Q3 2025 McKesson Corp Earnings Call
Please standby.
Speaker Change: Welcome to Mckesson's third quarter fiscal 2025 earnings conference call. Please be advised that today's conference is being recorded at this time I would like to turn the call over to Rachel Rodriguez V. P of Investor Relations. Please go ahead.
Speaker Change: Thank you operator, good afternoon, and welcome everyone to Mckesson's third quarter fiscal 2025 earnings call.
Speaker Change: Today, I'm joined by Brian Tyler, Our Chief Executive Officer, and Brent crude alone our Chief Financial Officer.
Speaker Change: Ryan will lead off followed by grant and then we will move to question and answer session.
Speaker Change: Today's discussion will include forward looking statements such as forecasts about mckesson's operations and future.
Speaker Change: Please refer to the cautionary statements in today's earnings release and presentation slides available on our website at Investor Mckesson Dot com.
Speaker Change: And to the risk factors section of our most recent annual report and other SEC filings for additional information concerning risk factors that could cause our actual results to differ from those in our forward looking statements.
Speaker Change: Information about non-GAAP financial measures, we will discuss during this webcast, including reconciliation of those measures to GAAP results can be found in today's earnings release and presentation slides.
Brian: Presentation slides also includes a summary of our results for the quarter and updated guidance with that let me turn it over to Brian.
Brian: So good afternoon, everybody thanks for joining the call.
Speaker Change: Earlier today Mckesson reported strong third quarter results delivering another quarter of double digit growth in operating profit our team executed against our company priorities with focus and unwavering dedication. Thanks to their commitment we are expanding our differentiated capabilities driving operational efficiencies and creating real value for.
Brian: Our partners and shareholders.
Yesterday, we were excited to announce the signing to acquire a controlling interest in vision, which is a provider of general ophthalmology and retina management services. This marks an important step as we continue to enhance our specialty services platform and capabilities.
Brian: Additional details about the transaction a little later in my comments, let's move on to the third quarter results. During the quarter revenue grew 18% to $95 3 billion and adjusted operating profit grew 16% to $1 5 billion.
Brian: Adjusted operating profit grew across all segments led by strong double digit growth in U S pharmaceutical and prescription technology solutions segments in the medical surgical growth was lower than anticipated primarily driven by the late start of a softer illness season.
Brian: The strength of the enterprise and the scale of our assets gave us the confidence to increase and narrow our full year guidance for adjusted earnings per diluted share from $32 40 to $33 to a new range of $32 55 to $32 95, which represents 19% to.
Brian: <unk>, 20% year over year adjusted EPS growth.
Brian: Today I'm excited to share with you the great progress we've made in the past quarter, which is key to the financial results. We delivered today and more importantly for the long run growth of the business that I will turn it over to Brett for more details in the financial review.
Speaker Change: I want to start with our focus on talent and culture, which is foundational to our company's strategy and everything we do here at Mckesson, we value the breadth of backgrounds experiences and skills of our team members and that includes our board of directors earlier. This week our board of directors elected two new members to our board Windows and Dr. Julie Gerber.
Brian: Again.
Speaker Change: And as Jodi brings accounting and finance expertise from the board from her experience as a former chair and Chief Executive Officer of KPMG Dr.
Speaker Change: Dr. <unk> brings extensive executive experience in the health care industry and public policy Arena. She was formerly the Chief Executive Officer is currently the Chief Executive Officer, and a foundation for National Institutes of Health and formerly Executive Vice President and Chief Patent Officer at Merck and a former director of the CDC.
Speaker Change: Mr. Li will serve on our audit Committee and Finance Committee and Dr. <unk> will serve on a compliance committee and the compensation and talent Committee. These additions are yet. Another example of our best talent philosophy at work, we look forward to their leadership as we work together to continue to drive the growth of the company.
Speaker Change: Let's move on to our second priority at strengthening the distribution capabilities that performance in North America within the U S. Pharmaceutical segment utilization trends remained stable leading to solid volume growth in the underlying business. The strong performance in the quarter is underpinned by our scale distribution capabilities across multiple therapeutic.
Speaker Change: Areas and our ability to provide exceptional services to our customers.
One of the channels, we serve as community pharmacies, which played a critical role in bringing assessable care to patients recently, we launched a strategic initiative to help protect critical pharmacy services and <unk>.
Speaker Change: Elevate the pharmacy profession.
Speaker Change: We will provide funding support to eligible community pharmacy associations across all 50 states to help meet their advocacy goals and strengthen their voice Nick in the community.
Speaker Change: And the role of the community pharmacy industry.
Speaker Change: Within the medical surgical segment.
Speaker Change: Strategically positioned this business to be focused on the alternate site markets.
One of the market dynamics that impact. This segment is the annual illness flew a respiratory season, each illness season is unique including a onset of severity and how long it lasts during the quarter, we observed lower than anticipated volumes related to the older season, which impacted the third quarter results market Dave.
Speaker Change: This shows that the number of flu like illness cases was lower than the average of the last five non two good years and below the prior season, the software illness season impacted demand of seasonal vaccines illness testing and foot traffic in primary care sites. This development, coupled with the general market weakness in the primary care.
Speaker Change: Channel that you've called out for the prior.
Speaker Change: Two previous quarters pose a challenging market backdrop for the segment.
Speaker Change: Despite the impact of the market trends, we remain confident in our strategy and the ultimate sale market and the strength of the underlying business. We continue to take immediate and effective actions to better align our service model and capabilities with our customer needs and the market demand in the past quarter, we made important progress.
Speaker Change: And the business rationalization initiatives that were previously announced thanks to the focus from our team. We're on track to complete the rationalization plan by the first half of fiscal 2026 and deliver meaningful savings as expected.
Speaker Change: Moving on to our two strategic growth pillars oncology and Biopharma services platforms.
Speaker Change: Over the years, we've continually invested and expanded our oncology assets in alignment with our stated strategy.
