Mckesson Corporation (MCK) — Q3 2018 Earnings Call Transcript

Thank you. Good morning and welcome to McKesson’s fiscal 2018 third quarter earnings call. I'm joined today by John Hammergren, McKesson's Chairman and CEO; and Britt Vitalone, McKesson’s Executive Vice President and Chief Financial Officer. John will first provide a business update and then Britt will review the financial results for the quarter. After Britt’s comments, we will open the call for your questions. We plan to end the call promptly after one hour at 9:00 AM Eastern Time. Before we begin, I want to remind listeners that during this call, we will make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson. Please refer to our press release for a discussion of the risks associated with such forward-looking statements. On today's call, we will refer to certain non-GAAP financial measures. John and Britt will reference adjusted earnings, adjusted operating profit margin excluding non-controlling interests, and items excluding foreign currency exchange effects. We believe these non-GAAP measures provide useful information for investors regarding the Company's operating performance, and comparability of financial results period-over-period. Please refer to our press release announcing third quarter fiscal 2018 results for further information, and a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thank you, and here's John Hammergren.

Thanks, Craig, and thanks everyone for joining us on our call. Today, we reported solid operational performance and we have raised and narrowed our fiscal 2018 guidance range of $11.80 to $12.50, to a new range of $12.50 to $12.80, driven by a lower tax rate and lower share count. For the third quarter, we generated total company revenues of more than $53 billion and adjusted earnings per diluted share of $3.41. Before I delve into the details of the quarter, let me briefly touch on a couple of recent developments. We are excited to have just closed the acquisition of RxCrossroads. We are committed to broadening and deepening our portfolio of solutions and services to better serve our pharmaceutical and biotechnology manufacturer partners' needs. Our vision is to be the partner of choice across the product life cycle by creating a comprehensive, best-in-class, differentiated set of services. RxCrossroads expands and improves our existing services in third-party logistics, reimbursement access, and health and pharmacy solutions. It also complements our offerings to include upstream plasma logistics and specialized field support. The integration of this business with our existing biopharma-facing solutions will enhance our ability to provide turnkey solutions for our manufacturer partners to assure patients get access to innovative therapies, enable rapid market penetration of products, and help manufacturers create value. For payers, we can provide evidence in a value-based way to highlight the best solutions for the patients they serve. In summary, we have a unique set of capabilities that bring a superior value proposition to our biopharma partners. In the third quarter, we made the decision to bring the capabilities of our Specialty Health businesses under Nick Loporcaro’s strong leadership, which will allow us to more closely coordinate and optimize how we provide service and solutions to our manufacturer and provider partners across the healthcare landscape. Many of you have met Nick at prior Investor Day events. He brings extensive experience in leadership positions he has held at McKesson Canada and McKesson Specialty Health. As some of you may recall when we were beginning to build our specialty franchise more than a decade ago, we made the decision to carve out these assets from our U.S. Pharmaceutical business to incubate high-growth opportunities to maturity. Now that our specialty franchise is well established and a leader in the market, the decision to combine Specialty Health and U.S. Pharmaceutical under Nick’s leadership is a natural next step in the evolution of these businesses. And for retail pharmacy customers with our recent acquisition of Well.ca, we have strengthened our e-commerce capabilities hoping to provide an omni-channel presence in serving our customers in a way that works for them. In addition to leveraging digital capabilities, our suite of retail pharmacy services extends beyond simply filling prescriptions. For instance, we connect patients digitally with pharmacists for medication education, treatment protocols, and medicine scheduling reminders, which drive adherence across our global retail footprint. Turning now to our business results, our North American pharmaceutical distribution and services businesses, which include U.S. Pharmaceutical, McKesson Specialty Health, McKesson Canada, and McKesson Prescription Technology Solutions, had year-over-year revenue growth in the third quarter of 7% on a constant currency basis. I'd like to discuss a few highlights in U.S. Pharmaceutical and Specialty Health. The business is now headed by Nick. I'm extremely pleased with the progress of ClarusONE and its strong contribution to our results this year. We have contracted a diverse range of manufacturers delivering benefits to our partner Walmart and more broadly, with all of our customers who purchase generics through us, helping them to be more successful in a competitive and dynamic market. Next, we continue to implement differential pricing for brand, generic, specialty, biosimilar, and OTC drug classes, working through our contract renewal cycles. We are pleased with the results and remain focused on obtaining fair compensation for the services we provide for each drug category. Finally, we are working closely with Rite to ensure the successful transition of the allotted stores to Walgreens. We continue to deliver exceptional value to Rite every day and we remain comfortable that our sourcing scale and capability will not be impacted by this transition. In addition to my earlier comments on the RxCrossroads acquisition, the breadth of our capabilities we are building and the support of biopharma companies, the intraFUSION acquisition