McKesson (MCK)

Q1 2011 Earnings Call

July 30, 2010 8:30 am ET


John Hammergren - Chairman, Chief Executive Officer and President

Ana Schrank -

Jeff Campbell - Chief Financial Officer and Executive Vice President


Lisa Gill - JP Morgan Chase & Co

Ricky Goldwasser - Morgan Stanley

Robert Jones - UBS

John Ransom - Raymond James & Associates

Ross Muken - Deutsche Bank AG

Helene Wolk - Bernstein Research

Garen Sarafian - Citigroup Inc

Lawrence Marsh - Barclays Capital

Robert Willoughby

Thomas Gallucci - Lazard Capital Markets LLC

George Hill - Leerink Swann LLC



Good morning, and welcome to the McKesson Corporation Fiscal 2011 First Quarter Earnings Conference Call. [Operator Instructions] I would like to now introduce Ms. Ana Schrank, Vice President of Investor Relations.

Ana Schrank

Thank you, Augusta. Good morning, and welcome to the McKesson Fiscal 2011 First Quarter Earnings Call. With me today are John Hammergren, McKesson's Chairman and CEO; and Jeff Campbell, our CFO. John will first provide a business update, and we'll then introduce Jeff, who will review the financial results for the quarter. After Jeff's comments, we will open the call for your questions. We plan to end the call promptly after an hour at 9:30 Eastern Time.

Before we begin, I remind listeners that during the course of this call, we will make forward-looking statements within the meanings of Federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson.

In addition to the company's periodic, current and annual reports filed with the Securities and Exchange Commission, please refer to the text of our press release for discussion of the risks associated with such forward-looking statements.

Thanks, and here is John Hammergren.

John Hammergren

Thanks, Ana, and thanks, everyone, for joining us on our call. Today we reported a solid start to fiscal 2011. For the first quarter, we achieved total company revenues of $27.5 billion and fully diluted earnings per share of $1.10. Our first quarter performance positions us well for the remainder of the fiscal year, and we continue to expect McKesson should earn between $4.72 and $4.92 per diluted share.

Before I turn the call over to Jeff for a detailed review of our financial results, I thought I would highlight the trends in both segments of our business.

Distribution Solutions started the year with solid growth and operating margin expansion. Operating profit was up 17%, including the $51 million antitrust settlement we talked about during our fourth quarter call. Excluding this settlement, the operating profit margin in Distribution Solutions expanded by four basis points as we continued to benefit from our generics offering across our Distribution businesses. If you take a moment to think back several years, you will recall that our discussions about our generics offering were mainly focused on progress we were making penetrating the independent segment of our U.S. Pharmaceutical business.

Today, when we talk about generics, our discussions encompass the broader array of customer-centric programs available throughout McKesson. In U.S. Pharmaceutical, our proprietary generics program, OneStop, is available to customers regardless of whether they are independent, retail chain, hospital or long-term care. Just importantly, our generics programs are available across different geographies and across multiple business units such as specialty and Medical-Surgical. With a favorable generics environment this year and our comprehensive offering, we anticipate continued profit growth in generics for fiscal 2011, and we have confidence that we are building a multi-year period of strong generics growth.

The revenues for our Specialty Distribution business are included in our U.S. Pharmaceutical business. Specialty Distribution is performing extremely well. We are wrapping up the final part of our very successful Centers for Disease Control and Preventions program to deliver the H1N1 flu vaccine. In addition, this quarter, we had another strong contribution from oxaliplatin. This drug is a good example of how we benefit from generics across our business.

In our Medical-Surgical business, revenues were flat for the first quarter, but I would remind you that last year in the first quarter, this business benefited from the demand resulting from the H1N1 virus. We expect Medical-Surgical will continue to have slower top-line growth until we see more of an economic recovery, which would translate into better employment rates and more physician visits. We also expect a normal flu season this year.

I'm very pleased we've been able to grow in spite of the softness we've seen in the market. Physician office visits are off somewhat. In this business, we are very focused on optimizing our sourcing of McKesson-branded products, and we continue to drive leverage through aggressive cost management. Combined, these initiatives are resulting in margin expansion.

Our Canadian Distribution business had solid performance in the first quarter. McKesson Canada has leading positions in every market segment. We offer a comprehensive set of solutions and have close relationships with our customers. This is a terrific business for us. As you know, there are significant differences between the Canadian and U.S. markets. In Canada, drug prices, price increases, patient reimbursement and wholesaler up-charges are regulated by the government. Recently, provincial governments have been seeking to reduce the budget deficits that resulted from stimulus spending during the economic downturn. Drug spending by the government has been targeted as a way to reduce costs. As a result, there have been public policy changes in Canada that have the potential to impact our performance.

Over the past several months, the provinces of Ontario, Alberta and British Columbia announced and enacted drug reform that will result in price cuts on most generic drugs by up to 50% over the next three years. Québec has recently announced its intention to implement a similar effort, but final details are not yet available.

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