Speaker Change: The ecology market continues to be the largest growing therapeutic category and is one reason we continue to invest in this area. We have built a portfolio of assets that include distribution of oncology drugs and value added services that improve the cancer care journey.
Speaker Change: Through the U S oncology network, we empower the delivery of advanced and integrated cancer care in the community setting, which is often closer to home and more cost effective for the patient. We're pleased to see the continued expansion growing to over 20 750 providers across 640 sites of care in 30.
Speaker Change: One different states, we provide resources and support to these community oncology practices to empower their growth and ultimately improve the patient experience and the outcomes of cancer care. We also provide clinical trial services to community based practices through the Sarah Cannon Research Institute joint venture, which we often refer to.
Speaker Change: SPRI.
Speaker Change: Last year, the patient accruals through clinical trials increased 25% within Cri and participated in the development of 33 of the 47 therapies approved by the FDA, we're excited to bring more innovative and life changing therapies to community based practices and their patients.
Speaker Change: As we continue to advance our strategy on oncology at other specialties. We've also been evaluating opportunities in other therapeutic areas.
Speaker Change: Last year, we acquired certain assets from U S retina and launched a new GPO program called on Mark vision.
Speaker Change: We also have retina clinical.
Speaker Change: Clinical workflow and inventory management technology that streamlines inventory revenue and payments management.
Speaker Change: All of these assets are building blocks for the acquisition that we announced yesterday, we are excited to sign an agreement to acquire a controlling interest in prism vision.
Speaker Change: Its affiliated practices include 180 providers 91 office locations and seven ambulatory surgery centers.
Speaker Change: Our strategy on oncology, we see an exciting opportunity in retina and ophthalmology, given its attractive drug pipeline, the speed and innovation and practitioners needs for additional support and services.
Speaker Change: We had a great track record of building and growing the oncology platform over the past several years, we're taking a similar approach to the expansion in retina.
Speaker Change: Our strategic and thoughtful in building these platforms and creating a portfolio of assets.
Speaker Change: That complement each other and reinforce each other the transaction is subject to customary closing conditions, including necessary regulatory clearances, we look forward to advancing retina and ophthalmology patient care through a meaningful platform of distribution and other value added services.
Speaker Change: Onto our Biopharma services platform, we offer a portfolio of solutions that connect biopharma companies providers pharmacies and payers to improve the access affordability and adherence of medications.
Speaker Change: In the third quarter, the prescription technology solutions segment delivered strong performance in line with our expectations growth accelerated in the quarter, reflecting strong demand across our product solutions, one of our value add solutions as prior authorizations, which automates the process and get patients access to their prescriptions faster.
Speaker Change: But in addition, the prior authorizations were seeing continued growth for many other solutions.
Speaker Change: In the fiscal third quarter, we added access and affordability support for pharma brands that span across 30 indications and more than 12 therapeutic areas. We're pleased to support a diversified portfolio of brands with their unique needs and ultimately make these medications more accessible and affordable to providers and patients biopharma.
Speaker Change: Service is a strategic growth pillar for us and we continue to invest strategically to support its growth in the past few quarters. We've updated the user interface of our key customer systems enhance the core technical infrastructure and improve the overall user experience. These updates help us support customers in a more efficient manager as we ramp up the annual.
Speaker Change: <unk> program in our fiscal fourth quarter.
Speaker Change: Looking across our business segments, we build a large and diversified portfolio of assets it.
Speaker Change: It is part of our continuous practice to assess this portfolio for strategic alignment in December we completed the divestiture of the rexall and well that CA businesses. This allows us to focus and prioritize investments in other strategic areas as Canada's largest pharmaceutical distributor, we continue to invest and modernize our distribution network.
Speaker Change: Introducing automation and technology to improve efficiency. We're also growing set of Biopharma solutions that include third party logistics patient care services and data insights.
Speaker Change: So let me try to sum up the quarter.
Speaker Change: The captain delivered strong quarterly results and fiscal 2025.
Speaker Change: Three of our four business segments grew adjusted operating profit at double digit rates in the quarter that represents over 80% of our business growing in double digits and highlights the strong momentum across the enterprise the fundamentals of our business remains strong and we are taking strategic actions to enhance our.
Speaker Change: <unk> portfolio to drive operational efficiencies and to modernize the enterprises, we're confident in our market positions and pleased with the momentum we're building across the business. Looking ahead, we're focused on delivering a strong finish to fiscal 2025 and driving sustainable long term growth in the years ahead with that I'll hand, it over to Brett for some <unk>.
Speaker Change: Additional insights and comments.
Brett: Thank you, Brian and good afternoon.
Brett: My comments today will refer to our adjusted results I'll start with consolidated results followed by a review at the segment level.
Brett: <unk> with an update on our full year fiscal 'twenty five outlook.
Brett: We reported another strong quarter with notable momentum across the enterprise. We are pleased to report record quarterly revenue and operating profit including year over year operating profit growth in each segment. These.
Brett: These results demonstrate the remarkable breath of mckesson's products and services and reflect the focus and execution against our company priorities.
Brett: Consolidated revenues increased 18% to $95 3 billion led by growth in the U S. Pharmaceutical segment due to increased prescription volumes from retail national account customers and growth in the distribution of specialty products, including higher volumes in oncology and specialty provider settings.
Brett: Gross profit was $3 3 billion, an increase of 7% primarily a result of specialty distribution and provided growth within the U S pharmaceutical segment.
Brett: And growth in our prescription technology solutions segment, driven by our access and affordability solutions.
Brett: Operating expenses increased 2% to $1 9 billion driven by higher expenses to support growth in the U S pharmaceutical segment.
Brett: We're pleased with the focus on driving a lower operating cost structure implementing efficiencies through automation and data capabilities and delivering insights to improve our operations products and services offerings.
Brett: This is reflected in the operating expense to gross profit ratio, which improved over 250 basis points as compared to the prior year.
Brett: Operating profit was $1 5 billion, an increase of 16% year over year results benefited from growth across all segments.
