Mckesson Corporation (MCK) — Q1 2016 Earnings Call Transcript

Thank you, Solari. Good afternoon and welcome to the McKesson fiscal 2016 first quarter earnings call. I'm joined today by John Hammergren, McKesson's Chairman and CEO, and James Beer, McKesson's Executive Vice President and Chief Financial Officer. John will first provide a business update and will then introduce James, who will review the financial results for the quarter. After James's comments, we will open the call for your questions. We plan to end the call promptly after one hour at 6:00 PM Eastern Time. Before we begin, I'd remind listeners that during the course of this call we will make forward-looking statements within the meaning 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 a discussion of the risks associated with such forward-looking statements. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures in which we exclude from our GAAP financial results: amortization of acquisition-related intangible assets; acquisition expenses and related adjustments; certain claim and litigation reserve adjustments; and LIFO-related adjustments. We believe these non-GAAP measures will provide useful information for investors. Please refer to our press release announcing first quarter fiscal 2016 results, available on our website, for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Please also note that on today's call, we will refer to certain measures calculated on a constant currency basis. Additional information on constant currency effects is available in our SEC filings. Thank you. And here is John Hammergren.

Thanks, Erin. And thanks, everyone, for joining us on our call. Today we reported a solid start to fiscal 2016. For the first quarter, we achieved total company revenues of $47.5 billion, up 13%, and adjusted earnings per diluted share of $3.14, up 30%, both on a constant currency basis over the prior year. During the first quarter we completed the sale of our Nurse Triage business, a small business within the Technology Solutions segment, and we recorded a gain of $0.16 per diluted share in the quarter. Therefore, we are updating our full-year guidance and now expect adjusted earnings per diluted share of $12.36 to $12.86 for fiscal 2016. Turning now to our business results for the quarter, Distribution Solutions revenues were $46.8 billion, up 13% on a constant currency basis. And Distribution Solutions adjusted operating profit was $1.1 billion, up 17% on a constant currency basis. Our North American Pharmaceutical Distribution and Services business, which includes U.S. Pharmaceutical, McKesson Specialty Health, and McKesson Canada, continued to lead the way, with revenue growth in the first quarter up 16% on a constant currency basis. Revenue in our U.S. Pharmaceutical business exceeded our expectations in the first quarter, driven by strong growth from a few of our largest customers and brand pricing trends ahead of our expectations. However, generic pricing trends were well below the level of the prior year and below our expectations for the first quarter. We will continue to monitor pricing trends in the market and will provide updates as we communicate our quarterly results going forward. We continue to grow our business with our U.S. Pharmaceutical customers across the retail, institutional, and independent channels. I'd like to take a moment to highlight our vibrant community of independent pharmacy customers. Last month we hosted our annual conference for retail independent customers, which brought together thousands of community pharmacy owners and pharmacists from across the country, including our growing base of Health Mart pharmacy customers, now representing more than 4,000 stores across the U.S. Record attendance at this year's conference reinforced the growing need for independent pharmacists to understand the dynamics shaping their industry and to evolve their business to meet these new demands. This year's conference centered on our strategy to help customers attract more patients through greater access to preferred networks and highlighted McKesson's suite of services, which enable pharmacies to operate more efficiently and capture new sources of revenue. We've hosted this conference now for almost 40 years, and it continues to provide an exceptional platform for peer networking and continuing education while celebrating innovation, patient commitment, and business growth of our exceptional independent pharmacist partners. In summary, I'm proud of the value we deliver for our U.S. Pharmaceutical customers and the innovative services and solutions that set us apart. As some of you may have heard me say on occasion, it is our standard of operational excellence that earns us the privilege to serve our customers every day. And it's our team's focus on our customers' success that allows us to grow our relationships and create value far beyond the core of Distribution Solutions. Turning now to our McKesson Specialty Health, I'm extremely pleased with the results for the first