Good day, ladies and gentlemen, and welcome to today's Nutrisystem Q3 Earnings Call. I'd like to remind everyone this call is being recorded. And at this time, I'll turn the floor over to Greg Mercer. Please go ahead, sir.
Thank you, Greg. Good afternoon, and welcome to the McKesson's New School 2019 quarter earnings call. I'm joined today by John Hammergren, McKesson's Chairman and CEO Brian Tyler, McKesson's President and Chief Operating Officer and Incoming CEO and Brit Vitalum, McKesson's Executive Vice President and Chief Financial Officer. John will provide our main remarks. Brian will provide a business update and Britt will review the financial results for the quarter.
After Britt's comments, we will open the call for your questions. At the end of the call, we will promptly after 1 hour at 3 pm Eastern Time. Before we begin, our remind listeners that during the course of this call, we will make forward looking statements within the meaning of the federal securities laws. These forward looking statements involve risks and uncertainties regarding the operations and future results of McKesson. In addition to the company's periodic, current and annual reports filed with the Securities and Exchange Commission, please refer to the text of our press release and forward looking statement slides for a discussion
of the risks and procedure with
such forward looking statements. Please note that on today's call, we will refer to certain non GAAP financial measures. In particular, we will rest with adjusted earnings, adjusted operating profit and margin and free cash flow and items excluding foreign currency exchange effects. We believe these non GAAP measures provide useful information for investors with regards to the company's operating performance and the comparability of financial results period over period. Please refer to our press release announcing Q3 fiscal 2019 results and a supplemental slide presentation for further information and a reconciliation of the non GAAP performance measures to the GAAP financial results.
The supplemental presentation is useful when reviewing the fiscal 2019 and fiscal 2018 results discussed today. Finally, for those who have not yet met her, I would like to introduce Hollie Weiss. Holly Weisz was recently appointed Senior Vice President of Investor Relations. My transition to Holly will be completed ahead of our year end earnings call. On a personal note, I would like to thank John, Brian and Budd as well as the investment community for the opportunity to work with everyone over the last few years.
And with that, thank you. And here's John Anderson. Thanks, Craig. And as you're probably aware, as he just mentioned it, this is his last earnings call. I want to thank you, Craig, for your invaluable service to our team over many years and in various roles, and I wish you the best in your future endeavors.
And Ali, welcome as our new Head of Investor Relations. And thank you all for joining us on our call today. This is my 79th earnings call with our investor community, and this call also marks my final earnings call as the leader of McKesson. As you know, our previously announced retirement takes effect at the end of our fiscal year. We are making solid progress with our strategic growth initiative.
And despite some headwinds, the company is in a strong financial position. Guess' future is bright.
It's been my great honor and privilege
to lead this company as Chairman and CEO for nearly 20 years. Together, we've created an organization that plays a unique and significant role in health care. No one is better equipped than Brian to lead McKesson into the future, a gifted leader and an innovator, with industry knowledge and unwavering commitment to customers' success. She has a strong vision for the future health care, both in the U. S.
And globally as well as for how McKesson will continue to play an integral role helping improve efficiency and effectiveness of patient care delivery. Perhaps most important, Brian personifies our eye care shared principles. In fact, he helped me create them as a member of my leadership team nearly 20 years ago. Throughout his tenure at McKesson, he's always fit the enterprise first, focused on teamwork, collaboration and communication and has consistently made employee engagement a high priority. I know that Brian is the right leader to take McKesson into the future.
In addition, I might add, he's a great husband and a father as well as a friend and a trusted advisor of mine. With my retirement, McKesson will be splitting the role of Chairman and CEO. Ed Miller, I'm currently independent Director, will become McKesson's new Independent Chairman on the night of April 1 and has developed a thorough understanding of McKesson over his 10 years of service and serves as a respected leader and will provide continuity for our Board. Over the balance of the fiscal year, the entire Board and I will work closely with Brian and Ed to ensure a smooth transition. And after April 1, I will continue to support McKesson in an advisory capacity, and I will remain Chairman of the Board of Change Healthcare.
I'll be forever grateful for the many things we have accomplished together as a senior at McKesson and for the incredible friendships I've made along the way. McKesson is truly a special place with our rich history, innovation, culture and most important, our people. Every day, I'm humbled by the opportunity to lead this great organization and together with our employees, we see positive impact across health care. I might also mention that with many of you, I've worked for years, and I want to thank you for your support over all of these years and your friendship in some cases. You've always treated us with great respect.
You've asked tough questions and fair questions, and we've attempted to be as transparent as we possibly can. So I appreciate the support. And with that, I'll turn the
call over to Brian. Brian? Thank you, John, and good afternoon, everyone. I want to be the first probably of many recognize and congratulate John for the lasting impact he has had on McKesson. He and I, as you mentioned, have been colleagues and friends for a long time, and I am truly humbled by the opportunity to succeed him as McKesson's CEO.
His leadership and vision for the past 20 years have allowed McKesson to achieve a level of success that few companies ever accomplish. I'm excited to build upon his legacy. I've had the privilege of running nearly every major business in McKesson as well as leading our corporate strategy function. I know our teams, I know our capabilities, our markets, our customers and importantly, our employees well. The lead McKesson at this point in time is energizing.
And I look forward to advancing the tremendous culture, solid foundation and global platform established by John and his team. The healthcare industry continues to undergo change as we focus on addressing affordability, access and quality outcomes for patients. I'm confident that McKesson is the partner of choice for biopharma, providers and pharmacies in all segments across health care to help improve the delivery of health in our communities. As I mentioned on our last earnings call, our strategic growth initiatives is gaining momentum. Most of the top leaders within McKesson were involved in developing our strategy to accelerate growth, supported by cost savings initiatives and operating model efficiencies like our recently announced headquarters move to Las Colinas.
