Well, good morning, everyone, and welcome to McKesson's 2018 Investor Day. We're delighted to have you here, those of you who are able to join us here in Boston and those joining via webcast. I'm particularly excited about the opportunity this event provides to have you here directly from our leadership team, the executives as well as the business unit leaders from across the enterprise. We have a great agenda for you today. First, we'll be covering our multiyear strategic growth initiative that was recently announced, and then we'll be going through our new operating segments, starting with U.
S. Pharmaceutical and Specialty Health. From there, we'll have a Q and A session, followed by a brief break. When we reconvene, we'll cover our European and Medical Surgical segments, we'll provide a financial update, have another Q and A session before we conclude today's event. Before I carry on, I wanted to acknowledge that we have via webcast the opportunity to submit questions, which we'll try to incorporate into Q and A session, time permitting.
Now before we begin, I want to remind you of our Safe Harbor statement. Over the course of today's presentation, we will be making forward looking statements within the meaning of the federal securities laws. These forward looking statements may contain certain risks and uncertainties,
which are disclosed in the
company's public filings. Additionally, we will make reference to certain non GAAP financial measures. For a full reconciliation of these non GAAP financial measures to our GAAP results, you can refer to these materials, which are available on the Investors page of the company's website. Now without further delay, it is my pleasure to introduce to you McKesson's Chairman and CEO, John Hammergren.
Good morning. Thank you for that rousing welcome. I and especially to the I think the 12th cadre of leaders teaching leaders over there in the corner. So is that you on that iPad playing it back to me? Okay.
Okay. I thought he was coming from the speaker. Anyway, the 12th class, welcome. They all graduated last night. We're excited to have them here.
These folks, as you know, are the people that are really 1 or 2 layers below the folks you're going to meet today, and we're excited to have all of you here and hopefully you'll enjoy this. I want to thank all of you also for coming today and being in the room with us. We know the weather is not particularly delightful, but we really appreciate you joining us. Before I get into the presentation, I know many of you have on your mind the announcement that was made this morning by Amazon related to a company called PillPack. We'd be happy to address it during our Q and A, but as a setup for those of you that may not be that familiar with the company, we are and there are other companies like PillPack around the country that have produced convenience packaging that allows patients to understand when and how they should be taking their meds, etcetera.
So, like any other business you can imagine that we are certainly aware of and concerned about Amazon's plans with this asset. But I might also tell you that we have terrific customers across this country and across the world that have been preparing for years to continue to meet the needs of their customers and have significant scale and momentum in their businesses. And I feel that our strategy to help them be more successful tomorrow than they are today is what got us here and what will continue to fuel the growth of our company going forward. Craig mentioned the management team that's with me here today. This is the list of executives that report to me.
Not everybody is going to have an opportunity to present, but by looking at this list, we'll see a lot of tenure and seniority in our group. You'll see some new names and phases you'll have a chance to spend some time with today. But I'm extremely excited about the quality and the bench here at McKesson and our ability to continue to deliver significant results from this team and the many others that are surrounding us. So you're very familiar with our company. I think one of the things that marks us as an organization is the significant footprint we have in healthcare, in particular, in medical supply distribution in the alternate site and clearly our pharmaceutical presence.
We do have anything to help our customers be more successful on really three dimensions, how do our customers attract more patients into their practice or into their pharmacy, how do our customers do a better job of delivering best in class quality care and how they do it in an economic way that improves the financial condition of the patients and the payers that simultaneously improves their own financial condition going forward. We believe that our ownership of retail pharmacy, both in Canada and in Europe, helps us understand more clearly the needs of our customers that are partnering with us in our banners or franchises, things like Health Mart, etcetera, that we run around the world with. That retail experience, we think, helps us build out our value proposition for our customers. Clearly, the management of free cash flow has been an important priority of our enterprise over the last several years and we are really proud of our not only ability to produce a great cash flow out of our operations, but also to deploy that cash flow in a very intelligent way. And clearly, one of the things that continues to be an important priority for us is our ability to interact directly with our investors in settings like this to make sure you realize the import we take relative to your ownership position in our company.
We're very fortunate to be in high growth businesses across the world. The global markets continue to grow at a healthy pace. We have, as you know, over the years increased our exposure both globally, but also to what we think are the fastest growing markets, particularly in specialty. We're going to talk a lot more about our specialty businesses today. And clearly, the demographics in all of these markets are supporting the continued growth of McKesson.
And one of the things that you'll hear about from our executives today is our desire to help patients get on the right drugs and help them stay on the right medications and there still is a significant amount of evidence that people are not as compliant to the physicians' prescription requirements as they could be. Not only is this a significant waste from a healthcare perspective somewhere in the neighborhood of $300,000,000,000 to $400,000,000,000 annually is spent because people are not adherent to their pharmaceuticals. But there's also a significant growth opportunity for the company as you think about doubling the size of the pharmaceutical business if people were just more compliant and more adherent to the pharmaceutical regimens that have been prescribed for them. So a lot of our recent acquisitions, things like CoverMyMeds and other acquisitions like that are helping us deliver value both to the manufacturers and to the patients and the providers that are trying to stay up with the innovation and get people on the right prescriptions. And if you actually think about the evolution of our company over 185 years, you hopefully have seen us on an ongoing basis continue to evolve our strategy to increase our exposure to growth opportunities and to evolve our ability to serve our customers.
And we started doing Investor Days like this 18 years ago. I think in 2000, it might have been one of the first ones that we did. And back then, the messages coming from our management team were really around world class execution, customer focus and evolving our operations, so we could be best in class from a delivery perspective and from a cost perspective. What you're going to hear today is continued themes around operational excellence, which is at the foundation of what we do every day, but this evolution to providing more and more services to our customers to allow them to be successful with a patient centric lens, thinking about the requirement that the patients are looking for, whether they're in hospital or whether they're in a pharmacy in the UK or whether they're in a physician's office, what are their expectations and how can we help our provider partners meet those expectations of those patients going forward and through that more all encompassing service grow our business. We do obviously continue to focus on our own operating costs and Britt will talk more about that.
And clearly, we continue to invest heavily in innovation internally and externally through M and A. And Britt will talk a little bit more about or I should say, Vancey will talk a little bit more about those growth initiatives when we transition to him. The growth initiatives are really on 3 large platforms. They're not all encompassing, but they're clearly a corporate wide strategy across all markets and across all businesses and that's an increase in our focus on manufacturer services. This helps innovators get their product to the marketplace quicker, help get more market share and obviously keep people on a sustained therapy and whether it's medical supplies or whether it's pharmaceuticals, what are we claim what can we do to help our manufacturers be more successful and move from a vendor relationship to more of a customer relationship.
Obviously, I talked about the specialty pharmaceutical business. We began investing and increasing our exposure to specialty, particularly in oncology over 15 years ago and we now have a very significant footprint, both in the distribution and solution set for the logistics and and to make sure that the therapy is sustaining and to make sure that the therapy is sustaining. And clearly, as I mentioned a few minutes ago, the role of retail pharmacy, we continue to believe and see tremendous evidence of payers, whether they're private payers or government payers looking to put pharmacy more in the center of healthcare, both because it increases access and availability, it's delivering care at a significantly reduced cost than non medication related therapies And increasingly, other care can be delivered in these retail pharmacy settings in a less expensive and high quality way. Underlying those 3 major pillars is a corporate wide analytics and digital strategy that is being led by Kathy McElligott, our CIO. We believe that we can approach analytics in a very comprehensive way and we believe the data that McKesson has across our enterprise, not the least of which resides in oncology, can be very valuable both for the provider customers and for the manufacturer customers.
And as we examine our cost structure across the enterprise, we believe there's significant opportunity for us to be more efficient, more agile in our decision making, certainly less bureaucratic and we can take layers of cost out over time and that helps fund and fuel the growth initiatives that we have underway. So as I talked about, our objective really is to help our customers think about the patients they serve in a comprehensive way for us to understand from that lens what those patients are looking for from a care perspective and then evolving our strategy back into the McKesson enterprise so that we can provide the services that are necessary to improve that quality of life and that cost dimension for the patients in the market. So with that, I'd love to invite Fancy Najee, our Head of Strategy and Business Development to the stage to take it to the next level. Thank you.
Good morning, everyone. I'm delighted to be here and share some observations on the areas we prioritize as our growth initiatives. As John described and you will see these themes echoed throughout the presentations that come from our business unit leaders, we took an approach here, which was to really look at global trends, customer needs and their evolution and industry dynamics and disruptions and looking to places where we had strength and capabilities that we felt we could build on and that would lead us to win in these areas. And we picked these three areas, manufacturer value proposition, specialty pharmaceuticals and the role of retail pharmacy. I'll do a double click on each of those.
And as John mentioned, we're going to support all of these with data and analytics capabilities, which take advantage of vast amounts of data that we have as a company. Let's talk about manufacturers. The pace and cost of drug innovation has never been higher in the industry. With all of this scientific innovation, the task of accessing the right patients in the right setting has never been more complex for our manufacturer partners. And we have steadily been building our capabilities in this space over time.
You will have noted the acquisition of RX Crossroads, Government Nets and Biologics. They're all examples of capabilities that we now offer to our manufacturer partners to help them commercialize their products more efficiently. And as the business model becomes more complex, particularly with speed to market becoming important and value based and performance business models, manufacturers need more data and more analytic support to commercialize their products, but also to help inform their R and D decisions and we believe we have a right to play in that world and we can help our manufacturer partners be more successful. You're all fully aware of the rate of growth in specialty products. By 2021, half the drug spend will be on specialty products.
The pipeline of innovation in this arena is very exciting. Immuno oncology drugs, cell therapies and in particular in the world of oncology, but not just oncology, rheumatology and neurology are examples of therapeutic areas with vast amounts of innovation going on. With this innovation comes a huge amount of complexity. There's a complexity of administration in some of the cell therapies that are coming out. There's complexity in approvals around biosimilars.
And with that complexity, I think, comes opportunity for us to help, again, our manufacturer partners and also help them figure out the right sites of care, the right way to administer their products. Our past and recent investments, I think, have positioned us particularly well in this space. We made investments many years ago in US Oncology and more recently, Advantage to build out ecosystems in the oncology space. Many years ago, we acquired OTN, we acquired GMD in Canada, IntraFusion, BDI, they're all supply chain solutions, but even our recent acquisition of MSD in our medical surgical business helps position us well in the specialty arena. And we're poised to continue to innovate with the rest of the market here.
John talked about our retail footprint. We have 16,000 owned and banner pharmacies. We think that setting is really important. We think that footprint is really important. We continue to believe that retail pharmacy is going to be a critical setting of care for patients.
We expect a lot of disruption in that space as is evidenced even by today's announcement about PillPack. And we believe that patients are increasingly going to expect the kind of experience they have in other parts of their life in the retail pharmacy setting, more omni channel interactions, more convenience and more ability to interact with their patients and sorry, more ability to act with their pharmacist and their physicians in an online way. Our pharmacist partners themselves need time to spend more quality time with their patients, so we can bring capabilities to them to use their time more efficiently to help them be more successful in their businesses and hopefully to take advantage of some of the opportunities that exist to improve the quality of care for patients, adherence being just one example of ways that Mission Partners can play a critical role. Nicola Fekara and Brian Tyler will talk more about some of our innovations in the retail space. And finally, our final growth platform, if you like, firmly our capability will enable all of these growth platforms as our role in the world of data and analytics.
And as a global pharmaceutical supply chain leader, we sit on vast amounts of unstructured data, vast amounts. For example, we have InaMed EHR in our oncology setting, which has biosimilar unstructured data in it. We think that the way in which we can accelerate our capabilities will bring solutions to our customers in a few different ways. We already help our manufacturer partners with real world evidence that helps them really improve their lifecycle economics and ultimately helps improve their R and D processes to help get their products developed and to market quicker. We think our ability to help our customers with predictive analytics could certainly be useful in creating targeted interventions in the adherence behavior that you saw earlier that John referred to and help us tailor patient interventions to keep patients on the therapy.
Our vast data sets in community oncology have already proved very valuable to manufacturer partners in their development activities, but also in helping develop care pathways that are particularly important as the world moves to value based care. So, we think there's a lot of opportunity to use the data we have and we are putting as one of our initiatives in this strategy that we're laying out a lot of effort at building capabilities to analyze that data more quickly, to access it more in a more targeted way and to use that in our offering with our customers. Now, I've helped articulate the growth areas. I'd like to invite Rick Verlone, our CFO to come up and he'll talk about how we're executing against those priorities and how we'll fund these initiatives. Britt?
