is there. The solutions and the differentiation continue to be strong, and the receptivity to these solutions remains very high.

Maybe just one more question. I'm almost even a little embarrassed to ask this, but one of the things -- the questions we get from investors is around AI vulnerability, right? People just -- they want to focus on the fact that McKesson runs different technology businesses. And we were in this crazy environment in the month of February where anything software-related was getting hit. And so, do you get the question? You've been marketing with investors, do people ask you about it? Do you have any sort of commentary around AI vulnerability or anything along those lines that's worth sort of calling out for people?

Look, it is a question that we get. Are you going to be disrupted by AI? Are other companies going to do that? And I would say a couple of things. First of all, we are implementing AI and technology in a very strong way. I'll give you a couple of examples here in a second. And I think the other key piece here that is very difficult to replicate is the scale of the connectivity across the number of providers, payers and pharmacies that we have and the fact that our solutions are integrated inside their workflow. That is very difficult to disintermediate. Now there's a few things that I would just point out of how we're using technology today. We have -- within CoverMyMeds, we have a chatbot that is now handling over 35% of all transactions. That's one example. The second example I would give you is we're using automation to increase the efficiency of our personnel in terms of the number of cases that they can handle during verification season. They're now -- case loads are 120 cases more per person than they were a year ago, given some of the automation and efficiencies that we've added. Those are just two small examples. We're continuing to look at adding technology into our integrated solutions.

Can we circle all the way back to where we started around the medical business, where you started with McKesson 20 years ago, the planned divestiture in 2027. Talk to us about why does that make sense? Particularly looking at the fourth quarter results. I mean, operating profit down again, sort of lower volumes. Why is that business sort of better on its own? Just talk about the rationale behind that spin and how confident are you in that business's ability to do better on a stand-alone basis?

Yes. Look, this is a great business, and it's been a great business for a long period of time. We have really good product capabilities on the private brand side. We've got excellent distribution into physicians' offices across really all sites of primary care. And we've got a strong footprint in extended care, particularly out to the home. So the products and the services that we have are very strong. Being able to focus that business and stand it on its own so we can focus on its strategy with its own growth capital, I think will really set it on its path. Today, inside McKesson, we've been very clear that our strategic pillars where we have differentiation in higher growth, higher-margin areas is in biopharma services and oncology and multi-specialty. And that's where we're focusing. And so while we've been allocating capital for the operations of the business for MedSurg, we've not been allocating growth capital. We're very disciplined about how we're allocating capital within the company, and we're allocating it in biopharma services and oncology and multi-specialty. So separating it allows that business to stand on its own, go after its own strategy with its own capital structure. We've done this before. We did this with Change Healthcare when we divested that business. We exited our European businesses. We exited our retail assets in Canada. We felt like in all cases, it put those businesses on their own path with their own growth capital. And in all cases, McKesson was able to get more disciplined with its capital allocation and grow faster.

Maybe since we're just -- we're pretty much out of time, I have one last question for you. It's a financial question. Can you just quickly comment on the guidance that you discussed on the fiscal third quarter call? You raised and sort of narrowed the range for essentially the balance of the fiscal year, which is just the end of this month. Any sort of thoughts on what gave you the confidence to raise and sort of refine that range a little bit outside of maybe just a stronger-than-expected 3Q? And then I fully get you're not going to comment on fiscal '27 or don't want to guide fiscal '27. But any sort of high-level pushes and pulls that we should be thinking about for fiscal '27?

Well, first of all, we raised and narrowed given the performance that we've had all year, the visibility that we have into the rest of the year, the momentum that we've had, not only this year, but really the last several years. And given the portfolio of assets and how they're performing, as we just talked about here earlier, we felt confident that we could raise and narrow that guidance. And that guidance now will be -- that range gives you 17% to 19% year-over-year adjusted EPS performance. And underneath that, 13% to 17% in terms of adjusted operating profit. So it's very strong. Again, as we think about next year, we are well positioned in not only North American pharmaceutical distribution, where we have a strong specialty footprint, but our oncology and multi-specialty business. Again, not only the oncology and retina platforms, but again, servicing providers across 14,000 providers within that segment in a very strong way. And then the continued growth momentum that we're seeing in Rx Prescription Technology Solutions. All of that is underpinned by a strong balance sheet and strong cash flows and disciplined capital deployment.

Okay. As we're done and we're wrapping up, I want to give you -- I want to flip it back to you to give you the last word if there's anything we didn't discuss you think is important to mention, any final word you want to leave with the investors here today?

I think McKesson has performed on a consistent, stable and strong level for years now. And the consistency to the strategy that we've laid out year in and year out, our ability to continue to invest in the business to drive modernization and automation and get further efficiencies. These businesses are very well performing, and they're well positioned to continue to grow in the future.

Well, congratulations. Britt Vitalone, CFO of McKesson.

Thank you.

Great career. Incredible.