Here at Bank of America, welcome to day one of the B of A Healthcare Conference here in Las Vegas. We are very excited to welcome McKesson here. We have CFO Britt Vitalone. Thank you, Britt, for joining us.
Thank you, Allen. I'm pleased to be here, and I always look forward to this because this comes on when we finish out a fiscal year and we give guidance for a new year. It is really great to be able to talk about the year that we just finished and the guidance going forward.
I want to start with something that's not going to come as a surprise to you, this MFN executive order that came out yesterday. I must have spent 90 minutes trying to put together a question here that encompasses everything going on with MFN, but I just.
Yeah, you do.
I kind of scrapped it, and maybe I can ask that as a follow-up, but what are your initial thoughts around MFN? Can you talk a little bit about how a change in list prices impacts your business, a change in ASP-based pricing could impact your business? Because your business has gone through a pretty big evolution over the past 10 years where you've moved away from fee-for-service toward fixed fee-for-service in the brand business, but then over that time period, you've also been adding to USO and the oncology piece that has sensitivity based on ASP pricing. I would love to get a sense, just first, your initial thoughts around MFN, and then two, what are the levers and sensitivities of your business today?
Yeah, I appreciate the question, and I anticipated this might be your first question. Look, over the last, really not just several days, but several weeks and months, there's been a lot of activity on the public policy side. As we always do, we stay very close with policymakers, and we work with them to help educate and inform them on the implications of the decisions that they might make or the proposals that they're making. As it relates to the executive order on MFN, I think I would offer a few things. First of all, it is a declaration of intent. As a declaration of intent, we would anticipate that there will be several comment periods and proposals and possibly even litigation over the next several weeks and months. What the MFN does lack is a lot of details.
As we look at this today, some of the details that we do n't find in this executive order include the number of products that would be impacted by an MFN price, the countries that would be included in an MFN reference basket. It is difficult for us to ascertain the impact of the MFN price on the launch of products. Certainly, how the MFN price would be implemented, all those details are lacking at this point in time. It 's also unclear to us what payment mechanisms would be impacted. Would this be Part B, Part D, Medicaid? All of that is really, those details do n't exist here today. The executive order really was to develop a plan. It is hard for us to know what that plan looks like, the implementation period, or the time that it would take for such a plan to be implemented.
Our view on that is this is months, and it's certainly not days or weeks. There's a lot of details that we'll learn over the next several weeks and months. Our view on this is that the executive order was not intended to impact the community provider setting. We have invested significantly in the community provider setting over the past decade-plus. We believe that the community setting is the most efficient and effective way to deliver care. We also believe that the community setting has the lowest cost of care for patients. As we always have, we will be supportive of proposals and reforms that impact the access, affordability, and better outcomes for patients, particularly in the community setting. It's very difficult for us to really comment on an executive order that really doesn't have any details.
The timing and implementation are unclear to us. Given the fact that it is really just a declaration of intent at this point in time, and we believe that this will take months, not weeks and days, the impact to our business for fiscal 2026, we believe, is limited, if there is any at all. To your question on how we operate as a distributor of drugs, whether those drugs be branded, specialty, or biosimilar drugs, we work very closely with biopharma to understand what their pipeline might look like, what the needs they have for the distribution of those drugs. We work to be paid a fair value for the services that we provide, and that is on a fixed fee-for-service basis.
Whether the price of a drug is $1,000 or $500, there's a certain level of services that a manufacturer is looking for us to provide on behalf of those drugs. And we're looking, as always, to be paid a fair value for those services.
If we look back over the past few years, the price of insulin has come down. Would that be a good proxy? Because I know that you've talked about insulin in the past and the experience you had there. Is that a reasonable proxy for if something happens to list prices of drugs, you can look to insulin as a proxy for what could happen more broadly, or is that a unique therapeutic class that might not be indicative of what could happen to other parts of the business?