Thank you, Vansy, and good morning. So Vansy did a nice job of really outlining our key growth platforms and the favorable long term dynamics that support those. And so, what I want to do today is talk a little bit about the cost side and how we're going to be aligning our operating structures and really focusing on some of the spend opportunities that John also highlighted. Executing on the opportunities that Vansy and John highlighted for you is going to require us to evolve and adapt the way that we work and also focus on the opportunities that we have to harmonize our cost opportunities across our organization. So, we're going to optimize our operating structures across the organization to help us continue this growth cycle on an ongoing basis.
As Nancy mentioned, we're using data and analytics. We're using that in a more effective way than we have in the past. We're also going to be looking at automation opportunities, process alignment and improvement opportunities across our organization become more streamlined, more effective and as John mentioned, more nimble, more agile. We're going to leverage the scale of McKesson. As we leverage that scale of McKesson, we're going to have significant cost synergies and cost reductions, and I'll talk about how those are going to be used to not only fund the opportunities that we have in the areas of data and analytics, but also fund our growth initiatives.
So as you heard us talk about already today and you'll hear all of our presenters talk about, the patient is really at the center of what we do. As we think about the patient and we think about delivering the capabilities that we have to the patient, we do that through, as John mentioned, consistent operational excellence. And it's a culture that we have of operating and financial rigor that helps us support our patients, helps us to continue to deliver enhanced value through innovation. In addition to that, our world class operations, we're continuing to bring new and innovative solutions. We're thinking about that in terms of the new growth pillars that Vansy outlined for you this morning.
So again, let me talk a little bit about the importance of the other side of our strategic growth initiative. We believe we have a tremendous opportunity to continue to evolve the way that we work and focusing on the back office to align our back office operations with the strategic growth pillars that Vansy talked about today in a much more efficient and effective way than we have previously. And we're going to really be focusing on simplifying our cost structure and focusing in the beginning on our enabling functions. You can see those here today, information technology, which will be streamlining that organization, but also making investments in that organization, focusing on our finance organization across the globe and also focusing on the opportunities that we have to streamline our human resources organization across the globe as well. And we're going to take advantage of the scale and the leverage and the expertise that McKesson has to reduce our spend, focusing on the cost opportunities that we have and we think those are very significant.
And those cost opportunities are initially going to be used to fund some of the data and analytics work that we're doing as well as to fund some of the growth initiatives. But over the mid- to longer term period, we would expect these cost opportunities to drop through to the bottom line and help us to accelerate our growth. I would remind you that as we work through the preliminary phase, we did outline for you that we would expect to take GAAP only charges of approximately $150,000,000 to $210,000,000 in FY 'nineteen. These estimated charges are not included in our adjusted earnings outlook. So we're very confident in the focus that we have on focusing on our operating structures, streamlining the organization, using the scale and the expertise of McKesson to drive significant and meaningful cost synergies that are going to drive sustainable growth over the long term.
I'd like to just briefly touch on our segments before I introduce our the Presidents of each of our segments who will go into more detail the strategies in each of our businesses. As a reminder, on our May earnings call, we introduced for you new segment reporting, which we believe will provide additional transparency and clarity into the way that we manage our business. So I'll just make a few comments on FY 2018 before I turn this over to my colleagues to go into more detail in each segment. Again, our segments are all very well poised to execute against the growth pillars that we've outlined for you today. And what you'll hear today is how our segments are working in a more collaborative way to take advantage of the opportunities that we have in front of us.
First, let me start with our U. S. Pharma and Specialty Solutions business. Previously, these businesses operated independently. What we've done is we've combined our U.
S. Pharmaceutical business with our specialty health assets and Nick Lipacaro will go into more detail about that. This segment is now over $160,000,000,000 in revenue. We have the opportunity to not only take the world class execution we have in the traditional full line wholesale business, but to combine those capabilities and the focus that we have on the specialty opportunities as well as some of the manufactured value creation opportunities that we're developing in this business. In our Europe segment, we've talked about we faced some NHS reimbursement reductions that were significantly above historical practice.
And more recently, we faced some increased competition in France. And Brian will talk today about how this business is well positioned though to take advantage of their diverse set of wholesale and retail assets. And we remain very confident in the position that we have in these businesses in Europe and many of the countries that we operate in are growing quite nicely. And our Medical Surgical business had a very strong FY 'eighteen and Stanton will talk about the diverse set of capabilities and assets that we have in this segment. This business continues to grow nicely.
And with the acquisition of the recently announced MSD business, we're very well positioned and we're in a great spot to add to our market leading positions in the medical surgical business. And while there is a potential for new competitive threats and that does exist, We believe that we have a superior array of assets in the medical business and we compete very effectively and we're a leading position in that segment. So, we're excited about the growth prospects that we have in Medical Surgical and Extant will do a great job of showing you the array of assets and the diverse set of businesses that we have to compete in that segment. Finally, within our other segment, we have our McKesson Canada, our McKesson Prescription Technology business as well as our equity contribution ownership from Change Healthcare. We talked earlier on our May call about the Canadian business and the recent challenges that it faced with the generic reimbursement reductions and the significance of those reductions.
We outlined for you that there's a gross headwind in FY 2019 of between $100,000,000 $120,000,000 But what you'll see is, as we talk through this segment, we are able to provide for the segment a flat adjusted operating profit outlook despite the challenges that we're seeing from these government actions. And that really speaks to the strength of the businesses within this segment. Our Canadian wholesale business is very well positioned, and we have very strong assets in our MRxTS business. So our segments are well positioned. We have a diverse set of very strong assets and capabilities.
We're adding to that with our strategic growth initiative. And these pillars really set us up quite well and we're very confident in the position that we have as we move into FY 2019. So, I'd like to now turn this over to my colleagues to go through a more detailed review of each of these segments and I'd like to start with Nick Lopecaro, the President for U. S. Pharmaceutical and Specialty Solutions segment.
Thanks, Britt.
Well, I'm
thrilled to be up here in front of you. I want to talk about the combination of bringing together U. S. Pharma and Specialty, but more so to talk to you about our efforts around bolstering the assets I have spoken to you about in the last couple of years in Specialty and how we are bringing that over to our pharma segment and helping our partners across the overall business. What gives us license to continue to serve our customers?
The underpinnings of everything we do is execution, as you've heard Britt mention it and John as well. 99.98 percent order accuracy when you look at our assets like ClarusONE and what we've been able to bring to our partners. It allows us to continue and deliver enhanced value here in excess of $30,000,000,000 of specialty revenues in fiscal 2018. We have talked about the acquisitions of VDI Pharma, Rx Crossroads and I will expand on those as well as IntraFusion and a few others. We continue to innovate.
I am going to expand a little bit on our new HealthSmart Atlas, a joint venture we have there on our PSAO offering and what that does for our independent retail partners. And last but not least here, this approach of patient focus and working back from the patient, really excited about sharing with you a lot of what we've been doing and how we look at maintaining the patient as a North Star and what we build around that and helping our partners better serve their patients. HealthPart has grown to now 4,900 stores. We have enhanced offerings around the continuum of care that we've talked about. Nancy mentioned the acquisition of Vantage Oncology and how that's complemented what we've done in the U.
S. Oncology network. And as you see here, 73,000 patients supported in 1600 clinical trials with more than a third of all oncology drugs that have been approved for the FDA coming through our research network. Just a couple of statistics here, 5% total market growth here from 2017 to 2022. What's interesting here is as you look at the oncology related products, a third of late phase specialty drug pipeline are oncology.
When you think about our presence and the ecosystem we've built in the oncology space, this positions us really well for that growth and those developments. Independent pharmacy still remain a third of all retail pharmacies, and that's remained pretty stable. What's exciting for me as you look at the biosimilar launch potential here of $29,000,000,000 over the next 5 years as well as the $76,000,000,000 in brand sales shifts. We're well positioned in every one
of these
spaces as these areas start to grow and being able to take advantage of them and service our pharma manufacturers as well as our provider partners. So as you look at our core offering, from a supply chain perspective, I had the opportunity and the pleasure actually this past Monday of going into our newest distribution center that serves the New York Metro area, highly automated, just a beautiful facility. We continue we have a plan looking across the country on what we're doing with our distribution network as we continue to automate that as well. Our value proposition to health systems, we continue to help them with analytics solutions. And what's been really interesting is the gain in share that we've had in this space and the growth is pretty interesting and very exciting.
As you look at our retail pharmacy footprint, I mentioned earlier, Health Mart has now grown to 4,900 stores. We continue to innovate with them as well. I'll expand on Health Mart Atlas a little later, but we've now partnered with PrescribeWellness, which gives our pharmacists a whole set of tools as well when you're thinking about med synchronization and adherence programs and how they can take advantage of those. And from the community based perspective, we've talked a lot and I've shared with you in the last couple of years, as we talk about our oncology ecosystem and how we've looked at other therapeutic areas and wanting to develop that model, I'm going to expand a little on our neurology footprint, but we've had great success there with the partnership with the Neuronet that we've just launched into, as well as signing with one of, if not the largest retina partnership in the market. So we continue to see that development and have made significant inroads what I've shared with you in the last couple of years of taking that oncology model now and getting into different therapeutic areas with that.
So as we look
at the 3 growth streams that Vansy, John and Britt have shared with you, As I look at the manufacturer area here, as you know, we've put up a business, our manufacturer solutions organization a couple of years ago. That's resonated really well with our pharma partners. We've made significant investments in that space. Rx Crossroads being the latest, biologics, I'll talk to you about IntraFusion as well. So, we are working with our manufacturer partners in a different way and have been and I will tell you truly has resonated.
I'm going to show you an example of 1 manufacturer partner specifically that we developed a few programs with that now take advantage of a full suite of what we have to offer as McKesson. From a specialty pharmaceutical perspective, I mentioned IntraFusion. This now gives us a beachhead, not only into neurology, but all these other specialties. And quite frankly, as we look at our retail space and our hospital systems space, how do we bring some of those assets in there? We've already started looking at solutions for those segments and how we can now take specialty and support those programs.
I've participated in several conferences in the last couple of months where we've worked and are working with some of our partners that have either invested or put up infrastructure around specialty and how we can help them now with what we've built and learned and developed on the specialty side of our business. Retail pharmacy, we've talked about this, you've heard it mentioned a few times, obviously, a space that we're interested in, invested in and continue to develop with our retail footprint. As John mentioned, we do see retail pharmacy as an extension of care. And even with models we've worked on, like the oncology care model, where we see partnerships in using retail pharmacy as an extension of some of those programs. So really looking at how can we bring these assets to bear and continue to support what we're doing in the retail space.
I mentioned PrescribeWellness. We have a Health Mart, My Health Mart app that we've put up for our Health Mart partners. And again, we'll talk about the PSOA joint venture in a little bit. So the example I mentioned here, AstraZeneca has been a phenomenal partner with us. Back in 2014 with the launch of COPRELLZA, we worked with them and had an opportunity to start looking at how else could we continue to work with them beyond just the distribution of the product.
So we started looking at further up stream access to the patient population that they needed to get to and that developed into the exclusive sorry, the CALPIRZA was in 2011, the exclusive access to the launch of Lynparza with McKesson, which then later to as we look at Calquence here, what's really been interesting is we now have a program with AstraZeneca where they work with 5 of our offerings. We have our specialty pharmacy, specialty distribution, GPO services, healthcare informatics, as well as our healthcare economics and outcomes research. So we've been able to take this distribution relationship that we developed with them back in 2011, get to an exclusive agreement on another product in 2014. And now in 2017, we're working across 5 different solution sets as well as our distribution services in a partnership with Astra. It's just been phenomenal.
And we see similar growth like that with other pharma manufacturers. Novartis has been a great partner for us in our patient assistance programs. We handle, if not all, the bulk of all of their programs currently. So you can see this just picking up. I know I've talked to you about this in the last couple of years, and we really do see the momentum around these programs picking up, enabling us to continue to grow our partnership and the business with all of these pharma manufacturers.