Brett: Interest expense was $62 million, an increase over the prior year, resulting from higher average balances of our loan portfolio during the quarter.
Brett: The effective tax rate was 23, 9% compared to 10, 6% in the prior year.
Brett: This rate was in line with the guidance provided at recent investor industry conferences.
Brett: Quarter diluted weighted average shares outstanding was $126 6 million a decrease of 5%.
Brett: Third quarter earnings per diluted share increased 4% to $8 three.
Brett: Year over year growth was driven by strong operational performance and a lower share count.
Brett: Partially offset by a higher tax rate, resulting from discrete items in the quarter.
Brett: Turning to third quarter segment results, which can be found on slides eight through 12, and starting with our U S pharmaceutical segment revenues.
Brett: Revenues were $87 1 billion, an increase of 19%.
Brett: Revenue growth was led by higher volumes from retail national account customers.
Brett: Growth from specialty product distribution, including higher volumes from oncology and specialty provider settings.
Brett: And partially offset by the anticipated decline of certain brand volumes due to formulary changes by our retail national account customer beginning in our fiscal 2025 first quarter.
Brett: Revenues from <unk> medications were $10 9 billion in the quarter, an increase of approximately $3 4 billion or 45% when compared to the prior year.
Brett: We anticipate continued DLP, one medication growth year over year, however, with variability from quarter to quarter.
Brett: Operating profit increased 14% to $944 million driven by growth in the distribution of specialty products to health systems and specialty providers.
Brett: The on boarding of a new strategic customer and growth in our differentiated oncology platform.
Brett: Partially offset by expected lower distribution volumes with COVID-19 vaccines as compared to the prior year.
Brett: And the prescription technology solutions segment organic and new program growth.
Brett: Our access and affordability solutions led to strong growth compared to the prior year revenues increased 14% to $1 4 billion.
Brett: And operating profit increased 22% to $235 million.
Brett: Third quarter results reflect increased prescription transaction volumes, which drove higher demand for access solutions.
Brett: <unk> prior authorization services for <unk> medications and growth in our third party logistics business.
Brett: Year over year growth was also supported by increased sales to new customers and programs across our access and affordability solutions.
Brett: Turning to medical surgical solutions.
Brett: As Brian mentioned earlier in his remarks, we observed lower than anticipated volumes due to less demand for illness season products.
Brett: As we've previously discussed E. Commerce season is unique and the timing and severity level of each illness season could drive variability from quarter to quarter.
Brett: During the fiscal third quarter. This illness season had lower severity levels compared to prior years and lower than our expectations impacting foot traffic in the primary care settings that we serve.
Brett: As measured by <unk> data illness severity was approximately 62% of the average of the previous five non COVID-19 illness seasons.
Brett: In the third quarter revenues decreased 3% to $2 9 billion.
Brett: The decline in revenues can be attributable to the lower levels of seasonal vaccines illness testing it related medical surgical supplies in the primary care channel.
Brett: Operating profit increased 4% to $294 million driven by operational efficiencies from the cost optimization initiatives that we announced in Q1.
Brett: And growth in the extended care business. These were partially offset by lower contributions in primary care channel as compared to the prior year.
Brett: As we previously guided we anticipate the cost optimization initiatives will deliver $100 million of cost savings in the second half of fiscal 2025 with a higher proportion coming in the fourth quarter.
Brett: We're pleased with the execution to date and we remain confident in achieving these savings.
Brett: Next let me address our international results revenues were $3 9 billion, an increase of 6% and operating profit was $124 million, an increase of 18% driven by higher pharmaceutical distribution volumes in the Canadian business.
Brett: Operating profit included $19 million or 11 cents of earnings accretion, resulting from the held for sale accounting related to the sale of our Canada base Rexall, well dossier businesses, which was completed on December 30, <unk> 2024.
Brett: Wrapping up our segment review with corporate.
Brett: Corporate expenses were $134 million, which included a pretax gain of $6 million or <unk> <unk> per share related to equity investments within our Mckesson ventures portfolio.
Brett: Impaired to pre tax losses of $8 million or <unk> <unk> per share in the third quarter of fiscal 2024.
Brett: Let me turn to cash and capital deployment, which can be found on slide 13.
Brett: We ended the quarter with $1 1 billion in cash and cash equivalents during.
Brett: During the quarter, we had negative free cash flow of $2 6 billion.
Brett: Timing, including the day of the week that the quarter ended on led to approximately $2 billion of cash shifting from our fiscal third quarter to our fiscal fourth quarter.
Brett: This does not impact our full year free cash flow guidance.
Brett: Additionally, free cash flow included $196 million of capital expenditures, primarily related to investments in new and existing distribution centers as well as investments in technology data and analytics to support our growth priorities.
Brett: In the third quarter, we returned $919 million of cash to shareholders, which included $827 million of share repurchases at an average price of $537 per share.
Brett: And we made $92 million in dividend payments.
Brett: Now, let me discuss our updated fiscal 2025 outlook.
Brett: As a result of our third quarter performance and the confidence that we have and the outlook for the remainder of the year.
Brett: We are raising and narrowing our guidance range for fiscal 2025 adjusted earnings per diluted share to $32 55 to $32 95.
Brett: Our strategy continues to yield exceptional results led by the growing and differentiated oncology and Biopharma services platforms supported by a foundation centered on a strong core of distribution assets.
Brett: In the U S pharmaceutical segment, our core pharmaceutical distribution operations continued to demonstrate a diversified and strong value proposition to customers.
Brett: We anticipate revenues to increase 18% to 20% and operating profit increased 11% to 13%.
Brett: This updated segment outlook incorporates strong third quarter performance as well as continued momentum in the core distribution business, including stable utilization trends performance of our sourcing program and continued growth in specialty pharmaceuticals.
Brett: We continue to be pleased with the strategic partner, we announced an onboard in July.
Brett: This partnership is a testament to our leading distribution and sourcing capabilities and our strong customer value proposition.
Brett: We anticipate the strategic partnership will contribute approximately $32 billion of incremental revenue in full year fiscal 2025, and it's incorporated in the full year outlook.