enhances our multi-specialty footprint with a focus on neurology and rheumatology. I’m happy to report that the team is executing the integration plan and we are doing well relative to the business case. Additionally, the BDI Pharma business we acquired last quarter is a solid complement to our existing plasma offering that allows us to expand plasma and biologics distributions into specialty pharmacy and homecare with differentiated expertise. We’re also pleased with the progress on integrating this transaction. I’ll move next to our Canadian business, where we saw nice growth in the quarter with constant currency results that were in line with our expectations as we passed the one-year mark following our acquisition of Rexall. We’re also encouraged by the progress we’re making on integrating and executing against the business cases of our Uniprix and GMD Distribution acquisitions. Before I move on, I wanted to comment on the recently announced generic price initiative by the Canadian Provincial Government. The initiative, effective April 1, 2018, will reduce the pricing of approximately 70 commonly-used generic drugs. We have a broad range of businesses in Canada that are growing strongly. While certain of our businesses will be affected by this initiative, we are evaluating the economic impact of these reductions. We are engaged in dialogue with the governments around ensuring fair compensation for the wholesale and retail services we provide to drive better health. And within our McKesson Prescription Technology Solutions business, which has demonstrated excellent revenue growth, CoverMyMeds has been honored with Frost & Sullivan's 2017 North American Visionary Innovation Leadership Award, recognizing our prior authorization solutions. While this award highlights the innovation and solutions we bring to the market, it demonstrates how we deliver value to pharmacists, manufacturers, providers, and payors. Turning now to our results for International Pharmaceutical Distribution and Services, we made progress on addressing the challenges facing our UK retail business that we announced in conjunction with our second quarter results. We are actively in the process of either closing or selling approximately 200 retail pharmacy locations. Although we have concerns with the current UK reimbursement environment, we remain committed to supporting our pharmacy customers. We do this by making it easier for patients to get what they need, whether through services like Click and Collect, Lloyds’ Online Doctor, or the ability to consult with a pharmacist when visiting a store. Additionally, we collect data and provide analytics which helps retail pharmacies manage individual patients, drive adherence, and deliver better health outcomes. When we put these assets together, it demonstrates how our investments provide pharmacies with a comprehensive offering to reduce time and administrative activities, while improving the focus on patient care. And finally, our medical-surgical business continues to be one of the fastest-growing businesses in our portfolio, reflecting strong market growth, including the benefits from a shift to lower-cost sites of care. We continue to expand our services to medical-surgical manufacturers. I’ll highlight our success in the last business where we serve as a sales team for certain manufacturers that focus on physician and community hospital labs. This is a great example of the unique value we bring to manufacturers for expanding the range of services our customers can provide to diagnose and treat patients for a variety of clinical conditions. In summary, I’m pleased with how our Distribution Solutions segment performed in the third quarter. Turning briefly to our Technology Solutions segment, beginning with this quarter, this segment consists solely of our 70% equity investment in Change Healthcare following the successful sale of our Enterprise Information Solutions business in early October. We continue to see progress against the execution of the business case and the realization of the anticipated cost synergies. Next, let me take a moment to provide our perspective on the recently enacted federal tax reform. We’re supporters of the tax reform and believe that it will allow U.S. companies to make new investments and improve their competitive position. Our complex, in scope and nature, we recognized a net benefit from the tax changes. Any cash realized from the reform will be deployed using our portfolio approach with the goal of delivering value for our shareholders through a mix of internal capital investments, acquisitions, share repurchases, and dividends. In addition, we expect Change Healthcare to benefit from the recently enacted tax reform, given it is predominantly a U.S.-focused business. Britt will provide you with more detail on the impact of tax reform. To summarize, McKesson's fiscal third quarter results represented continued execution across the enterprise, and we are raising and narrowing our adjusted earnings guidance for fiscal 2018 from $11.80 to $12.50 to a new range of $12.50 to $12.80 per diluted share. Before I turn the call over to Britt Vitalone, our new CFO, I want to take a moment to thank James Beer for his contributions. I appreciate the support over the past four years. Some of you have already met Britt and know his background. But for those of you who don't, I'm happy to share some details with you. During his 12-year tenure with McKesson, Britt has led the corporate FDA and M&A finance functions, was CFO of our Medical-Surgical business, and most recently served as CFO of our U.S. Pharmaceutical and Specialty Health businesses. He also has deep operational experience, which included the creation of the ClarusONE joint sourcing venture, which is delivering material generic sourcing benefits. While I'm pleased to have worked alongside James Beer over the last four years, our ability to immediately name a successor reflects our deep bench of talent. I look forward to continuing to work with Britt in his new role. With that, I'll turn the call over to Britt and return to address your questions when he finishes.

