Q2 2020 Earnings Call
Good day and welcome to make us since Q2, earning call. Today's conference is being recorded at this time I'd like to turn the call over to highways. Please go ahead.
Thank you Suzanne good morning, and welcome everyone to Mckesson second quarter fiscal 2020 earnings call today I'm joined by Brian Taylor, Our Chief Executive Officer in Britain bit alone, our Chief Financial Officer, Brian will lead off followed by Brett and then we will move to a question and answer session.
Today's discussion will include forward looking statements such as forecast about mckesson's operations and future results.
Please refer to the cautionary statements in today's press release, and our slide presentation enter the risk factor section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results may materially differ from those in are forward looking statements.
During this call we will discuss non-GAAP financial measures additional information about or non-GAAP financial measures, including a reconciliation of those measures to GAAP results is included in today's press release and presentation slides, which are available on our website at investor Dot Mckesson Dotcom with that let me turn it over to Brian .
Thank you Holly good morning, everyone. Thanks for joining us on our call today [laughter] today, we reported second quarter total company revenues of $57.6 billion or adjusted earnings per diluted share was $3.60, which was in line with our expectations.
And when excluding the 33 cents prior year benefit from the reversal of a contractual liability associated with mckesson's investment a change healthcare second quarter results per diluted share increased more than 10% year over year.
Our first out fiscal 20 results give us confidence in our reaffirmed fiscal 20 full year outlook of $14 to $14.60 adjusted earnings per diluted share.
This continues to reflect year over year adjusted operating profit growth in each of our segments.
Before I go deeper into our second quarter results I want to take a few minutes to discuss a one topic I know is top of mind for everyone and that is opioid litigation.
Last week Mckesson, along with two other distributors reached a collective $215 million settlement with two Ohio counties Cuyahoga and summit.
In the first track of the multi district opioid litigation.
Mckesson's portion of the settlement was $82 million, which was recorded in our second quarter results.
We strongly dispute the allegations made by these two counties. However, settling the Bell bellwether trial was in our view an important stepping stone to achieving a broad resolution to opioid litigation and to accelerating relief efforts for the people in communities impacted by this public health crisis.
Over the next few months, we'll be working hard with other parties on the settlement framework that includes states and their sub divisions. While we have made good progress. There are many details and variable that remain open and still needs to be addressed.
We're optimistic that abroad resolution can be achieved and that remains our goal all along we've said the goal is to ring fence. The risk however to the extent the broad resolution settlement framework is unsuccessful Mckesson is prepared it continues to be prepared to litigate into vigorously defend.
In the midst characterization that our company drove demand for opioids in this country.
Litigation process, if necessary will be costly and could take many years to conclude causing a significant insubstantial delay to crisis mitigation efforts.
I've stated this before Mckesson remains firmly committed to being part of the broader solution to this crisis and while I appreciate their many many questions on this topic given that discussions are ongoing will be somewhat limited in what we can say and I'm sure. You can appreciate this and we thank you for your understanding.
I also want to provide a brief update on our board of directors in mid October our board of Directors Welcome Maria Martinez as a new independent director.
Maria has served as executive Vice President and Chief customer experience officer for Cisco Since April 2018.
She brings deep experience in customer experience technology, and innovation, which we look forward to benefiting from our his appointment and in addition to Ken Washington, joining our board of directors in July demonstrates our continuing commitment to refresh our board and add valuable Ics expertise and new perspectives now.
Now, let's get to the business results.
And share why I'm, so confident in mckesson's positioning and our outlook.
If you step back from a macro perspective trends continue to support growth in health care, we have an aging population as well as increase in chronic conditions. We're also seeing growth in innovative specialty medicines, the pipeline as rich with such medicines, including bio Similars, our U.S. pharmaceutical and specialty solutions.
Segment reflected solid execution in the quarter against this macro backdrop.
Branded pricing is tracking in line with our fiscal 20 assumption of mid single digit price increases.
Our generics consistent with prior quarters, our claris one sourcing venture is performing in line with expectations and the sell side remains competitive but stable.
Independent pharmacies continue to demonstrate resiliency and remain an important customer mckesson.
Recently, our Mckesson Rx ownership team partnered with the National Community Pharmacist Association to sponsor its 10th annual ownership workshop series.
Rx owner shop ownership supports the future of pharmacy ownership by giving pharmacist the knowledge the support and the tools required to achieve their ownership goals in the past year Rx ownership assisted more than 725 owners and launching a new pharmacy and since 2008.
Our team aided in the ownership or transfer process of roughly 6000 community pharmacies.
We're proud of the long term investments, we've made in helping independent pharmacies deliver exceptional care to their patients and communities. I'm also pleased with the strength, we continue to see from our specialty businesses, where we have a broad array of assets and capabilities.
When I talk about our specialty businesses im largely referring to our provider solutions and practice management businesses that serve the community setting.
Primarily in oncology, but also another oncology is like ophthalmology rheumatology and neurology.
And our life sciences business that leverage our provider footprint and differentiated services to drive solutions upstream for our manufacturer partners.
These businesses are organized in three strategic areas.
