McKesson Corporation (MCK) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Morgan Stanley Global Healthcare Conference. I'm Erin Wright Healthcare Services analyst at Morgan Stanley. And we are happy to have McKesson with us today. But for more important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures fortamemory set by now. So thank you so much for joining us. We have Chief Executive Officer, Brian Tyler as well as the new or not so new anymore, even 3 months Chief Financial Officer, Kenny Cheng, with us today. Very happy to have you. I think, Brian, you wanted to say a few remarks at the beginning.

Well, I just want to thank you for hosting us this morning. We appreciate the opportunity to share a little bit about the McKesson strategy and recent performance, and we thank you all for being here early on a Monday morning. I appreciate your interest in McKesson.

Great. So let's start out with the most recent quarter in earnings print and guide. So more recently, I guess, raised your 2017 EPS by $0.40. You raised your AOI guidance I guess to start off, is there anything that you want to highlight from the more recent print or clarify based on kind of the feedback you got? And since then, you also announced an acquisition of get more into that later on, but just kind of give a high level in terms of the rationale behind the deal. .

Sure. I can start with the quarter, and I'll turn it over to BT on PMG. Overall for the quarter, for Q1, we are pleased with our business performance. We have momentum across the board. As you think about our 4 reportable segments, 3 of the 4 were double-digit growth across North America pharmaceutical, oncology and multi-specialty and RxTS business. As you think and you're correct, we did raise for the full year given our strong performance in Q1 and our confidence for the rest of the year. The $0.40 raise brings our full year EPS to $44.20 to $45, which translate growth of roughly 13% to 15%. And you can normalize for 2 things. The Norway exit as well as our gain on sale in Youson last year in this quarter in Q2, that is a 15% to 17% increase year-on-year. And that is, call it, in line, slightly above our long-term target of EPS growth of 13% to 16%. So Aaron, overall, we're extremely pleased. And I'll turn it over to BT on PMG, just 1 overarching common when we think about M&A or just general assets within our portfolio, it's important that we're strategic about it, disciplined about it as well, where the access, the platforms are interruptible and are complementary to each other across distribution, practice management, data and analytics, clinical trial services and the likes and PMG does fit that mold nicely.

If you just step back a little bit, 7 years ago, we set a strategy for the enterprise that was focused on a few pillars. One was people and culture, and we think PM is a great cultural fit with super talented people. So we're excited about that. It was to strength in North American distribution, and it was to modernize or continue to modernize our portfolio through disciplined capital allocation and then to focus on 2 growth areas oncology and biopharma services, where we felt like we had differentiated assets, we had end markets that had good growth that we could foresee into the future. And so over the last years, we've been executing on that strategy. We think precision for medicine fits both the focus on oncology through their clinical assets, which complement SCRI, Ontada, the USAN network and help extend our reach into clinical research with a particular focus on oncology. And then on the commercial side of their business, it supports our biopharma strategy. adding a depth in things like market access and payer insights and consulting that we think we can then leverage to have a more complete commercial solution for payers. So we're really, really pleased with just the people, the talent and the strategic fit.

Okay. Great. I'll get back to PMG in a second. So but in the most recent quarter, we've got some investor questions on this just in terms of quarterly cadence, how you're mapping it out for the year. But you tweaked North America pharmaceutical AO guidance a little bit higher or towards the high end of the prior range. but you did maintain that oncology and multi-specialty segment and RSTS guidance. Is there anything to keep in mind when we think about that quarterly cadence? Any areas of conservatism like why the momentum wouldn't continue kind of.

Yes. Yes. I probably wouldn't use the word conservatism, I would use so we're confident. We're extremely confident around the momentum in our business given the fact it's broad-based. And you are correct. We did increase the guidance tied to North America Pharmaceuticals. So you may remember, our original guide was 5.5% to 9.5% AOP growth for the year. And given the momentum we're seeing across the business from a customer standpoint, a product standpoint, we're seeing good growth from health system with specialty and for us, that gave us the confidence to race. That was the $0.40, give or take. Now your question was around O&M and RTS, -- how do we feel about those 2 businesses as well. For O&M, oncology and multispecialty we're off to a great start of the year. On a reported basis, our top line was 33% growth, and our AOP was roughly 41% growth. If you back out the core Ventures acquisition that was done last year, by the way, we lapped that it's roughly a 15% growth for oncology and multispecialty. That is right at the midpoint or 4-year guide, the 13.5% to 17.5%. So that feels we're on a good track their momentum is there as well. And we're really seeing a few folds of growth. One is just existing volume -- we're seeing good foot traffic into our USON and PSM networks. We're also seeing just overall healthy utilization in terms of production drugs and specialty the other good news is we're seeing good business growth as well, new business growth, too. On the RxTS side, just to remind everybody, we saw roughly 9% top line growth in Q1 and 13% growth in AOP. That 13% is right in the middle of our full year guide of 11% to 15%. And overall, we're seeing broad-based growth across our access to affordability programs. We're also seeing good momentum around our GLP program as well. Every year, we bring in new programs, can brands to our platform. for example, the GLP-1 Medicare bitch program is off to a good start. Now it is early innings, though. It started roughly July 1, so 2 months into it, and we're seeing good volume through there right now. But more importantly, operationally, we're ready as well. If you think about some of the key metrics we're looking at, for example, roughly call it 95% of time when the PA hits our network, 30%, 30 minutes, we have a determination. So overall, we are ready, and it's early innings and we'll update as we progress.