Brett: Our oncology platform is delivering across a range of capabilities, including distribution practice management data and analytics and clinical research.
Brett: Than 'twenty 750 providers in the U S. Oncology network continued to experience solid growth with same site visits increasing 6% in the quarter.
Brett: And yesterday, we announced the signing of a definitive agreement to acquire controlling interest in Prism vision holdings, a premier provider of general ophthalmology and breadth of management services.
Brett: This transaction advances mckesson's specialty position and our commitment to improve and expand patient access to quality community care we.
Brett: We intend to develop a leading platform for retinal care.
Brett: <unk> differentiated solutions and value across providers Biopharma partners and patients Mckesson's long track record of leading practice management and clinical research outcomes with our differentiated oncology platform will allow us to expand our suite of solutions and continue to pursue our purpose of advancing health outcomes.
Brett: For all.
Brett: Mckesson will purchase an 80% ownership interest of approximately $850 million, we anticipate financing the transaction with a mixture of cash and debt.
Brett: Following completion of the transaction Prism vision will be part of mckesson's broad set of specialty solutions and financial results, we consolidated with Mckesson's U S pharmaceutical segment.
Brett: Foreign closing prism is anticipated to be approximately 20% to 30 cents accretive to mckesson's adjusted earnings per diluted share in the first 12 months post closing.
65% to 70 <unk>.
Brett: 65% to 75 cents accretive by the end of the third year following the close of the transaction.
Brett: Transaction is subject to customary closing conditions, including necessary regulatory clearances.
Brett: We have not included any financial results from this transaction in our updated fiscal 2025 outlook.
Brett: And the.
Technology solutions segment, we anticipate revenues increased 9% to 12% and operating profit to increase 12% to 15%.
Brett: The updated outlook incorporates the strong third quarter performance and affirms our confidence in achieving operating profit growth at or above the long term growth targets in fiscal 2025.
Brett: As we've previously communicated we anticipate revenue and operating profit growth will not be linear and will vary from quarter to quarter, driven by several factors, including the timing and trajectory of new product drug launches utilization trends.
Brett: Evolution of our products program support requirements as it matures, which could result in the shift to other services or a program termination.
Brett: Delays in supply shortages.
Brett: Payer requirements, including utilization management and formulary strategies.
Brett: The annual verification programs that we provide for our customers that occur in our fiscal fourth quarter.
Brett: And the size and timing of investments to support and expand our product portfolio.
Brett: Moving to medical surgical solutions during the third quarter, we observed lower than anticipated illness season volumes, including vaccines and testing and lower volumes in primary care channel, which negatively impacted third quarter results more than originally anticipated.
Brett: As a result of third quarter performance and our revised outlook for the remainder of the fiscal year.
Brett: Now anticipate revenues and operating profit to be roughly flat to the prior year.
Brett: <unk> of the weaker than anticipated illness season.
Brett: Despite these macro challenges we have made progress toward our previously announced cost optimization initiatives, which have already begun to drive anticipated operational efficiencies in this segment.
Brett: We continue to anticipate these initiatives will deliver approximately $100 million in cost savings in fiscal 2025 as previously outlined.
Brett: And we will be more heavily weighted towards the fourth quarter.
Brett: In the International segment, we anticipate revenues to increase 3% to 7% and operating profits increased 10% to 14%.
Brett: As I mentioned at the beginning of my remarks, we completed the sale of our Canada base, Rexall, and well that CA businesses at the end of the third quarter.
Brett: This transaction closed earlier than we had previously anticipated negatively impacting operating profit guidance and is the main driver behind the change in guidance for the segment.
Brett: We also remain committed to exiting fully divest our European business as a reminder, Norway remains the only operating country in Europe that we have not entered into an agreement to sell.
Brett: The contributions related to operations in Norway are included in the fiscal 2025 outlook for this segment.
Brett: We intend to exit Norway as part of the completion of our European exits.
Brett: Finally in the corporate segment, we anticipate expenses to be in the range of $480 million to $520 million, which incorporates the impact of $6 million of pre tax gains related to equity investments within the Mckesson ventures portfolio in the third quarter.
Brett: As a reminder, mckesson venture's impact on consolidated financials can be influenced by the performance of each individual investment quarter to quarter, which may result in gains and losses, the timing and magnitude of which can vary for each investment.
Brett: Moving below the line, we anticipate interest expense to be approximately $255 million to $265 million.
Brett: Reflecting higher than anticipated interest expense in the third quarter and anticipate additional borrowing activities driven by the timing of working capital in the fourth quarter.
Brett: We anticipate income attributable to noncontrolling interest to be in the range of $185 million to $195 million.
Brett: And to the success of Claris one's generic sourcing operations.
Brett: We anticipate the full year effective tax rate will be in the range of approximately 17% to 19%.
Brett: And turning to cash flow and capital deployment.
Brett: We remain focused on shareholder value creation, and our disciplined capital deployment approach remains unchanged.
Brett: It starts with stable and growing free cash flow for fiscal 2025, we anticipate free cash flow of approximately four 8% to $5 2 billion.
Brett: Next we will continue to deploy capital to grow the business on strategy. The acquisition of Prism vision is a good example of this.
Brett: Secondly, we will return capital to our shareholders through a growing dividend and value creating share repurchases. Our guidance includes plans to repurchase approximately $3 $2 billion of shares in fiscal 2025.
Brett: As a result of the share repurchase activity, we estimate weighted average diluted shares outstanding to be approximately $128 million.
Brett: And finally, we'll maintain a strong balance sheet with stable credit ratings.
Brett: Wrapping up fiscal 2025 guidance.
Brett: We anticipate revenue growth of 16% to 18% and operating profit growth of 13% to 15% compared to the prior year.
Brett: For fiscal 2025, we anticipate earnings per diluted share of <unk> $32 55 to $32 95.
Brett: Which represents approximately 19% to 20% growth as compared to fiscal 2024.
