Q3 2021 Mckesson Corp Earnings Call
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Good morning, and welcome everyone to Mckesson and third quarter fiscal 2021 earnings call today, I'm joined by Brian Tyler, Our Chief Executive Officer, and Brent that alone.
Our Chief Financial Officer, Brian.
Brian will lead off followed by Britt.
Our chief.
And then moving to a question and answer session. Today's discussion will include forward looking statements such as forecast of about the Katherine the operations and future results.
Please refer to the cautionary statements in today's press release, and our slide presentation.
And the risk factors section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those and our forward looking statements.
During this call we will discuss non-GAAP financial measures additional information about our non-GAAP financial measures, including a reconciliation of those measures. The GAAP results is included in today's press release and presentation slides, which are available on our website at investor Mckesson and Dot com.
That let me turn it over to Brian.
Thank you Holly and good morning, everybody I appreciate you joining us on our call today.
Sure I get to our third quarter results I'd like to update you on the status of discussions related to our framework proposed by a group of attorneys general for a broad resolution of the opioid related claims.
And the third quarter, we made an accrual of approximately $8 $1 billion, reflecting the amount we would expect to pay over a period of 18 years for opioid related claims of governmental entity with more than 90% intended to remediate the opioid crisis.
We continue to be and ongoing advanced discussions with the state attorneys general and counsel for plaintiffs and based on the substantial progress we have made toward the settlement. We determined it was appropriate to the true for this liability.
Although we're prepared to defend ourselves vigorously we remain hopeful that of broad resolution can be achieved which would accelerate relief efforts for the people and communities impacted by the public health crisis.
Now, let's get to the results.
We're pleased to report third quarter total company revenue of $62 6 billion and and adjusted earnings per diluted share of $4 60 day.
Which is ahead of the prior year and the revised expectations, we laid out in November the <unk>.
And third quarter was yet another example of the Oct and unpredictable and dynamic nature of the recovery from the effects of the pandemic.
While heightened demand persisted for products like Covid, 19 tests, and PPE and medical visits and prescription volume trends did show some signs of softness and the quarter.
Slight those macro trends, we're pleased to have grown adjusted operating profit and across each of our segments and our third quarter results reflect the important role of Mckesson plays and the response to the COVID-19 pandemic in the us and abroad.
Fundamentals remained strong and we continue to see success across the differentiated assets and our broad portfolio today.
Today, we are raising and narrowing our fiscal 2021 adjusted earnings per diluted share guidance range to $16 95 to $17 and 25 per diluted share.
This is up from our previous range of $16 to $16 50 per diluted share.
And this update reflects our solid performance in the quarter and improved outlook across the business.
Including the anticipated contribution from our work distributed distributed and COVID-19 vaccine and assembling and distributing ancillary supply kit the <unk>.
Turning to the business I do want to expand on the work being done across Mckesson into the core of the COVID-19 vaccination efforts in the us.
In August of last year, the CDC selected mckesson to ramp up and distribute future COVID-19 vaccines and the U S. Expanding our 14 year partnership the CDC exercise of the existing option within our vaccines for children and contract, making mckesson and the centralized distributor of COVID-19, vaccines and ancillary supplies needed to administer.
Your vaccine similar to the role we played and the H, one and one pandemic over 10 years ago.
Our team immediately got to work spanning.
Standing up the infrastructure needed to support an initiative of the scale. We quickly established new fit for purpose distribution centers separate from our normal business operation. So that when vaccines became available for distribution and Mckesson would be ready to execute our part.
We've added four new distribution centers that are highly specialized and capable of frozen and refrigerated cold chain COVID-19 vaccine distribution and given our work also includes the assembly and storage of ancillary supplies. Several more Dcs were brought online to support this additional work in total we have added over three 3 million square feet.
Of dedicated space to support this initiative.
A little over a month ago on December 18th Maduro has COVID-19 vaccine and became the second COVID-19 vaccine granted emergency use authorization by the FDA and given this vaccine is within the scope of our contract with the CDC Mckesson and began distributing your back being within 48 hours of its authorization.
Through January and Mckesson and successfully distributed over 25 million doses of the COVID-19 vaccine. Despite the around the country from a distribution perspective, we remain on target to meet the US government plans to distribute hundreds of millions of refrigerated and frozen vaccine.
We're currently distributing vaccines from only two of the for the built for this program.
I would like to remind you that and this operation Mckesson operating of the third party logistics provider on behalf of the US government, which is similar to our role during each one and won the.
The us government and administer this program allocating vaccine per state pharmacy chains federal agencies et cetera, and takes orders for the participating providers.
Ultimately the US government makes all allocation decisions and decide what product is distributed to website and and what quantities. The orders of submitted to Mckesson and when the orders are received we pick pack and ship orders typically within one business day of receiving the order.
And are using the depth and breadth of our experienced and manage the safe distribution of hundreds of millions of doses of vaccines to the entire country. We believe this distribution approach is the safest and fastest way to get COVID-19 vaccines into the arms of Americans across our country.
This is a complex distribution program with several partners collaborating from India, and Mckesson takes extensive measures to maintain the safety and efficacy of the vaccine and supply chain. Our goal is that every shipment be received at the administration's site in a timely manner and within the specified guidelines established by the manufacturer.
As I've discussed our work is the centralized distributor is now underway. So earnings from the COVID-19 vaccine distribution program are factored into our improved outlook for fiscal 2021.
The Captain has also been hard at work preparing and distributing the ancillary kits needed to administer all of the COVID-19 vaccine, including for the Pfizer Ultra frozen vaccine, even though pfizer's vaccine itself is not distributed by Mckesson.
Each week, we are producing enough kits to support and a 15 million doses and to date, we have assembled enough kits to support over 250 million doses.
