McKesson Corporation (MCK) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for being here. We appreciate your support and interest in McKesson. We're excited to share a little bit about our strategy and recent performance, and it's great to be on the stage for the first time with Kenny, who will share a little bit about our financial discipline and the way we think about growth and investment in the company. So appreciate your time this morning.

It's the acquisition of Precision Medicine Group for $2.25 billion. This is going to be part of your oncology and multispecialty segment going forward and maybe first talk a little bit about the strategic rationale for the deal and then a couple of kind of follow-ups.

Sure. Look, we're really excited about this. About 7 years ago, we stepped back and kind of rethought the enterprise strategy for McKesson. We oriented that strategy around a few pillars; people, culture and talent being the first one, reinvigorating the growth in the core North American supply chain businesses and then thinking about the portfolio, but then focusing our growth and our capital allocation around areas that we think both represent long-term good growth, organic growth opportunities for the company and places where we had differentiated capabilities. And those markets were oncology and biopharma services. When we look at precision for medicine, it has primary businesses: aligned very well to our oncology growth strategy and 1 aligned really tightly to our biopharma commercialization business. And so this acquisition for us is very close adjacencies to both of our growth strategies, which we're really, really excited about. It brings us new capabilities in clinical trials, particularly kind of leading clinical trials oriented around biomarkers and that complements our existing Sarah Cannon assets, Ontada assets and our U.S. oncology network very well. So we just view this as a natural mix the assets that we've already built. And then on the commercialization side, takes us into some new markets like payer strategies and helping think about market access for the biopharma company. So it's a really great fit supporting both of our growth strategies. I think one of the things that we're extremely proud of and McKesson is when we think about building platforms, right, it's really important that these platforms create assets with our portfolio that are complementary. So think about distribution before practice management, data and insights clinical trial services, as Brian just mentioned. So -- and with PMG, this really fits that mold perfectly being able to have a 1 plus 1 is 3 equation where we can tack on to serocaninto your point to Ontada and really provide incremental value for our biopharma partners around drug innovation, clinical services, commercialization, as Brian mentioned. And then -- and at the end, as the patients as well, in particular, the community setting.

Great. Yes, I think that all makes perfect sense. I do think 1 of the things that you mentioned that stuck out in the deal announcement and some of the diligence that we did on the asset, which is a CRO offering feels like a little bit new for the company. I know that the service is offered by PMG or maybe a little bit niche and distinct versus some of the larger full-service CROs. But maybe just expand a little bit about the CRO component and maybe what your aspirations could be longer term and CRO spend?

Sure. Yes, look, I'd be happy to. I mean, in McKesson today and through our SeraCanon joint venture, we've got site management operations but really -- and some -- maybe a little bit of CRO light capabilities and assets, but PMG brings a true CRO capability, which we think complements that site management operation very, very well. . What we really liked about it, though, is that it's really focused on oncology, which is obviously a real strength for us, and we have a lot of unique assets in the oncology space. And then rare disease, immunology, cell and gene therapy. So these are areas that we've made bets in McKesson as well. We have a cell and gene operation, we call Inspiro gene. So it's not broad, but it is global. It does give us capabilities into what we view as the most exciting highest growth areas in the CRO segment. But -- but if it wasn't for that focus on an area of strength we already have, we probably wouldn't have been interested, but it's a really great complement to the assets we have in the markets that we've identified as growth markets going forward for the enterprise.

That's great. And then just thinking about the financial profile of the asset. I don't think that there was really a lot disclosed on that front. And I guess, how should we be thinking about the accretion profile and how you guys are thinking about how that contributes to the model over the next few years?

Yes. So we did sign a definitive agreement to acquire the asset. And right now, we are in the approval phase right now, including regulatory review and approval, as we march towards closing on the assets, we will provide more around financial accretion in terms of EPS and the like. With that said, though, maybe taking a step back. As I said earlier, -- this is a 1 plus 1 cost equation. We do view this as accretive to our overall company from a strategy standpoint, as BT just mentioned as well as a financial standpoint as well. So for us, every time we look at any deal, there has to be right rigor, hurdling the cost of capital, nice spread between that. ROIC being able to embed any risk involved as well, balancing that with near-term and long-term value for our customers and our shareholders as well. And the third leg of the stool is making sure that we balance against the asset at play versus the overall capital allocation structure as well. Obviously, we looked at traditional return back to shareholders. As we said on the Q1 earnings call, this year, we are committed to deploy roughly $5 billion back to shareholders were $2.5 million was achieved through share repo in Q1, and then our dividend increase of 15%, which is commensurate with our long-term growth. Overall, given the fact that our strong balance sheet with the luxury to invest in our business organically, through M&A as well and also rewarding our shareholders. Overall, we feel very good about the robustness of our balance sheet.