Good morning, and thank you for your kind remarks, John. As this marks the first time I'm addressing our investment community on an earnings call, I want to take a moment to make a few opening remarks. I'd also like to start by thanking James Beer for his leadership over the past four years. He's had a tremendous impact on the company, and I've enjoyed working closely with him. I wish James all the best. I've been in the role a few weeks now, and I'm excited about the opportunities we have in front of us and the opportunity to serve as McKesson CFO. I look forward to working with our investors and the analyst community. Finally, I'm going to briefly mention our current segment reporting. With Paul Julian's retirement as of the beginning of the calendar year, we are currently evaluating our operating structure. I anticipate that this review will result in a change to our existing segment reporting structure beginning in the first quarter of fiscal 2019. We will provide an update and additional details on our fourth quarter earnings call in May. Turning now to the results of our fiscal third quarter. Today, we reported third quarter adjusted EPS of $3.41, reflecting solid operating results, a lower tax rate driven in part by discrete tax benefits and a lower share count. As a result of a lower tax rate and lower share count, we are raising and narrowing our fiscal 2018 adjusted earnings outlook to $12.50 to $12.80 per diluted share. Let me start with a review of the Tax Cuts and Jobs Act of 2017. We believe the new tax law is positive for business and for McKesson. Our third quarter GAAP results reflect a material benefit stemming from the tax act. Both McKesson and Change Healthcare recorded net benefits related to the tax act in the third quarter. These nonrecurring benefits are excluded from our adjusted earnings. In December, McKesson recorded a net tax benefit of approximately $370 million, which contributed $1.78 to our third quarter GAAP EPS. This net tax benefit results primarily from the re-measurement of deferred tax liabilities due to a reduction in the U.S. federal tax rate from 35% to 21%, partially offset by the impact of transition taxes and foreign retained earnings. In addition, Change Healthcare recorded a net benefit, driven primarily by the re-measurement of its deferred tax liabilities at a lower tax rate. McKesson's 70% equity interest of that benefit is expected to be approximately $70 million to $110 million, which will be reflected in the equity investment in Change Healthcare line. However, given the one-month lag in McKesson's reporting of our equity share of Change Healthcare, that benefit will be reflected in our fourth quarter GAAP results. Next, let me discuss the impact of federal tax reform on our adjusted earnings. For McKesson, beginning in the fourth quarter of fiscal 2018, we expect a lower rate driven by the new U.S. federal tax rate. We expect a tax run rate range of 22% to 24% driven by our mix of business. Each fiscal year's tax rate may be impacted by pre-tax charges or benefits during the year from items such as tax planning initiatives and examinations of our tax returns by the tax authorities. We anticipate our fiscal 2018 adjusted tax rate will be approximately 21%. I would remind you that our anticipated fiscal 2018 adjusted tax rate has been positively impacted by the intercompany sale of software related to our Technology Solutions segment in the third quarter of fiscal 2017. That P&L benefit is expected to end at the close of fiscal 2018 driven by a change in income tax accounting rules. To summarize, we expect our fiscal 2019 adjusted tax rate to be above our fiscal 2018 adjusted tax rate, driven by the lapping of discrete tax items and the full year benefit related to software amortization realized in fiscal 2018. We'll provide an update on adjusted tax rates for fiscal 2019 and will provide guidance in May. For Change Healthcare, as I previously mentioned, we report these results in a one-month lag. As a result, their fourth quarter will include the effects of the lower run rate for two months of Change Healthcare results. Specific to fiscal 2019, we'll provide additional insight on McKesson's expected adjusted equity income from Change Healthcare when we provide guidance in May. Finally, due to the tax act, we anticipate modestly favorable cash flows over time. We expect to deploy these favorable cash flows in line with our portfolio approach to capital deployment. While some of the items I've just discussed have an immediate impact, there are certain items within tax reform in which companies have up to a year to finalize. As such, we may have true-ups in future quarters. In our 10-Q we filed later today, you'll find additional information about the impact of federal tax reform and the provisional amounts