First provider solutions, which is the largest of the three businesses include the distribution and GPO services that are core to mckesson and to the needs of our physician customers also in this business, we have technology and tools that enhance value based care delivery and products and services to help expand practice revenue.
Next is the practice management business.
We discussed the U.S. oncology network quite often this organization supports more than 1400 physicians across 450 sites of service.
We provide a unique value proposition, which allows the physician to remain independent while utilizing mckesson services and staff to ensure the practice is running efficiently and effectively this allows the physician to focus his or her time on treating patients.
Kesten has 15 practices in the U.S. oncology network that are participating in the oncology care model or LCM.
The centers for Medicaid.
And Medicaid innovation recently released results for the fourth performance period related to the LCM.
I'm pleased to report that all 15 practices earned high remark high marks for quality performance the practices improved care and provided an enhanced patient experience and also save Medicare approximately $35 million during the performance period as compared to the establish benchmark.
We're committed to ensuring that community practices have access to all the resources necessary, including access to clinical trials to successfully accomplished the challenging practice transformation required by the LCM.
And the other value based alternative payment models.
The third business is our Mckesson life Sciences business. This business includes third party logistics specialty pharmacy solutions for oncology and other rare and orphan products patient access adherence and affordability solutions clinical education services and a suite of data services, providing commercial insights.
And real World evidence.
These services help ensure biopharma manufacturers are successful in the post launch commercialization of their products.
These three businesses are well positioned as innovative specialty products, including Biosimilars are coming to the market and Mckesson is often the partner of choice throughout the life cycle of a therapy.
As you can see two of our strategic imperatives supporting specialty and the manufacturer services value proposition are underpinned by the strong portfolio of our existing offerings.
And we consistently look at ways to expand those offerings and create new value added services for our customers.
We are investing in these businesses specifically in the areas of oncology and Biopharma services, we're making these investments in order to further expand our capabilities and support our future growth.
Let me turn now to Europe .
As a reminder, last quarter in our UK retail business, we experienced industry wide underfunding by the NHS.
Consistent with our expectations in July we did see a nominal tariff increase in the month of August .
And we do expect a further upward tariff revision later this fiscal year, which should result in a partial recovery of the underfunding, we've experienced year to date.
Outside of the UK in Europe , we continue to see in aggregate year to date performance in line with our expectations for that segment.
Britt will discuss our full year outlook for this segment in a few minutes.
A few words on our medical surgical business, we continue to see above market growth as we operate and strong markets and care shifts out of the hospital to alternate sites of care.
Mckesson has a full range of products and services for our physician health system post acute and homecare provider customers. So we can serve their needs comprehensively and our customer business and our customers benefit from our enterprise mindset as our med surge team partners closely with our us pharmaceutical and specialty solutions.
Business to ensure physicians received the pharmaceuticals, they need to run their practices. This continues to be an area of growth for our business.
And the MSD acquisition, which we fully lapped in the first quarter is on track with this plan integration as we work to consolidate the business and position ourselves to effectively scale.
Turning to the other segment, which primarily consists of Canada, Mckesson prescription technology solutions or EMR xps, and our investment in change healthcare.
As we evaluate ways to further leverage the scale and expertise of our businesses.
In Canada, we've recently streamlined our leadership team structure into a retail and wholesale operations focus.
We've introduced two new senior Vice President positions responsible for leading the core operating businesses of retail which includes digital and loyalty programs.
And our distribution solutions and specialty health business in Canada.
This strategic change will enable our Canadian operations to work, even better together as we deepen relationships with manufacturers and retail partners and drive real value for patients I believe we have the right talent to move the company forward and contributed to a better healthcare system for all Canadians.
Moving on to M. Rx Ts.
The business continues to show strong growth in both new and existing products.
In addition, our Covermymeds business, which is focused on electronic prior authorization continues to innovate across the organization during the quarter Covermymeds and Rx crossroads by Mckesson announced the launch of and which stands for access for more patients.
First in class technology, driven patient support solution that transforms how patient access afford and adhere to their medications.
This collaboration brings together the robust technology platform and establish provider network of Covermymeds with the deep specialty experience and commercialization expertise of Rx crossroads by Mckesson.
And is designed to automate access to specialty medications for physicians and patients.
The traditional hub model.
As has had complex requirements and many times relied on time consuming manual processes, which typically delay treatment sometimes significantly in our pilot case study mckesson's am piece solution enabled patients across the us to access their specialty medications, 27% fast.
Other than traditional hub programs fundamentally improving the way patient support is provided.
Amp also provides high touch services for patient cases that need intervention support beyond the automated technology platform, such as proactive clinical support behavioral coaching and financial assistance, improving adherence and helping to support better outcomes for patients. We're very excited about this cross collaboration as it again exemplifies our mill.
Action to improve patient care by providing innovative service offerings and demonstrates the value of our mckesson team and our broad set of capabilities.
This represents another example of how we're investing in our differentiated businesses.
Let's move on to change healthcare.
Our value, creating transaction would change healthcare provided mckesson, where the cash payment upfront that allowed us to retain 70% ownership of the new company.