Got it. And then just to pivot now, going back to Q1 results, obviously, strong results. I think the number 1 KPI that probably jumped out the people was the earnings growth in the North America Pharma segment at 19%, I think it was a lot higher than what we were looking for. And I think most investors were looking for and above recent trends. How should we think about what the key drivers were of that result in the quarter and how you guys are thinking about the phasing of results for the North America business and the balance year?

Yes, I can start. So we are extremely pleased with our over enterprise performance in Q1. We saw a double-digit growth across our and APD business, as you pointed out, our oncology and multispecialty business and our RxTS business as well. particularly around your question around what drove the 9% growth for Q1. So Q1, just a recap. For NAPD our top line grew roughly 5%, and our bottom line, AOP grew roughly 19%. On the revenue side, we saw broad-based growth across the board, across products, channels, brand generics and the likes. So broad-based growth, which is not just 1 single item. For example, we saw really meaningful growth within our specialty -- within our health system -- products given the fact that we're seeing strong utilization trends. So we saw nice growth on revenue side. And then that worked our way down to AOP because we saw a nice GP tailwind as well, given some of the product launches that we saw within the quarter. And then on the supply chain side, we saw really healthy metrics to productivity, is robust, and we're seeing really nice automation as well to driving the leverage from revenue down to GP, down to AOP. One of the things that we talked about on the earnings call was product launches, new product launches and what I mean by that is within the quarter, we saw new brands and also BX, the GX brand to generics. And just to kind of provide some color there. Every launch is unique indifferent, right, depending on various variables, different channel mix, customer mix, when it comes to generic number of entrants, for example, the molecule itself. So we did see some favorability in Q1 from that. And the good news is our team tracks this very, very on a granular level. And right now, that is embedded within our full year forecast. But -- and the last question is about the phasing for NAPD, I think your question behind the question is that if your first quarter is 19% and your full year is 9.5%, why is there a slowdown in the back half of the year? I think that's the question behind the question. So for me, my point, just 2 points I would say here. The momentum is real. We're seeing underlying strong fundamentals within our NAPD business. Right now, we are forecasting the back half to be -- to embed investments in our business for business growth, automation and technology. It is the right thing to do for our business here at McKesson, we're all about delivering at the spot moment and building for Tamar as well. Even this year, we've done that. We invested in our business. I'll give you a couple of examples -- we invested supply chain with AI, really orchestrating between demand, supply, operations, and that's yielding working capital benefits, right? That's just one example. So we have many, many more. So as BJ and I think about capital allocation, we have the luxury right now given our liquidity profile to invest in our business while also delivering for our shareholders for the year as well.

Great. And another guys elephant in the room for kind of all the companies in your space is just that there are a number of large customer renewals that are in focus at the moment. I guess how should we think about renewals broadly and kind of the opportunities and trade-offs that come with a large renewal kind of where you are in the renewal process and maybe when investors might start to hear more news kind of on this front?

Yes. So look, we generally think about 1/3 of our business every year is up for renewal, and it's been that way forever. Renewals are a great chance for us to be very engaged with the customer opportunity to talk about market dynamics, how we think things are evolving, how we can evolve our service or provide more services to them to help them as they navigate their priorities as a business. So that is just a pretty normal occurrence of the business. Now obviously, there are some customers that are bigger than others, and we're very, very engaged with customers day-to-day. So renewals are, in some ways, not an event, right? I mean you start thinking about a renewal, the day you ink the original contract and start thinking about how you keep that intimacy up, how you evolve your services to support their evolving businesses and their unique needs, and that's what we do with all of our customers. We try to be a value-based partner, not a transactional partner. We have a lot of capabilities beyond just core distribution that we can bring to help our customers solve problems. And that creates really tight ongoing relationships. So we're very pleased a lot of our larger relationships are 20-plus year relationships. And the businesses are really tightly aligned and integrated. So we don't often as point of policy, talk about specific customers for kind of obvious reasons, why we don't do that, but we're very aligned. We appreciate the deep partnerships we have. And our goal is to always extend and renew and continue to provide additional value to the customers through every year of a contract cycle.

