Q3 2020 Earnings Call
Today's conference is being recorded this time would like to turn the call over to Hollywood. Please go ahead.
Thank you Jack good morning, and welcome everyone to Mckesson third quarter fiscal 2020 earnings call today, I'm joined by Brian Tyler, Our Chief Executive Officer, and break that alone our Chief Financial Officer, Brian will lead off followed by Brett and then we'll move to a question and answer session.
Today's discussion will include forward looking statements such as forecast about Mckesson operations and future results.
Please refer to the cautionary statements in today's press release, and our slide presentation and to the risk factor section of our periodic SEC filings for additional information concerning factors that could cause our actual results to materially differ from those in are forward looking statements.
During this call, we'll discuss non-GAAP financial measure additional information about our 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's dotcom with that let me turn it over to Brian.
Thank you Holly and good morning, Thank you everyone for joining us on our call. This morning.
Before I get into our third quarter results I wanted to take a few minutes to provide a brief update on opioid litigation.
You know, we've been engaged and complex discussions with the state attorneys generals and others about a settlement framework with the goal of achieving abroad resolution of opioid related claims those discussions continue to narrow what's left to address to achieve resolution on all the items that remain however, pretty extend our efforts to.
Reach a broad resolution settlement framework or unsuccessful.
Kesten continues to be prepared to litigate vigorously defend the miss characterization that our company drove the demand for opioids in this country.
Mckesson remains firmly committed to being part of the broader solution to this crisis.
Given however, the discussions and litigation are ongoing I'll be somewhat limited in what I can say I do appreciate your understanding now let's get to our business results.
Today, we reported third quarter total company revenues of $59.2 billion, our adjusted earnings per diluted share was $3.81 and I'm pleased with our third quarter and year to date execution across the majority of our businesses in our fiscal 2020.
Well so today, we reaffirmed our fiscal 2020 full year outlook of $14 in 60 cents to $14.80 of adjusted earnings per diluted share, which we first provided on January 13th.
This reflected.
This update reflects our outlook for growth in our U.S. pharmaceutical and specialty solutions segment, primarily driven by specialty strengthen our medical surgical segment lower than anticipated corporate expenses and the benefit from share repurchase activity in the third quarter.
Our U.S. pharmaceutical and specialty solutions segment performed well in the quarter, reflecting stable macro fundamentals and good execution and it was aided by the continued strong growth across our specialty businesses.
Maybe walk you through the recent trends from industry fundamentals standpoint.
The third quarter, we stopped branded price increases tracking in line with our expectations and we continue to receive a mid single digit branded price increases.
Year over year for fiscal 20.
For generics.
We remain disciplined in our approach to the market, we're sourcing effectively to our skilled sourcing venture and the sell side remains competitive but stable.
I'd like to take a moment their knowledge how pleased we are that the V. I announced in December is had again selected mckesson could be the prime pharmaceutical vendor beginning in August 2020.
We've been the VA is prime pharmaceutical vendor for veterans hospitals, and the departments Mail order pharmacies for more than 15 years. This is a great point of pride for Mckesson and were dedicated to hiring veterans and helping them build their careers after their service.
At Mckesson, we have many employee resource groups celebrating and leveraging the diversity of our workforce and Mckesson military resource group or M and our G. As we refer to it internally provides opportunities for all employees to recognize and welcome veterans and their families to Mckesson and MRG offers networking opportunity.
He is facilitates personal and professional development supports mckesson's recruitment hiring and retention of veterans and sponsors events within our communities for active duty military veterans I want to say mckesson's veterans and every veteran really for their service, we're very proud to serve the VA and we look forward to continuing.
Our long standing partnership.
Moving to specialty as you heard me discuss with several recent events, we have a differentiated portfolio of assets and capabilities that we've built over time with targeted internal and external investments.
First we distribute specialty pharmaceuticals, the other traditional wholesale model to retail in hospital pharmacies.
Although these products our margin rate dilutive, we benefit from this growth at the top line and then our gross profit dollars next redistribute specialty products that are primarily infused into community based bedding and typically require special handling including temperature control. We also provide other services like group.
Purchase organization activities data and technology services in oncology and other multi specialty practices.
And then we have our leading practice management business.
Specifically, the U.S. oncology network, which now includes more than 1200 oncology positions, providing 12% to 13% of all community based oncology care, we handle all aspects of managing the practice so that the physician can focus on treating the patient. In addition, we're active in clinical trials research.
Research and formulary development.
The practice management business combined with the wholesale distribution and specialty product distribution and services business are the scale channels, we leverage to provide services and solutions to our many biopharma partners, including commercialization hub and patient assistance services, we hope manufacturers fine patients.
Where appropriate and relevant for care helped them get started on that therapy sooner and work to keep their make here it to that therapy for the course of their treatment.
This resulted in a patient getting the best possible outcome from their treatment.
These services not aware support better outcomes for patients that they also provide tremendous value to our manufacturer partners.
We're really pleased with the growth we're seeing across the businesses and we remain focused on specialty as a key tenet of our strategic direction.
We're also pleased that we're returning to growth in the U.S. pharmaceutical and specialty solutions segment in fiscal 2020, while continuing to invest in our future.
Now, let me turn to Europe.
In mid December Mckesson, and Walgreens announced the joint venture agreement that we expect will bring together our respective wholesale operations in Germany.
After review of our business in Germany. We believe this is the right course of action as the combined business will have large reach and scale driving increased efficiency and performance in a market where scale is vitally important.