recorded in the quarter. Now let me turn to financial results for fiscal third quarter. The results that I provide this morning will be on an adjusted basis, unless I specifically call them out as GAAP. We provided a GAAP to non-GAAP reconciliation in our 8-K filed this morning. Our adjusted earnings exclude the following items: amortization of acquisition-related intangibles, acquisition-related expenses and adjustments, LIFO inventory-related adjustments, gains from antitrust legal settlements, restructuring charges, and other adjustments. Starting now with a review of our consolidated results, which can be found on Schedules 2 and 3. For the third quarter, consolidated revenues increased 7% year-over-year. Adjusted gross profit dollars increased 2% from a year ago, adjusted operating expenses increased 3% year-over-year and adjusted other income was $22 million for the quarter. Adjusted equity income from Change Healthcare was $55 million for the third quarter, which was adversely impacted by a lower-than-expected contribution in Change Healthcare's imaging business due to deferrals of customer purchases. We now expect adjusted equity income from the Change Healthcare joint venture to be in a range of $265 million to $295 million in fiscal 2018. Interest expense of $67 million decreased 9% for the quarter, driven primarily by the refinancing of debt at lower interest rates. Our adjusted tax rate for the third quarter was 11.5%, driven by discrete tax benefits of approximately $54 million in the quarter, which primarily relates to the conclusion of certain tax audits. We now anticipate our fiscal 2018 adjusted tax rate will be approximately 21%, down from approximately 24%, driven equally by our expected mix of business, a lower adjusted tax rate in the fourth quarter, and the discrete tax benefits recognized in the third quarter. Income attributable to non-controlling interests was $58 million for the quarter. The year-over-year increase in non-controlling interests is primarily driven by fee income from ClarusONE, our joint sourcing entity with Walmart. Adjusted net income from continuing operations totaled $712 million, with third quarter adjusted EPS at $3.41, which is up 12% compared to $3.04 in the prior year. Third quarter year-over-year adjusted EPS growth was primarily driven by a lower share count, organic growth across multiple business units including the company's strategic sourcing benefits through ClarusONE, incremental profit contribution from acquisitions, and a lower tax rate that included discrete tax benefits unrelated to tax reform. These positive drivers were partially offset by lower profit driven by the contribution of the majority of the Technology Solutions businesses of Change Healthcare, the sale of our EIS business, and the impact of reduced reimbursement in our UK retail pharmacy business. Wrapping up our consolidated results, diluted weighted average shares outstanding were $208 million down 6% compared to the prior year. Next, I'll review our segment results, which can be found on Schedule 3. Distribution Solutions segment revenues were $53.6. Revenues benefited from $663 million in favorable currency rate movements. On a constant currency basis, revenues increased 7% year-over-year. North America pharmaceutical distribution and services revenues increased 8%, driven by market growth and acquisitions, partially offset by brand to generic conversion. International pharmaceutical distribution resources revenues were $7 billion this quarter. Revenues benefited from $530 million in favorable currency rate movements. On a constant currency basis, revenues were up 4% driven by acquisitions and market growth. Our UK team continues to make progress in the retail pharmacy initiatives we outlined on our second quarter earnings call. To date, we've identified approximately 200 store closures and divestitures, with approximately 90 stores expected to be divested. We continue to expect meaningful savings from this program in fiscal 2019. Finally, Medical-Surgical revenues increased 9% for the third quarter driven by market growth. Distribution Solutions adjusted profit was up 20% for the quarter, driven by acquisitions and organic growth across multiple business units, including the company's strategic sourcing benefits through ClarusONE, partially offset by the impact of reduced reimbursement in our UK retail pharmacy business. Brand compensation for the third quarter was in line with expectations. January brand manufacturer pricing activity was in line with our expectations, and we continue to see results slightly above our full year assumption of mid-single-digit brand manufacturer price inflation. While the overall brand inflation rate is important, it is less impactful than in prior years as we continue to evolve our brand compensation