It's a great privilege to have been selected to serve the US government for these roles and we've been engaged with the new administration, the transition team and stand ready to fulfill our commitment and the ongoing battle against COVID-19.
Now, let's get to the business I'll summarize the third quarter, and then turn it over to Britt to provide more details let me start with U S pharmaceutical.
Prescription volume trends and the third quarter were again reflective of the non linear trajectory of the recovery after seeing stability and the market trends and the second quarter, we saw some volume declines and our third quarter as it progressed driven in part by of late cold and flu season versus the prior year.
Despite some softness and volume trends within the quarter, we continue to see stability and brand and generic pricing during the third quarter and into January branded price inflation has tracked in line with our original expectations.
For generics, we continue to be disciplined and our approach to pricing and the market on the buy side through the scale and strength of our sourcing operation with Claris, one we've leveraged our relationships with a diverse set of manufacturers to remain stable levels of supply of low cost for our customers throughout the pandemic strong pricing discipline and effective sourcing continue.
And to allow us to earn spread and the business.
While the total prescription volume trends fluctuated in the quarter specialty volume and particularly oncology have been more resilient throughout the pandemic, our provider solutions and U S. Oncology businesses have performed well year to date and our key areas of investment as we look to further differentiate our capabilities and oncology in.
In the quarter the us oncology network continued to expand its reach into the local communities by welcoming two new practices further strengthening the availability of advanced cancer care across the communities. We serve US oncology also reached a major milestone in its journey to provide high quality value based care by enrolling its 100.
Thousands of patient in the <unk>.
For Medicare and Medicaid innovation oncology care model.
Lastly, our health Mart franchises are expanding the role they play in the fight against the pandemic Health Mart pharmacies have performed more than 400, and COVID-19 test of collections through a partnership with E true north and the HHS.
Many of our health Mart franchise pharmacies are also preparing to serve as COVID-19 vaccine administration sites and local community when the BDC moves into the next phase of the rollout.
Let's transition to our international segment, our businesses in Europe, and Canada are continuing to play their part and the pandemic response and as essential businesses, our pharmacies remain open.
Through our owned and banner stores abroad, and we're working with local governments to accelerate COVID-19 testing effort, our digital offerings like <unk>, and Canada, and Echo by Lloyds Pharmacy, and continue to grow quickly and expand our service offerings to meet the needs of patients also as a reminder, on November one we completed the.
The creation of the joint venture with Walgreens Boots Alliance, combining our German wholesale businesses. While it is still early days. We're excited about these teams coming together and the progress they're making.
Let's turn to medical.
When we gave initial guidance for fiscal 2021, our alternate site customers were facing significant headwinds with providers and surgery centers being sharp declines in office visits due to shelter and place guidelines. These.
And these dynamics were clearly reflected in our first quarter results, which were significantly down versus prior year. The.
The pandemic continues to affect the needs of our customers and this market and how they operate today and look very different than it did nine months ago as our customers reopened and address COVID-19, the core business has recovered and returned to growth.
And then one of the largest with one of the largest and most tenured sales forces and the industry are primary and extended care teams work hard everyday to ensure that our customers have the products and services they need to provide patient care, whether it's COVID-19 tests PPE or pharmaceutical.
The investments we've made into our lab business over the last few years have given us additional expertise and reach around lab testing solutions. So us.
The Covid testing emerged we have been well positioned to expand our existing partnerships and quickly drive these products into the community provider channels.
We strategically built this business to succeed at moments like debt we.
We are the leader and distribution to the alternate alternate site setting and offer a broad set of products and solutions to over 250000 customers abroad.
The broad capabilities of this business position us well to quickly take advantage of new opportunities as they emerge and as customer demand evolve.
Continue to be impressed at how our medical business has responded to the rapid change in fiscal 2021.
Turning now to prescription technology solutions, we saw solid growth and the quarter underpinned by the expansion of our brand support programs for our Biopharma partners, we invest in innovation and this segment and our results reflect positive contributions from our prior authorization solutions and newer.
Products like access for more patients also known as the Amp.
And service offering us continuing to be recognized and the market both by our biopharma customers and the industry and recently signed on a full product portfolio for a top pharmaceutical company and was recognized as one of 2020, most innovative product and the health care and medical category. According to best in the <unk>.
These awards and honor voted on by top reporters and editors and North America.
Taking a step back to reflect.
It was over two years ago that we redefined our strategy identifying the areas of oncology and Biopharma services as key differentiators and areas of investment.
We also set out to make the business simpler and more efficient kicking off a comprehensive review of the company's operating and cost structure. Since then we have been methodical and our actions as we work to build the connected ecosystem of assets across the enterprise with the ultimate goal of creating innovative solutions that improve patient.
Care delivery and.
And drive incremental profit growth for the company.
Through internal investments and M&A, we built the powerful and scaled specialty business with deep oncology expertise. The day, we are the number one distributor and community oncology and the US oncology network is the nation's largest network of its kind of with 1400 independent physicians.
Most recently, we launched on taught us and internally developed technology and insights business dedicated to transforming the fight against cancer on Todd of builds off our existing capabilities and combine the real world data and research with the leading suite of technologies to help deliver innovative solutions that improve patient outcomes.
Shortly after the launch of untapped Amgen of Mckesson and announced the strategic agreement to advanced cancer care and improve outcomes by accelerating the development and access the life changing medicine.
Last quarter I talked about the evolution of our prescription technology solutions asset and to the exciting business. It is today. This business is the power of Biopharma commercial services business that enabled over $5 billion and annual prescription savings for patients through innovation and next generation patient.
The access and adherence solutions with.
And the strategic investments and discussed has been powered in part by the successful efforts to streamline the business. We've centralized many back office functions and North America, and Europe and have become smarter as an organization about how we spend and invest.