quarter, which represent a strong start to the fiscal year. Once again, we delivered impressive growth in our specialty business, driven by the performance in the U.S. oncology network and our broader oncology offerings and continued excellent growth in other multi-specialty categories. I believe we are very well positioned to continue to grow and innovate in this dynamic market. And our Canadian business had nice growth in the quarter, with results that were in line with our expectations. At our Investor Day last month, we highlighted the great achievements of our Canadian business. I'm now pleased to tell you that our team continues to grow, not only our core distribution business, but also expanding into our specialty and retail banner presence in the market. The recent addition of the Remedy'sRx banner in Canada adds to the scale we have built to support independent pharmacy. I'm proud to say that roughly 40% of all independent pharmacies in Canada operate under one of our banners, and we leverage our innovative services, products, and technology to drive better results for our business and our customers. Turning now to our results for international Pharmaceutical Distribution and Services, revenues for the first quarter were $5.8 billion, roughly flat year-over-year on a constant currency basis. And operating performance from Celesio was ahead of our expectations in the quarter. Earlier today, Celesio announced the acquisition of the pharmacy operations of Sainsbury's, a leading chain of supermarkets in the United Kingdom. Under the terms of the agreement, Celesio will acquire 277 in-store pharmacies and four hospital-based pharmacies, which will now be operated and branded as LloydsPharmacy. The acquisition is expected to close in the fourth quarter of our fiscal 2016 and will broaden the already strong footprint of LloydsPharmacy in the United Kingdom and add scale to the more than 12,000 owned or banner pharmacies across McKesson. In summary, we're off to a positive start to the year, and I'm encouraged by the momentum in our international Pharmaceutical Distribution and Services business. And finally, our Medical-Surgical business performed well in the quarter, with revenues of $1.4 billion, an increase of 4% over the prior year, including strong growth in our physician office business. Our McKesson surgical team continues to do an excellent job as we enter the home stretch of the integration activities driven by the PSS World Medical acquisition. We expect to complete our planned integration efforts by the end of fiscal 2016, on schedule and ahead of our original business case. And while our Medical-Surgical team is still in the midst of a tremendous amount of work, I'd like to recognize the outstanding progress they've made to date and their success in driving better value for our customers. In summary, I'm pleased with the performance of Distribution Solutions in the first quarter. We now expect Distribution Solutions revenue growth of high-single digits compared to the prior year. And we now expect that full-year adjusted operating margin in Distribution Solutions will be up in the mid-single digits compared to the prior year. Turning now to Technology Solutions. Revenues were down 4% for the first quarter to $736 million, driven primarily by anticipated revenue decline in our hospital software business and the sale of our nurse triage business. Adjusted operating margin in the segment was 22.7%, which includes a $51 million pre-tax gain associated with the sale of the nurse triage business. Excluding this gain, adjusted operating margin would have been 15.8%. Our first quarter results benefited from the steady growth profile of our Financial and Clinical Data and Services businesses, which include RelayHealth and our physician revenue cycle business, along with positive results in our payer solutions business. We continue to make steady progress across Technology Solutions, and I remain confident in our outlook for the full year, which includes an expectation for achieving adjusted operating margin in the high teens from the segment. Now to wrap up my comments. McKesson's fiscal first quarter results represent solid execution across both segments. We are updating our full-year outlook for fiscal 2016 to a range of $12.36 to $12.86 to reflect the gain on the sale of our nurse triage business. For the first quarter, we generated cash flow from operations of $454 million, and our expectation to deliver cash flow from operations of approximately $3 billion for fiscal 2016 remains unchanged from our original guidance. Earlier today the Board of Directors approved an increase to the quarterly dividend from $0.24 to $0.28 per share. We are extremely well positioned to execute our portfolio approach to capital deployment and deliver value for our shareholders through a mixture of internal capital investments, acquisitions, share repurchases, and dividends. With that, I'll turn the call over to James, and we'll return to address your questions when he finishes. James?