The transaction is subject to merger clearance and approval and that process is expected to take at least six months from the time of the announcement.
As such this transaction will not have any impact on adjusted earnings in our current fiscal year.
In the UK, we continue to monitor the retail pharmacy funding dynamics.
As we detailed earlier in the fiscal year, the retail pharmacy industry experienced under funding by the NHS in our first quarter.
Well there was a modest improvement in our fiscal second quarter further upward revisions have not yet been implemented we continue to monitor the situation in the UK closely and engage in active dialogue with the NHS related to industry funding and the role pharmacy can play in managing NHS is overall cost quality and access challenges.
Outside of the UK, we're continuing to see performance in line with our expectations for the other countries in that segment.
Next our medical surgical business.
Again this quarter you had good growth across multiple markets, such as our home care delivery business and product categories, including pharmaceutical sales into the primary care space customers I repeatedly choosing mckesson because of our relentless focus on providing what they need to take care of their patients we differentiate ourselves.
In the marketplace through innovation and a focus on operational excellence breadth of product and service offerings, along with one of the largest and most tenured sales forces in the industry.
We also saw an early start to the influenza season in the third quarter, which we are continuing to monitor for severity and duration.
In addition, our results continue to reflect the integration of the MSP acquisition, which we lapped during our first quarter and our focus is now on driving synergies. This acquisitions continues to perform in line with its business case.
Turning to other which primarily consists of Canada Mckesson prescription technology solutions, sometimes referred to and Lorex Ts and our investment in change healthcare.
In Canada, we're now capturing the benefits of previous actions, we've taken including our investments in people and then reconfigured pharmacy format as community pharmacy plays an important role in Canadian healthcare and market fundamentals are stable, which helped to drive growth in our wholesale operations year over year. In addition.
Mckesson, Canada also has broad specialty assets and capabilities and we are well positioned to participate in the growth of specialty in the Canadian market.
Moving onto MRF, Ts, which is a key area of investment.
We're making investments to ensure we have the right product and personnel resources in place to support the growth trajectory of these businesses and we're looking to launch new products that leverage our existing technologies and build upon them.
As we look at how EMR Xps is performing year to date, we're pleased with the growth in the business, which is net of several investments, we're making to drive and support our future growth.
Let's move on to change healthcare.
As we've discussed previously we continue to take the customary steps toward an exit of our investment in change healthcare.
As part of the exit process registration statements were filed today with the FCC.
The previously discussed timing expectations are unchanged and this is simply a necessary step as we move through the process of exiting our investment in change healthcare.
Recently, you've heard me talk about aligning Mckesson under one vision to improve care at every setting one product one partner one patient at a time, we've been transforming and energizing the culture at Mckesson, We've got a great collaborative work space at our new headquarters in the Dallas area, we've rolled out new enterprise behave.
Five years building on the already strong foundation of our eye care and highly values and getting everyone aligned around our strategy and how we want to work together to execute it.
We're looking to become a simpler more focused the nimbler organization.
We've centralized some of our functions that are looking at ways to work more efficiently and to utilize technology for day to day tasks that can be automated freeing up time to focused on strategy work that drives value for the organization and better Leverages our teams.
We're seeing great execution across the enterprise, including cost savings as we track towards our target of 400 million to 500 million in gross pre tax savings by the end of our fiscal 2021.
Our organization has rallied around these efforts and it's showing in the culture and the results I could not be prouder of the Mckesson team.
And with one quarter to go in fiscal 20, I'm confident in our reaffirmed adjusted earnings outlook of $14.60 to $14, an 80 cents per diluted share.
As we look forward we're in the initial stages of planning for our fiscal 2021.
Let me walk through some of the things we're thinking about.
The timing and impact of the exit of our investment in change healthcare exit activities are currently underway.
For customer renewals the V.A. contract goes into effect in August 2020, as a reminder, we've stated that this new contract will not be a material headwind to our fiscal 2021 outlook.
We are continuing to progress against our cost savings target with a portion of those savings falling to the bottom line and a portion being reinvested for growth.
And finally from a capital allocation perspective, we would anticipate Bennett benefits from share repurchases completed in fiscal 2020.
As you think about the market and the macro perspective in the US we're entering an election year and we'll make assumptions related to any potential impact we might expect based on our analysis, including related to the drug pricing trends.
Yes, it will continue to engage with policymakers and industry partners to ensure that any reforms support solutions to improve cost quality and access the policy landscape remains dynamic environment and we remain confident in mckesson's path forward.
As it relates to the UK, we're continuing to monitor the market environment and NHS funding as well as Brexit activities.
We will review, our businesses and expectations, including the impact of external factors and will provide our fiscal 2021 outlook in may when we report fourth quarter and full year fiscal 2020 earnings.
Before I turn the call over to Britt.
I want to take just a moment to think Kathy Mcelligott, who just retired from mckesson in her role as Chief information and technology offers she helped mckesson increase its focus on data and analytics and accelerate our technology modernization Cathy. Thank you for your contributions to Mckesson and on the flip side I'd like to also welcome.
Florence, who is succeeding Kathy as CIO and CTO Nancy has a long track record of success in healthcare IP and we look forward to utilizing our experience as we remain focused on our mission to improve health care in every setting by leveraging technology solutions for our company, our customers and our business partner.
And with that let me turn the call over to Britt to go through the financials.
Thank you, Brian and good morning, everyone.