It created a scaled healthcare software and analytics and technology enabled services company that will unlock the value of our legacy MTS businesses.
We have begun activities to exit the investment in the next six to 12 months in a tax efficient manner.
This drove certain charges that impacted our results for the second quarter Britt will walk you through these accounting details later in the call.
In the change healthcare transaction, we found a way to create value while exiting businesses that work core to our Mckesson strategy.
It's a great example of how Mckesson regularly evaluates our portfolio to ensure we have the right set of assets for the present, but also for the future.
I'm very pleased by the execution across our businesses in the second quarter.
That execution included the impact of our cost savings initiatives across the enterprise Britt will get into more of the details, but I think from my remarks, you can see evidence of not only the savings efforts, but the partnership across the businesses and overall cultural change happening across the organization for example.
We've centralized our IP organization implementing a central a center led hub model to increase efficiency in med surge I talked about the partnership with us pharmaceutical and specialty solutions segment to ensure physicians received the pharmaceuticals, they need to run their practice.
In an easy in an easy way and an M. Rx Ts I talked about the partnership with Rx Crossroads business to launch am.
Overall, we're evolving behaviors as it relates to company collaboration and spending and are focused on moving with speed and an ever changing healthcare landscape. We're building upon our strong culture, leveraging our diverse perspective to make decisions within enterprise first team Mckesson mindset I feel confident in the execution I've seen across our.
Businesses in the first half of fiscal 2000, I feel great about the future of Mckesson and with that let me turn the call over to Britt to go over the financials and some of the details I alluded to Brent.
Thanks, Brian and good morning.
I'll begin with a few comments in second quarter results, including changes to our guidance for you to consider is you update your models.
We're pleased with our adjusted earnings per diluted share results in the second quarter, which were in line with consensus and grew 10% over the prior year when excluding a one time $90 million benefit in our foreign 19, our performance through the first half of fiscal 2000 was solid we're pleased to the momentum across the business.
We're reiterating our fiscal 20 adjusted earnings outlook for $14 to $14 in 60 cents per diluted share.
Updated guidance assumptions can be found in our second quarter earnings slides posted to the investors section of our website before we get into the details of the results I want to address two items that impacted our GAAP only results.
First we have concluded is the appropriate time to exit our remaining stake and change healthcare and we began to be done activity is expected to lead to an exited the investment, which we anticipate will occur within the next six to 12 months.
As we previously communicated we will execute this transaction in the tax efficient manner, and we expected. This transaction will continue to deliver value to customers shareholders.
We believe that this transaction better positions with test in the focus is focused on its core set of businesses.
As part of this work, we completed a market value assessment and recorded a noncash pretax impairment charge of $1.2 billion in our fiscal 2002nd quarter. It's important to note. This charge in Norway reflects the future value of change healthcare, rather it's an adjustment of the book value to the current market value.
One of the necessary accounting activities within the planned exit process overall, the change healthcare transaction has been and continues to be value, creating from mckesson's shareholders.
Second as Brian mentioned earlier, we reported a pretax charge of $82 million after settling all claims against Mckesson and the suits filed by Cuyahoga installment counties that will highlight in the first track to the multi district opioid litigation.
Moving to the adjusted earnings results for the quarter.
On slide three the presentation or second quarter adjusted earnings of $3.60 per diluted share was flat year over year.
As a reminder, in the second quarter fiscal 19, Mckesson recorded a $90 million.33 per diluted share pre tax benefit related to the reversal of a contractual liability associated with our investment and change healthcare.
Excluding this onetime item second quarter adjusted earnings per diluted share increased 10% driven by lower share count and growth in the medical surgical in prescription technology around Rx DS businesses.
Year to date adjusted earnings per diluted share was $6.91, an increase of 6% year over year.
Excluding the previously mentioned onetime benefit net foreign 19 year to date adjusted earnings per diluted share grew 12% year over year.
Moving to the details were consolidated results on slide four.
Consolidated revenues for the quarter increased 9% year over year due to higher than anticipated growth in the us pharmaceutical and specialty solutions segment in part related to increased caremark volumes associated with the Onboarding of a new customer.
Taking this into account, we're updating our consolidated revenues guidance from low to mid single digit growth.
To mid to high single digit percentage growth year over year.
Adjusted gross profit increased 2% year over year or 3% on an FX adjusted basis, mainly driven by strong primary care pharmaceutical volumes within our medical surgical segment.
Continued growth in our specialty provider solutions business within our us pharmaceutical and specialty solutions segment.
Growth across our existing murex Ts offerings.
Visibly within our electronic prior authorization products.
Second quarter, adjusted operating expenses increased 5% year over year.
Excluding the prior year $90 million contractual liability reversal operating expenses increased 2.5% year over year on an FX adjusted basis.
Adjusted income from operations before tax was $859 million for the quarter, 6% below the prior year. However, excluding the onetime prior year $90 million benefit adjusted income from operations before tax increased 4%.
Interest expense was $64 million for the quarter decrease of 3% compared to the prior year.