Okay. We may have some follow-ups there. But any since I have to ask the obligatory question on contract renewals. Any sort of update on that front, particularly with your CVS relationship? How would you characterize that relationship today? And then just anything else to keep in mind in terms of some of those bigger contracts. .

Sure. Look, we're very pleased to have been aligned and partnered with CVS over 20 years. And they're a big growing organization. We've been a big growing organization. And so we like to think through constant dialogue, we're helping strengthen their business. And certainly, through their scale and volume, they continue to strengthen ours. So -- it's been a great relationship. We're super pleased to be affiliated and aligned with them. We extended our contract about 5 years ago. It extends June '27. I'm not going to give a lot of details around contract negotiations for obvious reasons. But we're very pleased with the partnership. We think we bring them a lot of value and they understand the value that we have helped create over the 20 years plus of the relationship. I would remind everyone that this is just a normal part of the business every year, about 1/3 of our contracts come up, and we're engaged in renewal discussions. We operate those discussions at the cadence that our customers want them. Sometimes we might early renew because they would see value in that. Sometimes we go through a process that can come down to the last months of the contract. So but a 1/3 every year is pretty normal, and we've got a pretty good track record of renewing.

Okay. Great. And then let's switch back to PMG Precision Medicine Group. And you mentioned some of the unique aspects of the this business, very focused on oncology, late-stage CROs like with a very niche kind of handholding type of experience with also that commercial arm as well. And how does that fit into kind of what you're doing at Cara Canon and Ontada, but also can you talk a little bit more about just the financials as well. We didn't get that much in terms of financial disclosure on the asset, but growth.

We did just sign the deal. So and we are going through the regulatory filings and things of that nature. I'll let Kenny comment on that. But maybe just from why are we excited? Why this asset, what does it bring to us? And I think to put that in good context, you got to remember how we've really gone about building our oncology business. So we started in distribution. We had a lot of specialty customers. We then expanded to offer GPO services. Then we expanded into our MSO, U.S. oncology. And after we began to then scale that, we've added -- we've roughly doubled the providers in the last 8 to 10 years. We now have 3,400 providers. So we've got great scale in the network. Then we invested in a data analytics and insight business called Ontada. We did a joint venture with SeraCanon, which then got us into site management and in and around clinical trials. So SeraCanon, for example, in 2025 of the 52 oncology drugs that made it to market for adult oncology, we were part of that managing that trial for 43 of them. But as you think about piecing those together, we just see the assets in PMG as a very next natural extension. A lot of oncology trials fail because we can't enroll enough patients fast enough to get them to the finish line. Well, we think a big unlock for that is availing the community practice of oncology where most of those patients who could be find a trial don't because they don't live near an academic medical center. Using the assets of PMG in alignment with and integrated into the things we're already doing at Sara -- can we think will allow us to develop a very strong value proposition for biopharma companies developing these oncology drugs. And we think that the combination of those assets is actually quite unique and a big unlock for us. As we then grow that and continue to scale that and get penetration or data that we can bring into Ontada, things like bioclinical markers, things that we hadn't prior had at the sale that we could now have it. And then you referenced their late-stage focus and some of our early stage focus, and we see that as a great opportunity to kind of cross-pollinate those businesses.

Yes. If you think about it, for us, we're excited because now Long story short, we can be part of -- we can add more value to a biopharma partners from innovation clinical trials to commercialization to at the end of the day, ex the patients, right, for the affordable as the patients, especially in the community setting. From a financial standpoint, as Pete said, we just signed a deal, we are in the process of the regulatory approval framework, if you will. And with that said, this deal is accretive from a strategy standpoint, as Peter just mentioned, as well as from the financial standpoint to share more financial impact as we get closer to the closing date of the asset. Two things I'll say, as we think about this asset strategy wise, it's on strategy, as BT said, I won't repeat what he said financially, it's also accretive, as I said earlier. As you think about the ways we use to evaluate assets, we factor in cost of capital. We look at the risk profile of the asset and we parlay that and marry that up with the near-term and long-term value for our shareholders. Overall, this asset checks all the boxes. And the last but not least, given the fact that we have a strong balance sheet, IG rated, and the fact that we have ample cash and liquidity, we have the luxury to do both, invest in our business organically and inorganically and also reward our shareholders. As we said on the earnings call last quarter, this year, we plan to redeploy capital against share repo of $5 billion, $2.5 billion was completed in Q1. And also in July, we raised our dividend by 15%, which is commensurate with our long-term algorithm for EPS growth.