We are this morning to talk about solid third quarter from a constant.
Ill focus on our third quarter results in full year fiscal 2020 guidance, including changes due to consider as you update your models.
Brian Walk you through high level puts and takes as we speak about our fiscal 21 guidance and will provide detailed assumptions for fiscal 2001, when we report fourth quarter and full year results in may.
With our adjusted operating profit and adjusted earnings per diluted share results in the third quarter, which were ahead of our expectations and represent solid execution.
We continue to see momentum across the business as we execute against our strategic initiatives.
As a result of this momentum based on the confidence in our fourth quarter outlook on January 13, you raised and narrowed our fiscal 2020 adjusted earnings outlook.
Turning to $14 in 60 cents $14, an eight cents per diluted share from the previous range of $14 to $40.60 per diluted share and today, we are reaffirming that adjusted earnings per diluted share guidance.
Updated guidance assumptions can be found in our third quarter earnings slide presentation, which is posted on our investor section of our website.
Before I provide more details on our third quarter adjusted results I want to address one item that impacted our GAAP only results in the quarter.
During the third quarter, we recorded a pre and post tax charge of $282 million for the re measurement to fair value of the net assets.
We already have mckesson's German wholesale business in relation to the expected formation of a new Drummond wholesale joint venture with Walgreens Boots Alliance.
Moving now to the adjusted earnings results for the quarter.
Our third quarter adjusted EPS was $3.81, an increase of 12% compared to the prior year, which was primarily driven by organic growth through us pharmaceutical in specialty solutions segment.
Medical surgical segment and European segment.
To better understand our third quarter results.
Right I remind you of two discrete events in our prior year third quarter, both within our newest suitable in specialty solutions segment.
First the 60 million dollar pretax charge related to the bankruptcy of shop, though and second a pre tax benefit of approximately $17 million related to the reversal of accrued New York State opioid stewardship back charges.
If you normalize for these two items Q3 fiscal 2020 adjusted earnings per diluted share increased 7%.
Moving to the details were consolidated results on slide four.
Consolidated revenues for the third quarter increased 5% versus the prior period, primarily driven by growth in our newest pharmaceutical and specialty solutions segment, driven by branded pharmaceutical price increases in higher retail national on volumes.
We continue to anticipate mid to high single digit percent consolidated revenue growth for the full year.
Third quarter adjusted gross profit increased 4% year over year, principally due to organic growth in our medical surgical newest pharmaceutical and specialty solutions segment.
Third quarter, adjusted operating expenses increased 3% year over year, driven by higher corporate expenses, which include plans technology investments.
Adjusted income from operations with $958 million for the quarter, which was up 4% year over year were 5% on an FX adjusted basis.
As a result of this solid performance in our updated outlook you are guiding full year adjusted income from operations to increase a low single digit percent.
Interest expense was $64 million in the quarter declined 4% compared to prior year and our adjusted tax rate was 17.1% for the quarter, which included discrete tax benefits of approximately $36 million.
For the full year or adjusted tax rate assumptions remain approximately 18% to 19%.
Wrapping up our consolidated results our third quarter diluted weighted average shares were 180 million a decrease of 8% year over year.
During the quarter, we completed approximately $500 million of share repurchases, bringing our year to date total share repurchases to $1.9 billion.
As a result, we now expect diluted weighted average shares of approximately 180 million for the year.
Next I'll review, our segment results, which can be found on slide five eight.
Before I start with my review in segments, including updated full year guidance I want to reiterate that we provide full year guidance does not provide quarterly guidance.
As a reminder, there are a number of items, particularly at our largest segment you respond suitable in specialty solutions that can cause fluctuations on a quarter to quarter basis.
Well this can make comparing year over year results on a quarterly basis difficult.
These items do tend to balance out over the course of a year.
These items include customer volumes customer and product mix ran price increases and the timing of discrete tax items.
We anticipate that there could be additional fluctuations in our fourth quarter results.
Let me now start with us pharmaceutical in specialty solutions.
Revenues were $46.9 billion for the quarter up 6% driven by branded pharmaceutical price increases.
Continued growth by our largest until national customers.
Partially offset by branded to generic conversions.
Third quarter, adjusted operating profit increased 11% to $658 million.
Primarily driven by the execution growth in our differentiated portfolio of specialty businesses.
As I mentioned earlier there were two discrete items included in our prior year third quarter results.
$60 million pre tax charge related to the bankruptcy shopko.
Pre tax benefit approximately $70 million related to the reversal of accrued New York State opioid stewardship charges.
If you adjust for these two prior year item the segment adjusted operating profit was up 3.5% year over year in the quarter.
Also as a reminder, this is the final quarter in which we are lapping the effects of the loss Shopko earnings, which was approximately $8 million per quarter in terms of operating profit.
The segment adjusted operating margin rate was 140 basis points increase of six basis points.
On a year to date bases to segment adjusted operating profit is up 7%.
If you adjust for the prior impact of the $6 million pre tax charge related to the bankruptcy of shopko and the prior year earnings contribution of approximately $24 million from three quarters of Shopko results.
Segment, adjusted operating profit increased 5% year to date.
For the third quarter brand price activity trended in line with our expectations.
Additionally, based on manufacturer price actions taken in January we are maintaining our full year fiscal 2020 assumption brand price increases to be in the mid single digit percent range.
I would remind you that our branded pharmaceutical contracts are primarily fixed fee for service rate in nature and as a result or compensation with branded manufacturers is less impacted by price increases we prepared and several years ago.