Thank you, John. And good afternoon, everyone. We are pleased with our first quarter results, which represent a solid start to fiscal 2016. As John discussed earlier, we are raising our previous outlook and now expect adjusted earnings per diluted share of $12.36 to $12.86. This revised outlook is a result of the pre-tax gain of $51 million or $0.16 per diluted share from the sale of our nurse triage business, which is reflected in both our GAAP and adjusted earnings for the quarter. We do not expect that the elimination of the nurse triage business's operating results will have a material impact on our expectations for fiscal 2016 adjusted operating profit. Now let's move to our results for the quarter. My remarks today will focus on our first quarter adjusted EPS of $3.14, which excludes three items: amortization of acquisition-related intangibles, acquisition expenses and related adjustments, and LIFO-related adjustments. Turning now to our consolidated results, which can be found on Schedule 2 and Schedule 3, consolidated revenues increased 9% for the quarter to $47.5 billion. On a constant currency basis, revenues increased 13%, led by strong growth in our Distribution Solutions segment. Adjusted gross profit for the quarter increased 4% to $2.9 billion. On a constant currency basis, adjusted gross profit increased 9%, driven by performance in both segments. Total adjusted operating expenses of $1.8 billion were down 5% for the quarter on a reported basis and up 1% on a constant currency basis. In accordance with U.S. GAAP, operating expenses are presented net of the $51 million pre-tax gain on the sale of our Nurse Triage business. Excluding this gain, total adjusted operating expenses were up 4% on a constant currency basis. Adjusted other income was $15 million for the quarter. Interest expense of $89 million decreased 7% on a reported basis and 4% on a constant currency basis. Now moving to taxes, our adjusted tax rate for the quarter was 31.1%. As usual, I would expect this tax rate to fluctuate somewhat from quarter to quarter. And for the full year, we continue to expect an adjusted tax rate of 31.5%. Adjusted income for the quarter was $737 million, with our adjusted earnings per diluted share of $3.14, up 27% on a reported basis and up 30% on a constant currency basis. The year-over-year currency headwind equated to $0.06 per share. Wrapping up our consolidated results, our diluted weighted average shares were flat year over year at 235 million. While we continue to plan for upcoming significant debt maturities, today's announced acquisition and dividend increase are consistent with our portfolio approach to capital deployment, which for some years now has focused on a blend of internal investments, acquisitions, share repurchases, and dividends. Let's now review the segment results, which can be found on Schedule 3. Distribution Solutions segment revenues of $46.8 billion were up 10% on a reported basis and 13% in constant currency during the quarter. North America Pharmaceutical Distribution and Services revenues of $39.5 billion increased 16% on a constant currency basis, primarily reflecting market growth in our U.S. Pharmaceutical, U.S. Specialty, and Canadian businesses. Our largest customers drove strong growth, with a corresponding impact on our mixed business and margin profile. In addition, this quarter's revenue also benefited from the timing of certain branded drug price increases, which came earlier in the fiscal year than we had originally anticipated. For the full year, we now expect North America Pharmaceutical Distribution and Services revenues to increase by a low double-digit percentage versus the prior year. International Pharmaceutical Distribution and Services revenues were $5.8 billion for the first quarter. On a constant currency basis, revenues were flat relative to the prior year and in line with our expectations. Overall revenue growth, driven by our businesses in the United Kingdom, was mainly offset by an anticipated revenue decline from last year's loss of a Norwegian hospital contract. As a reminder, the results from Celesio's operations in Brazil are reported as part of discontinued operations on Schedule 1 of the tables accompanying our press release. Medical-Surgical revenues were up 4% for the quarter, driven by market growth. Distribution Solutions adjusted gross profit increased 4% on a reported basis and 10% on a constant currency basis for the quarter. The increase in Distribution Solutions adjusted gross profit was driven by the strong revenue growth in our North American Distribution business, the timing of certain brand drug price increases that occurred earlier in the fiscal year than we expected, a benefit from antitrust settlement proceeds that was contemplated in our guidance, and a better-than-expected performance from Celesio. Offsetting this growth were weaker-than-expected generic drug pricing trends in the quarter. The level, nature, and timing of generic pricing trends remain difficult to predict. We will continue to monitor market activity and will provide updates to you as we communicate our results each quarter. Adjusted operating expense for the segment decreased 3% for the quarter on a reported basis. On a constant currency basis, segment operating expense increased 4% year over year. Segment adjusted operating profit of $1.1 billion increased 14% on a reported basis and 17% on a constant currency basis. The segment adjusted operating margin rate for the quarter was 242 basis points, an improvement of eight basis points on a constant currency basis versus the prior year, driven by solid growth across the segment, including continued expansion of our generics business, favorable timing of certain branded drug price increases, the anticipated antitrust settlements, and better-than-expected results from Celesio. This year-over-year segment adjusted operating margin expansion was partially offset by weaker generic pricing trends and our business mix. As I mentioned earlier, we now expect full-year revenue growth from our North America Pharmaceutical Distribution and Services business to increase by a low double-digit percentage versus the prior year, driven in part by higher-than-expected demand from our largest customers. Based on this growth and the resulting mix of revenue in our North American Distribution business, we now expect segment adjusted operating margin to increase by mid-single-digit basis points year over year. Turning now to Technology Solutions, revenues were down 4% for the quarter to $736 million. This decline was primarily driven by the anticipated revenue softness of the hospital software platform and the sale of our Nurse Triage business, partially offset by growth in our other technology businesses. As I discussed earlier, our consolidated first quarter gap in adjusted results reflect a pre-tax gain of $51 million from the sale of our Nurse Triage business. This gain was recorded as a reduction to Technology Solutions operating expenses for the first quarter. Adjusted operating expense in the segment decreased 27% and segment adjusted operating profit increased 109%, primarily as a result of this gain. Excluding this gain, segment adjusted margin increased 534 basis points year over year. For the full year, excluding the gain recorded on the sale of our Nurse Triage business, we continue to expect to achieve an adjusted operating margin in the high teens. Moving now to the balance sheet and working capital metrics, as you've heard me discuss before, each of our working capital metrics can be significantly impacted by timing, including which day of the week marks the close of a given quarter. For receivables, our days sales outstanding were relatively flat at 26 days. Our days sales in inventory decreased by one day to 30 days. Our days sales in payables increased by three days to 53 days. We generated $454 million in cash flow from operations for the quarter. And for the full year, we continue to expect our cash flow from operations to be approximately $3 billion. We ended the quarter with a cash balance of $5.6 billion, with $1.9 billion held offshore. Internal capital spending was $120 million for the quarter. Now I'll turn to our adjusted EPS outlook for the year. As I mentioned earlier, we are raising our fiscal 2016 guidance for adjusted earnings per diluted share from our original range of $12.20 to $12.70 to a new range of $12.36 to $12.86 to reflect the gain on the sale of our Nurse Triage business. This outlook assumes a full-year average exchange rate of $1.10 per euro, which is unchanged from our prior guidance. In addition, we now expect $1.24 per share in amortization of acquisition-related tangible assets and $0.30 of acquisition expenses and related adjustments. We also expect to exclude between $0.86 and $0.96 per share in LIFO-related adjustments, short of our adjusted earnings. While we cannot predict the timing of pharmaceutical pricing activity, our current expectation is that the split of earnings between the first and second half of fiscal 2016 will be in line with our experience in fiscal 2015. Thank you. And with that, I will turn the call over to the operator for your questions. In the interest of time, I ask that you limit yourself to just one question and a brief follow-up to allow others an opportunity to participate. Solari?