Brett: Before I close I'd like to share some initial thoughts on fiscal 2026.
Brett: We anticipate our operating momentum to persist as Brian mentioned earlier, approximately 80% of the operating profit of the company is growing at double digit growth rates in fiscal 2025.
Brett: As a result, we maintain confidence in the long term adjusted EPS target of 12% to 14% growth.
Brett: And U S pharmaceutical theres several positive items that we anticipate will continue to support growth in fiscal 2026.
Brett: These include the scale and efficiency of our pharmaceutical distribution operations, our leading position in specialty excluding the breath of our oncology platform. The U S oncology network GPO services on Tata and the Sarah Cannon Research Institute.
Brett: The growth of other specialties in areas like retina, and ophthalmology, which include the recently announced acquisition present vision.
Brett: And a leading generics offerings, including the strength of Claris one.
Brett: We anticipate that the strength, we're seeing across the prescription technology solutions segment will continue to benefit from our leading products and capabilities supported by several factors, which would include stable utilization trends differentiated access and affordability programs.
Brett: Unmatched connectivity as our solutions are in the workflow of over 950000 providers and more than 50000 pharmacies and innovative products and services supported by ongoing investments.
Brett: Our medical surgical solutions segment is well positioned as care continues to move across the alternate site settings.
Brett: We're confident that the cost optimization actions, we've taken will better align our business to the markets and customers that we serve will continue to evaluate the environment as the illness season progresses as primary care markets continue to stabilize and the overall impacts from our early cost optimization efforts materialize.
Brett: Finally, we will continue to invest in adding capabilities to our north American distribution footprint. These investments include increased capacity automation and regulatory excellence capabilities. We.
Brett: We're modernizing the enterprise and we are investing in data and analytics.
Brett: The acceleration of several investments in cloud networking and infrastructure were.
Brett: Also accelerating the use of AI to unlock the potential to deliver customer and foundational enhancements we're.
Brett: We're using AI to improve the customer experience and improve.
Brett: Productivity, including supply chain disruptions predictions forecast accuracy algorithms and fraud detection.
Brett: In closing our third quarter results represent another strong performance with operating profit growth across all segments, demonstrating remarkable execution against our strategic growth pillars.
Brett: Through the durability of our business models, the scale and differentiation across our solutions and services in the investments, we're making to modernize and accelerate the enterprise, we're committed to delivering value creation.
Brett: We're confident in mckesson's bright future, we have leading positions across distribution and Biopharma services.
Brett: Given by our execution and innovative solutions.
Speaker Change: Before turning to Q&A I'd like to take a moment to thank Rachel Rodriguez ratios, taking a new role in our corporate <unk>, we'd like to thank Rachel for positive impact leading investor relations for the past three and a half years and the partnership with both Brian and me and.
Speaker Change: And I'd like to welcome journey Domingos, we will now be leading the Investor Relations team journey has a long track record in several leadership positions across our finance teams at Mckesson.
Speaker Change: With that let's move to the Q&A session.
Speaker Change: Thank you if you would like to signal what questions. Please press star one on your Touchtone telephone. If you are joining us today using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment Youll hear a tone, indicating when your line is open at that point.
Speaker Change: Please state your name and company name before posing your questions again that is star one if you would like to signal and we will take our first question.
Speaker Change: Thank you Eric Percher from Nephron research I appreciate the detail on <unk> five an early view of 2006.
Speaker Change: Brian and Britt can I ask you.
Speaker Change: It sounds like you expect the utilization levels, you've seen driving pharma and especially continue.
Speaker Change: <unk> growth rate elevation how.
Speaker Change: Much of that do you attribute to the macro trends versus what is unique about your specialty business and any areas, where we should have concern about the ability to carry on into next year and then the final piece I would ask is is there any area, where IRI is impacting your <unk>.
Speaker Change: Today.
Speaker Change: I'll start.
Speaker Change: Eric Thanks for the question I mean, I think we've seen pretty stable and consistent overall prescription volume in the pharma segment.
Speaker Change: Over the last several quarters, obviously specialty oncology in particular has been strong we've been benefiting from the growth in <unk>.
Speaker Change: But I think as we scan the environment today other than some quarter to quarter volatility in <unk>, which could be hard to predict we think the environment. We will continue to be sort of.
Speaker Change: Pretty steady.
Speaker Change: <unk> been obviously FY 'twenty five is playing out very consistent with our expectations.
Speaker Change: The growth in the U S. Oncology network has been solid and is clearly a driver in our set of differentiated assets. There is helping us we've had 6%.
Speaker Change: Same store patient growth and then obviously, we augment that over the course of the last several years with practice.
<unk> members, joining the U S oncology network. So I think that has been a position of strength and will continue to be for us.
Speaker Change: Next question please.
Kevin Caliendo: And the next question will come from Kevin Caliendo with UBS.
Kevin Caliendo: Hi, Thanks for taking my question I guess I just wanted I am a little confused on the commentary that you had for fiscal 2006 are you are you actually sort of blessing that we should take the guidance from 25% given the variables that you described for the segments.
Kevin Caliendo: Comfortable with that Youre comfortable with the earnings growth rate of 12% to 14%.
Kevin Caliendo: If so is that inclusive of the deal that you've announced already that haven't closed yet.
Kevin Caliendo: Kevin Thanks for the question, let me clarify that we wanted to try to do was give you some of the qualitative factors that we see supporting the business. This year that we would expect qualitatively it will be a part of the algorithm next year, we are giving you the long term.
Kevin Caliendo: EPS growth rate, referring that at 12%, 14%, we feel comfortable with that obviously as we get to our fourth quarter earnings. We'll give you a more detailed breakdown by by segment qualitatively a lot of the factors that we see driving the business.
Kevin Caliendo: Should be in place next year, we think that will support the long term adjusted EPS growth rate of 12% to 14% in terms of the acquisitions I'll just remind you that they are subject to customary regulatory closing conditions and review.