To wrap up this segment given the underlying strength in the quarter in the year to date perform we have confidence in segment adjusted operating profit growth well beyond the high end of the previously provided range of 3% to 5% growth for fiscal 2001.
Next European pharmaceutical solutions revenues were $6.9 billion for the quarter, which was flat year over year.
On an FX adjusted basis revenues increased 3% driven primarily by market growth in the pharmaceutical distribution business.
Segment, adjusted operating profit was up 16% to $80 million driven in part by lower operating expenses as result of actions previously taken to rationalize store footprint.
Uhhuh mine back office functions.
The segment adjusted operating margin rate was 116 basis points on a constant currency basis, an increase of 16 points.
Moving now to medical surgical solutions revenues were $2.1 billion for the quarter, which was up 6% driven by organic growth led by the primary care business, including higher pharmacist volume and an early start the influenza season.
Segment adjusted operating profit for the quarter was up 8% to $184 million.
And by organic growth.
The segment adjusted operating margin rate was 809 basis point, an increase of 14 basis.
Year to date segment adjusted operating profit growth is 18% as a result of the organic growth in the segment year to date, we now anticipate that segment adjusted operating profit for fiscal 2020 will increase by low double digit percentage year over year.
We finished our business review with other revenues were $3.2 billion for the quarter, which was up 6% driven primarily by organic growth in the Canadian wholesale business.
Other adjusted operating profit was down 4% to $214 million.
Our driven by higher strategic product investments in our prescription technology solutions business or MRF, yes, partially offset by growth in our Canadian wholesale business.
Closing their segment review would change healthcare adjusted equity income from change healthcare was $51 million for the quarter.
As a reminder, our equity investment ownership and change healthcare was approximately 58.5% in our fiscal third quarter 20 point as compared to 7% in the prior year.
As Brian mentioned earlier registration statements were filed this morning with the SEC disclosing our intention to exit or invested in change healthcare via an exchange offer.
This is the next step in the process to exit our investment in a tax efficient manner I direct you to today's filing for additional information.
Next we tested recorded $170 million and adjusted corporate expenses, which was an increase of 29% year over year, driven primarily by planned technology investment, which included investments in data and analytic capabilities.
For the third quarter, we reported net opioid related adjusted operating expenses of $36 billion and year to date the $108 million.
For fiscal 2020 continued anticipate that opioid related costs were approximately.
$150 million.
But we continue to a solid progress against our cost savings programs, which include a focused on our core operating expenses by leveraging the scale of our enterprise and the continued transformation the back office functions.
We remain on track with our previously announced annual pre tax savings of $400 million to $500 million, which is anticipated to be substantially delivered by the end of fiscal 2021.
As we've discussed a portion of these seems to be reinvested back into the business in line with our growth initiatives, we remain will flow to the bottom line.
As a result of our performance year to date, we now anticipate adjusted corporate expenses to be in the range of $660 million to $700 million.
Now that I've wrapped up our results of the discussed our updated fiscal 2020 outlook.
We feel really good about our steady execution throughout fiscal 2020.
The recent narrowing an increase to our fiscal 2020 adjusted earnings per diluted share to a range of $14.60 to $14. An 80 cents reflects the following.
Solid core performance in our us pharmaceutical and specialty solutions segment, driven by continued strength across our differentiated portfolio specialty businesses.
Organic growth in our medical surgical segment.
Improved second half performance in our European segment as compared to the prior year lower corporate expenses than originally anticipated and a lower share count as result of share repurchase activity year to date.
This solid performance was partially mitigated by continued planned investments in strategic initiatives, including incremental second half investment in our differentiated oncology manufactured services businesses.
Investment in our technology products and investment in technology infrastructure, including data and analytics, we remain confident that we are well positioned to execute in our fourth quarter.
Turning now to cash which can be found on slide 10.
We ended the quarter with the cash balance of $2.1 billion.
In the quarter Mckesson used $121 million in cash flow from operations.
After deducting the $154 million internal capital investment.
Mckesson has negative free cash flow of $275 million.
I would remind you better working capital metrics, and resulting cash flow maybe impacted by timing, including today the week that marks the close of the given for.
It is not uncommon to experienced net cash.
Use of cash during our fiscal third quarter, primarily driven by the building inventory for the holiday season.
And our fiscal fourth quarter, we typically generate more than two thirds of our annual operating cash flow.
During the quarter, we repurchased approximately $500 million of common stock now repurchased approximately $1.9 billion in common stock for the first nine months in fiscal year.
The repurchase of our common stock underpins our belief that mckesson shares are undervalued combined with the confidence in our execution in our outlook. We view this as a prudent use of capital.
For the first nine months in fiscal year, Mckesson paid $97 million for acquisition in $222 million in dividends.
We now expect internal capital investments being the range of 500 $600 billion. We continued to anticipate free cash flow in the range of $2.8 billion to $3 billion.
In closing we are pleased with a solid operational results of our fiscal third quarter and our performance year to date, we will build on our third quarter performed and we remain confident in our business as we focus on a strong finish to the year, which is reflected in our ex expected adjusted earnings per diluted share range before $2 and 60.
Sense to $14, an 80 cents for fiscal 2020.
As I looked at our performance over the past several quarters and our outlook for the remainder of fiscal pointing it clearly demonstrates focus and execution against our strategy as well as continued steady improvement in our financial results.