We also continue to evaluate the portfolio and position the business for success last year, we successfully exited our position and change healthcare and most recently, we created the joint venture and Germany with Wpa further we re segmented the business to better align us around our strategies and increased focus and speed throughout the organization.
But underpinning everything we do is our continued focus on growing the core business, where fundamentals continue to be stable and execution has improved.
<unk> and the core enabled strong cash flow generation, which we can use to reinvest back into the business and returned to our shareholders.
While the pandemic has brought an unprecedented level of uncertainty it has not caused our strategic priorities and we will continue to invest to differentiate and innovate our service offerings to our customers. This has served us well throughout the pandemic as we responded to near term demands from our customers, but it also positions the business.
And to succeed in the long term as we look forward to our fiscal 2022 I'd like to walk through some of the things we're thinking about <unk>.
First and foremost the COVID-19 pandemic continues to present many unknowns.
Trajectory of the virus can change quickly accelerating and some communities and decelerating and others. The recovery from the pandemic is likely to continue to be non linear into fiscal 2022, but mckesson will continue to be part of the recovery, serving our customers and partners every step of the way.
Secondly, our work distributed and COVID-19, vaccines and ancillary supplies will ultimately be influenced by the number of vaccines that come to market. The percentage of the population that chooses to get vaccinated the effectiveness of each vaccine and the duration of the centralized distribution model. The same dynamics are likely to have an impact.
<unk> on the levels of demand, we see for products like Covid tests, and PPE and fiscal 2022.
And as I mentioned earlier, we have the new administration in Washington, and our teams have been working closely with the new administrations transition team and and now emerging team to ensure that the proposed reforms support solutions to improve cost quality and access.
I'll reiterate that we continue to see stability and the core and strength and the underlying fundamentals of the business heading into fiscal 2022, we will continue to make strategic investments and the areas of oncology and Biopharma services.
So in summary through.
Through nine months each quarter of the current fiscal year has proven to be different well into the next and the results were sharing today reflect mckesson <unk> ability to rise of the challenge and meet the evolving demands of our customers and partners.
Pandemic has not put our strategy on hold but at the challenged us to continue to think differently and react more quickly against the dynamic macroeconomic backdrop before I close I also want to touch on our commitment to our local and global communities. We're dedicated to doing our part to eliminate bias and promote the quality and we are.
<unk> had been recently recognized as one of the best places to work for LGBTQ equality by the human rights campaign for the eighth consecutive year.
And we recently recruited Dr. Kelvin again to the newly created role of Chief impact Officer reporting to me, where he will be responsible for advancing our strategy and execution related to diversity equity and inclusion ESG and Mckesson overall social impact we are excited to have Kelvin on the team.
And the and it all comes back to our people the passion and the focus of our 80000 plus employees are what make the mckesson special and without them. The work we're doing to combat the COVID-19 Pan net pandemic would not be possible by greatest banks to them all and thank you for your time and with that I'll turn it over to Britt.
Thank you, Brian and good morning, everyone.
I'm pleased to speak to you about another solid quarter for Mckesson.
Against the dynamic and challenging macroeconomic backdrop, we continued to respond to the evolving demand brought on by the pandemic leveraging the breadth and scale of our distribution and services capabilities.
And the underlying core business continues to be fundamentally sound and we built solid revenue operating profit and cash flow momentum over the past several quarters, which continued in the December quarter, our solid broad based third quarter results reflect this momentum.
Our demonstrated delivery of consistent and stable organic growth combined with the execution of the vaccine and kidney programs of the U S government are enabling us to further increase fiscal year 2021 guidance.
As we mentioned during our first and second quarter earnings calls, we expected the non linear recovery from the effects of the pandemic to persist for the remainder of our fiscal year and likely into our fiscal 2022.
We saw this uneven recovery play out in Q3, COVID-19 cases, and hospitalizations reached their highest levels. This led us was soft and the recovery firms during the quarter prescription.
Volumes were softer than the prior quarter and primary care patient visits and elective procedures continue to remain below pre COVID-19 levels.
Despite these challenges and Q3 all segments delivered year over year, adjusted operating profit growth and year to day adjusted earnings per diluted share grew 14% compared to the prior year.
And the third quarter, we recognized the benefit from our work with the U S government for assembling and distributing the ancillary supply kits alluded to administer COVID-19 vaccine and while not material to the quarter. We also began distributing the moderne of COVID-19 vaccine and late December.
Volume for Covid related testing and the personal protective equipment or PPE.
And to remain high and our medical segment, while the impacts of social distancing measures of.
The resulted in the soft cold and flu season accordingly.
According to a <unk> U S adult who diagnoses were down approximately 10% compared to the prior year, which resulted in lower generic scripts.
And similar to last quarter, and the third quarter, we recognized unclear and gains on equity investments within our Mckesson and ventures portfolio.
Now onto our third quarter results, which can be found and the investors section of our website and let me start by pointing out of two items that impacted our GAAP only results of the quarter.
Based on the substantial progress toward the settlement of our ongoing opioid related claims we've concluded that a broad settlement of opioid claims by governmental entities is now probable and can be reasonably estimated.
And as a result, we recorded a pre tax charge of $8 1 billion $6 $7 billion after tax.
Secondly, we recorded a pre tax long lived asset impairment charge of $115 million primarily.
Early related to mckesson's retail pharmacy businesses in Canada and Europe.
Let's move now to a discussion of our adjusted earnings results for the third quarter, starting with our consolidated results on slide four.
<unk> revenues of $62 $6 billion were up 6% compared to the prior year, primarily due to market growth higher specialty volumes and our U S pharmaceutical segment, and Covid related volumes, and our medical business, including Covid tests and PPE.
This was partially offset by branded to generic conversions and the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance.
Adjusted gross profit increased 7% year over year, driven by growth and our medical surgical segment, which once again benefited from the contribution of near term opportunities, including distribution of COVID-19 test.