I want to touch upon, John mentioned and Nancy mentioned CoverMyMeds. As we look across not just the specialty pharma businesses and look across to our other business units, we've developed some very unique and interesting programs leveraging CoverMyMed's technology as well as our hub services in our manufacturer solutions business. What we've been able to do here focused on electronic prior authorizations and benefit investigation is to be able to take what CoverMyMeds has done in a highly automated fashion and where they need assistance from our agents who are on the phone guiding patients through this process, there's this handoff when if need be, which then again positions us really well with our pharma manufacturers and being able to show them sort of a holistic platform where nothing slips through the cracks. We catch all of the prior auths and we're able to continue to make sure that that patient is covered, built up. John mentioned compliance, adherence, when you look at sort of that second or third slide that we had out there.
We have over 700,000 providers coming through CoverMyMeds portal that we get to interact with. And I want to get down to the integration of our copay card and the prior authorization. What's real interesting here is as you look at this, what we've developed is an offering called Express Coverage. And it's a combination of what I mentioned earlier. It's that automated service along with our agents who sit in our centers representing the manufacturers and helping literally holding those patients' hands throughout this whole process.
So what that does is making sure that we maximize the prior auths, which facilitates the provider's life. That helps with adherence and make sure that the patients are remaining compliant on their prescriptions. Rx Crossroads, we've mentioned this a few times, thrilled to have this group as part of our business. What's interesting here is this is a perfect example of where we've been able to take sort of the power, reliability of McKesson, our infrastructure and take sort of the flexibility and the tailored offerings of Rx Crossroads in working with our manufacturer partners. And what's interesting with Rx Crossroads, it actually complements 3 of our business segments.
So just a phenomenal team. We're just started the integration of this. It's going really well. Actually, John and I got to spend some time in Louisville just last week with the team in one of our newer facilities as well. So couldn't be more excited about bringing on the RS Crossroads business and team.
And our acquisition of this business again has resonated really well with our pharma manufacturer partners as well as our provider partners who get the benefit of that relationship. So as we get into looking at all the assets and I take the AstraZeneca example as the best example of this, where we started with a distribution relationship, we learned through that relationship what the needs were, invested accordingly and still have a significant sort of pipeline of targets of how do we continue to bolster all of these so that we can work with our manufacturer partners now even 2 years before launch of a product as we look at access, which channels we need to get to. And quite frankly, that influences how we're looking at these therapeutic areas and what networks we need to continue to develop or ecosystems like we've developed in the oncology space. I will also tell you our success in the oncology space as we talk about those biosimilars and the launches positions us really well, but has also been able to indicate to our manufacturer partners we can be as successful in these other therapeutic areas and I've been able to demonstrate that we can build those channels for them as well.
From the perspective of retail, I mentioned Health Mart Atlas. This has been a real nice success where we've been able to work with our American Pharmacy partners in a PSAO that they had and managed to come to the table together in a joint venture in bringing this together with now over 6,600 pharmacies. And actually, I believe since we've printed this, could be over 6,800 from what I understand from our folks that are running this. So you think about that 6,600 pharmacies that we have as part of this relationship, where now we get to facilitate and work with the PBMs on behalf of the retail pharmacies, bring pretty innovative programs for them and quite frankly get to do all the credentialing. And so the power of this is not insignificant when you think about our position in this space and think about that and marrying up the other assets we've developed elsewhere and how can we bring these into this channel as well.
So pretty exciting for us. We're thrilled about this partnership and being able to get to this conclusion with APCI. So this takes us back to where we started. This you've heard me say this earlier and I'll say it again. This focus of keeping the patient as the North Star, working back from that and understanding how each one of our partners, whether they're the providers, the pharma manufacturers, our payer partners, how do we continue to build to make sure that we're getting the right medications to the right patients, we're keeping them adherent and quite frankly, keeping them in lower cost, higher value settings where it's convenient for them and they're being taken care of.
Execution, a hallmark to we've said this before, we remain maniacal in making sure that we execute and deliver. It's what gives us the right to have these relationships and maintain them. You've seen what I believe is the enhanced value that we've been able to bring to all of our partners and constantly innovating, whether that's building internally, acquiring, integrating and leveraging to get right back to are we making sure that we're delivering the right solutions to our partners so they can give better care and better value to our patients. So I'm going to wrap up there and I'm going to ask my colleagues to go up to the stage for our first Q and A session.
So as you're thinking about your questions and before you start, I thought I would introduce 2 players you haven't met yet or you might have met them in the past, but you haven't met them today and that's Dominic Pila on the far right. He runs our Canadian business and Nathan Mott next to him who runs our technology businesses, RecoverMyMeds and the pharmacy systems, etcetera, report up to his organization. Those two executives represent the other segment of McKesson along with our Change Healthcare earnings result, a proportionate earnings result. So that's what that's all about. Dominic, maybe you can just quickly describe your business and what you're excited about this year and I'll ask Nathan to do the same thing and then we'll jump to the first question.
Sure. Thanks, John. Well, in Canada, we're extremely well positioned. We've assembled a great set of assets and we're able to get leverage from those assets by combining them, take advantage of our scale, take advantage of our technology and capabilities and bring those businesses together in a unique way that there is no nobody that's been able to replicate that in the Canadian market. And in each of the individual segments, we're a leader in the Canadian market, whether it's wholesale specialty, largest retail footprint in the Canadian market, largest provider of primary care services.
So a leader in each of the segments and then of course a unique set of assets that are combined. And not only are they combined in terms of having scale and capability, but they address the unmet needs in the Canadian market really around access, one of the largest unmet needs in Canada around quality, both in terms of health come and quality delivery of care and then around cost and efficiency. We're very well aligned with those unmet needs and it's still really resonating with all our stakeholders, our employees, our customers, our regulator, manufacturer partners and employers. And so we're in
a really, really good position and we're really delivering on that integration capability, John. Great. Thanks, Dominic, Nathan.
Yes. So as John said, we created McKesson Prescription Technologies about a year ago. And what we did is essentially take some of our technology assets that we already had and combine them with CoverMyMeds through the acquisition. And in doing so, we've got a lot of technology assets that are focused around the prescription and the prescription process and it's created a very robust network of technology capabilities. Essentially, we are connected
to the vast majority of all
the pharmacies in the United States, the payers, the manufacturers and with CoverMyMeds, as Nick talked about, now we're connected to over 700,000 providers as well. And so you can imagine that that capability is very, very helpful. And something just for an example, like the prior authorization concept, this is something where the payer has to essentially approve the medication or the service. And this would typically be manual and take almost a full week to take place. And what would happen is it would be frustrating for the patient and led to a lot of prescription abandonment.
With our capabilities, we can automate that communication between the pharmacy, the provider and the payer so that we ensure that that patient gets on therapy and stays on therapy.
Great. Thanks, Nathan. We'll start over here. I think it's Lisa.
Lisa Gillis, JPMorgan. John, it feels like the market has lost all faith in drug retail. But yet today, I hear you talk about the role of the retail pharmacy, especially around the independent. And I do appreciate that the number of independent pharmacies have remained roughly the same in the last 20 years. What do you think is really missing between the way Wall Street perceives the value of a retail pharmacy and what you're actually seeing in the market, 1?
And 2, do you think the role of the independent pharmacy is going to change over time? And do you think that either some Amazon like counterpart comes into the market? Or do you think that with some of the horizontal acquisitions that are going on right now that we're going to see market shifts away from the independents? And if that's the case, how do we think about this shift and change to your business model? I know that's a lot.
Well, clearly, independent pharmacy is an important part of our company. And but frankly, all retail pharmacy is an important part of our company. We have lots of other businesses, obviously, that we described today and we'll talk more about that when Stan gets up for your MedSurg in particular. But you actually see in the combination of CVS and Aetna, a decision to bring community pharmacy more into the care process. We talk to our business partner at CVS.
They talk about the fact that pharmacy can be a place where care delivery can happen in a broader context perhaps than just pharmacy, including MinuteClinic plays a role there. But keeping people out of these large acute care facilities, out of the emergency rooms is an increasing priority across the world, not just in the U. S. And I think access location, convenience and intimate relationships with the patient matters. Having said that, patients want to have an opportunity to buy the way they want to buy and part of what we are making sure that we are doing as a company is not only helping our own pharmacies in the case of Dominic's business and and Brian Tyler's business.
But in the case of all of our 16,000 customers who were in that banner owned kind of a position, how do we make sure that the customers' needs are met in a myriad of ways and whether it's I want to click and collect on my way home from the office, I'd like it delivered to my house because somebody is there, they can actually pick it up, it's not going to sit in the yard. I want to come in and actually have a consultation with the pharmacist and walk in the store and I need some other items while I'm there. Or I'd like to be on a regular scheduled delivery via mail order in some fashion. All of those things are things that are already happening in our customer set. And what we're trying to do is make sure that we leverage what we already do for our more sophisticated customers down to the very smallest community pharmacy.
So we've been a corporate headquarters of these community pharmacies for a long time. This PSAO idea, which is basically the network creation for pharmacy is something we've done to make sure they're in the contract with the PBMs, which is no simple feat by the way. And second, beyond that, how do we make sure that they have the same capabilities at a local Health Mart or at a local Rexall as the largest chains in the world are able to provide that omnichannel customer intimate experience without having to go through the effort of moving my script out of one store to another store without having to worry about whether it's in the network or out of the network, whether or not I have a copay, etcetera, We're having to learn the world of pharmacy. And we've seen over time, mail order pharmacy, obviously, still important, but it's not the growth engine that it used to be. People, I think, believe in a pharmacy relationship for many of their meds and they have a desire to meet with their pharmacists and receive the medication where and how they want to get it.
And mail and home delivery plays a role, but it's certainly not all encompassing. So the point that you made about independent pharmacy store count staying intact really for the last 20 years is evidence of the resilience of those pharmacies and the value that their patients perceive and actually get delivered to them on a local basis.
I guess my follow-up just would be two things. One, what gives us the confidence that that remains going forward, right? So just looking back is never a good way to think from an investing perspective. We're always looking forward as to what's going to happen on the horizon. And then secondly, how do we think about the margin structure going forward?
My belief has always been that the independents are a more profitable segment for a drug distributor than, say, a CVS or a Walgreens, just given the services that you provide to them and their size and scale. So those two things, if we could get a better understanding. Thank you.
Well, I'm happy to have Nick jump in here, but I think one of the things is if we can't stand still and they can't stand still.
And Lisa, to your previous question, is their role going to change? I would tell you their role has changed consistently over the last 10, 15 years, at least I've been involved. And I hope we're the ones helping them get to that change. One of the things I alluded to in my presentation is the learnings we've had in the specialty space, we're now bringing over retail, right? And what's interesting for me is if you look pharmacists are still rated amongst, if not the highest, the highest trusted professionals in healthcare, which tells me great.
So it's convenient. I can get patients there. And quite frankly, news like today, hope gives us the impetus to speed some of that stuff up, get to those solutions quicker because I really do believe that's what patients are going to prefer to be served. So how do we continue to bring in those programs, which candidly hopefully helps with that margin profile because we're bringing richer services and we're creating that pipeline for them. That's where I'm enthusiastic about this in spite of all the noise and what I see.
And yes, the statistic of that they've remained stable is encouraging and I agree with you, I'm not looking through the rearview mirror. I really am encouraged by if you look at the cadre of assets we've put together and how thoughtful we've been and Dominic can speak to this even more than I can and having that direct pharmacy. I mean the programs that we're building, I think will be convincing to the payer communities to make sure that we leverage this platform and quite frankly allow pharmacists to perform at the top of
their license. Yeah, Lisa. And one of the evidence of that is one of the fastest growing uptake is professional services and expanded scope of practice in pharmacy. If you look at Alberta, that's been very progressive in expanding the scope of practice of pharmacy. The uptake by the consumer has been significant, whether that's minor ailments prescribing, whether that's adherence programs or therapy management, annual therapy plans, flu shots, other inoculations now.
That's the fastest growing part of our retail business right now. And that is margin accretive and provides growth. And the evidence is the consumer is flocking to that because it's very convenient versus waiting in line at a doctor's office or going to ER for
some of those services. And Brian will talk about this more when he's up here as well. We're building factory operations for prescription fulfillment, not replacing our customers, but in service of our customers to help them make sure that they've got the lowest cost access to product, not only through our sourcing activity, but also through packaging, through next day delivery, home delivery. And we can bring that industrial complex to an independent pharmacy without competing with them, but helping them deliver those kinds of services to their customers. So the idea that we can ship something to a patient's home is not new.