Yeah, I think you have to come back to the basic fundamentals here, which is whether it's insulin or some other category of drug. We have seen adjustments to the WAC price over time with drugs over the last several years. It doesn't really matter to us whether it's insulin or some other category. What matters to us is working with biopharma to understand what needs do they have for the distribution of those products. Does it require special handling? Does it require temperature control? What are those services that we provide? And then we work very closely with the manufacturer to be paid appropriately for that, again, regardless of what the price of that product might be. Insulin, I don't know, would be a proxy.
The proxy I would give you is the process that we go through to work with manufacturers to understand what needs and services they have on behalf of those products.
Okay. I want to switch gears a little bit, talk about the MedSurge separation that you announced last week. A lot of feedback on our end about that specific separation. Can you talk about how McKesson thinks about value creation as you talked about the separation? I think there were some questions that we were getting around the relative valuations of RemainCo and MedSurge and what that would mean for the value that's created out of that separation.
Yeah, so just to remind, we announced the intent to separate the medical business, the medical segment, as an independent company. Capital deployment and focus on our priorities and focus on our strategies is really a hallmark of what McKesson has done for a number of years. We have executed divestitures over the last several years, whether that be the spinoff of Change Healthcare, the sale of our European operations, or more recently, the sale of our retail operations in Canada. We're always focused on our strategy, and we always want to be focused on deploying our capital against that strategy and against opportunities where we have higher growth and higher margin opportunities. In the case of the medical business, we believe that the medical business, while not directly on those two strategies, has a number of growth opportunities in front of it. The medical business is very well positioned.
It is very broad. It is a very scaled business across all alternate sites of care. We believe that there are a significant amount of growth opportunities available to that business to grow that business and to unlock that growth potential, we believe, is best as an independent company rather than for competing with for capital with inside McKesson. As we think about this, it's really developing two world-class, well-positioned leading companies that will be able to pursue their own growth and strategies and be able to do that with focused prioritization of capital. We believe that that will unlock the value for both businesses. We believe that for the remaining business, the larger McKesson business, focusing on oncology, biopharma services, more discreet focus, more discreet capital allocation against those will drive higher growth, will drive higher returns, and ultimately higher value for our shareholders.
A related question around the separation there. What is the level of shared distribution and infrastructure between the MedSurge business and the pharmaceutical business? Is it pretty separated, or is there a lot of shared services, technology, infrastructure between those two assets?
It's a great question. As we have operated this business over the last decade-plus, from an operating standpoint, the medical business is fairly separate. It has its own unique distribution network. It has its own ERP. It has many functions of an independent company today. As you would expect, we have efficiencies of scale and efficiency of services in a larger enterprise that we do apply to the medical business. We do that certainly through some shared service functions, whether that be finance or human resources or some IT functions. As we've done with every separation, there are going to be a set of shared function services that we'll need to transition over to the new business and we'll need to stand up.
We've done this many times before, but this business is fairly separable from the operations being discreet, the distribution network being discreet, and many shared services are already, or I should say many independent services are already in place. As you would expect, there's going to be an analysis that we go through to make sure that we transition this independent company appropriately, but we are doing that analysis today. We've done this before, and we feel comfortable with this.
Great. I want to talk about the long-term guidance update you provided last week. You increased EBIT targets in US Pharma. As I think about what the growth profile of that business look like over the past five years, I think there were some one-time benefits from things like COVID that drove some growth, but now you're raising those growth targets. As we think about the way that McKesson looks like today versus where it looked like a few years ago when you gave those targets the first time, what's changed and what gives you confidence that this business can grow faster in the market today?
Yeah, it's a great question. First of all, I would base this in our 2025 results, which was another outstanding year of performance across the company. We had 15% operating profit growth and 20% adjusted EPS growth, which is really phenomenal and above the long-term targets that we set several years ago. When we set our strategy several years ago, we had four pillars, and it was really to focus on oncology, biopharma services, to really strengthen the core distribution businesses, the pharmaceutical distribution businesses, and really to modernize and evolve the portfolio. We've done all those things in a consistent way with high execution year in, year out, delivering really strong results. 2025 was another year of that. Along the way in the pharmaceutical business specifically, we have seen a few things that I would point out.