And our work the assembly ancillary supply kits for COVID-19 vaccine.
Adjusted operating expenses increased 2% year over year led by higher operating expenses to support growth and strategic investments across the business.
Partially offset by the contribution of our German wholesale business to the joint venture with Walgreens Boots Alliance and the reduction in operating expenses due to the impact of COVID-19.
Adjusted operating profit was $1 1 billion for the quarter and increase of 11% compared to the prior year.
When excluding the $51 million contributed by change healthcare and the prior year, which was previously recorded and other.
Adjusted operating profit grew 18% exceeding our expectations.
Interest expense was $55 million and the quarter of decline of 14% compared to the prior year, which was driven by lower commercial paper balances and the retirement of approximately of $1 billion of debt.
We now expect fiscal 2021 interest expense and the range of $210 million to $230 million.
Our adjusted tax rate was 21, 6% per the quarter and we continue to assume a full year adjusted tax rate of approximately 18% to 20%.
Third quarter adjusted earnings per diluted share was $4 60, which was up 21% and the quarter compared to the prior year, driven by a lower share count and growth and the medical surgical solutions segment.
These items were partially offset by a higher tax rate and the lapping of the prior year contribution from the company's investment and change healthcare.
Third quarter adjusted earnings per diluted share also includes net pre tax gains of approximately $30 million or <unk> 14 per diluted share, which is associated with mckesson and ventures equity investments.
Wrapping up our consolidated results third quarter diluted weighted average shares were $161 million of <unk>.
Decrease of 10% year over year, driven by the successful tax free exit of our investment of change healthcare at the end of fiscal 2020, which lowered our shares outstanding by approximately 15 million shares and.
And in addition to share repurchase activity and the current and prior year.
We now expect diluted weighted shares outstanding for fiscal 2021 to be approximately $162 million.
The next I will review, our third quarter segment results, which can be found on slides five through nine starting with the U S. Pharmaceutical where revenues were $49 $5 billion up 7% driven by market growth and higher specialty volume, partially offset by brand and generic conversions.
Adjusted operating profit increased 2% to $656 million driven.
Driven by growth and specialty.
Partially offset by higher operating expenses in support of our strategic growth initiatives, including entendre.
These investments accounted for an approximate 2% headwind year over year segment growth.
Our segment results were also negatively impacted by the late cold and flu season.
Given the timing of FDA approval of <unk>, COVID-19 vaccine and December earnings related to the vaccine distribution were immaterial in the third quarter I will provide more detail on our outlook related to COVID-19 vaccine distribution later in my remarks.
And for the third quarter branded price the activity trended in line with our expectations. Additionally, based on manufacturer price actions taken in January we are maintaining our full year fiscal 'twenty and 'twenty, one assumption of branded price increases to be in the mid single digit percent range.
Okay.
Next the international revenues were $9 3 billion, a decrease of 6% year over year on.
On an FX adjusted basis revenues decreased 10%, primarily driven by the contribution of our German wholesale business to the newly formed joint venture with Walgreens Boots Alliance, which was effective as of November one 2020.
The segment also had lower volumes and the Canadian pharmaceutical distribution business largely due to the exit of an unprofitable customer at the beginning of the fiscal year.
Excluding the impact of the divestiture of our German wholesale business segment revenue increased 4% year over year and was flat on an FX adjusted basis.
Adjusted operating profit increased 9% year over year to $158 million on.
On an FX adjusted basis, adjusted operating profit increased 3% to $150 million, primarily driven by two additional sell days and the European business compared to the prior year.
Now moving on to medical surgical solutions.
Our medical surgical segment continues to be impacted by the COVID-19 pandemic, we experienced strong demand for COVID-19 tests throughout the quarter, and often unpredictable and uneven levels of demand related to PPE.
We're also pleased to have delivered solid growth and the core business. Despite patient mobility trailing pre COVID-19 levels are.
Our customers have been resilient throughout the pandemic and we're supporting providers and their patients with the breadth of our primary and extended care capabilities, such as lab solutions private brand and patient home delivery.
Similar to the U S. Pharmaceutical segment Q3 results were also impacted by the white cold and flu season, and we expect us to continue throughout the remainder of our fiscal year <unk>.
Revenues were $3 1 billion and the quarter up 43%, primarily driven by demand for COVID-19 test and the primary and extended care businesses.
As we discussed on the second quarter call and medical surgical business built supply quickly to meet demands from our customers for COVID-19 tests and elevated levels of demand for PPE.
And this elevated and uneven demand is reflected again in our third quarter results as COVID-19 cases, and hospitalizations reached their highest levels impacting patient mobility and elective procedures.
Which were down 15% to 20% at times and the quarter According to <unk>.
Throughout the pandemic and as always our focus has been meeting the needs of our customers and their patients providing access to the supplies and cleaning PPE that they need to continue to treat patients.
Early on and procured these products and are highly volatile market with unpredictable supply and demand levels due to the impacts of the pandemic.
Due to these dynamics on PPE and related items, it's gross inventory charges and our third quarter, we recorded $35 million of charges related to these products.
For the quarter adjusted operating profit increased 52% to $279 million driven by demand for COVID-19 tests and the contribution from the kitting and distribution of ancillary supplies for COVID-19 vaccine.
Partially offset by the inventory charges on certain PPE and related products.
Excluding the impact of incremental PPE and COVID-19 test adjust.
Adjusted operating profit in the segment is up 29% year over year and the third quarter.
And next prescription technology solutions revenues.
Revenues were $777 million and increase of 9% driven by new and higher volume of existing and brand support programs and.
Adjusted operating profit increased 27% to of $131 million driven by organic growth and the business.