With that I'll turn the call over to the operator for your questions in the interest assignment asked limit yourself to just one question in a brief follow to while others and opportunity to participate operator.
Thank you if you'd like to six of with question. Please press star one or your Touchtone telephony.
Youre joining us today using a speakerphone. Please make sure the mute function is turned off to allow your signal to reach our equipment.
With that is star wars, if you'd like to asked the question.
And our first question will come from Charles Rhyee.
With Cowen Your line is open.
Yes, thanks for taking the question.
Maybe.
As we start with does just dunkel dealers will quickly.
One of the remaining points that are being negotiated you kind of said that.
Innovations are going well.
Since we progressing and some of the points are being resolved maybe you can give a sense of what are some of the remaining kind of nicole sticking points, perhaps and.
If I understand correctly the framework as being discussed a mall.
Led by four state Attorney generals.
During these kind of discussion RV other constituents, let's say the other states or even the bigger municipalities that are in this last seen or part of this.
Multi district litigation are they able to sort of see the progress as well and understand what is being kind of negotiated so that.
When we get to maybe any final framework the process with them to review and and to accept is it's kind of in tandem or is that.
Just kind of being done in a close to kind of a close session and then opened up later.
Thank you for the question Charles and I think the way you frame. The question naming the number of parties. Our counterparties are folks involved in this discussion.
Helped to frame why it's moving at the cadence that it's moving.
We do continue to be and constructive dialogue with the agee's the agencies have broadened their group and they continue to talk amongst themselves.
The good news and from my perspective is the basic framework that we've laid out is still the framework, that's being discussed and the details for the many component parts of that are progressing well.
Well. It is there is still a long ways to go with regard to ultimately getting as broad of AG support as we can and then agee's themselves go into their subdivisions and extending that broad support. So there's a lot of work that is ongoing discussions.
Our really continuous.
Too early for me to try to.
For Jack the timeline or or where the finish line might be.
But I am pleased that the framework that we've been negotiating continues to be the framework. The details are progressing and I. Thank you.
We get through the coming months, we'll begin to Thats you know.
What the various AG and sub municipality to physicians are.
Great and what they have a follow up just on the on the core business. Obviously you increased your outlook on the core pharmaceutical segment here.
It seems a lot of things are moving right direction is there anything you'd point to specifically that is kind of driving the improved outlook here. Thank you.
Maybe I'll start in Britain might want to offer a few comments I mean, I think if you think about the general kind of industry fundamentals of the brand price inflation has been in line with where we thought it would be the generic market is continuing to behave.
In a way that we had forecast and by that I mean, our sourcing our skilled forcing entity continues to produce.
In line with our anticipation we are we are going in the market with a very disciplined approach.
You know reflective of the transition our industry has been in as we think that the competitive.
Well side in the generic market remained stable and made its competitive in those pressures, but but stable I think you know where we're seeing the benefits of a lot of the work and planning that we've we've been.
The last several quarters, we've been we've been executing and implementing and.
So combining that I think with the market fundamentals that are really good good positions in specialty is the is driving the results that you see maybe on wages that I think Brian you hit on it here the focus and our execution against our differentiated assets, particularly specialty you talked a lot about that I think is really driving a lot of this and then I would just.
Reiterate that our cost programs are really driving not only in our corporate line, but also across our segments is for that focus is not only on our core set of differentiated assets, but the just discipline and focus around cost for us not or corporate segments, but our business segment.
Thank you.
Thank you Charles.
And next will be Brian.
Thanks, Louis with Jefferies.
Hi, good morning, and congrats and good quarter. So I guess the question for me as I think Brian.
It's about the execution and how you guys seem really positive about it. So how do you think about the runway remaining in specialty as we head into fiscal 21 without going into guidance, specifically and just how you're looking at the volume outlook from the key accounts because it sounds like business volume driver that drives upside as well. Thanks.
Yes, I mean, we're really pleased with our specialty businesses, we talked a few weeks ago about you know the quote unquote core the distribution of these products to hospitals and retail pharmacies as being our biggest segment and clearly we benefit there from the growth.
These products have just in general and and the pipeline. If you look at the pipeline of innovative products coming state. They tend to look that way and as you know and we've got established scale channels across both of these segments and then if you think about the community setting.
Oncology, we have a clear leading stay clear leader in any of the other multi specialty setting they're going to benefit from that same pipeline and I also think if you step up from a more macro view.
If you think about the challenges that the cost of health care represent in this country, we have a fundamental belief that to get at access cost and quality care needs to continue this shift in kids that community based setting.
So thats, where our community provider business I think from a macro standpoint is is well positioned.
And then our U.S. oncology business, we have particular depth and strength in oncology and if you look at the pipeline. There that continues to be strong. So I would say all those things or what are what are giving us our confidence it but at the bottom the end of the day, it's really the execution of the business that led to capitalize on those those macro trends in opportunity.
Yes.
I guess my follow up Britt.
And the cost.
The cost cuts and the opportunities that you've found there. So do you think theres a lot of runway left as we think about cost opportunities both in the corporate side and also the operation side.
Yeah, our cost program brine, what we talked about we would capture these cost savings.
The end of fiscal 21, so we're still making progress not only and leveraging the scale of our enterprise across all of our business units, but some of the things that we've talked about previously in terms of back office functions transformation. We are still opportunities there as the size of our enterprise allows us to continue to work across can collaborate.
And drive additional cost synergies so.
I would say that that program as we talked about is.