The idea that we can have a compliance package that has time and date and adherence instructions on it is not new. What we also bring to the party are massive call centers with nurses that are well informed and pharmacists that are well informed. We bring relationships with manufacturers that are very intimate and are informed on both our reimbursement as well as the clinical front. And all of those capabilities, I think, give us tremendous confidence that when you combine that with all of our scale and the scale of our customers, the sophistication of this industry continues to evolve and we're going to continue to help our customers compete over here. Great.
Thanks. Bob Jones, Goldman Sachs. I wanted to ask 2 on the multiyear growth initiative. 1 on the growth side, 1 on the cost side, you talked a lot about adding manufacturer services. You mentioned specialty specifically.
Can you talk about the buy versus build approach to that strategy? And then as far as the assets that you are looking at out there, how robust is the pipeline and what do you think of valuations? And then just on the cost side, I think we've all probably thought of McKesson as a pretty efficient organization over the years. And so you shared some of the areas where you're targeting to take cost out. But I'm curious, is this more of a rightsizing just given some of the under performance in some of the businesses over the years?
Or is this just a re up on streamlining things that exist within the organization? Both good questions. Nancy, why don't you take the growth M and A strategy part of that and Britt will answer the cost part.
Good morning, Bob. So, I think we're taking an approach of being on the lookout for buy opportunities. We've also in parallel building capabilities internally across all of the dimensions you talked about. The pipeline is still very robust of transactions we've seen out there. Valuations are high, obviously, and we've been pretty disciplined, particularly with some of the recent deals, about making sure that we're disciplined in valuations and really building out the business cases, particularly the operating synergies that we can create from these businesses.
Yes. On the cost side, it's a great question. I appreciate it. We have grown significantly over the last few years. We've done a number of acquisitions.
We've done a number of acquisitions across multiple geographies and we've now expanded into multiple different areas of service and we've talked about some of those today. So the opportunity for us is to step back and harmonize some of the functions that we have across the globe, take some of these scale from a buying perspective on a direct basis. We do a great job of bringing that in and leveraging our scale from a buying perspective on a direct basis. We do a great job when we make an acquisition in a distribution area. We can fold that into our
distribution network in a very efficient way. And we've always
been very efficient from an and the number of acquisitions that we've made and the number of acquisitions that we've made across the globe and the way that we're innovating and collaborating amongst our businesses now, we have the opportunity to really align our enabling functions in a more efficient and effective way. So this is really an opportunity for us to do what we've always done, but to do it in a more efficient, effective way. And we think there's a great opportunity for us to reduce costs in a significant way as well.
Another question over here. I don't know if the mic is in the back row. Okay.
So given it's Ross Muken from Evercore. So given all of the noise we're seeing on the drug pricing side, particularly from the government, etcetera, as we think about sort of the evolution of your business, a lot more manufacturer added services, a lot more for the customer and the consumer. As you think about the role you can play given the potential pressure that may happen for some in the industry and the potential greater needs pharma may have for you as may the customer given some of the complexities of the drugs coming to market we need to pay for. I guess how are you thinking about how that sort of discussion goes because everyone thinks of it as a negative in terms of what happens to gross prices, but there has to be another side as well, I would think, in terms of some of the opportunity sets it gives you
in some of these new markets you entered. Yes, I think that's a good point. It really is about the opportunity set. And what's great about our industry is that no one questions the revenue growth that we're going to enjoy as an industry as a result of the aging population and now driven by increased innovation. And there aren't very many other businesses that you could be in that would have a revenue growth CAGR in the mid single digits for as far as you can see almost.
And the additional engine, the propellant here in the business is the complexity of the drugs that are coming out. And what we used to 20 years ago talk about cancer is cancer. And then now we talk about 300 different types of cancer. It won't be long before we talk about 3,000 or 100 of 1000 of different types of cancers as we define cancers specifically to each of us in this room if we are to have that unfortunate event. That complexity both from a diagnostic perspective, but also as it bleeds into a treatment and a pharmacological experience, provides significant opportunity for us to de confuse, declutter and make sense out of this, certainly for the patient with the support of the manufacturers, but also to the providers and to the payers.
And that's one of the reasons that things like CoverMyMeds and our call centers are such great resources, because the idea that you can simply prescribe something for a patient that's highly complex and very expensive and assume that it's going to be rubber stamped by our payer going forward is probably not the case. And so advanced analytics are going to help better diagnostic decisions to or diagnostic evidence to be delivered. Advanced analytics are going to help provide providers with a better tool to make treatment decisions and advanced analytics are going to help payers determine which of those patients and providers are making the right decisions. And so that space and its complexity gives us an opportunity. On the distribution side, you've heard us talk about specialty for some time and that really is a margin discussion when we talk about the mix of specialty as it flows through distribution and our efforts to make sure we've identified roughly 400 products, I think, that are classified as specialty and to price those in a discrete way.
But the other part of the business that we've spent some time on this morning is the services to the manufacturers, which are a vast array of capabilities that help us make sure that the right drug is being consumed. So, I think we're optimistic on both fronts and we think that the complexity and what we're doing to deal with that complexity is an opportunity for us and for the industry.
And maybe just building off of some of what Lisa was talking about before. As we think about, obviously, the news today on PillPack, if Amazon is successful sort of entering the pharmacy space, maybe one could envision them getting the size of Walmart or someone like that, a customer of yours. As you think about your role in that, right, Walmart now has gone to you with ClarusONE and your partners in terms of generic procurement. Is there any reason to think if there is a new player in the market, Amazon or someone else, that given the strength of what you bring to the table and distribution that that would be the center of the market they look to bring in house. And I just think of it in the context, Amazon today heavily uses FedEx and UPS for logistics.
Why wouldn't that be true, I guess, in the drug channel?
Well, it's difficult to speculate what Amazon might do. What I can say though is that companies like PillPack, as an example, are typically customers of wholesalers. And so, we don't typically compete with them. They would compete with other direct to patient kinds of models. What we've been talking about today is how do we make sure that our approach to the marketplace enables our customers to enjoy the same type of technological arrays or advances as might be available from other providers and make sure that they remain competitive.
And your example of Walmart, we're talking about customers like Walmart that are maybe a 1000 fold larger than what we're talking about in Wall Street this morning. So, there's an advantage to having a technological approach. There's an advantage to having a unique or convenient web presence, but there's also an advantage to having 1,000,000,000 and 1,000,000,000 and 1,000,000,000 of dollars of scale and a knowledge that has been built over decades in an industry as complex as pharmaceutical. So, I appreciate the question. But I also, Lisa, to your point, there always appears to be an over rotation in terms of what happens in these kinds of situations.
I think I have a microphone here. If you other people want to ask questions, if you raise your hand and you get a microphone, then you'll be the next one up. I'm going to go right and left or left.
Hi. Dave Larson with Leerink Partners. Can you talk a bit about Trump's blueprint plan? If we look at a couple of specific pieces to that, we're talking about rebates, for example, and compressing the gross to net spread. And ultimately, what this might do is decelerate the rate of brand inflation.
But in my mind, the rate has already decelerated very significantly over the past 3 years from like 15% to 7 percent. So longer term, what would your expectations be on the brand inflation rate? And how could that impact your revenue stream? Do you see that 7% maybe trending to 3% possibly? Or do you think it's largely stable now?
Any thoughts on that would be very helpful.
Well, I'm going to have Britt help me with this answer, but I would say that the dependence that our company has on brand price inflation has changed significantly and maybe you can talk a little bit more.
Yes. I would agree with you. We have seen the brand inflation rate come down quite significantly in the last couple of years. And what we've seen over the last 2 years and what we've outlined for you in our outlook is that we expect to see the stabilization of brand rates very similar to what we experienced in FY 2018 in that upper mid to single upper digit range for branded price inflation. As John mentioned, over the last few years, we've continued to reduce the reliance that we have on branded price inflation.
We talked about roughly 90% of our branded fee compensation is now more fixed. And so we still enjoy some portion of branded price inflation, but we're much more reliant now on a fixed compensation agreement with our manufacturers. So I think we've continued to take that variability out of our business over the last few years. That fixed portion is still dependent on list price though, right? It's a portion of list price.
Yes. There is a portion of that, obviously, that is tied to list price. But the variability has been removed quite significantly.
And where we had more of it related
to the variable side of it over time. We've reduced that over time. And we believe now that there's a very nominal impact for our changes in brand inflation and we've guided that in our FY 2019 guidance.
So we've been asked this question before about what happens if the list price goes from $100 to $50 because it's the net price of the product. I guess one way to think about that is that we don't believe the manufacturers have a single net price. They have 100, if not 1,000 of net prices depending on how they've negotiated with a specific manufacturer. And to assume that they're going to go to one single price for the entire world, which would be equivalent to their average net price, it's difficult for me to understand how that would happen without a significant economic challenge for the ones that are below that net going up to that net and the ones above it enjoying that rapid change. Having said that, if there's a change on the list price down to a lesser list price, that would affect the economics for our company based on the fee structure that Britt described.
And we believe we would rapidly go back to the manufacturers and say we've been collaterally damaged as a result of your decision and we'd like to get the dollars back, which means you'll have to change your rate to reflect the price changes you made on your product. So it would be another discussion with manufacturers, but it frankly would be, I think, a simpler discussion than the one we had when we went from a buy and hold world, where we were speculating on inventory, because this is going to be quickly identifiable. It's not something that would be, well, gee, we don't know how much money you made in the speculation world. We've made X number of dollars when you had your price at $100 and we need to make the same X number of dollars and your price becomes $70
Yes. The fees that we earn are for fair value of services that we provide. So whether it's $100 list price or $50 list price, we're going to go back to the manufacturer and we're going to ask for compensation for the value of the services that we provide. And so in that case, we would just go back and ask for an adjustment of the rate because at the end of the day, the conversations that we have is for fair value for the services that we provide.
Keep yourselves whole. Great.
Thanks very much.
Yes. You're welcome. Okay. Back on this side now.
Thank you. Ricky Goldwasser, Morgan Stanley. So staying on the manufacturer side, you spend a lot of time talking about the additional services and programs that you do with manufacturers and the fees that you collect. So can you leverage those relationships to the conversations that you have on the sold, oral branded and the inflation? And how do you think about that overall interaction with the manufacturers?
So can we leverage it? I'd frame it a different way, Ricky. Our hope is and back to 2 of the questions that came up earlier is, we continue to show our relevance, our importance in that partnership. And I'm not just going to rely on goodwill, but I think then that helps us with those other conversations. My AstraZeneca example, we started with a distribution relationship.
Now I've got 5 of those services that I'm able to partner with them. And we have examples like that across the board with our manufacturers. It's a very different conversation today when we sit down with our manufacturer partners. And to the point, Rich has raised, now when I'm talking about fair value for what I bring to you, that value now encompasses delivery of care, not just distribution of a package to a pharmacy, right? It's that overall.
And so I think we've kind of changed the narrative with our manufacturer partners. And as they look at us, we're not in there just debating what those basis points are for the delivery of the package. It truly is what's that partnership worth? What am I delivering of value to you for that program? Because we are getting John alluded to it earlier, you start thinking about why specialty is growing in that precision medicine and those therapies, we're getting very specific about populations, channels, how we're giving them access.
So it is a very different conversation when we look at value.
And most of those programs are helping on the revenue side, which is also a nice conversation to have with the pharma maybe.
And I just might add, one of the things that and I think you might agree is, as we've increased the alignment of our businesses as we brought our specialty business and our pharma business together, as we continue to align our businesses across with our medical surgical business, We're having a more complete conversation with the manufacturer about the fair value not only of the distribution but across all of the different services and capabilities that we provide to that manufacturer. So in the past, we had separate business units that we're negotiating for each of the channels that they worked in. Now that we've increased that alignment, the conversations change quite dramatically, and we're able to show all the services that we provide in more singular conversations rather than in multiple conversations.
And then just one follow-up on the generic side. Obviously, a lot of still debate and discussion in the marketplace on just the contribution of generic to your profit pool. So if you can talk a little bit about what you're seeing in the marketplace?
Yes. Well, I think you have
to look at generics really on 2 different dimensions. We think about generics on the sell side and on the buy side. From the sell side perspective, we have seen stabilization in the environment over the last 18 months. And so we're very confident that we're able to provide the same set of services in a more stable environment. On the buy side, Nick mentioned ClarusONE, and we're really pleased with the execution on ClarusONE and the partnership that we have there.