While we continue to invest and the expansion of our technology offerings for our Biopharma customers and we're starting to recognize the benefits of these investments such as our investment and Amp, which Brian discussed earlier.
Moving on to corporate Mckesson recorded $158 million and adjusted corporate expenses and the quarter of decrease of 6% year over year, driven by gains of approximately $30 million of on equity investments within our Mckesson and ventures portfolio.
This was partially offset by an increase and employee expenses as well as lower interest income.
This quarter, we had fair value adjustments related to several of our portfolio of companies within Mckesson and ventures.
As I mentioned on our second quarter call, it's difficult to predict low gains or losses on our venture portfolio of companies may occur and therefore, our practice has been and will continue to be not include ventures portfolio impacts and our guidance.
And finally, we reported opioid related litigation expenses of $34 million and the quarter and for fiscal 2021, we anticipate that opioid related costs will be approximately $160 million.
Turning now to cash which can be found on slide 11, we ended the quarter with the cash balance of $3 6 billion and.
And for the first nine months of the fiscal year, we generated free cash flow of $745 million per.
Of our working capital metrics, and the resulting free cash flow vary from quarter to quarter impacted by timing, including the day of the week that marks the close of the quarter.
In fiscal 'twenty, one and our cash flow dynamics of also been impacted by changing levels of customer demand and <unk>.
Q3, we again saw higher levels of inventory, resulting primarily from increased quantities of COVID-19 tests and PPE.
As we work to meet the evolving needs of our customers and ramp up our work with the US government, we may experience additional working capital volatility.
Year to day, we made $427 million of capital expenditures and includes internal investments to support our COVID-19 vaccine and kitting efforts and technology data and analytics investments.
The port our strategic initiatives of oncology and Biopharma services for.
And for the first nine months of the fiscal year, we returned $709 million of cash to our shareholders through $500 million of share repurchases and the payment of $209 million and dividends.
Let me now turn to our outlook for the balance of fiscal 2021 the <unk>.
Over 19 virus and effects of the pandemic continue to impact our communities in different ways.
The sharp declines across our businesses and the first quarter, followed by a more positive trajectory trajectory through our second quarter, indicating signs of stabilization.
However, the third quarter was another good example of the non linear shape of the recovery that we've been talking about all year and.
As the increase case counts and hospitalizations led to a softening of the trends and the third quarter.
And two important assumptions of underpinned our guidance throughout fiscal 2021, and the reiterating those today.
We do not assume and new wave of Covid, 19, which would lead to shelter at home and and economic Lockdowns, which would preclude patient mobility and consumption of healthcare services and second we do not assume any systemic customer installed and see events.
I'd also like to reiterate that we believe that the recovery will take longer than initially anticipated and we will not be and a straight line as the impacts of the pandemic will persist into our fiscal 2022.
Further we do expect that there will continue to be significant volatility and the demand and ultimate volume levels for COVID-19 test kits and PPE.
Through our third quarter, we've seen elevated levels of these product categories. However, we do expect these dynamic volume will moderate.
Also given there is now and approved COVID-19 vaccine that is within the scope of mckesson's contract our debt our guidance now takes into account earnings related to COVID-19 vaccine distribution in accordance with the distribution scheduled provided to mckesson by the CDC.
As a result of our solid third quarter performance and outlook for the remainder of the year, which now includes estimated earnings tied to the distribution of COVID-19 vaccines.
We are increasing and narrowing our adjusted earnings guidance range to $16 95 to $17 25.
From our previous range of $16 to $16 50.
We continue to anticipate consolidated revenues to increase between 2% to 4% for fiscal 2021, and we now expect the consolidated adjusted operating profit will grow 7% and 9% for the full year, excluding the results of change healthcare from the prior year, which is up from our prior guidance of an increase between 2% and six.
Percentage now moving to the segments and our U S. Pharmaceutical segment, we continue to expect revenue growth of 3% to 6% and now expect adjusted operating profit to grow 2% to 5% compared to the prior year.
We've included in our guidance the net benefit to fiscal 2021 adjusted earnings per diluted share.
Of approximately 25% to 35.
Related to our role as the centralized distributor for COVID-19 vaccine.
And this range is dependent on a number of factors, which includes final vaccine distribution volume and product mix as directed by the CDC.
I would also remind you of our continued commitment to invest in and extend our leading position and oncology.
Where we are making incremental investments and the second half of fiscal 2021, which equates to a headwind of approximately 5% to 10 of.
The adjusted EPS in fiscal 2021.
And our international segment, we now expect the revenue decline of 5% to 9% year over year and.
And segment adjusted operating profit to be 1% to 3% growth.
Let me now turn to medical surgical.
The shift and pattern and recovery path of COVID-19 remains of pivotal the pivotal variable within the medical surgical supply market.
As I referenced earlier throughout the third quarter, we continued to see elevated levels of demand for COVID-19 test kits and PPE.
We expect to see shifting volume, which we anticipate will moderate.
We expect the sales to be of near term opportunity and the segment and elevated levels of demand are factored into our guidance for the remainder of our fiscal year <unk>.
During the quarter, we expanded our contract with HHS for the assembly and storage of COVID-19, and ancillary supply kits and also contracted with Pfizer to distribute the ancillary and kits directed by administrative two administrations sites on their behalf.
Due to this expanded scope, we now expect the benefit of approximately 20% to 30 and FY 'twenty one related to the kitting and distribution of ancillary supplies for the COVID-19 vaccine.
Therefore, we now expect fiscal 2021 medical surgical segment revenue to increase between 27% and 32%.
And as a result of our improved third quarter performance and outlook, including the increase and our expected contribution from the kitting and distribution of ancillary Baxter and supplies.
And we now expect adjusted operating profit will grow and the range of 29% to 37%.