Yes. And maybe is there a way to expand a little bit on as you have these conversations, like the type of services that could be of interest. Obviously, you guys are getting more capabilities yourself every day. Like what do you hear from...

We've got capabilities in CoverMyMeds. We've got a network we interface with 50,000 different pharmacies. We think about supply chain, we think about AI tools and how they're evolving and how do we get better insights, provide better insights, better connect downstream and upstream to make the entire supply chain more efficient. So there's a range of those kinds of conversations that we can have. And we prefer to have because the more we have those conversations, we know we're great at the day-to-day transactional. We'll get the product where it needs to be, when it needs to be there for the patient that needs to consume it, but there's a lot more we can do as an industry to help think about the value creation from manufacturer to end provider.

Okay. And then if we think a little bit more, I guess, outside of the renewal dynamics, just kind of about the base fundamentals, obviously, generics have been a very solid contributor to you over the past few years and much more stable than prior periods really across the industry. I guess how do you think about the sustainability of trends in the generic component of the business? And how do you think about kind of the key opportunities with upcoming LOEs which seem like they're more meaningful than maybe they have been in a little while now?

Yes. I'll let Kenny elaborate on this. But generally, the generic environment is, look, it's competitive. It's always been competitive, but it's been stable for many years now. In the episode you were referring to, I think it was like 2015 or '16. So it's long memory is in the room, but it's a long way in the rearview mirror. . We think about our job in generics as having a scaled efficient sourcing engine. We have a joint venture called ClarusONE, it does our sourcing that we think is as good as any out there. So we got a source for stability of supply for obviously, for price to be competitive. And then we need to be partnered with our customers downstream and make sure we have availability of supply. And we don't make margin on anything you can't supply. So stability of supply, competitive price and then growing the channels. And then, of course, we have LOE events who can talk about the dynamic there. I would remind everyone, though, before Kenny makes remarks that given the growth of our North American pharmaceutical distribution business, generics are not as material as they may have been in past decades, I mean, just because the growth has been so significant.

Yes. Well, if you exactly -- so think about generics and clearest one, really good economics and value that drives provide for our customers. At the same time, surely supplies as well. As you think about the LE cliff, we do factor all of that and within our guidance as well just like the product launches as well. That's something we look at. It is accretive to us from a margin standpoint, but probably to Brian's point, just a not as accretive as it was before, call it, 10 years ago or so.

And definitely a big watch area has been all the dynamics going on in the Part B and D side of the business around IRA. And obviously, it's good to see that the industry as a whole seems to have been able to maintain economics on the 2026 cohort of drugs that were in for IRA. Have you started to have those same conversations for 2027? And if so, how are those going? And how are you guys thinking about IRA dynamics over the next couple of years?

Yes. Look, I mean, our conversations with manufacturers are continuous, just like they are with our end customers. And those are around specific products, portfolios, how we can help support their commercial launches, how we can make their products be more successful. So we are continually in those dialogues. For the IRA drugs that have come out, we think the manufacturers understand the value that we deliver in getting their products to their inpatients and that they pay a fair value for that service. And so while the IRA has been some revenue headwind, generally, it has not been a headwind on the bottom line. We are currently in those discussions. Obviously, we don't know exactly the prices and the parameters, but we would expect we'd navigate the next wave much like we've navigated the first wave and the waves that have come before that. I mean this is not an entirely new phenomenon. There have been WAC decreases in the past. So we've got a model. We've got ongoing engagement. We've got deep dialogue with our partners, and we think they understand the unique value that we bring.

From my standpoint, it's a muscle we flex and know how to flex in terms of just the building blocks, given the fact that we have continuous discussion with the manufacturer. I think one proof point that's important to press upon is the fact that the past couple of quarters, we did see was pressure on the pricing side, roughly to be a few hundred basis points on the top line. And even with that, as BT mentioned, you get the revenue headwind, if you will, given the fact that our selling price dictates more on the revenue side. But because of the fixed fee for service that we get, the fee-for-service that we get, roughly 95% of our contracts are fee-for-service. That's the reason why our GP and operating income is more intact and that's the reason why you're seeing still GP growth, AOP growth with positive leverage within our P&L for the past couple of quarters despite black pressure.

And then obviously, there's some really exciting potential down the road for Part B biosimilars and then some uncertainty around interaction with IRA and how that might impact the opportunity for the company down the road? I guess, philosophically, like how are you thinking about some of the Part B opportunities that might still be kind of 2, 3, 4 years in front of the company?