To succeed in today's evolving market, we will need to find new ways to innovate, speed up decision making and empower our teams so that we can provide even better value to our customers and patients everywhere. More than 20 years ago, John helped guide our company through a time of crisis and showed us what leadership and resilience look like. Fast forward to today and McKesson's success can be seen both by the financial health of the company and our culture of doing what's right and putting the patient first. I believe our culture truly is the competitive strength of McKesson. We thank you for that culture, John.
We thank you for your tremendous leadership and accomplishments. On behalf of all 78,000 employees, it's a very big thank you, a very big congratulations, and of course just huge riches for happiness in whatever is next to you. You will be missed greatly. You will always be warmly remembered and regarded. Now turning to the quarter.
For the Q3, we achieved total company revenues of 56 $1,000,000,000 and adjusted earnings per diluted share of $3.04 which were ahead of our expectations. As a result, we are narrowing our fiscal 2019 adjusted earnings per diluted share range to $13.45 to $13.65 from the previous range of $13.20 to $13.80 dollars We have reduced the top end of our guide to reflect the $0.26 impact of a customer bankruptcy that Rick will discuss in more detail. And we have raised the lower end of our guide based on the solid Q3 results and early indicators of our Q4 performance. A few comments on our business results. Our U.
S. Pharmaceutical and Specialty Solutions segment had year over year revenue growth in the Q3 of 6%. Last month, Rite Aid renewed their distribution and sourcing relationship with us for another 10 years as we had contemplated in our guidance. We're of course pleased that Rite Aid continues to see the value we deliver in our partnership through our industry leading service levels, which translates to better experiences with their patients and customers through our competitive pricing and through our efficient operating model. All of this helps them to succeed and their decision further validate our sourcing scale and service levels following Rite Aid's extensive competitive evaluation process.
As it relates to reform, we continue to monitor proposals and share our perspective and collaborate with the administration, policymakers and trade associations. We have been in discussions with our biopharma partners and customers on opportunities to address the shared concerns of the administration around affordability, access and quality. As the administration implements new strategies that transition from volume to value based reimbursement, we regularly demonstrate our ability to support our customers and improve patient care delivery. As a recent example, the U. S.
Oncology Network received incremental payments from both the oncology care model and the merit based incentive payment system, sometimes referred to as MIP, reflecting the value we provide to our physician partners. We and Tresen continue to believe that community based care is the best way to address these goals and that value based care models are important tools to drive improved patient outcomes. We expect that as various reimbursement changes are considered, the value of community based care will continue to be recognized. Now turning to McKesson Europe. In the Q3, we appointed Kevin Kettler, a 13 year McKesson veteran, as Chairman of the Management Board of McKesson Europe.
Kevin previously was President of Global Procurement and Sourcing. He managed the international team responsible for growing McKesson's private label generics business, which is a priority in Europe. Additionally, Kevin served in multiple leadership roles in corporate strategy and U. S. Pharma over the years.
He brings people experience in pharmaceutical distribution, procurement, marketing and retail pharmacies to his new role in Europe. Let me provide some color on Europe's operating performance in the quarter. Seasonality and market growth in all countries except the UK drove an improved sequential and year over year performance. While most of Europe continues to perform well and grow, the UK business does face challenges. The actions we took last year to rationalize our store footprint and streamline our back office operations only partially mitigated by U.
K. Government cuts. We previously mentioned the prior reimbursement cuts in the U. K. Were in excess of historical levels and greater than we had planned for in our initial fiscal 2019 guidance.
We're currently evaluating the recently released NHS long term plan and we're modestly encouraged by the general increase in health care funding that it proposes. While we're pleased to see the important role of pharmacy in the plan, we believe it's premature to expect a near term return to growth, particularly given the generally weak retail environment and the uncertainties of Brexit. The UK team is working closely with internal and external stakeholders to evaluate the government dynamics and operating environment, making further changes to continue to return the business to growth. We remain committed to ensuring the long term profitability of this business. Now some comments on our Medical Surgical business.
Medical Surgical continues to be a real good story for us, reflecting strong margin growth, incremental scale from our recent MSG acquisition and benefits from an ongoing shift to lower cost base of care. I'm particularly pleased with the segment's performance this quarter, especially when comparing the more normalized flu season experienced so far this year against the unusually strong flu season last year. And looking further ahead, we continue to expect incremental synergies from our MSC acquisition as we integrate operations. This acquisition directly supports our strategic growth objectives of increasing our value proposition for our manufacturer partners and expanding our solutions related to specialty pharmaceuticals. Finally, McKesson Canada, McKesson Prescription Technology Solutions and our equity investments in Change Healthcare, all included in other, saw upside in the quarter driven by organic growth mitigating actions in Canada to address previously discussed government generic price actions.
During the quarter, McKesson Canada continued its progress on mitigating the impact of government imposed generic pricing cuts that went into effect April 1, 2018. And together with strong organic growth in our McKesson prescription technology solutions business, we were able to offset slightly lower adjusted equity contribution from Change Healthcare. And specifically regarding Change, as we've mentioned before, to the extent market conditions are doable, we continue to expect an IPO in the first half of calendar twenty nineteen. Before I turn it over to Britt to provide more detail on the performance of each of these businesses, I wanted to spend a minute to discuss the opioid litigation and epidemic. As it relates to litigation, the timing for conclusion of the myriad of cases remains uncertain.