And our prescription technology solutions segment, we expect revenue to grow 5% to 8% and now expect adjusted operating profit to be approximately flat to the prior year and finally, we now expect corporate expenses and the range of $645 million to $685 million.
Let me wrap up our outlook with capital deployment.
We continue to expect free cash flow of approximately two three to $2 7 billion.
As a reminder, we historically have generated the majority of our cash and the fourth quarter of our fiscal year.
The strong cash flow generation provides the financial flexibility to execute our balanced capital allocation approach investing and our strategies of oncology and Biopharma services positioning of our business for long term growth, while remaining committed to return capital to shareholders through our dividend and share repurchases are.
<unk> grade credit ratings remains a priority and underpins our financial flexibility.
And Q3, we utilized a portion of our free cash flow and retire approximately $1 billion of debt and.
And we issued a $500 million bond and attractive market rates.
These actions, which were in line with our stated intent to modestly delever further strengthened our balance sheet and our financial position in closing we're pleased with the results of our fiscal third quarter, and we feel confident and our updated outlook for the remainder of the fiscal year and proud of our focus and execution across the.
The business, despite the challenging macroeconomic backdrop.
Investing and the strategy as we've outlined remains the priority as.
As we drive further differentiation and our positions and oncology and Biopharma services as evidenced by our continued investment and on Tata and.
The proud partner of the US government and the COVID-19 vaccine effort, we look forward to continuing our role and the pandemic response, where can we get vaccines and ancillary supplies into the communities that need them and with that Holly Let me turn the call back over to you for Q&A.
Thanks, Brian we will now take questions and the interest of time I ask that you limit yourself and Thats one question to allow other than the opportunity to participate.
Peter Please go ahead.
Thank you.
And I guess I'd now let me the question. Please press star one on your thoughts umbrella.
And you are joining us today using the speaker phone. Please make sure. The mute function is turned off for allowing us the signal our commitment.
And then that inspire line, if you'd like to ask questions.
And our first question with funds from the loans.
Of Mr. Michael Cherny.
With Bank of America. Your line is open.
Good morning, Thanks for all of the color and congratulations on the strong results.
I want to dive in a little if I can opt to the pharma segment profit given the moving pieces you had and the investments in the segments also with obviously the offset of the Covid vaccine can you just give us in terms of how you think about the implications for.
The <unk> growth and also with all of the market dynamics and place.
And the trajectory should progress on the core pharma side and and packing out the puts and takes in terms of.
And directionally or conceptually on the volume side versus some of the strategic investments versus the.
And the Covid benefits of you're seeing in that segment.
Sure let me start.
Britt can add any color.
And we're very pleased with the results from our core pharmaceutical business.
I think we see that kind of step back from Covid impacts would say market fundamentals are consistent with where we thought they would be and the beginning of the year brand price inflation and line <unk>.
The dynamics that we see and the and the generics marketplace. Both in terms of our go to market strategies and our sourcing capabilities are where.
And we're pleased to see where they're at I mean, we are continuing to invest and this segment and.
And the investment and the particularly.
Particularly in the area of oncology.
Comes at the expense of a little bit of what could be operating profit growth, but we think that that's very important investment to make for the long term positioning and the long term growth of the segment. So.
I think as <unk> and.
And in general.
Everybody recognizes the cold and cough and flu season was a little bit lighter than what we would historically have seen probably the result of the.
Social responsibility of social distancing mask wearing measures.
But overall, we're very pleased with the progress of this segment.
Yes, Mike David what I would just add and I think part of the.
The trends that we talked about the softening trends in Q3.
I think as we go into Q4 of lot of a lot of it will depend on how the pandemic continues to persist, but despite that we continue to grow and the quarter. So our business. Despite the kind of lumpiness and the overall environment continues to grow and we feel confident in that growth as Brian mentioned, the continued to invest and as I talked about we and.
And we invested about 2% of headwind year over year in on taught us So I think as the.
As this continues to persist as our vaccine distribution.
And to take hold and we feel comfortable that the business is stable and is showing good the fundamentals of it are strong and the growth is still there.
And again it allows us to continue to make investments for further growth going forward.
Operator next question please.
And the mix toward.
And what will be Lisa Gill with Jpmorgan.
Okay and Thats good morning.
So Brett I know I ask just a couple of weeks ago.
The conference and that's around the actual profitability per account on the vaccine and now that you've given us the numbers you talked about 25 million doses being on target.
And a lot of impact and the third quarter you talked about.
The 25% to 35%.
How do I think about that on a per gallon basis number one and then number two third of spend.
And then Tom news articles talking about at your tier two tier competitors, saying, Hey, we'll help out with the vaccine distribution as well.
And what would that potentially here with.
As far as the amount of volume that that Mckesson with cash we get Kevin Your current contract.
Good morning, and Lisa. Thank you for that question, let me start and I think Brian and we'll probably want to tackle on your some of your later question just to clarify what Brian talked about and his remarks was $25 million of doses through January $25 million and 25 million doses through January and as I talked about the.
The amount that was in our quarter was immaterial to our results we don't get into a per dose conversation. What we have guided here is based on of the distribution volumes that we've been provided by the CDC and we expect that that will deliver 25% to 35 of contribution and our fourth quarter.
Yes.
And to the second point the side.
Look a lot of people have offered their help and support of.
The vaccine distribution program and we appreciate everyones.
Desire to help facilitate the.
The.
The nation getting itself vaccinated.
Our view.
We think the centralized distribution model that we have is the safest and the fastest way to get these COVID-19 vaccine into the arms of people free half.
<unk> built capacity to ramp up to provide hundreds of millions of doses and we think it's the it's the.
The fastest safest way and by that I mean, it's the lead time from the time and order is delivered to that vaccine, arriving and it provider site and the lead handoffs and handling and chances for temperature excursions, our last product or damage products.