arrangements, which reduce the variability from branded inflation. As it relates to the generic market environment, generic deflation on the buy side continues to be in line with our expectations. The sell-side pricing environment remains competitive yet less volatile than the year-ago period. Distribution Solutions segment adjusted operating expenses increased 18% for the quarter. Segment operating expenses required an increase driven by acquisitions and the mix of retail business, partially offset by ongoing cost management output. As a reminder, in fiscal 2018, our year-over-year growth for adjusted gross profit and adjusted operating expenses are impacted by the shift of business in the segment, including our larger owned retail footprint and technology businesses. Distribution Solutions segment adjusted operating profit increased 23% to $991 million, driven by the same factors as previously discussed. In constant currency, segment adjusted operating profit was $982 million. As a reminder, in the third quarter of fiscal 2017, McKesson’s adjusted operating profit was negatively impacted by two nonrecurring charges totaling approximately $60 million. The third quarter segment adjusted operating margin rate was 185 basis points, an increase of 22 basis points. The adjusted margin rate was also impacted by our customer and product mix, including the growth of higher-priced specialty pharmaceuticals. Due to the mix shift, we now expect our full-year Distribution Solutions adjusted operating margin rate to be slightly below our original guidance range of between 198 basis points and 208 basis points. McKesson recorded $109 million in adjusted corporate expenses for the third quarter. We now expect adjusted corporate expenses to be between approximately $410 million and $430 million in fiscal 2018. I’ll review our balance sheet metrics. Our receivables day sales outstanding decreased one day from the prior year to 27 days. Days sales in inventory decreased one day from the prior year to 30 days. Days sales in payables decreased one day from the prior year to 58 days. Our working capital metrics may be impacted by timing, including the day of the week marking the close of a given quarter. We ended the quarter with a cash balance of $2.6 billion, and for the first nine months of fiscal 2018, we generated $1.3 billion in cash flow from operations. We continue to efficiently deploy capital. For the first nine months of fiscal 2018, we repaid $545 million in long-term debt and spent $392 million on internal capital investments. We now expect property acquisitions and capitalized software expenditures in fiscal 2018 to be below the previously guided range between $650 million and $750 million. We spent $2 billion on seven acquisitions during the first nine months of fiscal 2018. In the third quarter, we repurchased $250 million in common stock. Share repurchases during the first nine months of fiscal 2018 totaled $900 million. We now expect our weighted average diluted shares to be approximately $210 million for the full year. We have approximately $1.8 billion remaining on our share repurchase authorization, and yesterday, the Board of Directors approved the next quarterly dividend of $0.34 per share. Let me provide more detail on our fiscal 2018 adjusted EPS outlook. As mentioned earlier, we have raised and narrowed our fiscal 2018 adjusted earnings from a range of $11.80 to $12.50 per diluted share to a new range of $12.50 to $12.80 per diluted share. Our fiscal 2018 adjusted earnings outlook excludes the following items: Amortization, acquisition-related items of $2.35 to $2.65 per diluted share, acquisition-related expenses and adjustments of $1 to $1.20 per diluted share, LIFO inventory-related charges of $0.05; credits of $0.05 per diluted share, gains from antitrust legal settlements of up to $0.05 per diluted share, restructuring charges of $1.25 to $1.45 per diluted share, and other net credits of $0.50 to $0.70 per diluted share. Unless stated otherwise today, the underlying assumptions detailed in our fourth quarter fiscal 2017 press release and on our first and second quarter fiscal 2018 earnings calls are being reiterated. We continue to expect foreign currency exchange rate movements will have a net favorable impact of approximately $0.10 for the year. In closing, our third quarter results were operationally in line with our expectations, and we're pleased to be able to raise our fiscal 2018 outlook to reflect the lower tax rate and share count. We are well positioned for a strong finish to fiscal 2018. With that, I'll turn the call over to the operator for your questions. In the interest of time, I’d ask you to limit yourself to just one question and a brief follow-up to allow others an opportunity to participate. I’ll turn the call over to the operator.