We expected to be substantially complete by the end of fiscal 21. However.
As the business grows and our focus and execution in specialty continues there's still opportunities for us to leverage our scale and and transform our back office functions.
I mean efficient.
The core part of the way you have to run a business like this that the scale. So it is a program that we implemented a few years ago, but most importantly to me at the mindset.
Part of the way, we think about how we manage and run the business.
Got it thank you.
And next will be Robert Jones with Goldman Sachs.
Great. Thanks for the questions I guess just to go back to the segment guidance and specifically the U.S. pharma segment. It seems like if I look at what's implied with for Q.
The high end it seems like you're kind of calling for year over year.
Flat EBIT there in that segment I know, there's a number of moving pieces, Brett, but maybe could you just help us think about what the major swing factors aren't because you guys highlighted the business there in particular specialty seems to be performing well and there's some momentum, but it seems like for Q, you're implying at least that things could potentially slow a bit so just want to make.
Sure we had the moving pieces there correctly.
Yeah sure I saw this you're right about.
The implied what I would just going back to an endpoint outages and I've talked about the business the size of ours with customers that are growing than you have.
Mix of this change in terms of customer and product mix, we are going to see fluctuations from quarter to quarter. We've seen that historically, we're seeing that a little bit more this year some of our larger retail national customers are drilling a little bit faster.
I think what we're pleased with those Brian talked about Theres, some stability in the pricing environment, particularly with branded priced Brent pricing.
Certainly continue to good progress against generics, but what you should expect as I as I talked about beginning is that we're going to see some items that are going to fluctuate from quarter to quarter, we don't manage our business that way, we manage our business for the long haul we look at our business on an annual basis and these items do tend to balance out.
Over the course of the year, we're very pleased that we started the year with would be able to guide back to growth in this segment and we're very pleased that given the momentum and the execution that Brian talked about particularly in our specialty business. We did raise that guidance today to the upper end. So we're making good progress, but I think you should expect to consider.
We just see some fluctuation in our quarterly results.
No. That's fair and then I guess, Brian you opened the door to a little bit of preliminary 2021 thoughts and so I know, we'll get more detail in may, but if I heard you correctly. It sounds like core drivers playing out in line. This year with your expectations. You guys have highlighted the VA is not a material headwind sounds like cost savings will continue to be a better.
Fit from capital allocation, all seem pretty neutral to Tailwinds is there any is there any major headwinds you would have us.
Start to contemplate as we as we start to think about framing 2021 more specifically.
Well as well as we as we come to May will we will try to be very thoughtful and and.
Share with you our view of the of the thinking.
I think about what could materializes headwinds and the policy Arena has been dynamic will probably for most of my career, but certainly for for my tenure as CEO and yet.
While the cloud always seem to be gathering nothing has nothing has really materialize I would suspect we'll hear some commentary Tonight.
I think as we come into the face of of.
Election year, we'll be evaluating not only the policy for low proposals, but the politics, that's around that that sort of set the framework for the likelihood of any of that really getting done but to me Thats. Just said, that's a normal part of being in health care to normal part of being in this business I think though our European.
Business is coming off of a good quarter, but our experience there.
Typically in the NHS as Dan.
Been challenges around being having good line of sight into how the reimbursement mechanisms really pay play out and so while we're encouraged that we have a five year macro.
Agreement with NHS for the pharmacy community, there I think underneath the nuances of the timing and the different mechanisms that make up that framework will have to continue to monitor and evaluate.
And those are the two things first optimized.
When you want to add but I think you capture them correctly.
And next will be Lisa Gill with JP Morgan.
Good morning.
I just wanted to follow up that last point, if you talk about the policy arena as clearly specialty has been a growth area you talked a whole call about specialty what are your thoughts around ipi and what it means your specialty business and then secondly, as we think about the European markets.
What did you learn from the European markets, where it is fixed cost environment for superior than us.
Great. Thanks, Thanks, Lisa all I'll take the Ipi.
Business first question first so.
Hi is.
I guess theres been a lot of different constructs around getting took part b, there's been no discussions of caps or or limiting SP rates future in future caps on allowable inflation.
I would be a proposal to index, what what the us pays based on a basket of internationally referenced.
Prices up for various products and I think has even been some debater discussion around and method or most favored nation type clauses. So the proposals I've really been very wide in in the spectrum and.
So without commenting on any of them, specifically I would say first and foremost we think give me reform in part B should be constructed and we work with industry. The government in our partners to advocate for this in a way that pushes care into the community. It's clearly the low cost high access.
Setting and we believe it has.
Extremely high quality as well so it kind of hit over three macro principles and so anything any reform that with a half were to happen in our view should move here into the community anything that would move the opposite way would be counterproductive really for.
The U.S. spin on healthcare in general.
Relative to Ipi, if something were to occur the way I think about this is at most businesses and our and our core pharma distribution in our community provider setting. This is an implication to our customer. So we will be a secondary effect really from a wholesaler perspective, one place we would have some.
Exposure would be in the U.S. oncology network, where I'd remind you know through our partnership we share in the practice economics.
So we continue to watch this very closely I'm not sure. There's been a proposal that had more commentary and more aligned to commentary at the kind of come up against it because of the impact potentially to patients and patient access and cost of care.
But I suppose we'll see what we hear Tonight.
Great and then just my follow up I, just Greg you talked about the chain exit.
You know as being one of the key components to 2021, and you said, it's consistent with what you've said before can you just remind us what he said before on the timeline of the exit.