And we're confident that we're able to continue to negotiate in a very effective way, continue to drive better cost outcomes for our customers. And what we're really focused on and we're doing a great job of doing is creating that spread between the buy and the sell side. So, what we've seen on the buy side is a more stable environment. We're still seeing some manufacturers that are rationalizing their product lines, but it's more stable than it has been really over the last 12 months. But creating that spread between the buy and the sell is what we've been focused on.
We're doing a great job in delivering those cost savings to our customers.
Good morning. Thanks for taking the question. George Hill from RBC. John, as we think about we've talked a lot about generics and we've talked a lot about brand. As we think about specialty as a growth engine going forward, I guess, can you talk about the sources of earnings streams inside of specialty?
You guys have services to manufacturers, but you also have a lot of services to providers, particularly ambulatory providers in oncology where you guys have profit shares that come from those clinics. I guess if we were to see a meaningful disruption from Med B to Med D, you would think that would take place in events that could be scheduled as opposed to high acuity events. I guess, to the degree to which you can profit stream serving manufacturers, profit stream serving providers in specialty and kind of disruptive risk is what I'm trying to get my arms around? Thanks.
Nick, you're probably closest to
this.
So the whole Part B, Part D debate, I think if you look at what we've done over the last several years, I mentioned in past presentations those value based initiatives we've taken on the oncology care model. I think you get a better appreciation as you look at that provider base. Not that we're shielded from it, but I think we've put in some pretty interesting mechanisms in working with our provider partners on if that were to come to bear, I think we could get back to the CMSs of the world, CMIs and our commercial payers, again, to prove the value that we're able to deliver and get back to just to borrow from what Brit used on our manufacturer. Is that fair value for what it is we deliver? I'll tell you, we feel really comfortable that we can continue to prove that.
We've seen it in oncology. We're having discussions with our other providers as well. So I'm not overly concerned. We're paying attention to it, but not overly concerned. There's especially, like I said, in the oncology world where we've seen this.
And what I'm excited about, I mentioned this last year as well is, our provider partners have leaned into this. We didn't have to push them in, right? So I think that in and of itself has been we've been able to demonstrate to our payer partners that we want to be careful on that there's not too much collateral damage on taking that. And then how do you impact your patients and your overall cost when they're not going to be treated in the community setting and then they're sent over to the hospital?
I think that's we're going to take a quick break, but anybody who has a microphone next will get the first microphones in the next round of Q and A. So I promise you, you won't lose your slot. And we're going to take a quick 20 minute break, Craig, is that right? 20 minute break, we'll reconvene in here at 5 after 11 Thank you.
Okay.
Ladies and gentlemen, our presentation will resume in 5 minutes. Ladies and gentlemen, our program will resume shortly. Please move in and take your seats, and please remember to silence all mobile devices. Thank you. And now, please welcome Chairman of the Management Board, McKesson Europe, Brian Tyler.
Good afternoon. I hope everybody enjoyed their break. I saw lots of you getting your work done. We're going to spend the next few minutes talking about McKesson Europe. And you'll recognize this slide and the familiar theme that, for us, it all starts with the patient in the center.
And that's very easy for our 9,000 owned and franchise pharmacies who literally have the face to face interaction with this patient every day. What we really try to do and one of our key themes of pillars is to take the intimacy of that interaction, the knowledge, the tools and the services we've developed in our own networks to provide that value and also avail that to our thousands of independent pharmacy customers across Europe who are interacting with over 2,100,000 patients per day. So it starts with the customer. You all know the focus that we bring in terms of operational excellence And in Europe, this is no different and remains a great opportunity for us. John, in fact, talked briefly about the centralized automation facilities that we have now deployed our second and are in the process of releasing our third that allow us to take work out of the pharmacies, put it into a much more highly automated environment, freeing up our pharmacist time to further enhance this patient interaction.
So, we continue to be very focused, not only from a technology perspective, but from a cultural and process perspective on driving operational excellence through everything we do. The third thing is around innovation. And all of my colleagues have talked this morning about the innovation opportunities for retail pharmacy to advance its positioning in the provision of healthcare in the communities that we serve.
And I'm going to spend a
little bit more time this morning talking about that. And then lastly is enhanced value and how we continue to focus efforts in some of the adjacent faster growing markets like specialty and home care through our European portfolio. Just a quick level set in terms of the markets, about $250,000,000,000 in U. S. Dollars, have to get used to thinking in dollars again.
And it is in fact growing, growth in core markets of roughly 3%. So big market growing driven by many of the factors that we are all familiar with from our North American markets. Just to reflect for a minute on kind of the McKesson Europe journey, I mean, we're now in our 4th year of ownership of this asset. And when we started down this path, very initially, we were focused on some very tactical things like leveraging the procurement scale and synergies from being part of the global McKesson enterprise. And then we turned our attention to foundational investments, things like ERP systems that are Norway, our first country is now live on the new ERP platform and we're in the process of deploying the 2nd now.
We've looked at things like common e commerce platforms, so we could leverage capabilities across multiple countries. And as we completed some of this scale and sourcing procurement work and some of these foundational investments, we're increasingly turning our energies to our consumer channels. How do we take the traditional retail channel and make it more of an omnichannel experience and how do we wrap around and supplement that with other patient facing services? How do we find adjacent markets that allow us to migrate up the provision of healthcare scale or chain in our communities, things like our Wound Care businesses in Germany, our diabetes business in Denmark and our clinical home care investments in the UK. And so, we believe that as we continue to evolve our retail offerings into this omnichannel broader service portfolio, develop our channel, that's going to make us even more attractive in terms of our value proposition to the manufacturer partners.
And Nick talked a lot about ways we're going to leverage that. And we work very closely with his team and Dominic's team in a global framework to make sure we're harmonized to capture this. Now, we've have been on this journey 4 years. In the last 2 years, it certainly presented some headwinds and challenges that we had not anticipated. You will be all too familiar with this story.
The UK has been a significant headwind for us. Their reimbursement and some of the regulatory and policy decisions were orders of magnitude bigger than what we would have historically seen happen. And in response to that, this past year, we took undertook a pretty significant restructuring, not only of the kind of home office operations, but also the physical estate of our pharmacies. We made the difficult decision to kind of reshape our portfolio of closing or exiting operations in almost 200 stores. We did accelerate these automated centralized facilities to enhance efficiency, as I talked about.
We continue to migrate the focus to specialty and the home care market as a way of navigating through this environment. The second big headwind Britt alluded to, and I just wanted to then follow-up with a few comments, is just the competitive environment in France. In France, all our markets are competitive. We're used to competitive markets in all the countries that we operate in. But we did see a ratchet up in the competitive environment in France and a real focus on a rebate discount price environment.
So how are we responding to that? Well, we're responding to that by trying to shift the conversation away from price and onto value and delivery of value for our customers through things like our national redistribution center model. This is the only national redistribution center I'm aware of in Europe serving our French business. It's allowed us to enhance the fill rates to our in pharmacy customers by over 2%, therefore improving their business operations and their outcomes. We've also developed a very robust set of digital tools.
These are B2B applications and B2B2C applications. Customers to allow their interface with their patients to be at a different level. Over 7,500 pharmacies in France have signed up for this and are in the process of being implemented right now. That's about a third of the market. So, we think this connectivity between our customers through these digital apps will begin to shift this conversation to value.
And then the last thing is we've made 2 small acquisitions this past year of buying groups to allow us to strengthen and enhance our reach and channel and relationship with some of those independent customers. So, we certainly in the last 2 years, these were very big headwinds for us and it overshadowed a lot of the great work that's been done that I alluded to on the previous slide. That's been a bit unfortunate in that regard.
So let's shift to some of
the things we're doing that are exciting that we think are going to position us to drive growth in the future. And I'm not going to go through every single one of these, but maybe to highlight some that we haven't talked much about previously and call your attention maybe to the online doctor business as an example of the kind of innovations that we can bring. This is an online doctor business that it really automates and enables prescriptions to come in through a form based, rule based system processes very, very efficiently leveraging the physicians' time and then get the fulfillment out to the patients. It's been a big success for us. It's widely recognized in the UK as the highest quality solution.
We're taking the experiences and lessons there. We're collaborating with our colleagues in Canada to figure out how we can deploy this technology there. And likewise other places around Europe. We think this in conjunction with the expanded view of what retail pharmacy can play, married up completes a pretty compelling value proposition for our patients. Now the way we leverage these innovations is really off the foundation of our what we call our European pharmaceutical network.
This is the network of pharmacies owned in some instances, franchised in other instances and sometimes
have developed.
It's a broad offering. We deploy usually in a very comprehensive way in our own stores, but we give the flexibility to the independents just to adopt specific molecules or modules. So, they may decide, for instance, that in their community, there's big needs around obesity or big needs around pain management and they could adopt just the EPN module from us that addresses those needs. So, we continue we're in our 4th year of rolling this out and we continue to see as stores adopt these formats, an uptick in foot traffic and uptick in sales. And so, we continue to think the rollout of the EPN network will be important for our growth in the future.
And it's also the platform then off this network off of which we think we can scale the innovations that I previously mentioned. Just to give a very tangible example of how we leverage the European pharmaceutical network, I thought I'd share a little bit of the success we've had in our own label program. In the chart, you can see we've more than doubled our own label sales in the last 4 years. And it's also been given us the opportunity to launch new product lines like our NorthStar generics into Europe for the first time. So we're leveraging the EPN format as its foundation to launch innovations that at times have been developed in other parts of the country, but we also allow the flexibility for local countries to tailor the offering depending on the needs of the patient populations that they serve.
So, what are the opportunities for growth in retail? You can see the consistent portfolio of brands that we've delivered on the right hand side that we've developed on the right hand side of this chart. I talked about the common e commerce platforms that we have. I talked about online doctor, talked about some of the diabetes and wound care businesses we're developing to surround that. And you'd be familiar with the home care and the specialty type businesses that we have begun to develop in the UK.
I thought I might end with just a really specific example of some new models and new innovations that we've just recently begun to pilot. And this is consistent with the theme of how we evolve the presence and the role, John said, the migration of pharmacies to the upper, the top end of their license as they serve the healthcare needs of their communities. And so we're very pleased to have live this set of pilot projects that we're calling the healthcare center model. And what this is, is it's taking a traditional pharmacy, redeveloping the format to also have the nurse capability and the experiences of our clinical home care business embedded in it such that we can provide infusion and injectable services for the patients. The new model is just being launched.
We have a variety of different funding mechanisms. Some would be from the payer themselves, other would be from manufacturers. So, it's a bit of a testing phase right now, but we're really excited. We think this is going to be a great platform to demonstrate that pharmacy can in fact expand its role in communities meeting the needs of meeting the access, the quality and the cost challenges in the healthcare community space. So that's a really quick slide through Europe.
Again, the 4 pillars starts with the customer, the patient in the center, superior execution. We think we've got tremendous innovation happening in the company now that we can leverage our footprint to scale up and we'll continue to look for ways to augment those capabilities to deliver enhanced value for our customers, our employees and for our shareholders. With that, I'd like to invite up my friend and long time colleague, Stanton McComb, to take us through the medical business.
Good morning. My name is Stan McComb, and I'm the President of Medical Surgical. And I have the very good honor to tell you a great story about our and great growth trajectory. But the other thing I want to talk and great growth trajectory. But the other thing I want to talk about specifically is how we make a difference to people and patients' lives, probably to many of your lives as you go and visit healthcare providers across this country.
And we're proud of what we're doing in that regard. Over the course of the next 10 or so minutes, I'm going to cover the same general ideas that you heard from my colleagues. We think the market conditions, the patient behavior, the consumerism that exists in our markets is quite favorable to our business. We also believe there is a tremendous amount of innovation. You've heard about some of the pharmaceutical innovation, also innovation in diagnostics, innovation in IT and innovation in some of the core medical products that some of you might think are fairly mainstay that are not.
They're changing themselves. And there's change going on within the cats. Some of the innovation that my colleagues are developing within their businesses, we are bringing it forth and leveraging across our channels. And finally, there's some exciting new markets that we're entering, and I'll cover those. So, there's a lot of change.
There's a lot of reason to see growth at Medical Surgical, but there's one thing that remains true from the last time that we've presented here for those of you who have heard us speak before is that we're very, very focused on operational excellence. In our business, we have to be extremely efficient. We have to be able to deliver value to our providers And to do that, we have to operate at a very low cost to serve, and that is something we do. We also have to have a relentless focus on what our customers need to take care of their patients. So we'll talk more about that.