The magnitude of litigation expense is determined in part by the schedule set in these cases and underlying activity, which is not in our control and therefore difficult for us to project. We do take our fiduciary responsibility to our shareholders seriously. We will continue to evaluate the cost of all our options as the litigation in different jurisdictions progresses. We were encouraged by a recent decision dismissing the claims 21 municipalities in Connecticut, binding the lawsuit to the inappropriate means to recover societal costs associated with addiction. As for the ongoing epidemic, I, as many of you, I'm sure, are deeply concerned about the devastating impact it's having on the lives of so many people, including friends and families of McKesson.
Our teams are working on solutions. Last year, Congress passed a support act to address electronic prescribing, electronic prior authorization as well as some provisions related to Arco's data to avoid production quotas and suspicious orders. Many of the provisions near recommendations previously made in our opioid white paper. We also launched an opioid foundation that will focus on helping advance solutions to the nation's opioid crisis and is led by a distinguished physician with relevant public policy and addiction treatment experience. I'm very proud of McKesson's efforts to combat this epidemic and to support solutions for the future.
With that, I'll turn the call over to Britt, and we'll return to address your questions when he finishes. Britt?
Thank you, Brian, and good afternoon. Today, my comments will focus solely on our Q3 results and fiscal 2019 guidance. We will provide guidance for fiscal 2020 when we report Q4 results in May. As Brian discussed earlier, we are pleased with our fiscal 'nineteen Q3 results, which were ahead of our expectations. We continue to make very good progress on our strategic growth initiatives, operating model and cost optimization program.
As a result of this performance, we are narrowing our fiscal 'nineteen adjusted earnings outlook to $13.45 to $13.65 per diluted share in fiscal 'nineteen from the previous range of $13.20 to $13.08 per diluted share. Let's jump right into our 3rd quarter results. Quarter adjusted EPS of $3.40 flat compared to the prior year. This was primarily driven by a lower share count and growth in our Medical Surgical business, offset by higher tax rate, lower profit contribution from our U. S.
Pharmaceutical business and higher corporate expenses. Let me take a minute to discuss tax. As it relates to the higher tax rate compared to the prior year, I'd remind you that our adjusted tax rate in the Q3 of fiscal 2018 of 11.5% included discrete tax benefits of approximately $54,000,000 as well as a cumulative catch up adjustment related to the Tax Cuts and Jobs Act of 2017 to reflect a new lower federal tax rate of 21%. In addition, McKesson's fiscal 2018 adjusted tax rate was positively impacted by the intercompany sale of software related to our former Technology Solutions segment in the Q3 of fiscal 2017. Now let's turn to the details of our consolidated 3rd quarter adjusted earnings, which can be found on Slide 10.
Consolidated revenues for the Q3 increased 5% versus the prior period, primarily driven by growth in our U. S. Pharmaceutical and Specialty Solutions segment and acquisitions. We now anticipate low single digit percent consolidated revenue growth. 3rd quarter adjusted gross profit was up 5% year over year, mainly driven by growth in our Medical Surgical and U.
S. Pharmaceutical and Specialty Solutions segments, including acquisitions. 3rd quarter adjusted operating expenses were up 8% year over year due to charges related to the bankruptcy of Shopko within our U. S. Pharmaceutical and Specialty Solutions segment and acquisitions, partially offset by the reversal of an accrual related to the State of New York Opioid Stewardship Act and ongoing cost management.
Let me take a moment to provide more detail on the customer bankruptcy and the reversal of the New York accrual. First, we recorded $60,000,000 in pre tax charges, principally related to accounts receivable with Shopko, who recently filed for bankruptcy. This amount, which represents substantially all of the exposure related to this customer. We believe this would correlate to an approximate $0.03 impact to the 4th quarter. While we successfully manage payment terms, we work closely with Shopko to ensure we are paid for the products and services delivered.
We believe there is risk in our ability to secure full payment and therefore recorded charges during the quarter. We'll continue to pursue payment and we'll provide an update on our progress on our next earnings call. 2nd, as I detailed on our last quarter's call, while the New York opioid stewardship act was being challenging quarter at that time, the test recorded an accrual with both our GAAP and adjusted results to account for our estimated portion of the annual assessment. In mid December, District Judge in New York ruled the legislation unconstitutional, thus unenforceable. As a result of this ruling, Kestman reversed all previously recorded charges totaling approximately $17,000,000 We will continue to track this matter calling an appeal filed earlier this month.
While we benefited from the favorable ruling and reversal of the charge for New York recorded in our U. S. Pharmaceutical and Specialty Solutions segment, it was more than offset by higher opioid related litigation expenses in corporate. For the Q3, we recorded net opioid related adjusted operating expense of $20,000,000 and year to date $81,000,000 For fiscal 2019, we continue to anticipate that opioid related costs will exceed $100,000,000 Turning back to our consolidated results. Adjusted income from operations was $918,000,000 for the quarter, a decrease of 2% from the prior year.
We now anticipate adjusted income from operations will decline in the low single digits year over year. Interest expense of $67,000,000 in the quarter was flat compared to the prior year, and our adjusted tax rate was 15.3% for the quarter, mainly driven by discrete tax benefits of $58,000,000 resulting from tax planning initiatives in our mix of business. For the full year, our adjusted tax rate assumption is approximately 17% to 19%. This guidance takes into account our latest assumptions regarding income mix as well as other one time items in fiscal 2019 that we do not expect to reoccur. Income attributable to non controlling interest was $67,000,000 for the quarter, a decrease of 2% compared to the prior year.