Yeah, hi. Good afternoon. A couple of questions here. First of all, obviously, generic inflation is a big focus area for investors, so thank you for your comments on that. But can you just help us understand, how should we think about generic inflation trending within the context of your guidance range?

Certainly, as we've mentioned, we did see generic price increase activity below the levels of the last fiscal year and below our original expectations. Now, that said, obviously our guide that we issued a few months back has a variety of variables that are key to it, and we list those out for you. So the width of the range allows us some flexibility to take into account variables of one driver that's up versus another driver down. So we're comfortable with the range that we've articulated this afternoon. That reflects the addition of the care management nurse triage gain. And of course we'll keep everyone updated as we proceed through the fiscal year.

Okay. And then just as a follow up, very strong top-line growth for distribution solutions, up 15% despite some impressive year-over-year comps you're anniversarying. So when you think about the environment and branded inflation that you've seen in the quarter, do you expect similar trends for the remainder of the year? It seems just the growth is stronger than what you guys implied in the Analysts Day.

I think we've had good success in growing our business across the board. And I think the interesting part of the base of business that we have in our mix is that we have some customers that are growing we think more rapidly than the market. And that growth is clearly seen in our business. That comes with it better revenue growth, but it does put a little pressure on our mix as a result of the scale of those customers. We're certainly pleased with the performance in the quarter and we expect that revenue momentum to continue throughout the fiscal year.

And one of the other drivers of the revenue strength in Q1 was the acceleration of some of the branded price increases that occurred in the first quarter that we were originally expecting to occur later in the year.

Thanks. Good afternoon. I think we all understand the comments about generic inflation being difficult to predict. There's definitely no question about that. But I guess I'm just curious, with your privilege of daily conversations with generic suppliers, with some 20/20 hindsight now, do you have any thoughts or any opinions on what you think may have just led to that temporary slowdown of generic inflation in the June quarter? Or do you just attribute that to randomness and obviously some tough comps year over year that we saw for the June quarter in particular? Thanks.