And in essence, it's going to allow us to get the very the maximum amount of doses out of what is the produced and available from the manufacturers and the fastest time.
Now.
To the extent, we can find ways to be faster. We're open for any ideas make no mistake. Our goal is to get this product to into patient's arms as quickly as we can so that we can get this country vaccinated and back to a more normal environment.
Operator next question.
And next will be Eric Coldwell from Baird.
Thanks, Thanks, very much and good morning, and sorry toggling. Several calls this morning I want to.
And just follow up on one thing here quickly if you addressed and I apologize.
I know you've talked about the 25 million doses, mostly mostly in the month of January so far.
A couple of questions around that first off are you able to provide your expectations for total doses and the.
Fiscal <unk> Q specifically.
So the next two months, how much of that might ramp.
Our the guidance, we provided ties to the schedule. We have been provided by the CDC and just like every other major customer we have we don't comment on their plans and business strategies. So we are not able to talk about that but the guidance we provided tied to the <unk>.
<unk> been provided by the CDC.
Okay Fair enough and then just on my follow up on that was the kidney and opportunity.
Obviously, you've assembled a tremendous number of kits to date, youre, making $10 million to $15 million a month or a week excuse me I'm. Just curious does the kitting opportunity extended into fiscal 'twenty. Two are you. So advanced on what you've assembled to date of that opportunity really ends and fiscal 'twenty one even if the even if the vaccine. So obviously extend into fiscal <unk>.
And 22.
Yes, Eric Thank you for the question, obviously as we think about the kitting opportunities and we produced kits and advance of the vaccine. So as we've talked about that on our Q2 call I think it's a little early to tell how far this will actually play out we would expected some kidding.
And would continue on beyond the fiscal year, but it's hard to say at this point.
100 value that.
So we feel good about increasing the guidance range for the kits that we would expect the produced this year I think that you could expect to see some kitting into next year I guess it all really depends on the distribution schedule that we get from the CDC and what the volumes are of this year.
Operator next question.
Next one of the hub Jones with Goldman Sachs.
Great. Thanks for the question I guess, maybe just to shift gears over to med surge of EBIT, there was particularly strong in the quarter and Britt I know you share near what the increased contribution youre viewing from from kitting and other ancillary COVID-19 related.
Supplies, but I'm, just wondering you've been taking that out and it was a particularly strong result, just given where that business has been and I know utilization hasnt exactly been than even our strong.
And in this environment. So I was hoping maybe you could just talk a little bit about what's driving the gross kind of ex the.
And the vaccine kitting related.
Items that you that you quantified.
Good morning. Thank you for that question Youre right our core business was.
Did continue to be very solid into the quarter and I tried to call out a little bit for you and my remarks, what are what our growth was excluding COVID-19 tests and PPE.
And that gives you some sense that we did continue to see solid momentum into our quarter and talked about a few of the items and certainly Brian can elaborate on them as well, but if you think about our business. It is across all of <unk>.
Settings of alternate site and as we've talked about and in prior calls.
Our product.
Breath as very large private brand lab solutions, certainly the depth of capabilities that we have and extended care patient and home delivery. It's a very broad set of solutions capabilities and customer set that we addressed and we've seen that really.
And to grow and a very stable way over the last several quarters now.
Operator next question.
And next to the child Tsui column.
Hi, Yes. Good morning, Thanks for taking the question just two quick ones.
Britt, maybe just to clarify you talked about the 20 to 30 <unk>.
From Kidding I.
I think last quarter, you talked about fixing the 'twenty. So is this an incremental 2030 or is it really are we talking about just the kind of a bump of five to 10, and then secondly, and the drug international drug retail business.
And obviously you took the impairment charge here was there any benefit I think one of your peers talked about.
Proceedings of funding from NHS I just wanted to see if that was something that you guys were also.
Benefiting from thanks.
Good morning, and thanks for the question, let me take the first one quickly the 20% to 30.
And is not incremental it's 20% to 30 from 15 to 20, So we did increase it from.
From the last by that five to 10.
In terms of the international question the.
And the the NHS funding that you referenced here was was fairly immaterial to our quarter.
Operator next question.
I'm not sure of the Eric Percher with Nephron research.
Thank you.
So and medical I think of lot of questions on hitting next team and.
Am I wrong to expect that this is really testing driven strength and we look at the testing numbers mixing kind of.
Doubled or tripled from quarter to quarter to quarter.
So is that really the primary driver and the supply there continuing to expand and ways that will enable us continue facilitating that.
Eric Thank you for the question.
I would say, it's really both things I mean, I think the PPD demand has remained elevated and strong net debt.
Certainly contributing and there is no question that as Covid test kit.
The emerged on the Athene and remember when we provided our guide at the beginning of this year and it wasn't such a thing of the Covid.
Test.
So as the as the scientific community of the lab community began to develop these tests with other molecular antigen and antibody.
Because of our existing business and the lab, we were really well positioned to help get those to market quickly and swiftly and we have certainly benefited from the strong demand for Covid test kits and Eric maybe I'll just add on I did try to call out and my comments here that while this has been elevated and we've seen sort of in the uneven supply and.
<unk> throughout the year, we do expect that this will moderate and we expect the elevated demands to remain through our fiscal year, but we do expect of at some point in FY 'twenty to these elevated levels of demand will moderate.
Operator next question.
And next to the Doug and just staying with credit Suisse.
Yes. Thank you.
The quick clarification on vaccine.
Yes.
Does the vaccine EPS contribution take into account. The addition of vaccines and receiving approval for the use and the U S. And then my main question I wanted to better understand the $100 million increase of the company's Capex guide and guidance is that all related to building out more infrastructure portfolio vaccine distribution beyond fiscal 'twenty, one any medical Adobe.
And hopefully.
Yes.
Dart with the guide for the vaccine it is tied to the schedule that the CDC has provided us.