We have seen stable and consistent drug utilization, which is supportive of the scale business that we have. We've made continued investments in our oncology platform over time. We've added providers. Last year, we added 160 providers to the US Oncology Network. We've added 725 providers over the last three years. Continuing to invest in the oncology platform, we continue to see a really strong performance in our data services and analysis business that is helping pharma in terms of innovating and developing drugs specifically for oncology. We have created a joint venture with Sarah Cannon Research Institute to support the administration and management of clinical trials. We have over 1,000 sites of active trials that are going on right now. We have a 30% accrual rate increase last year versus the prior year.
We have a lot of things that we've invested in over the last several years that are continuing to add scale, continuing to add differentiation that are supporting the growth that we've seen and the consistent growth that we've seen over the last several years. We believe very strongly that this business is very well positioned, that our ability to deploy capital, and I think the two acquisitions that we announced and will be completing in this first quarter of fiscal 2026 are evident of that continued focus on these higher growth, higher margin opportunities.
You mentioned oncology, and one of the strategies you've talked about in the oncology franchise is the opportunity to leverage and commercialize data and allow providers to participate in clinical trials. One example is your joint venture with Sarah Cannon Research. Can you provide an update on that business? Is there a way to size the revenue contribution from those types of that part of your business from clinical trials and from data? Maybe not size it today, or is there a bigger opportunity for that to grow and become more material over time as now you represent such a material percentage of oncologists in the U.S.?
Yeah, just on that last point, again, to add to the number of providers that we've added over the last three years, we now have over 2,700 providers in the US Oncology Network. When we complete the acquisition of Florida Cancer, which, as we indicated on our call, we expect to happen in June, that will be another 530 providers. That's the scale that we're adding. All the providers are practicing on a single EMR, which is our iKnowMed system. That allows us to consolidate a scaled amount of data through our Ontada business, which allows us to partner with biopharma to help them as they commercialize and make investments in new oncology drugs. We're really pleased with the fact that we've been able to grow our clinical trial management, our site management, and our clinical trial resources over the last several years.
Sarah Cannon is a good example of this. As I mentioned, we're seeing a significant increase in the number of patients that are being accrued into clinical trials. That is developing and growing as well. The platform of oncology, which includes distribution, GPO services, our Ontada business, our site management, and Sarah Cannon Research business, is about $35 billion of annual revenue in fiscal 2025. We're starting to give you a sense of how large the overall platform is. The platform works together from distribution all the way through the data that's collected from the provider sites all the way through site management and clinical trial access. It is a very differentiated platform, but we believe it's very scaled. We believe that it's very differentiated, and we're pleased with the growth.
I want to switch gears a little bit to generics. There was a really interesting Financial Times article this morning that talked about different stakeholders buying more inventory after Liberation Day, given just, I guess, concerns around potential inflation in the generic market. As we think about what's happened post-Liberation Day, obviously, your quarter ended 3, 31, so the visibility into inventory levels at that time period wasn't that high. As we think about what's happened since the end of the quarter, was there an opportunity to buy more generics than normal, given some of the uncertainty in the market? Second, what's the recent conversations? What have they been like with your stakeholders in the generic market, whether it's manufacturers or whether it's your downstream pharmacies? Is there an increased concern around the future of pricing, the availability of different generics? Really, has anything changed since Liberation Day?
Yeah, a lot of questions to unpack there. First of all, the generic marketplace continues to be competitive but stable. We believe that our position with our US Pharma business, with our specialty provider business, provides us really good scale. We have a scaled and effective sourcing operation in ClarusONE, they're partners with our customers, partners with dozens, if not hundreds, of manufacturing partners. We focus on two things. We focus on providing the lowest cost product to our customers with the highest availability of supply. We've had over the years some disruption of supply that has happened, but I can tell you, just looking at a report even a couple of days ago, the service levels that we have are as high as they've been in the last several years.
That really indicates the stability that we're seeing in our marketplace with our manufacturers and our partners and really through the ClarusONE operations that we have. I think we feel really well positioned, given our customer base, given our scale, given the effectiveness of the sourcing operation that we have. We continue to focus on that dual mandate of low cost and availability of supply, which, again, as I mentioned, our service levels are quite strong right now.