Our adjusted tax rate was 17% for the quarter, which included discrete tax benefits of approximately $31 million and we continue to assume a full year adjusted tax rate of approximately 18% to 19%, which may vary from quarter to quarter includes anticipated discrete tax items that we expect to realize.
In the back half of the fiscal year.
During the quarter, we completed $750 million of share repurchases and our diluted weighted average shares outstanding were 184 million for the quarter, a decrease of 8% year over year.
As a result of share repurchase activity. This year, we're updating our guidance to diluted weighted average shares of approximately $184 million for the year.
Moving now to our segment results, which can be found on slide six through nine ill start with us pharmaceutical and specialty solutions.
Second quarter revenues were $46 billion up 10% year over year, driven by branded pharmaceutical price increases and the previously mentioned increase in caremark volumes, which were largely specialty products and were partially offset by branded to generic conversions.
Based on the revenue development in the first half of the fiscal year, we're updating our guidance to revenue growth of high single digits.
Segment adjusted operating profit for the quarter increased 1% year over year to 641 million due to continued growth in our specialty businesses led by the provider solutions business.
Partially offset by customer and product mix, which includes new customer volumes that are flowing through caremark.
Year to date segment adjusted operating profit growth is 6%.
As Brian discussed, we have differentiated assets and capabilities in the areas of oncology and manufacturer services as such we will be investing an incremental $25 million in the second half of the year to extend these leading positions.
Inclusive of these additional investments we are reiterating our adjusted operating profit guidance of low to mid single digit percent growth for the full year.
Next European pharmaceutical solutions second quarter revenues were down 1% year over year to 6.6 billion.
On an FX adjusted basis revenues grew 4% in line with our original expectations driven by market growth in the pharmaceutical distribution business.
Segment, adjusted operating profit was down 23% to $41 million.
On an FX adjusted basis, adjusted operating profit was $43 million down 19% due to continued weakness in the UK retail pharmacy environment.
As Brian mentioned, we are expecting partial recovery or the underfunding, we experienced year to date by the NHS.
And while we continue to anticipate improvement in the second half of fiscal 20.
We are however, updating our full year guidance for Europe .
Our updated revenue guidance is flat to low single digit percentage decline.
And adjusted operating profit growth in the low single digits.
Moving now to medical surgical solutions.
Second quarter revenues were 2.1 billion up 6% year over year, driven by growth in pharmaceutical volumes within our primary care business.
Segment adjusted operating profit for the quarter increased 20% to 166 million, primarily reflecting the previously mentioned organic growth in the lapping of $8 million of bad debt expense in the prior year.
The segment adjusted operating margin rate was 807 basis points, an increase of 99 basis points, driven by organic growth and lapping of prior year bad debt expense.
And finishing our business review with other revenues were 3 billion for the quarter up 4% year.
Year over year due to organic growth in the Canadian wholesale business and higher volumes of our prior authorization products within the prescription technology remarks Ts business.
Our original revenue guidance for other reflect the anticipated exit of an unprofitable customer Canadian business at the onset of the fiscal year. This transition has been delayed and as a result, we are updating revenue guidance for other to grow low single digits in fiscal 2000.
Other adjusted operating profit decreased 26% to 221 million driven by the prior year $90 million contractual liability reversal and lower contribution from our investment in jeans healthcare, partially offset by higher transaction volumes in our MRM business principally from our electronic.
Prior authorization products in growth in our Canadian wholesale business.
Excluding the prior year $90 million contractual liability reversal other adjusted operating profit grew 5% versus the prior year.
And we continue to expect adjusted operating profit to be down low to mid single digits.
Year to date or adjusted equity income from change healthcare was 147 million and we continue to anticipate the adjusted equity earnings from our investment in change healthcare fiscal 20 to be in the range of $250 million to $270 million.
Moving now to corporate expenses.
We tested recorded $146 million, an adjusted corporate expenses in second quarter, an increase of 2% compared to the prior year, resulting from planned investments in technology.
Adjusted recorded $36 million, an opioid related litigation expenses in the second quarter and $72 million year to date.
We continue to assume opioid related litigation costs will be approximately $150 million in fiscal 2020.
Based on the progress against our cost initiative program in the anticipated timing of plan technology investments, we're updating our corporate expense guidance to a range of $695 million to $745 million for the year.
Turning now to cash was can be found on slide 10.
We ended the quarter with the cash balance of 1.4 billion for the first half of fiscal 2000, Mckesson used $159 million and cash flow from operations.
We used $184 million for internal capital investments, resulting in negative free cash flow $343 million.
For the first half the fiscal year Mckesson also paid $95 million per acquisition, and we returned $1.6 billion to our shareholders through the repurchase of $1.4 billion in common stock and payment of $140 million in dividends.
Finally, I would remind you that our working capital metrics and result in cash flow may be impacted by timing clean the data week marks the close of given quarter.
I would also remind you we typically generate the majority of our annual operating cash flow in the second half of the fiscal year with more than $3 billion generated in each of the past two years.