Which would be largely consistent with what you read and the public statements.
And I'll take the Capex one we did increase our guide on Capex part of that is to support.
And the vaccine and creating programs.
Larger part of that is really continuing to invest in our strategies technology data and analytics to support those strategies. So I would say that of a portion of that is to support the infrastructure, but a larger portion of that is really to support ongoing growth initiatives.
Operator next question.
The next or the Glen Santangelo Guggenheim strength.
Hey, guys. Thanks for taking my question, Hey, Brian and I. Appreciate there's probably not much you can say with respect to the opioid settlement at this point, but if we assume per second day that does come to fruition as you outlined I wanted to ask about the potential impact on the future.
And capital deployment of algorithm and.
And to that if you look at the architect settle over 18 years may be netting that against some of the legal costs will go away. It looks like it could consume roughly 10 to 15 portfolio of free cash flow also trying to reconcile all of the future capital deployment versus maintaining the investment grade rating on the balance sheet.
<unk>.
Thanks, Glenn well you mentioned a couple of things that I'll come back to in my and my answer one is we are very focused on maintaining our.
Our investment grade credit rating.
We think we have and all of a business that generates good cash flow. We have a strong balance sheet. We've had time to contemplate. This so I think philosophically our approach to capital deployment, we will not change it will be a balance we look to make internal investments that we think support growth and the business.
We look to make growth investments and M&A, where we can find targets that are aligned to our strategy and offer the financial return.
That makes sense vis vis the other ways, we can deploy capital like buying back shares or paying a dividend. So I don't think our philosophy changes at all.
And I think we feel very comfortable that we have a strong balance sheet.
Operator next question and.
And next will be Ricky Goldwasser with Morgan Stanley.
Hi, good morning.
And taking everything that you said on the vaccine and understand that forward looking.
Basing it on the guidelines the CDC guidance.
And just wanted to confirm the baffles and should.
Think about as the result.
The back listen what's included in your guidance.
Take that and we extrapolate for us.
And what you are guiding for the fourth quarter.
With the <unk> two.
And thank you for that.
Dollar.
In 2020, and Salon and loaded.
And I just talked about 2022 and has been the guiding me and maybe you can't the co invest and thats going to be in line a nice tailwind so maybe Cheng Cheng.
Offer us some color on what's the volume.
Should we be considering and cabela's.
And about 2022.
Well, let me let me talk about the your opening comments on vaccines. The vaccine itself and then maybe Brent can give us a few headwinds of tailwind.
First just to reiterate our guidance is based on the schedule that the CDC has provided to mckesson and we've been working to that schedule from day, one and that is what we based our.
Our forward guide on and we can't really comment on that.
So I just want to make that clear.
And then Britt I don't know if you want to start down your list of our list of.
Puts and takes.
Thank you for the question, Ricky and really start with what I think of some strength and some tailwind and the business and we've talked about these.
Moving over the last several quarters now we've had.
Good momentum for several quarters, now, where we're seeing organic growth and Q3 is a good example of that where each of our operating segments grew over the prior year, we would expect that the fundamentals of our business will continue to be solid solid and sound and.
And we're starting to see some benefits from the investment of the investments that we're making Brian talked about amp and clearly we've talked about the investments, we're making and entendre. So the strategies and the investments and oncology and Biopharma services I would expect we will continue to be strengths of ours, obviously, the breadth of our medical business as we talked about earlier.
The breadth of our customers the breadth of services and capabilities across private brand and lab.
We will continue the strong for us So I think as you look across our operating segments and.
We have a lot of good momentum and strength, we are of very strong balance sheet as Brian just mentioned, we have seen consistent cash flow.
From a headwinds perspective, I think it will really be how long does the pandemic persist and the and.
EBIT of the unevenness and unpredictability of that and that will be the thing that we will be challenged with but as you have seen from our results. This year, we've been able to manage through that quite well and and.
And take on some near term opportunities at the same time.
Operator, and we have time for one more question Brian.
Certainly that question comes from Stephen Kim with Barclays.
Okay.
And we think about the 25% to 35% EPS related to Covid vaccine distribution per unit.
The 2000 and <unk> answering the kimpton supplies is the 100% of this combined EPS the and arrived in the US I just wanted to confirm that you can remind us about the potential for mckesson the capture international economics.
And neither of the Covid vaccines, our kitchen, and Canada or Europe.
And that stands out there for the remainder of fiscal 'twenty, one or maybe greater opportunity and your fiscal 'twenty two.
I'll start and the Great question, let me just clarify for the kitting component of invest the 20% to 30 is not incremental to last quarter, it's 20% to 30.
And from 15% to 20% and what we've talked about here both for the vaccine contribution and the kitting and supply contribution and our U S contributions and I will let Brian and talk a little bit about our international yes.
Our international countries.
Countries and companies are engaged with local governments to either through our distribution capabilities of our retail pharmacy capabilities that help the response of those countries to the pandemic day.
I would say the general characterization of probably from a timeline trailing the U S and little bit but.
We are heavily involved.
And those discussions, but nothing that would be material to our financials at this point.
Okay. Thank you everyone for your questions and thank you Zane for facilitating this call I want to conclude my remarks today buy.
Once again, recognizing and thanking all of the frontline health care workers across the world.
And day in and day out to keep us safe and also acknowledge the great work from our Biopharma scientific community.
Thats helpful moment as it relates to vaccinations.
Our company's top priority.
And is the vaccination program and we look forward to continuing to work with the US government successfully distributed COVID-19 vaccine and stand ready to support the distribution of additional vaccines as they come to market I want to thank the entire mckesson team for their continued commitment and hard work during this challenging time.
And we wish you all and your families good health and wellness. Thanks again for joining us today.
Thank you for joining today's conference call you may now disconnect and have a great day.