Thanks for the question, Steve. I think the comps are clearly one of the challenges when we think about the strength of the price increases in the prior year. I think that although we have close working relationships with the generic manufacturers, they don't always share with us their plans related to price increases. Clearly their view of product launches, their merger and acquisition activity, there are lots of things moving around in the market that may also be distracting them from some of the things that they may be doing on a short-term basis or could have done on a short-term basis. I think our view is that we believe that generic pricing power will remain a part of the strategy generic companies will employ. And that balanced with the scheduled generic launches, et cetera, are part of the things that drive their P&Ls. I would say following on to what James said earlier, there are lots of variables in the way our quarters flow. And one of the positive things in the quarter was the fact that our brand price inflation work was a little stronger than we'd seen on a compare basis. So there are always puts and takes as you move along. And I think the most important thing is that we continue to find ways to move the business. And we're obviously also very pleased with the performance of our Specialty business and Celesio had a very good quarter. So both Specialty and Celesio performed above what we would have expected, even though our generic price part of our business may have been a little bit behind.

Thank you. So on the topic of growth at large customers, do you think that growth is coming at the expense of smaller customers? Or is it that the larger customers are getting a greater share of where we do see outsized market growth?

Clearly I think the Specialty business is more inclined to go through the larger customers, particularly in the PBM channel. We obviously have seen some market shifts in PBMs as well. And I would imagine on the edge, our larger customers are taking some incremental share in the market. But I would say that at least the base of independents that McKesson is involved and closely working with, we've seen good strength in that business, both in the growth of Health Mart stores but also in terms of their revenue growth. So I think the most important thing for us to do is to continue to focus on bringing our scale and our capabilities to the smaller customers to help them continue to level the playing field relative to the larger customers. And on the larger customer side, we have to find ways to add more value so that our margin impact isn't as negative as it can be when the mix changes.

Even absent the growth at the top line, operating expense seemed to come in quite a bit below where we expected on the Distribution side where you didn't have the impact. Could you speak to some of the activity and how it felt relative to your own expectations?

We are very focused on, as you know, Eric, in being efficient and productive in our operations. I think we have over 3,000 – closer to 6,000 black belts if you include Celesio around the world. And those folks are designed to help us drive efficiency in our operations. I also think it's important for us to maintain discipline around pricing. Albeit the mix thing is hard for us to control, our pricing decisions are within our control and we have to stay disciplined on that. James, there might be color you want to add on expenses. I think our interest expense was down a little bit.

The operating expense line, really the focus ongoing right across the company, as John is referring to there, including Technology Solutions, and part of the business we've really been able to build our margins quite nicely. So directionally in line with what we were expecting, but we're certainly very pleased by the ongoing progress around our cost structure and our productivity.

Thanks very much. John, when you called out North America and some of the things you talked about, you did talk a little bit about Specialty in your prepared remarks. Can you maybe just give us a little more detail as far as what you saw for revenue growth there in the quarter, especially versus your expectations?

We expected our Specialty business to grow above market levels. And I think not only did it grow above market levels, it grew more than we had expected. And I think our strength in particular in our community-based oncology business was very strong. Clearly, U.S. oncology continues to perform well. Albeit off of a slightly smaller base, our multi-specialty business is growing very rapidly as we create value-differentiating capabilities in that market.

Okay, great. And then just on the follow-up side for the small acquisition that was made for Sainsbury, can you give us any indication as to what the earnings or financial impact will potentially be from that acquisition?

It's obviously a very important strategic move for us. It significantly expands the presence of Lloyd's Pharmacies in the UK, and it's an endorsement of the strength of the Lloyd's brand and operating model. I think that's an important aspect to what this win signifies to our team and to the markets. James, you might want to comment on the timing and margin impact.

Just based on our expected normal regulatory review process, we're expecting the transaction to close toward the end of February of this coming year, so I wouldn't expect it to have any material impact on fiscal 2016.

Thanks and good evening. James, I just want to follow up on the gross margins a little bit. This was probably – the gross margins are probably a little bit lower than what we had thought and maybe the lowest gross margin we've seen in five or six quarters, and I'm curious. Can you maybe give us a little bit more color in terms of what impacted that gross margin? I don't know if that was tied into the generic inflation comments or if there's something related to the purchasing synergies from Celesio having kicked in or Rite Aid or Omnicare. Can you give us a little bit better sense of what's going on there?