In fiscal 20, we continue to expect internal capital investments of between 500 $700 million and free cash flow of $2.8 billion to $3 billion. Our disciplined approach to capital deployment is committed to maintaining are investment grade rating, which underpins our financial flexibility and delivering value in returns to our shareholder.
Yes.
Before I wrap up we're updating our guidance around the impact of foreign currency exchange rate movements to a net unfavorable impact of up to five cents per diluted share year over year.
And in terms of fiscal 20 earnings progression, we continue to expect that the fourth quarter will be our largest in terms of EPS contribution similar to prior years in the first half earnings progression as compared to the second half will be similar to F. why 19.
Let me take a minute to update you on the optimization of our operating model and cost structure.
Our cost programs called spend smart.
This emphasizes that every one of the organization most think like an owner and that we will leverage scale. The enterprise, we're seeing good progress in reducing costs to be a competitive and lean operator.
As we've stated previously we expected a portion of these savings will flow through profit as evidenced by our lower corporate expense guide in overall operating expense results and a portion will be reinvested in growth such as the investments I discussed earlier in oncology and manufacturer services.
Additionally, we are on track to successfully transition several business unit functional and back office services to a more centralized hub model, allowing us to further increase standardization gain efficiencies and drive focus to our customers. We've already made great progress and transform refinance and IP and Weve some tangible results.
From our investments in technology, more specifically data and analytics and we're confident that our focus in this area one lock additional benefits.
The collective efforts and focus of our associates across the enterprise have resulted in meaningful savings for the organization.
In closing we are encouraged by the continued positive momentum across our businesses through the first half of fiscal 20 led by the focus and execution of our associates across the enterprise.
As a result, we're reiterating our fiscal 2020 outlook of adjusted earnings per diluted share of $14 $14 in 60 cents.
With that I'll turn the call over to the operator for your questions in the interest of time asked you limit yourself to just one question and a brief follow up to allow others and opportunity to participate operator.
Thank you if we would like to signal questions. Please press star one on your Touchstone telephone if you are joining us today using a speakerphone. Please make sure the mute function it turned out to allow your personnel to reach our equipment.
That is star one if you'd like to ask a question.
First question comes lot of Airporter No for research your line is open.
Thank you.
Maybe to again, it's hard to disaggregate, the underlying gross margin trend and for pharma in particular, given what's gone on in the EU can you give us some perspective on what gross margin is doing a navy.
Maybe gross margin and absolute gross profit.
Yes, Hey, Eric Thanks for that question.
As we talked about we had significant growth in revenues in the quarter and as I mentioned, specifically in our US farm and specialty solutions business, we had growth that.
Caused us to raise our guidance for the full year and I also pointed to the fact that that a greater portion of that came from specialty products and in particular from the growth of caremark through growth from new customers, there and that had an impact on our our gross profit rate in terms of.
Comparing that to our revenue growth, we did have a 1% impact from foreign exchange. So when you looked at our gross profit 3% when you exclude the impact of foreign exchange, but I would point you back to the fact that our revenue grew faster than we had anticipated at the beginning of the year is largely coming from the Onboarding.
Of some customer wins through caremark, and there is a customer and product mix.
Aspect to that where the products are largely coming through specialty products and that's really what's driving that delta between revenue growth in gross profit growth.
And then absolute basis, you're seeing growth from specialty and is it also reasonable to expect that given the stability you speak to in the generic marketplace given sourcing that we're seeing generic profitability grow on an absolute basis.
Yes, Eric we are seeing that is Brian talked about we continue to see great benefits coming from our clearance one sourcing organization, we're able to generate good savings. There. This year, we're seeing stability on the sell side thats, allowing us to continue to create is spread.
From a generics perspective in our specialty businesses, Brian I think talked.
A lot about our provider business, our advances that we have in manufacturer services and the lead the lead that we have in from us and colleges as an asset.
What we're seeing a lot of growth that is coming through our full line wholesale distribution and as I mentioned, thats, particularly coming from the growth of large customers like caremark.
Thank you.
And our next question comes Leno, Lisa Gill with Jpmorgan. Your line is open.
Great. Thank you good morning.
I just want to go back to your comments around the opioid litigation and settlement if I do the math, 38% of the settlement with Mckesson today, I think about that that was the market share and those two counties or do you anticipate just given your overall market share with the independent from the U.S. that if we think about any settlement it would be similar.
And that that type of range on a percentage basis.
Good morning, Lisa. Thank you for the question you've you did your math correct.
We were 38% of of that settlement.
No.
Obviously, there is data in the marketplace the arcos data in particular.
That.
Many of you are aware and familiar with and data can be cut lots of ways, depending on how you look at time periods and how you look at customer segments, and whether you consider doses et cetera, et cetera, and so part of the.
Discussions that we had to go through was a methodology and we landed on a data base methodology and so you can roughly think of 38% as the mckesson representation of quote unquote our share.
Okay. That's helpful. And then just as we think about that the time line of this.
I know you said that you're prepared to defend and litigate if needed.
My understanding is that the next court case isn't until sometime next summer.
Does that mean that that kind of gives you the.
Time between now and then for for settlement.