Our adjusted net income from continuing operations totaled $664,000,000 with 3rd quarter adjusted earnings of $3.40 per diluted share, which is flat compared to $3.41 in the prior year. Wrapping up our consolidated results. Our 3rd quarter diluted weighted average shares were $195,000,000 a decrease of 6% year over year. During the quarter, we completed $500,000,000 of share repurchases. We continue to expect diluted weighted average shares of approximately $197,000,000 for the year.
Next, I'll review our segment results, which can be found on Slides 11 to 14. Let me start now with U. S. Pharmaceutical and Specialty Solutions. Revenues were $44,300,000,000 for the quarter, up 6% to the point of market growth, including strong growth in pharmaceuticals and acquisitions, partially offset by previously disclosed customer losses and branded to generic conversions.
Segment adjusted operating profit for the quarter was down 2% to $593,000,000 due to charges related to the customer bankruptcy discussed earlier and previously announced customer losses, partially offset by growth in our specialty business and the reversal of a charge related to the State of New York Opioid Stewardship Act. Excluding the impact of the customer bankruptcy related charge, the reversal of the charge related to the New York Opioid Stewardship Act, we would have seen year over year growth in segment adjusted operating profit for the quarter. Segment adjusted operating margin rate was 130 4 basis points, a decrease of 10 basis points. For the Q3, brand compensation was in line with our expectations. Additionally, due to manufacturer price actions taken in January, we continue to be confident in our full year fiscal 2019 assumption with brand price inflation in
the U. S. To be
in the mid single digit percentage range. I would remind you that our branded pharmaceutical contracts are primarily of a fixed rate in nature. And as a result, the brand compensation is less impacted by brand price increases as compared to our historical experience. For full year fiscal 'nineteen, we now anticipate a low to mid single digit percentage decline in adjusted operating profit for the segment. This represents an improvement from our prior expectations driven by our 3rd quarter operational performance.
Next, I'll review European Pharmaceutical Solutions. Revenues were $6,900,000,000 for the quarter, down 1%, negatively impacted by $228,000,000 from currency rate movements. On an FX adjusted basis, revenues were up 2%, driven by strong performance outside the U. K, partially offset by the previously disclosed reduction in owned retail policies following the closure or divestiture of approximately 200 stores and a challenging operating environment in the U. K.
We now anticipate full year revenue for the segment will be flat compared to fiscal 'eighteen. Segment adjusted operating profit was down 19% to $69,000,000 On an FX adjusted basis, adjusted operating profit was down 16% to $71,000,000 While our U. K. Business was lower than the prior year, driven largely by the impact of the previously announced additional reimbursement cuts and market conditions in our retail business, the rest of Europe performed well, reflecting growth on a year over year and sequential basis. The segment adjusted operating margin rate was 99 basis points on a constant currency basis, a decrease of 23 basis points.
We continue to expect adjusted operating profit to decline year over year for the second half fiscal twenty nineteen contribution similar to what was recorded in the first half of the year. Moving now to Medical Surgical Solutions. Revenues were $2,000,000,000 for the quarter, up 19%, driven by the Medical Specialty Distributors MST acquisition and solid market growth. Excluding the MSD acquisition, segment revenue was up 8%. Segment adjusted operating profit for the quarter was up 21% $170,000,000 driven by solid operational performance, contribution from the MSC acquisition, improved cost of goods and operating expense leverage.
The segment adjusted operating margin rate was 3.45 basis points, an increase of 12 basis points. We now anticipate that the segment adjusted operating profit for fiscal 'nineteen will be at the high end of our previously provided range of mid to high single digit percentage growth. Finishing our business review with other. Revenues were $3,000,000,000 for the quarter, up 1%. Revenues were negatively impacted by $113,000,000 of currency rate movements.
On an FX adjusted basis, revenues were up 5%, driven primarily by market growth across the businesses in the segment. We now anticipate that full year revenues will be flat year over year. Other adjusted operating profit was up 5% to $224,000,000 On an FX adjusted basis, adjusted operating profit was $226,000,000 driven by growth in our prescription technology solutions business or MRxTS, partially offset by the impact of previously disclosed government initiatives on our Canadian business. We now anticipate that adjusted operating profit will grow in the mid single digits year over year, driven by the stronger than projected contribution in MRxTS. Closing our segment review with Change Healthcare.
Adjusted equity income from Change Healthcare was $52,000,000 for the quarter. The company continues to make focused internal investments to expand new technologies, to enhance systems and deliver on synergy realization. We remain pleased with the operating performance of the business, which is in line with our expectations. And subject to market conditions, we continue to expect a calendar first half ratio. Next, we tested recorded $138,000,000 in adjusted corporate expenses, an increase of 29% in constant currency year over year, driven primarily by opioid related expenses.
Due to higher than anticipated opioid related expenses, we now expect adjusted corporate expenses to increase by a high single digit percentage year over year. Now that I wrap up our results, let me discuss our updated fiscal 2019 outlook. We now expect adjusted earnings per diluted share of $13.45 to $13.65 per diluted share for fiscal 2019. Our updated outlook reflects the following: stronger than anticipated underlying performance in our U. S.
Pharmaceutical and Specialty Solutions segment, which includes a favorable ruling on the New York Opioid Stewardship Act, our performance in our Medical Surgical segment and continued growth within our MRxTS business. These positive developments are partially offset by the customer bankruptcy I previously discussed, higher opioid related litigation expenses and an updated assumption that foreign currency exchange rate movements will have a negative impact of up to $0.05 per diluted share. We are well positioned to continue to execute in our Q4. I'll now review our working capital metrics and cash flow, which can be found on Slide 15. For receivables, base sales outstanding decreased 3 days to 24 days.