Really I would point you to two comments that we made during our prepared remarks. First of all, very strong growth from our largest customers and therefore an impact on the mix and the margin, the gross profit margin profile. So that's number one; and then secondarily, the lesser effect around generic price increases than we were originally expecting in our plan.

Thanks for the questions. Sorry to go back to this again, but it does seem like the biggest change relative to the update we got from you guys at your Analyst Day. You're pointing out a mid-single-digit margin expansion in the Distribution Solutions business. And I'm just curious if there's any more detail you can give around how much of that lower margin expectation is just from revenue mix versus the less generic inflation that you guys have called out. And I guess the bigger picture question, John, would just be given where Specialty is growing and the growth there, is margin expansion as we think about this business going forward, is it something that we should think about in a more tempered manner?

I think the point on margin is a good one. We clearly didn't anticipate our revenues to be growing as rapidly as they have. And that has, as James mentioned, had a depressing effect on op margin. But if you actually look at operating profit growth, it's still very strong. And our objective is to satisfy the needs of our customers. And as you know, we have long-term contracts with many of them. So as they grow, the bigger ones will put some pressure on the mix. But the most important dimension here is I think our focus on making sure that we are driving efficiency in our operations as revenue grows, and that was pointed out earlier from an expense perspective. And we're disciplined in the way we approach the market. The comment about Specialty is an important one. That's a very high-growth area. Each company I think in the country probably defines specialty slightly differently, so it's difficult to talk to any one of us and get a perspective that's really industry-wide. From our point of view, there are some very profitable, positive mix products in the Specialty category, but there are also some products in the Specialty category that are really expensive and carry a margin rate that's low but produce tremendous returns and profit drop in the P&L. Albeit it may be dilutive to our margin expectations, they're certainly producing great returns. And I think that we have a responsibility to try to manage the company with both a perspective on margin rate as well as dollar growth and clearly at the bottom line the returns on our business. So we look at it in a portfolio way. If there's one message you can take away from me on the Specialty business, it has been a priority for us now for many years. We came from a very weak position to now we are in a very strong position, and I'm very pleased with where we are in that market. And as we define it, I think in most of them we're either number one or number two and growing very rapidly. So we are well positioned as we think out and look at the new product launches. Those launches, given the characteristics of some of them, could put some pressure on our margin rates. But clearly, we think that they'll be value-creating, and we're in the right position to take advantage of the relationships we have with our customers in the markets that we serve.

Good afternoon, guys. So maybe on the Tech Solutions business. Obviously the reformation of that asset continues. It seems like the margin outlook for the year is good. If my math is right, is this going to be a year where we actually see EBIT growth and, not only that, but maybe get back to some of the higher levels of EBIT we saw historically? And secondarily, when do you actually think we can see some of the transactional businesses come through to where we could actually see the division grow again?

I appreciate the question, Ross. We have been, as you know, working diligently for the last several years to reposition the business in the areas where we think we are strong or market leading and where the markets are actually growing and are favorable to McKesson. We have extremely strong franchises inside of our Technology Solutions business. And we have been struggling with our hospital IT business, where we have been reinvesting in the go-forward products and deinvesting in the products that we've already announced that we plan to sunset. And so it's difficult as an investor to see the positive momentum in the business through some of the drag that's present as a result of, as you described, the reformation of the business as we position it for growth going forward. And I think we are optimistic that we continue to make the right decisions to get the momentum back in the business. As to margins, I'll turn it over to James to talk a little bit about what you should think about there.

As we track towards that high-teens goal for fiscal 2016, I would say that right now we're looking at an increase in operating profit year over year, and that's excluding the $51 million benefit from the gain around the nurse triage business. So we're on track for some operating profit growth this year.

Good afternoon. Thanks for taking the questions. A couple follow-up questions at this point. First, sorry to harp on this again, but regarding moderating generic inflation, could you characterize that a bit more? Was it across the board, in certain therapeutic classes, vendor, anything?

I would just observe that we saw fewer manufacturers taking increases on fewer drugs. So both of those variables we saw less activity than we had certainly seen last year during our first quarter and less than what we were assuming we would see when we put our plans together.