And any update that you can give us on on where you are on a potential global satellites that if I remember correctly I think thats, what you talked about in the past straight ring fencing, this and having a global settlement not companies. These one off.
Yes.
Yes.
Yes, Thats right. Thank thank you Lisa I mean are our objective and priority continues to be.
No we call it sometimes global resolution or ring fencing and that remains our priority.
Our view on these two counties and coming to the settlement agreement. We did with them was that that was an important stepping stone or building block for the meant momentum for those for the more global discussions to progress and so you know we're encouraged by by the status of the discussions there is a.
A lot of.
Of activity and and things that we need to continue to work through and we are actively working through those were working through those with some urgency.
But but it will take a bit of time to get through those were talking about 50 states and we're talking about subdivisions within states. So we've got a framework that we're very optimistic about.
The teams are working diligently to address the issues will progress that as quickly as we can but obviously as we contemplate the two pads, we've always talked about theres a path to litigate, which then weekend project.
Amount of time and amount of dollars to go down that path in there as a path that we think ring fence as a risk and give us other resolution.
It will take the path that we think is most beneficial for our shareholders. We certainly are anxious to final resolution that gets care to patients in the communities. They serve as quickly as they can.
But as we pursue these these discussions we continue to invest in our defense and we think it's only prudent to do that.
And our next question comes a lot of Brian Tanquilut of Jefferies. Your line is open.
Brian just as I think about your comments about this trend that you saw with the medical side on the primary care physician offices. These supply how are you strategizing or how are you thinking about the emergence of retail based.
Clint care delivery in the primary care side, whether that's Walmart who's who's your client, obviously or the competitors and the retail space.
Yes, great. Thank you for thank you for the question.
Maybe just frame at my answer a little bit I'd go back in time, I think the medical business has been very successful.
At following the the emergence of new channels in the alternate site settings.
At one point in time that was urgent care clinics.
We have a large footprint in there in the retail base clinics that are out there today and so we thank Ed.
These new models for community based care emerge. This solutions that we have in the medical business are right on point for the needs that those businesses in services will have so my view is that's just a continued evolution and a new segment and our team has proven quite adept in quite effective at evolving our capabilities and really.
Right.
Really leading the way as these segments emerge at I would expect that's with the team is focused on today.
And then I guess, just my follow up front for Brett as I think about calendar 2020 is or what are your expectations in terms of.
Brand pricing.
Just for each one one.
Yes, I would I would say is that we're reiterating our our view that brand price inflation is mid single digit.
See anything that has occurred.
The first half of the year or this quarter that would change that expectation.
So we're continuing to review brand price.
In the mid single digits. Obviously January is usually an important month historically, but at this point, we're not changing our view on branded price inflation.
And our next question comes a lot of Stephen Baxter Wolfe Research. Your line is open.
Hi, Thanks for the question, so I'm trying to understand the magnitude of the revenue revision in the US pharma business I appreciate the color on caremark, but it sounds like you're suggesting this coming in a lot better than expected levels. So I guess first can you help us understand why that is and then I guess, a follow up to be or you're raising revenue guidance here by what looks like.
Roughly 3% to 5%, but not changing your EBIT growth outlook, you're not get there were talking about specialty and caremark led surprising there isn't really any noticeable drop through to earnings. So I guess, how should we be thinking about that and is there something about the rest of the business, we should be keeping in line. Thanks.
Yes, thanks for that questions. Let me just step back to the revenue guidance. Our prior revenue guidance was low single digit to mid single digit and so we've updated that to high single digit thats largely reflective of the growth that we're seeing that's coming from caremark, and particularly specialty products that are going through that customer that's really what struck.
Moving this in terms of the drop through to the bottom line. We're really pleased that we're able to make investments in the business I talked about $25 million of investments.
In our oncology and manufacturer services capabilities and despite those investments were pleased to be able to hold on an affirm our guidance for the segment on a LP at that low single to mid single digit number. So I would call. This as growth from one of our customers that is primarily coming through specialty we're.
Testaments, where we have leading positions in great capabilities.
And I talked about that as being an additional $25 million, but we're still holding and affirming the rupee guide or the segment.
Got it I guess, just coming back to like what is better than was expected going into the or is there any clarity you can provide on that I appreciate what the driver as an absolute terms, but understanding mercer prior expectation would be great. Thanks.
Sure well I'll, just reiterate reiterate a couple things branded price inflation is.
Performing as we had anticipated we're seeing really good progress on eclipsed one and so our from a generics perspective, I think is performing as we had anticipated still stable competitive marketplace.
A couple of things that I would point out that Brian really talked about is our specialty provider business is performing quite well.
And certainly the investments that we've been making in our manufacturer services capabilities and that we're continuing to make their who thats also performing well. So I think as you think about our specialty business, we're getting a lot of growth through.
Customer wins.
In our wholesale distribution business, we're making great advances in our provider business and our manufacturer services capabilities.
And our next question comes lot of Michael Tyranny of Bank of America Merrill Lynch. Your line is open.