As it relates to the prospect for generic inflation, there was generic inflation maybe 10, 11 years ago. Have your contract terms with generic manufacturers or your downstream pharmacies changed materially since then? As we kind of make estimations of what could happen moving forward, trying to get a sense, because your branded business, the contract terms have changed. Has anything evolved in the generics market? If so, can you talk a little bit about that?
Yeah, I don't know that I would say that there's much that has really changed or evolved here in the last few years. Again, that dual mandate that I talked about is what we focus on. As a business, we try to create a spread. If we can deliver the highest availability of product to our customers at the lowest cost and create a spread on the buy and the sell, that's what our focus is, and that's what our focus has been and we'll continue to do that.
Okay, great. On the prescription transaction business, specifically the prior authorization business and GLP-1s, you cannot go a day without a GLP-1 headline. A couple of weeks ago, CVS, the PBM portion of their business, partnered with Novo Nordisk to prefer Wegovy on their formulary. It sounds like a competing drug will lose volume there. As we think about your prior authorization business and we think about the drivers of growth and profitability, is a variance in the types of GLP-1s, meaning a shift from one manufacturer to another, could that introduce volatility in the profit model within the prior authorization business? If so, is that contemplated in the forward outlook for your guide there?
First of all, our prior authorization business is a very vibrant business. I think it's very differentiated. The technology and automation that we have in place and being in the workflow of over 900,000 providers and over 50,000 pharmacies is very differentiated. We support prior authorization programs for all the major GLP-1 products in place today, and we will continue to do that. We've seen good growth in GLP-1s in terms of prior authorizations. I referenced on our Q4 call that we saw prior authorization initiations increase over 15% in the fourth quarter. That's evidence that volumes continue to be quite healthy and strong. We believe that the services that we provide and the additional reporting and reject denial and other things that we can do around prior authorizations is differentiated.
There's certainly the characterization of a product, whether it's a weight loss drug or a diabetic component of the drug, that will create different requirements from a payer in terms of how often it needs to be renewed or what percentage of that is being renewed. We've seen this dynamic for several years, and we feel very comfortable that we're well positioned to continue the growth that I indicated that we're seeing in prior authorization initiations.
That's great. And related to that, you mentioned prior authorizations up 15%. Clearly, employers and plan sponsors are focused on GLP-1 spend. It's been the primary driver of the acceleration of traditional spend. Has the way that prior authorizations are embedded in, whether it's an employer or a broader health plan, have those evolved at all? Have they gotten more stringent, less stringent? Has there been any change to the way that plan sponsors are using prior authorizations over the past one, two, three years?
Yeah, first of all, I think this is really quite aligned with what our strategy is to provide better access, better affordability, which will lead to better outcomes. As things have evolved over time, it really fits with our strategy and with our focus. I think things have evolved over time. There have been additional indications that have been added to these drugs. There are requirements that change from time to time in terms of how often a renewal of a prior authorization is needed or if a prior authorization is needed for one particular indication versus another. We have seen the evolvement of not only GLP-1s, but other drugs as well. Our programs that we put in place with our partners will support that.
Shifting gears to just the really robust demand for prescription drugs that we've seen for the past several years, is there any early insight you can provide us into what you've seen so far in April, early May, as it relates to March? Has anything changed? Is it stable? The macro has gotten a little bit more uncertain, I guess, since the beginning of April, but just curious if that's having any impact in the demand for drugs.
Yeah, I mean, it's a little early, I think, in the quarter, but what we've seen thus far is really right aligned with the guidance that we provided and what we've seen really over the last couple of quarters. I don't know that I would say that we've seen any material or significant change in demand at this point.
There is a belief by some that changes to the benefit design within Medicare for specialty medications, the lower out-of-pocket maximums, could drive less script abandonment at the pharmacy and could obviously improve demand for drugs. Is there a way for McKesson to have visibility or insight into those specific things? I think that some are seeing an acceleration in certain high-priced drugs where maybe in years past, the utilization would be lower because that script abandonment is higher. Just curious if that is something that you are seeing in your data so far in 2025.