Hi. Can you comment on the Teva and Allergan transaction? Is that material or not with respect to generic inflation? Our objection is that as the generic industry consolidates, sometimes manufacturers raise price because they can. Just any thoughts there would be helpful. Thanks.

We clearly have a very strong working relationship with both Teva and Allergan. And I think that we see, as do you, that the question of generic inflation is sometimes driven by the ability for the price to actually benefit the generic manufacturers or otherwise stick in the marketplace. And so to the extent that the consolidation provides some of that opportunity, that would be a positive. I think that the market remains competitive, and I think these consolidations will help eliminate costs. But I also think that McKesson's position in the market will continue to afford us an opportunity to work with these very large companies in a very positive way for both parties.

Great. And just any general thoughts around PCSK9 and how material that might be going forward? Maybe you can characterize the (47:07) benefit.

I think it's difficult to tell. It's a little too early for us to comment on the characteristics of that product, albeit it is a positive, and the continued innovation that comes out in these categories of products will be extremely important to us going forward. And as I mentioned a few moments ago, our footprint in Specialty continues to grow. And I think that as people launch with some of these more unique products, it will help the patients, but it also will help McKesson.

Good morning. John, first a quick one, are there any situations where generic drug prices inflate where you guys don't benefit?

George, I think drug price inflation and the benefit is in the eye of the beholder. I think all of us in the supply chain have different characteristics with manufacturers and with customers that are highly variable, including the relationships of both in terms of the way the business models work, but also the way the contractual relationships might work. So I think it's probably better said that we try to optimize our value to the generic companies in a way where we benefit and may benefit. But at the same time, we have to stay extremely disciplined and diligent around making sure that our customers are also benefiting through our action in the supply chain. And that's been our priority and will remain our priority.

Okay, that's helpful, and maybe a quick follow-up on the Sainsbury transaction. It's interesting that this the second deal like this that's occurred in a little over a month. And as you see global payer consolidation, do you foresee global pharmacy consolidation? And how do you guys feel like you're positioned if global retail pharmacy consolidation steps up? Thanks.

I think it's a good question. Obviously, we've seen tremendous consolidation across healthcare in the last 90 days alone. There has been all kinds of activity. I think the way we think about consolidation is clearly we want to be positioned with winners, but that doesn't necessarily mean that we have to be always positioned with only scaled players. In fact, we think our Health Mart customers, for example, are winners and are able to consolidate in their own space with other independent pharmacies because of the scale we bring to them and the value we can deliver. In fact, that's why I continue to focus on the footprint of owned and banner pharmacies, provide us the ability to help our customers who are perhaps not all owned by the same enterprise, continue to benefit through their relationship at McKesson and may be able to stay as independent operators. Even though they may appear on the surface to be subscale in terms of store count, they may improve their efficiencies through their partnership with us and clearly improve their margin structure through some of the value-added services that we help them deliver into the marketplace on behalf of payers and consumers. So our focus is to help our customers be more successful across the board. And to the extent that people consolidate and we consolidate into our customers, we win or at least break even from a revenue perspective. And our objective is to continue to be more and more efficient with these larger customers so that we can earn the privilege of continuing to serve them.

Good evening. John, let me take that answer and go a little bit further with it. To the extent that we are seeing consolidation among many players in the supply chain, including payers and obviously some on the retail side, do you foresee the need strategically or otherwise to potentially further consolidate and own additional assets within the supply chain, or are there inherent conflicts in that which will keep you from doing that? How do you best position the company to be most advantageously positioned going forward?

I think it's a very good question. In fact, all of these questions are good questions. I think the industry is changing significantly. And I think it's incumbent upon us as it relates to our customers and our shareholders to remain open to any strategy that we think is sustainable and can create value. Having said that, it's always been our position that we don't compete with our customers. And so the challenge in some of the conceived combinations would either have us competing with people that are on the partner/supply side of our business or perhaps on the partner/customer side of our business, and that makes it difficult to conceive of some of those types of combinations. So I think that we remain open to everything. We'll be very cautious before we ever cross the line of competing with our customers.

Thank you, John. On September 16 we will present at the Morgan Stanley Global Healthcare conference in New York. And on November 10 we will present at the Credit Suisse Healthcare Conference in Scottsdale, Arizona. We'll release second quarter earnings results in late October. Thank you and goodbye.