But when you put it all together, our service, our capabilities, all the different innovations we can bring to the marketplace, we think we have a very unique and differentiated offering. And I'm going to speak specifically in a moment about how that compares to potential new entrants and disruptors, so you can understand what they might have to replicate in order to deliver same value to the over 200,000 providers that we take care of. So let's talk a little bit about trends. Many of the trends that we've spoken of in the past remain true: Decline reimbursement for providers, increasing cost for providers, which yields to greater consolidation, intense rivalry, much more competitive landscape and creates a provider ecosystem or environment where they are looking and continue to look for help from their partners, partners like McKesson. The 2 most prevailing tailwinds in our business in particular that I would draw your attention to are really demographics, which John alluded to in the past, is absolutely pushing consumption and demand higher.
And then the fact that we are all individually paying for a greater share of our health care buy. And those two things are driving a significant shift from the acute care setting to the non acute care setting where you get a lower cost of care, a more convenient setting to get care and increasingly greater outcomes. So we think in general the market trends and conditions are very favorable for Medical Surgical and in fact favorable for many of the providers we serve. We identified this trend a long time ago. We've been working on developing leadership positions in all of these ambulatory or non acute care settings for over a decade.
And we're very pleased with the way we develop leadership positions in each of these sub segments you see here. I'll just call out a few areas where we believe we have an especially strong position, most important probably of which is physician office. Take care of more than 200,000 physician offices across the country today. We believe we're a leader in this space by far. And that channel presence has been a very valuable piece for our business and is becoming even more valuable as we think about the innovation now that we can bring from the rest of McKesson through to those providers.
Our business around post acute care site and settings, skilled nursing facilities, long term care, assisted living, DME, home medical companies, also very powerful and very important for our business. And now with the acquisition of MSD, I'm pleased to say that we have a very nice position in infusion supplies, which we'll figure in pretty prominently as we think about our growth strategies around specialty, and I'll talk a little bit more about this. So we're the leader in all these spaces. We have an opportunity to grow with all these providers and to support all these customers. But why would you believe in the future?
Why would you believe that we have something special and differentiated to offer? And I'll speak specifically to Amazon. I think one of the questions that I read from many of you, one of the topics is, isn't the medical surgical business most likely to be disrupted by Amazon? I think I would say that we respect all of our competitors equally. Always get on our toes when we think about any of our competitors, and we have a lot of them in our space, and we admire all of them.
But let me tell you a little bit about what makes Medical Surgical quite unique and one of the reasons why we've retained such great leadership positions in all these markets. The first thing I will note is that we have, we believe, the largest and most tenured sales force in the entire industry. We have 1500 sales force that averages 16 years of tenure, covering a tremendous amount of ground with very trusting relationships. Nick talked about the trusted relationships with pharmacists, trusted relationships that our sales professionals have, we believe it's second to none and that matters and it is different. And you think about what we can do with that sales force and those relationships is pretty profound.
I'll give you an example. This past year, we activated our sales force to go out and promote CoverMyMeds. And in the past 6 months, we've activated over 1,000 physician offices on CoverMyMeds. That's a pretty powerful capability. We've done like similar activities for other IT solutions and we're doing the same thing for manufacturers.
That ability to reach providers is pretty unique. There was an earlier slide that John mentioned we have over 275,000 SKUs and the breadth of that portfolio is one thing. What you need to know is the mix of that portfolio is not only straightforward commodity items that anybody could ship in conjunction with regulated products, pharmaceuticals and lab. Not easy to do all of that together. Put that with our distribution network, which can reach 98% in the country the next day with the same order, I mean, all the lines, 98% fill rate, 99% accuracy, when a provider places an order with us, let's say for an average of 8 to 9 lines, they're going to get all of those lines the next day, not over the course of 2 weeks from 3 or 4 different vendors.
That's pretty important. Additionally, what you may not know is that in the non acute care space, GPO pricing and contract is actually quite prevalent. Obviously, it's a mainstay in the acute care space, but the vast majority of sales we make in the non acute care space is under GPO contract pricing, where rebates and rebate administration matters. I mentioned also the regulatory perspective, all these products need to be delivered correctly. They are complex products.
When you think about selling a piece of lab equipment, you got to figure out how that lab equipment is going to work in
an office. We have consulting services.
We have consulting training groups to walk in and help a new trainer a new provider put in new solutions. And we are very specialized. I think that's another key difference. We are not a generalist. We are a specialist.
And that is not what you would find in some of these other disruptors. When you call our 1800 number, you're getting somebody who is expert on 275,000 healthcare products, who understands reimbursement, who understands contract pricing. And finally, the value propositions we put together, whether that's CoverMyMeds, relationships like we have with MedTrainer, where we help providers get the adequate training they need to be covered under the regulations, these things are all very unique and specialized to health care, very unique and specialized to the non acute care settings. So when we think about what makes us different, it's really not one thing. It's a collection of capabilities that is really pretty powerful.
And then you see this one quote below, that's just one of many that would speak the same thing to you.
But I would say the other thing that's a testament
to this is we have great customer retention. We've been able to maintain our leadership position through that retention. And for the past 4 or 5 years, you may have heard us speak of the fact we measure Net Promoter Score. Our Net Promoter Score, as we survey about 100,000 different providers every year, has remained steady at 71%, which we think is world class, and we're very proud of that. So we have an opportunity to serve these customers that's unique and differentiated and allow us to participate in the growth in this segment.
And if you think about the new complex solutions and the specialty growth strategies that we have, we think we're in a great place to continue to use this channel, to use our capabilities to bring forth new innovations in the pharmaceutical space. In the past year, our pharmaceutical sales into the primary care and into the ambulatory space has grown by double digit rates, exceeding now over $1,000,000,000 of our sales. Likewise, our ability to offer value to our customers around our private label continues to grow at above market rates and lab is also growing at double digit rates. 2 years ago, we bought a specialty distributor called Labsco. We are now basically finishing with that business case.
That integration is complete, and we are beating our case. More importantly, what we feel really excited about is we now believe we are the leader in the distribution of lab equipment and solutions in the provider space. And the impact that we can make not only on providers, but in giving great care and great satisfaction to their customers or patients, I think is very unique. And it's starting to show up in the way that manufacturers are coming to us to ask to work with us. And we have many great lab partners, we've developed some new ones over the past few years, but I'm particularly pleased to announce that we have a new partnership with Sysmex.
And it's just one example where Sysmex has come out with a new technology. It's called CW product. It basically is a clear waved testing box for point of care that does a complete blood count test in 3 minutes. And historically, when your physician has wanted to do a complete blood count test, they're going to outsource that to
a reference lab or to a hospital.
The opportunity we allow for our provider customers now is to get access to this technology, set it up, learn how to use it, deliver great patient outcomes, great patient satisfaction and enjoy some good business lift for themselves. And Sysmex has chosen to work exclusively with us because of the relationships and those reps that we have, the sales professionals we have out in the marketplace. So it's just one example of the manufacturing value proposition that McKesson Medical Surgical can bring and it's one example of the way we bring innovation into the marketplace to help our providers to make an impact on patients' lives. Another example of how we're innovating and how we're aspiring to help ourselves and our customers grow is around infusion. June 1, we closed on the acquisition of Medical Specialty Distributors or MSD.
This business, if you don't know it, is really a business that is focused primarily on infusion. And what they've done over the past 2 decades is they built a really nice value proposition. They handle all the supplies much like we do. They just sell and distribute supplies, the tubing lines, kits to run IV infusions,
but they also sell and rent pumps.
Now that's something right down the alley for us, and we've got a very good line of sight on the synergies that we'll need to integrate this business. But what makes MSD unique is the services they've wrapped around that supply distribution business. So they help infusion providers like Quorum, CVS Quorum, and they help clinics track all of their pumps. And you may think that's not a big deal, but these pumps actually are pretty valuable and they're reused. So a pump will go out and spend some time in 3 to 6 months at a patient's home and you'd be able to track that.
MSD has the leading tracking asset management software for that. Now that in of itself, an asset management software, not unique. There's a lot of people out there who do asset management software. Coupled with that is a service, a biomedical service. So as they get those pumps back, MSD repairs, maintains, recalibrates, resets, puts those pumps back in circulation with the providers so that asset is constantly productive.
It's that combination of supply distribution with service that makes MSD very unique. Now we will get great synergies out of this business, but I'll tell you 2 exciting things about it. 1, we picked up a great team. The sales professionals that we've met over the last month are fantastic. The back office folks are great.
But the other exciting opportunity, which is above and beyond this, is the cross sell opportunity we have across the other parts of the business. We talk about our growth strategy in specialty. We believe the infusion opportunity here is a very good one. We will be able to take the MSD services and introduce them into the McKesson Specialty Health Business customer set like U. S.
Oncology. Likewise, we can take the McKesson Specialty Health Distribution capabilities and introduce those pharmaceutical services into the MSD customer set. I think a very good opportunity for us, very good opportunity for our customers and we're excited about it. And IntraFusion is a company that Nick bought recently and we think they're going around helping physicians set up infusion capabilities, which has become a plug and play right into that portfolio, right into that program. So MSD is a very nice add for us.
It works for our specialty growth strategies. It's right down the middle of the alley for us in terms of business we know. It's in the ambulatory space and it's another way that we can bring innovation and unique specialized services that would not likely be replicated to our customers. So in closing, I would say that our focus on our customers remains. Our focus on their patients is an exciting opportunity for us to make an impact.
The conditions in the market are fantastic. There is a ton of innovation in lab and in pharmaceutical that wants to play into the non acute care space that we're excited about And our focus on operational excellence, on driving spend out and driving efficiency and quality remains. And so in the overall value, what we can bring to our customers, think it's highly differentiated. We think our growth prospects are very, very good. We think our profit profile is solid.
But more importantly, our ability to make a difference in the U. S. Healthcare system is really as good as we could hope and hoping it's going to get better. So thank you for your time. I think right now, I'm going to invite Brit Malone back the stage to give you some more information.
Thank you, Stan. So my role today here is to really summarize a lot of the key themes that you've heard today and put a financial lens on that. So let me do that. And I want to start by reminding you that McKesson has been innovating and leading for over 185 years. And what we've talked about today is outlining for you how we've charted a path to continue to lead, innovate, execute and grow our business for the next 185 years.
You've heard a lot today about our multiyear strategic growth initiative. It's focused on some key growth pillars supported by robust data and analytics as well as an aligned cost structure and cost reductions. There are several key themes that I hope that you take away today. So let me just talk about that and you've seen this 4 blocker all day. So let me walk through this for you.
First, as all of my colleagues have talked about, as we think about our business and we think about how we're going to continue to innovate and execute, the patient is at the center of what we do every day. We are in attractive markets. And you've heard all of my colleagues talk about the markets that they're in, the capabilities and the assets that they've arrayed around their customers and how that positions us in a very unique and differentiated way. We're in attractive health care markets that have very strong growth dynamics. When we think about the overall healthcare markets, we have mid single digit revenue growth.
So these healthcare markets are strong. Each of my colleagues has talked about we have a very strong set of assets, very diversified and well positioned businesses. You've heard them talk about some of the examples today. We have a differentiated global sourcing platform. You heard Nick talk briefly about ClarusONE and how pleased we are with the success of ClarusONE and how that positions us for further opportunities as we move forward.
Nick talked about the growth in Specialty and each of my colleagues also talked about the opportunities that they see in specialty and the capabilities that we have to benefit from the growth of this high performing product line, but also the high margin services and capabilities that we're arraying around the growth of this product. And we heard our I heard my colleagues talk about our global retail presence and the role that we have in helping grow in the retail pharmacy space. We talk a lot about operational efficiency and leverage that we're going to create from this strong base of businesses and this diverse set of capabilities that we have. And we're continuing to drive operational efficiency and leverage. That's the hallmark of what McKesson does.
We talk about operational excellence, and we've delivered that over the last 185 years. We're well positioned now with our businesses and our focus on efficiency and productivity to continue to generate additional operating excellence and leverage. And finally, we're creating shareholder value. We're very focused on continuing to maximize the investments that we have, driving strong free cash flow, turning that into either growth investments that can continue to grow our business or returning capital to our shareholders. We've talked for a minute about some of the highlights from FY 2018.
It starts with 5% revenue growth. We had revenue that was over $208,000,000,000 This revenue growth translated into earnings per share of $12.62 But I'm really proud of the execution that we've shown delivering very strong cash flow generation. We generated free cash flow of over $3,800,000,000 in FY 'eighteen. We do this through execution in our businesses, operating performance, working capital discipline. And as we talked about on our May earnings call, while there was some benefit from timing in FY 2018, again, the superior execution in working capital discipline is what has been behind our strong free cash flow growth over the last several years.