Hi, thanks and good morning. Hey Britt, I just want to sort of follow up on the comments you just made about the operating profit assumptions within the Distribution Solutions segment. I think you sort of suggested that you now expect to come in slightly below the range. Can you give us a little bit more color? It sounds like price inflation is in line with what you thought, maybe a little better. Generic deflation is what you thought. We're not seeing any strange activity in terms of the competitive landscape. So could you give us some more color about that?

Yes, sure. Thanks for that question. Yes, we did note here that we're going to be at the low end or slightly below the range. I would attribute that to mix. As we talked about from quarter to quarter, we've seen a variety of mix between both products and customers, and I think that's really driving that comment. As we noted, it was an in-line quarter, but I would just point out the mix of both product and customers.

Maybe I could just ask one follow-up. John, you talked about differential pricing, and you're going through repricing all your contracts. Any takeaways from those repricings? Any impact on the margin that's worth calling out as we look on a go-forward basis?

Well thanks for the question, Glen. Clearly, we've talked about the importance of our work in this area. I think our customers clearly understand that the mix changes happening in our industry are significant, as these specialty products come to the marketplace. In the short-term, it has little impact on us or our customers, but we think these adjustments are appropriate for us, and frankly provide better line of sight to our customers related to all these products flowing through the supply chain.

Okay. Thank you.

Thanks very much and good morning. Let me start on the drug pricing side. There’s a lot of debate in Washington around drug pricing. John, can you talk about how you expect it to impact your business going forward? You talk about stabilization; talking about mid-single digits, what are the things that you potentially could see?

Well, I think you can break the drug pricing discussion into three large categories. Clearly, we continue to believe generic pricing and related deflation in that marketplace makes the generic product price very competitive. As a percent of total spend in healthcare, the price for these drugs or the treatment cost for patients continues to drop. We think that this phenomenon takes some of the pressure off the drug spend debate in this country. For branded drugs, you've seen a significant drop in inflation. The level of brand inflation that we have now is acceptable and defendable by these companies as they continue to use the remaining products they have under patent to fund their increased R&D work. The last category I would point out is new specialty drugs. These drugs can be expensive, but when pressed, I think there are strong arguments to be made for how these drugs decrease overall healthcare costs for the patients using them. In a value-based approach, pharmaceuticals continue to represent a solid investment.

So, even though the rhetoric is still there, it doesn't sound like things have really changed from what they were one year ago. Is that the right way to think about it?

Exactly. You've seen deflation in the generic side and a significant reduction in inflation on the brand side. The area of concern is some of the specialty drugs that have high costs. Overall, the evidence will show that spending on pharmaceuticals is an investment that remains well made.

Okay, great. Then, Britt, just going back to your comment about the mix. I'm curious about the flu and what impact it will have in your projections for the fourth quarter. Generally, I think of that as being a lower-margin product. Is that having any impact on your margins for the fourth quarter?

I'd say that we've had a pretty strong flu season, and that will be part of the product mix I've discussed. So that would be a part of the range that we provided you.

Yes. Hi, good morning. Thanks for taking my call. Just a couple of questions here. John, you mentioned changes in reimbursement in Canada. Could you walk through kind of what the profit contribution of Canada overall is? Any additional color on how these changes compare to what you've seen in the past?