And since you're talking about capital deployment, I'll switch to this question and ties into P&G. But you've suggested in the past that an FCS type of transaction or size of transaction is probably less likely, if there's just frankly not so many MSO deals to do like that. or at least at that size, should we interpret PMG as evidence of that next phase of strategy that lean towards acquiring these types of capabilities in sort of that CRO category where there is a long tail in a very fragmented market and could this be even a larger presence and what you're doing with PMG today?

Yes I mean, look, scaling our USA Network, or MSO, was an important part of our strategy over the last few years, and we're super pleased to be able to integrate FCS into the U.S. oncology network and give us the leading scale at 3,400 providers. We think there's continued growth in that network, building off the states and the practices we're already in recruiting new oncologists to join those practices. Kenny mentioned the solid same-store patient traffic that we're seeing. And there are an active funnel of additional practices that we think fit our model, meaning they want to practice oncology in a way that's consistent with the way U.S. oncology manages itself as a network. There are not more FCS scale out there, but we think we can continue to add active practices to grow it. But the key is for us that now that we have this leading scale, how do we continue to find ways to leverage that scale through doing things like acquiring a PMG, bringing capabilities, integrating them with site management and unlocking access to clinical trials in the community. We think that's got a long growth runway for the foreseeable future. And that's what we're really excited about is leveraging off prior investments GPO, Ontada, SCRI, Usan to attach an asset that we think has tremendous complementarity and makes those things in themselves stronger as well as making PMG stronger.

Okay. And then so letting into the MSO asset as well. So oncology, obviously, you're talking about that being a key growth driver, a key platform for you. You've really built that out nicely with a lot of other ancillary services as well. But I guess, can you talk about the underlying growth of that MSO asset on an organic basis? And you can highlight kind of U.S. oncology or the broader MSO business. But how sustainable is that growth in light of what we could see in terms of reimbursement evolving across that space. .

Yes, I can start. As you think about oncology and multispecialty you mentioned MSO, that's where that falls under. We're seeing really good momentum in that business. And as I mentioned in -- the operating profit growth was 41%. And if you back out the core ventures piece of it, which is M&A last year, fully lapped in Q1, it was roughly 15%. And that 15%, it's a good proxy for organic growth in that business. That's point number one. Point number 2 is if you think about the composition of of O&M from a revenue contribution standpoint, the majority of the business is actually distribution and GPO. That is the majority of the lion's share of that business. where we provide distribution services to providers and allow them to do, obviously, the treatment side of the house. We provide surety of supplies, safety, reliable service as well. And we get a fair fee for our service as well, right? That's a really important point. And the second piece I would say is that on the MSO piece, the benefit expands beyond just financials, right? Obviously, when you join the Youson network to your point, or our Prism network, you get the full basket of service. Obviously, distribution but you also get, call it, practice management, you get revenue cycle billing help as well. You get some back-office health as well. So it's a full suite of services that we provide to our provider and physician. In terms of your last question around kind of the reimbursement side, et cetera, I think I'll say 3 things, right? One is and I think this is more of a safe harbor and is -- we don't own the physician or the providers. We don't own the clinic as well. We provide choice, but the choice is retained by the provider, right? That's just really important. The second piece is that as you think about our business, it's a resilient business model. And again, distribution right now is the backbone. -- the oncology specialty. And we're off to a great start. And right now, as I mentioned, the exit rate of our business right now was really strong in Q2, and we're 2 weeks away from quarter close. And right now, momentum is still there as well. So overall, we feel good about the space.

You were referencing the IRA Part B drugs, which were announced in 2026, will not take effect until 2028. And we don't know what that MFN price will be relative to pricing in the market today. So it's a little bit hard to try to quantify what these few drugs impact could be. We step back though, from a little bit more macro level and look at it and say, we know the community is the lowest cost location to provide health care services today, good oncology care today. It's dramatically lower than the hospital setting any public policy that would incentivize care to leave the community setting to go somewhere else is going to work very counter to the overall goal of this country to reduce health care costs. And we think that's pretty widely recognized by our regulators and our legislators. And in fact, they've given us a blueprint of the model to achieve what they're trying to achieve through this IRA Part B in a way that does not impact physician potentially impact physician incomes at all. And that's the globe model, where you effectuate the price by a direct rebate from the manufacturer to CMS. And so we think that's a very workable and productive solution that allows the government to achieve its goals of reducing their spend on drug pricing, but insulating the community-based providers from any economic harm.

So you feel like you can navigate this is.

We think there's a working model that's out there that's already been endorsed and developed. Now we will advocate as we always do on behalf of the community practitioners, whether it's pharmacies or oncologists or anyone else based in the community because that's going to be an important part to solving the macro health care challenges in this country.

And then you mentioned Prism on the MSO side, and that platform now has, I guess, now includes more than 200 providers across 97 locations. You've obviously expanded some of that. Can you talk a little bit more about that opportunity, where that can go over time and then where else you might consider expanding from a specialty stand point.