Yeah, I mean, this is something that we've certainly heard and talked about with providers, with payers, but we have not seen anything that would indicate a material change or a material shift. Specialty drugs have been and continue to be the largest growth driver within our pharmaceutical business. This is not something that we've seen this really for the last several years. We would expect this to continue for the next several years. This is where all the innovation is. In terms of these particular characteristics that you're talking about, we have not seen that as an indicator of growth at this point in time.
Okay, makes sense. I want to spend the last few minutes talking about a few different things. First would be the competitive landscape around you and some of your largest competitors in the drug distribution space. Has anything changed over the past couple of years? Is it becoming more competitive? You look at specific areas of your business. It looks like you and your peers are all looking at acquiring similar assets, which feels new. Can you talk to the competitive landscape that you're seeing today? Maybe compare that to the years prior to COVID, right prior to COVID, and whether or not you think anything has changed or evolved from a competitive landscape.
Yeah, let me answer this in a couple of different ways. First of all, the landscape has been competitive for as long as I've been with the company. It'll remain competitive, I'm sure, but it is pretty stable. I think that competitive landscape has made all of us more efficient and effective as distributor partners. In terms of your second point on this question, though, I would say that we started down the path with US Oncology in 2010. We identified oncology as an area of growth, as an area of innovation, and an area where we could take our drug distribution capabilities and skill, our scale, and apply that to practice management. The acquisition of US Oncology in 2010 was evidence of that. We've been building the oncology platform now for the last 15 years.
We are really quite pleased and proud of what we have been able to build, the scale and breadth and depth of that oncology platform and all the components that are in it. When we look at the landscape here, what we are looking for is areas that are going to utilize the skills and capability that we have on drug distribution, the ability to provide GPO services, to provide data services like our iKnowMed business, where all of the providers are practicing in one area, which allows us to capture that data, utilize that not only for clinical purposes, but upstream for manufacturers. And then areas like oncology, where there is going to be a lot of research, and that leads to clinical trials, clinical trial management, site management. We have been at this for a very long time.
Now, recently, we have looked at the retina and ophthalmology space, where, again, we think that the characteristics in that particular category fit what we've done in oncology, drug distribution, GPO services, data, as well as research and research access capabilities. Again, a platform. We're not looking to manage providers. We're looking to utilize our capabilities to manage a platform of services. I think what's different about your comment is we have been at this a long time. We have built a very differentiated platform in oncology. We believe that where other ologies like retina and ophthalmology provide that breadth, that we'll be able to be successful and build those capabilities as well.
That's great. Then with the last 90 seconds or so, as we think about capital deployment here, M&A versus share repurchases, the valuation of your stock is up 80% from where it was three to four years ago, which is obviously a testament to the work that you and the company have done. As you think about the relative focus between M&A and share repurchases, I have to imagine that your thinking there has somewhat changed versus when the stock was trading 11-12 times earnings. Can you talk about, and then obviously with the focus now on biopharma services even more acutely with the separation of the MedSurge business, is it now more, is there more urgency to make M&A a bigger portion, or is it the same old framework that has gotten you this far?
Yeah, I understand the question. I would say that it's not a matter of urgency. We have deployed a three-pillar strategy against capital deployment for the last several years, and we will continue to do that. Our number one priority is to grow the business. That starts with having effective businesses that drive a lot of cash flow, which allows us to deploy that capital against growth as our number one priority. If there are opportunities for growth on strategy with good financial returns, that's what we want to do. I think Florida Cancer and Prism are good examples of that. If there are opportunities that are not on strategy, then we're not going to deploy capital against those opportunities. It has to also have the right financial return. We have been very disciplined in those two parameters around growth.
If we can't find that, then we're going to continue to be disciplined. We're going to return capital to our shareholders, and we're going to always do this, maintaining our credit rating.
Perfect. Looks like we are out of time. Thank you very much, Britt. Really appreciate the time. Thanks.