Kevin Caliendo: We did give you the first 12 months accretion when those deals do close but obviously they haven't closed are still going through the customary regulatory review process, but we feel comfortable at least providing you the accretion for the first 12 months and then after that.
Kevin Caliendo: Next question. Please thank you.
Speaker Change: And the next question will come from Allen Lutz with Bank of America.
Speaker Change: Good afternoon, and thanks for taking the questions one for Brad.
Speaker Change: 2% operating expense growth in the quarter Thats really strong as we look at the different segments. There does seem to be some variability by segment. I think you are investing in our XTS and theres. Some cost cuts in med surge can you talk about the big drivers and some of the variability within segments to get to that 2% opex growth and how to think about.
Speaker Change: What's embedded in <unk>, and maybe exiting <unk>, how youre thinking about operating expense growth.
Speaker Change: Yeah. Thanks for that question now and I think we've talked about this back in November when we had our sell side update one of the things that we've really focused on for the last several years is driving operating leverage into the business and we've seen our ability for us to do that over the last several years, it's getting operating efficiency in our.
Speaker Change: North American distribution businesses, and clearly focusing on investments.
Speaker Change: To drive better data and analytics better sourcing better capabilities from our operation. So we are getting more efficient, we're driving more leverage and more throughput through the organization, but at the same time investing back in key areas key areas like Rx GFS, where we're putting investments to play to <unk>.
Speaker Change: Port additional products and services and capabilities and you should expect us to continue to do that so generally speaking driving great operating leverage through getting efficiencies automation, some data and analytics capabilities, but we will continue to invest against our growth strategies <unk> being one of those.
Speaker Change: Next question please.
Speaker Change: And our next question will come from Elizabeth Anderson with Evercore ISI.
Speaker Change: Well again.
Speaker Change: Again Ms. Anderson your line is open perhaps you're on mute.
Speaker Change: Again, Mr Anderson, perhaps you're on mute.
Speaker Change: Absolutely. Our next question will come from Brian <unk> with Jefferies.
Brian: Hey, good afternoon guys.
Speaker Change: Hi, good afternoon.
Brian: As a quick two parter.
Speaker Change: Yes, just a quick two parter, Brian as I think about the medical side of the business, how do I get the seasonality factor that has impacted that but how are you thinking about market share in that segment or that industry, and then really quickly on prison, who as a distributor for prison currently is that incremental business coming in for you.
Brian: Thanks.
Brian: So I mean in terms of the medical business, just remind everybody that.
Brian: Years ago, we shifted the strategy of this business to be focused on the alternate site locations.
Brian: <unk> office specialty clinics long term care urgent care clinics retail care clinics and so that's when you talk about market share, it's really hard to get definitive market share in the alternate site markets, but it's clear we have a leading leading positions in those marketplaces.
Brian: Probably a lot less focused on market share than just growing customer base expanding share of wallet and part of our strategy in this business over the years has been to evolve from just commodity medical products to the.
Brian: More sophisticated medical products to lap pharmaceutical kind of all things that that these alternate site locations need to support.
Brian: The practice of medicine.
Brian: We're providing there.
Brian: So we're quite confident in our capabilities.
Brian: The breadth of those capabilities, including our private label programs and we think that that's what supported our great share position in those markets.
Brian: And quickly answer your question on Prism, we're not the distributor today, we would pick that business up and it's included in the accretion numbers that we provided you.
Brian: Next question please.
Speaker Change: And the next question will come from Charles right with TD Cowen.
Lucas: Alright. This is Lucas on for Charles I wanted to ask about.
Speaker Change: Can you hear me.
Lucas: Yes.
Lucas: Okay great.
Lucas: Thank you Charles.
I wanted to ask about the <unk>.
Lucas: <unk> segment and kind of the outlook for 2006.
Lucas: One of your.
Lucas: Implied guide for <unk> implies an exit rate growth rate of about 13, or 14% I guess, one how much.
Lucas: Strong growth rate incorporates an uptick in the respiratory illness.
Lucas: I mean.
Lucas: Obviously the uptick include cases.
Lucas: To start the year and then for fiscal 'twenty six just thinking about the growth rate in the moving pieces there.
Lucas: Obviously expecting $100 million worth of course, lapping and cost optimization benefit in 2006, but also too when you guys initiated your guidance last may you kind of highlighted investments made in the med search segment John.
Lucas: And two percentage points worth of growth.
Lucas: Maybe confirm that that's still an ongoing process in that.
Lucas: Essentially lap that.
Lucas: Thanks.
Lucas: Yes. Thanks for your question I'll make a couple comments here, we've not provided specific guidance for any of our segments at this point for FY 'twenty six.
Lucas: We have seen a softer flu season and less demand for.
Lucas: Illness season in general and for those on the season products, we're not making any prediction on the remainder.
Lucas: Certainly on next year's illness season.
Lucas: We are pleased with our efforts, thus far and the cost optimization initiatives and we do anticipate that will we will get those $100 million of savings this year and clearly we're continuing to work on the business and get it aligned correctly with our customer base in the markets that we serve.
Lucas: And that's something that we'll just continue to focus on we have seen softer volumes in the primary care channels in settings that we serve and we will continue to evaluate that as I mentioned in my comments, we're going to evaluate the markets and the how the illness season plays out for the rest of this year and we continue to evaluate our cost optimization efforts.
Lucas: As they materialize through the end of the year. So what I can tell you is that clearly we are seeing a soft illness season, that's impacting other components of our volumes in the primary care channel settings, but we're pleased with the efforts on the cost optimization initiatives. This year.
Lucas: Next question please.
Speaker Change: Certainly the next question will come from Lisa Gill with Jpmorgan.
Lisa Gill: Thanks very much.
Speaker Change: Brett I wanted to follow up on a comment that you made.
Speaker Change: Brand changes and im assuming that youre talking about formulary changes as it pertains to Pbms and you have two large mail order.
Speaker Change: That business will both Optum and Caremark I, just really wanted to understand as we see those changes I'm, assuming it's around things like humira.