Sure Lisa So what we've said previously dating back to our Q2 earnings call from that point in time, we would expect to exit our transaction in six to 12 months, although that could be before the end of our fiscal 2020, So I would reiterate that language today.
And next will be Ricky goals water with.
Morgan Stanley Your line is open.
Hi, good morning.
Bob.
Question on the cost cutting initiatives. Thank you against your corporate expense guidance by about $45 million.
Well part of his flow through cost savings bottom line with some timing of investments.
By our calculations about 18, Sensity PS and when should we think about the ongoing benefits of cost cutting can we.
Just kind of cycle run rate.
Thats 25.
Million did you say in the fourth quarter.
Yes, let me answer that Ricky it's certainly we are pleased with the progress that we're making a goods or cost initiatives and I'd reiterate that we expect to generate $400 million to $500 million of savings by the end of 21. So the cost programs are ongoing.
As I called out at the beginning of the year. There were some additional investments that we were going to be making particularly in the areas of information security management and data and analytics, we are continuing to make those investments, but we're seeing good efficiency across the organization. So I don't think you can necessarily take our performance this quarter engine.
Fronted out we're continuing to make investments in the business, but we're also continuing long getting efficiencies from scale in some of the back office functions. So we wanted to do today was to update our guidance based on some of the.
Benefits that we've seen in.
Performance and execution, but we're continuing to make investments along as we generate those savings.
Okay, and then one follow up on change I mean honestly I understand that the the exit taxation can you just.
Remind us directionally can affect the mechanics should we expect.
Change what should we expect contained an impact.
The neutral TPS increases are dilutive and same how should we think about just directionally to impact to cash.
Yes. So let me just reminds you that today is a filing that has another step along our our exit we have nothing is included in our F. why 20 gains related to change. So there's no additional information and I can provide you on that and in terms of when we exit.
Spending on regardless of how we exit there'll be no cash impact.
And next will be Elizabeth Anderson with Evercore.
Hi, Good morning, guys, I will say broader longtime picture on the specialty side.
How do we think about the like on the ramp up into the additional specialty services, you're providing the tech.
And can decide that maybe also in acquired business into that I mentioned, a key moments that cause there providers or other customers.
Take up that services and something gradual initiative looking for like a longer term vision of that.
Yeah, It's a it's a great question and it's obviously.
An area that we have some excitement about and we have spent.
Really good part of the last 10 or 15 years building out some through internal development and some through acquisition a set of capabilities that are really oriented around helping manufactures identify which patients are appropriate and should be benefiting from that therapy.
Finding those basins and getting them started on that therapy and then.
Ensuring that they stay on that therapy through the full clinically appropriate for so that they can get the best possible outcome.
So the first good news in that is it the patient gets the best outcome. We think it's good for the patient it's good for the healthcare system.
Honestly for our our Biopharma partners that can result in more patients benefiting from their products that has obvious benefit to them and Thats a service. Therefore, they are quite interested in paying up for us. So we think about building off of really our 20 year experience in this marketplace building off.
Of the sets of assets that we've acquired for the commercialization of these products, there's opportunities to both refine and deepen and develop the tools we offer today.
If you a few weeks ago I shared as an example of a program like that we're calling access for more patients, which fundamentally is getting at the same issue, but it's doing it in a more automated efficient way that lets us get more find more patients and get them on those therapies faster.
As as we look at that as a core we think there are opportunities to extend.
Downstream into get earlier stage services to support par pharmaceuticals, and as we think about some of our provider segment theres opportunity to do some integration of providers downstream. So this is an area that.
We think as you look at the pipeline as you look at the products as you look at what's happening in terms of note in the clinical trials based in the fragmentation of populations that they're going to continues to be a good opportunity here for mckesson.
Perfect Thats very helpful. Thank you.
And next will be Eric Coldwell with Baird.
Thanks. Good morning, So maybe maybe just focus on the Medsurg segment for a second you've mentioned the early flu season, consistent with peers I'm curious if you could carve out for US what you think the incremental benefit of early flu was or heavy flu and then.
I know, it's probably a bit early and may be.
Holding situation, but corona virus.
Any issues with sourcing.
Out of.
The Asia Pac region or.
Pricing changes demand changes in the U.S. as maybe some facilities pre stock from certain.
Gloves gallons masks et cetera, just just any questions on or on answers on current of Iris impact so far would be interesting. Thanks. So much.
Good morning, Erik This is Brent I'll take the first one we went brine comment on the second.
As I talked about in my remarks, we're really pleased with the performance of the medical business. We had good organic growth really across our business, but primarily in our primary care business and also called out higher pharmaceutical volumes.
One of the drivers.
We did see some modest impact from early flu season, I would remind you know that typically the flu season has a larger impact on our fourth quarter than our third quarter. We did plan the year for a normal flu season. So we buy a little earlier start than we had anticipated, but then I would just remind you that.
The strong core organic growth across our primary care business, which was inclusive of higher pharmaceutical volumes was really on.
The driver for the performance.
Uptake I'll take the CRO device, maybe before that we've been it around this business for a long time, and we chart every year with the flu season influenza season looks like in the US and every season as it is its own as its own cycle or rhythm. If you will end so.
I think we it's fair to say we have seen an early start ultimately how that plays out will depend on the duration of the severity and it's probably hard hard to predict that right now.
Relative to Corona virus.
I guess, let me start by first saying you know.
Our.
Yes, and sympathies go out to those particularly in China, but really Asia.