Base sales and inventory decreased 1 day to 29 days. Base payable outstanding decreased 4 days from the prior year to 54 days. I'd remind you that our working capital metrics and resulting cash flow may be impacted by timing, including the data release that marks the close of a given quarter. We ended the quarter with a cash balance of $1,800,000,000 For the 1st 9 months of the fiscal year, McKesson paid $866,000,000 for acquisition, repurchased approximately $1,400,000,000 in common stock and paid $216,000,000 in dividends. During the quarter, McKesson issued $1,100,000,000 in long term debt, which will be substantially used to repay an upcoming debt maturity with approximately $1,000,000,000 in short term borrowings outstanding at quarter end.
McKesson generated $141,000,000 in cash flow from operations After accepting $405,000,000 in internal capital investments, McKesson had negative free cash flow of $264,000,000 This result was in line with our expectations. For fiscal 'nineteen, we now expect internal capital investments at the low end of our previous range
between $600,000,000 $800,000,000
and free cash flow of approximately $3,000,000,000 I'd remind you that typically during our fiscal Q3, we experienced a net use of cash, primarily driven by the build in inventory for the holiday season. In addition, in our fiscal Q4, we typically generate more than 2 thirds of our annual operating cash flow, with more than $3,000,000,000 generated in our final quarter and 2 of the past 3 years. We also have a total of $3,700,000,000 remaining on our share repurchase authorization, which demonstrates the confidence that we have in our business going forward the conviction that the Board of Directors and the management team have that the company shares are an attractive investment opportunity. And finally, our Board of Directors approved our quarterly dividend of $0.39 yesterday, which will be payable to shareholders in April. To date, fiscal 2019, we have returned more than $1,600,000,000 to our shareholders through share repurchases and dividends, reflecting our focus on providing returns to our shareholders, while also making internal investments and acquisitions to support our long term growth.
Let me now take a minute to update you on the optimization of our operating model and cost structure. As we announced earlier this month, McKesson has expanded its relationship with Genpact, a global professional services firm focused on delivering process transformation. The expanded relationship will accelerate McKesson's operating model and cost structure program redesign, which will simplify and standardize finance processes while deploying leading edge technologies that will drive improved effectiveness, efficiency and savings. This partnership, in combination with other finance operating initiatives, is expected to contribute up to 1 quarter of the previously announced annual gross pre tax savings of $300,000,000 to $400,000,000 which are anticipated to be substantially delivered by the end of fiscal 2021. We expect that these savings will increase gradually over time and that a majority of these savings will flow to the bottom line.
In closing, we are very pleased with the results of our fiscal third quarter performance and the progress against our strategic priorities. Despite an unanticipated customer charge, our results exceeded our expectations, demonstrating our commitment to operational execution. Following solid third quarter performance, we now anticipate fiscal 2019 adjusted earnings per share of $13.45 to $13.65 per diluted share. We look to build on the momentum of our Q3 and remain confident in our business as we focus on a strong finish to fiscal 'nineteen. Lastly, I'd also like to thank John for his outstanding leadership.
We're very fortunate to have worked with an incredible leader. John has done a tremendous job leading the company for nearly 20 years. If we now turn the page to Brian, I'd echo John's comments that we that you've made in the press release today. We're well positioned, and I believe we're in very strong hands going forward with Brian. With that, I'll turn the call over to the operator for your questions.
In the interest of time, I ask that you limit yourself to just one question and a brief follow-up to allow others an opportunity to participate. Operator?
Good afternoon, guys. And again, John, congrats. It's been
a pleasure working with you over the years.
So I know you probably haven't had a ton of time to sort of digest and prepare, but there obviously was a number of things that came out after hours from HHS around rebates and end of the kickback. And so it looks like you're trying to push forward with some of the proposals we heard earlier in the year. I guess at a high level, I know this is something you feel strongly you can sort of recoup the economics of if it goes into place. But I guess how are you thinking about that in the context to just a disruptive course potentially at least in the short stretch of the business and how hard the government could approach at least for just one piece?
Ross, it's Brian. Thanks for the question. I did see that flash across my e mail screen as I walked into the conference room here. I thought we might get a question. First, let me say that we support programs that enhance access, quality and cost.
And if we think about the wholesaler model and how our economics in the supply chain work, we're not directly dedicated on the safe harbor in question. Our economics really come from the manufacturer and revolve around the fair value of the services that we provide to them. We continue to believe that we run a highly efficient distribution and supply chain service and that they over the years have reinforced that view and through various evolutions in our market and our industry. We continue to be paying fair value for the services that we provide. And that's based on the conversations that we've been engaged in today, We continue to believe that that will be the case.
So I might also just comment that we are not just a supply chain company in terms of logistics, but a pretty sophisticated financial operation as well. And on behalf of our manufacturers today, we administer lots of contract prices between manufacturers and hospitals or manufacturers and pharmacies and millions of literally millions of price item customer combinations today. We do it at scale and we do it with great accuracy. And in our pharmacy technology businesses that you heard Chris talk about in terms of their strong current performance, We have very sophisticated at scale pharmaceutical related transactions over $17,000,000,000 a year connecting directly at the pharmacy counter. So clearly, we will continue to engage in conversations with our manufacturer and other partners as people shift through the implications of what has just come out.