Speaker Change: Into 'twenty fiscal 'twenty or calendar 'twenty, five we're going to have solera.
Speaker Change: We'll have a biosimilar. So really my question is two things one.
Speaker Change: Is it that youre, calling out that's a revenue impact, but youre still going to distribute the product.
Speaker Change: I would say potential better margin on that Biosimilar or is it more that we're seeing some of these players actually.
Speaker Change: Self distribute something on the Biosimilar side, and therefore that could be a headwind as we move into more biosimilars I just wanted to understand that in general and how we should think about that going into next year as well.
Speaker Change: Look at the formulary changes for all of the Big Pbms and the changes that Theyre, making.
Speaker Change: Yeah. Thanks for the question Lisa This is a very similar comment that I've made in prior quarters. This year. This is one particular product.
Speaker Change: That did go Biosimilar and the there was a formulary change made by <unk>.
Speaker Change: A large retail national customer of ours, it's a revenue issue for us and on doing is calling that out as a revenue impact in this particular quarter not making any comments on other products that may go off brand and go.
Speaker Change: Biosimilar, we will see how those play out as time goes on but this is the same.
Speaker Change: The same issue that we called out in the first quarter. It's a revenue issue on one product with one particular customer.
Speaker Change: Next question please.
Speaker Change: Thank you. The next question will come from Stephen Baxter with Wells Fargo.
Stephen Baxter: Hi, Thanks for the question.
Stephen Baxter: I appreciate all the color on the factors of the business.
Stephen Baxter: Some of the comps that are going to persist into fiscal 2026 systems. When you think about the earnings baseline.
Stephen Baxter: Things that you think we should be thinking as.
Stephen Baxter: <unk> made the adjustments to the baseline special headwinds as we move into fiscal 'twenty pick or anything you might describe as more of a swing factor for us to keep in mind. Thank you.
Stephen Baxter: Yeah.
Stephen Baxter: Yes, I appreciate that question look I think there's a few things that are somewhat analogous to this year clearly we've on boarded a large strategic customer in our U S. Pharmaceutical business that was on boarded in our beginning of our second quarter.
Stephen Baxter: And I think other than that we really are very pleased with strong utilization as Brian mentioned it in our pharmaceutical distribution as well as in our specialty businesses.
Stephen Baxter: Continue to make good progress in our specialty areas such as oncology as Bryan has talked about here. We've added 185 providers. This year, which is really a high watermark for us over the last several years, we're seeing really good same site visits going through those provider basis. So I think as you think about.
Stephen Baxter: The year.
Stephen Baxter: Clearly there are a couple of items, such as adding a large strategic partner, but generally speaking the businesses are performing.
Stephen Baxter: In line with or slightly above our long range targets and we're really pleased with that performance.
Stephen Baxter: Next question please.
Speaker Change: Next question will come from Erin Wright with Morgan Stanley.
Erin Wright: Great. Thank you.
Erin Wright: Follow up on price and just how do you think about the opportunity across general ophthalmology versus the retina business I understand that has kind of both I think there is more of a pharmaceutical angle from a retina perspective, but how do you think about that and the potential synergies.
Erin Wright: Attunity is around Biosimilars like I leave.
Erin Wright: And you've mentioned some of the initiatives in this space like on Mark.
Erin Wright: From a vision perspective and are there other investments that you need to make our build out kind of in and around this space and is this an area that from a disclosure standpoint, and I think one of your peers will be doing that.
Erin Wright: Thanks, John.
Erin Wright: Thank you Miss out on whether it's pay than our U S oncology or thinking about greater disclosure around some of those MSL businesses. Thanks.
Erin Wright: I'll start and then you can complement.
Erin Wright: The comments.
Speaker Change: I think the one thing that attracted us to prism was there.
Speaker Change: Their approach to coordinated care and treating the full spectrum of Ikea retina general ophthalmology and ambulatory surgery centers.
Speaker Change: So they are a provider or general ophthalmology and retina centers and.
Speaker Change: As you think about our.
Speaker Change: Our strategy and the evolution of our strategy here, we started by acquiring some assets in the GPO and some software called retina Oss, which.
Speaker Change: Which I described in my opening comments and so we began to build pieces of the platform and.
Speaker Change: As we reflect on the success, we've had in oncology over the last decade, and a half and measured way. We grew that and started with drug distribution ended in the GPO services and then just continue to augment clinical trial services data and analytics services.
Speaker Change: We've been waiting and studying and looking for.
Speaker Change: Jason.
Speaker Change: Markets that had we saw a strong pipeline of drug growth, we thought Atlas practices, where we could bring these value add services to help.
Speaker Change: <unk> practice medicine, better and so we think this is a terrific opportunity and one thing that we're excited about is we feel like based on our experience with oncology, we really know what to look for group at practices medicine. In this case in ophthalmology in retina knowledge.
Speaker Change: So a very specific philosophy that wants to move together practices on a common.
Speaker Change: Our practice management systems, and we've all got integrated.
Speaker Change: So we very much look at this augmented with the distribution we already do the GPO services, we already view the other services, we already provide the tools we have as building out now that is analogous platform.
Speaker Change: Not exactly the same as the US oncology is tailored for retina and ophthalmology, but it's very much sort of an analogous strategy.
Speaker Change: Maybe I'll address your question on disclosure you always look to enhance our disclosure where appropriate we begun to give you some sense of the oncology platform and the pieces and that platform you might recall at our cell site update we talked about all the building pieces from distribution through practice manner to the GPO.
Speaker Change: Our data and analytics business, all the way through to <unk> and some of the clinical trial capabilities that we have and we outlined for you the revenue for fiscal 'twenty five from that platform is about $35 billion now.
Speaker Change: Now we've announced a few transactions here, but we havent close those and so as we get to a point, where hopefully we can close these transactions will evaluate whether it's necessary for us to do some further disclosure, but at this point in time and I think we feel comfortable that we're providing a good level of data to support.
Speaker Change: Some of the commentary that in some of our strategies around the oncology platform.
Speaker Change: Next question please.