Thanks, Ricky, for the question. The Canadian business is significant to McKesson and continues to grow nicely. In the past, we have been negatively impacted by reimbursement changes across various provinces. It's too early to size the impact of these most recent changes. However, we'll talk more about it as we get into our guidance for next year, working through discussions with the Canadian government regarding what services they want to reimburse.

Just as a follow-up, regarding the tax benefit and your capital initiatives, can you help us think through and quantify it as we think about the pull-through to fiscal year 2019?

Britt provided his expectations on the tax rate perspective. We will continue to follow a portfolio approach and that's the most color I can provide. We have a great track record of making intelligent acquisitions and significant share repurchases.

Good morning, guys. Just wanted to ask a question on the ClarusONE comment. How should we think about the remaining opportunity there in terms of expanding the relationship with Walmart or client base and product lines? What's your outlook on incremental margin opportunities with ClarusONE?

Thanks for the question. It's great to have Britt here, given that he built ClarusONE. We're very pleased with the progress we’ve made at Clarus. We have many opportunities going forward in either geographic expansion or product opportunities. We've been able to partner with a number of manufacturers and develop a solid base around generics in the U.S. We believe we have a tremendous foundation to take it further.

Got it. Thanks, guys.

Hey, thanks very much and good morning. Medical, I know it’s not your biggest segment, but 9% growth is impressive. Can you give more detail on product categories that are growing quickly? What's your outlook on this growth rate moving forward?

Thanks for the question. Our Medical-Surgical business has built a tremendous asset that focuses on growing with our customers outside the acute care system. We've extended our reach into key markets which expands our footprint. We've maintained and grown our business through acquisitions. The flu market has also benefited us, albeit less profitable, it's an important part of the value proposition in both retail and physician office settings. We believe the business continues to have growth potential.

Good morning, guys. Could you provide a bit more color on some of the recent acquisitions or new segments you've formed? What are their contributing to the core growth rate? And could you comment on the RxCrossroads deal?

Thanks for the question, Ross. Our acquisitions array a set of assets to capitalize on opportunities. We've strategically positioned ourselves in markets where the total addressable market is significant and where we can win. RxCrossroads expands our capabilities in the specialty market and supports manufacturers by providing effective product launches and reimbursements.

John, can you go over the initiative led by hospitals to build their own generic drug company? How do you think it could impact the industry and what you're hearing from your hospital customers around drug pricing?

I certainly read the announcement with interest. We've been in the generic business for a long time. My interpretation is it's aimed at improving availability alongside pricing. However, establishing a brand-new generic manufacturing company to compete with our largest partners will be a difficult task.

Understood. Just one quick follow-up. With one quarter left in the fiscal year, any thoughts regarding major drivers for next year’s guidance?

The markets remain competitive but relatively stable. The biggest change we see is an innovation cycle, particularly in specialty drugs, which requires us to support manufacturers effectively. We anticipate the continued demand for pharmaceuticals as a good value in the healthcare industry.

Thanks, guys. You've done a lot of acquisitions on the manufacturing services and specialty side. Are there any capabilities you don't have yet that you feel you might need?

We believe that the assets we have provide us competitive scale and capability. While there are other manufacturer needs that we may address in the future, we remain committed to our current strategic approach and will evaluate further opportunities as they arise.

Thank you. I’m glad to hear you're considering financial segment changes. My question is on the operational segmentation under Nick; how much of that is driven just by similar growth businesses versus a change in what a manufacturer or dispenser needs from their wholesaler?

The manufacturers we do business with are selling products through specialty channels. The service requirement is significantly different, and our relationships with these manufacturers require distinct operational approaches. We seek to optimize relations with customers across our various business lines.

As we think about the differentiated pricing model, what are the key drivers of profit growth going forward? Is it underlying volume? Price? Business mix?

Volume, price, and mix are all critical for our growth. We're fortunate to be in an industry that continues to grow. Our overall strategy involves capitalizing on the evolving mix towards specialty products, where we are receiving appropriate compensation for our services. In closing, I'm excited about the opportunities ahead of us. McKesson continues to execute against our fiscal 2018 plan, and we look forward to updating you with our fiscal 2019 outlook when we provide our fourth quarter results in May. Thank you, and goodbye.