But I focus you back on, we continue to believe that we deliver a very important service in the pharmaceutical supply chain. We continue to be paid for that service that has evolved over the years. We expect it will continue to evolve, but the net net we would expect will continue to be paid appropriately for the services that we provide. That's super helpful color.
And just maybe going to the quarter, I feel like all of the
segments sort of relative to your
expectations came in at least in line or maybe even better in some places. Do you feel like this is sort of evidence of aside from some of these pieces of the hiccups that come out again like what happened with Shopko, a tide preventing a situation like that, the underlying trends in each of your businesses, at least sort of that work are flat and maybe in some cases are certainly maybe even a touch better. And we're starting to see that bottoming that hopefully you should see the jump off for growth eventually and sort of the out years?
Well, we were certainly pleased with the operational performance of many of our businesses in the quarter. And as we've talked over the past months, we did see brand inflation come in line with where we had expected it to. That was a good development. It provides some good underpinning for us. We see the generic market as reaching at some point of stabilization.
It's always competitive, but it's competitive in the sense we feel confident or comfortable historically. And we do think that the focus that we've had over the past few months on the operating models and the discipline is beginning to resonate across our businesses. So I think I would say I feel real good about the quarter, the operational quarter that the business put out.
And then moving on, we
have Charles Rhyee with Cowen and Company.
Hi, this is James on for Charles. It looks like the MedSurg business performed better than we expected as the margins improved about 12 basis points year over year. Can you just talk more about what drove that margin expansion? And maybe what gives you confidence to improve the outlook as evidenced by your revised segment upward profit guidance?
Thanks for the question, James.
We were pretty pleased with medical business. I would characterize it as pretty solid performance really across the business. Most of our segments performed on or ahead of where we had expected them to. We performed well on the gross profit line. I think we saw some upside from expenses and this is an environment where we're operating in a normalized flu season when a typical year we would expect a little more tailwind from flu.
We're more normal than say last year's really strong season. And I think part of it is just good execution. We're obviously continuing to benefit from the MSC acquisition. And as we progress in the integration of the MSC acquisition, we feel good about the progress we're making and it continues to be on track. So I look at the medical business and just feel it was a pretty solid performance really up and down the P and L.
And I might just underpin that. As I mentioned in my remarks, including the MSC acquisition, which Brian mentioned, is performing well in terms of integration. We would have had 8% growth year over year. So that's really solid growth within the ongoing business, really across that business. So 8%, excluding MSD, I think really underpins Brian's comments about the solid performance of that segment.
Okay, great. And also can you maybe talk about the reimbursement environment in the U. K? Do you
get any sense of as
you can see into any incremental growth?
Well, as I've mentioned in past comments, we always expect some level of reimbursement headwind. We have experienced in the prior few years abnormally high headwinds, I would say, and that's clearly challenged the business. If I think about the current reimbursement landscape, there were the CNA test typically does a 3 year plan and this is the 3rd year of the plan and that plan would have called for them to push through some pharmacy specific cuts, which they elected to not do, which we took as a mild positive that the NHS is in tune with the landscape of community pharmacy in the U. K. Obviously, they've come out with a 10 year the NHS is 2110 year plan and community pharmacy was highlighted in that plan as having an important role in addressing cost access and quality for them.
I did just this week, yesterday or I think even this morning is Mac NHS announced the incremental funding into the provision of community health around GPs, but also including other healthcare professionals, which we think just continues to reinforce their view of the importance of community provision of health in addressing the cost challenges of NHS. We're still digesting a lot of that. And I would not want to ever declare a victory on a reimbursement front given recent experience, but probably would like to think that we've probably gone through the most significant of that. Now it's really a matter of how we continue to evolve the DHL pharmacy model and to be a more integrated part of healthcare delivery in the communities in England.
Moving on from JPMorgan, we have Lisa Gill.
Thanks very much. Good afternoon. John, I sincerely want to wish you the very best and wish you enjoyed time with your family. I may be the only one on the call today that has
been on all 79 earnings calls, if you could.
Hi, Lo. Truly miss you, as you know. I'd like to let you know, Brian, you can make a couple of comments. One, you talked about the Q3 being ahead of the internal expectations. Was there anything that was pulled forward for Q4?
Because you also made a comment that it's early the case of feeling good about where you stand for Q4. So I just want to understand if there was anything, number 1, that would go forward. And then secondly, as we think about the 4th quarter, if they're getting too hard to when I look into the new revised guidance, it does come in kind of towards the lower end of where the Street is on the midpoint.
Yes. Thank you. So I'll make a couple remarks and then let Britt add some color. Just with regard to the performance of the business in Q3, I think I characterize it as pretty solid and feeling good across many of our businesses. I don't believe there was any unique pull forward or I think of it as just for solid operating performance.
And Lisa, maybe what I would add to that, I agree with everything that Brian said. As we think about Q4, one of the things that I mentioned in my remarks was really around branded price inflation. And although we've talked that more of our branded compensation is about 95% now fixed in nature and that's variable, There still is that contingent part, obviously, that we talked about previously at JPMorgan. We feel comfortable on our mid single digit range. And again, we had very strong performance.
And we believe we'll continue into Q4.
Moving on, we have Eric Prusher with Network Research.
Thank you. And congrats to John and many thanks to Greg. For Brian and Britt, a question on opioids. I think the first part is relative you've just given some of the solutions that Newcap has taken part in, it would be interesting, Brian, to hear or a distributor plays in some of the responsibility or limitations of responsibility that computer should hold? And then, Britt, dollars 100,000,000 in legal expense, that's a significant number.