Speaker Change: Yeah.
Speaker Change: Moving on to George Hill with Deutsche Bank.
Hey, good afternoon, guys. Thanks for taking the question and two very quick ones for number one is the the recognition of the cost savings in the medical segment for the back half of this fiscal year seems to be non linear I'm wondering if we can annualize the Q4 part versus the Q3 part.
Speaker Change: Looking forward and then the other part is I just wanted to give you a chance to talk about whether or not there's any headwinds for fiscal 'twenty six cars from a first blush everything sounds great. Thank you.
Speaker Change: Yeah. Thanks George.
Speaker Change: Haven't given any guidance, obviously on what those cost optimization initiatives will yield in 2006.
Speaker Change: Clearly, we would give you a piece of it for FY 'twenty five in leisure, we would expect these to be more than temporary cost savings. So I'll just leave it at that in terms of headwinds look I think.
Speaker Change: We've talked about certainly public policy is a wildcard for us it's not something that we control, but we will certainly watch it and we think that we're well informed and helping educate policymakers and as we've talked about with our medical segment. We have seen slower volumes. This year not only the illness season, but in the primary care channel in general.
Speaker Change: <unk> for the last three quarters and so that's one of the reasons why we went down the path with our cost optimization initiatives to better align our business and to better align it to the markets and the customers that we serve and I would call that out is probably the one area.
Speaker Change: Net.
Speaker Change: Potentially could continue to be a headwind, but we need to as I mentioned, we need to see how the rest of the fourth quarter materializes.
Of the almost season finishes out and certainly our efforts against our cost optimization initiatives.
Speaker Change: Next question please.
Speaker Change: And the next question comes from Michael Cherny with Leerink partners.
Dan Clark: Great. Thank you this is Dan Clark on.
Speaker Change: Two on med surge one for the fiscal fourth quarter.
Speaker Change: What are your expectations for the flu and respiratory season, and any associated volumes, there and then secondarily.
Speaker Change: Like you just talked about in response to George's question, you seem slower volumes in the primary chair primary care channel for the past three quarters. When you talk about potential stabilization in fiscal 'twenty six like what what do you see as the main drivers to cause is it just lapping easier comps or is there anything else worth calling out.
Speaker Change: Thank you.
Speaker Change: So.
Speaker Change: We came into this fiscal year, we plan an illness season to be quote unquote averaged illness season as we as we look back over the years, obviously Q3 got out to a very slow start.
Speaker Change: I think Britain I've been around this business long enough to know that forecasting the illness season is probably it.
Speaker Change: Is that is a hazardous activity I mean, when they start how fast they accelerate how long they endure and then how fast they fall away. It looks very very different year to year. So to speculate on how that will play out in Q4 I think it's just it's just difficult at this moment of time, we're just not far enough.
Speaker Change: All right through that cycle.
Speaker Change: As to the medical surgical business looking forward I think we think we have terrific assets positioned in good markets. If you step away from the last few quarters and just think about aging demographics think about the most convenient sites of care for patients think about the cost of delivering that care.
Speaker Change: Alternate sites.
Speaker Change: Play right into all three of those themes and.
Speaker Change: Population is only aging, it's only going to need to consume more alpha over time. So I think we continue to believe we're in the right segments. We've got the right capabilities. We've got the right team we've got confidence in the actions that we've taken over the last quarters to position the business against the trends that we see.
Speaker Change: And we have time for one more question. Please.
Speaker Change: And that question will come from Daniel Crosslight with Citi.
Daniel Crosslight: Hi, Thanks for taking the question I wanted to go back to the present Mac acquisition I think it makes a whole lot of sense here I was really curious on timing the acquisition comment shortly on the heels of.
Daniel Crosslight: One of your competitors closing down their retina MSL. So I was wondering if theres been any change in the oncology, our retina and ophthalmology markets that makes now a more opportune opportune time to invest in this space said another way has the opportunity in oncology been kind of tapped now youre hunting in other areas.
Daniel Crosslight: And then secondly, I was curious if you could maybe go into a little bit more detail.
Daniel Crosslight: What.
Daniel Crosslight: What services are what expertise from your oncology platform you can bring to the retina space. Thanks.
Daniel Crosslight: So.
Daniel Crosslight: Certainly I want to emphasize that oncology remains one of the central growth pillars for the business, but we think we've got decades of experience terrific assets a track record over the last four or five years of growing very consistency with the scale and the capabilities like Sarah cannon and on top of that we think our value proposition to those.
Daniel Crosslight: <unk> just continues to strengthen and so oncology very much remains central growth platform for us not for this year, but into the future as well.
Daniel Crosslight: In terms of the timing of it.
Speaker Change: Can understand the coincidental nature of it the fact of the matter is when you do M&A. It takes a willing buyer and a willing seller and it takes a financial model that works for us and we maintain very a lot of financial discipline through that through the M&A process and so as we look at various targets, sometimes we can act on them.
Speaker Change: Sometimes the conditions don't match, we can't agree on valuation we don't like following the asset. So we want to do is be thoughtful disciplined and stick to our strategy stick to our financial discipline and when we could find a transaction that aligns to our strategy and makes sense leverages our strength in specialty distribution leverages the retina GPO we have.
Speaker Change: Average is.
That business performance services that we have to support that this was just became a perfect fit at the right time, and we could agree on valuations.
Speaker Change: Okay, well. Thank you everybody really appreciate the great questions and you taking the time to join our call I want to thank Justin our operator for facilitating the call Catherine delivered strong results in our fiscal third quarter were really confident in our strategy and our execution.
Speaker Change: Seniors to position us for sustainable growth over the long term I'd be remiss not to thank all of our teammates our employees for their focus and their passion advancing our mission together I'm proud to be part of your leadership team and excited for what the future holds for all of US. Thanks again, everybody I Hope you have a terrific evening.
Speaker Change: Thank you for joining today's Mckesson FY 'twenty five third quarter Conference call. You may now disconnect and have a great day.
Speaker Change: [music].