Thanks, so much for taking the question. So I wanted to go back to the comment you made Brian about stability of what you're seeing on the sell side relative to generics and now it's been about three years since we had a shift in the independent market. You also highlighted some of the value the provide terms of the independent.
Customers and so I guess as we go forward how do you think about the activity in the kind of the puts and takes that go on with the independent market.
And how they think about negotiating especially as they all tend to get into their own specific buying groups.
Yes sure.
Thank you. Thank you for the question I mean I referenced.
In my comments, the Rx ownership program and the fact that.
700 ish pharmacy, new pharmacy owners, we helped in opening are establishing our transferring.
Into the business and that's that's not a unusual number I mean, if you go back you know many many years, we often see lots of exits in the independent pharmacy segments. Some of those are family planning and transition exits.
Summer script file sales, but we also see as many new as many new openings or many new store fronts come into play and so it's been remarkably stable over the years and that that trend. We continue to see today, we do over the years, we haven't we continue to invest in these tools and these services that we help.
That we think help independent pharmacists stay independent stay healthy businesses and stay vibrant and the communities and the patients that we serve.
But we really haven't seen anything that I'd say it was a massive trend break in terms of as always ins and there's always outs in the independent segment.
Thanks, and then just one quick question on capital deployment as you think about the discussions and debates going on relative to the close Corey Global settlement does that have any impact on your cash availability or capital deployment priorities and I know not from our reserving perspective per se, but do you think about keeping some level.
Cash to.
Present itself for any type of potential settlements.
I would say I would say this.
I think we've been pretty clear on what our capital deployment philosophy has been in the past a very very balanced approach to that and what I would say as we have not made a change to that that portfolio approach.
We continue to make investments internally that we think will drive future growth.
We continue to be open to M&A, where we can find that M&A that make sense.
Balancing obviously valuation expectations, where our share prices what alternative returns of of that capital are but that was a long answer to give you. The short answer that we really it really has not impacted our approach to capital deployment and I think if you look at how we've deployed capital in the first half of the year. It's.
Pretty historical amount of capital has been deployed we've returned a lot of capital to our shareholders, particularly in the second quarter and as Brian mentioned, we'll continue to evaluate really on a balanced perspective, but we haven't made any changes to the amount or how we are deploying capital at this point.
Our next question comes lot of Charles Rhyee Cowen Your line is open.
Yes. Thank you are getting questions just wonderful blocked.
Paul buying the bottom world.
Pretty much hearing we're optimistic about in terms of getting close of mobile global settlement.
Justin we get to corporate business you can discussion in.
You.
Thank you will encompass all play equals multiple Jackie can you just that quarterly.
They were breaking up a little bit let me read I think the question was coming back to the framework is it going to be all encompassing.
Of all the litigation and what I would say is that relative to the states and relative to the subdivisions in those states. Our goal is to get as comprehensive of a settlement within that framework as we can.
And that is the majority of the of of the outstanding litigation, but it is not all of that cases.
And we'll be mechanical.
No you kind of legions framework and Dan.
Paul.
Arden.
Gary royalty reports.
And that sort of answers from terrible.
No standpoint, thats going to look at embedded.
This is a mall.
Moving forward or not involved.
Yes.
Good morning.
Some large comes from okay, well there.
Well all levels of division.
Okay.
Well from Pluggables administration 12.
Can you give the truck.
Yes.
So I guess the easiest way to answer to that is to say that this is a complex.
This is a complex legal situation.
We have.
Established a framework and had good discussion around that framework. It is very much a process, though and we are very much working through the details of how that process will unfold and is really not a lot more I can add to it at this time.
Okay. Thank you and we're just to follow one real quick question on the European.
Our European segment.
Thank you so we'll keep more operating profit guidance low single digit replied.
That's helpful.
Just a little more thoughts on what we want to get there.
Thanks.
Yes. Thanks for your question I think as we've we've talked about we expected the business will continue to improve its performance in the back half in that Brian also talked about some nominal increases in the tariffs in the UK.
And we would expect that there could be additional.
Increases in the back half of the year. So thats really what is driving that second half performance.
Our next question comes a lot of Stephens delegates Barkett Barclays. Your line is open.
Great. Thanks, good morning.
Mission here so.
Hi, guys. This has been touched on a little bit of I guess I'm looking for any update on claris, one progress and tied into that.
Based on a little bit of the margin compression in the us pharmaceutical and specialty business shows should we assume that the relationship between the procurement price on generics versus your sell side pricing.
May have fallen off a little bit during the quarter or in your mind was that relationship still relatively consistent during the quarter. Thanks.
Thanks for that question, we're really pleased with the performance of cleaners, one and is performing in line with what our expectations were beginning of the year, we're continuing to see that organization drive great value, which is very helpful.
As we think about the sell side, which is as we've talked about now for several quarters. So a competitive but is stable.
Environment, we're pleased with Claros one is performing as we had anticipated we think that there's still great value to be gain to out of that organization and we were pleased with the partnership that we have with with our partner Walmart as we continue through in that relationship as well.
Okay, and what about the relationship then between the bias ever cells have pricing was that consistent during the quarter or was there some slight erosion just curious just a high level.