That are obviously dealing with this in a very real time real time way.
We have mckesson ill have really been working across industry partners peers trade associations government agencies for the better part of three or four weeks. So we try to jump on these things early.
And get ahead of them and so we're we're monitoring this very very closely I would remind everybody that we don't manufacturer. These products, we procure them, we sell them and we distributed them.
And we do have a domestic supplier base, although the majority of the products.
The masks in the disinfectants and downs are sourced from Asia or China.
And I guess, fortunately or unfortunately, depending on your perspective, we've had some experience with bars in H. one in one and so what we're doing is implementing the protocols the monitoring capabilities that we've built up through these prior experiences.
So and working in close close coordination with government agencies and industry partners to make sure. We can we can keep could continuity of supply now whether what that ultimately looks like depends really on how does the virus continue to proliferate.
They contain in a region. So those are things that we just have to watch.
But we wake up everyday thinking about the markets that we serve and now we make sure we have product available for our customers that operate in those markets.
And next will be Michael Cherny with Spi Securities.
Hi, Thanks, so much we're taking the question I guess.
Obvious mask the one thing that did Sandoz you highlighted the.
The success of you on the transaction side medical really rocking it pretty low so far from actors perspective at least in terms of your historical spend year to date as you're heading into fiscal 21 this year.
Getting rid of the change position on this on the balance sheet in the.
Ownership stake as you think Ford of the portfolio are there any macro trends that you think would drive some areas for opportunities for you to go.
And driving organic growth or anything from a broader picture perspective, where your customers are really asking you to pursue an area that you may not be in or even as strong as you would like to be right now.
Great Great question.
No I think we probably if you think you know look back over the past few few years, we came through a cycle pretty heavy M&A as we really bolstered some of the capabilities in assets that we thoughts around at our specialty biopharma manufacturer value prop and and are on call.
LNG business or ecosystem. However, you want to think about that.
And as as we've done the work to integrate those and that's a lot of work to integrate these things and to integrate them them properly in parallel we've really been refining our strategies and.
Pardon me.
You heard me say this before all good M&A follows a good strategy and so we've put this strategy together we've identified the areas that we think we have differentiated capabilities in markets that have good overall growth prospects. So what I think about capital deployment. So we've obviously got to deploy.
Capital to to be invested in efficiency and compliant and safe secure always on environment.
Then and then the second area, we'd look for the growth, but those growth those growth investments, meaning M&A investments has to be closely aligned to the strategy and I think that thats. What you should expect so we like growth investments, we like both capital either extend our capabilities or add scale to the places that we have capabilities, although we all.
It is half the balance though.
I would say strategy can't be based on M&A to that takes a buyer and seller to take or price that you can agree on that so as we've looked at the market lift those trade offs, obviously, the past 12 month or so we've been favoring to deploy our capital buyback our shares because as they so those are great investment, but we continue to be very active and looking for areas. We can.
We can organically helps support the growth.
And next will be Stephen Baxter with Wolfe research.
Hi, Thanks for the question. So I wanted to ask about the generics business you guys have been very clear. The gross profit is growing here and that appears to be a pretty different result than the rest of the industry. So from a macro point of view it looks to us like the broader market is relatively flat since opening a better understand what's driving your growth year and bigger picture things.
Growing generic revenue it as a backdrop of stable margins stable revenue was improving margins really any color you can add on how you're achieving this result, so we can better assess sustainability going forward would be appreciated. Thank you.
Good morning, I'll start and certainly Brian can add on your as we've talked about previously we're really pleased with a couple dimensions that lead to have been around or generics business first of all we have a scaled and efficient sourcing operation, we think we stores as well as anybody who continue to to file.
And opportunities from the stores in perspective, we continue to be disciplined in a stable not competitive environment. We think that that is lead those dynamics are leading to our ability to generate gross rent gross profit growth.
We are seeing some some growth in units and when you combine that with.
Scaled is stable sourcing operation and disciplined approach in a competitive but stable market. We think that those are dynamics that are really helping us.
Be very successful in generics area.
Operator, we have time for one more question.
Certainly that question will come from Eric furniture with Nfone Research. Your line is open.
Thank you quick one on Europe.
Loud and clear on expense reduction and a little benefit from the UK, helping any uptick this quarter and op profit.
Is it correct that the German business has not been moved to discontinued ops and is that still flowing through and at some point would we see that a benefit or maybe a loss Mike.
Even moved from that segment when the JV.
Structure or improved.
Good morning, Eric.
Truly have not moved to discontinued operations. It doesnt qualify for discontinued operations I did talk about a GAAP only charge that we took in the quarter.
And we have the assets as held for sale on our balance sheet.
And can you state anything on whether that is in a loss position.
I would just go back to my comments in terms of the loss that we recorded.
From a capital only perspective in the quarter of $282 million.
Okay.
Well I think that runs at a time I want to thank everyone for free are great questions and and your continued interest in Mckesson I want to thank Jack Jack for facilitating this call to conclude Mckesson continue to execute well in the third quarter and we remain confident in our fiscal 2020 outlook.
Streamlined proud of how our employees are embracing the team Mckesson culture, and I want to thank them for everything they do day in day out.
Not only to deliver these results, but most importantly to improve care in every setting we serve thanks again for your interest in Mckesson, We will release fourth quarter earnings result in early May look forward to talking to you then goodbye.
Thank you for joining today's conference call you may now disconnect and have a great day.