And we deployed over $5,000,000,000 of capital during the year. We did that in a very balanced way. And we've continued to deploy capital in a very balanced and strategic approach. We've talked a lot today about how we're executing against our multiyear strategic growth initiative, and we are now in the execution phase. And as I think about this strategic growth initiative, I think about this in 3 primary ways.
First, organic growth. The growth pillars that we discussed today that you have heard all of our speakers talk about are what we believe will drive sustainable growth over the long period over the long term. Free cash flow conversion, I talked about that, the strength that we've shown delivering free cash flow over the last several years. Now we do that from good operating performance, good working capital discipline and the efficiency of our capital investments. And again, balanced capital deployment.
You heard me talk about already today, we do this in a very disciplined way and we balance that between investing in growth opportunities, whether that's internal innovation or M and A and we balance that against returning capital to our shareholders. Let me switch gears for a minute and talk a little bit about each of our segments. And I won't go into a lot of detail because my colleagues really covered this quite well, you heard Nick talk about our U. S. Pharmaceutical and Specialty Solutions business and how we're bringing these businesses together to leverage the capabilities that we have across our traditional full line wholesale business in the U.
S. And the specialty assets and capabilities that we're arraying around the manufacturer. This combined set of businesses now has revenue of over $160,000,000,000 and in FY 2018 had over $2,500,000,000 in adjusted operating profit. In FY 2019, we provided you guidance. As you can see here, revenue in lowtomidsingledigits and flat to downlow single digits from an adjusted operating profit perspective.
Let me talk about that for a minute. To remind you, on our May earnings call, we talked about the fact that we had some customer transitions that impacted our FY 'nineteen outlook. In late FY 'eighteen, we transitioned over 1900 Rite Aid stores as those stores were sold to Walgreens. We also talked about the fact that we lost a large grocery customer. Excluding these customer transitions, we would have guided the growth in this segment on a year over year basis.
So we believe that we have a strong business. And as Nick talked about, the capabilities and the assets that we're arraying around our customers in this segment provide us really good feel for how we're going to continue to grow this business as we move forward. Brian talked about our European business. This business now has over $27,000,000,000 in revenue $340,000,000 in operating profit in FY 'eighteen. In FY 'nineteen, we guided to flat to mid single digit revenue and adjusted operating profit growth.
Now we did have some challenges during FY 'eighteen. We had higher than historical practice NHS reimbursement reductions, but we responded to that, mitigated these challenges by closing or divesting over 200 retail stores. And as Brian shared with you today, we've built a solid business with a significant array of diversified assets. We believe that we're very well positioned in the European marketplace. And as Brian talked about, many of the countries that we operate in today are growing quite nicely.
And as Stan just talked about, we have a wonderful Medical Surgical business that's growing quite nicely. And the acquisition of MSD only adds to our superior array of assets in the medical surgical space. In FY 'eighteen, we had revenue of over $6,000,000,000 We had adjusted operating profit of nearly $550,000,000 As we look at FY 2019's outlook, we provided you low double digit revenue growth and adjusted operating profit growth in the mid to single high digits, and that includes the acquisition of MSD. This outlook, as Stan talked about, also includes the growth that we're seeing from our lab business and the growth of Rx. This is adding very nicely to that business.
And in our other segment, you heard Dominic talk about our Canadian business, heard Nathan talk about the assets that we have in our Technology business. And this also includes our equity contribution from Change Healthcare. Last year, these businesses contributed nearly $12,000,000,000 of revenue and over $900,000,000 of adjusted operating profit. And as we look at FY 2019, provided you an outlook of low single digit revenue growth and flat adjusted operating profit growth. Net flat adjusted operating profit growth includes what we talked about on our May earnings call, the headwind from the Canadian government's generic reimbursement reduction of $100,000,000 to $120,000,000 So we've been able to absorb that headwind in this segment and still provide you flat growth, which speaks to the strength that we have in this segment.
Dominic talked about the position that he has both in wholesale and retail in Canada. Nathan talked about the assets that we have in our technology business, which includes the acquisition of CoverMyMeds, which is performing quite well. And each of my colleagues talked about the collaborative opportunities that they have in their segments working with our technology segment. Let me spend a minute and talk about Change Healthcare. FY 2018 was the 1st full year of Change Healthcare's contribution to McKesson.
And as you'll remember, we closed the transaction in March of 2017. We report Change Healthcare as an equity contribution on our financial statements on a 1 month lag. In fiscal 2018, Change Healthcare had $272,000,000 of adjusted operating profit. And in fiscal 2019, as you can see here, we expect that we're going to see lowtomidsingledigitgrowth. I would tell you that Change Healthcare is progressing quite nicely against the synergies.
We outlined for you synergies of over $150,000,000 by the end of the 2nd year of the transactions closed. And the Change Healthcare team is progressing quite well against those synergies. We're very focused on getting ready for an IPO and the Change Healthcare team is progressing nicely against that preparation. We're very focused with our joint venture partner on the right timing and doing this in a very tax efficient manner. But we're quite pleased with the progress that Change Healthcare is exhibiting, particularly against their synergy opportunities.
Let me talk for a minute about cash flows and capital deployment. Again, I've already talked today about the strength of our cash flows. As you can see over the last 7 years, we've seen continued growth in both operating and free cash flows. And from FY 2012 to FY 2018, our free cash flows have grown 48%, driven by the things I've already talked about today, working capital discipline, operating performance and really efficient capital investment. We're quite pleased with the steady improvement in our free cash flows.
We expect to see free cash flows at about $3,000,000,000 in FY 'nineteen. We have a very disciplined capital allocation strategy and that starts with strong free cash flows. In FY 2018, we deployed those free cash flows against growth opportunities and returning capital to our shareholders. From a growth opportunities perspective, we made several investments in FY 'eighteen. I'll call out a few that my colleagues have already talked about today: IntraFusion, CoverMyMeds, Rx Crossroads, BDI, just a few to name that we've allocated against this $2,900,000,000 of acquisitions in FY 2019.
We also have demonstrated our ability to return capital to our shareholders. We had share buybacks last year of about $1,700,000,000 We also paid a dividend. And it's important for us that we've been able to maintain our strong credit rating, And that gives us great financial flexibility and we're able to reduce our long term debt last year by about $800,000,000 So how does this all add up for our shareholders? As we think about our business, we have a very simple financial model. Historically, this financial model has returned remarkable results for our shareholders, and we're confident that this model is still effective and in place today.
As I talked about, we're in strong healthcare markets with mid single digit revenue growth. We have strong diverse set of assets and businesses and that translates into good revenue growth. We start with that good revenue growth and we manage the margin effectively. We have a good focus on managing product margin and increasing product margin. You've heard us talk about our differential pricing strategies and how we're continuing to improve and balance our product margins as well as arraying these assets around that you've heard us talk about today, our capabilities in specialty, our manufacturer value proposition, these higher margin services and capabilities.
We also do a great job of taking our operating expense base and creating consistent sustainable operating leverage. And you've heard us talk today about our focus on cost and aligning our operations around these growth pillars to create continued additional operating leverage. And we have stable strong cash flows, which create good financial flexibility for us that we've been able to deploy historically in a very effective way. When you add all of this up, we've been able to generate really good operating profit growth. We think this model still exists and is very viable and we're confident that we're going to continue to be able to take good revenue growth, a strong margin focus, creating good operating leverage on that cost base, balanced with strong cash flows and financial flexibility and continue to drive operating profit growth.
And in fiscal 2019, today we reaffirmed our full year guidance and adjusted operating EPS of $13 to $13.80 And just to remind you on our quarterly progression, we continue to expect the first half quarterly EPS progression to be similar to that that we experienced in 2018 and the second half to have a stronger relative contribution. And today, we're providing you preliminary guidance on our Q1. We're off to a good start. We anticipate that our Q1 adjusted earnings per share would be in the range of $2.85 to $2.95 So to wrap it up, again, the patient is at the center of everything that we do. We're in attractive growing healthcare markets with leading position and differentiated assets and capabilities.
To drive efficiency through our scaled operations, we have a continued focus on driving even more efficiency through our cost alignment with our growth strategies. We continue to innovate and drive enhanced value to our customers as well as focusing on driving shareholder value in a very disciplined capital deployment approach. We're very excited about our multiyear strategic growth initiative. We're very confident in the assets that we have to help us deliver value to our customers, but also growth for our shareholders. So with that, I'm going to invite my colleagues back up for a Q and A session.
Where did we leave off? Where? Okay. Hi, good afternoon. It's Brian DeCulli from Jefferies.
Brett, just to go back to the I think it's the 3rd to the last slide that you presented. So you were showing what lead through operating profit growth, right? But I think one of the things that we haven't talked about is the renewals, contract renewals. So as you think about the next 3 years, layering on top of that the equation, so to speak, contract renewals, generic pricing expectations and maybe brand inflation, how do you think about your ability to deliver operating income growth over the next 3 years?
Thanks for that question, Brian. I'm glad you actually brought that up. We certainly do have contract renewals this year. But what I would point out is every year, about onethree of our book does renew. And so this is this year is not unlike any other for us.
And we have very strong relationships with our customers that we create over decades, not years. We're very confident that we're going to manage very effectively to partner with our customers on a long term basis. So I would just repeat, this is not an unusual year for us from a contract renewal perspective. We expect every year to have about onethree of our book renew. We're very confident in our ability to renew those contracts.
And that's all our renewals are contemplated in our guidance. Every year we step back and we look out over a 3 year period of the contracts that are coming up. And we look at the history of the relationships with those customers, certainly look at market dynamics, and we factor all of that into our guidance. And certainly, Nick, if you wanted to add anything to that. But again, this is not an unusual year for renewals for us.
And just to reiterate what Britt said, we're feeling really confident on our renewals and everything is in our plan. So what Britt has showed you is accounted for and feeling really confident
on the conversations we have. And then you had a question about generics and brand. I think it's difficult for us to forecast out 3 years what's going to happen, but you've seen the company continue to grow through periods of significant changes in the dynamics of generic and brand price characteristics. We talked earlier about the gross to net discussion, if that continues to proceed or even a reduction in just list prices and how the company views that. And we certainly have talked about and you've seen the effect of significant deflation in possibility for unusual events to So, there are always the possibility for unusual events to occur, but you've seen the company manage through unusual events on a continued basis and typically grow through those unusual events, certainly over time, but usually even in the same period.
In the last few years, we've had unusual events pile up on us and it's been difficult in some instances to grow in a quarter or a year as a result of that. But I think the business model for the generic manufacturers has remained strong. They're going to continue to launch new products. We're seeing a reduction in some cases in the number of players in certain categories when they can't provide the right kind of return on the products. And I think that the branded manufacturers are still going to have price inflation in certain categories as part of the feed that they need for continued innovation and cash to fuel their innovation.
And then clearly, the newer and emerging part of the puzzle is a significant growth in specialty products, which come on at a much higher price and also are a fuel for the revenue side of our of the model that Burt just described. Back over here somewhere. Yes.
Erin Wright, Credit Suisse. In an increasingly vertically integrated healthcare continuum here, Speaking to your relationship in JV with Walmart, I guess, how can you potentially expand or extend your relationships there? And what are the next steps? And then I guess my second question would just be on priorities and capital deployment. What are some of those targeted areas from an M and A standpoint?
There seems to be a lot of discussions around various different other types of businesses, whether it be dental or medical or animal health. Can you speak to those potential opportunities? Thanks.
Well, that's a good question. Why don't you start with the Walmart relationship and you've covered the capital deployment?
I think our success actually not that I think I know our success in Clarus with Walmart has been, 1, phenomenal. Both parties have been very pleased. I think that sets us up for interesting other partnership opportunities with Walmart, whether globally through a Clarus model and adding to that, as well as we've alluded to many times and looking at how do we work with our retail partners in the U. S. And those programs.
I think the Clarus partnership has truly opened the doors to us considering ourselves truly as partners, not just as a client vendor relationship. And I'm really optimistic on what you'll see us develop over the next few years with Walmart.