Is there a lot of early stage work and will that work and flow or is that where we're going to be for the future?
Well, I'll take the first part of the question, Eric. And as you well know, the healthcare supply chains are incredibly complicated with lots of actors playing various different roles. I mean, as it particularly relates to opioids, we get the product to DEA licensed pharmacies. They fulfill those based on scripts written by DEA licensed physicians and the DEA itself even controls the overall quantity of opioids in the marketplace. So while we have a role in that typical supply chain, I would say that we would we feel like a disproportionate amount of the attention has been placed on wholesalers at this point.
Eric, I'll take your second question. Again, we've updated our guidance on the opioid litigation costs. And again, we our best view on it right now is that it will be in excess of $100,000,000 for the year. I think it's challenging for us to really have visibility on what the cost could be over the longer term. These costs have continued to increase over the balance of this year.
I think as we think about going forward, just projecting the cost going forward will be difficult. It will depend on a lot of different banks, decisions that the judge will make in the various cases, how the judge will potential certain milestones in each of the cases. It's very difficult for us to predict how each of those situations will play out. But we'll continue to update you as we go forward. And what we've given you now is our best projection on those costs, at least for
this year. And we do pay just responsibilities in a very serious way. At this point, where we are, we think it's very important, but we invest in the legal defense and we invest lawyers to represent us in that defense. And as Britt said, it's very difficult to predict where and how and when these things will evolve. But our commitment is to be good stewards the capital that you have invested in us, and we will continue to keep you updated as this process unfolds.
Thank you.
And next we have Brian Tanquilut with Jefferies.
Hey, good afternoon guys. Just a question on CVS on that contract. I mean, what are your expectations around the ability to retain the current services that you provide them? And then what are your thoughts on any additional services that you can provide? Now I would say the additional services that you can I'd start with, we've had a long standing relationship with GBS.
We've been longtime partners and we think that we service their business to highest standards and levels that can be found in the industry. So we value and appreciate the relationships we've had with them over the years, and we would fully expect that we will continue that relationship here in discussions with them currently around the renewal and extension of that agreement. And like we said many times, if you look at the industry, there's a pretty good track record of renewing these. And certainly for McKesson, we feel very strongly that our track record of renewing and maintaining these relationships is strong. Other than the seasonal loss from acquisition related activity, we think CVS well respects the work that our associates do on their behalf.
And so we enter into these discussions, we have every full expectation to renew it. We often talk about CVS as a big customer for the U. S. Pharma business and that certainly is true. We also have relationships with them in
our Relay Health and some
other parts of the company as well. So it's a pretty big broad comprehensive relationship overall and we're optimistic that we will continue that relationship.
Next we have Mike Turney with Bank of America.
Great. Thanks so much for all the color today. I know it was addressed earlier
in terms of the HHS and the
rebate rule. I'm not expecting, as
you said, an A2 on this. I think we've asked this question in the past, but when you talked about going back and making sure
you're getting company compensation, what else goes into the conversation in terms of is this creating an opportunity with your customers to explore new services
to pitch them on some of
these things, whether it's part of
my meds and some of
the other areas that they haven't bought me for
the past? Are there other services that they're coming back and asking you to try
and pursue over time? Just trying
to understand in a situation like this with uncertainty around how the pricing paradigms play out for pricing as a whole, how can we create incremental strategic opportunities for a company that historically has been pretty active on the M and A
Yes, great. Thank you for that question. As I think about addressing an issue like this and I think about healthcare, it's fundamentally connected upstream, downstream. I mean, whether it's employers, payers, CVM, wholesalers, retail pharmacies, it's a pretty interconnected system. And we're fortunate in McKesson that really have businesses, solutions and relationships across multiple of those constituents.
So we tend to talk, I mean, you call it a lot about the dialogues we have with manufacturers, but we certainly have dialogues with those other constituent customers as well. And I think one of the great strengths of McKesson is the breadth of reach that we have and the capabilities we have, including some unique capabilities like you cover my meds and RelayHealth, which we would think there is good potential for some opportunities as contingent, of course, on how this evolves. But when we meet with our partners, when they're upstream or downstream, we try to bring the full capability and complement of McKesson into those discussions, not to let it primarily focus on just one
piece. And next from Leerink, we have Dave Clark.
Hi. Congrats on a good quarter. Can you talk a little bit about the Rite Aid renewal? Are those renewal rates reflecting in this quarter's results or the new guidance for fiscal 'nineteen? Can you just talk a little bit about the sell side market environment as it relates to China comparison?
Thanks a lot.
David, thanks for that question. I'll start and then I'll let Brian jump in. As we've talked about before, we're very pleased obviously with renegotiating or renewing Rite Aid for a longer period of time. We think there's strategic opportunities for both of us. As we've also said, this was renewed within our guidance.
So there will be what was the guidance we gave you today includes the renewal with Rite Aid.
Is it in the quarter? Is it fully reflected in the quarter to Q2?
Fully reflected in our numbers, in our results, yes. Okay, great. And then can
you just touch on generic deflation? Like how is that trending relative to expectations without being too specific? One of your peers said, you know, it's single to high fee inflation rates is what you're seeing. Is that what you're seeing as well or?
Yes. We don't give specific ranges on the rates of generic deflation. But as Brian mentioned, we're seeing a more stable or more normalized environment around generics. And I think it's important to look at both the sell side as well as the buy side. On the sell side, we are seeing the competitive marketplace as we've seen for many years.