Comment on that.
Yes, sure no actually it's consistent we're seeing consistency over the last several quarters now and.
Again, good performance on cleaners, one and as a stable competitive environment on the sell side and that's in line with our expectations in what we've seen now for several quarters.
And our next question that is a lot of Bob Jones of Goldman Sachs. Your line is open.
Great. Thanks for the questions I guess, just a couple to go back to specialty Brian If I could you discuss the three main areas within specialty in sounds like generally very pleased with the performance across the board there.
I think most of us get the mix dynamic that you guys have discussed within specialty pharmacy and caremark.
Specifically, but I guess, if we take a step back into the operating profit for the overall pharma specialty segment was up <unk> percent.
In the quarter. It just sounds like there's a lot of secular tailwinds. There. So I guess just wondering if you could shed a little bit more light on how you think about overall EBIT growth.
As it relates specifically to what seems like some pretty strong tailwinds within specialty.
Great. Thank you and we.
We reflected on the questions. We've had over the last few quarters and Thats why we included a little more description or color on on the specialty businesses that we have in the pharmaceutical solutions segment.
And if you if you think about the three segments. We highlighted they are all performing very well and we think in all cases, we have.
We have assets that are not only competitive with the market, but probably one of them. The most robust set of solutions and services when taken in the aggregate and so those businesses are continuing to perform well.
They are delivering good growth in there they're performing right in line with where we thought they would would for the year.
Obviously, there is another segment in specialty.
That is the more retail.
Mail order oriented specialty products and Britt talked a lot about the impact we've seen of growth in in the Caremark book of business that has been held the mix has been slanted towards those specialty products, which tends to be the lower the lower margin profile for us So billion in unit that all out Thats really gets what you get the Thats I get to the result based.
Seeing today.
And then I guess, just a follow up on that maybe Brett I mean, just to maybe if I understand that a little bit better I mean, these these kind of outsized growth within caremark products I mean these aren't these arent margin.
Or EBIT dilutive I guess I would say and then just on the 25 million investment that you mentioned in the back half, maybe just a little bit more.
Specificity around what area within specialty those would be pointed out would be helpful too. Thanks.
Yes, as we've talked about before in is we think about specialty distribution in our wholesale.
Line wholesale business, they do have a dilutive impact on the rate.
We still participate in the profit dollars, which has grown a lot faster than we had anticipated and thats had a much more.
Dilutive impact on the rate of growth as we think about the investments that we're making as Brian talked about we are very pleased with our positions in oncology or positions that were developing and manufacturer services. As we think about this $25 million it will be largely invested in and koji capabilities.
And assets, but again, we're continuing to invest in our our manufacturing services capabilities as well, but you should think about this investment as investing where we have leading edge positions and oncology is certainly one of those at just to build on that.
These investments are tied to our strategy our strategy is anchored and where we believe we have differentiated capabilities than we have good marketplace growth and so we're very happy to be able to say, we're continuing to make these investments then and still delivering still delivering on the year as we committed.
Operator, we have time for one more.
Okay, Great. My last question for today, it's Kevin Caliendo PBF. Your line is open.
Hi, Thanks for getting man guys I appreciate that.
If we think about the CBS relationship and the fact that it was just sort of re up.
For June is there some anticipation that overtime the margin with them could get better meaning like are we.
In a situation right now with the first sort of 12 months of this relationship the margins from that contract might be worsen over time, they could get better.
Well first let me say, we're always happy to renew our customers are always happy when they grow.
We are experiencing a shift in the mix of business that on our margin rate perspective.
It is you see in our results have been great topline growth, but there is a margin rate impact in there.
No were.
We are never disappointed when our customers grow and we think it's always additive to the business.
One quick follow up can you talk about the performance and impact Northstar would have had in the quarter.
We don't specifically talk about norstar, but when we think about our generics portfolio Norstar is obviously a critical part of that we're very pleased with the performance of Northstar and we're pleased with the progress that we're making there I think the relationships with the manufacturers and Northstar.
Really evolved over the years that are quite productive at I think thats whats supporting the success overseeing there.
Okay, well. Thank you everyone for your questions and thanks again for your interest and giving US some of your time this morning.
Thank you Suzanne for.
Facilitating this call.
Just maybe to conclude I really think the fundamentals inside the business are strong the macro healthcare environment is supporting a stable market, we executed well in the second quarter I'm very proud of the team the teams and the execution, we're continuing to drive cost savings were continuing to speed up our decision making for continuing.
To make investments, where we think we have opportunities for growth and I feel good about our fiscal 2000 full year outlook.
My confidence is of course rooted in 80000 employees that come to work everyday for Mckesson for our shareholders are really embodying our values, including integrity. They do the right thing and our execution success are a direct result of their contribution so I want to say, thank you to them none of this as possible.
So without you and now let me hand, the call over to Holly for review of our upcoming event Holly. Thank you, Brian we will participate in the JP Morgan Healthcare conference in San Francisco in mid January and we will release third quarter earnings result in late January Thank you and goodbye.
And thank you for joining today's conference call. You May now disconnect have a great day.