So we typically don't talk about specific companies or even specific sectors. But, Nancy, maybe you can talk a little
bit about how we think about capital deployment. Yes. As Brett talked about, we are very focused on a balanced capital deployment approach. You should expect our M and A activity to be focused on the growth areas we went through today, manufacturer value proposition, specialty and future retail models, particularly the first two areas we imagine there are capabilities that we can buy inorganically. I think we're always on the lookout, particularly at good valuations for companies that are more traditional tuck ins, although there are fewer opportunities that look like that.
And I think it's quite unlikely that we would stray outside of those areas.
Next question. If you raise your hand, we'll get you a microphone.
I've got a mic. So this is one from the webcast, maybe for you, Brian. Didn't the NHS recently get a £20,000,000,000 increase in funding? Where will this funding be allocated? And is this a sign that the NHS cuts have bottomed?
Yes.
So yes, there was recent announcement from Tim Down and Theresa May about increasing the funding to the NHS to the tune of $20,000,000,000 to $22,000,000,000 over the next several years. I'm not sure that's definitive and has been translated and pushed down into budgets. And they certainly don't know specifically which parts of the NHS system would benefit from that. But I would say that our initial reaction to that was certainly positive. I think the headwinds we faced in the last few years correlated quite strongly to a trough period in NHS funding.
So to the extent that there's some relief to that, that can only be good the entire healthcare community.
There's a question, if you can get a mic up. And in the meantime, on stand, I'm going to ask you a question. Increasingly, we know patients are being treated in the home. And I know there's a several different models that people just buy the stuff and have it shipped home, but there's also places where there's a prescription involved or a physician's order or some type of a payment process that's involved with directly with the payer, it could be sometimes a government payer, talk about how Medical Surgical is positioned against those in home kind of models?
Well, absolutely correct. There is a mix of way that people can acquire medical products and mix of reasons why they might need medical products. Those individuals or patients who have chronic conditions and often need a steady stream of supplies, they will often have those covered by an insurer. It could be a commercial insurer, payer, it could be Medicare or Medicaid. For those particular patients, we have a business called Patient Care Solutions, where we provide chronic supplies and then we bill their payer for them.
And that is a great example of where we make a direct impact on patients. And I'm very proud of the team that we have working in that area because a lot of these patients are calling very confused around how to use their product, how to get them covered. And we offer really nice compassionate but expert service. And it's a nice business. It's also growing for us.
Over here.
Thanks, Ken. I know a lot of us keep close eyes on data points on generic drug pricing, looking for leading indicators of stability in the wholesaling space. I guess, can you tell us what you guys would expect to see as leading indicators of price stability, whether it's NDAs being approved and drugs not entering the market, whether it's seeing shortages in categories, whether it's a slowing in the number of end applications. I guess, what are the leading indicators that you guys look at inside of McKesson as it relates to generic drug price stability? And then can you tell us anything anecdotally that you're seeing?
You want to start with that? Yes. I think we started at real high level. And one clearly would be the company is unique in our position in that we're still negotiating directly with generic manufacturers. So I think that it's nice to have a position where we can see their behavior clearly and we have a great sense for what we're actually going to pay for the drug and that would be we'll have Nick talk a little bit about what we're seeing as that plays out.
But the more important part of this is what's happening on the sell side. And as you know, what we pay for a drug and what we sell it for can be related, but they're not necessarily correlated. And we set our pricing to the market based on what the market price is and we try to source as positively as we possibly can. And that creates the opportunity for us to have expanding margins in generics. But for a period of time, we had significant deflation on the buy side and part of that was going into the marketplace.
And we actually don't think that you can continue to have a viable generic supply with continued deflation in generics. At some point they leave the market and we've seen evidence of it certainly in Canada where suppliers have exited the market because reimbursement hasn't been positive. We've seen it in European markets where they can't get access to the product anymore as people shift their capacity to markets that are more profitable. And we have seen some evidence, I think, on the supplier side that they've said we're not going to bid this product line.
Yes. So to your leading indicators question, I think we've hit them, you've hit them, right? You look at the number of FDA approvals, you look at how many players are showing up, you look at which molecules are being pulled out. So we're looking at the same things. Anecdotally, we've seen it slow down.
You've read about it. I anticipate you'll see more of that. I don't have a crystal ball. Someone asked me earlier during the break, I don't know what that normalized number is going to be, but we definitely see a deceleration in that. I don't know.
Brad, if you have any other comments?
No, I would agree with that. And I think our ClarusONE organization is in a unique position. When the vendor is looking to exit a product line, they'll usually call us first and explain to us this is a product line that we no longer can afford to carry and we're either going to get out or we're going to sell the product line or we're going to license it out to somebody else. And so we're in a very unique position not only to get the right cost basis, but to make sure that we have surety supply for our customers. And that's something that the team is looking at all the time is how many suppliers are on a particular molecule.
And if there is a vendor that is going to optimize their manufacturing line and get out of that, we have alternates that we can go to not only from a good cost basis, but again that surety of supply. And we've seen that stabilize a little bit over the last several months. Okay.
The microphone coming over here, I think, to Ricky.
So your follow-up question on guidance. So you just guided 1Q about where the Street is. I think the implied growth is somewhere in the mid teens versus same period last year, but you're still saying that second half of the year is going to see second growth faster growth versus the first half of the year. So one, are you just seeing something that was pulled forward in the quarter from Q2 to Q1? So are we off in the cadence in is the stronger performance in 1Q operational above the line or below the line?
Well, first of all, I would start with we typically do see stronger performance in our second half of the year, particularly in our Q4. So historically, I think that's played out for itself. What I would say is that compared to last year, we had some timing issues that we talked about last year between our Q1 and Q2. So this is really good operating performance that is in line with our plan, And there's nothing really a pull forward between Q2 and Q1. So nothing happened in the Q1 that helped drive kind of like that guidance range?
Our Q1 is in line with our plan. So it's more of a summary of our model.
What we're doing
is providing you a more discrete look at our Q1 since we're sitting here on June 28 and we have good visibility into that.
Thank you.
Hi. Can you maybe talk a bit about biosimilars and your U. S. Oncology network and the opportunity that is there? I mean, we were talking with the management team with 1 specialty pharmacy and they said that the margins that they make on biosimilars could be 50% or 100% higher than what the margins they were on the original product.
So even though the discount in list price might be 20% or so for the biosimilar products, the rate that the specialty pharmacy is buying on that is much greater than that, which means the opportunity for margin expansion is much higher than what I think a lot of folks expect. Any thoughts around the biosimilar opportunity and how McKesson is uniquely positioned to take advantage of that?
Actually a lot. So I won't get into the specific numbers. Opportunity, yes, great opportunities as well. And I think what's interesting is if you look at not just our U. S.
Oncology network, you look at our Onmark presence, which is our open oncology. Last year, I cited the example of Xarxio and the success we had with that. We went, I was mentioning it earlier, from 0% to 85% penetration within the 1st 3 weeks and 92% by week 5. That's huge when you think about transition. And now with pegfilgrastim, which is in Neulasta, just about to launch, we're in an incredible position on how to leverage that on our 2 platforms.
And what's interesting there is how we're able to introduce that into the channel in our GPO presence as well. So there is we have a compounding effect there and what we can do for our provider partners on those contracts is incredible, because we can show that shift, that share shift and then influence of where that share is going to go.
And I think in addition, when we get early adoption in our own network, our partner specialists, that becomes evidence for everybody else that the product works as the equivalent or the originator product did. And that also provides an incentive for the manufacturers to come to us first and say, right, help us get this product taken up and help us prove to the rest of the world that it works as good as the original product. So we're pretty bullish about biosimilars. It's going to take a way to play out and while to play out across many categories, but clearly in some of these specialties, we're very optimistic.
Any sense for the margin difference?
Big. Thank you.
Good.
Yes, over here. Yes. And I've got one more just before that from the webcast, maybe for Britt. What is the amount of cash that you need to have on the balance sheet to operate your business? Well,
I won't point to a specific number. But certainly, we provided good financial flexibility through our strong cash flow generation and we've been able to deploy that very effectively. So we feel like we have very strong financial flexibility. We've been able to maintain really good investment grade ratings and we're very comfortable with our ability to continue to generate strong cash flows over the coming years that we can continue to deploy not only against good growth opportunities as Bhansi referenced, but also returning cash to our shareholders.
Today, you laid out a lot of the building blocks for the company going forward. And I think all of us can appreciate the growth within healthcare and the opportunities that McKesson has. And as we look at this year, it looks like top line midpoint of your guidance range is about 4%, EBIT about 2% and EPS around 6%. John, you've been a little apprehensive about talking about those kinds of numbers longer term, right? So you give us a framework as to how to think about it.
Are there numbers that we can put around that? If I heard you correctly today, mid single digit top line, it sounds like everybody is talking about that you should be able to get leverage out of your business, growing margins in certain components of your business. So if we were to think about this not over the next 12 months, but think about this over the next 3 to 5 years, how do you think about that business, your business overall? And what are your internal goals or the way you think about your business and the growth opportunities?
Well, we haven't provided long term guidance. But what we attempted to do today, especially in Britt's discussion, was to identify how this model works and how the model has worked successfully for us for 20 years and perhaps a lot longer. We've been able to drive terrific leverage in our business through not only good revenue growth, but a proper mix management, great expense leverage, good capital deployment and drop positive growth to the bottom line that exceeds revenue growth on almost every quarter during my tenure. So, we've gone through what I think is a relatively unusual period of time where we've had some consolidations in our industry that affected us in a negative way that I don't see continuing. And we've had a period of time where the mix has shifted more towards specialty at the same time as the profitability in generics were more negatively affected.
I believe that we're not going to go through periods of time going forward that we'll have that many things moving at once, particularly those that moved in a negative direction on us. And what we wanted to do in that conversation was to provide some sense of confidence
that we believe
in the business model, that the business model has existed before. We believe that that business model is going to continue to exist and we're bullish about the way that it works. The only caveat I would give on any of this is that the specialty products are still a little bit of an unknown for us. How fast are they going to come out? What are the prices going to be on those products?
And we note that at least historically on the distribution side of our business, margin rate on those very expensive specialty drugs has been less and it's dilutive to the overall margin of the business. So said another way, it might propel our revenue growth higher than what we've typically delivered at least bit of an unknown. How fast are these products going to come out? What are the pricing parameters of those products going to be? And how do we offset that adverse mix with more services?
Where those manufacturers are paying us a rate of margin on those revenue dollars is significantly higher than what we get on the portfolio. Why don't you repeat that one more time, Lisa?
Sorry. But Kessin has talked historically about being a double digit grower on the bottom line. So taking everything that you just talked about as well as your opportunity to whether it's tax or other initiatives, is that still a goal of the company? Is that a way for us to think about this when we get back to a more normalized basis? If you know, I have to
She's going to ask. We're prepared to make any commitments about the size of the growth and the bottom line. What you should be hearing from us though is a sense of confidence around the model. What you should be hearing from us is a continued focus on appropriate capital deployment and clearly that helps at the EPS line if we do share repurchases and it also helps at the EPS line if we do accretive acquisitions that deliver above cost of capital returns and we're able to get synergies out of them, which drives a better performance to the bottom line in addition to cash flow. So, I think that you shouldn't it would be difficult to question the strategic position of the company, the performance we've had over decades and our position in the industry going forward and the continued consolidation of the use of services like McKesson provides from great customers like Walmart and others who are increasingly turning to the wholesalers to provide a complete array of services in a very cost effective way.
Anything else online over there? Well, let me wrap this up then. I want to thank you all for your time and attention and your attendance today. I know there's lots of things moving in our industry and it never seems to fail that when
we show up in one
of these meetings, something happens. So, I appreciate the fact that you're here, you paid attention. I also want to thank the management team. A lot of work and effort goes into these presentations. But more important, a lot of work and effort goes into the execution of this business year in and year out.
We've got, I think, the best management team in the industry. We have great and deep benches of talent. We think about the company in a long term way, how do we grow 5 10 years out, not just how do we make the next quarter. We try to position the company's assets in advance of the opportunity and we not just we not only just listen to our customers in terms of what their current needs are as defined by their expectation of our role. We try to think about our customers' needs as defined by where we think healthcare is going and what the patient requirements are going to be and build our company's strategy back from that point of view.
We understand our responsibility to build shareholder value. We take that very seriously. But we know that's a trailing indicator of our ability to perform on these other dimensions. And you have our commitment to continue to watch for your resource and asset in a very appropriate and responsible manner. So thank you for your time and attention.
Travel safe and enjoy the 4th July holiday. Thank you.