And then we expect we have to continue, but we're seeing a very stable environment. And then on the buy side, we're very pleased with the performance that we have at Clarus 1. We think that that entity is still performing quite well and is providing us the opportunity to continue to work very closely with our manufacturers. And we think that the pipeline environment is more normal in terms of historical ranges and it's a more stable environment than it has been several quarters ago. So we're very pleased with the environment that we're in.
It's a competitive environment, but a more stable one. Our next
And our question comes from Ricky Wasser with Morgan Stanley.
Yes. Hi. Good evening. And John and Craig, wishing you all the best and enjoy your time And Brian and Holly, I'm looking forward to working with both of you. So, yes, just a second question for you.
Let me congratulate you.
I know earlier on the call, you
said that you're going to focus only on fiscal year 'nineteen. But I do know starting next week, starting Monday, most of the questions we're going to get will be on fiscal year 'twenty. So just if you can just help us think about the factors we should consider. I mean, obviously, there's VITAIC and the CVS that you already talked about, which are likely to be headwinds next year. But how should we think about any other factors that we should consider and whether tailwind to keep which that terrain as we think about next year?
Yes. Thanks for the question, Richard. Maybe there's another call you can congratulate me on something.
I hope that you have a long tenure of going.
Thank you for that. So as we've talked about, we're very pleased with the quarter and there's a lot of things that both Brian and I outlined that we do as providing momentum as we go into Q4. And certainly, we feel very strongly about it as we move forward. We talked about our medical business and we had very good performance in our medical business, not only from the acquisition of MSC, but the rest of the business performed quite well at Alltel. We talked a little bit about our protection prescription technology business, and we're certainly seeing good product new product growth as well as good revenue growth in that business.
And then our U. S. Pharmaceutical and Specialty Solutions business, again, as we talked about, we had the customer charge in the quarter, outside of that customer charge and the reversal from the New York State Opioid Stewardship Act, we would have had growth in the quarter. And so we feel that there's really strong growth underneath in that business as well. So there's a number of areas in our business that are performing quite well.
We certainly feel good about the position that we're in as we close the Q3 and as we have momentum going into the Q4. Those are a few of the areas that I would point out to
right now. Okay. So nothing in 'twenty. So let me ask you another question here. So the healthy healthcare market is changing and much faster than we all anticipated or appreciated heading into this year.
Brian, from your perspective, as you look ahead, is it a big part of your 1st year as a CEO of the business? What do you think is kind of the one area or maybe 2 areas are going to be your top priorities? And where do you think that you're going to spend most of your time under the opioids? There's obviously the relationship with the manufacturers, a number of different things. So from your perspective, what are we
really kind of assessing
your key priorities?
Yes. Thank you for the question. It certainly is a dynamic time in our industry. And we often, I think, in these calls, we're on clouds. And the fact of the matter is when I look at the investment and I look at the breadth of the businesses we have, I look at the reach in the channels, I look at the positioning in the community based channel And the capabilities, whether they're supply chain, whether they're software, pharmaceutical transaction or medical surgical related, I think we've got just a tremendously broad set of assets and capabilities, unbelievably talented teams, and that change creates great opportunities for companies like ours that can bring these assets together in unique and differentiated ways on behalf of biopharma partners, on behalf of provider customers.
I think to me that's the real exciting part of it and that's the real opportunity that lies ahead. So that's where I'll be spending my time with our partners upstream, downstream and with our teams that are dedicated on delivering the value to those partners in and out every day.
Thank you and congrats again.
Thank you, Vicky. One last question?
All right. The final question from Goldman Sachs, we have Robert Jones.
Great. Thanks for sticking me in. John wishes best, Craig. It's a pleasure.
I guess, Brian, just going back
to this idea that you discussed, is there services that you as a wholesaler provide for hospitals and other channels that aren't currently being leveraged in the retail channel? I heard something obviously very similar from one of your peers this morning. Obviously, the HHS news seems to be kind
of pushing us towards this kind of net pricing world, which seems
to play a part in this. Could you maybe just level set up and maybe just elaborate a little bit on what specifically the services are that the changing or current pricing dynamic would allow for a wholesaler to leverage its Q4 channel?
Well, I think
the reality is we're going to have to see how things evolve here and how various constituents respond to the proposal that's been laid out. But I feel good about when I think about the capabilities of McKesson, and I mentioned this in my comments, is the fact that we do financial transactions, we do pharmaceutical transactions today is very important to our business at scale with high accuracy, with really mature, developed, established incredible reputation for performance around those. And so I do think as we look to how the markets will respond, how various segments will respond, we are in a good position to be able to provide solutions to whatever that evolution is. Thanks so much. Okay.
Thanks, Robert. And thank you, Greg. I'd like to thank all of those of you on the call with us for your time today. I certainly look forward to engaging with you and the rest of our investor community going forward. I want to acknowledge John one last time, thank him one last time for his terrific career accomplishments and impression he's left on me and then I left I know he's left all across the teams of McKesson.
It was a great thing to miss. I want to thank our employees for their dedication to our customers and partners in line with our eye care values of putting the patient and the customer first in everything we do. In closing, I'm excited about the opportunities ahead of us. McKesson continues to execute against our fiscal 2019 plan. We look forward to updating you with our fiscal 2020 outlook in a few months' time.
We'll now hand the call back to Craig for his review of upcoming events for the financial community. Craig?
Thank you, Brian. On Thursday, February 28, we will present at Verint Partners' 8th Annual Global Healthcare Conference in New York, And we look forward to releasing our 4th quarter earnings results in early May. With that, thank you and goodbye. Ladies and gentlemen, thank you
for joining today's conference call. You may now disconnect. Have a good day.